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East West Hotels Limited v. The Deputy Commissioner Of Income Tax
Judgment Summary — Manjunath, J.
Factual and Procedural Background
The assessee is a company registered under the Indian Companies Act, 1956, engaged in the hotel business and operating the "East West Hotel Ltd." at Residency Road, Bangalore. The return of income for the assessment year 1989-1990 was filed on 31.12.1989 and processed under Section 143(1)(a) of the Income Tax Act. The assessee entered into an agreement dated 1.6.1997 with Indian Hotels Company Limited (IHCL), described in the documents as a "Licence Agreement", under which IHCL was permitted to run the hotel in consideration of a licence fee. The agreement was for an initial period of 33 years with options to extend (potentially up to a total of 99 years), and included detailed provisions on percentage-of-sales or minimum guaranteed annual licence fees.
The assessing officer treated amounts received by the assessee from IHCL as income from other sources (holding the arrangement to be a lease) rather than business income. The assessee appealed to the Commissioner of Income Tax (Appeals), who confirmed the assessing officer's view. The assessee then appealed to the Income Tax Appellate Tribunal, Bangalore Bench, which also dismissed the appeal, holding the transaction to be in the nature of a lease. Aggrieved by these concurrent findings, the assessee filed the present appeal raising a specific question of law.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the transaction between the assessee and the Indian Hotels Company Limited is in the nature of a lease and not a licence agreement, and whether the amount received by the assessee from IHCL must be treated as income from other sources rather than business income.
Arguments of the Parties
Appellant's Arguments (Assessee)
- The assessee contended that the "Licence Agreement" should be treated as a licence under which IHCL was managing the hotel on behalf of the assessee, and therefore the amounts received were business income.
- The appellant relied on the Bombay High Court judgment in Commissioner of Income Tax Ltd. v. Mohiddin Hotels (P) Ltd. (2006 152 Taxman 611), arguing that the facts in that case are the same and that the Division Bench there held the income to be business income rather than income from house property/other sources.
Respondent's Arguments (Revenue)
- The revenue argued that the Bombay High Court decision in Mohiddin Hotels is distinguishable and inapplicable because it did not consider the principle laid down by the Supreme Court in Universal Plast Ltd. v. Commissioner of Income Tax, Calcutta (237 ITR 454).
- The revenue relied on Universal Plast and on a Division Bench judgment of the Karnataka High Court in Dharak Ltd. v. Commissioner Of Income-Tax (163 ITR 734), and argued that proper application of those authorities and consideration of the terms of the licence agreement show that the transaction is not merely management by IHCL but effectively a lease such that licence receipts are not business income of the assessee.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Universal Plast Ltd. v. Commissioner Of Income Tax, Calcutta — 237 ITR 454 (Supreme Court) | The Supreme Court's general principles relating to income from leasing out business assets, including a four-condition framework to determine whether a transaction is in the nature of a lease/licence and whether the assessee has temporarily assigned the business with an intention to revive it. | The court explicitly referenced and applied the Universal Plast principles to the facts of the present case, using them to assess whether the transaction was a lease in substance. The court concluded that the Universal Plast framework supported treating the transaction as a lease. |
| Commissioner of Income Tax Ltd. v. Mohiddin Hotels (P) Ltd. — 2006 152 Taxman 611 (Bombay High Court) | The Bombay High Court held in that case that income from the hotel was business income, not income from house property/other sources; the appellant relied on this decision as analogous. | The court considered the Mohiddin Hotels decision but expressly declined to follow it in the present case, observing that Mohiddin had held the Universal Plast principles inapplicable on its facts. The present court disagreed with that view and found Mohiddin distinguishable for the transaction before it. |
| Dharak Ltd. v. Commissioner Of Income-Tax — 163 ITR 734 (Division Bench of this Court) | Cited by the revenue as an authority relevant to characterization of receipts and the effect of licence/lease arrangements on whether an assessee has given up business or intends to resume it. | The decision was relied upon by the revenue before the court; the opinion records that the revenue relied upon Dharak Ltd. along with Universal Plast. The text does not elaborate a detailed, separate application of Dharak by the court beyond noting it was cited by the revenue in support of their position. |
Court's Reasoning and Analysis
The court considered the undisputed facts: the assessee had operated the hotel for decades; the hotel was closed for about 17 months; the assessee entered into the agreement with IHCL on 1.6.1997 allowing IHCL to run the hotel in consideration of a licence fee; and the agreement expressly provided for an initial 33-year term with options to extend for further 33-year periods (potentially aggregating to 99 years). The licence fee schedule (paragraph 5.1 of the agreement) set fees as a percentage of new sales or a minimum guaranteed annual licence fee for specified periods of operation, and the parties also computed licence fees for extended periods.
The court examined key clauses (Clause 3.1 and Clause 3.2) which established the 33-year term and the options to renew twice for further 33-year periods. The court also noted a supplemental agreement allowing the assessee to permit IHCL to assign rights in favour of Gateway Hotel on an enhanced licence fee. From these contract features, the court inferred that the assessee had no real intention of resuming hotel operations at the premises for at least 33 years and possibly up to 99 years.
