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TMI Blog2014 (9) TMI 431X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - Tax Case (Appeal) Nos.341 and 342 of 2014 & M.P.No.1 of 2014 - - - Dated:- 2-9-2014 - R. Sudhakar And G. M. Akbar Ali,JJ. For the Appellant : Mr. R. Vijayaraghavan For the Respondent : Mr. G. Vardhini Karthick for Mr. T. Ravikumar Standing Counsel for Income Tax JUDGMENT (Delivered By R. Sudhakar, J.) The above Tax Case (Appeals) are preferred by the assessee aggrieved against the order passed by the Income Tax Appellate Tribunal for the assessment years 2005-06 and 2006-07 raising the following substantial questions of law: 1. Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the rental income from lease/franchise should be assessed as business income and not under the head income from house ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ex to other State Tourism Department/Corporations etc. 4. It is further stated by the assessee before the Assessing Officer that the assessee in its 168th meeting held on 16.12.1996 had resolved to lease/franchise un-economic units to avoid further cash loss and to improve the existing units significantly. The Government, vide G.O.Ms.No.101, Information and Tourism Department dated 3.6.1998 approved the proposal of leasing the 15 Hotel Units. Subsequently, the assessee had obtained the Government approval for leasing 16 more units, which were incurring losses based on Board resolution and 10 restaurants of the assessee. Based on the Government order, the assessee had called for open tenders for leasing the hotels. Hence, the assessee claimed it as a lease income from house property. 5. The Assessing Officer rejected the submissions of the assessee and disallowed the deduction claimed at 30% by the assessee under the head 'income from house property' holding that the assessee had given the hotel premises to private parties on franchise only, which was one of the activity of the regular/ordinary business of the assessee. Accordingly, the Assessing Officer completed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees was shown as franchisee fee. The Tribunal, therefore, came to the conclusion that what was derived as income out of the property was business income and not income out of house property and hence, the assessee was not entitled to 30% deduction. Accordingly, the Tribunal allowed the appeals filed by the Revenue. 8. Aggrieved by the orders of the Income Tax Appellate Tribunal, the assessee is before this Court raising the substantial questions of law referred to above. 9. Learned counsel appearing for the assessee submits that it is evident from the Memorandum of Association of the assessee that leasing of the undertaking of TTDC form a separate activity distinct from running of Hotels and Restaurants. Hence, the lease income derived from these properties has been classified as income from house property and not as business income . He also submits that neither any commercial activity nor any business activity is carried on by the assessee to earn such income. The assessee is only exploiting the property as owner by leasing out the same and realized the income from letting out the hotel property. Hence, the income may be treated as income from house property and not as b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scellaneous Provision Act ESI Act and all other industrial legislations without fail. iv. The Franchisee should obtain Medical Certificate for Production and Service Staff from the Labour Department. v. The Franchisee should obtain D O Licence (Dangerous and Offence) from the local body for the machineries including the Generator installed in the Hotel. vi. The Franchisee should register under VAT and under Service Tax. He should pay the VAT and Service Tax regularly and should produce documentary proof to the inspecting Officers of TTDC. vii. The Franchisee should obtain all other statutory Licenses from the Statutory authorities. II) Lodging: a. The rooms should be cleaned regularly with arrangements for pest control at regular intervals. b. The linen provided in the rooms should be of good quality. It should be changed daily and also after every check in- check out. c. All the equipments provided in the rooms should be in proper working conditions. d. The toilets should be cleaned regularly, properly sanitized and operated at all times. e. The tariff fixed for the rooms shall be competitive and on line with prevailing rates charged by hotels of si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nse for running the Restaurant(Form No.III) and Weighing and Scale measurement certificate from Labour Department. k. The Franchisee should obtain PFA Licence (Prevention of Food Adulteration) from the local body. l. The Restaurant and food articles should comply with all the acts and rates. 6. Bar: a. The Bar should be operated only after obtaining the FL3AA Licence from Commissioner of Prohibition And Excise and should be renewed every year. a. The entire purchase of liquor for the bar should be purchased only from TASMAC . Any purchase of liquor from shops other than TASMAC is illegal and shall be liable for termination of the contract. c. Bar licenses to be obtained from the Commissioner of Prohibition and Excise, by the Franchisee at his own expenses and responsibility (For Hotels only). There is no Bar license for Restaurants. d. The Franchisee should obtain Peg Measure Certificate from Labour Department. 7. No additions . alterations, modifications to the existing building or in vacant land allotted to him, shall be made by franchisee in any manner without the written consent of the Franchiser and the Franchisee shall maintain the building in good con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the end of the Franchise year. In such cases the franchisee shall furnish a fresh Bank Guarantee within one month of invoking the Bank Guarantee. c) If the franchisee failed to pay the franchise fee of 2nd and 3rd year within the stipulated period, (Three months in advance) interest will be levied at 14 % p.a and if the franchisee failed to remit the fee and the interest even after 3 months from the due date, the franchiser shall re-enter the premises and resume possession of the property from the defaulting franchisee and the contract shall be terminated forthwith. d)TTDC shall have the right to terminate the Franchise Agreement without notice and resume possession of the premises in case of default in payment of franchise fee, interest or in furnishing Bank Guarantee within the specified period. 14. The Franchisee should operate the Unit on continuous basis throughout the franchise period. If the franchisee fails to run the Unit for a period of one month continuously the franchiser shall issue a notice to the franchisee and if the franchisee fails to operate the Unit even after one month on receipt of the notice the franchiser shall re-enter premises and resume t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en allotted to him. 25. Unlawful Activities : No political meeting/banner shall be allowed within the premises, which has been allotted to him. 26. No unlawful activities like betting, gambling, etc. shall be allowed inside the campus. 27. Anti Government activities shall not be allowed inside the premises. 28. Financial Records Use and Access: a) The Franchiser shall have the right to inspect the premises and also the books of accounts, etc.at any time to verify whether the franchisee has remitted the statutory dues promptly. b)The Franchisee shall submit statements, reports, accounts, documents and any other particulars as required by the Franchiser from time to time. 29. Franchisors Reservation of Rights: The franchisee shall extend a special discount of 25% on the normal room tariff and 10% on the Food Tariff prescribed by franchisee from time to time and are applicable for its Hotels / Restaurant , to the Package Tourists of franchiser accommodated in the Hotel. 30. Franchisee should give preference for accommodating the package Tourists of TTDC. 31. Registration: The franchise agreement should be registered and the stamp duty and registration charg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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