TMI Blog2000 (3) TMI 1039X X X X Extracts X X X X X X X X Extracts X X X X ..... business in the restaurants/food outlets owned and set up by the aforesaid two companies in the amusements parks set up by them which are known as Fantasy Land and Essel World respectively in Bombay. Under the arrangement, the assessee was to conduct and run the outlets in the amusement parks and in consideration thereof the assessee was to pay a commission or royalty of 15 per cent and 20 per cent respectively of the sales, exclusive of taxes, to MF and PIP. Detailed provisions were made as to how the arrangements should be worked and how the business was to be conducted, which we shall presently notice. Under these agreements, the following amounts of royalty or commission were payable by the assessee : "Royalty/Commission for the period To Pan India To Madhu Fantasy Oct/Nov 94 to 31-3-1995 6,02,118 3,36,061 1-4-1995 to 31-3-1996 21,88,559 4,81,607 1-4-1996 to 31-3-1997 22,34,124 3,24,719 1-4-1997 to 31-3-1998 19,24,927 5,80,467." 3. The Assessing Officer took the view that the assessee was liable to deduct tax from the aforesaid payments under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MF had constructed several food outlets in the amusement parks as an ancillary facility for the visitors and that the assessee approached it seeking permission to conduct the catering business in those outlets which were called Gulal and Chinese Pavilion and that MF accepted the assessee s offer and had agreed to allow the assessee to conduct the catering business in those outlets on certain terms and conditions. In the agreement, MF has been described as the "owner" and the assessee has been described as "the conductor". 7. Clause (1) of the agreement stated that MF authorised the assessee to conduct or run the business in the two food outlets with its permission. Clause (2) stated that MF had provided the assessee with an inventory of all the articles and things including kitchen equipments and gadgets in the food outlets which the assessee had acknowledged as being in good working condition. Under clause (4), MF would permit the assessee to install its own further equipment for cooking and catering purposes in the outlets. It was provided in clause (5) that the assessee shall serve only vegetarian food in Gulal and both vegetarian and non-vegetarian food in the Chinese re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outlets are renewed from time to time in the name of MF or in its own name. As per clause (18), the assessee could not cater to any persons who have entered the premises without purchasing tickets to the amusement park. Under clause (19), the assessee was obliged to provide food in the case of group bookings or bookings for special occasions as hitherto being done by MF. The assessee was responsible for making available this facility in accordance with the requirements of MF and the assessee was bound in this regard by the policy framed by the Owner. Clause (20) made detailed provisions in respect of uniform, entry, stay and conduct of the assessee s employees/labourers. They were required to display their identity cards which would be issued by MF. No person without identity card would be allowed to remain in the premises. Under clause (21), it was the assessee s responsibility to ensure that the employees behaved with the required decorum and did not give room to any complaint from the visitors to the amusement park. Under clause (22), MF was liable to pass on the benefit of discounts which were available to it on account of exclusive rights on sale of certain products such as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly unable to look after the activities of running food outlets, was looking for a person who is conversant in the preparation of food items and services thereof to the visitors to the park, that the assessee approached PIP with the proposal to run the food outlets which was accepted by PIP. It narrated further that PIP having considered the experience and expertise of the assessee in the field agreed to allow and permit the assessee to make use of the food outlets "only for the purpose of preparing and serving food and eatables to the visitors to the said Essel World." 15. Clause (1) granted permission to the assessee to use the restaurant "admeasuring about 816.36 sq. mtrs." during the time the park was open to the visitors, for a period of five years. Under clause (2), the assessee agreed to use the restaurant for the purpose of activities related to running thereof viz., preparation and serving of food items and juices, ice-cream, soft drinks, etc. As per clause (3), in consideration of PIP agreeing to permit the assessee to run the restaurant, the assessee shall pay to PIP 20 per cent of the total daily collection received by the assessee exclusive of sales tax. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ark is closed for the purpose of maintenance and repairs, the assessee shall not conduct any business in the restaurant. The assessee was not entitled to make any claim against PIP for any loss of business or income during this period. Under clause (4)(f), the assessee was liable to attend to the complaints of the visitors in respect of food and if required, the liability extended to replacement of the items sold by it to the visitors or to refund the amount in full or in part. In respect of such complaints or refunds, the decision of the PIP shall be binding on the assessee. Any loss suffered by PIP on account of refusal of the assessee to entertain or rectify the complaint shall be compensated by the assessee. There were also other provisions regarding the conduct of the day-today business in clause (4). The assessee was to use only the service roads to bring in or take out materials. The assessee was also to show the documents relating to such materials whenever required by PIP. The materials were to be insured, the movements of the assessee s employees shall be confined to the restaurant, and the assessee was liable for conduct and behaviour of its employees etc. 16. Clause 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n clean and hygienic condition, that it was open to PIP to shift the restaurant to any other part of the park, that in case of breach of the terms of the agreement, the same would stand terminated etc. 18. Clause (6) declared that the assessee recognises that the restaurant is and shall always be in the exclusive possession of PIP and the occupation by the assessee is incidental to it being permitted to prepare, serve and sell food and other items as provided in the agreement and it shall have no right whatsoever in respect of restaurant either by way of tenancy, sub-tenancy or otherwise. The assessee undertook, under the said clause, not to raise any such claim at any time during the tenure of the agreement or thereafter. 19. The other clauses of the agreement are not very important for the purpose of the present appeal. 20. In an able argument, Mr. Pardiwalla, for the assessee, put forth the following contentions. He firstly contended that the royalty of commission deductible under the agreements from the sale proceeds cannot be considered as rent even under the extended definition of the word rent in the Explanation ( i) below section 194-I. He pointed out that even unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the premises where the arrangement was a conducting arrangement or the arrangement for the management of business. On the strength of these authorities, it was contended by Mr. Pardiwalla, that payments under the agreements were not for the use of land or building with furniture and fixtures. He next contended that it was not open to the departmental authorities to rewrite the agreement between the parties in the guise of looking into the substance of the agreement and this principle must be applied to the present case. He cited the judgment of the Delhi High Court in D.S. Bist Sons v. CIT [1984] 149 ITR 2761 and that of the Calcutta High Court In CIT v. Arun Dua [1990] 186 ITR 494 2 in support of this contention. It was his submission that the intention of the parties to the agreements was that the assessee should conduct and manage the business in the food outlets owned by MF and PIP and it was not an agreement for lease or sub-lease of the outlets and that there was no intention to part with possession of the premises in favour of the assessee and if that is the intention of the parties, it is not open to the Income-tax authorities to ignore the same and the legal effect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the orders passed under section 201. 22. On behalf of the Department, the ld. DR pointed out that under the definition of the word rent in section 194-I, any amount paid for the use of the land and building together with the furniture and fittings, by whatever name called, is to be treated as rent and the payer is liable to deduct tax. A wide meaning has thus been given to the word rent and notwithstanding that in the present case, the amounts are described as royalty/commission, they partake the character of rent and therefore, the assessee was liable to deduct tax. It was submitted that the provisions of section 194-I were introduced by the Finance Act, 1994 w.e.f. 1-6-1994 and the agreements under consideration were entered into within 4 to 5 months thereafter and clearly the object was to scuttle the liability to deduct tax or defeat the very object of the section by giving a nomenclature different from rent. He strongly relied on the observations of the Assessing Officer in paragraph 4 of the assessment order for the assessment year 1995-96. In this connection, he also drew our attention to the fact that the assessee had made an interest free security deposit of Rs. 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt if the payee is an individual or a Hindu undivided family; and (ii)twenty per cent in other cases : Provided that no deduction shall be made under this section where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed one hundred and twenty thousand rupees. Explanation - For the purposes of this section, (i)"rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee. (ii)where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly." The main question concerns the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e inspect the kitchen and check the quality of the food served or to ensure that the assessee used filtered water or the cooking medium which is approved by them. The assessee had no right to change the name of the outlets which continued to be run in the names originally given by MF and PIP. All that the assessee was allowed was to add its logo and name. Even the napkins and cutlery used in the outlets were to carry the monogram of Fantasy Land. In the agreement with MF, the assessee was to serve only vegetarian food in Gulal restaurant and vegetarian non-vegetarian food could be served only in the Chinese restaurant. The assessee could not cater to any visitor or invite or solicit any custom from any