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Apeejay Surrendera Park Hotels Ltd. And Another, Federation of Hotel And Restaurant Associations of India And Others Versus Union of India & Others

2016 (3) TMI 880 - DELHI HIGH COURT

TDS u/s 194I - whether the tour operators/travel agents were required to deduct TDS under Section 194-I of the Act while making payments to the hotels on behalf of foreign tourists? - Held that:- The Revenue is right in its contention that applicability of Section 194-I does not depend upon whether the income of the hotel from room charges is assessed under "profits and gains of business or profession" or "income from house property". Section 194-I is applicable at the time of payment of rent or .....

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of the person (other than an individual or HUF) making payment to deduct TDS at the time of making such payment.

Question whether any part of the payment received by the hoteliers, who are members of FHRAI, from persons other than individuals and HUFs, can be construed as ‘rent’ within the meaning of Section 194-I of the Act is answered in the affirmative. The contention of the Petitioners that no part of the payment received by them as room charges falls within the ambit of 'rent' u .....

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Muralidhar And Vibhu Bakhru, JJ. For the Petitioners : Mr Lalit Bhasin, Advocate with Ms Ratna Dwivedi Dhingra and Ms Bhavna Dhami, Advocates. For the Respondent : Mr Ashok Manchanda, Senior Standing Counsel with Ms Vibhooti Malhotra, Junior Standing Counsel and Mr Amino Aziz, Advocate JUDGMENT Dr. S. Muralidhar, J. 1. These writ petitions seek a declaration that Section 194-I of the Income Tax Act, 1961 ( Act ) does not apply to the Hotel Industry since the charges for a room in a hotel is, ac .....

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he hotel includes not only charges for use and occupation of the room but also for water, electricity, air-conditioning, telephone facility, and various other items or amenities provided for guests in the room. The room tariff charge is therefore stated to be a composite charge for all the above and not merely for occupying the room alone. 3. Writ Petition (Civil) No. 2130 of 1999 is by the Federation of Hotel & Restaurant Associations of India ( FHRAI ) (Petitioner No. 1), M/s Asian Hotels .....

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vidual or a Hindu undivided family, who is responsible for paying to any person any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rate of - a. fifteen per cent if the payee is an individual or a Hindu undivided family; and b. twenty per cent in other cases; Provided that no deduction shall be m .....

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nt 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 sha .....

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is earlier, deduct income-tax thereon at the rate of- (a) two per cent for the use of any machinery or plant or equipment; and (b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings: 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 .....

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s credited or paid, shall be liable to deduct income-tax under this section : Provided also that no deduction shall be made under this section where the income by way of rent is credited or paid to a business trust, being a real estate investment trust, in respect of any real estate asset, referred to in clause (23FCA) of section 10, owned directly by such business trust. Explanation.-For the purposes of this section,- (i) "rent" means any payment, by whatever name called, under any le .....

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e, 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. 6. According to the Petitioners, initially even the Income Tax Department ( Department ) understood the above provision as not applying to the hotel industry and therefore, did not issue any orders or directions to any hotel in that regard. 7. The Central Board of Direct Taxes ( CBDT .....

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of the Act to hotels by filing Writ Petition No. 105 of 1995 in the High Court of Bombay. By an order dated 2nd February 1995, the Bombay High Court stayed the applicability of Section 194-I of the Act. Letters by way of clarifications were issued by the Department in respect of the hotels of EIHL in Bangalore, Calcutta and Mumbai on 21st August 1995, 6th June 1996 and 21st March 1997 respectively stating that no instruction were issued to its clients to deduct the tax at source and that the cl .....

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7. The present petitions 10. The immediate provocation for the filing the present writ petitions was a Circular No. DEL/056/99 dated 12th March 1999 received from Indian Association of Tour Operators along with a copy of letter dated 2nd February 1999 issued by the Deputy Commissioner of Income Tax ( DCIT ) clarifying that the tour operators/travel agents were required to deduct TDS under Section 194-I of the Act while making payments to the hotels on behalf of foreign tourists. The tour operato .....

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was being sought to be drawn between Indian and foreign guests when the provision itself did not envisage it. According to the Petitioners this was also contrary to the stay order granted by the Bombay High Court. 12. Writ Petition (Civil) No. 2130 of 1999 was listed on 12th April 1999 and while directing notice to issue, it was directed that provisions of Section 194-I of Income Tax Act will not be enforced qua the charges payable for temporary stay of guests to members of Petitioner No. 1 who .....

