1. These four appeals by the assessee are directed against the orders of the Assessing Officer treating the assessee as an assessee in default under section 201, demanding the tax from the assessee which according to the Assessing Officer ought to have been deducted by the assessee and charging under section 201(1A) for the assessment years 1995-96 to 1998-99.
2. The assessee is a company engaged in the business of hoteliering and catering belonging to Kamat group, which is known for the restaurants it runs. In the course of its business, it entered into agreements with Madhu Fantasy Land Pvt. Ltd. ('MF' for short) on 13-10-1994 and with Pan Indian Paryatan Ltd ('PIP' for short) on 24-11-1994. We shall notice the terms of the agreement in some detail a little later, but here it is suffice to say that under these agreements the assessee was permitted to run and conduct the business in the restaurants/food outlets owned and set up by the aforesaid two companies in the amusements parks set up by them which are known as Fantasy Land and Essel World respectively in Bombay. Under the arrangement, the assessee was to conduct and run the outlets in the amusement parks and in consideration thereof the assessee was to pay a commission or royalty of 15 per cent and 20 per cent respectively of the sales, exclusive of taxes, to MF and PIP. Detailed provisions were made as to how the arrangements should be worked and how the business was to be conducted, which we shall presently notice. Under these agreements, the following amounts of royalty or commission were payable by the assessee : 3. The Assessing Officer took the view that the assessee was liable to deduct tax from the aforesaid payments under section 194-I of the I.T.Act and since it had failed to do so it was liable to be treated as an assessee in default under section 201 of the Act and was liable to pay interest under section 201(1A). Accordingly, he determined the amount of tax and the interest payable by the assessee for the years under appeal in the following amounts : 4. The assessee filed appeals to the CIT(A) who initially appears to have had reservations about the right of the assessee to file the appeals, but after hearing the assessee's arguments on this point, upheld the right. Against this part of the decision, there is no appeal by the department before us. As regards the merits, however, the CIT(A) held that the provisions of section 194-I were applicable to the amounts of commission or royalty payable by the assessee, that these amounts were nothing but rent within the meaning of the definition of the word in Explanation (i) below section 194-1 and that the mere fact that the agreements or arrangements were understood as conducting arrangements viz., an arrangement to conduct the business in the food outlets does not absolve the assessee of its liability to deduct tax at the appropriate rate from the amounts payable as royalty or commission to MF and PIP. In the view of CIT(A), the definition was wide enough to cover all kinds of payments, by whatever name called, for the use of the land or building alongwith the furniture and fittings therein and the payments in question clearly fall within the definition of rent. In this view of the matter, he upheld the orders of the Assessing Officer.
5. The fate of the appeals depends upon the answer to the question whether the payment of royalty/commission under the agreements can be described as 'rent' within the meaning of Explanation (i) below section 194-I of the Act. It is, therefore, necessary to notice the terms of the agreements in some detail in order to understand the intention of the parties and the real nature of the payment.
6. In the agreement with MF, it was narrated in the preamble that MF had constructed several food outlets in the amusement parks as an ancillary facility for the visitors and that the assessee approached it seeking permission to conduct the catering business in those outlets which were called 'Gulal' and 'Chinese Pavilion' and that MF accepted the assessee's offer and had agreed to allow the assessee to conduct the catering business in those outlets on certain terms and conditions.
In the agreement, MF has been described as the "owner" and the assessee has been described as "the conductor".
7. Clause (1) of the agreement stated that MF authorised the assessee to conduct or run the business in the two food outlets with its permission. Clause (2) staled that MF had provided the assessee with an inventory of all the articles and things including kitchen equipments and gadgets in the food outlets which the assessee had acknowledged as being in good working condition. Under clause (4), MF would permit the assessee to install its own further equipment for cooking and catering purposes in the outlets. It was provided in clause (5) that the assessee shall serve only vegetarian food in Gulal and both vegetarian and non-vegetarian food in the Chinese restaurants. The responsibility of keeping the food outlets clean and tidy in accordance with the relevant rules and regulations governing the food outlets was to be on the assessee as per clause (6). Clause (7) provided that the assessee shall take prior approval of MF in respect of the menu (viz., the items to be served), quality of the food, cutlery & crockery and pricing. It was specifically provided in the clause that all disposable service items, paper napkins, etc. used in the outlet shall carry the monogram of Fantasy Land which is the name of the amusement park run by MF: It was further provided that the assessee had no right to advertise or promote any products through the food outlets. Under clause (8), it was the responsibility of the assessee to take all precautions to ensure that the quality and hygiene of the items served in the outlets measure upto the standards required by the Health Department of the Bombay Municipal Corporation. The assessee was under an obligation to keep MF indemnified against any claims that may be made in this regard. As per clause (9), it was the joint responsibility of MF and the assessee to obtain all licenses necessary for the purpose of conducting the business in the outlets. It was, however, agreed that the licence which may be obtained by the assessee in its name would be only for the sake of convenience and would not create or constitute any right of any nature whatsoever in favour of the assessee with respect to the property or goodwill of the business of the outlets or upon the property where the business is conducted. Clause (10) restrains the assessee from making any changes in the appearance of the outlets.
