ACIT, Trivandrum V. M/S PALMSHORE HOTELS (P) LTD, Trivandrum

ITA 249/COCH/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64774 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2012
• Appeal Filed By: Department
• Bench Allotted: DB
• Assessment Year: 2005-2006
• Appeal Filed On: 12-04-2011
• Court: TRIBUNAL
• Department Lawyers: PRADUMNA KUMAR SINGH
• Assessee Lawyers: R KRISHNA IYER
• Keywords: Business income; Depreciation; Question of law

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A. NO.249/COCH/2011 ASSESSMENT YEAR: 2005-06 THE ASSISTANT COMMISSIONER OF INCOME-TAX,CIRCLE-1(1), TRIVANDRUM. VS. M/S. PALMSHORE HOTELS (P) LTD., LIGHT HOUSE ROAD, VIZHINJAM, TRIVANDRUM. [PAN: AABCP 3814F] (REVENUE-APPELLANT) (ASSESSEE-R ESPONDENT) REVENUE BY SHRI PRADUMNA KUMAR SINGH, JR. DR ASSESSEE BY SHRI R. KRISHNA IYER, CA DATE OF HEARING 24/07/2012 DATE OF PRONOUNCEMENT 14/09/2012 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE APPEAL OF THE REVENUE IS DIRECTED AGAIN ST THE ORDER DATED 27-01-2011 PASSED BY THE LD. CIT(A)-I, TRIVANDRUM AND IT RELATES TO T HE ASSESSMENT YEAR 2005-06. 2. THE SOLITARY ISSUE URGED IN THIS APPEAL IS WHETH ER THE LD. CIT(A) IS JUSTIFIED IN HOLDING THAT THE LEASE RENT RECEIVED BY THE ASSESSE E SHOULD BE ASSESSED AS BUSINESS INCOME AND NOT AS INCOME FROM HOUSE PROPERTY. 3. THE FACTS RELATING TO THE ISSUE ARE STATED IN BR IEF. THE ASSESSEE HEREIN CONSTRUCTED AND OPERATED A HOTEL BY NAME HOTEL PAL MSHORE WITH A CAPACITY OF 35 ROOMS AND TWO COTTAGES. SINCE IT WAS INCURRING LOS SES, THE ASSESSEE DECIDED TO GIVE THE HOTEL ALONG WITH FURNISHINGS AND EQUIPMENTS ON LICE NSE BASIS. ACCORDINGLY, THE ASSESSEE ENTERED INTO AN AGREEMENT OF LICENSE ON 11 TH DECEMBER, 2000 WITH M/S. ABAD MOTELS AND RESORTS (P) LTD., WHO ARE EXPERIENC ED IN THE FIELD OF OPERATING AND MANAGING HOTELS. AS PER THE TERMS AND CONDITIONS O F THE SAID AGREEMENT, THE HOTEL ALONG WITH THE FURNITURE, FURNISHINGS AND OTHER REL ATED ITEMS WAS GIVEN TO THE LICENSEE I.T.A. NO.249 /COCH/2011 2 FOR A PERIOD OF 7 YEARS. THE ASSESSEE IS DESCRIBED AS LICENSOR AND M/S. ABAD MOTELS AND RESORTS (P) LTD. IS DESCRIBED AS LICENSEE. T HE COMPENSATION FOR THE GIVING THE THE MANAGEMENT OF THE HOTEL HAS BEEN FIXED AS PER ARTIC LE VIII OF THE AGREEMENT AS UNDER:- ARTICLE VIII LICENCE FEE IN CONSIDERATION OF THE LICENSOR PERMITTING THE LIC ENCEE TO OPERATE THE HOTEL FULLY OR PARTIALLY THE LICENCEE SHALL PAY THE LI CENSOR THE FOLLOWING LICENCE FEE AND FURNISH AN INTEREST FREE SECURITY DEPOSIT OF RS. 20 LAKHS (RUPEES TWENTY LAKHS). THE SAID SECURITY DEPOSIT OF RS. 2 0.00 LAKHS (RUPEES TWENTY LAKHS) WILL BE RETAINED BY THE LICENSOR AND RETURNE D TO THE LICENCEE ON THE EXPIRY OR TERMINATION OF THIS AGREEMENT. THE LICENCEE WILL PAY THE LICENSOR THE FOLLOWING AS LI CENCE FEE. PERIOD LICENCE FEE (A) FOR THE FIRST 12 CALENDAR MONTHS FROM RS. 36.00 LAKHS THE EFFECTIVE DATE. (B) FOR THE SECOND 12 MONTHS FROM THE RS. 42.00 LAKHS EFFECTIVE DATE. (C) FOR THE THIRD 12 MONTHS FROM THE RS. 48.00 LAKHS EFFECTIVE DATE. (D) FOR THE FOURTH 12 MONTHS FROM THE RS. 48.00 LAKHS EFFECTIVE DATE. (E) FOR THE FIFTH 12 MONTHS FROM THE RS. 48.00 LAKHS EFFECTIVE DATE. (F) FOR THE SIXTH 12 MONTHS FROM THE RS. 48.00 LAKHS EFFECTIVE DATE. (G) FOR THE SEVENTH 12 MONTHS FROM THE RS. 48.00 LAKHS EFFECTIVE DATE. I.T.A. NO.249 /COCH/2011 3 ARTI CLE IX MANNER OF PAYMENT THE LICENSEE SHALL PAY TO THE LICENSOR THE LICENCE FE E AT THE RATES SPECIFIED IN ARTICLE VIII ON EQUAL MONTHLY BASIS, THE MONTHL Y LICENCE FEE BEING 1/12 OF THE YEARLY LICENCE FEE. SUCH LICENCE FEE FOR EACH MON TH SHALL BE PAID ON THE 10 TH DAY OF EVERY SUCCEEDING CALENDAR MONTH. IN THE EV ENT OF DEFAULT OF MONTHLY PAYMENT CONSECUTIVELY FOR 3 (THREE) MONTHS THE LIC ENCEE SHALL CEASE TO HAVE THE RIGHTS UNDER THIS AGREEMENT. 