2016 (3) TMI 880 - HC - Income Tax

TDS u/s 194I - whether the tour operators/travel agents were required to deduct TDS under Section 194-I of the Act while making payments to the hotels on behalf of foreign tourists? - Held that - The Revenue is right in its contention that applicability of Section 194-I does not depend upon whether the income of the hotel from room charges is assessed under profits and gains of business or profession or income from house property . Section 194-I is applicable at the time of payment of rent or at the time of crediting such amount to the payee, if the other conditions laid down under the said provision are fulfilled. It is for the Assessee to decide whether it seeks to retain the hotel as an investment or as a business asset. The income therefrom could be taxed as business income if it is exploited as a business asset. Rental income can also be taxed under the head Income from other sources . This, however, does not affect the constitutional validity of the provision or the liability of the person (other than an individual or HUF) making payment to deduct TDS at the time of making such payment. Question whether any part of the payment received by the hoteliers, who are members of FHRAI, from persons other than individuals and HUFs, can be construed as rent within the meaning of Section 194-I of the Act is answered in the affirmative. The contention of the Petitioners that no part of the payment received by them as room charges falls within the ambit of rent under Section 194-I of the Act is hereby rejected. The Court nevertheless clarifies that it will depend on the facts of every case, and the onus would be on the concerned hotel to show, whether the payment made by the customers to the hotel includes any payment that can be said to be outside the ambit of rent as defined under Section 194-I of the Act. fall outside the ambit of Explanation to Section 194-I of the Act.

Issues Involved:
1. Applicability of Section 194-I of the Income Tax Act, 1961 to the Hotel Industry.
2. Definition and interpretation of 'rent' under Section 194-I.
3. Validity of Circulars issued by the Central Board of Direct Taxes (CBDT).
4. Constitutional validity of Section 194-I.

Detailed Analysis:

1. Applicability of Section 194-I to the Hotel Industry:
The petitioners sought a declaration that Section 194-I of the Income Tax Act, 1961 does not apply to the hotel industry as charges for a room in a hotel do not constitute 'rent' as per the Explanation to Section 194-I. The petitioners argued that the room tariff is a composite charge including various amenities and not just for occupying the room alone.

2. Definition and Interpretation of 'Rent' under Section 194-I:
The court examined the definition of 'rent' under Section 194-I, which includes any payment under any lease, sub-lease, tenancy, or any other agreement or arrangement for the use of land, building, machinery, plant, equipment, furniture, or fittings. The court emphasized that the words "any payment" and "any other agreement or arrangement" indicate the legislative intent to give the widest scope to the term 'rent'. The court held that even if the room charges are composite and include various amenities, they still fall within the ambit of 'rent' under Section 194-I.

The court referred to various judgments to support its interpretation, including the Andhra Pradesh High Court's decision in Krishna Oberoi v. Union of India, which held that charges paid to a hotel for room usage are considered 'rent' under Section 194-I. The court also discussed the impact of the 46th Amendment to the Constitution, which introduced Article 366 (29A), allowing the separation of service and sale elements in composite transactions.

3. Validity of Circulars Issued by CBDT:
The court examined Circular No. 715 of 1995 and Circular No. 5 of 2002 issued by the CBDT, which clarified that payments for hotel accommodation on a regular basis are subject to TDS under Section 194-I. The court found that these circulars did not expand the scope of Section 194-I but provided clarity. The court held that the circulars are not ultra vires the Act and do not cause any hardship or confusion.

4. Constitutional Validity of Section 194-I:
The petitioners challenged the constitutional validity of Section 194-I on the grounds that it is arbitrary and violates Articles 14 and 19(1)(g) of the Constitution. The court rejected this challenge, stating that the provision does not create an artificial distinction between Indian and foreign guests. The court noted that the scheme of the Act, including provisions for TDS certificates and lower deduction rates under Section 197, does not render Section 194-I arbitrary or unreasonable.

Conclusion:
The court dismissed the petitions, holding that the word 'rent' in Section 194-I has to be interpreted widely and includes payments for hotel room charges. The court clarified that the applicability of Section 194-I depends on the facts of each case, and the onus is on the hotel to show if any part of the payment falls outside the ambit of 'rent'. The interim orders were vacated, and no costs were awarded.

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