Tax ability of Income from Leasing of Hotel with provision and maintenance of various facilities and amenities
M/s. Kenton Leisure Services, P. Ltd. Vs. DCIT (ITAT Cochin)- It was held that lease rental income arising from agreements for letting on lease hostel premises along with provision and maintenance of various facilities and amenities would be taxable under the head ‘Income from Business’ as against ‘Income from House Property’. The characteristic of lease rental income as ‘Income from Business’ comes as a relief to taxpayers who lease out property along with provision of facilities / amenities. However, this issue is fact specific and it would be important for taxpayers to bear the above principles in mind while determining the tax ability of such revenue streams.
It would also be relevant to note that the Bangalore Tribunal in two recent rulings in the case of ITO v. Information Technology Park Ltd [2012-TIOL-01-ITAT-Bang] and DCIT Vs. Golflink Software Park P Ltd [2011-TIOL-660-ITAT-Bang] relied on their earlier decision in the case of Global Tech Park (P) Ltd’ and have held that lease rental income arising from a complex commercial activity which includes provision of space along with provision of facilities/ amenities would be taxable under the head ‘Income from Business’ as against ‘Income from House Property’. The proposed Direct Taxes Code seeks to tax such lease rental income as ‘Income from House Property’ as against ‘Income from Business’ with a specific exclusion to developers of Special Economic Zones.
Where agreement for construction of hostel building, agreement for lease of hostel building and agreement for provision of facilities in hostel building during lease period were part of one composite arrangement for provision of hostel facilities by assessee to lessee, entire income under three agreements was to be assessed as business income.
INCOME TAX APPELLATE TRIBUNAL, COCHIN
I.T.A Nos. 171/Coch/2009 & 291/Coch/2010- Assessment Years: 2004- 05 & 2006- 07
M/s. Kenton Leisure Services, P. Ltd.
The Deputy Commissioner of Income Tax, Circle-1(1),
Date of pronouncement- 30/12/2011
O R D E R
Per Sanjay Arora, AM:
These are a set of two Appeals by the Assessee contesting the separate Orders by the Commissioner of Income-tax (Appeals)-I, Trivandrum (‘the CIT(A)’ for short), i.e., dated 16/12/2008 and 25.2.2010, in its case for the assessment years (A.Y.) 2004-05 and 2006-07, confirming the assessments as framed u/s. 143(3) of the Income-tax Act, 1961 (‘the Act’, hereinafter) vide orders dated 7.12.2006 and 19.12.2008 for the successive years respectively. The subject matter of the appeals being the same, the same were taken for hearing together, and are being disposed of vide a common, consolidated order.
2. At the very outset, the ld. AR clarified that the absence of any appeal by the assessee for the intervening period, i.e., 2005-06, is for the reason that the return for that year was accepted by the Revenue as such u/s. 143(1), and not subject to scrutiny assessment.
3.1 The facts of the case are that the assessee is a company in the hospitality business. It entered into three separate Agreements of even date, i.e., 03.8.1999, with M/s. Tata Sons Limited (acting through its Division `Tata Consultancy Services, Mumbai (`TCS’ for short)). The first agreement was for construction of hostel/transit facility, so as to provide residential accommodation for it’s (the latter’s) trainees/new recruits, being trained at Trivandrum for the time being. The assessee, stated to be engaged in providing hostel facilities and other related services, was to construct the said hostel at its cost (on a land already acquired by it, i.e., duly identified in the Agreement), consisting of 150 rooms (and later extended to 175 rooms) and other facilities, within a period of 18 months from the day the construction activity is commenced. The design of the building was to be made by an architect, as approved by TCS. The hostel was contemplated to contain all amenities, suitably well-furnished and equipped in accordance with Schedule III to the agreement. The assessee-promoter is further obliged to give the hostel premises on lease to TCS per a separate agreement. It is also required to provide and maintain the necessary amenities and facilities, the terms and conditions of which stand agreed to per a separate agreement. The consideration for the said construction agreement is an interest-free deposit for a sum of ~99 lakhs by TCS with the assessee at the time of execution of the agreement for the term of the lease. The same would be however refundable (along with interest at 18% per annum) under certain specific circumstances set out in Schedule II of the agreement, being principally the failure on the part of the assessee-lessor to fulfil its obligations under the contract and, in any case, upon expiry of the lease. The assessee, nevertheless, has to furnish a bank guarantee (from a reputed bank as approved by the TCS) for an amount no less than the amount placed as deposit by it with the assessee. The assessee was further required to maintain the hostel facilities as well as sufficiently insure it against all risks whatsoever. The second agreement is a lease agreement, which is to commence within 30 days of the completion of the hostel facilities, per which the said hostel is leased to the TCS-lessee for term of 10 years, reserving a rent for the entire period of the lease. The lessor is to pay all the taxes in relation to the building, i.e., as may be levied by the Municipality or any other authority, as well as to keep the premises in good and tenable repairs. The third agreement is again an agreement for provision and maintenance of amenities and facilities during the period of the lease. The same details the various amenities and facilities, viz., laundry facilities, health club, multi-cuisine restaurant, recreation/ sports rooms, etc. to be provided by the lessor for the hostel.