4. THE ASSESSEE OFFERED THE LICENCE FEE UNDER THE H EAD INCOME FROM BUSINESS. HOWEVER, THE AO PROPOSED TO ASSESS THE SAME UNDER T HE HEAD INCOME FROM HOUSE PROPERTY. BEFORE THE ASSESSING OFFICER, THE ASSES SEE SUBMITTED THAT IT HAS PERMITTED THE ASSESSEE TO MANAGE THE HOTEL AND FURTHER AS PER THE AGREEMENT, NOT ONLY THE BUILDING, BUT ALSO FOR FURNITURE, FURNISHINGS AND O THER EQUIPMENT WHICH ARE NECESSARY FOR CARRYING OUT THE HOTEL BUSINESS WERE GIVEN TO THE L ICENSEE. ACCORDINGLY, IT WAS CONTENDED THAT THE LICENSE FEE RECEIVED BY IT SHOUL D BE ASSESSED AS BUSINESS INCOME. THE ASSESSING OFFICER TREATED THE LICENSE FEE AS L EASE RENT AND ACCORDINGLY REJECTED THE CONTENTIONS OF THE ASSESSEE BY PLACING RELIANCE ON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. CHENNAI PR OPERTIES AND INVESTMENTS LTD., 266 ITR 685. ACCORDINGLY, THE ASSESSING OFFICER ASSESS ED THE LEASE RENTAL INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) AND THE FIRST APPELLAT E AUTHORITY ALLOWED THE CLAIM OF THE ASSESSEE. AGGRIEVED, THE REVENUE IS IN APPEAL BEFO RE US. 5. THE LD. DR SUBMITTED THAT THE ASSESSEE HAS A CTUALLY GIVEN THE HOTEL BUILDING ON LEASE ON FIXED RENT BASIS AND HENCE, THE ASSESSING OFFICER WAS RIGHT IN LAW IN ASSESSING THE LEASE RENTAL INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THE LD. DR PLACED HEAVY RELIANCE ON THE DECISION OF THE HONBL E SUPREME COURT IN THE CASE OF SULTAN BROTHERS PVT. LTD. VS. CIT (1964) 51 ITR 353 AND SUBMITTED THAT UNDER IDENTICAL FACTS, THE HONBLE SUPREME COURT HAS HELD THAT THE INCOME RECEIVED ON LETTING OUT THE HOTEL PREMISES IS ASSESSABLE AS INCOME FROM HOUSE P ROPERTY. I.T.A. NO.249 /COCH/2011 4 6. ON THE CONTRARY, THE LD. AR SUBMITTED THAT THE A SSESSEE HAS GIVEN ONLY THE LICENCE TO OPERATE THE HOTEL TO M/S. ABAD MOTELS AN D RESORTS (P) LTD. AS PER THE AGREEMENT OF LICENSE DATED 11-12-2000. HE FURTHER SUBMITTED THAT, AS PER THE AGREEMENT, THE NAME HOTEL PALMSHORE WILL BE SUFFI XED WITH THE WORDS AN ABAD BEACH RESORT, WHICH MEANS THAT THE ASSESSEE WANTED TO RE TAIN ITS BRAND NAME HOTEL PALMSHORE EVEN DURING THE TERM OF LICENSE AGREEMEN T. HE FURTHER SUBMITTED THAT THE ASSESSEE ENTRUSTED THE OPERATION OF THE HOTEL ALONG WITH THE BUILDING, FURNITURE, FURNISHINGS, UTENSILS AND OTHER EQUIPMENT AND THE S AID ACTION OF THE ASSESSEE CONFIRMS THAT THE AGREEMENT WAS ENTERED INTO, ONLY TO MAINTA IN AND OPERATE THE HOTEL. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS ALSO CARRIE D OUT PROMOTIONAL ACTIVITIES SUCH AS CANVASSING THE CUSTOMERS, CREATING BRAND IMAGE, PRO MOTE FACILITIES PROVIDED IN THE HOTEL ETC. SINCE THE ASSESSEE HAS NOT TRANSFERRED THE RI GHT OF OWNERSHIP AND THE AGREEMENT WAS ENTERED INTO ONLY TO OPERATE THE HOTEL, THE LEA SE RENT RECEIVED BY THE ASSESSEE SHOULD BE TREATED AS INCOME FROM BUSINESS. 7. THE LD. AR FURTHER SUBMITTED THAT THE DECISION O F THE MADRAS HIGH COURT IN THE CASE OF CHENNAI PROPERTIES AND INVESTMENTS LTD., RE FERRED SUPRA WAS WITH REGARD TO THE ISSUE OF INTERPRETATION OF THE WORD HOUSE, I.E., WHETHER THE WORD HOUSE SHALL INCLUDE COMMERCIAL BUILDING OR NOT. HENCE, THE SAID DECISI ON IS NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE. THE LD. AR RELI ED UPON VARIOUS DECISIONS IN SUPPORT OF HIS CONTENTIONS, WHICH ARE DEALT WITH BY US IN T HE ENSUING PARAGRAPHS. