Rent received by a ‘licensee’ is ‘Business Income’, not taxable under the head ‘Income form House Property’: ITAT Kolkata [Read Order]

The Kolkata bench of the Income Tax Appellate Tribunal in a recent decision ruled that the rental income earned by a licencee is chargeable under the head ‘business income’.

The Tribunal further made a clear distinction between the terms ‘lease’ and ‘license’ and held that a ‘licensee’ is not a deemed owner for the purpose of determining liability under the head ‘income from house property.’

The factual settings of the case are that, the assessee-company entered into an agreement with another company to acquire licence on a building for 50 years with an aim to set up a shopping mall. The shopping spaces of the mall were further subscribed to various parties on monthly subscription. Apart from these the assessee also provided certain infrastructure facilities such as electricity, air-conditioning, telephone services, maintenance, water etc.for which they received consideration based on the bills. The assessee categorized the income received by them as consideration for subscribing the shopping spaces under the head ‘business income’. Further, the claimed deduction in respect of the amount paid as ‘licence fee’ to the licencor-company by treating the same as expenditure. However, the Assessing Officer, rejected the claims by treating the above income as ‘income from house property’ under section 22 of the Act. He further, relied upon the decision in CIT – vs. – Poddar Cement Ltd.226 ITR 625 in this regard.

Before the CIT(A), the assessee contended that section 22 is not applicable since they are not an owner or a deemed owner in respect of the said property. However, the CIT(A) concluded the appeal by confirming the impugned order. Therefore, the assessee filed a second appeal before the Tribunal.

Thequestion to be decide by the Tribunal was whether the assessee is a ‘lessee’ or a ‘licensee’ in the in the instant case. While analyzing the terms ‘lease’ and ‘licence’ in the light of the relevant provisions of the Transfer of Property Act, 1882 the Tribunal observed that ‘Lease is a transfer of interest, but licence is not. Generally Lease can be assigned, but a licence generally cannot be assigned. A lease being a proprietary right is a transferable interest. Licence the other hand cannot be transferred by virtue of it being a personal right. However, there exist certain exceptions such as movie tickets. A Lessee is required to have exclusive possession of the property for its proper enjoyment. But, a licence is created without transfer of possession. A Licensee is required to share the possession with the grantor (who is still the owner) and has not parted with the interest.’

The Tribunal further pointed out that the tests laid down by the Supreme Court in the case, Associated Hotels of India Ltd. v. R. N. Kapoor, as to distinguish between a ‘lease’ and ‘license’ is applicable in the instant case. While observing so it was observed that “Applying the above tests to the facts of the present case, especially in the light of clause-2 and 7 of the leave and license agreement, we have no hesitation in coming to the conclusion that on the facts of the present case the assessee was only licencee of the premises owned by M/s. East India Hotels Ltd., and the parties intended it to be license and the agreement did not create an interest in the property owned by the licensor and that the licensee did not have exclusive possession of the property. As a licensee it had granted sub-licence to various parties and derived income there from. Once we come to the conclusion that the Assessee is only a licencee, then it can safely be said that the provisions of Sec.22 read with Sec.27(iiib) of the Act are not attracted and hence the income in question cannot be assessed under the head ‘Income from House Property”.

Read the full text of the order below.