APEEJAY SURRENDERA PARK HOTELS LTD. AND ANR vs. UNION OF INDIA & ORS

$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI

+ W.P.(C) 1924/1999

Reserved on: February 17, 2016
Decision on: March 23, 2016

APEEJAY SURRENDERA PARK HOTELS
LTD. AND ANR ..... Petitioners
Through Mr Lalit Bhasin, Advocate with
Ms Ratna Dwivedi Dhingra and Ms Bhavna
Dhami, Advocates.

versus

UNION OF INDIA & ORS ..... Respondents
Through Mr Ashok Manchanda, Senior
Standing Counsel with Ms Vibhooti Malhotra,
Junior Standing Counsel and Mr Amino Aziz,
Advocate.

AND

+ W.P.(C) 2130/1999

FEDERATION OF HOTEL AND RESTAURANT
ASSOCIATIONS OF INDIA AND ORS ..... Petitioners
Through Mr Lalit Bhasin, Advocate with
Ms Ratna Dwivedi Dhingra and Ms Bhavna
Dhami, Advocates.

versus

UNION OF INDIA & ORS ..... Respondents
Through: Mr. Rahul Chaudhary with
Mr. Raghvendra Singh and Mr. Zoheb Hossain,
Advocates.

CORAM:
JUSTICE S.MURALIDHAR
JUSTICE VIBHU BAKHRU


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 1 of 32




J U D G M E N T
% 23.03.2016

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, according to them, not ‘rent’ in terms of
Explanation to Section 194-I of the Act.

Profile of the petitioners
2. Writ Petition (Civil) No. 1924 of 1999 is by M/s Apeejay – Surrendera
Park Hotels Limited (‘ASPHL’), Petitioner No. 1 and Ms. Priya Paul,
shareholder of Petitioner No. 1. ASPHL is a public limited company
which runs a five star hotel in New Delhi by the name 'Park Hotel'.
ASPHL offers a number of facilities and amenities to its guests. It is
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.”

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 Limited (‘AHL’) (Petitioner No. 2) and Mr. Sushil Gupta,
(Petitioner No. 3) who is the Managing Director (‘MD’) and a
shareholder of AHL. FHRAI is stated to be an apex body of hotels and
restaurants in India and formed to protect their interests.


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 2 of 32





Section 194-I as enacted and at present
st
4. Section 194-I of the Act was inserted with effect from 1 June 1994.
The said provision, as it existed at the time of the filing of these petitions,
reads as under:
194 - I. "Any person, not being an individual 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 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 purpose of this section, -
(i) "rent" means any payment, by whatever name called, under
any lease, sublease, 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


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 3 of 32



the payee and the provisions of this section shall apply
accordingly."

5. It is necessary to note that the definition of 'rent' in Section 194-I of the
Act has since undergone a change. It now reads as under:
“194-I. Any person, not being an individual or a Hindu
undivided family, who is responsible for paying to a resident
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) 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 or paid during the financial year by the
aforesaid person to the account of, or to, the payee, does not
exceed one hundred and eighty thousand rupees:

Provided further that an individual or a Hindu undivided
family, whose total sales, gross receipts or turnover from the
business or profession carried on by him exceed the monetary
limits specified under clause (a) or clause (b) of section 44AB
during the financial year immediately preceding the financial
year in which such income by way of rent is 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.



W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 4 of 32



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 (either separately or together) any,—
(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory
building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings,
whether or not any or all of the above are 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.”

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’) issued Circular No. 715
of 1995 which inter alia provided the following clarification:
“Question 20: Whether payments made to a hotel for rooms
hired during the year would be of the nature of rent?

Answer: Payments made by person other than individuals and
HUF's for hotel accommodation taken on regular basis will be
in the nature of rent subject to TDS under Section 194- I.”

Initial challenge to Section 194-I
8. East India Hotels Limited (‘EIHL’) challenged the applicability of


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 5 of 32



Section 194-I of the Act to hotels by filing Writ Petition No. 105 of 1995
nd
in the High Court of Bombay. By an order dated 2 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
st
of the hotels of EIHL in Bangalore, Calcutta and Mumbai on 21 August
th st
1995, 6 June 1996 and 21 March 1997 respectively stating that no
instruction were issued to its clients to deduct the tax at source and that
the clients need not be deduct tax at source as regards payment of room
rent to the hotel under Section 194-I of the Act in view of the stay granted
by the Bombay High Court.