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERU SED THE RECORD. ACCORDING TO THE ASSESSEE, THE RENTAL INCOME, WHICH IS DESCRIBED AS LICENSE FEE, IS TO BE ASSESSED UNDER THE HEAD INCOME FROM BUSINESS. IN THIS REGARD, T HE LD A.R RELIED UPON VARIOUS CASE LAW AND THEY INCLUDE ONE SUPREME COURT DECISION AND 12 HIGH COURT DECISIONS. THE DETAILS OF CASE LAW AS SUBMITTED BY THE ALONG WITH SHORT COMMENTS ARE EXTRACTED BELOW:- (I) COMMISSIONER OF EXCESS PROFITS VS. SHRI L AKSHMI SILK MILLS LTD (20 ITR 451) (SC). I.T.A. NO.249 /COCH/2011 5 (II) 69 ITR 247 (PUJ) GINNING FACTORY LEASE D OUT FOR YEARS A GOING CONCERN COURT HELD THAT INCOME DERIVED IS BUSINESS INCOME . (III) 96 ITR 499 (PAT) CINEMA AS A GOING CO NCERN HELD AS BUSINESS INCOME (IV) 128 ITR 497 (DEL) LEASING OUT CINEMA H OUSE IS ASSESSABLE UNDER BUSINESS INCOME. (V) 164 ITR 571 (MP) RICE MILL AND THEATRE BOTH LEASED OUT RENTALS ARE CHARGEABLE TO BUSINESS INCOME. (VI) 284 ITR 229 (BOM) LEASING OF HOTELS WIT H FITTINGS & FIXTURES WAS HELD TO BE BUSINESS INCOME. (VII) 283 ITR 162 (MP) BIDI MANUFACTURING AC TIVITIES AND LET OUT SOME OF ITS GODOWN ASSESSABLE AS BUSINESS INCOME. (VIII) 114 ITR 779 (KOL) EVEREST HOTELS TH E ENTIRE HOTEL BUSINESS UNDER THE NAME AND STYLE HOTEL MOUNT EVEREST RS. 7500/- L EASEHOLD RENT PER ANNUM FOR A PERIOD OF 5 YEARS. THE COURT HELD THAT RENTAL I NCOME DERIVED FROM LEASE SHOULD BE TAXED U/S. 10 OF THE INCOME TAX ACT, 1922. IF THE APPELLANT IS TAXED U/S. 12(4), IT LOSES CERTAIN OTHER ALLOWANCES U/S. 10 B Y REASON OF DEPRECIATION. IN THAT CASE THE HONBLE HIGH COURT REFERRED TO THE DECISI ON IN 51 ITR 353. SEC. 9 OF THE INCOME TAX ACT, 1922 REFERRED TO INCOME FROM HOUSE PROPERTY. SEC. 10 PROFIT AND GAIN OF BUSINESS TERMS AND CONDITIONS ARE ID ENTICAL. (IX) 282 ITR 61 (ALL) INCOME FROM LETTING OUT OF HOUSE PROPERTY AND IN ADDITION HAD LEASE RENT FROM LETTING OUT OF WORKSHOP, COLD STORAGE, MOTOR GARAGE, RAJ OIL AND INTEREST INCOME AND MISC. INCOME RECEIPT OF RENTAL BUSINESS INCOME. IN THAT CASE DECISION OF THE HONBLE SUPREME COURT IN 51 ITR 353 WAS REFERRED TO. THE COURT ALSO CONSIDERED THE DECISION IN 20 ITR 4 51 (SC) PLANT WAS UNUSED FOR SOME TIME, AFTER SOME TIME LET OUT ON MONTHLY RENT COURT HELD THAT IT WAS CHARGEABLE TO BUSINESS INCOME. (X) 147 ITR 692 (MAD) BUILDING CONSISTING OF 68 ROOMS AND WITH VARIOUS FACILITIES SATISFIED REQUIREMENT OF LODGING HOUSE BEING RUN ON COMMERCIAL BASIS INCOME DERIVED FORM LETTING OUT THE LODGING HOUSE SHOULD BE ASSESSED UNDER BUSINESS INCOME. (XI) 282 ITR 61 RENT FROM COLD STORAGE, MOTOR GA RAGE ETC. MAY BE TAXED UNDER INCOME FROM BUSINESS. (PAGE 24). I.T.A. NO.249 /COCH/2011 6 (XII) 298 ITR 371 (KOL) AGREEMENT WITH USERS OF SHOPPING MALLS PROVIDING SERVICES TO USERS BUSINESS INCOME IN THIS CASE A LSO 51 ITR 353 WAS REFERRED TO. 82 ITR 547 AND 114 ITR 779 (KOL) IN EVEREST HOTELS WAS ALSO CONSIDERED. IN PAGE 382 THE HONBLE COURT OBSERVED THAT THE RATIO OF THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IS OF LITTLE HELP TO THE DEPAR TMENT AND ACTUALLY SUPPORTS THE STAND OF THE APPELLANT. (PAGE NO. 25 OF APPEAL PAP ER BOOK). (XIII) 298 ITR (AT) 394 (DEL) LEASE OF THEATRE F OR A SHORT PERIOD INCOME FROM LEASE ASSESSABLE AS BUSINESS INCOME. THE HONBLE TRIBUNAL ALSO FOLLOWED THE DECISION IN 237 ITR 454 (SC). 9. IN THE CASE OF SHRI LAKSHMI SILK MILLS LTD, THE ASSESSEE THEREIN WAS ENGAGED IN MANUFACTURE OF SILK CLOTH AND DYEING SILK YARN AND IT WAS UNABLE TO OPERATE THE DYEING PLANT ON ACCOUNT OF DIFFICULTY IN OBTAINING SILK YA RN AND HENCE IT LET OUT THE DYEING PLANT TEMPORARILY . IT WAS FOUND THAT SUCH LETTING OUT IS PART OF THE U SUAL ACTIVITY OF BUSINESS . IN THE FACTS OF THE SAID CASE, THE SUPREME COURT HELD THAT THE PLANT DOES NOT CEASE TO BE A COMMERCIAL ASSET WHEN LET OUT TEMPORARILY AND THE INCOME EARNED FROM SUCH LETTING OUT IS BUSINESS INCOME. (A S EXPLAINED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF MANGALA HOMES P. LTD VS. INCOME TAX OFFICER AND OTHERS (2010)(325 ITR 281)(BOM)). IN THE INSTANT CASE, TH E ASSESSEE HAS NOT DEMONSTRATED ANY BUSINESS DIFFICULTY AND FURTHER IT HAS NOT BEEN SHOWN THAT THE LETTING OUT IS PART OF THE USUAL ACTIVITY OF BUSINESS. HENCE, IN OUR VIEW , THE ASSESSEE COULD NOT PLACE RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CAS E OF SHRI LAKSHMI SILK MILLS LTD, REFERRED SUPRA. 