Composite hotel lease receipts retain business income character when assets remain commercial assets used in ongoing business.

A composite lease of a hotel building, furniture, equipment and goodwill for a consolidated rent was treated as commercial exploitation of a business undertaking rather than a mere letting of property. Because the lease covenants showed that the assets were to remain commercial assets and be used in the course of an ongoing hotel business during the lease term, section 9 was held inapplicable and the receipts retained their business character. The income was therefore assessable as business income under section 10 of the Indian Income-tax Act, 1922, rather than as income from property or other sources under section 9 or section 12(4).

---

---

Issues: Whether the rental income from the composite lease of hotel premises, furniture, equipment and goodwill was taxable as business income under section 10 of the Indian Income-tax Act, 1922, or as income from property / other sources under section 9 or section 12(4).

Analysis: The lease covered the hotel building together with its furniture, equipment, goodwill and other assets for a consolidated rent, and the covenants required the lessee to use and return the assets in the manner of an ongoing hotel business. The intention gathered from the terms of the lease and surrounding circumstances was that the assets were to remain commercial assets during the lease period and be exploited as part of the hotel business, rather than being merely let out as property. On those facts, section 9 was inapplicable, and the case fell within the principle that income from temporary commercial exploitation of a business asset may retain its business character. The reasoning also aligned with the view that the composite letting, viewed as a whole, supported taxation under section 10 rather than under section 12(4).

Conclusion: The rental income was taxable under section 10 of the Indian Income-tax Act, 1922, and not under section 9 or section 12(4).

Final Conclusion: The assessee succeeded, the contrary assessments were set aside, and the income was held assessable as business income arising from the commercial exploitation of the hotel undertaking.

Ratio Decidendi: Where a composite lease of a hotel undertaking shows that the assets were intended to remain commercial assets and to be exploited as part of the business during the lease term, the rental receipts retain the character of business income under section 10.

---