M/S BLACK PEARL HOTELS PVT LTD V. THE DEPUTY COMMISSIONER

ITA/8/2009

AI Insights

The case revolves around the classification of income derived from a conducting agreement between M/s Black Pearl Hotels Pvt. Ltd. and M/s Bennet Colman & Company Co. Ltd. (BCCL). The Income Tax Department assessed this income as 'income from house property', while the assessee classified it as 'business income'. The dispute reached the High Court after the lower authorities upheld the tax department's classification. The court examined the terms of the agreement and the nature of the business activities conducted by BCCL in the premises leased from the assessee.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 727135 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 14-10-2014
• Assessment Year: misc
• Other Referred Cases: COMMISSIONER OF INCOME TAX vs VELANKANI INFORMATION SYSTEMS (P) LTD
• Laws Referred To: I.T. Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: S PARTHASARATHI; JINITA CHATTERJEE
• Keywords: Commercial exploitation; Income from Business; Income from house property; Lease; Conducting agreement
• Section: 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 14th DAY OF OCTOBER 2014 PRESENT THE HON’BLE MR JUSTICE N. KUMAR AND THE HON’BLE MR JUSTICE B. MANOHAR ITA NO. 8/2009 BETWEEN: M/S BLACK PEARL HOTELS PVT. LTD. NO.9, I FLOOR, CURZON COMPLEX BRIGADE ROAD, BANGALORE – 560001 REPRESENTED BY ITS DIRECTOR SRI VAIBHAV NARANG AGED ABOUT 24 YEARS S/O SRI BHARAT BHUSHAN NARANG ..APPELLANT (BY SRI S PARTHASARATHI & JINITA CHATTERJEE, ADVS.) AND: THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE – 11(1) BANGALORE. ..RESPONDENT (BY SRI K V ARAVIND, ADV.) THIS APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 29/08/2008 PASSED IN ITA NO.1150/BNG/2007, FOR THE ASSESSMENT YEAR 2002-2003, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.1150/BNG/2007, DATED 29-08-2008 IN THE INTEREST OF JUSTICE. 2 THIS APPEAL COMING ON FOR HEARING THIS DAY, N KUMAR J., DELIVERED THE FOLLOWING: JUDGMENT The assessee has preferred this appeal against the concurrent finding recorded by the three authorities that the income derived from the premises constitutes ‘income from house property’ and not from ‘business’ as contended by the assessee. 2. The assessee is a private limited company incorporated under the Companies Act, 1956 having its registered office at Bangalore. The object of the assessee is carrying on business and running and operating hotels, retail stores etc. in India. The assessee was running a hotel in Brigade Road, Bangalore in the premises taken on lease. The said business was closed. The assessee was using the lease hold building for various purposes like giving the hall on rent, taking franchise business etc. With effect from 30- 07-2000, the assessee had given the premises to M/s Kids Kemp to run their franchise business for three years under the brand name ‘Toy Kemp”. The said arrangement was terminated on 31.07.2001. The assessee had offered the income during the said three years period under the head 3 ‘business’ which was accepted by the authorities. Subsequently, the assessee entered into a conducting agreement dated 14.08.2001 with M/s Bennet Colman & Company Co. Ltd. (Hereinafter referred to as ‘BCCL’ for short) for a period of 8 years from 15.08.2001. The assessee had engaged the BCCL to conduct a service described in the agreement and appointed them to manage the premises measuring 7900 Sq.Ft. of built-up area being one of the outlets of its chain of retail stores for a consideration of Rs.4,75,000/- per month as minimum guaranteed conducting fees or 8% of net sales proceeds of business carried on by BCCL whichever is higher. The assessee apart from the floor area, also provided all the ancillary utilities and benefits of licenses and permits listed in the statements annexed to the agreement. The area in commercial complex which belonged to the assessee was taken on lease from M/s Choudri Nagappa Enterprises, who is the absolute owner of the said premises. The assessee was commercially exploiting the said premises and derived income there from. A composite right was given by the assessee to BCCL to run the business. 4 3. For the assessment year 2002-03, the assessee filed his returns of income claiming the income derived from conducting agreement with BCCL under the head “business”. The return was selected for scrutiny assessment. The assessing authority held that the income derived by the assessee from conducting agreement with BCCL was liable to be brought to tax under the head ‘income from house property’ and not from ‘income from business’. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals) who declined to entertain the appeal and dismissed the same. Aggrieved by the same, the assessee preferred an appeal to the tribunal which has upheld the finding recorded by the earlier authorities. It is against the said orders, the present appeal is filed. 