PALMSHORE HOTELS (P)LIMITED vs. COMMISSIONER OF INCOME TAX

ITA/83/2013HC KeralaKLHC01025968201319 October 2017Author: HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU,HONOURABLE MR.JUSTICE ANTONY DOMINIC10 pages
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What were the facts?

The assessee, Palmshore Hotels (P) Limited, is in appeal against an order of the Income Tax Appellate Tribunal (ITAT), Cochin Bench, for Assessment Year 2005-06. The ITAT had allowed the Revenue's appeal, setting aside the order of the Commissioner of Income Tax (Appeals) and the assessment order. The ITAT held that income derived from the property was taxable under the head 'Income from house property' and restored the assessment. The assessee had constructed and operated a hotel named 'Hotel Palmshore'. Due to business losses, the assessee granted a license for the hotel, including furnishings and equipment, to M/s Abad Motels and Resorts Private Limited for seven years from December 11, 2000. The assessee initially offered the license fee as 'income from business' in its return. The assessment order taxed it as 'income from house property', which the first appellate authority reversed, deeming it 'income from business'. The ITAT then restored the assessment order.

What did the High Court hold?

The High Court held that the case should be resolved by considering the intention of the parties as reflected in the license agreement and the nature of their respective obligations. The Court analyzed the license agreement dated December 11, 2000, noting that the licensor appointed a licensee to operate the hotel in conformity with specified standards. Several provisions indicated that the license authorized the licensee 'to operate the hotel'. Upon expiry or termination, the licensee would cease operation rights, and the licensor would regain them. The licensor had the right to inspect operations and ensure compliance. Membership in hotel associations was to be in the licensor's name. The agreement explicitly stated it did not create a partnership, joint venture, or agency, but only a license. The hotel was to retain its name, 'Hotel Palmshore', suffixed by 'An Abad Beach Resort' and the Abad logo. The agreement conferred supervisory control on the licensor over hotel operations. These provisions demonstrated that the license granted was for a fully established, running hotel, authorizing the licensee to operate it under specified terms. Therefore, the income derived was income from business. The Court found the Commissioner of Income Tax's decision to treat the income as business income justified, setting aside the assessment order. Consequently, the Tribunal's order was deemed unsustainable and set aside. The questions of law were answered in favor of the assessee.

What were the issues?

The Tribunal had to decide the following questions of law: 1. Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the income derived out of the property was chargeable under the head 'Income from house property' and not under the head 'Income from business or profession'? (Section 22 vs. Section 28(i) of the Income Tax Act) 2. In the facts and the circumstances of the case and in law when the assessee derives income from commercial asset, namely its hotel business, which asset is capable of being used as a commercial asset, whether the asset would cease to be a commercial asset simply because it was let out to others and is it not in law income from business no matter whether the commercial asset is used by itself or somebody else? 3. Whether the income earned from letting out a running hotel, a commercial asset, can be treated as income from house property at all and when such rental income is wholly and exclusively for business purpose and is it not liable to be assessed as Business income only? 4. Whether on analyzing Section 22 and 28(i) of the Income Tax Act and on a conspectus of the facts and circumstances of the case, where, from the very beginning the building and the machinery were a hotel of commercial activity and the income was from this commercial property, whether the income earned out of letting a commercial asset as the hotel with the entire building, plant and machinery, furniture can be assessed as house property at all? Assessee's contention: The first appellate authority correctly held the income to be income from business, considering the Act, decided cases, and the license agreement. Revenue's contention: The assessee was exploiting a commercial asset, and therefore, the income was income from house property, relying on the judgment in Sultan Brothers Pvt. Ltd. v. CIT (1964) 51 ITR 353.

Which sections of the Income-tax Act were involved?

Section 22,Section 28(i)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU THUR AY, THE 19TH DAY OF OCTOBER 2017/27TH ASWINA, 1939 ITA.No. 83 of 2013 ---------------------- AGAINST THE ORDER IN ITA 249/2011 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 14/9/12 ------- APPELLANT/APPELLANT: --------------------------- PALMSHORE HOTELS (P)LIMITED, LIGHT HOUSE ROAD,VIZHINJAM,TRIVANDRUM.

BY ADV. SRI.A.KUMAR RESPONDENT/RESPONDENT: -------------------------------- COMMISSIONER OF INCOME TAX(APPEALS)-I, KOWDIAR,TRIVANDRUM-695001. BY SRI.JOSE JOSEPH, SC, FOR INCOME TAX SRI.P.K.R. MENON, SC (SR.) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 19-10-2017, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ANTONY DOMINIC, & DAMA SESHADRI NAIDU, JJ. ------------------------------------------------ I. T. A. No.83 of 2013 ------------------------------------------------ Dated this the 19th day of October, 2017 JUDGMENT Antony Dominic, J. 1. aThe assessee is in appeal against the order passed by the Income Tax Appellate Tribunal, Cochin Bench in ITA No.249/2011 concerning

The order continues below.

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