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were disposed of an order dated 23rd February 2001 with directions to CBDT to give a hearing to the Petitioners in the said writ petitions and other hotels and lay down proper guidelines for the assessing authority with regard to the scope of Section 194-I of the Act and the manner in which it is to be implemented. 15. Pursuant to the said order of the Madras High Court, a hearing was given to those Petitioners and the CBDT issued a Circular No. 5 of 2002 dated 30th July 2002 clarifying that the .....

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nt as payment made for accommodation on regular basis and that this was inconsistent with Section 194-I of the Act. The Petitioners sought to amend their respective writ petitions challenging Circular No. 5 of 2002 dated 30th July 2002 issued by the CBDT. The amendments were allowed by this Court by its order dated 22nd March 2005. Submissions of Counsel 17. Mr. Lalit Bhasin, learned counsel appearing for the Petitioners made the following submissions: (i) The definition of rent in the Explanati .....

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ls v. R.N. Kapoor (1960) 1 SCR 368. He is at best a licensee. (iii) The words any payment appearing in the Explanation to Section 194-I of the Act must be read consistent with the word rent in the main body of Section 194-I of the Act. Further, the words any other agreement or arrangement in the definition of rent has to be ejusdem generis and therefore read together with the preceding words any lease, sub-lease or tenancy in the definition. A reference was made to the definition of other as def .....

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vide, beside boarding and lodging, highly trained experienced and efficient staff, 24 hours service for reception, information and housekeeping of the highest possible standards and other facilities like restaurant, beauty salon, barber shop, health club, business centre service etc. It can at best be a licence fee. Reliance was placed on the decision in State of Punjab v. M/s. Associated Hotels of India Limited AIR 1972 SC 1131, Northern India Caters (India) Ltd. v. Lt. Governor of Delhi (1979) .....

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collected by the Airport Authority of India. It was held not to merely mean charges for use of land but for services and facilities offered in connection with the aircraft operation at the airport. Likewise, the stay of a guest in a hotel room did not involve use of land or building alone within the meaning of Section 194-I of the Act. (vi) Circular No. 5 of 2002 is vague as it did not define the expression regular basis . The mere fact that a hotel might receive bookings for guests either from .....

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the room in a hotel is really for the sake of convenience. 18. It must be noted that certain other grounds have been urged in the petitions which were not urged in the course of arguments. This includes a challenge to Section 194-I of the Act being violative of Article 14 read with Article 19 (1) (g) of the Constitution inasmuch as it seeks to treat made by individual foreign guests of a hotel, who may be making payments through a tour operator, different from Indian individual gests who may be .....

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nd inasmuch as it treats unequals equally it violates Article 14 of the Constitution. Further the income earned by the Petitioners through their hotels has been assessed under the head 'profits and gains from business and profession' and not under the head 'income from house property' and therefore Section 194-I cannot apply to room charges collected from guests at the hotels. 19. The above submissions were countered by the learned counsel for the Revenue, i.e., Ms. Vibhooti Malh .....

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petitions should be held to be barred by laches. (iii) The definition of rent in Explanation to Section 194-I of the Act has the widest scope given the context in which it occurs. The ambit of the word rent was not meant to be confined to any particular type of 'agreement or arrangement' i.e., lease, sub-lease or tenancy. Reliance was placed on the decision of the Andhra Pradesh High Court in Krishna Oberoi v. Union of India (2002) 257 ITR 105 (AP) which in turn referred to the decision .....

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d that the dominant intention test was no longer determinative of whether the charges collected can be said to be rent . A reference was also made to some of the invoices, copies of which are enclosed with Writ Petition (Civil) No. 1924 of 1999, to show that a major portion thereof pertained to the room tariff. (iv) Reliance was also placed on the decisions in Commissioner of Income Tax, Bangalore v. Venkateswara Hatcheries (P) Limited (1999) 3 SCC 632 and UCO Bank, Calcutta v. Commissioner of I .....

