2024 (7) TMI 151 - HC - Income Tax

Nature of receipt - receipt of money on account of relinquishment of its right to operate a hotel as a license - sum received by the assessee from ELEL licence grantor under an award/consent terms - LTCG or revenue receipt - M/s. ELEL Hotels Investment Ltd. ( ELEL ) granted licence to the respondent/assessee herein i.e., ITC to operate the hotel Sea Rock from the first day of July, 1986 for a period of 25 years with an option to renew the licence for a further period of 25 years on giving notice to ELEL of such intention of not less than 24 months before the expiry of the licence HELD THAT - As from the agreement dated 03.05.1986 it is evident that under the agreement the ITC was authorised to run and operate hotel with all the employees, staff including managerial staff of the ELEL. No right, title or interest of any kind was created by the ELEL in favour of the ITC in any of the assets/properties of ELEL (Hotel) to carry on the aforesaid commercial activity of operating the hotel. The ELEL was to get 23% of the gross turnover as license fees (subject to some variation as provided in clause V). Considering the terms of the licence operating agreement in its entirety, it is a Trading contract. The settlement agreement between ELEL and ITC shows that to fully and finally adjust, compromise and settle disputes between the parties, the settlement agreement was entered. Clause I(f) of the settlement agreement defines disputes to mean that all allegations, claims, counter-claims and disputes forming the subject matter of the Suits and/or the Arbitration and includes all allegations, claims, counterclaims and/or demands between the Parties, of any nature, arising, in any manner, out of or touching or relating to the Hotel and/or any and all arrangements / understandings / agreements relating to the Hotel including the Operating Licence. The aforesaid sum was received by the ITC from the ELEL for relinquishment of right to operate Hotel under the operating license as mentioned in Clause 3 (n) (iv) of the Consent Terms. The license operating agreement dated 03.05.1986 is clearly a trading contract and the receipts of ELEL under the said agreement being the business receipts have always been revenue in nature. ITC never had any right title or interest in the Hotel or properties of ELEL. The settlement agreement dated 11.05.2005 was entered between the parties to settle number of disputes, claims and counter claims between the parties including those which were pending in courts. The termination of operating license agreement was part of the settlement of dispute. To run or operate Hotel is one of the business activity of the ITC under it was also running the Hotel in question belonging to ELEL. The amount in question was part of Award received by the ITC to finally adjust, compromise and settle all disputes, allegations, claims, counter claims and case pending in counts arising out of or relating to operating licence Agreement to run Hotel in question. The amount so received under the Award (consent terms) by the ITC in the matter of a Trading Contract, to settle all disputes, claims and counter claims, is certainly not the transfer of any capital asset. All the employees required to run the hotel were employees of the ELEL. The termination of agreement was the result of settlement/compromise of all claims, counterclaims and disputes relating to the aforesaid business contract and in lieu thereof the ITC received from ELEL and not in lieu of its rights in any capital assets. The aforesaid amount was part of the award by the Arbitrator as per consent terms. Thus the amount received by the ITC as per consent terms to settle/ compromise all dispute or in any case in the form of compensation for loss of trading operation of running the hotel under the agreement and not for loss of any asset of enduring value. Under Article XVII of the Operating Lisence Agreement the ELEL had the sovereign right to terminate the agreement. Thus, the termination of the Operating Lisence Agreement and payment by the ELEL to the ITC was revenue receipt in hands of the ITC and not capital receipt and consequently formed part of total income of the ITC. We hold that the sum received by the respondent assessee shall not fall under long term capital gain. The findings recorded by the ITAT that the aforesaid sum of Rs. 32.42 crores constituted long term capital gain is perverse. The impugned order of the ITAT to the extent it relates to the aforesaid sum cannot be sustained. For all the reasons afore stated the substantial question of law is answered in favour of the Revenue/Appellant and against the respondent assessee. It is held that the receipt in question in the hands of the respondent assessee is revenue receipt and not capital receipt.

Summary

Issues Involved:
1. Nature of the receipt of Rs. 32.42 crores: Capital receipt vs. Revenue receipt.
2. Interpretation of the operating license agreement dated 03.05.1986.
3. Impact of the settlement agreement dated 11.05.2005 and consent terms on the nature of the receipt.
4. Applicability of relevant legal precedents and statutory provisions.

