OM ESTATE & FINANCE (P) LTD,MUMBAI vs. ITO 7(1)(2), MUMBAI

The facts of the case in brief are that the assessee filed its return of income on 10.1.2007 declaring an income of Rs.1,36,630/-. The case of the assessee was processed under section 143(1) of the Income Tax Act, 1961 (the Act) on 26.11.2007 and thereafter was selected for scrutiny. Statutory notices u/s 143(2) and 142(1) were issued and served upon the assessee. The AO during the course of assessment proceedings found that the assessee company had leased out its hotel premises alongwith the movable properties such as kitchen utensils, kitchen equipments furniture, TVs, fixture, lenien + furnishing electric and electronic appliances etc. for an annual lease rent of Rs.9 lakhs and TDS was deducted from the said payment u/s 194 of the Act. After issuing show cause notice dated 11.2.2008 the AO came to the conclusion that the 3 and ITA No.2133/M/um/2013 income from the leased out hotel premises, movable and immovable properties were to be treated as income from the property and not business income as treated by the assessee. The AO also rejected the contention of the assessee that the assessee was running the business operation of hotel since many years and resulted income therefore was treated as business income and the said business was carried on by the assessee company in accordance with the objects clause contained in the Memorandum of Association and also the leasing out of hotel was an commercial decision taken due to glut and depression in the hospitality industry. Thus, the AO assessed the income derived from the hotel as income from house property by allowing deduction u/s 24(a) at the rate of 30% of the total rent. Aggrieved by the decision of the AO, the assessee preferred an appeal before the ld. CIT(A) , who also confirmed the action of the AO by holding that the company had leased out the land and building with moveable properties comprising of old canteen, furniture, fixtures and treating all these items as part of the renting out land and building. The ld. CIT(A) further held that AO had rightly treated the rental income under the head “income from house property” and rightly allowed deduction u/s 24 of the Act on the annual value and no further expenditure was allowable from the said income of house property by placing reliance on various decision as incorporation in para 2.4 of the

The ld. AR submitted before us that the assessee-company was owning and operating hotel till 2000 and thereafter took a commercial decision to lease out the same in view of the overall recession in the hospitality industry by way of two lease agreements simultaneously, leasing out the other movable properties in the hotel such as furniture, fixture, electrical /electronic appliances, canteen equipments etc. copies of which are placed at pages 16 to 30 of the paper book. The ld. Counsel vehemently submitted that the hotel was leased out upon the assessee finding it difficult to operate and run the same on its own due to a market conditions and decision to lease by the same was in accordance with the object clause of the company as enunciated in the Memorandum of Articles of Association of the assessee-company. The ld. Counsel brought to our notice the details of various items leased out which was comprehensively detailed in agreements filed as page 27 to 31 of the paper book. Lastly, the ld.Counsel submitted that the income from the operation of the hotel was treated as income of business which was accepted by the department in the earlier years and likewise the income from the said hotel property and other movable items as detailed in the lease agreements were to be treated as income from the business of the 5 and ITA No.2133/M/um/2013 hotels as claimed by the assessee. In support of the contentions raised by the ld.AR, he placed reliance on the following decisions: i ) Mohiddin Hotels (P) Ltd. reported in 284 ITR 229 (Bom); ii) Plaza Hotels (P) Ltd-147 ITD 98 (Mum) iii) Gesco Corporation Ltd-31 SOT 132 (Mum) iv) Sultan Brothers P Ltd 51 ITR 353 (SC)

Per contra, the ld.DR vehemently opposed the argument of the ld. AR by relying on the orders of the authorities below.

We have carefully considered the rival contentions and perused the material placed before us. We find that the assessee was owner of the hotel comprised in land admeasuring about 1012 sq. mtr bearing plot No.51 at Hilltop Colony, Lonawala, which was run and managed by the company on its own till the financial year 1999-2000 and thereafter it was leased out at a monthly rent of Rs.75,000/- by giving entire hotel comprising, building, furniture, fixture and movable properties attached thereto and other miscellaneous assets comprising, crockery, fancy items, geezers, air conditioners etc. The AO treated the same as income from the property on the ground that the lease rent accrued from leasing out of the building as hotel and TDS were also deducted from the receipt of rental income u/s 194I of the Act. The ld.CIT(A() also sustained and upheld the findings of the AO on this issue. As it is seen from the record before us and the rival submissions of the counsel that the rent from leasing out of the hotel premises was rightly treated as business income as 6 and ITA No.2133/M/um/2013 the assessee was running the hotel till 2000 and it is only thereafter when the assessee faced difficulties in marketing and operating the hotel it decided to lease out the same which is in accordance with the object clause of the company for which it was formed as per the Memorandum of Association of the company. We find merit in the arguments of the ld AR that the lease rent from the hotel falls under the head of “income from business” and not “from house property” and the assessee was entitled to all the allowances and expenses including the depreciation, from the said lease rent because the hotel is a business asset and has been rented out as a whole. .In case of CIT Vs. Mohiddin Hotels P. Ltd., reported in 284 ITR 229, similar facts were involved. In this case also the hotel was given on lease to a third party. The AO treated the lease income as income from house property against shown by the assessee as business receipt. The Tribunal allowed the issue in favour of the assessee. On appeal before the High Court, the Hon‟ble High Court in the aforesaid case confirmed the order of the Tribunal by holding as under :-

In the result, the appeals of the assessee are allowed.