Article by Saumya Sakshi
Student of Amity Law School, Noida
EAST WEST HOTELS LTD. …PETITIONER
THE DEPUTY COMMISSIONER OF INCOME TAX …RESPONDENT
DECIDED ON: JANUARY 18, 2008.
K Manjunath (J), A Bopanna (J)
ILR 2008 KAR 1004.
The East-West Hotel Ltd. Vs. The Deputy Commissioner of Income Tax is a case related to the determination of the head of income. The whole case revolves around the determination of agreement whether it is a lease agreement or licence agreement as contended by the assesses of the respective case and asserting income received by the assesse is to be treated as business income or income from other sources.
The assessee is a company registered under The Companies Act, 1956 and is indulges in hotel business activities. The assessee has one such establishment in Bangalore named “EAST WEST HOTEL LTD.” The said hotel through an agreement entered between the assessee and Indian Hotels Company (IHC) given on lease for an initial period of 33 years and an option was given to renew the same lease for a further period of 33 years. The said agreement was made just exactly like a lease agreement.
The assessee contended that the income received from the Indian Hotels Company has to be treated as business income. This contention was rejected by accessing officer, the reason of so being cited as, the assessee received such income from its leased-out hotel, thus such income doesn’t come under the head of business income but has to be treated as income from other source.
Not agreed by the order passed by the assessing officer, the assessee appeal before the Commissioner of Income Tax (Appeals), asserting that the assessing officer ignores the true nature of the lease agreement entered between the party and again contended that the income received by IHC has to be treated as business income not income from other source. But the Commissioner of income tax held the same as held earlier by the assessing officer, i.e., income received by the assessee from the said hotel building was income from other sources.
Again, aggrieved by the said finding, the assessee filed a second appeal before the Income Tax Appellate Tribunal, Bangalore Bench, which also held the same as earlier and dismissed the appeal.
At last, the assessee filed an appeal in the Karnataka High Court, against the concurrent finding of all the above authorities.
The issue before the court was-
Whether on the fact and in circumstances of the case, the holding of the authorities below that the agreement entered between the parties was in nature of lease agreement, not a licence agreement was right?
Whether the Income received by the assessee under the lease agreement come under the head of income from other sources or business income?
1. Section 28 of The Income Tax Act, 1961.
1. Commissioner of Income Tax v. Mohiddin Hotels (P) Ltd.
2. Universal Plast Ltd. v. Commissioner of Income Tax.
3. Dharak Limited v. Commissioner of Income Tax.
The High Court dismissed the appeal of the assessee. The court while dealing with the first issue held that the clauses in the said agreement were much like a lease agreement not like a licence agreement being made for a specific period. By bare reading of the agreement, it is cleared that the assessee has no intention to resume its business of hotel in the premise in question for a definite period of 33 years which can be extended to the next 33 years. So, it is clear that the said agreement is a lease agreement as the hotel in question was leased out.
The court in the second issue held that it is cleared by considering the fact and document produced before the court that the transaction is in the nature of the lease and it is cleared by considering the entire pith and substance of the documents and fact produced before the court that, the assess was not managing the hotel through Indian Hotels Company (IHC). It was the IHC who was managing the hotel in the question. Thus, any income received by the assessee from IHC has to be treated as income from other sources, not as business income.
In my opinion, The High Court dismissing the appeal of the assessee was justified. The agreement in question is a lease agreement, not a licence agreement as, the lease is the transfer of an interest in a specific immovable property but the licence is just permission, without the actual transfer of an interest in the property. In this case, the agreement which was made between the parties was having similar nature as the lease agreement and by reading the clauses of the said agreement it was held as a lease agreement, not a licence agreement because there was the transfer of interest by the assessee to the IHC. And the claim of the assessee that the income received by him from IHC has to be treated as Business income. As per section 28 of the Income Tax Act, 1961, if any person has to treat the income received as business income, he has to manage and maintain the business then only such income received from such can be counted as business income. And in this case, it was appearing from the clause the agreement that the assess was not in the mood to restart his business and the assessee was not managing the hotel in question through IHC, it was IHC who was managing such affairs of the hotel. Thus, any income received from such a hotel to the assessee has to be treated as income received from other sources, not as business income.