4. Learned counsel for the assessee assailing the impugned order contended the terms of the agreement clearly discloses that it is not a case of lease and there was no transfer of interest in the immovable property in favour of BCCL. The consideration agreed upon i.e., Rs.4,75,000/- per month or 8% of the total turnover whichever is higher 5 would demonstrate that it is not a case of letting out of property for rent. Thirdly, he contended what has been let out is not only the premises i.e., the immovable property but, also all the ancillary utilities and benefit of license and permits listed in the statements annexed to the agreement which is evident from Clause 3.02. Inspite of the aforesaid material, the authorities committed an error in treating the said agreement as an agreement of lease and assessing the income as ‘income from house property’ and therefore, he submits a case for interference is made out. 5. Per contra, learned counsel appearing for the revenue submitted though the terminology employed in describing the agreement as conducting agreement, the recitals therein amply demonstrate that it is a case of simple lease. The assessee had no control over the business carried on by the BPHPL. The assessee was only entitled to the rental income and therefore, the authorities on proper interpretation of the terms of the agreement, have carefully held that it is a case of lease and consequently, income is assessable under the heading ‘Income from house property’ 6 and therefore, no case for interference with the said finding is made out. 6. The substantial question of law which arises for consideration in this appeal is as under: “Whether in law, the tribunal was right in holding that conducting fees received by the appellant was liable to be taxed under the head “income from house property” instead of “Income from business/other sources?” 7. This Court had an occasion to consider the difference between the ‘business income’ and ‘income from house property’ in the case of COMMISSIONER OF INCOME TAX vs VELANKANI INFORMATION SYSTEMS (P) LTD reported in (2013) 85 CCH 289 KarHC after referring to the various Judgments at Paragraphs 25 and 26 has held as under: “25 We have to find out in that context what was the intention of the parties in entering into the lease transaction. It is not the number of agreements, which are entered into between the parties which is decisive in determining the nature of transaction. What is the object of entering into more than one said transactions is to be looked into. However, if for enjoyment of lease, the subject matter of all the agreements is necessary, then notwithstanding the fact that there are more than one agreement or one lease deed, the transaction is one. As all the agreements are entered into contemporaneously and the object 7 is to enjoy the entire property viz: building, furniture and the accessories as a whole which is necessary for carrying on the business, then the income derived there from cannot be separated based on the separate agreement entered into between the parties. What has to be seen is, what was the primary object of the assessee while exploiting the property. If it is found applying such principle that the intention is for letting out the property or any portion thereof, the same may be considered as rental income or income from properties. In case, if it is found that the main intention is to exploit immoveable property by way of complex commercial activities, in that event it must be held as business income. 26. Sub-section (1) of Section 56 makes it clear that income of every kind which is not be excluded from the total income under this Act shall be chargeable to income tax under the head \"Income from other sources\", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. Sub-section (2) of Section 56 specifically states that the incomes shall be chargeable to income-tax under the head Income from other sources. Clause (ii) of Section 56(2) provides that income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head profits and gains of business or profession. Clause (iii) also provides that where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head `profits and gains of business or profession'. Therefore the intention of the legislature is explicit. The provision is clear, i.e., if the letting of building, plant, machinery and furniture is inseparable, the income from such letting should ordinarily fall within the head `profits and gains of business or profession'. But for any reason, if it does not fall under that head, it shall fall under the `head income from \" other sources \", but certainly not under the heading income from House property. If the intention 8 is to exploit commercial property by putting up construction and letting it out for the purpose of getting rental income, then notwithstanding the fact that the furniture and fittings are provided to the lessee, the income from the building fall under the head income from house property. But if the assessee is in the business of taking land, putting up commercial buildings thereon and letting out such buildings with all furniture as his profession or business, then notwithstanding the fact that he has constructed a building and he has also provided other facilities and even if there are two separate rental deeds, it does