Systematic / Regular Sub-Leasing of premises is taxable as business Income

Assessee carried on a systematic and regular activity in the nature of business and therefore the income from granting the premises on sub-license was to be assessed under the head income from business.

On 16.04.1991 the Assessee entered into an agreement with M/s East India Hotels Limited (now renamed as EIH Limited) to acquire under a license an area of 9,000  square feet in Hotel Oberoi Towers, Bombay (now renamed as Trident Nariman Point) for the purpose of using the same as a shopping centre. The tenure of the said leave and license was a period of 50 years at a fixed monthly license fee as agreed between the parties. After acquiring the said shopping space the assessee utilized it in granting different portions of the shopping space to various parties who were interested in setting up shops there with the condition that the shopkeepers had to subscribe to a specific number of shares of the assessee apart from payment of monthly charges (termed as contribution from shops). The Assessee also provided various services to the licensees like air-conditioning, telephone services, maintenance, electricity, water, sanitary, security etc. In consideration for the same The licensees were required to pay to the Assessee monthly consideration on the basis of the bill by the Assessee as determined by the Board of Directors from time to time. According to the Assessee, since the assessee is basically involved in the business of providing the shopping space on license along with various services, the consideration received from the said shopping space was shown as business income in the computation of income. According to the Assessee, since the assessee is not the owner of the building, the amount of license fees paid to EIH Limited was claimed as a deductible expenditure against the said business income.

In the assessment order U/s 143(3) of the Income Tax Act, 1961 (Act) dated 15.12.2008 for AY 2007-08, the Assessing Officer (AO) rejected the claim of the assessee and treated the above income as ‘Income from house property’ on the following grounds:

a) That the assessee has an irrevocable right of 50 years over the shopping space.

b) The Apex Court in the case of CIT – vs. – Poddar Cement Ltd.226 ITR 625 has held in context of section 22 that the owner is a person who is entitled .to receive income from the property in his own right.

c) In view of the provisions of section 27(iiib) of the Act and findings of the Apex Court the assessee is the owner of the shopping space.

We have given a very careful consideration to the rival submissions. A perusal of the record shows that the assesse had entered into an agreement dated 16.04.1991 under which it got on a leave and licence basis 9000 sq.ft. of shopping area from M/s.The East India Hotels Ltd., in Out of this sq.ft in Hotel Oberoi Towers, Bombay Reclamation Estate, Mumbai, in an area ear marked as shopping area on payment of monthly licence fee computed at Rs.1.50 per month. The licence was not only for use of the shop area but also for use of facilities like air conditioners, use of elevators etc., Security service charges, sanitary services etc. The operative portion of the lease deed is as follows :- (The hotel company means “The East India Hotels Ltd.” And the Subsidiary means “The Assessee”) “The Hotel Company and Licensee in concurrence have agreed to give licence to the Subsidiary and the & subsidiary has agreed to take over the said area in the shopping centre from the Hotel Company and licensee on licence commencing on and from 15th April, 1991 and ending ‘on 31st December, 2033.

(2) The Subsidiary shall observe and perform the following terms and conditions and stipulations, namely :-

(i) (a) To pay to the Hotel Company compensation for the said Licence at the rate of Rs.1.50 per month during the period of the Licence and pro-rata compensation for any broken period; to pay compensation for each month on or before the 10th day of the month following the month for which it is due and for any broken period at the end of such period.

(b) To pay to the Hotel Company for making available air- conditioning facilities, an amount calculated at the rate of Rs.8.50 per month during the period of the Licence and pro-rata for any broken period, such payment to be made along with compensation under the preceding sub-clause (a).

(c) To pay to the Hotel Company Rs. 10/- per Sq. ft. per month for Service Charges which include use of Elevators, Security Services, sanitary Services, common lighting and music and other related services.

(ii) To reimburse to the Hotel Company actual out of pocket costs and expenses on a bill being submitted for telephone, and other services, and for maintenance, repairs and other outgoings.

(iii) To pay or cause to be paid to the Hotel Company electricity charges and meter hire in respect of electricity consumed in the shops comprised in the Shopping Area on presentation of the bills thereof.”

In Clause-(xiv) it has been agreed between the parties as follows :-

“(xiv) It is clearly agreed and understood that the leave and licence hereby, granted shall be irrevocable for the period mentioned in clause 1 above, and even if the Subsidiary commits default in observance and Performance of any of the terms and conditions herein contained the Hotel Company shall not be entitled to revoke the Licence, but its remedy for any such breach on the part of the Subsidiary shall only be in damages. “

Clause-7 of the agreement provides as follows :-


(i) This Agreement does not create any interest or any other right in favour of the Subsidiary in the said Shopping Centre or any part thereof but it is mere licence to use the said Shopping Centre given to the Subsidiary.