10. IN THE CASE OF UNIVERSAL PLAST LTD VS.CIT (2 37 ITR 454), THE HONBLE SUPREME COURT HAS LAID DOWN THE GENERAL PRINCIPLES RELATING TO THE INCOME FROM LEASING OUT THE ASSETS OF THE BUSINESS BY AN ASSESSEE, WHICH IS REF ERRED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. MOHIDDIN HOTELS P LTD (2006)(284 ITR 229) AS UNDER:- THE GENERAL PRINCIPLES LAID DOWN BY THE SUPREME CO URT IN THIS CONNECTION ARE THUS (PAGE 461): (1) NO PRECISE TEST CAN BE LAID DOWN TO ASCERTAIN WHETH ER INCOME (REFERRED TO BY WHATEVER NOMENCLATURE, LEASE, AMOUNT, RENTS, LICENS E FEE) RECEIVED BY AN I.T.A. NO.249 /COCH/2011 7 ASSESSEE FROM LEASING OR LETTING OUT OF ASSETS WOUL D FALL UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION; (2) IT IS A MIXED QUESTION OF LAW AND FACT AND HAS TO BE DETERMINED FROM THE POINT OF VIEW OF A BUSINESSMAN IN THAT BUSINESS ON THE FACTS AND IN THE CIRCUMSTANCES OF EACH CASE, INCLUDING TRUE INTERPRETATION OF THE AGREEMENT UNDER WHICH THE ASSETS ARE LET OUT.; (3) WHERE ALL THE ASSETS OF THE BUSINESS ARE LET OUT, THE PERIOD FOR WHICH THE ASSETS ARE LET OUT IS A RELEVANT FACTOR TO FIND OUT WHETHER THE INTENTION OF THE ASSESSEE IS TO GO OUT OF BUSINESS ALTOGETHER OR TO COME BACK AND RESTART THE SAME.; (4) IF ONLY A FEW OF THE BUSINESS ASSETS ARE LET OUT T EMPORARILY, WHILE THE ASSESSEE IS CARRYING OUT HIS OTHER BUSINESS ACTIVIT IES, THEN IT IS A CASE OF EXPLOITING THE BUSINESS ASSETS OTHERWISE THAN EMPLO YING THEM FOR HIS OWN USE FOR MAKING PROFIT FOR THAT BUSINESS; BUT IF THE BUSINESS NEVER STARTED OR HAS STARTED BUT CEASED WITH NO INTENTION TO BE R ESUMED, THE ASSETS WILL CEASE TO BE BUSINESS ASSETS AND THE TRA NSACTION WILL ONLY BE EXPLOITATION OF PROPERTY BY OWNER THEREOF, BUT N OT EXPLOITATION OF BUSINESS ASSETS . IN THE CASE OF MOHIDDIN HOTELS P LTD, REFERRED SUPR A, THE ASSESSEE THEREIN CONSTRUCTED A HOTEL AND LET IT OUT ON A FIXED ANNUAL AMOUNT, FROM THE DAY ONE WHEN IT WAS READY FOR COMMISSIONING. IN THE FACTS OF THE SAID CASE, THE H ONBLE BOMBAY HIGH COURT FOUND THAT THERE WERE ENOUGH MATERIALS IN THE RECORD TO FIND T HE INTENTION OF THE PARTIES AND FURTHER THEY SUGGESTED THAT THE ASSESSEE THEREIN AC TUALLY INTENDED TO EXPLOIT THE HOTEL AS ITS BUSINESS ASSETS, AS HELD BY HONBLE SUPREME COURT IN THE CASE OF MOHIDDING HOTELS P LTD, REFERRED SUPRA. UNDER THOSE CIRCUMST ANCES, IT WAS HELD THAT THE RENTAL INCOME RECEIVED THERE IN IS BUSINESS INCOME. 11. IN THE CASE OF EVEREST HOTELS LTD VS. CIT (11 4 ITR 779), THE HONBLE CALCUTTA HIGH COURT FOUND THAT THE ASSESSEE HAD RESUMED THE HOTEL BUSINESS EVEN BEFORE THE ASSESSMENT WAS COMPLETED BY THE ASSESSING OFFICER. UNDER THOSE CIRCUMSTANCES, THE HIGH COURT HELD THAT THE RENTAL INCOME IS ASSESSABL E AS BUSINESS INCOME. I.T.A. NO.249 /COCH/2011 8 12. THE FACT THAT WAS PREVAILING IN DECISION R ENDERED BY HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SHANMUGHAM (147 ITR 692) WAS THAT THE ASSESSEE HIMSELF HAD LET OUT THE ROOMS IN THE LODGING HOUSE AND HENCE TH E SAID DECISION IS NOT APPLICABLE TO THE ASSESSEES CASE. 13. THE HONBLE SUPREME COURT HAD AN OCCASION T O CONSIDER THE ISSUE ABOUT THE NATURE OF RENTAL INCOME IN THE CASE OF SHAMBHU INVE STMENT PVT LTD (263 ITR 143), WHEREIN THE APEX COURT HAS UPHELD THE DECISION REND ERED