ORDER
B.M. Kothari, A.M.
1. These appeals by the appellant company are directed against the consolidated order passed by the CIT(A) on 16th March, 1990 for asst. yrs. 1985-86 and 1986-87 and the consolidated order dt. 1st Feb., 1991 for asst. yrs. 1987-88 and 1988-89. All these appeals involve consideration of the following identical grounds raised in these appeals :
“1. On the facts and in the circumstances of the case the learned CIT(A) legally erred in upholding that the income from minimum guaranteed business profits under licence was assessable as income under the head “income from other sources” and not “income from business and profession”.
2. On the facts and in the circumstances of the case the learned CIT(A), legally erred in rejecting the assessee’s claim of depreciation on hotel building on considering the same as ‘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 AO as business losses and were allocated to the accounts of the partners and shown in their individual returns. The copies of the assessment orders of Maharaj Jagat Singh and of Maharaj Prithvi Raj for the year 1984-85 have been furnished to show that the share of loss in the firm M/s Jai Mahal Hotels was assessed in the individual assessment of these partners. Subsequently the firm M/s Jai Mahal Hotels was dissolved and the assessee-company carried on the business of hotel.
In order to run the business of hotel the assessee-company which was earlier a partner in the firm draw up a memorandum of understanding with M/s Indian Hotels Co. Ltd. which is a company owning all the Taj Group of Hotels. M/s Indian Hotels Co. Ltd. was having a long experience and expertise in carrying on business of hotels and was conversant with the modern technology and specialised skill required for running and managing five star hotels. The assessee-company accordingly entered into an agreement with M/s Indian Hotel Co. Ltd. on 2nd June, 1984 and the object of the agreement was to carry on business of hotels, restaurants, lodges, resorts, tea and coffee houses, cafes, taverns, bear houses and refreshment rooms, etc. The assessee-company was the owner of the hotel known as Jai Mahal Palace Hotel, Jaipur and the agreement with M/s Indian Hotels Co. Ltd. was to run and operate the Jai Mahal Palace Hotel at Jaipur on the premises owned by the assessee-company. The agreement with M/s Indian Hotels Co. Ltd. was made for a period of 5 years from 2nd June, 1984. On expiry of five years the agreement could be renewed and extended. As per cl. 3.4 of the agreement M/s Indian Hotels Co. Ltd. agreed to pay to M/s Jai Mahal Hotels a portion of the profits computed @ 1 per cent p.a. of the gross operating profit of the hotel or the minimum guaranteed business profits whichever was higher. The minimum guaranteed business profits for the initial period of 5 years for which the agreement was made were agreed at Rs. 35,00,000 to be paid by M/s Indian Hotels Co. Ltd. to the assessee-company in advance. The agreement also provided that the advance payment of the minimum guaranteed business profits amounting to Rs. 35,00,000 shall be utilised by the assessee-company to carry out the initial and basic repairs to the hotel building, to replaster the external walls to make structural repairs, to clean the site and surrounding areas and to level the appurtenant land. The minimum guaranteed profits of Rs. 35,00,000 payable for the initial period of five years commencing from 2nd June, 1984 to 3st May, 1989 were shown by the assessee at Rs. 4,08,333 for the period of seven months from 2nd June, 1984 to 31st Dec., 1984 under the head ‘business income’ but were adopted by the AO at Rs. 7,00,000 and taxed under the head ‘income from other sources’.”
3. In the subsequent years from asst. yrs. 1986-87 to asst. yr. 1988-89 the AO following the reasons discussed in the assessment order for asst. yr. 1985-86 held that the licence-fee credited in the P&L a/c amounting to Rs. 7 lakhs in each of those years will be assessable under the head ‘income from other sources’
4. The CIT(A) after considering the entire relevant facts and the various judgments cited in the orders passed by them agreed with the view taken by the AO 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 expression “business” as defined in s. 2(30) gives an inclusive definition which includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce of manufacture. It has a very wide connotation. The income derived by the appellant-company by entering into the said agreement with IHC is assessable under the head ‘income from business’. He placed reliance on the judgment in Mazagaon Dock Ltd. vs. CIT (1958) 34 ITR 368 (SC), to support his contention.
