2023 (6) TMI 1027 - AT - Income Tax

Correct head of income - letting out of Hotel/Resort as running business - treatment of revenue receipts from operation of Hotel/Resort - Contract for managing the business from the said premises on a consideration of management license basis - No fixed consideration - addition qua revenue from House Property or business income - HELD THAT - As in the agreement executed by Assessee with M/s Four Seasons, not a single term or condition reflects the essence of rent agreement. The Assessee had received the receipts/income from the revenue generated by M/s Four Seasons on fluctuation basis and undisputedly has not received any fixed amount, which can be termed as rental income , hence, we do not have any hesitation to hold that the revenue receipts generated by the Assessee from M/s Four seasons, are undoubtedly income from the Business and therefore, should be treated under the head Business Income but not as rental income from House Property as determined by the authorities below. Consequently the AO is directed to delete the addition on this issue and re-compute the liability. Disallowing the claim of set off of brought forward unabsorbed depreciation losses of earlier years - In view of our decision in treating the receipts as income under the head Business Income , Assessee shall be eligible for unabsorbed depreciation as claimed for. AO is directed to allow the set off of the unabsorbed depreciation. Appeal filed by the Assessee stands allowed.

Summary

Issues Involved:
1. Treatment of Revenue Receipts from Hotel Operations as "Business Income" vs. "Income from House Property."
2. Allowing Set-Off of Brought Forward Unabsorbed Depreciation Losses.

Summary:

Issue 1: Treatment of Revenue Receipts from Hotel Operations
The Assessee declared revenue receipts from the operation of a hotel as "rental income" in the original return but revised it to "Business Income." The Assessing Officer (AO) issued a notice under section 142(1) of the Income Tax Act, 1961, questioning the revised return. The Assessee argued that the revenue was generated from a management license agreement with Four Seasons Hospitality Pvt. Ltd., and thus should be treated as "Business Income." The AO, however, assessed it as "Income from House Property," citing the long-term nature of the agreement and the fact that the Assessee did not run the hotel operations itself.

The Ld. Commissioner upheld the AO's decision, relying on Supreme Court judgments in Sultan Brothers Pvt. Ltd. and Shambhu Investment (P) Ltd. vs. CIT. The Commissioner noted that the Assessee had rented the entire hotel to Four Seasons Hospitality, which managed the hotel and paid a license fee based on a percentage of net business revenue.

The Tribunal, however, found that the Assessee's main object was to carry out the business of running a hotel. The agreement with Four Seasons was on a revenue-sharing basis, where the Assessee received a percentage of the net revenue generated from the business, not a fixed rental amount. The Tribunal relied on Supreme Court judgments in Chennai Properties and Investments Ltd. vs. CIT and Rayala Corporation Pvt. Ltd. vs. ACIT, which held that income from property given on rent as part of business should be treated as "Business Income."

The Tribunal concluded that the revenue receipts from Four Seasons were indeed "Business Income" and not "Income from House Property," directing the AO to delete the addition and re-compute the liability.

Issue 2: Allowing Set-Off of Brought Forward Unabsorbed Depreciation Losses
Given the Tribunal's decision to treat the revenue receipts as "Business Income," the Assessee is eligible for the set-off of brought forward unabsorbed depreciation losses. The AO was directed to allow the set-off as claimed by the Assessee.

Conclusion:
The appeal filed by the Assessee was allowed. The Tribunal directed the AO to treat the revenue receipts from the hotel operations as "Business Income" and allow the set-off of brought forward unabsorbed depreciation losses.