BY HONBLE KOLKATTA HIGH COURT IN THAT CASE REPORTED IN 249 ITR 47. THE FA CTS OF THAT CASE HAS BEEN EXPLAINED AS UNDER BY THE HONBLE CALCUTTA HIGH COURT. SHAMBHU INVESTMENT (P) LIMITED, THE ASSE SSEE ABOVE NAMED, IS THE OWNER OF A BUILDING AT RAHEJA CHAMBERS, NARIMAN POINT, MUMBAI . THE SAID PREMISES HAVE BEEN FURNISHED BY THE ASSESSEE AND HAVE BEEN LET O UT TO VARIOUS PERSONS AND /OR FIRMS AND/OR ORGANISATIONS WITH ALL FURNITURE, FIXTURES, LIGHT, AIR-CONDITIONERS FOR BEING USED AS TABLE SPACE. THE SAID ASSESSE E UNDER THE AGREEMENT WITH THOSE OCCUPIERS IS TO PROVIDE SERVICES LIKE WATCH AND WARD STAFF, ELECTRICITY, WATER AND OTHER COMMON AMENITIES. THE QUESTION ABOUT ITS TAXABILITY, I.E. WHETHER THE RENT RECEIVED IS BUSINESS INCOME OR HOUSE PROPERTY INCOME AROSE BEFORE THE HONBLE HIGH COURT, WHICH CONSIDERED THE TEST LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF SULTAN BROTHERS PVT. LTD (1964)(51 ITR 33). THE RELEVANT OBSERVATIONS MADE BY THE HONBLE HIGH COURT IS EXTRACTED BELOW:- BEFORE TAKING A DECISION ON THE ISSUE LET US FIR ST DEAL WITH THE DECISIONS CITED BY MR. MURARKA. (I) SULTAN BROTHERS PVT. LTD. VS. CIT (1964) 51 IT R 353 (SC) : A FIVE JUDGES BENCH OF THE APEX COURT HEREIN HAS CONSIDERED A CA SE WHEREIN THE ASSESSEE CONSTRUCTED A BUILDING AND FILLED IT UP WITH FURNI TURE AND FIXTURES AND LET IT OUT ON LEASE FULLY EQUIPPED AND FURNISHED FOR THE PURPOSE OF RUNNING A HOTEL. THE LEASE PROVIDED FOR A MONTHLY RENT FOR THE BUILDING AND A HIRE CHARGE FOR THE FURNITURE AND FIXTURES. DEALING WITH THE SAID CASE, THE APEX COURT HE LD THAT THE LETTING OUT OF THE SAID BUILDING DID NOT AMOUNT TO THE CARRYING ON OF A BU SINESS AND THE INCOME UNDER THE LEASE WOULD NOT, THEREFORE, BE ASSESSED AS INC OME FROM BUSINESS. THE APEX COURT DIRECTED THE SAID INCOME TO BE ASSESSED ACCO RDINGLY. I.T.A. NO.249 /COCH/2011 9 TO DECIDE SUCH AN ISSUE THE APEX COURT GAVE A GUIDE LINE THAT TO COME TO A CONCLUSION ONE HAS TO FIND OUT THE ANSWER ON THREE ISSUES, NAMELY: (A) WAS IT THE INTENTION IN MAKING THE LEASE AND IT MATTERS NOT WHETHER THERE IS ONE LEASE OR TWO, I.E., SEPARATE LEASES IN RESPECT OF THE FURNITURE AND THE BUILDING THAT THE TWO SHOULD BE ENJOYED TOGETHER? (B) WAS IT THE INTENTION TO MAKE THE LETTING OF THE TWO PRACTICALLY ONE LETTING? (C) WOU LD ONE HAVE BEEN LET ALONE, AND A LEASE OF IT ACCEPTED, WITHOUT THE OTHER? IF THE ANSWERS TO THE FIRST TWO QUESTIONS ARE IN THE AFFIRMATIVE AND THE LAST IN THE NEGATIVE, THEN IT HAS TO BE HELD THAT THE LETT INGS WOULD BE INSEPARABLE. THE HONBLE HIGH COURT, ALTERNATIVELY, APPLIED THE TESTS PRESCRIBED BY THE HONBLE SUPREME COURT ON THE FACTS PREVAILING IN THE CASE O F SHAMBU INVESTMENTS PVT. LTD. THE RELEVANT OBSERVATIONS MADE BY THE HIGH COURT ARE EX TRACTED BELOW:- LET US APPROACH THE PROBLEM FROM ANOTHER ANGLE B Y APPLYING THE TEST SUGGESTED BY THE FIVE JUDGES BENCH IN THE CASE OF SULTAN BROTHERS PVT. LTD. (1964) 51 ITR 353 (SC). THE THREE QUESTIONS FRAME D BY THE APEX COURT ARE APPLIED IN THE INSTANT CASE AS FOLLOWS (PAGE 363): (A) WAS IT THE INTENTION IN MAKING THE LEASE AND IT MATTERS NOT WHETHER THERE IS ONE LEASE OR TWO, I.E., SEPARATE LEASES IN RESPECT OF THE FURNITURE AND THE BUILDING THAT THE TWO SHOULD BE ENJOYED TOGETHER? IN THE INSTANT CASE THERE IS NO SEPARATE AGREE MENT FOR FURNITURE AND FIXTURES OR FOR PROVIDING SECURITY AND OTHER AMENITIES. TH E ONLY INTENTION, IN OUR VIEW, WAS TO LET OUT THE PORTION OF THE PREMISES TO THE RESPECTIVE OCCUPANTS. HENCE, THE INTENTION IN MAKING SUCH AGREEMENT IS TO ALLOW THE OCCUPANTS TO ENJOY THE TABLE SPACE TOGETHER WITH THE FURNITURE AND FIXTUR ES. HENCE, THIS QUESTION SHOULD BE ANSWERED IN THE AFFIRMATIVE. (B) WAS