2021 (2) TMI 421 - AT - Income Tax

License Agreement Income Classified as Business Income, Not House Property. Tribunal Reverses CIT(A) Decision.

The Tribunal ruled that income earned under a license agreement with M/s Oriental Hotels Ltd. should be classified as 'income from business or ... Income from business or profession - income from house property - license fee assessed as business income - nature of income - letting out of premises versus exploitation of property - intention of the parties as reflected in the licence agreement - revenue sharing licence for operation of hotel - application of precedents distinguishing licence to operate a running hotelIncome from business or profession - income from house property - intention of the parties as reflected in the licence agreement - revenue sharing licence for operation of hotel - license fee assessed as business income - License fee received for licensing a fully furnished hotel along with the licence to operate it is taxable as income from business or profession and not as income from house property. - HELD THAT: - The assessee constructed and operated a five star hotel and subsequently granted to a hotel operator a long term licence to operate the fully furnished hotel on a revenue sharing basis. The arrangement was not a simple letting on a fixed rent; it authorised the licensee to operate the hotel and continued the business activity originally carried on by the assessee. The Tribunal found that the nature of the agreement and the commercial intent of the parties point to a business licence rather than mere exploitation of property as owner. While the lower authorities relied on the Supreme Court principle of examining the assessee's objects to treat receipts from letting as business income where letting is the assessee's main object, the Tribunal noted that the assessee's objects permit leasing but the factual matrix here squarely aligns with the High Court of Kerala's decision in Palmshore Hotels, which held that licence fees for giving a hotel with furniture and fixtures for operation by another company constitute business income. Applying that reasoning, the Tribunal concluded that the licence fee is a business receipt and not rental income chargeable under the head income from house property. [Paras 7, 8, 9]The assessment treating the licence fee as income from house property was reversed and the licence fee is to be assessed under the head income from business or profession.Final Conclusion: The assessee's appeal is allowed; the licence fee received for permitting another company to operate the fully furnished hotel on a revenue sharing basis shall be assessed as income from business or profession for Assessment Year 2014 15 and the AO is directed to assess accordingly. Issues Involved:1. Whether the income earned under the Memorandum of Understanding (MoU) with M/s Orient Hotels Limited should be classified as 'income from house property' or 'income from business or profession'.Issue-wise Detailed Analysis:1. Classification of Income Earned Under the MoU:The primary issue in this case revolves around the classification of income earned by the assessee under a license agreement with M/s Orient Hotels Limited. The assessee reported this income under 'income from business or profession,' while the Assessing Officer (AO) classified it as 'income from house property.'Facts and Arguments:The assessee, engaged in the hotel business, constructed a hotel at Trivandrum in 2008 and operated it until 31.07.2009. Subsequently, the assessee entered into a license agreement with M/s Oriental Hotels Ltd. (Taj Group of Hotels) to operate the hotel for 40 years on a revenue-sharing basis. The AO, referencing the MoU, concluded that the income was rental income assessable under 'income from house property,' based on the Supreme Court decisions in Chennai Properties and Investments Ltd. vs. CIT and Rayala Corporation (P) Ltd. vs. ACIT. The AO argued that the main object of the assessee was to run the hotel, not to let out property for rental income.CIT(A) Decision:The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, stating that the income was derived from property exploitation and not from any business activity carried out by the assessee. The CIT(A) referenced various judicial decisions and the MoU to support this conclusion, emphasizing that the assessee ceased business activities related to the hotel upon signing the MoU.Assessee's Appeal:The assessee contested this decision, arguing that the income should be classified under 'income from business or profession,' as the hotel was licensed to another company due to business exigencies. The assessee highlighted that the revenue-sharing model did not constitute a fixed rental income, citing the Kerala High Court’s decision in Palmshore Hotels (P.) Ltd. vs. CIT, which classified similar income as business income.Tribunal's Analysis:The Tribunal examined the nature of the agreement and the business model of the assessee. It noted that the agreement was not a simple lease but an arrangement to continue the business activity of running a hotel. The Tribunal found that the revenue-sharing model indicated a business arrangement rather than a rental agreement. The Tribunal also considered the Supreme Court’s decisions and concluded that the main object of the assessee, as per its Memorandum of Association, included constructing and leasing hotels, supporting the classification of the income as business income.Judicial Precedents:The Tribunal referenced the Kerala High Court’s decision in Palmshore Hotels (P.) Ltd. vs. CIT, which held that license fees from a hotel with furniture and fixtures for running the hotel should be classified as business income. The Tribunal emphasized that the intention of the parties and the nature of the agreement indicated a business arrangement.Conclusion:The Tribunal concluded that the license fee received by the assessee for licensing a fully furnished hotel along with the license to run the hotel should be classified as 'income from business or profession.' The Tribunal reversed the findings of the CIT(A) and directed the AO to assess the income under the head 'income from business or profession.'Final Order:The appeal filed by the assessee was allowed, and the order was pronounced on 8th February 2021 at Chennai.Summary:The Tribunal determined that the income earned by the assessee under the license agreement with M/s Oriental Hotels Ltd. should be classified as 'income from business or profession' rather than 'income from house property,' based on the nature of the agreement and judicial precedents. The Tribunal reversed the CIT(A)’s decision and directed the AO to assess the income accordingly.