5.1 The learned counsel contended that s. 56 is a residuary section. If a particular income does not fall under any other head of income then only a resort can be made to s. 56 except in relation to income specifically made assessable under the head ‘income from other sources’. The various heads of income prescribed in the provisions of IT Act are mutually exclusive to each other. Where an income falls specifically under that head and no other head of income then alone the income would be taxable under the head ‘income from other sources’. He submitted that if the income from a source falls under a specific head under s. 14, the fact that it may indirectly be covered under some other head also, it will not make that income taxable under that other head of income. For this proposition he placed reliance on Bihar State Co-op. Bank Ltd. vs. CIT (1960) 39 ITR 114 (SC), Karanpura Development Co. Ltd. vs. CIT (1962) 44 ITR 362 (SC), East India Housing & Land Development Trust Ltd. vs. CIT (1961) 42 ITR 49 (SC) and CIT vs. Chugandas & Co. (1965) 55 ITR 17 (SC).
5.2 The learned counsel then invited our attention towards the said agreement entered into by the appellant-company with IHC. He drew our attention towards the various clauses of the said agreement. After elaborately going through the said agreement, the learned counsel submitted that the agreement with IHC was executed in accordance with the various object clauses contained in the memorandum of association. Such an agreement was entered into with a view to run the Jai Mahal Hotel owned by the appellant-company as a five star hotel and thus the agreement was made with a view to exploit the commercial assets of the company in a more profitable manner. He submitted that the appellant-company was carrying on the hotel business prior to the execution of the said agreement with IHC. The erstwhile firm was also carrying on the business as hoteliers at the same premises. The share of the erstwhile 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(A) in his order for asst. yr. 1985-86 wherein the CIT(A) 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(A) 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 learned counsel particularly invited our attention towards termination clause contained in cl. 14.1 of the said agreement which authorises the appellant-company to terminate the said agreement by giving 30 days notice of termination and on the 61st day of the receipt of termination notice this agreement shall stand terminated. He submitted that the moment the appellant-company finds that due to non-compliance of any terms by IHC, the agreement is not advantageous to the company it could terminate the agreement with IHC in accordance with termination clause contained in cl. 14.1. He also pointed out that on the expiry of the said agreement by efflux of time, the entire property including immovable assets, fixed assets, all fittings attached to the building introduced by IHC will revert back to the appellant-company automatically without payment of any compensation whatsoever to IHC, as per cl. 14.4 of the said agreement. Clause 20 of the agreement further provides that nothing contained in that agreement shall be construed as establishing or creating a relationship of master and servant, partnership, principal and agent, lessor and lessee or landlord and tenant between the parties. This clearly shows that no interest was passed on to IHC except that it was entitled to run the business in accordance with the terms of agreement executed between the parties. Possession was given for the limited purpose of running hotel business under which the assessee had a right to receive a portion of the profits computed @ 1 per cent per annum of the gross operating profit of the hotel or the minimum guaranteed profits whichever was higher. The learned counsel invited our attention towards the judgment of the Hon’ble Supreme Court in the case of Associated Hotels of India Ltd. vs. R. N. Kapur AIR 1959 SC 1262. He further submitted that under s. 105 of Transfer of Property Act such an agreement cannot be regarded as a lease agreement. At best it could be only a licence under the provisions of Indian Easement Act.
7. The learned counsel then invited our attention towards various clauses in the memorandum of association. He submitted that cl. 1 of the main objects authorises the company to carry on the business of hotels, restaurants, lodges, resorts, refreshment room, etc. Clause 11 authorises the company to carry on such business by entering into partnership or 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 cl. 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. CIT(Asstt.), Hyderabad who 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 were relied upon by the assessee before the CIT(A) and the authorities which were relied upon by the CIT(A) in the order passed by him as well as further authorities on which, the assessee now places reliance. He submitted that the assessee had placed reliance on the judgment of Hon’ble Supreme Court reported in CIT vs. Calcutta National Bank Ltd. (1959) 37 ITR 171 (SC), S. G. Mercantile Corporation (P) Ltd. vs. CIT (1972) 83 ITR 700 (SC) and CEPT vs. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC), before the learned CIT(A) to support his contention that such income was assessable under the head ‘income from business’. Each judgment laid down the principles of law relating to this aspect and such principles of law deduced from the aforesaid judgments clearly support the assessee’s contention.