Relying on the Supreme Court's decision in Universal Plast, the court applied the four-condition analytical framework used to distinguish a genuine temporary assignment for management from a substantive lease. The court found that, on the pith and substance of the agreement and the surrounding facts, the arrangement bore the character of a lease rather than a licence given for temporary management. The court expressly disagreed with the Bombay High Court's approach in Mohiddin Hotels, which had considered Universal Plast to be inapplicable on its facts; the present court could not follow Mohiddin in light of the nature of the present transaction.
On the basis of the contractual terms (length of term and renewal options), the licence fee structure, the supplemental agreement permitting assignment, and the long hiatus in operation before the agreement, the court concluded that the assessee did not intend to revive or restart hotel operations itself and that the substance of the arrangement was that of a lease. Consequently, the court held that the assessee was not running the hotel through IHCL and the arrangement could not be characterized as IHCL merely managing the assessee's business.
Holding and Implications
HOLDING: The court answered the question of law framed against the assessee and dismissed the appeal.
Implications:
- Direct effect on the parties: The concurrent findings of the assessing officer, the Commissioner (Appeals), and the Income Tax Appellate Tribunal that the transaction is in the nature of a lease are upheld by this court; the appeal by the assessee is dismissed.
- The court's decision rests on treating the substance of the agreement (term, renewal options, fee structure, and supplemental assignment provisions) as indicative of a lease rather than a temporary licence for management. The opinion does not set out a new legal principle beyond applying the Supreme Court's Universal Plast framework to the facts of this case.
Manjunath, J.:—
This appeal is by the assessee challenging the concurrent findings of the assessing officer, Commissioner of Income Tax (Appeals), Bangalore, and the order passed by the Income Tax Appellate Tribunal, Bangalore Bench in ITA. No. 19.Bang/98 for the assessment year 1989-1990.
2. The assessee is a company registered under the Indian Companies Act, 1956. The assessee filed the return of income on 31.12.1989 and the same was processed under Section 143(1)(a) of the Income Tax Act (for short the ‘Act’). The assessee is indulged in the hotel business activities. One such establishment was in Bangalore under the name and style “East West Hotel Ltd.”, at Residency Road, Bangalore. The said hotel has been given to the Indian Hotels Company Limited under an agreement dated 1.6.1997 for an initial period of 33 years and giving option to renew the same for a further period of 33 years. The said agreement is entered into under the name and style of “Licence Agreement”. The assessee contended that the amount received by it from Indian Hotels Company Limited has to be treated as its business income. The contention of the assessee was rejected by the assessing officer on the ground that the assessee is not getting any business income from East West Hotels and the same has been leased out by the assessee in favour of Indian Hotels Company Limited and any amount received by the assessee from such company has to be treated as the income from other sources and not a business income. Accordingly, an order of assessment was passed.
3. Aggrieved by the order passed by the assessing officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), contending that the assessing officer did not consider the pith and substance of the licence agreement entered into between the assessee and Indian Hotels Company Limited. It is further contended that since the Indian Hotels Company Limited is managing the hotel of the assessee, such transaction cannot be treated as a lease transaction and the income received by the assessee has to be treated as an income from the business of the assessee. However, the Commissioner of Income tax rejected the contention raised by the assessee and confirmed the orders passed by the assessing officer and disposed of the appeal.
4. Aggrieved by the same, the assessee filed a second appeal before the Income Tax Appellate Tribunal, Bangalore Bench, which also dismissed the appeal holding that the transaction between the assessee and Indian Hotels Company Limited is in the nature of lease and cannot be held that the assessee herein is running the hotel and any income from such hotel building has to be treated as a business income of the assessee.
5. Aggrieved by the concurrent findings of all the authorities below, this appeal is filed by the assessee raising the following question of law,
“Whether on the facts and in the circumstances of the case, the authorities below were right in holding the transaction between the assessee with the Indian Hotels Company Limited is in the nature of lease and not a licence agreement and that the amount received by the assessee from the Indian Hotels Company Limited has to be treated as an income from other sources and not as business income.”
6. We have heard the learned Counsel for the appellant and the respondent.
7. The learned Counsel reiterated the grounds urged before the authorities below and relying upon the judgment of the Bombay High Court in the case of Commissioner of Income Tax Ltd. v. Mohiddinhotels (P) Ltd. . 2006 152 Taxman 611., contends that the facts involved in the aforesaid case and facts involved in the present case are one and the same. In such circumstances, the Division Bench of the Bombay High Court has held that the income from the said hotel has to be treated as business income and not an income from the house property. Therefore, he requests the Court to allow the appeal.
