Neemrana Hotels Pvt. Ltd. vs DCIT

“4.3

Grounds of appeal Nos. 7 and 8 challenge the treatment of Rs.1,98,00,000/- received as compensation for loss of business from SRK Travels & Tours Pvt. Ltd. on termination of principle Agreement as revenue receipt.

4.3.1

On the issue of treatment of Rs.1,98,00,000/- received as compensation for loss of business from SRK Travel & Tours Pvt. Ltd. on termination of principle Agreement as capital receipt, in view of the facts of the case wherein only one of the agreements out of total 24 agreements entered into by the assessee, the AO observed that it could not be said that the trading structure of the assessee had got impaired or the source of income had been extinguished. It was also observed that when the assessee had so many agreements, it was quite natural for some of the agreements to come to an end whether by expiry of term or otherwise and it was normal instance of business in the case of the assessee. The AO also referred to the decision of the Hon'ble Delhi High Court in the case of Khana & Annadhanam vs. CIT (supra) which had been relied upon by the appellant and wherein the Hon'ble Court had referred to the decision of the Hon'ble Supreme Court in the case of Best & Co. (supra). It was also noted that the termination was voluntary and without any protest form the assessee and there was no whisper about any reason for such termination in the entire Agreement which led to the conclusion that the termination was a normal instance of business and there was no impairment in the trading structure of the assessee which was running various who tells all over the country. The AO also referred to clause 4(1) of the termination on Agreement as per which the said amount was paid as compensation towards loss of business/profit for the residue were term of the Agreement dated 23/06/2005. The AO also distinguished the cases relied upon by the assessee. It was held that here was no restrictive covenant impairing the trading structure of the assessee and compensation received for mere settlement of trading rights, being loss of future business profits, could not constitute capital receipt.

4.3.2

The appellant has submitted that agreements like he one entered into with SRK Travels & Tours Private Limited bench after long periods of deliberations and are of very long duration. The Agreement with SRK Travels & Tours Private Ltd. was borrowed duration of 17 years. It has also been submitted that the agreements constitute important centres of revenue generation for the appellant and it is not easy to wind up from one place and to replace the same with another such place. It has also been submitted that termination of Agreement in such a situation which still 8½ years left for expiry a: mounts virtual putting a stop on the revenue generating centre of the appellant and greatly in pairs a trading structure which stabilizes only when the appellant is able to create similar other entre of revenue. It has further been submitted that compensation for termination of the impugned Agreement in such a case is, therefore, compensation for loss is an important source of income and in no way can be taken as a normal trading transaction or for loss of income n it is a case of settlement of rights in a trading contract. It has also been submitted that such receipt of compensation is capital nature.

4.3.3

I have considered the assessment order and the submissions of the appellant. The issue for consideration is whether compensation received or loss of business from SRK Travels & Tours Private Limited on termination of principle Agreement is a capital receipt or a revenue receipt. It is settled that whether a receipt is capital or revenue in nature depends on the facts of the case. The character or a receipt in the hands the assessee has to be determined with respect to the purpose for which it is received. Hence, if the object of the receipt was to enable the assessee to run the business, it is on revenue account whereas if the object of the receipt w to enable to set up a new unit to expand an existing unit, then the receipt is on revenue account In the case of the appellant the compensation has been received for loss of business from SRK Travels & Tours Private Limited on termination of principle Agreement. As has been noted by the Hon'ble Delhi High Court in the case of Khanna & Annadhanam (supra), the Hon'ble Supreme Court while deciding the matter in the case of Best & Co. Ltd. (supra) have observed that the application of the principle laid down in the Kettlewell & Bullen case must depend on the facts of the case. In the case under consideration, it is a fact that the hotel, in respect of which compensation was received on termination of the principle Agreement, was a part of the revenue generating apparatus. It is also a fact that the Agreement which was cancelled was one of the 24 agreements which were in place and it cannot be said that the trading structure of the assessee got impaired or the only source of income of the assessee got extinguished and it is but natural that some of the agreements may come to an end whether by expiry of term or otherwise which is the normal course of business. It is also noted that from the termination Agreement dated 16/12/2013 that the termination was mutual and the assessee gave up the contract without any protest which is apparent from clause. C of the Agreement. There is no whisper about any reason for termination of the Agreement and it is apparent that the termination is a normal instance of business and it cannot be considered that there was any impairment in the trading structure of the assessee. Further, as is also been pointed out by the AO, clause 4(1) of the termination Agreement clarifies that the said sum is compensation towards loss of business/profit for the residual term of the Agreement dated 23/06/2005 That being the case the finding of the AO that the compensation received was in view of future business profits and hence has to be considered as a revenue receipt

4.3.4

With regard to the judgement in the matter of Kettlewell & Bullen and Co. Ltd. (supra. it is to be noted that the facts are different and distinguishable from the case of the appellant inasmuch as in that case the Hon'ble Court observed that a managing agency of a company is in the nature of a capital asset and that the assessee was paid to compensate for the loss of a capital asset. The Hon'ble court have also observed is the said case that where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue. In the case of the appellant, it is a fact that the property was not a capital asset of the assessee and was on lease for which the assessee had been paving licence fee which had been claimed as a deduction and the cancellation was in the normal course of business. Hence, even the ratio in the case of Ansal Properties and Industries Ltd vs CIT (supra) is applicable. It has been held in the case of Ansal Properties and Industries Ltd that compensation received from the landowner on termination of development Agreement was the deprivation of potential income and loss of future profits as mentioned in the settlement Agreement and not for divesting the assessee of its earning apparatus since the restrictive covenant in the said Agreement only prohibited the assessee from undertaking a similar project in the vicinity of the existing project without the consent of the landowner for the limited duration of 3 years and, therefore, the compensation was a revenue receipt. It is apparent from the material available on record and the facts of the case that there is no restrictive covenant with regard to the appellant not running another hotel in the vicinity of the property. In fact, it has been mentioned in the termination Agreement [clause iiia] that in the event that SRK Travels & Tours Pvt. Ltd. wish to enter into arrangements with any 3rd party for the purpose of operating a hotel business from the property during the an expired period of the original Agreement, notwithstanding the termination, ie, April 2022 similar to the business of the 2nd party (being the appellant) and an cifer is received by SRK Travels & Tours Pvt. Ltd., they shall 1 offer such right by sending notice to the appellant and that the appellant shall have the right of 1 refusal

4.3.5

The other cases relied upon by the appellant are distinguishable on facts inasmuch as that the property in respect of which compensation was received was not the only property and was not the only source of income for he assessee. Hence, in view of the discussion above it is held that there is no infirmity in the order of the AO in treating the receipt on account of compensation received for loss of busiiness from SRK Travels & Tours Private Limited on termination of principle Agreement as revenue receipt. The addition made is upheld. Grounds of appeal Nos. 7 and 8 are dismissed.