9.1 He submitted that the learned CIT(A) had placed reliance on judgments reported in Seth Banarsi Das Gupta vs. CIT (1977) 106 ITR 559 (All), New Savan Sugar & Gur Refining Co. Ltd. vs. CIT (1969) 74 ITR 7 (SC), Narain Swadeshi Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC), CIT vs. Central Studios (P) Ltd. (1973) 88 ITR 298 (Mad) and Hindustan Chemical Works Ltd. vs. CIT (1980) 124 ITR 561 (Bom), to support the conclusion arrived at by him against the assessee. The learned counsel submitted that the facts of all those cases are clearly distinguishable with the facts of the present case. The facts of those judgments clearly reveal that the business in those cases was either altogether closed and the assets were dismantled and sold away or that on the facts of those cases it was clearly observed that there was no intention on the part of the assessee to carry on such business. He submitted that the judgment of the Supreme Court reported in New Savan Sugar & Gur Mfg. Co. LTD vs. CIT (1969) 74 ITR 7 (SC), relied upon by the CIT(A) has been further discussed in the subsequent judgment of Hon’ble Delhi High Court reported in Addl. CIT vs. Rajindra Flour & Alied Industries (P) Ltd. (1981) 128 ITR 402 (Del) and in the judgment of Hon’ble Patna High Court in Eclat Construction (P) Ltd. vs. CIT (1988) 172 ITR 84 (Pat) and CIT vs. Central Studios (P) Ltd. (supra). In those judgments it has been clearly observed that the facts of the case decided by the Hon’ble Supreme Court clearly reveal that in that case there was n intention to carry on the business while it was given on lease. The learned counsel also invited our attention to the decision of Tribunal, Hyderabad Bench Majety & Sons Oil Co. (P) Ltd. vs. ITO (1994) 48 ITD 72 (Hyd).
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’ :
CIT vs. Sun Engineering Works (P) Ltd. (1992) 198 ITR 297 (SC);
CIT vs. Prem Chand Jute Mills Ltd. (1978) 114 ITR 769 (Cal);
Addl. CIT vs. Rajendra Flour & Allied Industries (P) Ltd. (1981) 128 ITR 402 (Del);
Eclat Construction (P) Ltd. vs. CIT (1988) 172 ITR 84 (Pat);
CIT vs. A. P. Industrial Infrastructure Corporation Ltd. (1989) 175 ITR 361 (AP);
CIT vs. Sarabhai Management Corporation Ltd. (1991) 192 ITR 151 (SC);
B. Nagi Reddy vs. CIT (1993) 199 ITR 451 (Mad);
CIT vs. Ganeshdass Sreeram (1989) 180 ITR 397 (Gau);
CIT vs. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC);
CIT vs. Favre Leuba & Co. Ltd. (1979) 120 ITR 897 (Bom);
G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC); 51 ITD 125 (Cal)
Majety & Sons Oil Co. (P) Ltd. vs. ITO (1994) 48 ITD 72 (Hyd);
Everest Hotels Ltd. vs. CIT (1978) 114 ITR 779 (Cal); (1995) 211 ITR 417 (All) (sic)
CIT vs. Northern India Iron & Steel Co. Ltd. (1995) 211 ITR 370 (Del).
9.3 The learned counsel further submitted that in the judgment reported in CIT vs. Calcutta National Bank Ltd. (supra) and CEPT vs. Shri Lakshmi Mills Ltd. (supra) the Revenue contended that income received by way of rent from such commercial assets should be treated as business income because excess business profits tax was leviable thereon. The findings given by the Hon’ble Supreme Court in these two cases fully support the assessee’s contention.
9.4 The learned counsel thus strongly urged that the order passed by the CIT(A) should be set aside and the assessee’s contention that such income is assessable under the head ‘profits and gains of business’ should be accepted.