3.2 While the assessee returned the entire receipts, i.e., from the said three agreements, as a part of its business receipts for the year, the Revenue has segregated the lease rent of hostel building and, accordingly, assessed it as income from house property. The assessee’s case is that the three agreements constitute a part of a composite arrangement entered into by it with the TCS, i.e., for provision of hostel facilities. Accordingly, the same constitutes a part of the same indivisible `business’, and there is therefore no scope for artificially segregating the two, i.e., one qua house property, and the other qua business. The Revenue’s case is that the three agreements, though running concurrently, reserves separate rights and duties for the parties there-to. As such, where the consideration for the lease has been separately defined and enumerated, the same would only constitute income from house property. In fact, even where there is a composite agreement, so that an indivisible consideration is provided therefor, i.e., the rent received/receivable from the house property, as well as the provision of amenities/ facilities, the higher courts of law have approved the principle of allocation of such consideration reasonably into that for the two identifiable sources of income, so that the rent is assessed under Chapter IV-C of the Act, i.e., as income from house property (refer: Attukal Shopping Complex vs. CIT, 259 ITR 567 (Ker.). Reliance is also placed by it in the case of Shambhu Investments vs. CIT (2003) 263 ITR 143(SC).
4. We have heard the parties, and perused the material on record.
4.1 The respective cases of both the parties have been set out even in the earlier part of the order, so that we may dwell on the same here. The question before us is the head of income under which the income from the letting of the building, used as a hostel premises/ transit facility, earned per a lease agreement, is taxable; the Act providing for heads of income which are mutually exclusive. The matter, clearly, is a mixed question of fact and law. We shall address the legal aspect first. Income is taxable as `income from house property’ where it is derived from the exercise of property rights, so called. That is, which the proprietor of those rights derives either by enjoying the possession or by parting with it by letting the property to tenants. Business income, on the other hand, arises out of activities which can be properly called as constituting a `business’. Leasing activity, it is again well-settled, would not by itself qualify to be a business, in the sense that the income therefrom is asses sable as business income, in view of the fact that income received from house property has been made specifically asses sable under a separate head of income under the Act. The character of the income would not alter just because it is received by a company formed with the object of developing property and turning it into account. The question, thus, that arises is, whether the facts as determined show the income as arising out of a single source or two sources. That is, whether the services rendered were merely incidental to the letting of house property, or could be property categorized as a separate source of income. This capsules the controversy attending this case, the relevant facts in respect of which have again been set out herein before.
4.2 In our view the answer to the question afore-referred lies in answering the question as to whether it is a case of inseparable letting, or not so. We say so as the third agreement, i.e., for the provision and maintenance of amenities and facilities, is also nothing but a lease agreement; its clause (1)(a) reading as under:-
“1(a) The Lessor hereby agrees to provide the Lessee and maintain in the premises demised the amenities and facilities specified herein for the duration of the lease upon the lessee paying the monthly charges here under reserved.”
