Asstt. CIT v. Palmshore Hotels (P.) Ltd.

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The Tax Publishers2013 TaxPub(DT) 0510 (Coch-Trib) : (2013) 055 SOT 0198 INCOME TAX ACT, 1961 --Head of income--Business income or income from house property Income from leasing of hotel along with furnishings and fittings for seven years--Assessee had constructed, operated a hotel and due to incurring losses in the same, it decided to give the hotel along with furnishings and equipments on licence basis for seven years to a private limited company. Assessee offered the licence fee under the head 'Income from business' as he had not transferred the right of ownership and the agreement of licence between assessee and private limited company was entered into only to operate the hotel. Assessing officer rejected the contention of assessee and held that licence fee has to be treated as lease rent and the same was assessable under the head 'Income from house property'. *Held:* Was justified, as though in the agreement, it was mentioned that the operation of hotel was leased out, in substance, it was only leasing out of the hotel building along with the furniture, furnishings, etc. It was also not a case that assessee had to let out the hotel building for a temporary period due to some adverse business conditions. Moreso, the clause numbered as 'Item IV' under article XV of the agreement made very clear that the intention of assessee was to let out the hotel building and hence, it could not be considered that assessee was exploiting the property for its commercial business purposes. Therefore, the lease rent was liable to be assessed under the head 'Income from house property'. The intention of the parties have to be considered in order to decide the question whether the lease/rental income is to be treated as house property income or business income. The nomenclature given to the said income is irrelevant. [Para 15] 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. Therefore, the conditions have been imposed upon the licensee only to ensure that the hotel premises should continue to be operated as only hotel. [Para 18] It is not a case that the assessee has to let out the hotel building for a temporary period due to some adverse business conditions. [Para 19] The clause numbered as Item IV under article XV of the agreement 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 licence, i.e., the intention is only to lease out the hotel building along with furniture, furnishings, equipments etc. [Para 21] Hence it cannot be considered that the assessee was exploiting the property for its commercial business purposes. Accordingly, the lease rent is liable to be assessed under the head 'Income from house property'. [Para 23] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0510 (Coch-Trib) : (2013) 055 SOT 0198

INCOME TAX ACT, 1961

--Head of income--Business income or income from house property Income from leasing of hotel along with furnishings and fittings for seven years--Assessee had constructed, operated a hotel and due to incurring losses in the same, it decided to give the hotel along with furnishings and equipments on licence basis for seven years to a private limited company. Assessee offered the licence fee under the head 'Income from business' as he had not transferred the right of ownership and the agreement of licence between assessee and private limited company was entered into only to operate the hotel. Assessing officer rejected the contention of assessee and held that licence fee has to be treated as lease rent and the same was assessable under the head 'Income from house property'. Held: Was justified, as though in the agreement, it was mentioned that the operation of hotel was leased out, in substance, it was only leasing out of the hotel building along with the furniture, furnishings, etc. It was also not a case that assessee had to let out the hotel building for a temporary period due to some adverse business conditions. Moreso, the clause numbered as 'Item IV' under article XV of the agreement made very clear that the intention of assessee was to let out the hotel building and hence, it could not be considered that assessee was exploiting the property for its commercial business purposes. Therefore, the lease rent was liable to be assessed under the head 'Income from house property'.

The intention of the parties have to be considered in order to decide the question whether the lease/rental income is to be treated as house property income or business income. The nomenclature given to the said income is irrelevant. [Para 15] 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. Therefore, the conditions have been imposed upon the licensee only to ensure that the hotel premises should continue to be operated as only hotel. [Para 18] It is not a case that the assessee has to let out the hotel building for a temporary period due to some adverse business conditions. [Para 19] The clause numbered as Item IV under article XV of the agreement 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 licence, i.e., the intention is only to lease out the hotel building along with furniture, furnishings, equipments etc. [Para 21] Hence it cannot be considered that the assessee was exploiting the property for its commercial business purposes. Accordingly, the lease rent is liable to be assessed under the head 'Income from house property'. [Para 23]