TMI Blog1997 (1) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... plant'. 3. The appellant reserves the right to add, alter, amend, delete or modify any ground or grounds of appeal either before or during the course of appeal." 2. The brief facts necessary for disposal of ground No. 1 are as under : "The assessee-company as stated above was incorporated in the year 1981 with the main object of carrying on business of hotel and restaurant. The assessee-company initially started the business in the partnership with two other partners namely Maharaj Jagat Singh and Maharaj Prithvi Raj under the name and style of M/s. Jai Mahal Hotels. Later on this firm constituted with the assessee-company as one of the partners was dissolved and the entire business of the partnership was taken over by the assessee-company styled as M/s. Jai Mahal Hotels (P.) Ltd. During the existence of the partnership firm styled as M/s. Jai Mahal Hotel the losses suffered by the firm were accepted by the Assessing Officer as business losses and were allocated to the accounts of the partners and shown in their individual returns. The copies of the asstt. orders of Maharaj Jagat Singh and of Maharaj Prithvi Raj for the year 1984-85 have been furnished to show that the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 2-6-1984 to 31-12-1984 under the head 'Business income' but were adopted by the Assessing Officer at Rs. 7,00,000 and taxed under the head 'Income from other sources'. 3. In the subsequent years from assessment year 1986-87 to assessment year 1988-89 the Assessing Officer following the reasons discussed in the asst. order for assessment year 1985-86 held that the licence fee credited in the profit and loss account amounting to Rs. 7 lakhs in each of those years will be assessable under the head 'Income from other sources'. 4. The CIT(Appeals) after considering the entire relevant facts and the various judgments cited in the orders passed by them agreed with the view taken by the Assessing Officer and held that the minimum guaranteed business profits were assessable under the head 'Income from other sources' and not under the head 'Income from business'. 5. The learned counsel for the assessee submitted that the agreement entered into between the appellant-company and M/s. Indian Hotels Co. Ltd. (hereinafter referred to as IHC) to run a five star hotel in the premises of Jai Mahal Hotels belonging to the assessee-company was to carry on the business of the hotel. The expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as hoteliers at the same premises. The share of the erst while firm was assessed in the individual hands of the partners. The hotel building owned by the assessee is admitted to be a commercial asset, which was exploited for commercial purposes by executing an agreement with IHC. The learned counsel also invited our attention towards the findings given by the CIT(Appeals) in his order for assessment year 1985-86 wherein the CIT(Appeals) has observed that it is true that Jai Mahal Hotel building was essentially a hotel building and could be profitably used as a hotel. It is also true that under an agreement with the IHC, they (IHC) was to part with 1 per cent of the operating profit in favour of the assessee-company or the minimum guaranteed business profit whichever was higher. The CIT(Appeals) had also accepted the fact that the said hotel building could be profitably used as a hotel by entering into the said agreement with IHC to run it as a five star hotel. All these facts the learned counsel stated adequately supports the assessee's contention that income derived by the appellant-company under the aforesaid agreement with IHC was assessable as income from business. 6. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrangement in the nature of partnership or other arrangement of a like nature with any person, firm or company engaged or interested in carrying on or conduct of any business or enterprise which the appellant-company is authorised to carry on. He invited our attention towards clauses 27 and 35 of the Memorandum of Association which further empowers the company to do all or any of the things either as principals, agents, contractors or in any other manner either alone or in conjunction with any other persons. By relying on these clauses of Memorandum of Association the learned counsel submitted that the agreement executed by the appellant-company with IHC was in consonance with the various clauses contained in the Memorandum of Association. 8. The learned counsel also invited our attention towards assessment order of Hotel Banjara Ltd. made by the Dy. Commissioner of I.T. (Asst.),Hyderabadwho had entered into almost an identical agreement with Gateway Hotels and Gateway Resorts Ltd. the Taj Group of Hotel. The licence fee received by that company was held to be assessable under the head 'Income from business'. 