CIT V. ELEL HOTELS

ITA/344/2011

AI Insights

The case involves two appeals by the Revenue against ELEL Hotels concerning the assessment years 2001-02 and 2002-03. The primary issues were the inclusion of license fee as business income and the allowance of depreciation on the hotel building owned by ELEL Hotels but operated by ITC Ltd. The Income Tax Appellate Tribunal had previously ruled in favor of ELEL Hotels, stating that the license fee should be included as business income and depreciation should be allowed, as the hotel was being used for business purposes by ITC Ltd under a hotel operator agreement. The High Court's decision affirmed the Tribunal's ruling, dismissing the Revenue's appeals.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 720382 (HC-DELHI)
• Appeal Type: Others
• Pronouncement Date: 14-02-2012
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: M S SYALI; RAHUL SATEEJA
• Assessee Lawyers: RASHMI CHOPRA
• Keywords: Accrual basis; Business income; Depreciation; Hotel Operator Agreement; License fee
• Section: 143(3); 132; 153A; 260A

Judgement Text

"ITAs 344 & 355 of 2011 Page 1 of 5 $~8 & 11 * IN THE HIGH COURT OF DELHI AT NEW DELHI % Date of Decision : 14th February, 2012. + ITA 344/2011 + ITA 355/2011 CIT ..... Appellant Through Ms. Rashmi Chopra, sr. standing counsel versus ELEL HOTELS ..... Respondent Through Mr. M S Syali, Sr. Adv. with Mr. Rahul Sateeja, Adv. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE R.V. EASWAR SANJIV KHANNA,J: (ORAL) These two appeals filed by the Revenue under Section 260A of the Income Tax Act, 1961 (Act, for short) relate to assessment years 2001-02 and 2002-03. They arise out of the common order of the Income Tax Appellate Tribunal (Tribunal, for short) dated 16.4.2010. 2. The respondent assessee owns hotel “Sea Rock” in Mumbai. In November, 1978 it entered into a lease with ITC Ltd. As per the said ITAs 344 & 355 of 2011 Page 2 of 5 agreement, the assessee was entitled to 23% of the gross turnover of the hotel as licence fee. 3. The licence fee receivable/paid was declared and treated as income. The depreciation on the asset i.e. the hotel building was also allowed to the assessee. 4. On 12th March, 1993, the hotel building was damaged in the serial bomb blast. Thereafter, disputes arose between the assessee and ITC Ltd. regarding repair to the damaged portion of the structure and other related issues. The respondent-assessee claims that there was a mutual settlement on 11.5.2005 and a consent award was passed on 24th May, 2005. 5. In the returns of income, for assessment years 2001-02 and 2002- 03, the assessee had not included the license fee as its income. The Assessing Officer, in the two assessment orders, held that the assessee had earned licence fee on accrual basis in terms of the hotel operator agreement. Accordingly, the Assessing Officer added 23% of the gross turnover as the business income of the assessee and allowed depreciation on the hotel building. The assessee did not, in the appellate proceedings, challenge the addition made by the Assessing Officer on account of the licence fee. 6. On 28th February, 2007, search operations under Section 132 of the Act took place at the premises of the assessee. As a result, a notice under Section 153A of the Act was issued and, thereafter the assessment orders ITAs 344 & 355 of 2011 Page 3 of 5 have been passed under Section 153A read with Section 143(3) of the Act. In the assessment order, the Assessing Officer disallowed the claim of depreciation holding that the assessee the hotel building was not being used for business. The CIT(Appeals) deleted the said addition. 7. The findings recorded by the CIT(Appeals) in respect of assessment year 2001-02 read as under : “2.3.2 It appears that only to disallow the claim of depreciation, this observation has been made by the AO. But for claiming the depreciation it is not necessary to use the asset by the assessee directly. For example in the case of lease transaction, the lease rent is assessable in the hands of the lessor as its business receipt and depreciation on the assets owned by lessor and being used for the business in real sense by the lessee, is allowed to the lessor only. Similarly in the case of the appellant also, under hotel operator agreement, the appellant has allowed ITC Ltd to run hotel owned by it and therefore the share of revenue received or receivable in the form of license fee as per this agreement is liable to be assessed in the hands of the appellant as business receipt and depreciation on hotel assets actually being used in the business of hotel run by ITC ltd is to be allowed in the hands of appellant against this business receipt. Exactly same principle was all along adopted by the department in past in this case including the original order passed u/s. 143(3) in this case for A.Y. 2001-02 by the AO which had reached finality also. The appellant’s ownership over the asset on which depreciation is claimed is not under dispute and user of these assets in business is also not under dispute. Therefore the action of AO is not found justified to ITAs 344 & 355 of 2011 Page 4 of 5 withdraw the claim of depreciation in this order on the same facts. XXXXXXXXXX 2.3.4 It is also seen that in the original order for the A.Y. 2001-02, the appellant has not shown license fee receivable as its income. However, it has claimed deprecation on the assets, which is being used by ITC in running the hotel. The AO brought into taxation the license fee receivable from ITC on accrual basis. He did not disturb the claim of depreciation at the same time. This action of the AO was approved by CIT(A) also. The matter was not taken in further appeal for this year in ITAT by the appellant. Thus, for this year the settled position is that accrued license fee of Rs. 6,81,084/- is added to the income of the appellant and the claim of the depreciation was allowed. It is worth-mentioning that in the A.Y.1997-98 appellant has gone to the Tribunal against the action of AO as approved by CIT (A) to tax accrued license fee as the income. The ITAT has decided this issue in favor of the appellant. Following that decision in A.Y. 2003-04, the CIT(A) has deleted the addition made by the AO on account of accrued license fee. But as far as assessment year 2001-02 is concerned, appellant did not raise this issue while filing the return in response to notice u/s 153A. It did not raise this issue even in assessment proceedings also. Actually in return filed for A.Y. 2001-02 in 153A proceedings, it has shown same income/loss as was finally determined by the AO in original assessment proceedings. In order words in the return filed in response to 153A notice, the licence fee has been offered as its business receipt by the appellant. Thus as far as this year is ITAs 344 & 355 of 2011 Page 5 of 5 concerned, it is not the case that receipt is not offered and only depreciation is claimed.” 8. The aforesaid findings have been upheld by the Tribunal. The Tribunal has recorded that as far as ownership is concerned there was no dispute between the Revenue and the assessee. There was also no dispute that the lincence fee was taxed under the head “income from business”. The Tribunal has recorded that the Revenue has held that the licence fee payable under the hotel operator agreement with ITC Ltd. should be included as “business income” for the two assessment years. Accordingly, it has allowed depreciation on the hotel building. 9. In view of the aforesaid findings and facts record by the CIT(Appeals) and the Tribunal, no substantial question of law arises in these two appeals. Appeals are, accordingly, dismissed. SANJIV KHANNA,J R.V.EASWAR, J FEBRUARY 14, 2012 vld "