2015 (9) TMI 13 - AT - Income Tax

Income from hotels - income from business or house property - Held that - The inference drawn by the Assessing Officer that the assessee intended to let out the hotels on rent and earn rental therefrom is not justified. Our this view also finds support from the decision of the Hon ble Bombay High Court in the case of Mohiddin Hotels P. Ltd. (2005 (9) TMI 46 - BOMBAY High Court ), wherein in the similar facts and circumstances of the case has held that when the agreement did not relate to a bare tenement but was in respect of the hotel, the hotel was complete with fittings and fixtures and ready for commencing the business, all licences, permissions and no objection certificates required for running hotels were to be obtained in the name of the assessee was a pointer to the aspect that the assessee intended to exploit the hotel properties as business asset, and therefore, the income was income from business u/s. 28 of the Act. Hence, we find no infirmity in the order of the Commissioner of Income Tax (Appeals), which is hereby confirmed and the grounds of appeal of the Revenue are dismissed. - Decided against revenue.

Issues Involved:
1. Whether the CIT(A) was correct in concluding that the assessee had the intention to run the business of a hotel and allowing the benefits of depreciation.
2. Whether the income from the hotel should be treated as 'business income' or 'income from house property.'
3. Whether the CIT(A) was correct in holding that only 60% of Long Term Capital Gains (LTCG) arose to the assessee and the remaining 40% to M/s. Shunya Projects Consultancy Pvt. Ltd.

Issue-Wise Detailed Analysis:

1. Intention to Run the Business of a Hotel and Allowing Depreciation:
The Revenue's appeal argued that the CIT(A) failed to appreciate that the assessee had never started the business, and thus, the property should be considered as intended for exploitation rather than as a business asset. The CIT(A) observed that the assessee had fully furnished the hotel rooms and borne incidental expenses, indicating a clear intention to run a hotel business. The CIT(A) concluded that the assessee's income depended on the profitability of the hotels, and since the hotel did not make any profits, no income was received. The CIT(A) directed the Assessing Officer to treat the income as 'business income' and allow the benefit of depreciation.

2. Classification of Income:
The Assessing Officer had treated the income from the hotel as 'income from house property,' citing the Bombay High Court's decision in CIT vs. Mohiddin Hotels Pvt. Ltd. The CIT(A) disagreed, noting that the agreement with M/s. Shunya Projects Consultancy Pvt. Ltd. was for managing the hotel on a profit-sharing basis, not for rental income. The Tribunal found that the assessee had previously used the properties as hotels and that the income was assessed as 'business income' in the assessment year 2006-07. The Tribunal supported the CIT(A)'s view, emphasizing that the agreement did not relate to a bare tenement but a fully furnished hotel ready for business. Consequently, the Tribunal confirmed the CIT(A)'s order, treating the income as 'business income' under Section 28 of the Income Tax Act.

3. Apportionment of Long Term Capital Gains (LTCG):
The Revenue contended that the CIT(A) erred in apportioning 60% of LTCG to the assessee and 40% to M/s. Shunya Projects Consultancy Pvt. Ltd., arguing that the assessee was the sole owner at the time of acquisition. However, the Tribunal noted that this ground did not arise from the CIT(A)'s order, a point conceded by the Departmental Representative. Therefore, this ground of appeal was dismissed.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s order that treated the income from the hotel as 'business income' and allowed the benefit of depreciation. The Tribunal also dismissed the ground regarding the apportionment of LTCG, as it did not arise from the CIT(A)'s order. The order was pronounced in court on 9.7.2015.

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