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at the Department may be justified in pointing out that there was a delay of four years in the Petitioners approaching this Court to challenge the Circular No. 715 of 1995, the fact also remains that the Hotel Restaurant Association (Western India) had also challenged Section 194-I of the Act in the Bombay High Court by filing Writ Petition (Civil) No. 1917 of 1995. Likewise EIHL, a member of FHRAI had also challenged it by filing Writ Petition No. 105 of 1995 in the High Court of Bombay. These .....

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ursuant to the stay granted in the aforementioned writ petitions in the Bombay High Court, the Department itself did not think it necessary to issue any clarification or direction. 22. The third reason is that no objection as such was raised by the Department to the writ petitions being amended in 2004, which amendment was allowed in 2005. The amended prayers included a challenge to Circular no. 5 of 2002 in particular. Consequently, this Court negatives the plea of the Department that these wri .....

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d rent . It begins by stating that rent means any payment, by whatever name called . The payment need not be only under a lease/sub-lease/tenancy . It could be under any other arrangement or agreement and such arrangement could permit the use either separately or together any land, building, land appurtenant to a building, machinery, plant, equipment, furniture, fittings whether or not any or all the above are owned by the payee. 25. The words any other preceding the word arrangement or agreemen .....

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of such payment to the account of payee or at the time of payment in cash itself is 2% for the use of the machinery or plant or equipment and 10% for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings. 26. The Explanation to Section 194-I is consistent with and not beyond its scope of Section 194-I of the Act. It envisages 'rent' as any payment for the use of land or building or machinery o .....

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ol Act, 1947 ( DAMRCA ). There the Respondent had occupied two rooms in the Imperial Hotel, New Delhi run by the Appellant therein, described as Ladies and Gents Cloak rooms. The Respondent carried on his business there as a hair dresser. The document executed between the parties was one between a licensor and licensee. The Respondent was to pay an annual rent of ₹ 9,600 in four quarterly instalments. Later by a mutual agreement, this was reduced to ₹ 8,400. On an application made by .....

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ed. In the appeal by Imperial Hotel, two questions that arose for determination were (i) whether the agreement created a lease or a license and, (ii) whether the said rooms can be said to be rooms within the meaning of Section 2(b) of DAMRCA. This was because Section 2 (b) of DAMRCA defined the premises to mean any building or part of a building which is, or is intended to be, let separately for use as a residence or for commercial use or for any other purpose but does not include a room in a dh .....

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g is not used as a hotel, dharamshala or lodging house, but only a part of it so used. In that event, the hotel, lodging house or dharamshala will be that part of the building only which is used as such, and any room therein will be a room in a hotel, dharamshala or lodging house. Rooms outside that part but in the same building will not be rooms in a hotel, dharamshala or lodging house. Take, however, a case where the room in question is within that part of the building which is used as a hotel .....

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e composite expression room in a hotel must take colour from the context or the collocation of words in which it has been used; in other words, its meaning should be determined noscitur a sociis . It was then stated that a room in a hotel must fulfil two conditions, namely (i) it must be part a hotel in the physical sense and (2) its user must be connected with the general purpose of the hotel of which it is a part. The mere fact that the people not resident in the hotel might also be served by .....

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rd rent in the present case must be restricted to payment received under a lease, sub-lease or tenancy. That would be contrary to the legislative intent that is apparent from the wide sweep of the words 'any payment' and 'any other agreement or arrangement.' Unlike Section 2 (b) of DAMRCA there is no exclusion from Section 194-I of the Act of any arrangement or agreement under which payment might be received It certainly does not exclude the payment received by a hotel for use by .....

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incapable of being split up into separate charges: for each of the amenities furnished and availed of by the customers. 30.2 The High Court held that the transaction was primarily one for lodging that the board supplied by the hotel amounting to an amenity considered essential in all properly conducted hotels and could not be said to constitute a sale every time a meal was served to such a resident visitor. It was this decision of the High Court that was challenged before the Supreme Court. 30.3 .....

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of the transaction in question does not render it a transaction of sale. It was further clarified that in every case the Court would have to find out what was the primary object of the transaction and the intention of the parties while entering into it. 30.4 Thereafter in para 13 the Court agreed that in the case of hotels the mere transfer of property was not conclusive and did not render the event of such supply and consumption a sale since there is no intention to sell and purchase. The trans .....