9. Meanwhile, the tour operators and travel agents sought clarifications
from the Department in respect of deduction of tax at source on payments
being made to the hotels on behalf of the clients. This request, which was
also made by the members of FHRAI, was declined by a letter issued by
th th
the Director, CBDT on 19 /20 June 1997.

The present petitions
10. The immediate provocation for the filing the present writ petitions
th
was a Circular No. DEL/056/99 dated 12 March 1999 received from
nd
Indian Association of Tour Operators along with a copy of letter dated 2
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.


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 6 of 32




11. 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.

th
12. Writ Petition (Civil) No. 2130 of 1999 was listed on 12 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
are running their hotels with proper authorization.”

th
13. On 15 April 1999 Writ Petition (Civil) No. 1924 of 1999 by ASPHL
was listed. While directing notice to issue in this writ petition a similar
interim order was passed.

14. 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 stay of their employees
or others authorized by them. The aforesaid writ petitions were disposed
rd
of an order dated 23 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


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 7 of 32



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
th
dated 30 July 2002 clarifying 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.

16. The Petitioners contended 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
th
Circular No. 5 of 2002 dated 30 July 2002 issued by the CBDT. The
nd
amendments were allowed by this Court by its order dated 22 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 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 has


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 8 of 32



erroneously classified ‘rent’ into rate charged and accommodation
taken on regular basis.
(ii) The occupant of a room in a hotel, whether a foreigner or an
Indian, is not a tenant as explained by the Supreme Court in
Associated Hotels 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
defined in Stroud’s Judicial Dictionary of Words and Phrases
(Fourth Edition) which states that the word 'other' “always implies
something additional” and that “where general words follow
particular ones, the rule is to construe them as applicable to persons
ejusdem generis”.
(iv) The room tariff is a composite charge which comprises all the
facilities and amenities provided to the guest. It would include the
charges for water, electricity, air conditioning, telephone facilities,
it has to provide, 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


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 9 of 32



India Caters (India) Ltd. v. Lt. Governor of Delhi (1979) 1 SCR
557, Hotel and Restaurants Association v. Star India (P) Limited
2006 (12) SCALE 543 and The Federation of Hotels &
Restaurants Association of India v. Union of India AIR 2007 Del
137 .
(v) An analogy is sought to be drawn with the definition of 'landing
charges' collected at airports which was interpreted in Japan
Airlines Company Limited v. Commissioner of Income Tax
(2015) 377 ITR 372 (SC) as including charges for landing and
take-off services as well as parking of aircrafts 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 the individuals themselves or from
travel agents and tour operators or corporate bodies, did not change
nature of use of the hotel room. Likewise whether the room is used
for one or several days would not make any difference to the nature
of the use and the amount charged for such use. In other words, the
expression ‘regular basis’ did not change the essence of the
transaction. The payment by travel agents or tour operators on a
consolidated basis on behalf of all the individual guests who
occupy 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


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 10 of 32



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 making such payment directly. Apart from making an
irrational and unreasonable classification, it is urged that it imposes an
unreasonable restriction of the right to carry on business under Article 19
(1) (g) of the Constitution, It has further been urged in the grounds in the
writ petitions that Section 194-I equates room charges with rent when
plainly room charges were not restricted to use of the space in the room
but was a composite charge for a host of amenities and facilities
provided, and 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 Malhotra, Mr. Raghvendra Singh and Mr.
Zoheb Hossain who submitted as under:
(i) It is not understood why the hotels would have any objection to
the circulars as they could not be said to be prejudiced by them. In
any event there was no challenge to the circulars insofar as it
mandated deduction of TDS from the room charges where the
giving of a room on hire was on regular basis.
th
(ii) Further the challenge to the circular dated 8 August 1995 was