IT THE INTENTION TO MAKE THE LETTING OF TH E TWO PRACTICALLY ONE LETTING (PAGE 363): FROM A PLAIN READING OF THE AGREEMENT IT APPE ARS THAT THE INTENTION OF THE PARTIES TO THE SAID AGREEMENT IS CLEAR AND UNAMBIG UOUS BY WHICH THE FIRST PARTY HAS ALLOWED THE SECOND PARTY TO ENJOY THE SAID TAB LE SPACE UPON PAYMENT OF THE COMPREHENSIVE MONTHLY RENT. HENCE, THIS QUESTION S HOULD BE ANSWERED IN THE AFFIRMATIVE. (C) WOULD ONE HAVE BEEN LET ALONE, AND A LEAST OF IT ACCEPTED, WITHOUT THE OTHER (PAGE 363)? I.T.A. NO.249 /COCH/2011 10 AS WE HAVE DISCUSSED HEREINBEFORE THAT IT IS C OMPOSITE TABLE SPACE LET OUT TO VARIOUS OCCUPANTS, THE AMENITIES GRANTED TO THOSE OCCUPANTS INCLUDING THE USER OF THE FURNITURE AND FIXTURES ARE ATTACHED TO SUCH LETTING OUT AND THE LAST QUESTION, IN VIEW OF THE SAME, MUST BE ANSWERED IN THE NEGATIVE. APPLYING THE SAID TEST WE HOLD THAT BY THE SAI D AGREEMENT THE PARTIES HAVE INTENDED THAT SUCH LETTING OUT WOULD BE AN INSEPAR ABLE ONE. HENCE, WE HOLD THAT THE PRIME OBJECT OF THE ASS ESSEE UNDER THE SAID AGREEMENT WAS TO LET OUT THE PORTION OF THE SAID P ROPERTY TO VARIOUS OCCUPANTS BY GIVING THEM ADDITIONAL RIGHT OF USING THE FURNI TURE AND FIXTURES AND OTHER COMMON FACILITIES FOR WHICH RENT WAS BEING PAID MO NTH BY MONTH IN ADDITION TO THE SECURITY FEE ADVANCE COVERING THE ENTIRE COST OF THE SAID IMMOVABLE PROPERTY. IN VIEW OF THE FACTS AND LAW DISCUSSED ABOVE W E HOLD THAT THE INCOME DERIVED FROM THE SAID PROPERTY IS AN INCOME FROM PROPERTY AND SHOULD BE ASSESSED AS SUCH. THE VIEW TAKEN BY THE HONBLE CALCUTTA HIGH COURT W AS APPROVED BY THE HONBLE SUPREME COURT AND THE SAID DECISION OF THE APEX COU RT IS REPORTED IN 263 ITR 143. 14. THE FOLLOWING CASE LAW RELIED UPON BY THE ASS ESSEE, IN OUR VIEW, ARE NOT APPLICABLE TO THE FACTS OF THE INSTANT CASE, SINCE IN THOSE CA SES, THE ASSETS LET OUT CONSISTED OF BUILDING AND MACHINERIES AND FURTHER THEY WERE LET OUT FOR A TEMPORARY PERIOD DUE TO SOME ADVERSE BUSINESS CONDITIONS. (A) 69 ITR 247 (P & H) GINNING FACTORY (B) 96 ITR 499 (PATNA) CINEMA HOUSE (C) 128 ITR 497 (DELHI) CINEMA HOUSE (D) 164 ITR 571 (MP) RICE MILL AND THEATRE (E) 283 ITR 162 (MP) BIDI MANUFACTURING (F) 282 ITR 61 (ALL) HOUSE, WORKSHOP, COLD STOR AGE ETC. (G) 292 ITR 371 (KOL) SHOPPING MALL & PROVIDING SERVICES TO USERS. (H) 298 ITR (AT) 394 (DELHI) LEASE OF THEATRE. 15. ON A CAREFUL PERUSAL OF THE VARIOUS DECISIO NS, IT BECOMES CLEAR THAT THE FACTS PREVAILING IN EACH CASE AND THE INTENTION OF THE PA RTIES HAVE TO BE CONSIDERED IN ORDER TO DECIDE THE QUESTION WHETHER THE LEASE/RENTAL INC OME IS TO BE TREATED AS HOUSE I.T.A. NO.249 /COCH/2011 11 PROPERTY INCOME OR BUSINESS INCOME. THE NOMENCLATU RE GIVEN TO THE SAID INCOME IS IRRELEVANT. 16. NOW WE SHALL EXAMINE THE FACTS PREVAILING I N THE CASE BEFORE US. THE LD A.R SUBMITS THAT THE ASSESSEE HAS GIVEN ONLY LICENSE TO OPERATE THE HOTEL. HOWEVER, ON A SPECIFIC QUERY FROM THE BENCH, WHETHER THE ASSESSEE HEREIN IS ACCOUNTING FOR DAILY COLLECTIONS MADE FROM THE GUESTS OCCUPYING THE ROOM S AND ALSO THE EXPENSES ON RUNNING THE HOTEL, THE LD A.R FAIRLY CONCEDED THAT THE ASSESSEE IS RECEIVING ONLY THE FIXED LICENCE FEE MENTIONED IN THE AGREEMENT AND TH E LICENSEE IS ACCOUNTING FOR THE DAILY COLLECTIONS AND EXPENSES IN HIS BOOKS OF ACCO UNT. 17. BEFORE THE AO, IT WAS SUBMITTED THAT THE AS SESSEE WAS INCURRING HUGE LOSSES ON ITS HOTEL BUSINESS AND HENCE IT WAS LEASED OUT THE HOTEL ALONG WITH FURNITURE, FURNISHING, EQUIPMENTS ETC. FOR A PERIOD OF SEVEN YEARS. ON TH E EXPIRY OF THE ABOVE SAID PERIOD OF 7 YEARS, THE LICENSEE SHALL CEASE TO HAVE ANY RIGHT ON THE OPERATION OF HOTEL. ACCORDINGLY, IT WAS CONTENDED THAT THE RENTAL INCOM