Income from licensing of running hotel is business income

Palmshore Hotels (P) Limited Vs. CIT (Appeals) (Kerala High Court)

The license agreement is dated 11^thof December, It is stated that the licensor is desirous of appointing a hotel operator who would operate the hotel “in conformity with standards comparable to hotels of similar standard and standing and consistent with the facilities provided in hotels of similar class upon the terms and conditions” set out in the agreement.

Thereafter, Article III of the agreement provides that the licensor covenants and agrees that the licensor shall permit the licensee to operate the hotel in accordance with the terms of the agreement. That the license is granted authorizing the licensee “to operate the hotel” is recited in several other provisions of the agreement.

In Article VI, it is also stated that on expiry of the seven year period of agreement or on termination of the same, the licensee shall cease to have any right on the operation of the hotel and the licensor shall have full right to operate the hotel. Clause-1 of Item-IV of Article X entitles the licensor to inspect the operations of the hotel with a view to satisfy itself that the hotel is being operated in terms of the agreement and also to intimate observation, if any, to the licensee.

Similarly, Clause-2 of Item-V of Article XV, specifically provides that the membership of the hotel in the Federation of Hotel and Restaurant Association of India, Kerala Hotel and Restaurant Association etc. will be in the name of the licensor. Similarly, provision is also made to clarify that the provisions of the agreement shall not be construed as creating a partnership or joint venture or managing/selling agency or any other relationship except a license.

In Article XIV of the agreement, it is specifically provided that during the term of the agreement, the hotel shall be known as and designated by the logo and name Hotel Palmshore, which will be suffixed by the words “An Abad Beach Resort” —along with Abad logo. The provisions of the agreement also indicate that the licensor has the right of supervisory control in the manner in which the hotel is operated.

All these, provisions of the agreement would, therefore, indicate that the license that has been granted is that of a fully established running hotel authorizing the licensee to operate the hotel for a specified period subject to the terms and conditions incorporated therein.

Therefore, the license granted is that of a business. These facts would, therefore, clearly indicate that the intention of the parties as reflected in the agreement was to grant license in respect of a running hotel, the income of which can only be income from business.

Therefore, the Commissioner of Income Tax was fully justified in setting aside the order of assessment and holding that the income of the assessee was income from business and not income from house property. In that view of the matter, the order of the Tribunal is unsustainable and has to be set aside and we do so.

Full Text of the High Court Judgment / Order is as follows:-

The assessee is in appeal against the order passed by the Income Tax Appellate Tribunal, Cochin Bench in ITA No. 249/2011 concerning the Assessment Year 2005-06. By the said order, the Tribunal allowed the appeal filed by the Revenue and set aside the order passed by the Commissioner of Income Tax (Appeals) and the assessment order, holding that the income derived was income from house property, was restored. It is aggrieved by this order of the Tribunal, this appeal is filed by the assessee, with the following questions of law framed for the consideration of this Court:

“A Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the income derived out of the property was chargeable under the head ‘Income from house property‘ and not under the head ‘Income from business or profession‘?

B In the facts and the circumstances of the case and in law when the assessee derives income from commercial asset, namely its hotel business, which asset is capable of being used as a commercial asset, whether the asset would cease to be a commercial asset simply because it was let out to others and is it not in law income from business no matter whether the commercial asset is used by itself or somebody else?

C Whether the income earned from letting out a running hotel, a commercial asset, can be treated as income from house property at all and when such rental income is wholly and exclusively for business purpose and is it not liable to be assessed as Business income only?

D Whether on analyzing Section 22 and 28(i) of the Income Tax Act and on a conspectus of the facts and circumstances of the case, where, from the very beginning the building and the machinery were a hotel of commercial activity and the income was from this commercial property, whether the income earned out of letting a commercial asset as the hotel with the entire building, plant and machinery, furniture can be assessed as house property at all?”

