2014 (9) TMI 431 - HC - Income Tax

Assessment of rental income from lease/finance Business income of House property Held that - The assessee has not leased out the property merely as a land and building, but also with further conditions as to how the business of the lessees/franchiees should be conducted with regard to the hotel industry only - The Special conditions of contract make it clear that the name of the assessee should clearly indicated in the name Board and the name of the franchisee should be below the name of TTDC, making it clear that the TTDC continues to be operating their business through their franchisees - the Special conditions make it clear that the assessee corporation continues to be in the business of tourism activities, though not directly but through the franchisees and has received income as franchisee fee and that cannot be lost sight of while determining the nature of income. Tribunal rightly was of the view that the properties let out by the assessee are business assets of the assessee corporation, as they have not treated the leased out properties as non-business assets of the assessee-corporation - the assessee has given a special right or privilege to the franchisees to undertake a particular business in the property of the assessee on receipt of franchisee fee - the income is clearly in the nature of business income and not income from house property thus, the order of the Tribunal is upheld Decided against assessee.

Summary

Issues Involved:
1. Classification of rental income from lease/franchise as business income or income from house property.
2. Impact of ceasing hotel business on the classification of rental income.
3. Conditions under which income from leasing constitutes income from house property.

Detailed Analysis:

Issue 1: Classification of Rental Income
The core issue was whether the rental income from lease/franchise should be assessed as business income or under the head "income from house property." The Tribunal held that the rental income should be assessed as business income. The assessee argued that leasing of hotels and restaurants is distinct from its business of operating and maintaining hotels. However, the Tribunal found that the properties were let out to recover better profits from loss-making units, and the income derived was shown as franchisee fee, indicating business activity. The Tribunal concluded that the income was business income, not income from house property, and thus, the assessee was not entitled to a 30% deduction under the head "income from house property."

Issue 2: Ceasing Hotel Business and Impact on Income Classification
The assessee contended that it had ceased to carry on hotel business in the impugned properties and had chosen to exploit the same as their owner by leasing out the land and building for long periods. However, the Tribunal found that the assessee continued the business activity of tourism development through franchisees. The properties were not treated as non-business assets, and the income derived was considered business income. The Tribunal emphasized that the assessee corporation continued its tourism activities through franchisees, and the income received as franchisee fee could not be overlooked while determining the nature of income.

Issue 3: Conditions for Income from Leasing to be House Property Income
The Tribunal noted that the properties were let out with specific conditions on how the business should be conducted, indicating that the assessee was still involved in the business. The Tribunal referenced the tender document's special conditions, which required the franchisee to operate the hotel under the TTDC name, maintain the property, and adhere to various operational standards. These conditions demonstrated that the assessee was not merely leasing out property but was engaged in an ongoing business activity. The Tribunal concluded that the income was business income, not income from house property.

Conclusion:
The Tribunal's decision was upheld, and the appeals were dismissed. The Tribunal's findings that the properties were business assets and that the income derived was business income were justified. The Tribunal's reasoning aligned with the special conditions of the contract, which indicated that the assessee continued its business activities through franchisees. Consequently, no substantial question of law arose for consideration, and the appeals were dismissed without costs.