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 11 of 32



made only after four years in 1999 and therefore the 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 decisions in State
of Punjab v. British India Corporation Limited AIR 1963 SC
1459 and Smt. Rajbir Kaur v. S. Chokasiri & Co. AIR 1988 SC
1845.
(iii) Relying on the decision in Indus Towers Limited v.
Commissioner of Income Tax (2014) 364 ITR 114 (Del) it was
urged that the Explanation to Section 194-I which defined ‘rent’
was 'determinative'. It meant ‘any payment’ by whatever name
called. Referring to the decision in Bharat Sanchar Nigam
Limited v. Union of India (2006) 3 SCC 1 it was submitted 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
Income Tax, West Bengal (1999) 4 SCC 599 . It was contended
that concepts which may be relevant for a particular statute may


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 12 of 32



not be ipso facto be relevant in interpreting the word ‘rent’ in
Section 194-I of the Act. The decision in Union of India v. Motilal
Padampat Sugar Mills 1969 (1) SCC 320 was referred to urge that
the word ‘any other’ preceding the words ‘agreement or
arrangement’ had to interpreted in the widest possible manner

Laches
20. On the issue of laches this Court would like to observe that 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
st
writ petitions were disposed of as withdrawn by orders dated 21 March
th
2009 in Writ Petition (Civil) No. 1917 of 1995 and 24 March 2009 in
Writ Petition (Civil)_ No. 105 of 1995.

21. Further, till such time, the tour operators were not asked by the
nd
Department by its letter dated 2 February 1999 requiring them to deduct
the TDS on the payments made to the hotels for the bookings made by the
individuals/clients, there was no reason for the members of the FHRAI to
have any grievance. In fact pursuant 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


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 13 of 32



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 writ petitions are barred
by laches.

Interpreting the word 'rent'
23. The central issue as far as the present writ petitions are concerned is
regarding the interpretation of the word ‘rent’ occurring in Section 194-I
of the Act. With the petitions having been amended in 2005, the
challenge is to even the amended Section 194-I as it presently stands.

24. At the outset it requires to be noticed that Explanation to Section 194-
I of the Act, as it stands, gives an exhaustive definition of the word ‘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
agreement’ is dispositive of the express legislative intent of giving the
latter words the widest scope. As far as the main body of Section 194-I of
the Act is concerned, it declares that any person who makes payment, not
being an individual or Hindu undivided Family (‘HUF’), by way of rent
has to deduct TDS. Significantly therefore, when such payment is made
by an individual or a HUF, no TDS is expected to be deducted from such


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 14 of 32



payment. The deduction of TDS from the payment, either at the time of
credit 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 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.

Discussion of case law
27. The Court next proceeds to discuss the decisions cited by Mr. Bhasin
in support of his submissions.

28.1 In Associated Hotels of India Limited v. R.N. Kapoor ( supra ) the
question as to what constitutes ‘rent’ arose under the Delhi and Ajmer-
Merwara Rent Control 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 Rs. 9,600 in four quarterly
instalments. Later by a mutual agreement, this was reduced to Rs. 8,400.
On an application made by the Respondent for standardization of rent


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 15 of 32



under Section 7 (1) of DAMRCA, the Rent Controller of Delhi fixed the
rent at Rs. 94 per month.

28.2 On appeal by the Appellant, the order of the District Judge reversing
the order of the Rent Controller was set aside by the High Court. It was
held that the agreement created a lease or not a license and that Section 2
(b) of DAMRCA did not exempt the two rooms from the operation of the
DAMRCA. The order of the Rent Controller was, therefore, restored. 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 dharamshala, hotel or lodging house. It was in this context the Court
was called upon to answer the question “what is the meaning of the
expression ‘a room in a, hotel.’?

28.3 The Court re-formulated that question by observing, as under:
“If a strictly literal construction is adopted, then a room in a
hotel or dharamshala or lodging house means merely that the
room is within, and part of, the building which is used as a
hotel, dharamshala or lodging house. There may be a case
where the entire building 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


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 16 of 32

( supra ) then examined the purpose of use of the space in the hotel which
was given on rent. It was stated that the “expression ‘room’ in the
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 the hair dresser
would not alter the position that it was still an amenity for the residents in
the hotel. Accordingly, it was held that two rooms which were given on
hire did not fall within the meaning of 'premises' in Section 2 (b) of
DAMRCA and therefore, the Respondent was not entitled to ask for the
standardization of the rent.