The law, per s. 56 (2)(iii), reproduced here under, provides an exception to income from letting of house property being asses sable as `business income’ or as `income from other sources’, where the same arises integrally to the letting of a plant, machinery, or furniture. This is as, even as explained by the apex court per its five-member constitution bench decision in the case of Sultan Bros. Pvt. Ltd. vs. CIT (1964) 51 ITR 353 (SC), is for the reason that it then becomes a new kind of income, not covered u/s. 9 (of the 1922 Act, corresponding to s. 22 of the 1961 Act). That is, income, not from the ownership of the building alone, but an income which though arising from building, would not have arisen if the plant, machinery, or furniture had not been let along with it:
Income from other sources.
`56(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in s. 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely:-
(iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head ‘profits and gains of business or profession;
4.3 The question, thus, boils down to the intention of the parties. The same has necessarily to be inferred from the agreements entered into between them, and of course, the subsequent conduct in pursuance thereto. The hon’ble apex court has toward this framed the following questions in the case of Sultan Bros. Pvt. Ltd. vs. CIT (supra) (pg. 363,364), as:-
a) Was it the intention in making the lease – and it matters not whether there is one lease or two, that is, separate leases in respect of furniture and building – that the two should be enjoyed together?
b) Was it the intention to make letting of the two practically one letting?
c) Would one have been let alone and a lease of it accepted without the other?
If the answer to the first two questions is in the affirmative, and the last in the negative, it was held by it that then it has to be said that the lettings are inseparable.
4.4 We may now examine the facts of the case. Simply put, would the assessee¬company undertake the construction of the hostel premises, if not accompanied by the lease agreement in its respect, as well as for the provision of facilities to the lessee-company. In our view, the answer, as borne out of the agreements between the parties and their conduct, is clearly in the negative. In fact, in our view, there is essentially only one and not three, agreements. The `agreement for lease’ and the `agreement for provision of facilities’ form part of the construction agreement, the parent agreement, as abundantly clarified vide clause (6) thereof. The preamble to the leas agreements, as well as the clauses thereof, which we may advert to for the purpose, would clarify this beyond doubt:
AGREEMENT TO LEASE
`AND WHEREAS it was one of the conditions of the “Agreement of construction” that upon the hostel facilities being completed the Lessor will grant unto the Lessee a lease of the hostel facilities (hereinafter called ‘the premises’) subject to the period of lease and payment of rent hereinafter reserved and shall provide in the premises the amenities and facilities and maintain the said amenities and facilities during the period of the lease in the manner specified in the “Agreement for provision and maintenance of amenities and facilities”.
NOW THESE PRESENTS WITLESSNESS AND IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO as follows:
1a. The Lessor hereby agrees to demise unto the lease the premises together with all fixtures, fittings, appurtenances there-to and stairs, lifts and common areas to hold unto the Lessee upon paying the monthly rent here-under reserved.’
(PB pg. 44)
AGREEMENT FOR PROVISION AND MAINTENANCE OF AMENITIES AND FACILITIES
`WHEREAS under an Agreement to lease made between the Lessor and the Lessee hereto, the Lessor agreed to grant on lease the hostel facilities consisting of 150 rooms together with other amenities as described in the said Agreement dated –
AND WHEREAS it was one of the conditions of the said agreements that upon the hostel facilities being completed and the Lessor granting unto the Lessee a lease of the hostel facilities (hereinafter called ‘the premises’) for a term of 10 years and subject to the payment of rent reserved, the Lessor shall provide the amenities and facilities specified hereunder and shall maintain the said amenities and facilities in the manner specified hereunder:
NOW THESE PRESENTS WITNESETH AND IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO as follows:
1. (a) The Lessor hereby agrees to provide the Lessee and maintain in the premises demised the amenities and facilities specified herein for the duration of the lease upon the lessee paying the monthly charges here under reserved.
(b) The duration of this agreement shall be coterminous with that of the aforesaid agreement to lease entered into between the parties.
