In Universal Plast Ltd v. Commissioner Of Income

IN THE HIGH COURT OF BOMBAY AT GOA TAX APPEAL NO. 31/2002 The Commissioner of Income Taxhaving office at Aayakar Bhavan,Patto Plaza, Panaji, Goa. ......... Appellant. V/s. 1. Mohiddin Hotels Pvt. Ltd.Salgaonkar Building, Vasco- da- Gama, Goa. Salgaonkar Building, Vasco- da- Gama, Goa. 2. The Income Tax Appellate Tribunal Panaji Bench, Aayakar Bhawan, Patto Plaza, Panaji, Goa. ......... Respondents Mr. S. R. Rivonkar, Advocate for the Revenue. Mr. A. N. S. Nadkarni with Mr. H. D. Naik, Advocates for theAssessee. DATE : 13TH SEPTEMBER, 2005. ORAL JUDGMENT (Per R.M. LODHA, J.) This tax appeal at the instance of the Revenue under Section 260- A of the Income Tax Act. 1961 was admitted fordeciding the following substantial question of law: Whether the income of Rs.7,80,000 /- receivedfrom V.M. Salgaokar & Bros. Pvt. Ltd. in thehands of Assessee is income from house propertyunder Section 22 or income from business underSection 28 of the Income Tax Act ? 2.Mohiddin Hotels Pvt. Ltd. (the respondent No.1) is acompany incorporated under the Companies Act. Hereinafter, weshall refer the said Company as "the Assessee". For theassessment year 1990- 91, the Assessee filed return on 30.12.1990in response to the notice under Section 139(1) and declared a lossof Rs.4,70,464 /- . The Assessee constructed a hotel and forcommissioning hotel business, by Agreement dated 1/2 / 1987appointed V.M. Salgaokar & Brother Pvt. Ltd. (for short 'theSalgaokars') as manager to manage and run the business of hotel.As per the said agreement, an amount of Rs.7,80,000 /- was to bepaid every year by the Salgaokars for first 10 years as guaranteeincome to the Assessee. The tenure of the agreement was 20 yearsand after expiry of 10 years the Salgaokars were required to pay atthe rate of Rs.10,20,000 /- per annum to the Assessee. Next fiveyears, the Salgaokars were to pay @ Rs.12,00,000 /- per annum tothe Assessee. The agreement commenced from 1[st] February, 1987.The Assessing Officer treated the income of Rs.7,80,000 /- received by the Assessee in the previous year from the Salgaokars in theform of guarantee income as income from "house property" videAssessment Order dated 30.3.1993. The Assessee preferred anappeal before the Commissioner of Income Tax (Appeals). TheAppellate Authority reversed the order of the Assessing Officer andtreated the guarantee income of Rs.7,80,000 /- received by theAssessee from the Salgaokars as "income from other sources"under Section 56 of the Income Tax Act. The Appellate Authoritypassed the order on 13.12.1993. The Revenue, aggrieved by thedecision of the Commissioner of Income- tax (Appeals) preferred anappeal before the Income Tax Appellate Tribunal. The Income TaxAppellate Tribunal overruled the decision of the Commissioner ofIncome- tax (Appeals) vide its Judgment dated 20.9.2001 and heldthat the guarantee income in the sum of Rs.7,80,000 /- received bythe Assessee from the Salgaokars was business income underSection 28 of the Income Tax Act. The Judgment of the Income TaxAppellate Tribunal dated 20.09.2001 is the subject- matter ofchallenge in this appeal. The substantial question of law thatrequires consideration and decision by us has been noticed by usabove. 3.In Universal Plast Ltd. vs. Commissioner of Income- 3.In Universal Plast Ltd. vs. Commissioner of Income- tax, (1999) 237 ITR 454, the Supreme Court of India has laiddown the general principles relating to income from leasing outthe assets of the business by an assessee. The general principleslaid down by the Supreme Court in this connection are thus : “ (1) no precise test can be laid down toascertain whether income (referred to by whatevernomenclature, lease, amount, rents, licence fee)received by an assessee from leasing or letting outof assets would fall under the head "Profits andgains of business or profession; (2) it is a mixed question of law and fact andhas to be determined from the point of view of abusinessman in that business on the facts and inthe circumstances of each case, including trueinterpretation of the agreement under which theassets are let out; (3) where all the assets of the business arelet out, the period for which the assets are let out isa relevant factor to find out whether the intention ofthe assessee is to go out of business altogether orto come back and restart the same; (4) if only a few of the business assets are letout temporarily, while the assessee is carrying outhis other business activities, then it is a case of exploiting the business assets otherwise thanemploying them for his own use for making profitfor that business; but if the business never startedor has started but ceased with no intention to beresumed, the assets also will cease to be businessassets and the transaction will only be exploitationof property by an ownerthereof, but notexploitation of business assets." While laying down the aforesaid general principles andsummarizing the legal position, the Supreme Court considered itsprevious decisions viz., (1) CEPT Vs. Shri Lakshimi Silk MillsLtd. [1951] 20 ITR 451; (2) Narain Swadeshi Weaving Mills vs.CEPT [1954] 26 ITR 765; (3) CIT Vs. Calcutta National BankLtd. [1959] 37 ITR 171; (4) Sultan Brothers Private Ltd. vs.CIT [1964] 51 ITR 353; (5) New Savan Sugar and Gur RefiningCo. Ltd. vs. CIT [1969) 74 ITR 7; and (6) CIT vs. Vikram CottonMills Ltd. [1988] 169 ITR 597. 