9. The learned counsel submitted a list of various judgments which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The learned counsel also invited our attention to the decision of ITAT, Hyderabad Bench reported in 48 ITD 72. 9.2 The learned counsel for the assessee further placed reliance on the following judgments to support his contention that the income would be assessable under the head 'Profits and gains of business' :-- 1. CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 (SC); 2. CIT v. Prem Chand Jute Mills Ltd., [1978] 114 ITR 769 (Cal.); 3. Rajindra Flour Allied Industries (P.) Ltd.'s case; 4. Eclat Construction (P.) Ltd's case; 5. CIT v. A.P. Industrial Infrastructure Corpn. Ltd. [1989] 175 ITR 361/[1988] 36 Taxman 201 (AP); 6. CIT v. Sarabhai Management Corpn. Ltd. [1991] 192 ITR 151 (SC); 7. B. Nagi Reddy v. CIT [1993] 199 ITR 451 (Mad.); 8. CIT v. Ganeshdass Sreeram [1989] 180 ITR 397/46 Taxman 312 (Gau.); 9. CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC) ; 10. CIT v. Favre-Lemba Co. Ltd. [1979] 120 ITR 897/1 Taxman 419 (Bom.); 11. G. Venkataswami Naidu Co. v. CIT [1959] 35 ITR 594 (SC); 12. P. Venkata Subbarao Sons v. ITO [1993] 46 ITD 514 (Hyd.); 13. Everest Hotels Ltd. v. CIT [1978] 114 ITR 779 (Cal.); 9.3 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership, principal and agent, master and servant, lesser and lessee or landlord and tenant. The said clause clearly proves that there was no relationship of any of the aforesaid kinds and particularly not that of a principal and agent. The aforesaid jurisdictional High Court judgment, therefore, clearly supports the view taken by the CIT(Appeals). He further invited our attention towards clause 1.1 of the said agreement with a view to show that the entire land and hotel building was given on lease or licence to IHC in accordance with the terms of the said agreement. Clause 4 of the said agreement provides that all liabilities of the said hotel which pertained to the period upto the appointed date shall be those of JMHL (appellant-company). All the liabilities that may be incurred by IHC on and from the appointed date during the currency of this agreement shall be those of IHC. The learned DR submitted that the appointed date is the cut off date which clearly proves that from that date the appellant-company ceases to carry on hotel business and such business thereafter was carried on by IHC. He then invited our attention to clause 5.1 with a view to show that IHC shall be entitled t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee submitted that the facts of the judgment of the Hon'ble Delhi High Court reported in Super Fine Cables (P.) Ltd.'s case are clearly distinguishable. In that case the building and plant was let out which was held to be covered within the ambit of section 56. In the present case the assessee has entered into an agreement with a view to exploit the commercial assets in a profitable manner. The appellant-company is entitled to 1 per cent of the net operating profit or the minimum guaranteed business profit whichever is higher. The appellant-company was carrying on hotel business in the past. The company can terminate the agreement in accordance with the termination clause. The facts of that case are, therefore, apparently distinguishable. 12. We have carefully considered the submissions made by the learned representatives of the parties and have perused the orders of the learned departmental authorities. We have also gone through the various other documents to which our attention was drawn during the course of hearing. We have also carefully gone through all the judgments relied upon by the learned representatives of both sides. 13. The following principles of law clearly emer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be looked at from the business-man's point of view to find out whether the letting was the exploitation of commercial assets in a more profitable manner or such a letting out of the commercial assets resulted in a permanent closure of assessee's business. 14. We will, therefore, have to examine the fact of the present case in the light of the aforesaid legal principles deduced from the various judgments cited by the learned representatives of both sides. 15. It is an undisputed fact that the erstwhile firm was carrying on the business as hotelier in the same premises. The appellant-company was incorporated in the year 1981 with the main objects of carrying on business of hotel and restaurant. The company initially started the business in the partnership with two other partners under the name and style of M/s. Jai Mahal Hotel. Copies of asst. orders of the said firm submitted in the compilation shows that the said firm had suffered a loss of Rs. 18,000 in asst. year 1982-83 and loss of Rs. 38,250 in asst. year 1983-84. The preamble of the agreement executed between the appellant-company and IHC reveals that IHC possessed expertise resources and infrastructure, covering, inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term business agreement