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Judgment
R. Sudhakar, J.—The above tax case (appeals) are preferred by the assessee aggrieved against the order passed by the, Income-tax
Appellate Tribunal for the assessment years 2005-06 and 2006-07 raising the following substantial questions of law:
Whether, on the facts and in the circumstances of the case, the Tribunal was right in 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 leasing of hotels and
restaurants is distinct from its business of operating and maintaining the hotels?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in 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?
Whether, on the facts and in the 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?
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 a return of income on October 31, 2005, admitting nil income and, subsequently, filed a revised return
of income on June 9, 2013, admitting nil income under the normal computation and book profits of Rs. 3,24,89,295 under section 115JB of the
Income-tax Act. For the assessment year 2006-07, the assessee filed a return of income on November 27, 2006, admitting the total income of Rs.
2,05,70,640. For both the assessment years, the returns were processed under section 143(1) of the Income-tax Act and the case was selected
for scrutiny and notice was issued under section 143(2) to the assessee.
Before the Assessing Officer, the assessee relying upon its memorandum of association had stated that its main activity was to start, operate and
promote establishments, undertakings, enterprises and activities which facilitate or accelerate the development of tourism, handicrafts and cottage
industries in Tamil Nadu; to take over, develop and maintain all places of tourist interest like wild life sanctuaries, open places, parks, beaches,
avenues, beauty and recreational spots, etc., in the State of Tamil Nadu and elsewhere. It is also submitted that the activities of the assessee
includes operation of hotels, petrol bunk, telescope house, boat house, leasing of hotels and restaurants, renting of space at tourism complex to
other State Tourism Department/Corporations, etc.
It is further stated by the assessee before the Assessing Officer that the assessee in its 168th meeting held on December 16,1996, had resolved
to lease/franchise uneconomic units to avoid further cash loss and to improve the existing units significantly. The Government, vide G.O. Ms. No.
101, Information and Tourism Department, dated June 3, 1998, approved the proposal of leasing the 15 hotel units. Subsequently, the assessee
had obtained the Government approval for leasing 16 more units, which were incurring losses based on board resolution and 10 restaurants of the
assessee. Based on the Government order, the assessee had called for open tenders for leasing the hotels. Hence, the assessee claimed it as a
lease income from house property.
The Assessing Officer rejected the submissions of the assessee and disallowed the deduction claimed at 30 per cent, by the assessee under the
head ""Income from house property"" holding that the assessee had given the hotel premises to private parties on franchise only, which was one of
the activities of the regular/ordinary business of the assessee. Accordingly, the Assessing Officer completed the scrutiny assessment under section
143(3) for both the assessment years determining the total income at Rs. 6,02,32,323 in respect of the assessment year 2005-06 and Rs.
4,92,09,503 in respect of the assessment year 2006-07 under the normal computation. While completing the assessment, the Assessing Officer
disallowed the statutory deduction of 30 per cent, amounting to Rs. 50,88,343 in respect of the assessment year 2005-06 and Rs. 41,47,414 and
Rs. 45,34,350 in respect of the assessment year 2006-07 claimed under the head ""Income from house property"" and assessed the lease rental
income under the head ""Income from business"".
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 Commissioner of Income Tax Vs.
Chennai Properties and Investments Ltd., , which was followed in the decision reported in Keyaram Hotels (P) Ltd. Vs. 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 income has to be treated as income from house properly. Accordingly, the Commissioner of Income-
tax (Appeals) granted the benefit in favour of the assessee and allowed the appeals.
On appeals preferred by the Revenue as against the order of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate
Tribunal, the Tribunal was of the view that the assessee has continued the business activity of tourism development in the State and also carried on
the same business, which the franchisees are also doing under the same name. The findings of the Tribunal are that the properties were let out to
the lessees/franchisees not because the assessee having withdrawn his business of carrying on tourism activities but only to recover better profits
out of loss-making units. It is also the finding of the Tribunal that the assessee-corporation never treated the let out properties as non-business
assets of the assessee and that the income derived from such transfer to franchisees was shown as franchisee fee. The Tribunal, therefore, came to
the conclusion that what was derived as income out of the property was business income and not income out of house property and, hence, the
assessee was not entitled to 30 per cent, deduction. Accordingly, the Tribunal allowed the appeals filed by the Revenue.
Aggrieved by the orders of the Income-tax Appellate Tribunal, the assessee is before this court raising the substantial questions of law referred
to above.
Learned counsel, appearing for the assessee, submits that it is evident from the memorandum of association of the assessee that leasing of the
undertaking of TTDC form a separate activity distinct from running of hotels and restaurants. Hence, the lease income derived from these
properties has been classified as ""income from house property"" and not as ""business income"". He also submits that neither any commercial activity
nor any business activity is carried on by the assessee to earn such income. The assessee is only exploiting the property as owner by leasing out the
same and realised the income from letting out the hotel property. Hence, the income may be treated as income from house property and not as
business income.
