2017 (11) TMI 1086 - HC - Income Tax

Income derived out of the property licensed - chargeable under the head Income from house property OR Income from business or profession - assessee herein had constructed, established and operated a hotel by name Hotel Palmshore but gave the hotel along with its furnishings and equipment on license basis - Held that - In Article XIV of the agreement, it is specifically provided that during the term of the agreement, the hotel shall be known as and designated by the logo and name Hotel Palmshore, which will be suffixed by the words An Abad Beach Resort -along with Abad logo. The provisions of the agreement also indicate that the licensor has the right of supervisory control in the manner in which the hotel is operated. All these, provisions of the agreement would, therefore, indicate that the licence that has been granted is that of a fully established running hotel authorising the licensee to operate the hotel for a specified period subject to the terms and conditions incorporated therein. Therefore, the license granted is that of a business. These facts would, therefore, clearly indicate that the intention of the parties as reflected in the agreement was to grant licence in respect of a running hotel, the income of which can only be income from business. Therefore, the Commissioner of Income Tax was fully justified in setting aside the order of assessment and holding that the income of the assessee was income from business and not income from house property. - Decided in favour of the assessee

Summary

Issues:
1. Determination of income as "Income from house property" or "Income from business or profession" for a hotel property.

Analysis:
The case involved an appeal against the order passed by the Income Tax Appellate Tribunal concerning the Assessment Year 2005-06. The Tribunal had allowed the appeal filed by the Revenue, setting aside the order passed by the Commissioner of Income Tax (Appeals) and the assessment order, categorizing the income derived as income from house property. The appellant, the assessee, challenged this decision, framing questions of law for the court's consideration. The main contention revolved around whether the income derived from letting out a running hotel, a commercial asset, should be treated as income from house property or business income.

The facts of the case revealed that the assessee had constructed and operated a hotel named "Hotel Palmshore," which was later given on license basis due to running losses. The agreement with the licensee was crucial in determining the nature of income. The assessee initially offered the license fee under the head "income from business," but the income was later treated as income from house property during assessment. The first appellate authority held it to be income from business, but the Tribunal overturned this decision, leading to the appeal.

The court considered the provisions of the Income Tax Act, relevant case law, and the agreement between the assessee and the licensee. The Apex Court's judgment in Sultan Brothers Pvt. Ltd. v. CIT was cited, emphasizing the distinction between conducting a business and merely exploiting property as an owner. The court highlighted the importance of analyzing the intention of the parties as reflected in the license agreement to determine the nature of income.

Upon analyzing the license agreement dated December 11, 2000, the court noted various clauses indicating that the license granted was for operating a fully established running hotel for a specified period, subject to terms and conditions. The agreement outlined the licensee's rights and obligations, including operational control, branding, and supervisory aspects, all indicative of a business arrangement. Consequently, the court concluded that the income derived from letting out the hotel property was indeed income from business, not house property. The order of the Tribunal was set aside, and the questions of law were answered in favor of the assessee, disposing of the appeal in their favor.