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to guests with a view to bring the latter under the Act. 31 Turning to the next decision in Northern India Caters India Limited v. Lt. Governor of Delhi (supra), the question there arose under the context of Bengal Finance (Sales Tax) Act, 1941. The decision followed the decision in State of Punjab v. Associated Hotels of India Limited (supra) and it was held that since it was a composite charge levied by the hotelier on those residing therein, the Revenue was not entitled to split up the transa .....

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any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, deliver or supply of goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. 32.2 After r .....

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ing. Therefore when in 2005, C.K. Jidheesh v. Union of India (2005) 13 SCC 37 held that the aforesaid observations in Associated Cement Companies Limited (supra) were merely obiter and that Rainbow Colour Lab v. State of M.P. (2000) 2 SCC 385 was still good law, it was not correct. It is necessary to note that Associated Cement did not say that in all cases of composite transactions the Forty-sixth Amendment would apply. 32.3. The Supreme Court in Bharat Sanchar Nigam Limited v. Union of India ( .....

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h the matter from the point of view of a reasonable person of average intelligence. 33. Thus it is apparent that after the 46th Amendment the 'dominant nature' test is no longer the sole determinant of whether a transaction can be said to be 'sale' within the meaning of Article 366 (29-A) of the Constitution. This is a useful principle to be kept in view while interpreting the word 'rent' in Section 194-I of the Act as well, since that word need not, in the context in whi .....

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ilways Act 1890, it was held that word rates occurring thereunder could not be given the narrow meaning so as to exclude charges made or levied by the railway for all other services. In Commissioner of Income Tax, Bangalore v. Venkateswara Hatcheries (P) Limited (supra) the Court was considering the word produce and article occurring in Section 32-A (2)(b)(ii) and Section 80-J (4) (iii) of the Act. The question was whether the chicken being produced by the Assessee can be construed to be an arti .....

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that word. In such a situation the word has to be construed in the context of the provisions of the Act and regard must also be had to the legislative history of the provisions of the Act and the scheme of the Act. It is settled principle of interpretation that the meaning of the words, occurring in the provisions of the Act must take their colour from the context in which they are so used. 35. In State of Punjab v. British India Corporation (supra), the question before the Supreme Court was whe .....

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he rule-making authority would not depart from the meaning in which it had reason to believe that the legislature had used the word, and that it used the word in cl. (ii) of Rule 18 (4) in the same narrower sense of payment by tenant to landlord for demised property. Our conclusion therefore is that the word "rent" in cl. (ii) of Rule 18 (4) means payment to a landlord by a tenant for the demised property and does not include payments made by licensees." 36. In Rajbir Kaur v. S. C .....

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f has no power to grant the lease. In the last analysis the question whether a transaction is a lease or a licence "turns on the operative intention of the parties" and that there is no single, simple litmus-test to distinguish one from the other. The "solution that would seem to have been found is, as one would expect, that it must depend on the intention of the parties. Decisions on Section 194-I of the Act 37. The Court now turns to the decision of the Andhra Pradesh High Court .....

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on 'regular basis'. The Court negatived the challenge to the provision based on the hardship caused to hoteliers by observing: 20. Therefore, even accepting that the obligation to effect TDS creates hardship, financial inconvenience to the 1st Petitioner, even then, that circumstance itself cannot be a valid or legal ground to take out the payments received by the payee from the patrons for use of the hotel rooms in pursuance of agreements between them from the purview of "rent" .....

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section. Therefore, it is open for the 1st petitioner to make necessary application under Section 197 if there is any justification or hardship for it to do so. In conclusion, we hold that the charges paid to the 1st petitioner-company by its customers like the respondents 4 and 5, for use and occupation of the hotel rooms should be regarded as "rent" within the meaning of Section 194-I. 38. Accepting the plea of the Department that a wider meaning had to be given to the word 'rent .....

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urring in Explanation to Section 194-I only to the payment made by a tenant or a lessee for the use of land or buildings demised to him. We say this because, the term "rent" is defined in the Explanation in a wider sense. As per the definition; "rent" includes and means not only a payment made under any lease or sub-lease or tenancy, but also means and includes payment made under any other agreement or arrangement for the use of building or land. If that is so, even accepting .....

