2021 (2) TMI 421 - AT - Income Tax

Characterization of income - License fees received for licensing a hotel to another company for running and maintenance - assessable under the head income from business or profession OR income from house property - HELD THAT - Case of the assessee is squarely covered by the decision in the case of M/s.Palmshore Hotels (P) Ltd vs. CIT 2017 (11) TMI 1086 - KERALA HIGH COURT has reversed the decision of ITAT, Cochin, which was heavily relied upon by the AO to justify his conclusion to tax license fee under the head income from house property . The Hon ble High Court held that license fee received by an assessee for giving its hotel with furniture and fixture to a company for running a hotel for a specified period was assessable under the head income from business and not under the head income from house property We are of the considered view that, license fee received by the assessee for licensing a fully furnished hotel along with license to run the hotel is a business receipt, which is assessable under the head income from business or profession but not a rental income, which is assessable under the head income from house property . AO as well as the CIT(A) were grossly erred in assessing license fee under the head income from house property and hence, we reverse the findings of the CIT(A) and direct the AO to assess license fee under the head income from business or profession as claimed by the assessee. - Decided in favour of assessee.

Issues Involved:
1. Whether the income earned under the Memorandum of Understanding (MoU) with M/s Orient Hotels Limited should be classified as 'income from house property' or 'income from business or profession'.

Issue-wise Detailed Analysis:

1. Classification of Income Earned Under the MoU:
The primary issue in this case revolves around the classification of income earned by the assessee under a license agreement with M/s Orient Hotels Limited. The assessee reported this income under 'income from business or profession,' while the Assessing Officer (AO) classified it as 'income from house property.'

Facts and Arguments:
The assessee, engaged in the hotel business, constructed a hotel at Trivandrum in 2008 and operated it until 31.07.2009. Subsequently, the assessee entered into a license agreement with M/s Oriental Hotels Ltd. (Taj Group of Hotels) to operate the hotel for 40 years on a revenue-sharing basis. The AO, referencing the MoU, concluded that the income was rental income assessable under 'income from house property,' based on the Supreme Court decisions in Chennai Properties and Investments Ltd. vs. CIT and Rayala Corporation (P) Ltd. vs. ACIT. The AO argued that the main object of the assessee was to run the hotel, not to let out property for rental income.

CIT(A) Decision:
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, stating that the income was derived from property exploitation and not from any business activity carried out by the assessee. The CIT(A) referenced various judicial decisions and the MoU to support this conclusion, emphasizing that the assessee ceased business activities related to the hotel upon signing the MoU.

Assessee's Appeal:
The assessee contested this decision, arguing that the income should be classified under 'income from business or profession,' as the hotel was licensed to another company due to business exigencies. The assessee highlighted that the revenue-sharing model did not constitute a fixed rental income, citing the Kerala High Court’s decision in Palmshore Hotels (P.) Ltd. vs. CIT, which classified similar income as business income.

Tribunal's Analysis:
The Tribunal examined the nature of the agreement and the business model of the assessee. It noted that the agreement was not a simple lease but an arrangement to continue the business activity of running a hotel. The Tribunal found that the revenue-sharing model indicated a business arrangement rather than a rental agreement. The Tribunal also considered the Supreme Court’s decisions and concluded that the main object of the assessee, as per its Memorandum of Association, included constructing and leasing hotels, supporting the classification of the income as business income.

Judicial Precedents:
The Tribunal referenced the Kerala High Court’s decision in Palmshore Hotels (P.) Ltd. vs. CIT, which held that license fees from a hotel with furniture and fixtures for running the hotel should be classified as business income. The Tribunal emphasized that the intention of the parties and the nature of the agreement indicated a business arrangement.

Conclusion:
The Tribunal concluded that the license fee received by the assessee for licensing a fully furnished hotel along with the license to run the hotel should be classified as 'income from business or profession.' The Tribunal reversed the findings of the CIT(A) and directed the AO to assess the income under the head 'income from business or profession.'

Final Order:
The appeal filed by the assessee was allowed, and the order was pronounced on 8th February 2021 at Chennai.

Summary:
The Tribunal determined that the income earned by the assessee under the license agreement with M/s Oriental Hotels Ltd. should be classified as 'income from business or profession' rather than 'income from house property,' based on the nature of the agreement and judicial precedents. The Tribunal reversed the CIT(A)’s decision and directed the AO to assess the income accordingly.

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