Delhi HC brings “Hotel Industries” under the ambit of S. 194-I of the Income Tax Act, 1961 [DOWNLOAD JUDGMENT]

ED’s - Rajiv Saxena - Agustawestland- Delhi High Court - Taxscan

The High Court of Delhi, in a path-breaking judgment, held that S. 194-I of the Income Tax Act applies to hotel industries also. The Bench consists of S. Muralidhar.J and VibhuBakhru.J expressed a view that the charges for a room in a hotel is “rent” according to the provision and therefore, section 194-I covers the rent received by the hotel industries.

The petitioners in the instant case, APEEJAY Surendra Park Hotels Ltd and Federation of Hotel and Restaurent Association of India are running hotel industries in the country.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 operators informed the hotels that they would be deducting TDS @ 20% for the year 1998-99 from the payments made to the hotels wherever the payments had crossed the limit of Rs. 1.20 lakhs in any financial year.The Petitioners stated that by an administrative letter of the DCIT, a tax liability was being imposed on foreign guests in a hotel. It was accordingly contended that the Department was enlarging the scope of Section 194-I and that this was legally impermissible. Further, a distinction 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.

In the meanwhile, similar writ petitions were filed in the High Court of Madras challenging the applicability of Section 194-I of the Act to payments being made by the companies for hotel industries stay of their employees or others authorized by them. The aforesaid writ petitions 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 beimplemented. The Madras High Court in this case made it clear that the payment made to the hotel for hotel accommodation, whether in the nature of lease or license, was covered within the meaning of ‘rent’, so long such an accommodation was taken on regular basis. It was further clarified that wherein the agreement was in the nature of ‘rate contract’, it could not be said to be accommodation taken on regular basis.

the petitioners approached the High Court of Delhi alleging that while issuing the above circular the CBDT overlooked the definition of ‘rent’ and that it had erroneously classified ‘rent’ 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.

They further submitted that the definition of ‘rent’ in the Explanation to Section 194-I of the Act specifically states that it must be a payment under any ‘lease or sub-lease or tenancy’ or ‘any other similar agreement’ with the hoteliers. However, in issuing the impugned circulars the Department has overlooked the above definition and haserroneously classified ‘rent’ into rate charged and accommodation taken on regular basis.

It was further argued by the petitioners that 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.

It was also stated that the charges for a room in the 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.”

All these contentions were rejected by the Court and it was observed by the Court that 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 or plant or equipment or furniture or fittings. Merely because the room charges might also comprise charges for the facilities provided would not take it out of the ambit of ‘rent’ in terms of Section 194-I of the Act.

The Court further upheld the validity of the Circulars which were challenged by the petitioners since these notifications helps to clarify the scope and ambit of section 194-I. it was further opined by the Court that the question whether the payment made by the customers to the hotel includes any payment that can be said to be outside the ambit of ‘rent’ as defined under Section 194-I of the Act is very much depends on the facts and circumstances of the case.

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