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the building owned by the 1st petitioner. Therefore, the consideration paid to the 1st petitioner by its customers under the agreements for the use and occupation of the hotel rooms squarely falls within the term "rent" as defined under the Explanation." 39.1 In Indus Towers Ltd. v. Commissioner of Income Tax (supra), the Court concurred with the above decision in Krishna Oberoi (supra). The Court formulated the question that arose as under: "20. The crucial question which h .....

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e of the premises, and the right to access it, amounts to renting the premises." 39.2 Delving into the interpretation of Section 194-I of the Act, this Court observed: "26. What strikes instantly is that the definition is clear as to the nature of transactions it covers ("means"). Secondly, it is expansive in sweep ("any other...arrangement for the use, (either separately or together)" any land, building, machinery or plant irrespective of ownership of the payee is .....

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ture is given access to, and in that sense, it is given for the "use" of the mobile operators. The towers in a sense are the neutral platform without which mobile operators cannot operate. If one goes back in time each mobile operator - which is now Indus' customer - used to carry out this activity, by necessarily renting premises and installing the same equipment. Of course, the rent paid then to the owner, whenever such transactions were leases, were business expenses. Yet leases .....

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an inseparability to the transaction as spelt out in Sultan Brothers (p) Ltd. v. CIT (1964) 51 ITR 353). Therefore the submission of Indus, that the transaction is not "renting" at all, is incorrect; equally, the revenue's contention that the transaction is one where the parties intended the renting of land (because of the right to access being given to the mobile operators) is also incorrect. The underlying object of the arrangement or agreement (in the MSA) was the use of the mac .....

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f such like nature. (ii) given the context of the said provision which is intended to cover a wide range of transactions as is evident from the words "any other agreement or arrangement" it is evident that the principles of ejusdem generis or noscitur a sociis cannot be invoked to narrow the scope of those words. The words "any payment" occurring in definition of 'rent' in the Explanation to Section 194-I is also indicative of the legislative intent to accord the wide .....

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he legislative intent has to be taken into consideration in examining a narrower or a wider meaning has to be given to the word. (iv) Even where the room charges collected by a hotel from its customer is not confined to the use of the space but to a host of facilities and amenities such payment would still fall within the ambit of 'rent' under Section 194-I of the Act. Constitutional validity 41. Turning to the specific challenge to the constitutional validity of Section 194-I of the Act .....

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rs seek to question the constitutional validity of the provision on an abstract basis on the ground that it is per se arbitrary and irrational. The Court is unable to agree with the submission that the word 'rent' as used in Section 194-I is incapable of a wider meaning than payment under a transaction of lease, sub-lease or tenancy. Also, no artificial distinction, as suggested by the Petitioners, is being sought to be drawn between individual guests of a hotel, on the basis whether the .....

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the hotel concerned under Rule 31 of the Rules. In terms of Section 199 such deduction is treated as payment of tax on behalf of the hotel and credit is given in the assessment to the hotel for the TDS deducted on the production of certificate furnished under Section 203. Consequently, the hotel does not suffer any prejudice or inconvenience. Further, the hotel can under Section 197 of the Act apply to have the TDS deducted at a lower rate. The Petitioners have been unable to point out what in .....

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194-I is applicable at the time of payment of rent or at the time of crediting such amount to the payee, if the other conditions laid down under the said provision are fulfilled. It is for the Assessee to decide whether it seeks to retain the hotel as an investment or as a business asset. The income therefrom could be taxed as business income if it is exploited as a business asset. Rental income can also be taxed under the head "Income from other sources". This, however, does not affec .....

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ing beyond the powers of the CBDT under Section 119 of the Act. 45. In fact it is not understood how any portion of either Circular Nos. 105 of 1995 dated 8th August 1995 or Circular No. 5 of 2002 dated 30th July 2002 can be said to be prejudicial to hoteliers. There is no vagueness as to what constitutes hotel accommodation taken on 'regular basis'. In order to remove any ambiguity that may attach to that term, the subsequent Circular dated 30th July 2002 was issued. Para 2 of the said .....

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like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under Section 44AB as mentioned above) since it is the employee or such individual would makes the payment and the company merely reimburses the expenditure. Furthermore, for purposes of Section 194-I, the meaning of rent has also been considered. Rent means any payment, by whatever .....

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commodation made available on regular basis . Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement. 46. What a 'rate contract' is has also been clarified in the same Circular in para 3 as under: 3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room t .....

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