4. Keeping in mind the aforesaid legal position, we shallnow advert to the facts of the present case and particularly theAgreement dated 1[st] February, 1987 entered into between theAssessee and the Salgaokars. The agreement recites that the 4. Keeping in mind the aforesaid legal position, we shallnow advert to the facts of the present case and particularly theAgreement dated 1[st] February, 1987 entered into between theAssessee and the Salgaokars. The agreement recites that the Assessee has recently completed construction of a buildingcomprised of a ground floor and three upper floors on a plot ofland situated at Swatantrapath, in the town of Vasco da Gamawith a view to running a hotel therein. The hotel at the time of theexecution of the agreement was ready for the purpose ofcommissioning the hotel business. The Salgaokars possessed thenecessary knowhow and trained staff for carrying on the businessof running a hotel. There was earlier agreement between theAssessee and the Salgaokars dated 23.2.1984, subsequentlymodified by Agreement dated 2.1.1985 whereby the Salgaokarswere to be appointed as their Managers to manage, run and carryon the business of hotel then under construction on the terms andconditions set out therein. The agreement inter- alia recordedthat the Salgaokars were appointed as Managers to manage, runand carry on the business of hotel for a period of 20 yearscommencing from 1[st] February, 1987; that the Salgaokars aloneshall be entitled to terminate the agreement after expiry of periodof 10 years by giving one year's prior notice in writing to theAssessee; that the Salgaokars shall pay a fixed amount @ ofRs.7,80,000 /- per annum for the first 10 years, @ Rs.10,20,000 /-per annum for the next five years and @ Rs.12,00,000 /- per annum for further next five years; that the Salgaokars shall beincharge of the entire management, running and working of thehotel without any interference from the Assessee; that theSalgaokars shall be entitled to make additions, alternations and/orimprovements to the hotel so as to run the same profitably andefficiently; that all licences, permits and no objection certificatesrelating to the said hotel shall be obtained in the name of theAssessee; that the Assessee shall not alienate or dispose of thehotel or building housing the hotel or any part thereof and/or partwith possession thereof during the currency of the agreement; thatthe Salgaokars shall bring in their own staff for running the hoteland also for keeping and maintaining the said hotel in goodcondition, subject to the natural wear and tear; that the Assesseeshall pay property tax, house tax or any other taxes, levies andpublic charges; that the Salgaokars shall have right to replace thefittings, fixtures and any installations in the hotel in the event ofsame becoming unserviceable or unfit for use due to normal wearand tear; that the Assessee does not have any employee, workerand/or staff as of the date and that the Salgaokars shall not beliable to take in service or employment the employees, workers andthe staff employed by the Assessee; that the Salgaokars shall not make any structural alterations or additions without priorpermission from the Assessee; that upon expiry of the agreementor sooner determination, the Salgaokars shall surrender vacantpossession of the said hotel and hand over the business to theAssessee; that the Salgaokars shall be at liberty to replace anyfixtures or fittings and items of machinery and other equipmentaffixed to and/or existing in the said building after intimation to theAssessee; that the Salgaokars shall not be liable to renderaccounts to the Assessee and that the agreement was not intendedto transfer the said hotel to the Salgaokars, but to improve themanagement thereof by, so as to run the the said hotel efficientlyand profitably. 5.Mr. S. R. Rivonkar, the learned Counsel for the Revenuestrenuously urged that the intention of the parties was not toappoint the Salgaokars as Managers to manage, run and carry onthe business of hotel. As a matter of fact, the learned Counselwould submit, it could not have been because the hotel was notbeing run by the Assessee. He would submit that the intention wasto lease/license the property and derive income therefrom. Thelearned Counsel for the revenue submitted that this intention is reflected from the various clauses in the agreement, particularlythat the tenure of the agreement was of 20 years; that the hotelwas not being run by the Assessee at the time when the agreementwas entered into; that all the licences were to be procured by theSalgaokars; that the Assessee, in fact, had no hotel business; thatthere was nothing to suggest that the Assessee did anything forcarrying on the business of the hotel and that the Assessee had nocontrol over the hotel business. 