2. We heard the learned counsel for the assessee and the learned Senior Counsel appearing for the Revenue.

3. The facts of the case are that the assessee herein had constructed, established and operated a hotel by name “Hotel Palmshore”. Since the business was running on losses, the assessee decided to give the hotel along with its furnishings and equipments on license basis. Accordingly, the assessee entered into an agreement of license on 11^thDecember, 2000 with M/s Abad Motels and Resorts Private Limited for a period of seven years. The compensation for giving the hotel along with other furnitures and fixtures on license has been fixed in Article VIII of the agreement, the details of which may not be relevant for this judgment. In the return filed, the assessee offered the licence fee under the head “income from business”. Subsequently, the return was processed under Section 143(3) and the income in question was brought to tax as income from house property. This order was set aside by the first appellate authority holding that the income in question was income from business. The Tribunal set aside the order of the first appellate authority and restored the order of assessment. It is in this background, this appeal is filed.

4. According to the learned counsel for the assessee, it was taking into account the provisions of the Act, the decided cases and the agreement between the assessee and the licencee, that the first appellate authority has held the income to be income from business. On the other hand, the learned counsel for the Revenue placed considerable reliance on the judgment of the Apex Court in Sultan Brothers Pvt. Ltd. v. CIT (1964) 51 ITR 353 and contended that, this is a case where the assessee was exploiting a commercial asset and therefore, the income in question was income from house property as rightly concluded by the Tribunal.

5. Having considered the submissions made, we feel that as held by the Apex Court in Sultan Brothers Pvt. v. CIT (supra), each case has to be looked at from the businessman’s point of view to find out whether the letting was the doing of a business or the exploitation of the property by an owner. This being the test indicated by the Apex Court, according to us, the controversy should be resolved in the context of the intention of the parties as reflected in the license agreement and the nature of the respective obligations as contained in the license agreement which is also placed on record.

6. The license agreement is dated 11^thof December, It is stated that the licensor is desirous of appointing a hotel operator who would operate the hotel “in conformity with standards comparable to hotels of similar standard and standing and consistent with the facilities provided in hotels of similar class upon the terms and conditions” set out in the agreement. Thereafter, Article III of the agreement provides that the licensor covenants and agrees that the licensor shall permit the licensee to operate the hotel in accordance with the terms of the agreement. That the license is granted authorizing the licensee “to operate the hotel” is recited in several other provisions of the agreement. In Article VI, it is also stated that on expiry of the seven year period of agreement or on termination of the same, the licensee shall cease to have any right on the operation of the hotel and the licensor shall have full right to operate the hotel. Clause-1 of Item-IV of Article X entitles the licensor to inspect the operations of the hotel with a view to satisfy itself that the hotel is being operated in terms of the agreement and also to intimate observation, if any, to the licensee. Similarly, Clause-2 of Item-V of Article XV, specifically provides that the membership of the hotel in the Federation of Hotel and Restaurant Association of India, Kerala Hotel and Restaurant Association etc. will be in the name of the licensor. Similarly, provision is also made to clarify that the provisions of the agreement shall not be construed as creating a partnership or joint venture or managing/selling agency or any other relationship except a license. In Article XIV of the agreement, it is specifically provided that during the term of the agreement, the hotel shall be known as and designated by the logo and name Hotel Palmshore, which will be suffixed by the words “An Abad Beach Resort” —along with Abad logo. The provisions of the agreement also indicate that the licensor has the right of supervisory control in the manner in which the hotel is operated. All these, provisions of the agreement would, therefore, indicate that the license that has been granted is that of a fully established running hotel authorizing the licensee to operate the hotel for a specified period subject to the terms and conditions incorporated therein. Therefore, the license granted is that of a business. These facts would, therefore, clearly indicate that the intention of the parties as reflected in the agreement was to grant license in respect of a running hotel, the income of which can only be income from business. Therefore, the Commissioner of Income Tax was fully justified in setting aside the order of assessment and holding that the income of the assessee was income from business and not income from house property. In that view of the matter, the order of the Tribunal is unsustainable and has to be set aside and we do so.

Accordingly, the appeal is disposed of setting aside the order of the Tribunal and answering the questions of law in favour of the assessee.