Detailed Analysis:

1. Nature of the Receipt of Rs. 32.42 Crores: Capital Receipt vs. Revenue Receipt

Issue:
Whether the receipt of Rs. 32.42 crores by the assessee for relinquishing its right to operate a hotel constitutes a capital receipt subject to capital gains tax or a revenue receipt.

Findings:
The court concluded that the amount of Rs. 32.42 crores received by the assessee from ELEL is a revenue receipt and not a capital receipt. The court reasoned that the operating license agreement dated 03.05.1986 was a trading contract, and the receipt was part of the business activity carried out by the assessee. The court emphasized that the agreement did not confer any right, title, or interest in the property to the assessee, and the receipt was the result of a business transaction.

Relevant Judgments Cited:
1. Associated Hotels of India Ltd. vs. R. N. Kapoor: Emphasized the distinction between lease and license.
2. Commissioner of Income Tax, Nagpur vs. Rai Bahadur Jairam Vaiji: Held that compensation for the premature termination of a contract in the ordinary course of business is a trading receipt.
3. Kettlewell Bullen & Co. Ltd. vs. Commissioner of Income Tax, Calcutta: Distinguished between compensation for loss of office (capital receipt) and compensation for trading contracts (revenue receipt).
4. Oberoi Hotel Pvt. Ltd. vs. Commissioner of Income Tax: Discussed compensation for loss of source of income as a capital receipt.

2. Interpretation of the Operating License Agreement Dated 03.05.1986

Issue:
Whether the operating license agreement dated 03.05.1986 conferred any right, title, or interest in the property to the assessee.

Findings:
The court found that the agreement was purely a license to operate the hotel and did not confer any right, title, or interest in the property to the assessee. The agreement allowed the assessee to run the hotel, but the ownership and legal possession remained with ELEL. The court highlighted that the agreement specified that no interest or tenancy was created in favor of the assessee.

Relevant Clauses:
1. Clause 2.1: Granted license to operate the hotel.
2. Clause 2.4: Limited powers under the Power of Attorney.
3. Article V: License fee based on gross turnover.
4. Article XVIII: No interest or tenancy created in favor of the assessee.

3. Impact of the Settlement Agreement Dated 11.05.2005 and Consent Terms on the Nature of the Receipt

Issue:
How the settlement agreement and consent terms influence the classification of the receipt.

Findings:
The court noted that the settlement agreement and consent terms were aimed at resolving disputes and did not alter the fundamental nature of the receipt. The amount received was part of the settlement to terminate the operating license agreement, which was a trading contract. The court emphasized that the settlement was not an admission of wrongdoing by either party and was intended to resolve all disputes, claims, and counterclaims.

Relevant Clauses:
1. Clause 22 of the Settlement Agreement: Payment of Rs. 32.42 crores for relinquishment of rights.
2. Clause 3(n)(iv) of the Consent Terms: Receipt as part of the settlement.

4. Applicability of Relevant Legal Precedents and Statutory Provisions

Issue:
Application of legal precedents and statutory provisions to determine the nature of the receipt.

Findings:
The court relied on various legal precedents and statutory provisions to conclude that the receipt was a revenue receipt. The court referred to Section 2(14) of the Income Tax Act, 1961, which defines "capital asset," and Section 2(47), which defines "transfer." The court also considered the judgments cited by both parties and distinguished between compensation for loss of office (capital receipt) and compensation for trading contracts (revenue receipt).

Relevant Provisions:
1. Section 2(14) of the Income Tax Act, 1961: Definition of "capital asset."
2. Section 2(47) of the Income Tax Act, 1961: Definition of "transfer."
3. Section 45(1) of the Income Tax Act, 1961: Chargeability of capital gains.

Conclusion:
The court held that the receipt of Rs. 32.42 crores by the assessee was a revenue receipt and not a capital receipt. The court set aside the order of the ITAT to the extent it related to the sum of Rs. 32.42 crores and answered the substantial question of law in favor of the Revenue.