person other than the persons who are visitors to the amusement parks. The assessee was bound by the policy framed by MF in the manner of providing food in the case of groups or special occasions. Even the movements of the employees of the assessee were controlled and regulated by MF and PIP. In the case of any breach of the conditions relating to the license or permit, the assessee was to indemnify the MF or PIP in whose names the licenses stood. More importantly, MF, under clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay High Court in the case of Mrs. Fatimabai Noor Md. (supra) cited by Mr. Pardiwalla. In that case, there was an agreement to conduct the business and to hand over the furniture and other articles in the premises for the purpose of conducting the business. The agreement was for a particular period and at the end of the period, the person who was allowed to conduct the business refused to handover the possession of the premises. A suit was filed by the person who handed over the possession of the premises and the business. The defence was that the person who came to possession was a protected licensee under the Bombay Rents Control Act, 1947 and therefore cannot be asked to vacate and handover the premises. The matter reached the High Court. The High Court held, on a perusal of the agreement and the relevant facts, that they pointed to only one conclusion viz., that what was embodied in the agreement was not a license to use the premises simplicitor but was a license exclusively for conducting the business of pan beedi. It was noted that there was not a single word anywhere in the agreement that there was a letting out of the said premises and that what was meant by the agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and conduct the catering busienss and it was only incidental that the premises was allowed to be used by the assessee as a permissive user or under a license. When the substance of the agreements or the arrangements is this, the mere possibility of a part of the payment of royalty/commission being attributable to the use of the land or the building together with furniture and fittings does not, in our opinion, have the effect of converting what in substance and truth is an arrangement for conducting or managing the business into one for the mere use of the land or building together with furniture, fittings, etc. Mr. Pardiwalla pertinently referred in this context to a couple of authorities to contend that if the dominant intention of the parties was that the restaurant business should be conducted by the assessee, it is not open to the Income-tax authorities to rewrite the agreements and infer a different intention. We also find that in CIT v. Motors General Stores (P.) Ltd. [1967] 66 ITR 692 , it was held by the Supreme Court that in the absence of any suggestion of bad faith or fraud the true principle is that the taxing statute has to be applied in accordance with the legal ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company must be allowed as rent, it was held by the Privy Council at page 278, as follows : "Their Lordships do not think that there is in the present case any sufficient ground for holding that the sum in question is of the nature of a rent. It is neither described as a rent, not does the agreement contain several of the clauses which a lease of plant of such a character would naturally contain. Circumstances of greater importance are that the sum payable may be small or great or nothing - a most unusual feature in the case of a rent - and that it is impossible to presume or infer that the half share of profits is being paid only as rent or as a similar payment, in consideration merely of these of the plant the subject of the licence in Cl. 3 of the agreement. The sum is in truth made payable as part of the consideration in respect of a number of different advantages. . . ." The aforesaid observations of the Privy Council show that great importance should be attached to the fact that rent should normally be a payment of a fixed sum and if the payment varies because of its link with another variable such as the net profits, it would be most unusual to call the payment a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o treat the payment as quid pro quo for the use of the land or building together with the furniture, fittings, etc. and if it is possible to do so, the mere fact that the payment was styled under some other name, would not absolve the person paying the amount from the liability to deduct tax. It is, thus, always a question of gathering the intention of parties to the agreement or arrangement. The use of the words "by whatever name called" in the definition does not permit the Income-tax authorities to refuse to look into the real intention of the parties or the substance of the agreement. 31. The ld. DR had submitted that the agreements were entered into after the introduction of section 194-I w.e.f. 1-6-1994 and therefore, they must be taken to have been entered into with a view to scuttling the liability to deduct tax or to defeat the purpose or the object of the section. The mere fact that the agreements were entered into after 1-6-1994 does not entitle the Income-tax authorities to take such a view of the matter without examining the substance of the transaction or the dominant intention of the parties under the arrangement. Such an extreme contention cannot be countenanced. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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