10. The learned Departmental Representative strongly supported the order of the CIT(A) and also placed heavy reliance on the reasons mentioned in the assessment order. He submitted that there is no quarrel about the legal principles canvassed by the learned counsel for the assessee. The decision as to whether a particular income is assessable under the head ‘profits and gains of business’ or under ‘income from other sources’ will depend upon the facts and circumstances of each case. He submitted that the agreement executed with IHC clearly reveals that the assessee was required to incur only the initial and basic repairs at the time of giving the premises on licence or lease. Thereafter the assessee was not required to incur any other expenditure. The assessee had no role to play in carrying on of hotel business after it was given to IHC under the aforesaid agreement. He invited our attention towards judgment of the Hon’ble Delhi High Court in CIT vs. Super Fine Cables (P) Ltd. (1985) 154 ITR 532 (Del), with a view to convince that it is necessarily required that there should be a relationship of principal and agent so as to bring the income under the said agreement as assessable under the head ‘income from business’. It is also an admitted fact that the said agreement is not in the nature of joint venture for carrying on the business jointly by the appellant-company and IHC. He also placed reliance on judgment in G. R. Narasimier & Co. vs. CIT (1969) 73 ITR 257 (Mad). The learned Departmental Representative drew our attention to cl. 20 of the agreement in which it has been clearly agreed that the said agreement executed with IHC will not be construed as established or creating a relationship of partnership, principal and agent, master and servant, lessor 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(A). He further invited our attention towards cl. 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 Departmental Representative 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 cl. 5.1 with a view to show that IHC shall be entitled to utilise the services in respect of supply of electricity, water, gas, licence-fee and other items referred to in cl. 5.1 of the said agreement. In cl. 6.2 it has been agreed that the assets brought in by IHC during the agreement period shall be the property and belonged to IHC for the duration of the said agreement. The IHC was authorised to renovate, alter, modernise, upgrade or expand by putting up such permanent construction and structure as may be necessary or expedient at its cost in the said hotel. This clause gives permission to IHC to make necessary renovation, alteration, modernisation, upgradation or expansion of the said hotel or any asset created in this process. The learned Departmental Representative invited our attention towards cl. 8.1 (n) at page 11 of the paper-book. This clause permits IHC to give on licence or sub-licence use of any area in the shape of arcade or commercial space of the said hotel, with the prior written approval of JMHL in respect of each case. It has also been clarified in the said clause that JMHL shall not unreasonably withhold such permission/approval. Clause 8.1(o) further provides that IHC agreed to provide free of cost air-conditioning office space not exceeding 625 sq. ft. for use by JMHL. The learned counsel submitted that this clause conclusively prove that the possession of the entire building was handed over to IHC and JMHL could use only the air-conditioning office as prescribed in cl. (o). Clause 9(f) of the said agreement provides that IHC shall have full right and absolute authority to run and operate the hotel in implementation of this agreement without any interference of whatsoever nature by JMHL. Clause 13 authorises IHC to directly or indirectly assign or transfer the interest or the benefit of this agreement to any company/companies associated with it, after obtaining prior written approval of the JMHL. The learned Departmental Representative on the strength of these clauses in the agreement submitted that the appellant-company had no right to interfere in the business of hotel carried on by IHC under the said agreement. It was pure and simple case of giving property on lease. The rental income derived under the said agreement was, therefore, assessable as income from other sources and it cannot be regarded as income chargeable to tax under the head ‘profits and gains of business’.
11. In the rejoinder the learned counsel for the assessee submitted that the facts of the judgment of the Hon’ble Delhi High Court reported as CIT vs. Super Fine Cables (P) Ltd. (supra) are clearly distinguishable. In that case the building and plant was let out which was held to be covered within the ambit of s. 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 emerge as a result of a careful study of the various judgment cited by the learned representatives of the parties and on the basis of a plain reading of the relevant provisions of law :
(a) That the term “business” as defined in s. 2(13) are of very wide import and it must be construed in a broad rather than in a restrictive sense. Such a view is clearly fortified by the provisions contained in s. 2(13) as well as the judgments reported in Mazagaon Dock Ltd. vs. CIT (supra), CIT vs. A. Dharma Reddy (Decd) (1969) 73 ITR 751 (SC), CIT vs. Calcutta National Bank Ltd. (supra) and CEPT vs. Shri Lakshmi Silk Mill Ltd. (supra).
