Coronet Hotel Services & Suppliers Pvt. Ltd. Vs DCIT (ITAT Delhi)
ITAT Delhi held that revenue receipt generated from the operation of “Hotel/ Resort” is taxable under the head “Business income” and not under “House Property” as fixed amount was not received in fact revenue was generated on fluctuation basis.
Facts- The Assessee declared the revenue receipts generated from operations of “Hotel/Resort” as “rental income”. Subsequently the Assessee by revising it return of income offered the ‘revenue receipts’ from the operation of “Hotel” under the head “Business Income”.
AO show-caused the Assessee, as to why the receipts from M/s Four Seasons Hospitality Pvt. Ltd. which has been declared as “Income from Business & Profession” in its revised return, should not be assessed under the head “Income from House Property” as per original return.
AO consequently treated the income under the head “House Property” instead of “Income from Business & Profession”. Commissioner affirmed the action of AO. Being aggrieved, the present appeal is filed.
Conclusion- We are of the considered view that simply because the Assessee in original return of income has inadvertently or mistakenly or on wrong advice treated/shown the revenue receipt/income under wrong ‘head of income’, it can not be considered as estoppels and/or foundation for treating the income of the Assessee /making the addition.
The Assessee had received the receipts/income from the revenue generated by M/s Four Seasons on fluctuation basis and undisputedly has not received any fixed amount, which can be termed as “rental income”, hence, we do not have any hesitation to hold that the revenue receipts generated by the Assessee from M/s Four seasons, are undoubtedly income from the Business and therefore, should be treated under the head “Business Income” but not as rental income from “House Property” as determined by the authorities below. Consequently the AO is directed to delete the addition on this issue and re-compute the liability.
FULL TEXT OF THE ORDER OF ITAT DELHI
The Assessee/Appellant herein has preferred this appeal against the order dated 22.03.2019 impugned herein passed by Ld. Commissioner of Income Tax (Appeals)-2, New Delhi {in short ‘Ld. Commissioner)’} u/s 250 of the Income Tax Act 1961 (in short ‘the Act’) for AY 2015-16.
2. In the instant case, the Assessee declared its income at Rs. (-) 10,17,441/- by filing its original return of income on dated 27.09.2015, wherein the revenue receipts generated from operations of “Hotel/Resort” situated at Tarudham Valley, Golf Homes, Village Dadu, Tahsil Tauru, District Mewat, Haryana was shown as “rental income”. Subsequently the Assessee by revising it return of income on dated 01.06.2016 declared its income to the tune of Rs. (-) 54,52,184/- and offered the ‘revenue receipts’ from the operation of “Hotel” under the head “Business Income”, therefore, the Assessing Officer (AO) by issuing notice 13.02.2017 under section 142(1) of the Act along with questionnaire, show-caused the Assessee to furnish the detailed reasons with justification for filing of the revised return.
2.1 In response, the Assessee vide letter dated 24.11.2017, claimed as under:
“The Assessee company has appointed an expert & experienced operating management agency M/s Four Seasons Hospitality Pvt. Ltd for carrying the business from the said premises in consideration of management license basis. The Assessee company has generated revenue on account of management licence fee Rs. 76,00,494/- which has been offered to tax unde head “Income From House Property”. With reference to terms & conditions of the aforementioned management agency agreement between the Assessee Company and Four Seasons Hospitality Pvt. Ltd, it is apparent that there is no relationship of Owner/Tenant nor is any fixed amount received or receivable by the Assessee. The Assessee receives percentage of the revenue which fluctuates from month to month and has different terms for each source of Revenue, namely Golf Course/ F&B, Rooms etc.
The Assessee since inception has disclosed the Revenue from Operations as “Business Revenue”, duly accepted by the authorities in earlier years. The predecessor has after detailed scrutiny of the Agreement assessed the same as Business Income in the A.Y.2012-13. The copy of Agreement with Four Seasons was duly filed and after scrutiny assessment was framed. The principle of Consistency enunciated by the Supreme Court states that if a decision has been accepted in the earlier years, the same is to be followed unless there is material change in facts. Thus since this issue has been examined and accepted in AY 2012-13 vide order w/s 143(3), the same continues to be followed.
However the accountant of the Assessee on mistaken belief, inadvertently, filed the return of Income reflecting the “Revenue from Operations” as Rental Income. The Assessee company has inadvertently offered such income under house property which should be considered under business & profession. Hence, the computation was revised to correctly offer such income to tax under the head ‘business income.”
