1997 (1) TMI 132 - AT - Income Tax

Assessing Officer, Assessment Year, Income From Other Sources, Profits And Gains Of Business

Summary

Issues Involved:

1. Classification of income from minimum guaranteed business profits under a license agreement.
2. Claim of depreciation on hotel building by considering it as 'plant'.

Issue-Wise Detailed Analysis:

1. Classification of Income from Minimum Guaranteed Business Profits:

The appellant-company contended that the income from minimum guaranteed business profits under a license agreement with M/s. Indian Hotels Co. Ltd. (IHC) should be assessed under the head 'Income from business and profession'. The CIT(Appeals) and the Assessing Officer had categorized this income under 'Income from other sources'. The appellant-company argued that the agreement with IHC was to exploit the commercial assets of the company in a more profitable manner and that the income derived from the agreement should be considered as business income. They emphasized that the heads of income under the Income-tax Act are mutually exclusive and that if an income falls under a specific head, it should not be taxed under another head. The appellant-company relied on various judgments to support their claim, including cases like Bihar State Co-operative Bank Ltd. v. CIT and Karanpura Development Co. Ltd. v. CIT.

The Tribunal noted that the term 'business' as defined in section 2(13) is broad and includes any trade, commerce, or manufacture. They observed that the agreement with IHC was entered into with the predominant motive of exploiting the hotel building and its fixtures in a more profitable, organized, and systematic manner. The Tribunal highlighted that the appellant-company had not abandoned the idea of conducting the hotel business on its own and had the option to terminate the agreement if IHC failed to comply with its terms. The Tribunal concluded that the income derived by the appellant-company from the license fee received from IHC is assessable under the head 'Profits and gains of business' and not under 'Income from other sources'. The orders of the CIT(Appeals) and the Assessing Officer were set aside, and the Assessing Officer was directed to compute the income under 'Profits and gains of business'.

2. Claim of Depreciation on Hotel Building:

The appellant-company claimed depreciation on the hotel building by treating it as 'plant'. They relied on various decisions, including the judgment of the Hon'ble Calcutta High Court in the case of S.P. Jaiswal Estate (P.) Ltd. v. CIT, which held that a hotel building should be treated as 'plant' for the purpose of depreciation. However, the Tribunal noted that the Hon'ble Rajasthan High Court in the case of CIT v. Lake Palace Hotels & Motels (P.) Ltd. had taken a contrary view, holding that a hotel building is a 'building' and not a 'plant'. The Tribunal observed that the hotel belonging to the appellant-company is located in Rajasthan, and therefore, the judgment of the Hon'ble Rajasthan High Court should be applied.

The Tribunal emphasized that the legislative intent is clear that a hotel building remains a building despite any decorations or fittings. They noted that the hotel industry is service-oriented, and the dominant object is providing service rather than merely providing a room. The Tribunal concluded that the CIT(Appeals) had rightly rejected the assessee's claim for depreciation on the hotel building by treating it as a plant. Consequently, the common ground raised by the assessee in all these appeals was rejected.

Conclusion:

The appeals were partly allowed. The Tribunal directed that the income from the license fee received from IHC should be assessed under 'Profits and gains of business'. However, the claim for depreciation on the hotel building by treating it as a plant was rejected, affirming the decision of the CIT(Appeals).