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TMI Blog2013 (1) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... ffs, 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... License" on 11th December, 2000 with M/s. Abad Motels and Resorts (P) Ltd., who are experienced in the field of operating and managing hotels. As per the terms and conditions of the said agreement, the hotel along with the furniture, furnishings and other related items was given to the licensee for a period of 7 years. The assessee is described as "licensor" and M/s. Abad Motels and Resorts (P) Ltd. is described as "licensee". The compensation for the giving the the management of the hotel has been fixed as per Article VIII of the agreement as under:- "Article VIII LICENCE FEE In consideration of the LICENSOR permitting the LICENCEE to operate the HOTEL fully or partially the LICENCEE shall pay the LICENSOR the following Licence Fee and furnish an interest free security deposit of Rs. 20 lakhs (Rupees Twenty Lakhs). The said security deposit of Rs. 20.00 Lakhs (Rupees Twenty Lakhs) will be retained by the LICENSOR and returned to the LICENCEE on the expiry or termination of this AGREEMENT. The LICENCEE will pay the LICENSOR the following as Licence Fee. Period Licence Fee ( a ) For the first 12 calendar months from the Effective D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental income under the head "Income from house property". The Ld. DR placed heavy reliance on the decision of the Hon'ble Supreme Court in the case of Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353 and submitted that under identical facts, the Hon'ble Supreme Court has held that the income received on letting out the hotel premises is assessable as income from house property. 6. On the contrary, the Ld. AR submitted that the assessee has given only the licence to operate the hotel to M/s. Abad Motels and Resorts (P) Ltd. as per the Agreement of License dated 11-12-2000. He further submitted that, as per the agreement, the name "Hotel Palmshore" will be suffixed with the words "An Abad Beach Resort", which means that the assessee wanted to retain its brand name "Hotel Palmshore" even during the term of license agreement. He further submitted that the assessee entrusted the operation of the hotel along with the building, furniture, furnishings, utensils and other equipment and the said action of the assessee confirms that the agreement was entered into, only to maintain and operate the hotel. He further submitted that the assessee has also carried out promotional activities such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years. The Court held that rental income derived from lease should be taxed u/s. 10 of the Income Tax Act, 1922. If the appellant is taxed u/s. 12(4), it loses certain other allowances u/s. 10 by reason of depreciation. In that case the Hon'ble High Court referred to the decision in Sultan Bros. (supra). Sec. 9 of the Income Tax Act, 1922 referred to Income from House Property. Sec. 10 Profit and gain of business - terms and conditions are identical. (ix) CIT v. Pateshwari Electrical Associated Industries (P.) Ltd. [2006] 282 ITR 61- Income from letting out of House Property and in addition had lease rent from letting out of Workshop, Cold Storage, Motor Garage, Raj Oil and Interest income and Misc. income - receipt of rental - business income. In that case decision of the Hon'ble Supreme Court in Sultan Bros. (supra) was referred to. The Court also considered the decision in Shri Lakshmi Silk Mills Ltd. (supra) - Plant was unused for some time, after some time let out on monthly rent - Court held that it was chargeable to "Business Income". (x) CIT v. V. Shanmugham [1984] 147 ITR 692- Building consisting of 68 rooms and with various facilities satisfied requirement of lod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hotels (P.) Ltd. (supra) as under:- "The general principles laid down by the Supreme Court in this connection are thus (page 461): (1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease, amount, rents, license fee) received by an assessee from leasing or letting out of assets would fall under the head 'Profits and gains of business or profession'; (2) it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out.; (3) where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same.; (4) if only a few of the business assets are let out temporarily, while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business; but if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion about its taxability, i.e. whether the rent received is business income or house property income arose before the Hon'ble High Court, which considered the test laid down by the Hon'ble Supreme Court in the case of Sultan Bros. (P.) Ltd. (supra). The relevant observations made by the Hon'ble High Court is extracted below:- "Before taking a decision on the issue let us first deal with the decisions cited by Mr. Murarka. (i) Sultan Brothers Pvt. Ltd. v. CIT [1964] 51 ITR 353 (SC) : A five judges' Bench of the apex court herein has considered a case wherein the assessee constructed a building and filled it up with furniture and fixtures and let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease provided for a monthly rent for the building and a hire charge for the furniture and fixtures. Dealing with the said case, the apex court held that the letting out of the said building did not amount to the carrying on of a business and the income under the lease would not, therefore, be assessed as income from business. The apex court directed the said income to be assessed accordingly. To decide such an issue the apex court gave a guideline ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amenities granted to those occupants including the user of the furniture and fixtures are attached to such letting out and the last question, in view of the same, must be answered in the negative. Applying the said test we hold that by the said agreement the parties have intended that such letting out would be an inseparable one. Hence, we hold that the prime object of the assessee under the said agreement was to let out the portion of the said property to various occupants by giving them additional right of using the furniture and fixtures and other common facilities for which rent was being paid month by month in addition to the security fee advance covering the entire cost of the said immovable property. In view of the facts and law discussed above we hold that the income derived from the said property is an income from property and should be assessed as such". The view taken by the Hon'ble Calcutta High Court was approved by the Hon'ble Supreme Court and the said decision of the Apex court is reported in Shambhu Investment (P.) Ltd. (supra). 14. The following case law relied upon by the assessee, in our view, are not applicable to the facts of the instant case, since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreement has been executed for sole purpose of carrying out the business operations of running the hotel on behalf of the lessor. Hence, the assessee's contention that it is the right to operate the activities of the hotel which has been transferred but not the right of ownership of the property, is not acceptable. (b) Moreover, the agreement had been executed for a considerably longer period of 7 years. The lease rental income received by the assessee at a fixed rate annually is for both the building as well as the furnishings which have been let out. (c) As long as the ownership of the property vests with the lessor, the lease rental income received as per the lease agreement is to be assessed as income from house property and not business income. (d) The terms and conditions of the agreement also do not contain any clause which specify that the lease rental income will vary with regard to the total turnover from business operations. The rental income has been received at a fixed rate annually and does not vary with decrease or increase in the turnover from business operations carried out by the lessee. Hence the lease rental income received by the assessee does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the parties is clearly stated in the clause numbered as 'Item-IV' under Article XV of the agreement, which reads as under:- "Nothing contained herein shall be construed as creating a partnership or a joint venture or managing/selling agency or any other relationship and render either party liable except the relationship of LICENSOR and LICENCEE as herein expressly provided. Both the parties agree that the intention of the parties herein is only to create a License and under no circumstances will this licence be treated as tenancy or lease or any other arrangement, and the LICENCEE shall not acquire any such interest in THE HOTEL, by virtue of this agreement." This clause clearly brings out the intention of the parties. It clearly says 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. 22. Now we sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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