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2.2 The AO further show-caused the Assessee, as to why the receipts from M/s Four Seasons Hospitality Pvt. Ltd. which has been declared as “Income from Business & Profession” in its revised return, should not be assessed under the head “Income from House Property” as per original return.
2.3 In response, the Assessee by filling its reply dated 07.12.2017 made following submissions :
“Your goodself has issued a show cause as to why receipts from four seasons hospitality pvt. ltd should not be treated as income under the head “Income from House property”. In response to your show cause, we on behalf of the assesse submit as under:
a. That the main object being perused by the company is to carry out the business of hotel/resort in building developed by the Company at Tarudhan Valley Golf Home Project, Village Dadu, Tehsil-Tauru, District – Mewat (Haryana).
b. That the said resort was constructed and completed in AY 2007-08 and thereafter it was put to use in the said year.
c. That the commercial activities (Revenue from Operation) in the said Resort started from F.Y. 2006-07 (AY 200708)
d. That Assessee company in A.Y 2010-11, appointed an expert & experienced operating management agency M/s Four Seasons Hospitality Pvt. Ltd for managing the business from the said premises in consideration of management license basis. (Copy of Agreement has already been filed).
e. That during the A 2015-16 the assesse company has generated revenue on account of management license fees of Rs. 76,00,494/- which has been disclosed in the Audited Accounts under the head” Revenue from Operations”.
f. That the assesse company had installed the furniture and fitting in the said resort and in AY 2007-08 the resort was put to use and the assesse company was itself operating the resort before the assesse company appointed an expert & experienced operating management agency M/s Four Seasons Hospitality Pvt. Ltd for managing the business. Thus all the necessary amenities together with the building was already in place at the resort at the time of appointment of the management agency M/s Four Seasons Hospitality Pvt. Ltd.
g. That the Assessee since inception has disclosed the Revenue from Operations as “Business Revenue”, duly accepted by the authorities in earlier years. The predecessor has after detailed scrutiny of the Agreement assessed the same as Business in AY 2012-13. The copy of Agreement with Four Seasons was duly filed and after scrutiny assessment was framed.
h. The relevant clauses of the Agreement are reproduced hereunder :-
i. Thus on a perusal of the aforesaid terms & conditions, it is apparent that there is no relationship of Owner/Tenant nor is any fixed amount received or receivable by the Assessee. The Assessee receives %age of the Revenue which fluctuates from month to month and has different terms for each source of Revenue, namely Golf Course/ F&B, Rooms etc. The Assessee has placed reliance on the following judgments……
j. We would also like to submit that assuming but not admitting that income is Rental, even then the same is to be assessed as Business Income based on principles laid down by Supreme Court. The Assessee had been operating the Resort itself since AY 2007-08 and thereafter gave a management contract to Four Seasons, which is being interpreted to mean a Rental Agreement. We object to the said Interpretation but even then in view the judgments cited the same would still constitute Business Income
k. Further the courts have had occasion to examine whether Rental income is assessable as Income From Business OR Property. The Assessee placed reliance on the following judgments…”
2.4 The AO though considered the submissions of the Assessee referred to above, however, did not find the same as tenable and by examining the agreement dated 01.07.2009 entered into between the Assessee and M/s Four Seasons Hospitality Pvt. Ltd. (In short ‘Four Seasons’), concluded as under:
“3.8 In the instant case, it is undisputed that the accounting for daily collections made from the guests and also the day to day expenses on running the hotel are not being done not by the Assessee buy by M/s Four Seasons Hospitality Pvt. Ltd. (hereinafter referred to as Seasons) This is evident from Para 5 (Page 6) of the agreement which states that the business will be carried out by Seasons. Further at point (a) on page 7 – it has been specified that Seasons shall provide complete accounts of the revenue generated to the Assessee. Clause 3 (page 5) of the agreement deals with the duration of the agreement. The agreement starts off with an initial period of 2 years to be extended by a further period of 4 years. It further specifies that in case it is not renewed for the further period of 4 year, the Assessee shall enter into a Management Agreement with Seasons for a minimum of 9 years. The agreement between the parties is thus for considerably long period and clearly reveals that the Assessee did not have any intention to run the business itself. It is also noted that the employees have been employed by Seasons and report to Seasons and this has admitted by the Assessee in its letter dated 14.12.207 in response to a specific query raised by this office.