(b) The distinct heads of income specified in s. 14 of the Act are mutually exclusive. The income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. If the income from a source falls within the specific head set out in s. 14, the fact that it may indirectly be covered by another head will not make the income chargeable under the latter head.
(c) A commercial asset can be exploited in many ways. So long as a commercial asset is exploited as such and profits and gains earned from it, the same are profits and gains of a business. In order to decide whether income arising due to exploitation of commercial assets would be assessable as income from business or as income from other sources one will have to examine the terms of agreement by which the commercial asset was exploited by letting out the same to others. For this purpose it will have to be ascertained whether the business of the assessee was entirely closed or the letting out of the commercial asset for a temporary period was made for profitable mode of exploitation of the said commercial assets. The intention of the parties, either expressed or gathered from the circumstances may provide a guiding test in the matter. If in giving commercial assets of a business by way of a licence to other party, the intention of the licensor-owner is to go out of the business altogether, it will not be assessable as income from business. But if the intention of the licensor-owner is to continue in the said business, the income would be assessable as income from business. Whether a particular letting is business has to be decided on the facts and circumstances of each case. Each case has to be looked at from the businessman’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 judgment 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 assessment orders of the said firm submitted in the compilation shows that the said firm had suffered a loss of Rs. 18,000 in asst. yr. 1982-83 and loss of Rs. 38,250 in asst. yr. 1983-84. The preamble of the agreement executed between the appellant-company and IHC reveals that IHC possessed expertised resources and infrastructure, covering, inter alia, highly developed technology in the field of hotel-tourists understanding, the need of Indian and foreign tourist and travellers and meeting them through specialised techniques particularly in the context of hotel business and other hotel related services.
16. A careful scrutiny of various clauses of the said agreement executed between the appellant-company and IHC reveals that the said agreement was executed with the predominant motive of exploiting the hotel building and its fixtures in a more profitable, organised and a systematic manner. It is well-known that IHC is a company owning all the Taj groups of hotels and they have a long experience and expertise in carrying on the business of hotels. They are fully conversant with the modern technology and specialised skill required for running and managing five star hotels. The agreement in question was made effective from June, 1984. The period of this agreement was 60 years commencing from the appointed date which was 2nd June, 1984. For the first 5 years the appellant-company was entitled to minimum guaranteed business profits of Rs. 35 lakhs i.e. Rs. 7 lakhs per annum. Thereafter the minimum guaranteed business profits was agreed to the increased periodically from Rs. 10 lakhs per annum to Rs. 55 lakhs per annum as stipulated in cl. 3.4 of the said agreement. The assessee was entitled to 1 per cent share in the gross operating profits of the aforestated minimum guaranteed business profits whichever is higher as per the aforesaid clause. It is evident from the aforesaid clause that the appellant-company while ensuring minimum guaranteed business profits had also retained the right to receive 1 per cent share in the gross operating profit, if it is more than the minimum guaranteed business profit. The termination clauses authorises the appellant-company to terminate this agreement by giving 30 days notice of termination in a situation prescribed under cl. 14.1. The said agreement also provides that on the expiry of this agreement by efflux of time, the entire property including the immovable assets, fixed assets including electrical wiring, water services, sanitary fittings, all fittings attached to the building etc. introduced by the IHC will revert back to JMHL automatically without payment of any compensation whatsoever to IHC. These clauses indicate that the appellant company entered into a long-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 reference of various clauses of memorandum of association has already been given in earlier parts of this order which shows that the company was entitled to carry on the business of running a hotel in any manner including by entering into any kind of arrangement or agreement with any other firm or company engaged in this line of business.