E IS ASSESSABLE AS BUSINESS INCOME. THE AO, HOWEVER, REJECTED THE SAID CONTENTIONS WITH THE FOLLOWING OBSERVATIONS:- A) AS PER THE TERMS AND CONDITIONS OF THE AGREEME NT ENTERED INTO BY THE ASSESSEE WITH ABAD MOTELS, THE LESSEE SHALL CEASE T O HAVE ANY RIGHT ON THE OPERATION OF HOTEL ON THE EXPIRY OF THE SAID 7 YEAR S. THIS CLAUSE IN THE AGREEMENT CANNOT BE INTERPRETED TO MEAN THAT THE AGREEMENT HA S BEEN EXECUTED FOR SOLE PURPOSE OF CARRYING OUT THE BUSINESS OPERATIONS OF RUNNING THE HOTEL ON BEHALF OF THE LESSOR. HENCE, THE ASSESSEES CONTENTION THAT IT IS THE RIGHT TO OPERATE THE ACTIVITIES OF THE HOTEL WHICH HAS BEEN TRANSFERRED BUT NOT THE RIGHT OF OWNERSHIP OF THE PROPERTY, IS NOT ACCEPTABLE. B) MOREOVER, THE AGREEMENT HAD BEEN EXECUTED FOR A CONSIDERABLY LONGER PERIOD OF 7 YEARS. THE LEASE RENTAL INCOME RECEIVED BY TH E ASSESSEE AT A FIXED RATE ANNUALLY IS FOR BOTH THE BUILDING AS WELL AS THE FU RNISHINGS WHICH HAVE BEEN LET OUT. C) AS LONG AS THE OWNERSHIP OF THE PROPERTY VESTS WITH THE LESSOR, THE LEASE RENTAL INCOME RECEIVED AS PER THE LEASE AGREEMENT I S TO BE ASSESSED AS INCOME FROM HOUSE PROPERTY AND NOT BUSINESS INCOME. D) THE TERMS AND CONDITIONS OF THE AGREEMENT ALSO DO NOT CONTAIN ANY CLAUSE WHICH SPECIFY THAT THE LEASE RENTAL INCOME WILL VAR Y WITH REGARD TO THE TOTAL I.T.A. NO.249 /COCH/2011 12 TURNOVER FROM BUSINESS OPERATIONS. THE RENTAL INCO ME HAS BEEN RECEIVED AT A FIXED RATE ANNUALLY AND DOES NOT VARY WITH DECREASE OR INCREASE IN THE TURNOVER FROM BUSINESS OPERATIONS CARRIED OUT BY THE LESSEE. HENCE THE LEASE RENTAL INCOME RECEIVED BY THE ASSESSEE DOES NOT HAVE ANY D IRECT NEXUS WITH THE BUSINESS OPERATIONS CARRIED OUT BY THE LESSEE M/S A BAD MOTELS AND RESORTS PVT. LTD. 18. NOW, WE SHALL TRY TO FIND OUT THE INTENTION OF THE ASSESSEE IN LEASING OUT THE HOTEL BUILDING ALONG WITH FURNITURE, FURNISHINGS, EQUIPME NTS ETC. THE ASSESSEE HAD BEEN RUNNING THE BUSINESS OF HOTEL, BUT INCURRED HUGE LO SSES. HENCE, IT HAS DECIDED TO LEASE OUT THE HOTEL BUILDING. THOUGH IN THE AGREEMENT, I T IS MENTIONED THAT THE OPERATION OF HOTEL IS LEASED OUT, IN SUBSTANCE, IT IS ONLY LEASI NG OUT OF THE HOTEL BUILDING ALONG WITH THE FURNITURE, FURNISHINGS, EQUIPMENTS ETC. THE HO TEL IS BEING OPERATED BY THE LICENSEE WITH HIS OWN FUNDS AND STAFFS, WHICH IS CLEAR FROM THE AGREEMENT, WHERE IT IS STATED THAT THE LICENSEE SHALL OPERATE THE HOTEL BY APPOINTING HIS OWN STAFF WITH THE WORKING CAPITAL FUNDS BROUGHT IN BY HIM. THE LD A.R HAS ALSO FAIRL Y CONCEDED THAT THE ASSESSEE IS RECEIVING THE MONTHLY LEASE RENT AS DETERMINED IN T HE AGREEMENT. IT IS A WELL SETTLED PROPOSITION OF LAW THAT THE SUBSTANCE WILL PREVAIL OVER THE FORM. ACCORDINGLY, THOUGH THE AGREEMENT ENTERED BY THE ASSESSEE IS TITLED AS AGREEMENT OF LICENCE, YET ON READING THE VARIOUS CLAUSES OF THE AGREEMENT, THE I MPUGNED AGREEMENT HAS TO BE CONSIDERED AS LEASE AGREEMENT FOR LETTING OUT THE H OTEL BUILDING WITH FURNITURE, FURNISHINGS, EQUIPMENTS ETC. IN OUR VIEW, THE VAR IOUS CONDITIONS HAVE BEEN IMPOSED UPON THE LICENSEE ONLY TO ENSURE THAT THE HOTEL PRE MISES SHOULD CONTINUE TO BE OPERATED AS ONLY HOTEL. 19. IT IS NOT A CASE THAT THE ASSESSEE HAD TO L ET OUT THE HOTEL BUILDING FOR A TEMPORARY PERIOD DUE TO SOME ADVERSE BUSINESS CONDI TIONS. THE DECISION TO LEASE OUT THE HOTEL BUILDING HAS BEEN TAKEN, SINCE THE ASSESS EE WAS INCURRING OF HUGE LOSSES IN THE OPERATION OF THE HOTEL. UNDER THESE CIRCUMSTAN CES, IT CANNOT BE HELD THAT THE ASSESSEE HAS LEASED FOR A TEMPORARY PERIOD. IN FAC T, THE LEASE PERIOD IS 7 YEARS, WHICH IS QUITE A LONG PERIOD. I.T.A. NO.249 /COCH/2011 13 20. AS PER CLAUSE III UNDER ARTICLE XV OF THE AG REEMENT ENTERED INTO BETWEEN THE ASSESSEE AND THE LICENSEE, THE LEASE PERIOD SHALL B E AUTOMATICALLY EXTENDED, IF THE LICENSEE IS CONSTRAINED TO PAY THE LOAN LIABILITIES ON BEHALF OF THE ASSESSEE HEREIN AND THE EXTENSION SHALL BE TILL SUCH TIME THE ENTIRE AM OUNT PAID BY THE LICENSEE IS RECOVERED. THUS, IT CANNOT BE CATEGORICALLY STATED THAT THE LE ASE PERIOD IS ONLY SEVEN YEARS. 