with IHC to ensure that their hotel is managed and run in a profitable manner by a company which possesses rich experience in this line and which has an established name in the field of running five star hotel in the country. The company also ensured minimum guaranteed business profits as a result of exploitation of their commercial assets by entering into such an agreement with IHC. The said agreement also clearly reveals that the company did not give up its intention to carry on the hotel business at its own. In the event of failure on the part of IHC to act in accordance with the terms of the agreement, the appellant-company had the liberty to terminate the said agreement by giving 30 days notice and in that event the entire assets brought into existence by IHC by way of fittings in the said hotel building will revert back to the appellant-company. This clearly shows that the appellant-company had all intentions to run the hotel at its own in the event of termination of the said agreement for any reason whatsoever. 17. The Memorandum of Association of the company also permit exploitation of commercial assets belonging to the assessee in such a manner, A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax under the head 'profits and gains of business' and not under the head 'income from other sources'. The order passed by the CIT(Appeals) as well as by the ITO taking such a view are, therefore, set aside. The Assessing Officer is directed to compute the said income as assessable under the head 'profits and gains of business' and not under the head 'income from other sources'. 20. The next common ground is that the CIT(Appeals) has legally erred in rejecting the assessee's claim of depreciation on hotel building by treating the same as 'plant'. 20.1 The learned counsel for the assessee relied upon the following decisions to support his contention :-- (i) Decision of ITAT, Delhi Bench 'A' in the case of Ram Bagh Palace Hotel (P.) Ltd. v. ITO [IT Appeal Nos. 3 4 of 1983 and 988 of 1984] dated3rd April, 1986(copy placed at page 66 to 74 of the Paper book); (ii) Decision of ITAT, 'D' Bench,Delhiin the case of Rambagh Palace Hotel (P.) Ltd. in [IT Appeal Nos. 3011 and 3012 (Delhi) of 1991] for asst. year 1987-88 (copy placed at pages 77 to 82 of the paper book); (iii) Judgment of Hon'ble Calcutta High Court in the case of S.P. Jaiswal Estate (P.) Ltd. v. CIT [1995] 216 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Bombay High Court in the judgment reported in 211 ITR 390 and 207 ITR 615. He also submitted that the judgment of Hon'ble Rajasthan High Court is directly against the assessee. The said judgment being of a binding nature should be followed. 22. We have carefully considered the submissions made by the learned representatives of the parties and have a gone through the orders of the departmental authorities. We have also carefully perused all the judgments to which our attention was drawn during the course of hearing. 22.1 It is true that the judgment of the Hon'ble Calcutta High Court in the case of S.P. Jaiswal Estates (P.) Ltd.'s squarely support the assessee's contention. However, it is incorrect to say that the aforesaid judgment of the Hon'ble Calcutta High Court has been approved by the Hon'ble Supreme Court in the case of East India Hotels Ltd's case. The judgment of the Hon'ble Calcutta High Court has been referred to in the aforesaid judgment delivered by theHon'ble Apex Courtin East India Hotels, Ltd.'s case while dealing with the assessee's claim for grant of extra shift allowance in respect of plant and machinery installed in a hotel. The judgment of the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant subject to their use. The use of the building is as a setting. Building is not used as a tool of the trade. Different rates of depreciation for building have been provided which also makes the legislative instant clear what the different type of buildings remains as building. The amendment of section 32(1)(v) has only clarified the legislative intent that the building of hotel is a building, though by amendment higher rate of depreciation is provided to it. In an industry no production can be normally carried on without a building where the plant and machineries are installed but for that reason the building cannot be considered plant when there is separate entry of building for purposes of depreciation. Building may accommodate plant and machinery or living persons. It remains a building. The structure having roof and durability is considered as building. Every movable and immovable property has its categorisation. It is basically the hospitality which is provided in a hotel may be by human service or by equipment, surroundings, atmosphere etc. which is provided by decorated rooms beautiful furnishing. The recompense of the hotelier is for the care, pain, facility which is p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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