INCOME TAX ACT, 1961

Section 28

Business income - Rental income - Income from letting out of specifically constructed hotel -

The assessee company, being engaged in the business of running hotel, had constructed a hotel and further operated the hotel for a small period before licensing it out to another company on annual revenue sharing basis. The assessee has shown this income from licensing as its business income. However, in course of scrutiny proceedings, the AO considered this income as rental income on the ground that the main object of the assessee was to run the hotel and not letting out property for earning rental income. On appeal. CIT(A) upheld the order of the AO on the ground that income earned by the assessee on account of license fee was not out of any business activity being carried on by the assessee himself, but merely through the exploitation of the property being the owner of the property and hence said license fee was assessable under the head 'Income from house property'. Held: On perusal of records, available on record and those made available by the assessee, it transpired that the assessee was in the business of running and maintaining a hotel and for this purpose, it had constructed a hotel which was operated by the assessee itself for a short period. Further, due to business exigency and also for effective management of hotel, the fully furnished hotel including license to run the hotel was handed over by way of 'Memorandum of Understanding' to another company on revenue sharing basis. As per the terms of MoU, the assessee has agreed to share revenue at the rate of 9% of the annual gross revenue subject to a minimum of Rs. 1.75 Cr. per annum. From the above, it is very clear that the understanding between the parties is not a simple agreement for letting out of premises on monthly fixed rent, but an arrangement for continuing the running business which was earlier carried on by the assessee as its main business activity. Further, even after the hotel was licensed to another operator, the business model of the assessee was not changed. Therefore, it has been held that both the AO and CIT(A) erred in coming to the conclusion that the license fee derived by the assessee by licensing a fully furnished hotel to another company for operating said hotel is rental income.

Followed:M/s. Rayala Corporation (P) Ltd. Vs. Asstt. CIT (2016) 72 Taxmann.com 149 (SC) : 2016 TaxPub(DT) 3682 (SC) M/s. Chennai Properties & Investments Ltd. Vs. CIT (2015) 56 Taxmann.com 956 (SC) : 2015 TaxPub(DT) 2180 (SC) Sultan Brothers Private Limited Vs. CIT 1964 TaxPub(DT) 0259 (SC) Palmshore Hotels (P) Limited Vs. CIT (Appeals)-I (2017) 252 Taxman 191 (Kerala) : 2017 TaxPub(DT) 5065 (Ker-HC) Asstt. CIT, Circle-1(1), Trivandrum Vs. Palmshore Hotels (P) Ltd. (2012) 28 Taxmann.com 156 (Coch) : 2013 TaxPub(DT) 0510 (Coch-Trib)

REFERRED :

FAVOUR : In assessee's favour

A.Y. :

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