Clause (11) restrained the assessee from permitting gambling games to be held in the outlets. Clause (13) prohibited the assesee from sub-contracting any part of the business. Clause (14) prohibited the assessee from changing the name of the outlets in any manner, except that the assessee may add its name and logo. Under clause (15), the assessee had no right to create any encumbrance by way of mortgage, charge or security on the food outlets or the equipments. According to clause (16) the assessee was to observe the rules and regulations prescribed by the municipal authorities regarding the running of food outlets and to take precautions to see that the licenses granted to MF or to it in respect of food outlets are renewed from time to time in the name of MF or in its own name. As per clause (18), the assessee could not cater to any persons who have entered the premises without purchasing tickets to the amusement park. Under clause (19), the assessee was obliged to provide food in the case of group bookings or bookings for special occasions as hitherto being done by MF. The assessee was responsible for making available this facility in accordance with the requirements of MF and the assessee was bound in this regard by the policy framed by the Owner. Clause (20) made detailed provisions in respect of uniform, entry, stay and conduct of the assessee's employees/ labourers. They were required to display their identity cards which would be issued by MF. No person without identity card would be allowed to remain in the premises. Under clause (21), it was the assessee's responsibility to ensure that the employees behaved with the required decorum and did not give room to any complaint from the visitors to the amusement park. Under clause (22), MF was liable to pass on the benefit of discounts which were available to it on account of exclusive rights on sale of certain products such as ice-cream, cold drinks, etc. to the assessee. Clause (23) obliged the assessee to provide to MF's guests food items at a discounted price of 30 per cent.
8. Clause (24) affirmed that the assessee had deposited a sum of Rs. 30 lakhs with MF as security deposit for due observance and performance of the conducting arrangements. The deposit was not to carry any interest.
9. As per clause (25), the conducting arrangement was to be in force initially far a period of three years, and could be renewed at the option of MF on mutual acceptable terms.
10. Clause (26) provided that in consideration of MF allowing the assessee to run the food outlets, the assessee would pay by way of royalty 15 per cent of the gross sales including the sales tax. It further provided that MF would employ its own cashiers on the counter and the proceeds shall be collected by such cashiers. MF will settle account on Tuesdays of every week for the previous week commencing from Monday to Sunday by paying to the assessee the gross collection after deducting the royalty.
11. Clause (27) provided that the security personnel provided by MF for the amusement park will also look after the security of the food outlets. Clause (28) referred to a request by the assessee to MF to make available adequate storage place in the food outlets and stated MF would consider the same and its decision shall be final. As per clause (29) MF would provide an extension line of the telephone to the two outlets. The assessee will have to make use of the public telephones in the amusement park for outgoing calls.
12. Clause (32) provided that the assessee shall be responsible to provide filtered water, use good medium for cooking as approved by MF.MF was also entitled at any time and without notice to inspect the kitchen to check whether the assessee is using filtered water and the cooking medium approved by MF. It was the responsibility of the assessee to set right complaints about the food served, if any and take immediate corrective action.
13. Clause (31) provided for the termination of the conducting arrangement. The assessee may terminate the arrangement by giving 30 days prior notice to MF.14. The agreement with PIP was entered into on 24-11-1994 and in the preamble stated that PIP had set up various food outlets and snack counters as part of the infrastructure in Essel World and that being personally unable to look after the activities of running food outlets, was looking for a person who is conversant in the preparation of food items and services thereof to the visitors to the park, that the assessee approached PIP with the proposal to run the food outlets which was accepted by PIP. It narrated further that PIP having considered the experience and expertise of the assessee in the field agreed to allow and permit the assessee to make use of the food outlets "only for the purpose of preparing and serving food and eatables to the visitors to the said Essel World." 15. Clause (1) granted permission to the assessee to use the restaurant "admeasuring about 816.36 sq. mtrs." during the time the park was open to the visitors, for a period of five years. Under clause (2), the assessee agreed to use the restaurant for the purpose of activities related to running thereof viz., preparation and serving of food items and juices, icecream, soft drinks, etc. As per clause (3), in consideration of PIP agreeing to permit the assessee to run the restaurant, the assessee shall pay to PIP 20 per cent of the total daily collection received by the assessee exclusive of sales tax. The assessee was to produce the sales tax challans every quarter, evidencing the payment of sales tax and in case of failure of the assessee to do so, PIP was entitled to receive the amount under this clause ignoring the sales tax liability. As per clause (3)(c), the assessee shall deposit with PIP every day after the closure of the park the amount received by it in running the restaurant. On every Monday of the week, PIP shall make up the accounts for the previous week and return to the assessee the amount in excess of the amount receivable by it under the agreement. The assessee was not to sell any articles of food or drinks without a proper coupon. The assessee was also to submit every month a statement of itemwise sales made during that period and the liability to sales tax. Under clause (4)(a), the assessee was to permit the employees of PIP to sell souvenir articles developed and marketed by PIP from the restaurant. If PIP so demands, such articles shall be sold by the employees of the assessee. As per clause (4)(b), the assessee was under an obligation to comply with all the laws pertaining to the running of the restaurant and shall be solely responsible for any breach thereof or any of the conditions of the licence or permit required for the purpose of running the restaurant and obtained by PIP. PIP shall be kept indemnified against any loss suffered by it by reason of the breach. As per clause (4)(c), the assessee was to use the restaurant for serving and selling food only during the hours for which the park is kept open. PIP may in its discretion permit bona fide employees of the assessee to remain in the premises for the preparatory work during the period other than the hours for which the park is kept open. As per clause (4)(d), the sale price of the food and drink items was to be prescribed and recommended by PIP. These prices were to be printed on a menu card to be made available to the visitors to the restaurant. The menu card was to indicate the logo of Essel World. No menu card without such logo shall be stored or offered to the visitors. The menu card shall also indicate the date on which the prices were fixed. The assessee was to give a copy of the menu card from time to time. The assessee was also obliged to provide the food items to the managerial staff of PIP at 50 per cent of the rates written on the menu card. As per clause (4)(e), whenever the park is closed for the purpose of maintenance and repairs, the assessee shall not conduct any business in the restaurant. The assessee was not entitled to make any claim against PIP for any loss of business or income during this period. Under clause (4)(f), the assessee was liable to attend to the complaints of the visitors in respect of food and if required, the liability extended to replacement of the items sold by it to the visitors or to refund the amount in full or in part.
In respect of such complaints or refunds, the decision of the PIP shall be binding on the assessee. Any loss suffered by PIP on account of refusal of the assessee to entertain or rectify the complaint shall be compensated by the assessee. There were also other provisions regarding the conduct of the day-today business in clause (4). The assessee was to use only the service roads to bring in or take out materials. The assessee was also to show the documents relating to such materials whenever required by PIP. The materials were to be insured, the movements of the assessee's employees shall be confined to the restaurant, and the assessee was liable for conduct and behaviour of its employees etc.
16. Clause 4(1) provided that the assessee shall not close or suspend the business in the restaurant for more than three consecutive days during which the park remains open to the visitors without sufficient cause or without sufficient notice thereof to PIP. Clause 4(m) provided that the assessee shall not sell any soft drinks, ice-cream or ready to eat items in respect of which PIP bas not entered into any agreement with the manufactures or distributors. The assessee shall not store any such items in the restaurant area. The assessee was prohibited from selling any liquor in the restaurant.
17. As per clause (5)(a), all the licences and permits required to be obtained for the purpose of running the restaurant shall be in the name of PIP. The assessee shall neither claim nor will have any right over the licence, save and except to run the restaurant. It was made clear that the restaurant and the business therein shall at all times be the exclusive property of PIP. It was further stated that PIP shall obtain all such permits and licences as are in law required to be obtained by it as the owner of the restaurant. Clause (5)(b) stated that that the possession of the restaurant shall always be with PIP and the assessee shall have a "licence to enter the same during the period and manner prescribed by PIP from time to time" and the assessee 'shall not be deemed to be in exclusive or otherwise possession of the said restaurant or part thereof". In order to put the matter beyond any doubt, it was further declared that the assessee shall not set up any claim for possession of the restaurant or part thereof. However, the keys of the kitchen and storeroom of the restaurant shall remain with the assessee. Clause (5}(e) granted a right to PIP to check through its authorised representative the sale proceeds received by the assessee in the restaurant. Under clause (5)(f), if PIP decided to suspend or discontinue the running of the amusement park, the assessee would have no right whatsoever against PIP for the unexpired period of the agreement. Clause (5)(g) gave PIP liberty to inspect the restaurants and test the items prepared by the assessee and make observations and suggestions. The suggestions made both on quality of food and maintenance of cleanliness and service shall be carried out by the assessee. The other clause provided that the assessee was to maintain the restaurant in clean and hygienic condition, that it was open to PIP to shift the restaurant to any other part of the park, that in case of breach of the terms of the agreement, the same would stand terminated etc.
18. Clause (6) declared that the assessee recognises that the restaurant is and shall always be in the exclusive possession of PIP and the occupation by the assessee is incidental to it being permitted to prepare, serve and sell food and other items as provided in the agreement and it shall have no right whatsoever in respect of restaurant either by way of tenancy, subtenancy or otherwise. The assessee undertook, under the said clause, not to raise any such claim at any time during the tenure of the agreement or thereafter.
19. The other clauses of the agreement arc not very important for the purpose of the present appeal.
20. In an able argument, Mr. Pardiwalla, for the assessee, put forth the following contentions. He firstly contended that the royalty of commission deductible under the agreements from the sale proceeds cannot be considered as rent even under the extended definition of the word 'rent' in the Explanation (i)) below section 194-I. He pointed out that even under the extended definition, the prime condition was that the payment should be for the use of any land or building together with furniture, fittings etc. He pointed out that the agreements embodied a conducting arrangement in respect of food outlets owned by MF and PIP and the payments made thereunder were a composite and indivisible whole in consideration of the assessee being permitted to conduct the business and the same cannot be considered as one for the use of any land or building together with furniture and fittings etc. simplicilor.
He next contended that rent, as normally understood, it a fixed payment which does not vary and is not linked with some other fluctuating payments or amounts and applying this test to the present case, it will be seen that the payments of royalty/ commission cannot be considered as rent. He drew our attention to page 30 and 31 of the paper-book, which contained the details of the monthwise royalty/commission on the sales which were deductible from the sale proceeds and retained by MF and PIP. He submitted from these details that the royalty/commission varied widely and such variation is not consistent with the concept of rent as generally understood. He pointed out that the idea that rent should be a fixed payment has not been given the go-by even in the statutory definition. In support of the contention that the rent generally meant a fixed payment, Mr. Pardiwalla relied upon the following judgments : (1) Indian Radio & Cable Communications Co. Ltd. v. CIT [1937] 5 ITR 270 at p. 278 (PC) The third submission was that a conducting arrangement in respect of a business has been held by the Bombay High Court in Mrs. Fatimabai Noor Md. v. Khailil Ahmed [1990] Bom. R.C. 366, to fall outside the purview of the Bombay Rent Control Act, 1947, and a person who conducts the business in a premises upon payment of a sum to the owner of the premises is not a licensee, for the purposes of the said Act, and that in order to determine whether the arrangement was a conducting arrangement or whether it was a lease of the premises for rent, one has to look at the dominant intention of the parties. Attention was also invited to the judgment of the Supreme Court in the case of Md. Saleem v. Md. Ali [1987] 4 SCC 270, wherein it was held that there was no parting of possession of the premises where the arrangement was a conducting arrangement or the arrangement for the management of business. On the strength of these authorities, it was contended by Mr.
Pardiwalla, that payments under the agreements were not for the use of land or building with furniture and fixtures. He next contended that it was not open to the departmental authorities to rewrite the agreement between the parties in the guise of looking into the substance of the agreement and this principle must be applied to the present case. He cited the judgment of the Delhi High Court in D.S. Bist & Sons v. CIT [1984] 149 ITR 276 and that of the Calcutta High Court In CIT v. Arun Dua [1990] 186 ITR 494 in support of this contention. It was his submission that the intention of the parties to the agreements was that the assessee should conduct and manage the business in the food outlets owned by MF and PIP and it was not an agreement for lease or sub-lease of the outlets and that there was no intention to part with possession of the premises in favour of the assessee and if that is the intention of the parties, it is not open to the Income-tax authorities to ignore the same and the legal effect thereof and to invoke the definition of the word 'rent' in section 194-I and convert what is not in fact and in law a payment of rent into a payment of tent and fasten the liability to deduct tax at source from the assessee. Reliance was also placed on the circular of the Board-Circular No. 736 dated 13th February, 1996 (copy filed at page 43 of the paper-book) where the Board has clarified that the provisions of section 194-I are not attracted to the sharing of the proceeds of film exhibition between a film distributor and film exhibitor owning a cinema theatre.
21. Mr. Pardiwalla also raised two other submissions. He submitted that the royalty/commission was deducted by MF and PIP from the sale proceeds and only the balance was paid to the assessee and in this situation where the assessee did not have any control over the funds belonging to those parties and was not actually paying the monies to them, the provisisons relating to tax deducted at source cannot come into operation. He pointed out that the idea behind the TDS provisions is that the person liable should be in possession of funds representing the income belonging to the payee from which he would be able to withhold the tax and pay the same to the Government, The assessee was in no such position; in fact the royalty/commission was deducted or retained by MF and PIP under the agreement by an overriding provision enabling them to do so. Reference in this behalf was made to the judgment of the Bombay High Court in the case CIT v. Dharti Films [1991] 191 ITR 261 which dealt with the provisions of section 40(b) in a similar context. Mr. Pardiwalla's next submission was that the payee companies have paid the tax on the royalty/com mission on the footing that the amounts received represent business income (income from park services) and therefore, the Assessing Officer had no jurisdiction to demand the tax from the assessee. Reference was made to the following judgment in support of the submission : (1) CIT v. Divisional Manager, New India Assurance Co. Ltd. [1983] 140 ITR 818 (MP) (3) CIT v. Kannan Devan Hill Produce Co. Ltd. [1986] 161 ITR 477 (Ker.) He, however, fairly stated that it was not known whether the assessments on MF and PIP were completed earlier to the assessments made upon the assessee or earlier to the orders passed under section 22. On behalf of the Department, the ld. DR pointed out that under the definition of the word 'rent' in section 194-I, any amount paid for the use of the land and building together with the furniture and fittings, by whatever name called, is to be treated as rent and the payer is liable to deduct tax. A wide meaning has thus been given to the word 'rent' and notwithstanding that in the present case, the amounts are described as royalty/commission, they partake the character of rent and therefore, the assessee was liable to deduct tax. It was submitted that the provisions of section 194-I were introduced by the Finance Act, 1994 w.e.f. 1-6-1994 and the agreements under consideration were entered into within 4 to 5 months thereafter and clearly the object was to scuttle the liability to deduct tax or defeat the very object of the section by giving a nomenclature different from rent. He strongly relied on the observations of the Assessing Officer in paragraph 4 of the assessment order for the assessment year 1995-96. In this connection, he also drew our attention to the fact that the assessee had made an interest free security deposit of Rs. 30 lakhs with MF and it was only in consideration of this that the royalty payable was lower at 15 per cent, as against 20 per cent payable by the assessee to PIP where no security deposit was payable. In his contention, it was not one of the characteristics of rent that it is a fixed amount every month. He pointed out that in the agreement with PIP, the extent of the area let out to the assessee was clearly defined which itself was an indication that what was paid by the assessee was in the nature of rent. Turning to the circular relied upon by the ld. counsel for the assessee, the ld. DR submitted that it was issued for the benefit of a different class of business, viz. cinema exhibitors and hence was not applicable to the present case. On his part, he relied on the Circular No. 715 dated 8-8-1995 (page 35 of the paper-book) wherein the Board has stated, in answer to a query, that tax is to be deducted from rent by whatever name called for hire of a property and the liability does not depend upon the nomenclature to the arrangement given by the parties. In answer to another question, it has been stated that if there is a composite arrangement for user of the premises and provision of manpower for which consideration is paid as a specified percentage of the turnover, there would still be a liability to deduct tax from the payments if the composite arrangement is in essence the agreement for taking premises on rent. The ld. DR also submitted that the provisions of section 201(1A) are mandatory and therefore, there was no escape from liability. He, therefore, submitted that the assessce was rightly held liable to deduct tax and as an assessee in default. The tax is therefore recoverable from it and consequently the assessce was also rightly held liable to pay interest.
23. On a careful consideration of the rival contentions, we are of the view that the assessee was not liable to deduct tax under section 194-I. The section is reproduced below : 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 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.
(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 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 the payee and the provisions of this section shall apply accordingly." The main question concerns the content or substance of the agreement.
If the payment under the agreements are for the use of the land or the building together with the furniture and fittings of the land appurtenant thereto, whatever may be the nomenclature of the payment, the assessee would be liable to deduct tax. A perusal of both the agreements, the relevant clauses of which have been noticed in extenso by us earlier clearly indicate that the content and the substance of the agreements and the dominant intention of the parties thereto, was to have an arrangement for conducting or managing the business of catering for and on behalf of MF and PIP by the assessee. The various clauses of the agreements show the extent of control exercised by these two companies over the assessee in the matter of conducting the business. The very object of the agreements is to permit the assessee to conduct the catering business efficiently. It was only incidental, thereto that the assessee was permitted to use the premises. The consideration payable by the assessee in the form of royalty/commission was therefore, not for the use of the land or building or the furniture and fittings, therein per se. The consideration was for allowing the assessee to manage or conduct the business. There were a whole lot of restrictions and reservations made in the agreements, most of them in favour of MF and PIP. The assessee was subject to strict control in the manner of conducting the business. The licenses were to be the joint responsibility of the assessee and MF - clause (9) of the agreement with MF. Under this clause, it was made clear that even the licenses which were obtained by the assessee in its name was only for the sake of convenience and did not create any right of any nature whatsoever in the property or goodwill of the business or over the premises where the business was conducted. Similar clause is found in clause (5)(a) in the agreement with PIP which shows that the licenses and permits will be in the name of PIP and the assessee shall have no right whatsoever over the same and that the restaurant and the business shall be exclusive property of the PIP. Even in the manner of conducting the business, as already noticed, the assessee was put to a number of restrictions and control by both the agreements. The assessee had no right even to fix the menu. The prices were fixed by MF and PIP. They could at any time inspect the kitchen and check the quality of the food served or to ensure that the assessee used filtered water or the cooking medium which is approved by them. The assessee had no right to change the name of the outlets which continued to be run in the names originally given by MF and PIP. Alt that the assessee was allowed was to add its logo and name. Even the napkins and cutlery used in the outlets were to carry the monogram of Fantasy Land. In the agreement with MF, the assessee was to serve only vegetarian food in Gulal restaurant and vegetarian & non-vegetarian food could be,-served only in the Chinese restaurant. The assessee could not cater to any. visitor or invite or solicit any custom from any person other than the persons who are visitors to the amusement parks. The assessee was bound by the policy framed by MF in the manner of providing food in the case of groups or special occasions. Even the movements of the employees of the assessee were controlled and regulated by MF and PIP. In the case of any breach of the conditions relating to the license or permit, the assessee was to indemnify the MF or PIP in whose names the licenses stood. More importantly, MF, under clause 26 of the agreement, had the right to employ its own cashiers on the counter of the food outlets who collected the sale proceeds, retained the royalty/commission due to MF and paid only the balance of the collections to the assessee. In the agreement with PIP, under clause (3)(c), the assessee was under an obligation to deposit the sale proceeds of the day with the person authorised in writing by PIP. On every Monday of the week, PIP was to make up the accounts for the previous week, retain the commission due to it and pay the balance to the assessee. At page 66 of the paper-book, is a specimen of the Debit Note sent by the assessee to MF (Fantasy Land). It says that the Debit Note is raised "on account of sale proceeds collected by you on our behalf for the period from 1-11-1994 to 6-11-1994 and payable to us after adjusting your commission of 15 per cent as shown in the working enclosed". At page 69 is the cheque received by the assessee for the amount shown in the Debit Note from Fantasy Land.
24. The amount of control exercised by virtue of the aforesaid provisions by both MF which ran the Fantasy Land and PIP which ran the Essel World, both amusement parks in Bombay, over the assessee in the manner of running the restaurants and food outlets in the parks clearly shows that the dominant intention of the parties under the agreements is the conduct of the business and not a mere letting of the land or the building alongwith furniture, fittings, etc. The agreements embody an arrangement by which the assessee, which had a good reputation for running restaurants and food outlets would manage and run the business for and on behalf of MF and PIP and as consideration for extending these facilities, would pay MF and PIP the royalty/com mission. The dominant intention of the parties was not to let out the premises to the assessee, though permission was given by the agreements to the assessee and its employees to enter and work in the premises in pursuance and in furtherance of the dominant intention viz. to conduct the business. The agreements as we have noted earlier did contain clauses which clearly stated that the assessee shall have no right of possession over the premises nor would it have any interest or right over the goodwill or the premises from which the business was conducted.
25. The test of dominant intention has been recognised and applied by the Bombay High Court in the case of Mrs. Fatimabai Noor Md. (supra) cited by Mr. Pardiwalla. In that case, there was an agreement to conduct the business and to hand over the furniture and other articles in the premises for the purpose of conducting the business. The agreement was for a particular period and at the end of the period, the person who was allowed to conduct the business refused to handover the possession of the premises. A suit was filed by the person who handed over the possession of the premises and the business. The defence was that the person who came to possession was a protected licensee under the Bombay Rents Control Act, 1947 and therefore cannot be asked to vacate and handover the premises. The matter reached the High Court, The High Court held, on a perusal of the agreement and the relevant facts, that they pointed to only one conclusion viz., that what was embodied in the agreement was not a license to use the premises simplicitor but was a license exclusively for conducting the business of pan beedi. It was noted that there was not a single word anywhere in the agreement that there was a letting out of the said premises and that what was meant by the agreement was that the respondent was allowed to run the pan beedi business in the suit premises on payment of compensation of Rs. 200 per month and for that purpose he was entitled to use the said premises alongwith other articles mentioned in the agreement. The Court also noticed that it was a condition that he should carry on the said business subject to certain terms and conditions. The same position holds good in the present case. Here also, there is not a single word in the agreements to the effect that the premises are being let out to the assessee. On the contrary, it has been clearly stated that no interest or tenancy or sub-tenancy in the property was being created in favour of the assessee. The Bombay High Court further noticed that in the agreement (in the aforesaid case), there was a clause that the owner had agreed to renew the business license and that he would attend to all matters concerning the license of the said premises during the tenure of the agreement. A similar term appears in the present case in clause (9) of the agreement with MF, which says that it shall be the joint responsibility of the owner (MF) and the assessee to obtain the licenses and that even if the licenses are in the name of the assessee that would be only for the sake of convenience and would not create any right in its favour. In the agreement with PIP, there is a reference to the permit or license being obtained by PIP. The Bomhay High Court after noticing the relevant clause held that if the intention of the parties was to transfer the suit premises or handover the possession of the suit premises, such a clause was not necessary and that the insertion of the clauses disclosed that the dominant intention of the parties was not to transfer possession in the suit premises and that the license to occupy and use the premises was only incidental to the conduct of the business. The presence of a similar term in the agreements before us, therefore, should be taken to indicate the dominant intention of the parties, that the assessee shall use the premises--the premises of the restaurant and food outlets - only as incidental to the management and conduct of the business and not as a tenant who would use it in his own right.
26. Thus, in our view, the dominant intention of the parties to the agreements under consideration was to grant a conducting license to the assessee to manage and conduct the catering busienss and it was only incidental that the premises was allowed to be used by the assessee as a permissive user or under a license. When the substance of the agreements or the arrangements is this, the mere possibility of a part of the payment of royalty/commission being attributable to the use of the land or the building together with furniture and fittings does not, in our opinion, have the effect of converting what in substance and truth is an arrangement for conducting or managing the business into one for the mere use of the land or building together with furniture, fittings, etc. Mr. Pardiwalla pertinently referred in this context to a couple of authorities to contend that if the dominant intention of the parties was that the restaurant business should be conducted by the assessee, it is not open to the Income-tax authorities to rewrite the agreements and infer a different intention. We also find that in CIT v.Motors & General Stores (P.) Ltd [1967] 66 ITR 692, it was held by the Supreme Court that in the absence of any suggestion of bad faith or fraud the true principle is that the taxing statute has to be applied in accordance with the legal rights of the parties to the transaction.
When the transaction is embodied in a document, the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction. In CIT v. B.M. Kharwar [1969] 72 ITR 603, the Supreme Court again reiterated that the legal effect of a transaction cannot be displaced by probing into the "substance of the transaction". It was further held that the taxing authorities are bound to determine the true legal relation resulting from a transaction, where the legal relation is recorded in a formal document or it has to be gathered from evidence and the conduct of the parties to the transaction. Applying these principles to the present case, it is not possible to spell out an intention on the part of the parties thereto to let out simplicitor the land or the building alongwith furniture and fittings. As we have been at pains to point out earlier, the agreements embodied a composite arrangement for the conduct of the business by the assessee and the letting out or the use of the premises is only an incident thereto.
27. The intention of the parties to the agreement or the arrangement is the sole criterion in such cases, as has also been recognised by the Board in its Circular No. 715 dated 8th August, 1995 (answers to questions 23 and 24). The Circulars does not per se apply to the facts before us but we are referring to that only for the purpose of showing that the Board's view itself is that the true content or intention must be gleaned on a proper construction of the agreement.
