Perpetual right of possession of Hotel suite with right to transfer is capital Asset

ITAT DELHI BENCH ‘G’

Assistant Commissioner of Income-tax

versus

Shabnam Sachdev

IT Appeal Nos. 5253 & 5254 (Delhi) of 2010
[ASSESSMENT YEAR 2007-08]

DECEMBER 14, 2012

ORDER

S.V. Mehrotra, Accountant Member

These appeals filed on 30-11-2010 by the revenue are against the order dated 31-08-2010 of the Ld. CIT(A), XXII for AY 2007-08.

2. The assessee had filed a return of income declaring total income of Rs. 59,08,331/- from house property, capital gain and other sources. The AO noticed that assessee had shown Long Term Capital Gain on sale of capital asset held by her in the name of M/s Godawari Shilpkala Pvt Ltd. with the following computation :-

3. The AO noticed that assessee had reserved a suite in hotel complex at village-Lakkar Pur, Near Suraj Kund, Faridabad, Haryana on 04.02.1993. As per the agreement, the company M/s Godawari Shilpkala Pvt Ltd. had accepted deposit and made an agreement for long term reservation. As per the agreement, the hotel company agreed to keep a suite No-404 of Karan Block in Western Wing of the hotel complex permanently reserved for the use and benefit of the assessee, as long as the agreement subsist. He noted that in clause-9 of the agreement, it was also mentioned that the health club, swimming pool, sport, games and other recreational facilities will be available at concessional rate. Thus, assessee had reserved a room/suite in a hotel for her use for a period of time and for use of other facilities available in the hotel/resort, the assessee had to make payment as per the prevailing rates. The assessee had sold this suite for a consideration of Rs.45,000/- and had reduced indexed cost of acquisition at Rs. 22,36,676/-. As regards, the cost of acquisition claimed by the assessee, the AO noticed that the same had two parts:-one, the installment which she had paid during the period from FY 1992-93 to FY 1995-96 and two, the maintenance charges which the assessee had paid in FY 1998-99 to 2003-04. The AO required the assessee to furnish computation of income for AYs 2005-06 & 2006-07 and noticed that assessee had shown rental income from the suite under the house property and also claimed deduction u/s 24(a) on account of maintenance expenses. He, therefore, observed that assessee had claimed both the benefit of deduction u/s 24(a) of the Income Tax Act, 1961 at the time of offering income under the head income form house property and when she offered the profit under long term capital gain, she had also claimed the maintenance expenditure as capital expenditure. The AO further observed in para 4 as under :-

“However, a major question arises as to whether the reservation of a suite can be treated at par with owning of a capital asset. If a person books a room in hotel for long period of time by making advance payment, he does not become owner of the capital asset or to say owner of the room which he booked in the hotel. Same is the case of assessee. This is a benefit/booking of a time share in a hotel and on surrender of such time share, the assessee has received a certain premium. The reservation of suite for a long period of time cannot be equated with right of tenancy under a tenancy act. As per the transfer application, the assessee has surrendered her reservation/booking of suite in favour of M/s Godawari Shilpkala Pvt Ltd. for a consideration of Rs.45,00,000/-. The assessee never enjoyed right of tenancy under a tenancy act. More-so-over, the assessee in her letter dated 05.11.2009 has also admitted that “these rights in a room in a small hotel, measuring appx. 750 sq. ft. in a property which were sold for a lump-sum as the entire property was being taken over by a third party. This itself shows that assessee was not an owner of capital asset an was enjoying right to use of one suite room in the hotel complex and as such the profit earned on transfer of right to use of a room in Godavari Shilpkala is not an income taxable under the head capital gain. I, therefore, treat this profit as income from other sources earned by assessee on account o compensation/premium on the surrender of the reservation she made in booking of the hotel room.”

4. He also required the assessee to explain as to how the expenses incurred on maintenance and up-keep of the hotel suite was an expenditure for an improvement of a capital asset and why it should not be disallowed. After considering the assessee’s reply that the payment during earlier year made pertaining to the property at Godavari Shilpkala were never claimed as expenses and had been capitalized because the payments were necessary for preserving and safeguarding the property, the AO observed as under :

“Even if the assessee’s contention is accepted, the capitalization of expenses incurred on payment of Municipal Tax/charges levied by local authorities or expenses incurred on preserving and safeguarding the property are considered as cost of acquisition or improvement. In fact by no stretch of imagination, the expenses incurred on regular up-keep or even payment of statutory dues are part of the cost of acquisition. Even otherwise, the deduction @ 30% is allowed U/s 24(a) of the Income Tax Act, 1961. I hold that neither the expenses incurred on regular up-keep and maintenance of a suite of a hotel or even a house property (though not accepted) are part of original cost nor can be considered as cost of improvement of the property. In view of this, I hold that (indexed) amount of Rs.2,32,993/- included by assessee in the cost of acquisition are not to be considered while working out the profit from surrendered of reservation of the suite in hotel.”

5. He, accordingly, computed profit from transfer of booking as under without allowing any benefit of indexation :-