(ii) The Hotel Company shall throughout the period of the licence have full control over the said Shopping Centre and the Subsidiary shall have only  the licence to use it for the period and on the terms and conditions here in set out.

(iii) The Hotel Company shall retain with itself the key/s of the main entrance/s’ of the said Shopping Centre and deliver to the Subsidiary only the duplicate/s thereof.

(v) The Subsidiary shall bear and pay all the costs, charges and expenses of and incidental to the preparation and execution of the licence in triplicate.”

In the light of the aforesaid clauses of the Agreement between the parties the question to be decided is as to whether the relationship between the parties could be said to be licensor or licensee or lessor or lessee. Except for clause (xiv) all other terms of the agreements between the parties clearly indicates that the relationship between the parties was that of the licensor or licencee. The test for determining whether a transaction is in the nature of ‘license’ or ‘lease’ has been laid down in judicial pronouncements. Before distinguishing the concept of lease and licence, first of all, let us see the definition of both these terms. Sec.105 of the Transfer of Property Act, 1882 defines a lease as transfer of a right to enjoy an immovable property for a certain period, in consideration of price paid or promised to be paid in cash or kind. Sec.52 of The Indian Easements Act, 1882 defines Licence as a right to do or continue to do, in or upon the immovable property of the grantor, something which would in the absence of such right does not amount to an easement or an interest in the property. Keeping in mind these definitions let us now go through the very important points which distinguish a lease from a licence: Lease is a transfer of interest, but licence is not. Generally Lease can be assigned, but a licence generally cannot be assigned. A lease being a proprietary right is a transferable interest. Licence the other hand cannot be transferred by virtue of it being a personal right. However, there exist certain exceptions such as movie tickets. A Lessee is required to have exclusive possession of the property for its proper enjoyment. But, a licence is created without transfer of possession. A Licensee is required to share the possession with the grantor (who is still the owner) and has not parted with the interest. In lease exclusive possession is obtained and hence lessee has exclusive control over the property. Normally in licence possession remains with the grantor. In Associated Hotels of India Ltd. v. R. N. Kapoor, AIR 1959 SC, the following  guidelines were laid down by the Supreme Court of India for the purpose of distinguishing between lease and licence. They are as following:

1. Whether a document creates a lease or a licence, the substance of instrument must be referred rather than the form.

2. The real test is the intention of the parties.

3. If a document creates an interest in the property, it is a lease. But if it only permits another to make use of the property on which legal possession continues with owner, it is a licence.

4. If under the document, transferee gets exclusive possession of the property he is prima facie a lessee. But circumstances may be established which negative the intention of parties to create a lease. Therefore, difference between exclusive possession and exclusive occupation cannot be disregarded.

Applying the above tests to the facts of the present case, especially in the light of clause-2 and 7 of the leave and license agreement, we have no hesitation in coming to the conclusion that on the facts of the present case the assessee was only licencee of the premises owned by M/s. East India Hotels Ltd., and the parties intended it to be license and the agreement did not create an interest in the property owned by the licensor and that the licensee did not have exclusive possession of the property. As a licensee it had granted sub-licence to various parties and derived income there from. Once we come to the conclusion that the Assessee is only a licencee, then it can safely be said that the provisions of Sec.22 read with Sec.27(iiib) of the Act are not attracted and hence the income in question cannot be assessed under the head “Income from House Property”.

The assessee was not only deriving licence fee but also deriving service fee and other fees. Similarly even for A.Y.2007-08, the consideration received by the Assessee as licensor from the sub-licensee, comprised of licence fees and service fee and air condition fees. Keeping in mind the objects of the assessee and keeping in mind the facts and circumstances of the present case, it can be safely concluded that the assessee carried on a systematic and regular activity in the nature of business and therefore the income from granting the premises on sub-license was to be assessed under the head income from business. The latest judicial pronouncement in the case of Chennai Properties and Investments Ltd. Vs CIT (supra) was not available for consideration before the Tribunal when the Tribunal passed its order in the case of another group company based on which the CIT(A) confirmed the action of AO. With the change under law laid down by the Hon’ble Supreme Court, we are of the view that the income in question has to be assessed under the head income from house property. In view of the decision of the Hon’ble Supreme Court in the case of Chennai Properties and Investments Ltd. (supra), we are of the view that the question whether the Assessee is a deemed owner u/s.22 read with Sec.27(iiib) of the Act, no longer assumes importance. For the reasons given above we allow the appeals of the assessee.

Categories: Income Tax


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