Per contra, learned standing counsel appearing for the Revenue produced before us the tender document for operation and maintenance of
TTDC hotels, wherein in section IV conditions of contract 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.
Heard the rival submissions of the learned counsel appearing for the assessee and the learned standing counsel appearing for the Revenue and
perused the materials placed before this court.
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
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 compound wall, laying approach road, eviction of encroachments if any will be the responsibility of the Franchisee
only.
The hotel unit shall be run in the name of ''franchisee'', viz., the successful tenderer but the fact that the property belongs to TTDC shall be
indicated in the name board prominently. Name of the franchisee should be below the name of TTDC.
The franchisee should utilise the property only for the purpose of running of hotel and not for any other purpose.
Permits and licences
The successful bidder should apply for and obtain all the statutory licences required for operation of hotel at his cost as indicated below:
(I) General
(i) The franchisee should obtain clearance from the Pollution Control Board for Air and Water by paying the requisite consent fee.
(ii) The franchisee should obtain fire safety certificate from the District Fire Officer.
(iii) The franchisee should cover his establishment under EPF and Miscellaneous Provisions Act, ESI Act and all other industrial legislations without
fail.
(iv) The franchisee should obtain medical certificate for production and service staff from the Labour Department.
(v) The franchisee should obtain D & O Licence (Dangerous and Offence) from the local body for the machineries including the Generator installed
in the hotel.
(vi) The franchisee should register under VAT and under service tax. He should pay the VAT and service tax regularly and should produce
documentary proof to the inspecting officers of TTDC.
(vii) The franchisee should obtain all other statutory licences from the statutory authorities.
(II) Lodging
(a) The rooms should be cleaned regularly with arrangements for pest control at regular intervals.
(b) The linen provided in the rooms should be of good quality. It should be changed daily and also after every check-in-check-out.
(c) All the equipment provided in the rooms should be in proper working conditions.
(d) The toilets should be cleaned regularly, properly sanitized and operated at all times.
(e) The tariff fixed for the rooms shall be competitive and on line with prevailing rates charged by hotels of similar standards.
(f) The successful bidder shall obtain the approval from municipal/district/corporation authority before commencement of the operation of
hotel/restaurant.
(g) The successful bidder shall register with the Commercial Tax Department and obtain licence 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 1/2 years
Enamel paint - Once in 2 years.
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) The restaurant should be kept clean with proper furniture. Pesto flash to be installed to keep away the flies.
(f) All food service (restaurant) and storage area shall be free of evidence of insects, rodents and other pests.
(g) The employees of the franchisee providing services directly to guests or performing house keeping functions shall wear clean uniform and
should be of good health without any communicable disease. The employees should undergo medical check up once in a year in Government
hospital and should produce the report to TTDC.
(h) Should provide safe drinking water facilities to the guests.
(i) The prices fixed for the food stuff should be competitive and in line with prevailing rates charged by hotels/restaurant of similar standard. The
menu and the price list should be displayed prominently at the restaurant.
(j) The franchisee should obtain catering licence for running the restaurant (Form No. III) and weighing and scale measurement certificate from the
Labour Department.
(k) The Franchisee should obtain PFA licence (prevention of food adulteration) from the local body.
(l) The restaurant and food articles should comply with all the acts and rates.
Bar
(a) The Bar should be operated only after obtaining the FL3AA licence from the Commissioner of Prohibition and Excise and should be renewed
every year.
(b) The entire purchase of liquor for the bar should be purchased only from TASMAC. Any purchase of liquor from shops other than TASMAC
is illegal and shall be liable for termination of the contract.
(c) Bar licences to be obtained from the Commissioner of Prohibition and excise, by the franchisee at his own expenses and responsibility (for
hotels only). There is no bar licence for restaurants.
(d) The franchisee should obtain peg measure certificate from the Labour Department.
No additions, alterations, modifications to the existing building or in vacant land allotted to him, shall be made by the franchisee in any manner
without the written consent of the franchiser and the franchisee shall maintain the building in good condition.
Unauthorised occupation of additional area: The franchisee has to confine his activities only within the specified area handed over to him. If he
occupies additional space unauthorisedly he shall vacate the additional space occupied by him within one month from the date of receipt of notice
from TTDC, failing which the contract shall be terminated.
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.
Bank guarantee
(a) The bank guarantee equivalent to 50 per cent of the bid amount shall be furnished by the successful tenderer and shall be valid for 42 months.
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.
The licence of franchisee is renewable every year by paying the franchise fee, three months in advance.
Payment of franchise fee
(a) The successful tenderer will have to remit the franchise fee for the first 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 any cost. The successful tenderer should also furnish the bank guarantee and
execute agreement within 30 days from the date of order of franchising the hotel. If the successful tenderer fails to remit the fee or furnish the bank
guarantee or execute the agreement within the due date, the TTDC has the right to cancel the award of franchise without any intimation to the
franchisee and the EMD will be forfeited.