29. The Court does not agree with Mr. Bhasin that on the strength of the
above decision in Associated Hotels of India Limited v. R.N. Kapoor
( supra ), the word ‘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


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 17 of 32



certainly does not exclude the payment received by a hotel for use by a
customer of a room therein. The decision in Associated Hotels of India
Limited v. R.N. Kapoor ( supra ), therefore, does not help the case of the
Petitioners.

30.1 Turning to the next decision in State of Punjab v. M/s. Associated
Hotels of India Limited ( supra ), it is seen that the question that arose in
that case was whether the hotels were liable to pay sales tax in respect of
meals served to the guests coming there for stay in hotels. It was stated
that the bill raised on the customers was 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 The Supreme Court held that “in considering whether a transaction
falls within the purview of sale tax, it becomes necessary at the threshold
to determine the nature of the contract involved in such a transaction for
the purpose of ascertaining whether it constitutes a contract of sale or a
contract of work or service. If it is of the latter kind it obviously would
not attract the tax.” It was clarified that “mere passing of property in an
article or commodity during the course of the performance of the
transaction in question does not render it a transaction of sale.” It was


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 18 of 32



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 transaction essentially is one of service by the hotelier
in the performance of which meals are served as part of, and incidental to
that service, such amenities being regarded as essential in all well
conducted modern hotels.” It was therefore held that the Revenue was not
entitled to split up the transaction into two parts, one of service and the
other of sale of food stuffs and to split up also the bill charged by the
hotelier as consisting of charges for lodging and charges for food stuffs
served 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 transaction into two parts.

The legal position after the 46th Amendment
32.1 It requires to be noticed at this stage that the above legal position
was overturned by the 46th amendment to the Constitution by which
Article 366 (29A) was introduced. The effect of this change was


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 19 of 32



explained by the Supreme Court in Bharat Sanchar Nigam Limited v.
Union of India ( supra ) . In terms of Article 366 (29A) of the
Constitution, tax on the sale or purchase of goods includes “tax on the
supply, by way of or as part of 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 referring to the decision in Associated Cement Companies
Limited v. Commissioner of Customs (2001) 4 SCC 593, the Supreme
Court in Bharat Sanchar Nigam Limited v. Union of India ( supra )
conclusively held:
“49. .... After the Forty-sixth Amendment, the sale element of
those contracts which are covered by the six sub-clauses of
clause (29A) of Article 366 are separable and may be subjected
to sales tax by the States under Entry 54 of List II and there is
no question of the dominant nature test applying. 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 ( supra ) further observed:
“50. What are the "goods" in a sales transaction, therefore,


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 20 of 32



remains primarily a matter of contract and intention. The seller
and such purchaser would have to be ad idem as to the subject
matter of sale or purchase. The Court would have to arrive at
the conclusion as to what the parties had intended when they
entered into a particular transaction of sale, as being the subject
matter of sale or purchase. In arriving at a conclusion the Court
would have to approach 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 which it occurs, need not be
circumscribed by what is the dominant feature of the underlying
transaction, be it a lease, a tenancy, a sub-lease or any other 'agreement or
arrangement'

Contextual interpretation
34. Contextual interpretation has been favoured by the Courts when the
question arose as regards the meaning to be attributed to particular words.
For e.g., in Union of India v. Motilal Padampat Sugar Mills Co. (P)
Limited ( supra ), in the context of Section 41 (1) (c) of the Indian
Railways 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


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 21 of 32



construed to be an article or thing. In this context it was observed as
under:
“Neither the word 'produce' nor the word 'Article' has been
defined in the Act. When the word is not so defined in the Act it
may be permissible to refer to dictionary to find out the
meaning of that word as it is understood in the common
parlance. But where the dictionary gives divergent or more than
one meaning of a word, in that case it is not safe to construe the
said word according to the suggested dictionary meaning of 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 whether the payment received from the
employees of the Respondent company on leave and license, was liable to
be taxed under the Punjab Urban Immovable Property Tax Act 1940. The
specific question was whether such payment was 'rent' within the
meaning of the Rule 18(4) (ii) of the Punjab Urban Immovable Property
Tax Rules, 1941. IN answering the question in the negative, the Supreme
Court held:

36. In Rajbir Kaur v. S. Chokesiri and Co. ( supra ) it was held that the


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 22 of 32



question whether a transaction is a lease or licence had to be determined
keep in view the "operative intention of the parties" rather than whether
there was exclusive possession handed over thereunder. The reason given
was:
"exclusive possession itself is not decisive in favour of a lease and
against a mere licence, for, even the grant of exclusive possession
might turn out to be only a licence and not a lease where the
grantor himself 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 in Krishna Oberoi v. Union of India ( supra ) which was called
upon to answer the very question that arises in these petitions. The Court
there was asked to give a declaration that "the charges paid/payable to the
petitioner-company by its customers on account of room charges are not
in the nature of rent within the meaning of Section 194-I of the Act." The
th
Court noted Circular dated 8 August 1995 which clarifies that Section
194-I would apply to payments made for accommodation taken 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" as
defined in the Explanation to Section 194-I. If TDS results in
hardship, financial burden on the recipient, the Parliament
itself has made provision in Section 197 f or obtaining


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 23 of 32



certificate for deduction at lower rate or no deduction of
Income Tax. Section 197 of the Income Tax Act relating to
certificate for deduction of Income Tax at lower rate or for no
deduction of Income Tax in appropriate cases has been
amended to include income by way of "rent" within the scope
of the said 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' occurring in Section 194-I, the Andhra
Pradesh High Court observed:

"the word "rent" in its wider sense may mean payment made
by a licensee also for the use of land or buildings and not
necessarily a payment made by a tenant or a lessee. If such a
wider meaning can be given to the word "rent", even in the
absence of definition of the word "rent" in a statute, we do not
find any weighty or sound reasons to limit the meaning of the
word "rent" occurring 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 the contention of Sri Kodandram, that die
relationship between the 1st petitioner and its corporate
customers is a kind of licence-arrangement and not a leasing-
arrangement as correct, the payment made by such licensees
could validly be treated as "rent" within the meaning of that
term for the purpose of Section 194-I. There is no controversy
that the payments have to be made by the corporate customers
of the 1st petitioner under agreements entered into between
them and for the use of the building owned by the 1st
petitioner. Therefore, the consideration paid to the 1st


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 24 of 32



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 has to be decided is whether the
activity, i.e. provision of passive infrastructure by Indus to the
mobile operator constitutes renting within the extended definition
under Explanation to Section 194-I or whether the activity is
service, pure and simple without any element of hiring or letting
out of premises. The assessee urges that there is no intention to
rent or lease the premises or facilities or equipment and what is
contemplated by the parties is a service; the revenue contends that
the use 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 covered. The Parliamentary intent was
clear that transactions - the consideration for which otherwise may
not be covered by rent - also ought to be within Section 194-I, by
use of the expression "other ... arrangement for the use". Whilst
there is no doubt that the intention of the parties in the present case
was to ensure that the use of technical and specialized equipment
maintained by Indus should be resorted to; at the same time, there
is no escape from the fact that the infrastructure 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.


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 25 of 32



Yet leases or such like arrangement had to be resorted to. That
situation has remained unchanged; now instead of the mobile
operator performing the task, it is done exclusively by Indus. The
dominant intention however, in these transactions - between Indus
and its customers - is the use of the equipment or plant or
machinery. The "operative intention" here, to borrow the phrase
from Rajbir Kaur (supra) , was the use of the equipment. The use
of the premises was incidental; in that sense there is 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 machinery, plant or equipment, i.e. the passive
infrastructure. That it is necessary to house these equipment in
some premises is entirely incidental."


Summation of the legal position re: ‘rent’ under Section 194-I

40. In view of the legal position explained in the above decisions, with
which the Court concurs, it holds as under:

(i) The word ‘rent’ in Section 194-I of the Act has to be interpreted
widely and not confined to payments received towards a ‘lease, sub-
lease or tenancy’ or transactions of 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


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 26 of 32



intent to accord the widest possible meaning to the payment received
as a result of any of the underlying transactions envisaged in that
provision.