21. THE INTENTION BETWEEN THE PARTIES IS CLEARLY STATED IN THE CLAUSE NUMBERED AS ITEM-IV UNDER ARTICLE XV OF THE AGREEMENT, WHICH READS AS UNDER:- NOTHING CONTAINED HEREIN SHALL BE CONSTRUED AS CRE ATING A PARTNERSHIP OR A JOINT VENTURE OR MANAGING/SELLING AGENCY OR ANY OTHER REL ATIONSHIP AND RENDER EITHER PARTY LIABLE EXCEPT THE RELATIONSHIP OF LICENSOR AND LICENCEE AS HEREIN EXPRESSLY PROVIDED. BOTH THE PARTIES AGREE THAT THE INTENTION OF THE PARTIES HEREIN IS ONLY TO CREATE A LICENSE AND UNDER NO CIRCUMSTANCES WILL THIS LICENCE BE TREATED AS TENANCY OR LEASE OR ANY OTHER ARRANGEMENT, AND THE LICENCEE SHALL NOT ACQUIRE ANY SUCH INTEREST IN THE HOT EL, BY VIRTUE OF THIS AGREEMENT. THIS CLAUSE CLEARLY BRINGS OUT THE INTENTION OF THE PARTIES. IT CLEARLY SAYS THAT THIS AGREEMENT IS NOT AN AGREEMENT FOR CREATION OF A MA NAGING AGENCY, WHICH FALSIFIES THE CONTENTION OF THE ASSESSEE THAT IT HAS ENTERED INTO THIS AGREEMENT ONLY TO GIVE THE OPERATION OF THE HOTEL. FURTHER, UNDER THIS CLAUSE , IT IS MADE VERY CLEAR THAT THE INTENTION OF THE PARTIES IS ONLY TO CREATE A LICENS E, I.E., THE INTENTION IS ONLY TO LEASE OUT THE HOTEL BUILDING ALONG WITH FURNITURE, FURNISHING S, EQUIPMENTS ETC. 22. NOW WE SHALL APPLY THE THREE QUESTIONS TEST SUGGESTED BY THE FIVE JUDGES BENCH IN THE CASE OF SULTAN BROTHERS PVT LTD, SUPRA. (A) WAS IT THE INTENTION IN MAKING THE LEASE AND IT MATTERS NOT WHETHER THERE IS ONE LEASE OR TWO, I.E., SEPARATE LEASES IN RESPECT OF THE FURNITURE AND THE BUILDING THAT THE TWO SHOULD BE ENJOYED TOGETHER? IN THE INSTANT CASE THERE IS NO SEPARATE AGREEMENT FOR FURNITURE AND FIXTURES OR FOR PROVIDING SECURITY AND OTHER AMENITIES. WE HAVE ALREADY TAKEN A VIEW THAT THE INTENTION OF THE ASSESSEE WAS TO LET OUT THE HO TEL BUILDING ALONG WITH FURNITURE, FURNISHINGS, EQUIPMENTS ETC. HENCE, THIS QUESTION SHOULD BE ANSWERED IN THE AFFIRMATIVE. I.T.A. NO.249 /COCH/2011 14 (B) WAS IT THE INTENTION TO MAKE THE LETTING OF TH E TWO PRACTICALLY ONE LETTING (PAGE 363): IN THE INSTANT CASE, THE ASSESSEE HAS LET OUT THE H OTEL BUILDING ALONG WITH THE FURNITURE, FURNISHINGS, EQUIPMENTS ETC. HENCE, THIS QUESTION SHOULD BE ANSWERED IN THE AFFIRMATIVE. (C) WOULD ONE HAVE BEEN LET ALONE, AND A LEAST OF IT ACCEPTED, WITHOUT THE OTHER (PAGE 363)? THE ANSWER TO THIS QUESTION IS DEFINITELY NO. HENCE THE LETTING OF BUILDING AND FURNITURE ETC. IS INSEPARABLE. 23. FROM THE FOREGOING DISCUSSIONS, WE ARE OF T HE VIEW THAT THE INTENTION OF THE ASSESSEE WAS TO LET OUT THE HOTEL BUILDING AND HENC E IT CANNOT BE CONSIDERED THAT THE ASSESSEE WAS EXPLOITING THE PROPERTY FOR ITS COMMER CIAL BUSINESS PURPOSES. ACCORDINGLY, WE ARE OF THE VIEW THAT THE LEASE RENT IS LIABLE TO BE ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THAT OF THE ASSESSING OFF ICER. 24. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS ALLOWED. PRONOUNCED ACCORDINGLY O N 14-09-2012 SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 14 TH SEPTEMBER, 2012 GJ COPY TO: 1. M/S. PALMSHORE HOTELS (P) LTD., LIGHT HOUSE ROAD , VIZHINJAM, TRIVANDRUM. 2.THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE- 1(1), TRIVANDRUM. 3.THE COMMISSIONER OF INCOME-TAX(APPEALS)-I, TRIVAN DRUM. 4.THE COMMISSIONER OF INCOME-TAX,TRIVANDRUM. I.T.A. NO.249 /COCH/2011 15 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN