TaxTMI 
TaxTMI 
2014 (9) TMI 431
X X X X Extracts X X X X
X X X X Extracts X X X X
....n law in holding that the rental income from lease/franchise should be assessed as business income and not under the head income from house property without appreciating that the assessee had ceased to carry on hotel business in the impugned properties and had chosen to exploit the same as their owner by leasing out the land and building for long periods? 3. Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that only if the assessee corporation had ceases to carry on its regular business of tourism development only then the income from leasing would constitute income from house property?" 2. The brief facts are as follows: The assessee is a wholly owned Government of Tamil Nadu undertaking engaged in the business of development of tourism in the State. For the assessment year 2005-06, the assessee filed return of income on 31.10.2005 admitting NIL income and subsequently filed revised return of income on 09.06.2013 admitting NIL income under normal computation and book profits of Rs. 3,24,89,295/- under Section 115 JB of the Income Tax Act. For the assessment year 2006-07, the assessee filed return of income on 27.11.2006 admitting tota....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n. While completing the assessment, the Assessing Officer disallowed the statutory deduction of 30% amounting to Rs. 50,88,343/- in respect of assessment year 2005-06 and Rs. 41,47,414/- and Rs. 45,34,350/- in respect of assessment year 2006-07 claimed under the head 'income from house property' and assessed the lease rental income under the head 'income from business'. 6. Aggrieved by the order of the Assessing Officer, the assessee preferred appeals before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) relying upon clauses 1 to 3 of the agreement was of the view that letting out the land and building and earning rental income was to be assessed as income from house property. Relying upon the decision reported in (2004) 266 ITR 685 (CIT V. Chennai properties), which was followed in the decision reported in (2008) 300 ITR 118 (Mad) (Keyaram Hotels (P) Ltd. V. Assistant Commissioner of Income Tax), the Commissioner of Income Tax (Appeals) held that the appellant in this case did not engage in any commercial or business activity to earn such income and hence, the in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... are stipulated. She submits that the assessee had let out the property to the franchisees and earned income through franchisees. The assessee has never treated the let out properties as non-business assets. Hence, the income has to be treated as business income and not as income from house property. 11. Heard the rival submissions of learned counsel appearing for the assessee and the learned standing counsel appearing for the Revenue and perused the materials placed before this Court. 12. It is relevant to extract Section IV of the tender document of the assessee in which the Conditions of Contract - Special Conditions are stipulated, which reads as follows: "Conditions of Contract- Special Conditions 1. Business Operations: The Unit will be handed over to franchisee on AS IS WHERE IS CONDITION". Any improvements need to be done only by the franchisee at his own cost. The words AS IS WHERE IS CONDITION mean that the land and buildings and other assets available in the hotels on the date of the release of Tender Notice . No Additions/ Alterations will be carried out in the land or building by TTDC after the tender notices are published. Arresting leakages, erection of compou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce in Form No.23 for providing accommodation facilities. III) Common Area: a. The reception, corridors, Stair cases and parking area should be kept clean always . b. There should not be any garbage strewn over the public area. IV) Garden Maintenance : The garden should be maintained properly with the help of a gardener. v) Maintenance of Building : The Franchisee shall maintain the building and movable properties like furniture, electrical installations, vehicle, etc. in good condition and shall compensate the franchiser for any damages to such properties with replacement value. The following maintenance work to be undertaken by the Franchisee: White washing - Once in six months Cement Paint - Once in 1 = years Enamel Paint - Once in 2 years. 5. Catering: a. The quality of food stuff provided by the franchisee should be of high standards. b. South Indian, North Indian and Continental food to be provided. c. All food shall be stored and presented in a way that protects food from cross contamination and as per the Statutes like Food Preservation Act. d. The food supplied shall be free from spoilage, filth or other adulteration and shall be safe for human consumption. e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h the contract shall be terminated. 8. Holiday Period : If there is any necessity for repairs, alterations, additions in the franchised unit by the franchisee at the time of taking over the unit, leave period will be given after handing over the unit to the franchisee based on his written request subject to a maximum of 4 months from the date of taking over or the date of commencement of commercial operations by the franchisee whichever is earlier. 10. Bank Guarantee a) The Bank Guarantee equivalent to 50% of the Bid amount shall be furnished by the successful tenderer and shall be valid for 42 months. 11. The franchisee should take over the franchised unit within one month time from the date of receipt of franchise orders, failing which the franchiser shall have the right to cancel the order and forfeit earnest money deposit. 12. The license of franchisee is renewable every year by paying the franchise fee,3 months in advance. 13. Payment of Franchise Fee: a) The successful tenderer will have to remit the Franchise Fee for the 1st year in full within 30 days from the date of receipt of order of franchising the hotel. Further relaxation of due date will not be entertained at....
X X X X Extracts X X X X
X X X X Extracts X X X X
....may be absorbed by the Franchisee and the Franchiser will not be liable for any claim in respect of such employees. The franchisee should not engage any person without issue of letter of appointment as per the draft enclosed with tender documents. 17. Surrender of Possession of Property: After the expiration of Franchise period, the Franchisee shall surrender possession of all movable and immovable properties franchised in proper condition including superstructure now existing. 18. The Franchisee shall not claim any title to the superstructure already put up or to the modification made by him or claim any compensation at the time of surrendering possession after the expiration of the Franchise. 19. The building, furniture and other properties franchised shall be insured against fire, rioting and other possible losses and the insurance policy be taken in the joint names of the Franchiser and the Franchisee and the insurance premium shall be borne by the Franchisee. 20. The Franchisee should take possession of all the movable articles belonging to him at the time of handing over the unit to the franchiser failing which the properties will be disposed off by TTDC as deemed fit wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s." 13. As is evident from the various clauses in the above agreement, the assessee has not leased out the property merely as a land and building, but also with further conditions as to how the business of the lessees/franchiees should be conducted with regard to the hotel industry only. The Special conditions of contract make it clear that the name of the assessee should clearly, in fact, prominently be indicated in the name Board and the name of the franchisee should be below the name of TTDC, thereby, making it clear that the TTDC continues to be operating their business through their franchisees. Thus the Special conditions make it clear that the assessee corporation continues to be in the business of tourism activities, though not directly but through the franchisees and has received income as franchisee fee and that cannot be lost sight of while determining the nature of income. 14. We also find much force in the findings of the Tribunal that the properties let out by the assessee are business assets of the assessee corporation, as they have not treated the leased out properties as non-business assets of the assessee-corporation. It is relevant to state the definition of th....