18. It is evident from the aforesaid discussions that in the instant case, the intention of the assessee was never to go out of hotel business but the company had all the intentions to very much continue the business. The intention of entering into the contract with IHC was that the offer given by IHC was found to be more lucrative and profitable. The company as a prudent businessman thought that by entering into such an agreement with IHC for a long term, it will ensure minimum guaranteed business profits as well as it will be entitled to retain 1 per cent share in the operating gross profit, whichever is higher. The past experience of running a hotel by the erstwhile firm was not a happy experience. The firm incurred loss by running the hotel in those very premises. The company by entering into the said agreement not only obviated the possibility sustaining loss in the future but it ensured the minimum guaranteed business profit for the entire duration of the said agreement. Apart from this the IHC had undertaken to make various improvements, add furniture and fixtures, incur substantial expenditure for beautifying the hotel keeping in view the need of the tourists. All such fittings and fixtures made in the hotel building will revert back to the appellant-company at the time of termination of the contract. This aspect was also one of the considerations on account of which a long-term licence was granted to IHC. Such clauses in the aforesaid agreement and the material brought on record clearly show that the assessee never abandoned the whole idea of conducting the hotel business on its own. On the other hand, the termination clause clearly indicate that in case IHC does not implement the various terms of the agreement, the appellant-company will be entitled to terminate the said agreement and will be able to run the hotel at its own.
19. Considering the totality of the facts and circumstances we are clearly of the opinion that the income derived by the assessee by way of licence-fee received from IHC is assessable to tax under the head ‘profits and gains of business’ and not under the head ‘income from other sources’. The order passed by the CIT(A) as well as by the ITO taking such a view are, therefore, set aside. The AO 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(A) 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 Tribunal, Delhi Bench ‘A’ in the case of Ram Bagh Palace Hotel (P) Ltd. vs. ITO, ITA Nos. 3&4/83 and 988/84 dt. 3rd April, 1986 (copy placed at pp. 66 to 74 of the paper-book);
(ii) Decision of Tribunal, ‘D’ Bench, Delhi in the case of Rambagh Palace Hotel (P) Ltd. in ITA Nos. 3011 and 3012 (Del) 91 for asst. yr. 1987-88 (copy placed at pp. 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. vs. CIT (1995) 216 ITR 145 (Cal).
20.2 The learned counsel submitted that the Hon’ble Calcutta High Court in the aforesaid case has held that the hotel building was to be treated as ‘plant’ for the purpose of depreciation under s. 32. The assessee was held entitled to depreciation and extra shift allowance in respect of the same. He submitted that the aforesaid judgment of the Hon’ble Calcutta High Court has been approved by the Hon’ble Supreme Court in the recent judgment in the case of East India Hotel Ltd. vs. CIT. The learned counsel also submitted that there is no contrary judgment of any other High Court on this point. At this stage the Bench informed the learned counsel for the assessee that the Hon’ble Rajasthan High Court in a recent case of Lake Palace Hotels & Motels (P) Ltd. has taken a contrary view. Since the hotel belonging to the assessee is located in Rajasthan, why the judgment of the Hon’ble Rajasthan High Court should not be applied as that would be a binding judgment for persons deriving income in the State of Rajasthan.
20.3 The learned counsel in reply submitted that since the assessee is assessed to tax in Delhi, the judgment of the Hon’ble Rajasthan High Court cannot be regarded as a binding judgment of the jurisdictional High Court. The jurisdiction over the assessee’s case is with the IT authorities of Delhi and, therefore, the ratio of the Calcutta High Court judgment which has been approved by the Hon’ble Supreme Court should be followed.
20.4 The learned counsel also submitted that there are various other judgments where cinema building, nursing home building and such other buildings which form part of the apparatus of their business have been held to be plant for purposes of grant of depreciation, etc. He placed reliance on judgment reported in R. C. Chemical Industries vs. CIT (1982) 134 ITR 330 (Del), CIT vs. Taj Mahal Hotel (1971) 82 ITR 44 (SC); Santosh Enterprises vs. CIT (1993) 200 ITR 353 (Kar), CIT vs. Dr. B. Venkata Rao (1993) 202 ITR 303 (Kar), CIT vs. Motor & Central Sales Ltd. (1995) 212 ITR 58 (St.); M. Mani vs. Asstt. CIT (1995) 51 TTJ (Coch) 373, CIT vs. Mazagaon Duck Ltd. (1994) 206 ITR 260 (Bom) and CIT vs. R. G. Ispat Ltd. (1994) 210 ITR 1018 (Raj). The learned counsel thus strongly urged that the assessee’s contention should be accepted.