8. Per contra, the learned Counsel for the revenue contends that the judgment of the Bombay High Court is not applicable to the facts of the present case since the Bombay High Court did not consider the principle laid down by the Hon'ble Supreme Court in the case of Universal Plast Ltd. v. Commissioner Of Income Tax, Calcutta . 237 ITR 454.. According to him, if the principle laid down by the Hon'ble Supreme Court in the aforesaid judgment had been properly applied by the Bombay High Court and if the Bombay High Court had considered the terms and conditions of the document therein, it would not have reached such a conclusion. He further contends that on facts, the facts in the Mohiddin Hotels Limited and the facts involved in the present case are quite different and therefore the said judgment cannot be applied to consider the case of the assessee.
In addition to that the learned counsel also relied upon a Division Bench judgment of this Court reported in the case of Dharak Ltd. v. Commissioner Of Income-Tax . 163 ITR 734. Relying upon these two judgments and relying upon the licence agreement produced by the assessee along with the appeal memo and the supplemental agreement thereon, contends that it cannot be treated that the assessee has not given up its business and the assessee has no intention to resume the hotel business of the present unit and the amount received by the assessee from Indian Hotels Company Limited has to be treated as a business income. Therefore, he requests the Court to dismiss the appeal.
9. Having heard the learned Counsel for the parties, we notice the following undisputed facts in this case.
It is not in dispute that from many decades the assessee herein was running the hotel in question under the name and style of East West Hotel Limited at Residency road, Bangalore. It is also not in dispute that the hotel was closed over a period of 17 months and thereafter the assessee herein has entered into an agreement on 1.6.1997 with Indian Hotels Company Limited for a period of 33 years. The assessee has permitted the Indian Hotels Company Limited to run the hotel along with the licence of the assessee subject to the payment of licence fee.
Paragraph 5.1 of the agreement reads as hereunder:
“5.1 In consideration of the licence hereby granted, IHCL shall pay to EWH the following licence fee
Percentage of New Sales Per Year OR Minimum Guaranteed Annual Licence Fee During period of the repair work is carried out (commencing from the appointed date up to the reopening date) Nil Nil For the first year of hotel operation (commencing from the reopening date) 10 OR Rs. 20 lakhs Whichever is higher For the second year to the sixth year of hotel operation 10 OR Rs. 24 lakhs; whichever is higher For the seventh year to the fifteenth year of hotel operation 12.5 OR Rs. 24 lakhs; whichever is higher
From sixteenth year on wards of hotel operations 14 OR Rs. 24 lakhs; whichever is higher
While computing the licence fee, the parties have also computed the licence fee to be paid during the extended period of agreement.
The Clause 3.1 of the agreement reads that,
“The licence shall be for a period of thirty three years commencing form the appointed date.
Clause 3.2(i) reads that,
“After expiry of 33 years, option open to the Indian Hotels Company Limited to extend it for a further period of 33 years.”
Clause 3.2(ii) reads that,
Indian Hotels Company Limited after the expiry of 66 years has further option to renew it for the second time for a further period of thirty three years.”.
From the above clause, it is clear that if the Indian Hotels Company Limited intended to renew the lease period, it has an option to renew the same for a further period of 33 years. In addition to that, supplemental agreement produced along with the appeal memo discloses that the assessee herein has permitted the Indian Hotels Company Limited to assign its rights in favour of Gateway Hotel on an enhanced licence fee. Therefore, it is clear that when the assessee herein has no intention to resume its business in the premises in question, at least for a minimum period of 33 years which can be extended up to 99 years. On facts it is not in dispute that the assessee herein was running the hotel business in the same premises for few decades prior to permitting the Indian Hotels Company Limited in the year 1987. When the assessee has permitted the person who is in occupation of the building to renew the lincence for a total period of 99 years, we are afraid that the assessee has an intention to resume/restart the business and intention of the assessee was only to permit the Indian Hotels Company Limited to manage the affairs of the Hotel on behalf of the assessee.
10. When we consider the clauses of the agreement, it disclose that it is more in the nature of lease deed and not a licence deed and it is given for a temporary period with an intention to resume its business of Hotel in the premises in question. The Hon'ble Supreme Court in Universal Plast Limited case had an occasion to consider the general principles relating to income from leasing out the assets of the business by an assessee. The four conditions are imposed therein to arrive at a conclusion whether such transaction and the income received has to be treated as a lease amount or licence fee and whether the licence has been temporarily assigned to any other persons to carry on the has been temporarily assigned to any other persons to carry on the business with an intention of reviving it. It is no doubt true that the Bombay High Court in Mohiddin Hotels (P) Ltd., had held that after construction and furnishing of a hotel, the same had leased the property for a period of twenty years in favour of Salgaokars, still held that the principles laid down in Universal Plast Limited by the Apex Court has no application to the facts of the case therein. In all respects, we cannot follow the views expressed by the Bombay High Court in Mohiddin Hotels (P) Ltd., considering the nature of transaction in this case.
11. Considering the facts of this case and considering the nature of document produced by the assessee before us and considering the entire pith and substance of the documents, we hold that the transaction is in the nature of lease and the intention of the assessee is not revive/restart business and to hold that it was leased for a temporary period. Therefore, we cannot come to the conclusion that the assessee has been managing the hotel through Indian Hotels Company Limited.
12. In the result, the question of law framed is answered against the assessee and the appeal is dismissed.
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