(iii) After the 46th amendment to the Constitution which inserted
Article 366 (29A) the 'dominant purpose' test cannot form the sole
basis for determining whether the payment received as consideration
for the transfer of the right to use or enjoy a property is 'rent'. The
context in which the word has been used, the particular statute in
which it occurs and the 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, it must be noted at the outset that the
present petitions do not pertain to any particular assessment orders.
The question whether any part of the consideration charged for the
room by the hotel, includes payment for services that fall outside the
ambit of the term 'rent' as defined in the Explanation to Section 194-I
of the Act would depend of the facts of a particular case and the
specific terms of the 'agreement or arrangement' between the parties.

42. However, the Petitioners seek to question the constitutional


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 27 of 32



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 they are Indians or foreigners. Where
the payment on behalf of the foreigner is made by a tour operator,
such payment would fall within the ambit of Section 194-I and that is
a reasonable classification based on an intelligible differentia as to
the entity making payment. Section 194-1 obliges the person making
the payment, who is neither an individual nor an HUF, to deduct TDS
at the prescribed rates, deposit it under Rule 30 of Income Tax Rules,
1962 ('Rules') and issue TDS certificate to 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 the
above scheme of the Act renders Section 194-I either arbitrary or
unreasonable so as to attract Articles 14 or 19 (1) (g) of the
Constitution. The challenge to the constitutional validity of the said
provision must fail.

43. 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


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 28 of 32



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

The validity of the Circulars
44. Turning to the circulars in question, they cannot be said to have
expanded the scope of Section 194-I of the Act. As explained in UCO
Bank, Calcutta v. Commissioner of Income Tax, West Bengal ( supra ),
where the circulars are not adverse to an Assessee, they cannot be
considered as travelling 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.
th th
105 of 1995 dated 8 August 1995 or Circular No. 5 of 2002 dated 30
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
th
subsequent Circular dated 30 July 2002 was issued. Para 2 of the said
Circular clarifies the position as under:
“2. The Board have considered the matter. First, it needs to be
emphasised that the provisions of Section 194-I do not normally


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 29 of 32



cover any payment for rent made by an individual or HUF
except in cases where the total sales, gross receipts or turnover
from business and profession carried on by the individual or
HUF exceed the monetary limits specified under clause (a) or
clause (b) of Section 44AB. Where an employee or an
individual representing a company (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 name called, under any lease ........ or any other
agreement or arrangement for the use of any land.....”
(emphasis supplied). The meaning of ‘rent’ in Section 194-1 is
wide in its ambit and scope. For this reason, payment made to
hotels for hotel accommodation, whether in the nature of lease
or licence agreements are covered, so long as such
accommodation has been taken on ‘regular basis’. Where
earmarked rooms are let out for a specified rate and specified
period, they would be construed to be accommodation 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
tariffs of hotel rooms for their executives/guests/customers.
Such agreements, usually entered into for lower tariff rates, are
in the nature of rate-contract agreements. A rate-contract,
therefore, may be said to be a contract for providing specified
types of hotel rooms of pre-determined rates during an agreed
period. Where an agreement is merely in the nature of a rate
contract, it cannot be said to be accommodation ‘taken on


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 30 of 32



regular basis’, as there is no obligation on the part of the hotel
to provide a room or specified set of rooms. The occupancy in
such cases would be occasional or casual. In other words, a
rate-contract is different for this reason from other agreements,
where rooms are taken on regular basis. Consequently, the
provisions of Section 194-I while applying to hotel
accommodation taken on regular basis would not apply to rate-
contract agreements.”

47. The Court accordingly holds that the Circulars, far from expanding
the scope of Section 194-I serve to lend further clarity to the scope and
ambit of the said provision and therefore, cannot be held to be ultra vires
the Act. No instance has been pointed out to the Court to demonstrate
how the said circulars have caused any hardship or confusion.

Conclusion
48. The 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' under Section 194-I of the Act is
hereby rejected.

49. The Court nevertheless clarifies that it will depend on the facts of
every case, and the onus would be on the concerned hotel to show,
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. fall outside the ambit of Explanation to Section
194-I of the Act.

50. The petitions are accordingly dismissed but, in the facts and


W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 31 of 32



circumstances of the cases, with no orders as to costs. The interim orders
are vacated.


S.MURALIDHAR, J



VIBHU BAKHRU, J
MARCH 23, 2016
Rk





W.P. (Civil) Nos. 1924/1999 & 2130/1999 Page 32 of 32