21. The learned Departmental Representative submitted that a contrary view has also been taken by the Hon’ble Bombay High Court in the judgment reported in Fariyas Hotels (P) Ltd. vs. CIT (1995) 211 ITR 390 (Bom) and CIT vs. Berry’s Hotels (P) Ltd. (1994) 207 ITR 615 (Bom). 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 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 Estate (P) Ltd. (supra) squarely supports 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. (supra). The judgment of the Hon’ble Calcutta High Court has been referred to in the aforesaid judgment delivered by the Hon’ble apex Court in East India Hotels Ltd. (supra). 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’ble Supreme Court did not deal with the question as to whether hotel building should be treated as plant for the purposes of grant of depreciation. It only considered that the question as to whether the assessee who is running hotel is entitled to extra shift allowance and whether such an approved hotel is entitled to extra shift allowance in addition to extra shift allowance on the cost/WDV of plant and machinery installed in a hotel. It cannot, therefore, be said that the judgment of Hon’ble Calcutta High Court so far as it relates to the question as to whether a hotel building can be treated as a plant was approved by the Hon’ble Supreme Court.
23. It is an undisputed fact that the hotel belonged to the assessee is located at Jaipur (Rajasthan). A perusal of the assessment order made in the case of the assessee for all the years under consideration also reveals that a major part of the assessee’s income consisted of licence-fee received from IHC. The other income consists of interest income from banks etc. Thus there is no other business activity of the company except in the State of Rajasthan. Merely because the company is assessed to tax at Delhi, it cannot be held entitled to a benefit, which is denied to other hotels located in the State of Rajasthan in view of the judgment of the Hon’ble Rajasthan High Court. We are, therefore, of the opinion that the judgment of the Hon’ble Rajasthan High Court in the case of CIT vs. Lake Palace Hotels & Motels (P) Ltd. (supra), should be applied in the present case also.
24. The Hon’ble Rajasthan High Court in the aforesaid judgment has held as under :
“41. Hotel business is a business in which the building is one of the components besides the other facilities like food, air-conditioning, etc. The building itself is of different uses like rooms for stay, conference hall, kitchen, etc. The hotels are also of different categories. The facility in the hotels differs according to the star mark given to them. The facility of comfortable stay is also provided by guest houses, house hotels, inn, Sarai, etc. The building which is used in the business of hotel remains a building in spite of the fact that it is decorated by plaster of paris, timber work, etc. The skeleton of building without decoration if is building then the items by which it is decorated would not change the character of building. The item may, however, be considered as 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 intent clear what the different type of buildings remains as building. The amendment of s. 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 buildings. 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 provided by him by way of service rendered and not by providing the room alone it could be considered as a tool of the trade. The hotel industry is a service oriented industry and better the service higher the charges, the element of service is the dominant object, and not providing the room alone. The room rent in a city like Jaipur differs from hotel to hotel. The ordinary rooms may be available at Rs. 100 per day where the suit in five star hotel may be as costly as Rs. 10,000 per day. If the building of five star hotel is a plant there is no reason why the building of an ordinary hotel should be treated differently only on account of the charges on extra facilities. The difference of charges are because of extra services, facilities etc. provided and the role of the building in two type of hotels remains same, and same time even the better services are provided in number of guest houses. Looking to the common parlance meaning and the specific use of the word ‘building’ in s. 32 of IT Act, we are of the view that the building of hotel is a ‘building’.”
25. In view of the aforesaid judgment of the Hon’ble Rajasthan High Court, which in our view, should be preferred on the facts and circumstances of the present case, we are of the opinion that the CIT(A) has rightly rejected the assessee’s claim for grant of depreciation on hotel building by treating the same as plant. Hence such a common ground raised by the assessee in all these appeals is rejected.
26. In the result, all the appeals are partly allowed.