3.9 As per Point 9 of the agreement, Seasons is required to invest between Rs. 100-150 lakhs towards capital & pre-opening expenses (capital cost). This clearly reveals that the Assessee did not even have the full hotel in operation when it entered into the Agreement and required a party to complete the hotel as well as resort. This is corroborated by the Assessee’s submission dated 14.12.2017 where it has been stated as under: –
“We are attaching the balance sheet of FY 2008-09 Indicating that a part of the resort (Emphasis supplied) disclosed as Capital Work in Progress has been capitalized and put to use during the said financial year”
The fact that a huge investment was required to be made by Seasons and it had to be charged to revenue expenses over a period of 6 (244) 11 (249) years reveals the intention of the Assessee to let out the assets for a long period. This also falsifies the Assessees submission vide letter dated 07.12.2017 that all the necessary amenities together with the building was already in place at the resort at the time of appointment of Seasons.
3.10 As per Point 12 B 1. (Page 12) of the agreement, the VAT registration, Liquor License, Health License. Police permission, [smoking, music), requisite permission under PFA Act, Fire NOC, and all other licenses, statutory permissions, registration and approvals required for carrying out the Business are to be obtained by Seasons at its own cost and in its own name. This has been reiterated at Point 13 (Page 14) of the agreement where it has been further specified that in case of transfer of licenses being permissible, such license shall be transferred by Coronet to Seasons.
3.11 Further as per Point 12 B 4. (Page 12) of the agreement, Seasons is required to fully indemnify Coronet against all damages, risks, losses, penalties, fines etc. arising out of the Business or from its own conduct or from the conduct of its employees or third parties during the subsistence of the Agreement. As per Point 12 B 6. Seasons is responsible and liable for observing all rules and regulations for all the workers/ employees engaged by it for carrying out the Business including contract workers/employees.
3.12 As per Point 14 (Page 14) of the agreement, all the taxes and levies related to running and operating of the Business including but not limited to VAT, luxury tax, service tax, excise, etc. (only for the hotel, conference and F&B) shall be the responsibility or Seasons and Coronet shall not be pay or liable for the same.
3.13 The various clauses of the agreement (as discussed above) clearly reveals that the entire hotel with all machinery, fixtures & furnishings have been handed over to Seasons and it is Seasons which is running the entire business in its own name, obtaining all the clearances & licenses in its own name & paying all the taxes. It is not the case that only a part of the hotel business has been given to Seasons for being run.
3.14 In the instant case, as per Clause 5.1, the Assessee is receiving a percentage of the net revenue generated from the business. But that cannot be the sole deciding factor to conclude that the amount received by the Assessee is rental income or business income. The percentage of the net revenue payable to the Assessee is only a basis/ formula for calculation of rent.
3.15 It is a well settled proposition of law that the substance will prevail over the form. In the instant case, as discussed above, it is clear that intention of the Assessee was to let out the property and it cannot be considered that the Assessee was exploiting the property for its commercial business purposes. The management license fees of Rs. 76,00,494/- will thus be assessed under the head ‘Income from House Property’ as declared by the Assessee in the original return. I am satisfied that the Assessee has furnished inaccurate particulars of income and hence, penalty proceedings u/s 271(1)(c) of the 1.T. Act, 1961 are initiated on this point.”
2.5 The AO, consequently assessed the management license fees of Rs. 67,00,494/- as income under the head “House Property” as declared by the Assessee in the original return of income and also disallowed an amount of Rs. 28,51,200/- paid to the Director, being not incurred for the purpose of the business and consequently added in the income of the Assessee and also made other additions .
3. The Assessee being aggrieved against the treatment of revenue of Rs. 67,00,494/- from operation of Hotel as “Income from House Property” instead of “Income from Business” and consequently disallowing the deduction of Business Expenses amounting to Rs. 53,84,457/- and depreciation amounting to Rs. 51,36,730/- on account of set off of the unabsorbed depreciation carry forward from earlier years, preferred first appeal before the Ld. Commissioner.
4. The Ld. Commissioner by relying upon the judgments passed by the Hon’ble Apex Court in the cases of Sultan Brothers Pvt. Ltd. (1964) 51 ITR 353 (SC) and Shambhu Investment (P) Ltd. Vs. CIT (2003) 263 ITR 143, affirmed the action of the AO by treating the revenue receipts from operation of Hotel as “Income from House Property” by observing as under:
