Thursday, April 11, 2013

Advance booking of a hotel suite is capital asset; its transfer is chargeable to tax

Long-term advance booking of hotel suite, which gave assessee perpetual right of possession and right to transfer same, was capital asset

In the instant case, the assessee had entered into an agreement with 'G' for long-term advance booking of a suite in a hotel complex, permanently reserved for her use, till the agreement subsisted. She had treated profit on sale of such right in the suite as long term capital gain (‘LTCG’) after reducing indexed cost of acquisition, which consisted of security deposit paid to 'G' and maintenance charges paid to hotel. The AO noticed that the assessee had claimed both the benefit of deduction under sec. 24(a) in previous year as well as indexed cost of acquisition on maintenance expenses while computing capital gains. He held that the long term advance booking was not tenancy right and, hence, not a capital asset. Therefore, he treated the profit on surrender of reservation of suite as income from other sources, after deducting the amount of installments, but not the maintenance charges. On appeal, the CIT (A) held that the sale consideration received was taxable as long-term capital gain and assessee was entitled to benefit of indexation. He, however, held that assessee was not entitled to benefit of indexation on amount paid as maintenance charges to hotel. Aggrieved by the order of CIT(A), assessee filed the present appeal.

The Tribunal held in favour of assessee as under:

1) The assessee was entitled to constant use of suite only in consideration of the agreement and the security deposit. Further, the agreement contained covenants as under:

    a) All government, Municipal and other tax or levies in relation to the suite were to be paid by the assessee separately.

    b) Although the booking was in favour of the assessee, yet it could occupy it itself or use the same for its family members or  senior staff and bona fide personal and business guests.

    c) The agreement/advance booking was transferable as and when desired by the assessee in writing.

All these covenants made it abundantly clear that assessee had got right of residence or possession in the suite by virtue of the agreement. This right was transferable at the option of assessee. Thus, this right was akin to the tenancy rights which are a valuable right in the property.

2) Section 2(14) defines 'capital asset' as property of any kind held by an assessee. The term 'property' encompasses in its ambit bundle of rights. The right to dispose of a thing in every legal way, to possess it and to use it to exclude everyone from interfering with it, comes within the ambit of property. The exclusive right of possessing, enjoying and disposing of a thing comes within the term of 'property'. The assessee had perpetual right of possession of suite and was entitled to transfer the same. Therefore, long-term advance booking, by virtue of which assessee got right to possession, was 'capital asset' within the definition of section 2(14) and, therefore, on transfer of the same, LTCG had accrued to the assessee and assessee was, accordingly, entitled to indexation of cost of acquisition. Thus, the department's appeal was dismissed – ACIT v. Shabnam Sachdev [2013] 32 22 (Delhi - Trib.)