2014 (7) TMI 1148 - AT - Income Tax

Management fees (Royalty) received from Kamat Hotels (India) Limited - assessable as income from business OR income from House property - Held that - Receipts received from KHIL constitute business receipts. See Commissioner of Income-Tax Versus Mohiddin Hotels P. Limited And Another 2005 (9) TMI 46 - BOMBAY High Court - Decided in favour of assessee. Disallowance u/s 14A read with Rule 8D - Held that - it is a settled position that when there is no expenditure has been incurred for earning the income which does not part of the total income, then the provisions of section 14A cannot be applied. Considering the above, we are of the opinion that the matter should revisit the file of the AO for applying the principle laid down in the judgment of the jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd vs. DCIT reported in (2010 (8) TMI 77 - BOMBAY HIGH COURT ) and to decide the issue afresh. AO shall grant a reasonable opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Taxability of management fees (Royalty) received from Kamat Hotels (India) Limited (KHIL) as income from property vs. business income.
2. Disallowance under Section 14A read with Rule 8D.
3. Addition of notional interest on interest-free deposit.

Issue-wise Detailed Analysis:

1. Taxability of Management Fees (Royalty) Received from KHIL:
The primary issue was whether the management fees (Royalty) received from KHIL should be taxed as income from property or business income. The assessee argued that the income should be considered as business income, citing that the management fees were for the efficient and effective management of the hotel business, not for letting out the property. This position was consistent with the treatment of such income in earlier years from AY 1995-96 to 2005-06. The Tribunal referred to its previous decision for AY 2006-2007, which favored the assessee, stating that the receipts from KHIL were business receipts. The Tribunal emphasized the principle of consistency and noted that the nature of the income had not changed. The Tribunal concluded that the management fees received from KHIL should be treated as business income, not as income from house property.

2. Disallowance under Section 14A Read with Rule 8D:
The second issue was the disallowance of expenses under Section 14A read with Rule 8D. The assessee contended that no expenditure was incurred for earning exempt income. The Tribunal referred to its previous decisions, including the case of Garware Wall Ropes Ltd., where it was held that if no expenditure is incurred for earning exempt income, Section 14A cannot be applied. The Tribunal directed the AO to re-examine the issue in light of the Bombay High Court's judgment in the case of Godrej & Boyce Mfg. Co. Ltd., ensuring a reasonable opportunity for the assessee to be heard. Consequently, the disallowance issue was remanded to the AO for fresh adjudication.

3. Addition of Notional Interest on Interest-Free Deposit:
The Revenue contended that the assessee's rent was reduced due to an interest-free deposit from the lessee, warranting an addition of notional interest. The Tribunal, however, had already determined that the income from the hotel should be taxed as business income. Consequently, the grounds raised by the Revenue regarding the addition of notional interest did not survive. The Tribunal dismissed these grounds, aligning with its earlier decision that the receipts from KHIL were business receipts.

Conclusion:
The Tribunal concluded that the management fees received from KHIL should be treated as business income, following the principle of consistency. The issue of disallowance under Section 14A was remanded to the AO for fresh consideration. The addition of notional interest on the interest-free deposit was dismissed as it was contingent on the nature of the income, which was determined to be business income. The appeals were partly allowed for statistical purposes, with specific directions for re-examination by the AO where necessary.