28. Mr. Pardiwalla referred to the judgment of the Privy Council in Indian Radio & Cable Communications Co. Ltd's case (supra) in support of the contention that rent is generally understood as a fixed payment and in the present case, the payments contemplated by way of royalty/commission are not fixed payments but are linked to the sale proceeds and therefore, they cannot be characterised as rent. In the judgment cited, the question was whether the half share of the net profits payable by the assessee company to another company under an agreement was of the nature of rent or was in truth payable as part of consideration in respect of a number of different advantages which the assessee derived under the agreement. While repelling the claim that the payment, which was based on the net profits of the assessee company must be allowed as rent, it was held by the Privy Council at page 278, as follows : "Their Lordships do not think that there is in the present case any sufficient ground for holding that the sum in question is of the nature of a rent. It is neither described as a rent, not does the agreement contain several of the clauses which a lease of plant of such a character would naturally contain. Circumstances of greater importance are that the sum payable may be small or great or nothing - a most unusual feature in the case of a rent - and that it is impossible to presume or infer that the half share of profits is being paid only as rent or as a similar payment, in consideration merely of these of the plant the subject of the licence in Cl. 3 of the agreement. The sum is in truth made payable as part of the consideration in respect of a number of different advantages...." The aforesaid observations of the Privy Council show that great importance should be attached to the fact that rent should normally be a payment of a fixed sum and if the payment varies because of its link with another variable such as the net profits, it would be most unusual to call the payment a rent. In the present case, the details furnished in pages 30 and 31 of the paper-book, monthwise and yearwise, show that the royalty/commission varied from as little as Rs. 5,711 in the month of July, 1996 to Rs. 1,16,827 in the month of December, 1997 in the case of Fantasy Land and from as low as Rs. 4,318 in the month of November, 1994 to Rs. 3,73,832 in the month of May, 1996 in the case of Essel World. The royalty/commission is fixed as a percentage of the sale proceeds which itself is subject to wide variations. Therefore, it is very difficult to say that the payment should be regarded as rent.
The aforesaid decision of the Privy Council has been followed by the Lahore High Court in Gopinath Vir Bhan 's case (supra). In that case, the claim for deduction of a payment was made under section 10(2)(i) of the 1922 Act, which allows deduction of any rent paid for the premises in which the business is carried on. The payment in that case was a sum of Rs. 22,429 representing 1/3rd of the net profits earned by the assessee after making the deductions specified in the agreement. The Lahore High Court after referring to the judgment of the Privy Council (supra), held that a fluctuating payment cannot be treated as a rent.
29. In the light of the aforesaid judgments, which have stood the test of time for more than 60 years and in the absence of any judgment taking a contrary view which was brought to our notice, we accept Mr.
Pardiwalla's contention that the payments in the present case being of fluctuating nature depending on the sale proceeds, cannot be called a rent.
30. The ld. DR submitted that under the definition of rent contained in the Explanation below section 194-I, any payment by whatever name called can be treated as rent. It is no doubt true that under the definition, the nomenclature used by the parties to the transaction is not decisive. It is not difficult to appreciate the anxiety of the Legislature. The words "by whatever name called" have been inserted in an attempt to rope in all such payments which are clearly payments of rent but which the parties, by adopting a different nomenclature want to pass off as some other payment so as to avoid the liability to deduct tax at source. The crux of the matter is that looking at the substance of the agreement or arrangement, one should be able to say that the dominant intention of the parties was to treat the payment as quid proquo for the use of the land or building together with the furniture, fittings, etc. and if it is possible to do so, the mere fact that the payment was styled under some other name, would not absolve the person paying the amount from the liability to deduct tax. It is, thus, always a question of gathering the intention of parties to the agreement or arrangement. The use of the words "by whatever name called" in the definition does not permit the Income-tax authorities to refuse to look into the real intention of the parties or the substance of the agreement.
31. The ld. DR had submitted that the agreements were entered into after the introduction of section 194-I w.e.f. 1-6-1994 and therefore, they must be taken to have been entered into with a view to scuttling the liability to deduct tax or to defeat the purpose or the object of the section. The mere fact that the agreements were entered into after 1-6-1994 does not entitle the Income-tax authorities to take such a view of the matter without examining the substance of the transaction or the dominant intention of the parties under the arrangement. Such an extreme contention cannot be countenanced.
32. The ld. DR had then contended that the amount of rent need not be a fixed amount and it can vary. No authority taking such view has been cited before us. We have already referred to the judgment of the Privy Council and that of the Lahore High Court rendered more than 60 years earlier, in which it has been held that a payment characterised as rent cannot be of a variable amount. In the light of these judgments, we are unable to accept the contention of the ld. DR. He then submitted that the provisions of section 201(1A) are mandatory and in fact cited some authorities in support of the contention. No doubt, the interest is leviable mandatorily, but before that, it must be established that the assessee is liable to deduct the tax at source.
33. For the aforesaid reasons, we are of the view that the assessee was not liable to deduct tax from the royalty/commission payments made under the agreements and therefore, cannot be treated as an assessee in default. The assessee, therefore, is also not liable to pay any interest under section 201(1A).
34. In the view we have taken as above, it is not necessary for us to examine the two subsidiary contentions raised by Mr. Pardiwalla viz., that there was no actual payment by the assessee under the agreements and therefore, there as no liability to deduct tax and that when the payee has paid the tax on the royalty/commission on the footing that they were income from business, the Assessing Officer had no jurisdiction to demand the tax from the assessee.