2013 (1) TMI 364 - AT - Income Tax

Lease rent received - business income OR income from house property - Held that - The assessee has given only license to operate the hotel. However, on a specific query from the bench, whether the assessee herein is accounting for daily collections made from the guests occupying the rooms and also the expenses on running the hotel, the assessee fairly conceded that the assessee is receiving only the fixed licence fee mentioned in the agreement and the licensee is accounting for the daily collections and expenses in his books of account. Intention of the assessee in leasing out the hotel building along with furniture, furnishings, equipments etc. - The assessee had been running the business of hotel, but incurred huge losses. Hence, it has decided to lease out the hotel building. Though in the agreement, it is mentioned that the operation of hotel is leased out, in substance, it is only leasing out of the hotel building along with the furniture, furnishings, equipments etc. The hotel is being operated by the licensee with his own funds and staffs, which is clear from the agreement, where it is stated that the licensee shall operate the hotel by appointing his own staff with the working capital funds brought in by him. The assessee has also fairly conceded that the assessee is receiving the monthly lease rent as determined in the agreement. It is a well settled proposition of law that the substance will prevail over the form. Accordingly, though the agreement entered by the assessee is titled as Agreement of Licence , yet on reading the various clauses of the agreement, the impugned agreement has to be considered as lease agreement for letting out the hotel building with furniture, furnishings, equipments etc. The various conditions have been imposed upon the licensee only to ensure that the hotel premises should continue to be operated as only hotel. It is not a case that the assessee had to let out the hotel building for a temporary period due to some adverse business conditions. The decision to lease out the hotel building has been taken, since the assessee was incurring of huge losses in the operation of the hotel. Under these circumstances, it cannot be held that the assessee has leased for a temporary period. In fact, the lease period is 7 years, which is quite a long period.As per clause III under Article XV of the agreement entered into between the assessee and the licensee, the lease period shall be automatically extended, if the licensee is constrained to pay the loan liabilities on behalf of the assessee herein and the extension shall be till such time the entire amount paid by the licensee is recovered. Thus, it cannot be categorically stated that the lease period is only seven years. Clause numbered as Item-IV under Article XV of the agreement states that this agreement is not an agreement for creation of a managing agency , which falsifies the contention of the assessee that it has entered into this agreement only to give the operation of the hotel. Further, under this clause, it is made very clear that the intention of the parties is only to create a license, i.e., the intention is only to lease out the hotel building along with furniture, furnishings, equipments etc - thus applying the est suggested by the five judges Bench in the case of Sultan Bros. (P.) Ltd. 1963 (12) TMI 4 - SUPREME COURT the intention of the assessee was to let out the hotel building and hence it cannot be considered that the assessee was exploiting the property for its commercial business purposes and the lease rent is liable to be assessed under the head Income from house property - in favour of revenue.

Issues Involved:

- Whether the lease rent received by the assessee should be assessed as business income or as income from house property.

Issue-wise Detailed Analysis:

1. Background and Facts:

The assessee constructed and operated a hotel named "Hotel Palmshore" but incurred losses. Consequently, the hotel, along with its furnishings and equipment, was given on a license basis to M/s. Abad Motels and Resorts (P) Ltd. for a period of 7 years. The agreement stipulated a fixed license fee and an interest-free security deposit of Rs. 20 lakhs.

2. Assessee's Argument:

The assessee argued that the license fee should be assessed as business income since the hotel, along with its operational assets, was given to the licensee for management. The assessee retained the brand name and undertook promotional activities, indicating an intention to continue the business.

3. Assessing Officer's (AO) Argument:

The AO assessed the license fee as income from house property, treating it as lease rent. The AO relied on the decision of the Hon'ble Madras High Court in CIT v. Chennai Properties & Investments Ltd. and the Hon'ble Supreme Court in Sultan Bros. (P.) Ltd. v. CIT, which held that income from letting out hotel premises is assessable as income from house property.

4. CIT(A)'s Decision:

The CIT(A) sided with the assessee, holding that the license fee should be assessed as business income. The revenue appealed against this decision.

5. Revenue's Argument:

The revenue argued that the hotel building was leased on a fixed rent basis, and hence, the income should be assessed as income from house property. They placed heavy reliance on the decision in Sultan Bros. (P.) Ltd. v. CIT.

6. Tribunal's Analysis:

The Tribunal analyzed various case laws and principles laid down by the Hon'ble Supreme Court and High Courts regarding the nature of rental income from leasing business assets. The Tribunal noted that each case must be determined based on its facts and the intention of the parties involved.

7. Key Case Laws Cited:

- Shri Lakshmi Silk Mills Ltd. v. CIT: Income from temporarily letting out a dyeing plant was considered business income due to the temporary nature and business context.
- Universal Plast Ltd. v. CIT: Laid down general principles for determining whether rental income is business income or house property income.
- Shambhu Investment (P.) Ltd. v. CIT: Income from letting out furnished premises with services was held as income from house property.

8. Tribunal's Findings:

- The assessee's agreement with M/s. Abad Motels and Resorts (P) Ltd. was essentially a lease agreement for the hotel building and its operational assets.
- The hotel was operated by the licensee with their own funds and staff, and the assessee received a fixed monthly license fee.
- The agreement's substance indicated a lease rather than a business operation management contract.
- The intention of the parties, as per the agreement, was to create a license, not a business partnership or managing agency.

9. Application of Sultan Bros. (P.) Ltd. Test:

The Tribunal applied the three-question test from Sultan Bros. (P.) Ltd. and concluded that the letting of the hotel building and its assets was inseparable and should be treated as a single letting.

10. Conclusion:

The Tribunal held that the lease rent received by the assessee should be assessed under the head "Income from house property" and not as business income. The order of the CIT(A) was set aside, and the AO's assessment was restored.

11. Final Judgment:

The appeal filed by the Revenue was allowed, and the lease rent was to be assessed as income from house property.

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