6.We are afraid the submissions of the learned Counsel forthe Revenue cannot be accepted. From the facts found by theTribunal as well as the Agreement dated 1[st] February, 1987, it ismore than clear that the agreement between the Assessee and theSalgaokars related to the hotel that was ready for the purposes ofcommencing the hotel business. The agreement does not relate tobare tenement but is in respect of the hotel. That the said hotelwas complete with fittings and fixtures and ready for commencingthe business is apparent from the agreement. If it was not wherewas the occasion to mention in the agreement that the Salgaokarsshall have right to replace the fittings, fixtures and anyinstallations in the hotel in the event they became unserviceable or unfit for use due to normal wear and tear. It is true that the namegiven to the agreement is not decisive; what is important is theintention of the parties. The agreement provides that uponexpiration of the term of the agreement or sooner determinationthereof, Salgaokars shall surrender the vacant possession of thehotel and handover the business to the Assessee. If the agreementbetween the assessee and the Salgaokars was a lease or a licenceof the building as is sought to be contended by the Revenue, therewould not have been covenant providing for that on the expiry ofthe term of the agreement or sooner determination, theSalgaokars shall hand over the business along with the vacantpossession of the hotel. This suggests and rather unambiguouslythat the Salgaokars were appointed by the Assessee for runningthe hotel business. The agreement also clarifies and binds theSalgaokars that the agreement is not intended to transfer the hotelto the Salgaokars. It is true that the period for which the businessassets are let out is always a relevant factor in finding out whetherthe intention of the Assessee is to let out the business assetspermanently and if the Assessee had never started the business, aninference may be drawn that the Assessee intended to exploit theproperty and not the business assets but the intention of the parties has to be gathered from the over- all facts and not theisolated circumstances. It is settled legal position that each casehas to be decided on its own facts including the construction of theagreement under which the assets have been let out or handedover to a third party and no precise test can be applied toascertain as to under which head the income received by theassessee from leasing or letting out the assets should fall. Thelonger duration of the agreement could have been for manyreasons. The one which is discernible from the available material isthat Salgaokars helped the Assessee in getting finance forcompleting the construction of the hotel and for that purpose theparties may have agreed for longer duration. The contention of theRevenue that the Assessee was left with no concern in thebusiness of hotel is negated by the fact that the agreementprovides that all the licences, permissions and no objectioncertificates relating to the hotel which are required for the operationof the hotel business shall be obtained in the name of the Assessee.It is not material that the application for obtaining such licences,permissions or no objection certificates could be made by theAssessee or the Salgaokars. The fact that all licences, permissionsand no objection certificates required for running hotel were to be obtained in the name of the Assessee is pointer to the aspect thatthe Assessee intended to exploit business assets (the hotel). 7.Section 22 of the Income Tax act deals with income fromhouse property and it reads thus : "22. Income from house property. - Theannual value of the property consisting of anybuildings or lands appurtenant thereto of whichthe assessee is the owner, other than suchportions of such property as he may occupy forthe purposes of any business or professioncarried on by him the profits of which arechargeable to income- tax, shall be chargeable toincome- tax under the head "Income from houseproperty". obtained in the name of the Assessee is pointer to the aspect thatthe Assessee intended to exploit business assets (the hotel). 7.Section 22 of the Income Tax act deals with income fromhouse property and it reads thus : "22. Income from house property. - Theannual value of the property consisting of anybuildings or lands appurtenant thereto of whichthe assessee is the owner, other than suchportions of such property as he may occupy forthe purposes of any business or professioncarried on by him the profits of which arechargeable to income- tax, shall be chargeable toincome- tax under the head "Income from houseproperty". It needs no emphasis that when a specific head of charge isprovided for income from house property, rents or other incomefrom the ownership of the house property it has to be under thishead and no other head. However, for an income from houseproperty it should be covered by Section 22. By catena of decisionsthe Courts, time and again, have held that where the subject-matter that is let out or given on licence is not bare tenement but is a complex one like a well furnished paying guest establishmentor sheds with infrastructural facilities, the income derivedtherefrom which is not separable as income from letting out thebuilding and the income letting out from the furniture, plant andmachinery etc., such composite income shall not be covered by theincome from house property. In the present case, the agreemententered into between the Assessee and the Salgaokars on1.2.1987, reference of which has been made above, clearly showsthat a sum of Rs.7,80,000 /- received by the Assessee from theSalgaokars in the form of guarantee income was the compositeincome from the hotel building with fittings and fixtures and wasintended for exploitation of business assets and, therefore, cannotbe held to be covered by the income from house property. 7.We, accordingly, hold that the income of Rs.7,80,000 /-received from V.M. Salgaokar and Bros. Pvt. Ltd., in the hands ofthe Assessee is income from the business under Section 28 of theIncome Tax Act and the Tribunal did not commit any error inholding so. 8.In the result, the substantial question of law is decided infavour of the Assessee and against the Revenue. No costs. R.M. LODHA, J. N.A. BRITTO, J. ssm.