The three agreements are, without doubt, complementary and supplementary, bearing cross references to each other, and contemplate the provision of hostel facilities by the assessee to the TCS, the lessee, for its use. No doubt, the lease agreement reserves a separate consideration for lease of the hostel premises, but the question, in our view, that needs to be considered is whether the said lease agreement could be considered in isolation, i.e., as independent and apart from the other two agreements, all of which are qua and toward a single arrangement for the provision of hostel facilities to TCS, the lessee, over a ten year period. The three agreements have to be considered as a part of one composite arrangement, and only for the provision of hostel facilities by the assessee to the TCS for a period of 10 years. Maintaining and operating of a hostel as in the case of a lodge, and which the ld. AR was at pains to emphasize before us, with reference to the decision in the case of Joseph George & Co. v. ITO, 328 ITR 161 (Ker), is only a business, even as we may clarify that the said decision does not have a direct application in the facts and circumstances of the present case. In the instant case, therefore, it is definitely a case of the answers to the first two questions (stated at para 4.3 above) being decidedly in the affirmative, and of the third, in the negative.
True, where there is a long term understanding as in the instant case, being for a period of 10 years, it would give rise to a presumption of being only a rental income. So, however, the lease period matches with the period for which the hostel facilities are to be operated and provided by the assessee. As such, the regularity of income, which the ld. DR would emphasize, would bear no special significance in the facts and circumstances of the present case so as to alter the character of the income.
4.5 The next question that arises is whether the income by way of lease rental of the building is to be assessed u/s. 28 (i.e., as business income) or u/s. 56 (i.e., income from other sources). There can hardly be any doubt with regard to this, even as there is no material to exhibit that the assessee- company is in this trade, as contended by it. A trade in any case can always be commenced at any time. We express absence of any doubt in this regard, because this income, which we have held as forming an integral part of the lease income on letting of amenities and facilities, stands already assessed and accepted as business income by the Revenue. As such, this income has to be assessed only u/s. 28. We decide accordingly.
5.1 Under the circumstance, in our considered view, the consideration arising out of the three agreements form part of one arrangement undertaken by the assessee with the TCS for provision of hostel facilities to the latter. There is no scope of any segregation of the consideration into separate streams. The entire income, the net of expenses, which the assessee undertakes as a business organisation, has to be treated as business income.
5.2 The assessee, however, we find, has claimed interest in the pre- construction period. Deduction in respect of interest for the said period is only available u/s. 24, i.e., in the computation of income of house property. The assessee’s claim is, thus, contrary, and we are afraid that the ld. AR failed to draw our attention to this material fact. Subject to these conditions, we decide the issue, in principle, in favor of the assessee. We decide accordingly.
6. In the result, the assessee’s appeals for both the years are allowed.
Dated: 30th December, 2011
CORRIGENDUM to above appeal is given below
INCOME TAX APPELLATE TRIBUNAL, COCHIN
I.T.A Nos. 171/Coch/2009 & 291/Coch/2010
Assessment Years:2004-05 & 2006-07
M/s. Kenton Leisure Services, P. Ltd.
The Deputy Commissioner of Income Tax
Per Sanjay Arora, AM:
The Order by the Tribunal in the said appeals was passed on 30-12-2011. However, it is found to bear certain inadvertent omissions and/or typographical errors/mistakes. The same are, therefore, sought to be rectified vide this Corrigendum, passed u/s. 254(2) of the Income-tax Act, 1961, and which does not in any manner impact either the finding/s or the ratio of the said order, or in any other manner whatsoever, except of course correcting the same. We enlist the same hereinbelow:-
a) Line 2, Para 4.1: The word ‘not’ may be read between the words ‘may’ and ‘dwell’, so that the relevant part of the sentence would read as ‘we may not dwell on the same here.’
b) Line 8, Para 4.4: The word ‘leas’ is to be read as ‘lease’, so that the relevant part of the sentence would read as:- `The preamble to the lease agreements,..’
c) Line 8, Para 4.5: The words ‘, and in our view only rightly so’ would stand to be read after the words ‘by the Revenue’.
d) Para 5.1: The word ‘for’, `at’ and ‘is’ may be read as against the words ‘of’, `the’ and ‘has’, occurring at line 3,4 and 5 of the said para, so that its last two sentences would read as: `There is no scope for any segregation of the consideration into separate streams. The entire income, at net of expenses, which the assessee undertakes as a business organization, is to be treated as business income.’
e) Line 3, Para 5.2: The words `from house property’ and ‘contradictory’ would substitute the words`of house property’ and ‘contrary’; the latter being in apposite.
Dated: 16th January, 2012