(b) The franchise is for a period of three years only as specified in the tender notice. The franchise fee for the second and subsequent years should
be remitted three months earlier than the date of second and subsequent years of franchise and then the franchise licence is to be got renewed. If
the franchisee fails to remit the second and subsequent year fee before 90 days, the franchiser is at liberty to invoke the bank guarantee at any time
before the end of the franchise year. In such cases the franchisee shall furnish a fresh bank guarantee within one month of invoking the bank
guarantee.
(c) If the franchisee failed to pay the franchise fee of second and third year within the stipulated period (three months in advance) interest will be
levied at 14 per cent per annum and if the franchisee failed to remit the fee and the interest even after three months from the due date, the franchiser
shall re-enter the premises and resume possession of the property from the defaulting franchisee and the contract shall be terminated forthwith.
(d) TTDC shall have the right to terminate the franchise agreement without notice and resume possession of the premises in case of default in
payment of franchise fee, interest or in furnishing bank guarantee within the specified period.
The franchisee should operate the unit on continuous basis throughout the franchise period. If the franchisee fails to run the unit for a period of
one month continuously the franchiser shall issue a notice to the franchisee and if the franchisee fails to operate the unit even after one month on
receipt of the notice the franchiser shall reenter premises and resume the possession of the unit without further notice.
In case of default in payment of franchise amount, interest amount or furnishing bank guarantee, within the due dates specified, the Franchiser
shall re-enter the premises and resume possession and operation of the unit.
Letter of appointment: All employees except the regular staff of TTDC 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.
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.
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.
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.
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 of by TTDC as deemed fit without further notice to franchisee.
On the expiry of the franchise, the franchisee shall hand over all articles which were entrusted to him in good condition.
Encumbrance of property: The franchisee shall not encumber the Franchised properties by way of pledge, hypothecation, mortgage, charge,
lien, lease, leave and licence or in any other manner.
Sub-lease of property: The tenderer shall not assign, transfer, pledge or sub-contract/sub-lease the operation and maintenance of the hotel.
In case of sub-lease or any other kind of encumbrance of the franchised property by way of pledge, hypothecation, mortgage, charge, lieu by the
franchisee for which no prior notice will be issued by TTDC.
The franchisee shall not permit his clients to use the open space available within the premises, which has not been allotted to him.
Unlawful activities: No political meeting/banner shall be allowed within the premises, which has been allotted to him.
No unlawful activities like betting, gambling, etc., shall be allowed inside the campus.
Anti Government activities shall not be allowed inside the premises.
Financial records use and access:
(a) The franchiser shall have the right to inspect the premises and also the books of account, etc., at any time to verify whether the franchisee has
remitted the statutory dues promptly.
(b) The franchisee shall submit statements, reports, accounts, documents and any other particulars as required by the Franchiser from time to time.
Franchisor''s reservation of rights: The franchisee shall extend a special discount of 25 per cent on the normal room tariff and 10 per cent on
the food tariff prescribed by franchisee from time to time and are applicable for its hotels/restaurant, to the package tourists of franchiser
accommodated in the hotel.
Franchisee should give preference for accommodating the package tourists of TTDC.
Registration: The franchise agreement should be registered and the stamp duty and registration charges to be borne by the franchisee.
In the event of franchise being cancelled by Pollution Control Board''s Directives the franchiser will not be liable for refund of franchise fee.
The franchiser will not be vicariously liable for any act of the franchisee and the franchisee alone shall be liable for violation of any law. The
franchisee shall indemnify the franchise from all claims.
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/franchisees 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 asses-see-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.
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 the word ""franchisee"" mentioned the dictionary, which reads as follows:
any special right, privilege, or exemption granted by the government, as to be a corporation, operate a public utility, etc.
In the decision reported in Keyaram Hotels (P) Ltd. Vs. Assistant Commissioner of Income Tax, , while dealing with the income earned by the
assessee therein by letting out the property, this court held as follows (page 121):
Before the authorities under the Act as well as the Tribunal, the assessee has not placed any materials to support its case that the property from
which income has been derived was used as business property and the exploitation of the property was in the nature of the business of the
assessee company.
In this case, we find that the assessee has given a special right or privilege to the franchisees to undertake a particular business in the property
of the assessee on receipt of franchisee fee. Therefore, the income is clearly in the nature of business income and not income from house property.
Hence, the decision reported in Keyaram Hotels (P) Ltd. Vs. Assistant Commissioner of Income Tax, does not applicable to the facts of case.
We find that the reasoning of the Tribunal is justified in the facts of the case. Accordingly, we find no question of law much less any substantial
question of law arises for consideration in the above tax case (appeals). In the result, both the above tax case (appeals) stand dismissed. No costs.
Consequently, M.P. No. 1 of 2014 is also dismissed.