not fall within the heading of income from house property. Therefore, firstly what is the intention behind the lease and secondly what are the facilities given along with the buildings and documents executed in respect of each of them is to be seen. Thirdly it is to be found out whether it is inseparable or not. If they are inseparable and the intention is to carry on the business of letting out the commercial property and carrying at complex commercial activity and getting rental income therefrom, then such a rental income falls under the heading of profits and gains of business or profession. In fact, any other interpretation would defeat the very object of introduction of Section 80-IA as well as the scheme which is framed by the Government for development of industrial parks in the country. In that view of the matter, the finding recorded by the Appellate Authority as well as the Tribunal is in accordance with law and does not suffer from any legal infirmity which calls for interference. Accordingly, the substantial questions 1 and 2 are answered in favour of the assessee and against the revenue”. 8. From the aforesaid passage, it is clear what has to be seen is what was the primary object of the assessee while exploiting the property. If the intention is to exploit the commercial property by putting up construction and 9 letting out for the purpose of getting reasonable income, then not-withstanding the fact that the furniture and fittings are provided to the lessee, the income from building fall under the heading “income from house property” but, if the assessee is in the business of taking land, putting up commercial buildings thereon and letting-out such building with all furniture as his profession or business, then notwithstanding the fact that he has constructed the building and he has also provided other facilities and even if there are two separate rental deeds, it does not fall within the heading of “Income from House Property”. Therefore, firstly, what has been the intention behind the lease and secondly, what are the facilities given along with the building and documents executed in respect of each of them has to be seen. Thirdly, it has to be found out whether it is inseparable or not. If they are inseparable and the intention is to carry on the business of letting out the commercial property and carrying out complex commercial activity and getting rental income there from, this rental income fall within the heading “Profits and Gains of business. 10 9. In the instant case, there is a written agreement entered into between the parties. The assesse is not the owner of the premises which he had handed-over to the conductor. In fact, the lessess took the premises on lease and he was carrying on his business. When he could not carry on business, he had permitted commercial activity to be carried on in the said premises by exploiting the facilities available thereon by others. Firstly, it was given to Kids Kemp for three years and the income derived there from is shown as ‘business income’ though the income derived there from is shown as ‘business income’ though the returns filed under Section 143(1) was accepted by the Department but, subsequently when Kids Kemp vacated, the assessee has entered into an agreement with BCCL for commercial exploitation of the property. The terms of the agreement shows there is no demise, there is no transfer of interest in the immovable property. On the contrary, BCCL is permitted to enter the property, use the facilities thereon, manage the whole property and commercially exploit the entire asset given to them. In turn, the consideration fixed is Rs.4,75,000/- per month being the minimum or 8% of the total turnover whichever, is higher 11 is payable to the assessee if the premises is let out for rent, consequently such premises are not found in the lease deed. Lease of a property is for a definite amount with periodical increase every year. Payment of rent is not dependent on the income derived from the lessee by the commercial exploiting of the property. That apart, not only, the premises is given to BCCL, but all fittings, furniture, licences, permits which was standing in the name of the assessee is handed-over to BCCL to carry on the commercial activity. These aspects have not been properly considered by the three authorities. They committed a serious error in proceeding on the assumption that the terms of the agreement according to them is in the nature of the terms in a rental agreement or lease agreement and therefore, the income derived there from constitutes ‘income from house property’. The said finding is contrary to the material on record, it is case of mis- interpretation of the terms of the agreement. The real intention of the parties as could be covered from the terms of the agreement is not property appreciated. In that view of the matter, the findings of the three authorities is unsustainable and accordingly it is set-aside. The 12 substantial question of law is answered in favour of the assessee and against the revenue. The appeal is allowed. Parties to bear their own costs. Sd/- JUDGE Sd/- JUDGE brn "