The main legal point established in the judgment is the classification of lease income from hotels and restaurants as business income or income from house property, based on the nature of the franchisee arrangement and the special conditions of the contract.

R. Sudhakar, J.

The above Tax Case (Appeals) are preferred by the assessee aggrieved against the order passed by the Income Tax Appellate Tribunal for the assessment years 2005-06 and 2006-07 raising the following substantial questions of law:

"1. Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the rental income from lease/franchise should be assessed as business income and not under the head income from house property without appreciating that leasing of Hotels and Restaurants is distinct from its business of operating and maintaining the Hotels?

2. Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the rental income from lease/franchise should be assessed as business income and not under the head income from house property without appreciating that the assessee had ceased to carry on hotel business in the impugned properties and had chosen to exploit the same as their owner by leasing out the land and building for long periods?

3. Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that only if the assessee corporation had ceases to carry on its regular business of tourism development only then the income from leasing would constitute income from house property?"

2. The brief facts are as follows:

The assessee is a wholly owned Government of Tamil Nadu undertaking engaged in the business of development of tourism in the State. For the assessment year 2005-06, the assessee filed return of income on 31.10.2005 admitting NIL income and subsequently filed revised return of income on 09.06.2013 admitting NIL income under normal computation and book profits of Rs.3,24,89,295/- under Section 115 JB of the Income Tax Act. For the assessment year 2006-07, the assessee filed return of income on 27.11.2006 admitting total income of Rs.2,05,70,640/-. For both the assessment years, the returns were processed under Section 143(1) of the Income Tax Act and the case was selected for scrutiny and notice was issued under Section 143(2) to the assessee.

3. Before the Assessing Officer, the assessee relying upon its Memorandum of Association had stated that its main activity was to start, operate and promote establishments, undertakings, enterprises and activities which facilitate or accelerate the development of tourism, handicrafts and cottage industries in Tamil Nadu; to take over, develop and maintain all places of tourist interest like Wild Life Sanctuaries, Open places, Parks, Beaches, Avenues, Beauty and Recreational Spots, etc. in the State of Tamil Nadu and elsewhere. It is also submitted that the activities of the assessee includes operation of hotels, petrol bunk, telescope house, boat house, leasing of hotels and restaurants, renting of space at tourism complex to other State Tourism Department/Corporations etc.

4. It is further stated by the assessee before the Assessing Officer that the assessee in its 168th meeting held on 16.12.1996 had resolved to lease/franchise un-economic units to avoid further cash loss and to improve the existing units significantly. The Government, vide G.O.Ms.No.101, Information and Tourism Department dated 3.6.1998 approved the proposal of leasing the 15 Hotel Units. Subsequently, the assessee had obtained the Government approval for leasing 16 more units, which were incurring losses based on Board resolution and 10 restaurants of the assessee. Based on the Government order, the assessee had called for open tenders for leasing the hotels. Hence, the assessee claimed it as a lease income from house property.

5. The Assessing Officer rejected the submissions of the assessee and disallowed the deduction claimed at 30% by the assessee under the head 'income from house property' holding that the assessee had given the hotel premises to private parties on franchise only, which was one of the activity of the regular/ordinary business of the assessee. Accordingly, the Asses