Even as the lease renewal of the property that houses the Taj Mahal Hotel on New Delhi’s Mansingh Road looks set for an interesting showdown, the Supreme Court on Tuesday directed Spences Hotels, the earlier lessee, to pay capital gains tax on the three-decade-old transaction with The Indian Hotels Co Ltd (IHCL).
Hearing an appeal by Spences Hotels to dismiss the tax department’s notice on the grounds of limitation, Chief Justice S H Kapadia asked: “You have not paid any tax at all these years. How have you accounted for this in your books? We cannot accept this.” He pointed out that it was not the company’s case that tax was not due.
To this, the company counsel said there was no tax demand but there was just a notice for taxes due 20 years earlier, which according to the company was barred by limitation.
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The court directed the company to pay the tax due duly registering the protest. It added the payment would be without prejudice to the appeal before the court.
The facts of this case put together by Business Standard from tribunal orders and appeals available in the public domain, bring out the interesting circumstances under which Indian Hotels came to possess the iconic Taj Mansingh property. J E D Fonseca was lessee of the premises, 1 Man Singh Road, New Delhi and was running a hotel by the name of Fonseca (P) Ltd. The lease had expired in 1968.
During the subsistence of the lease, the land and building in which the hotel was run had become an evacuee property after the partition of India. The title to the said estate, therefore, vested in the director of estates, ministry of works and housing, government of India, New Delhi.
However, despite the expiry of lease in 1968 Fonseca continued to be in possession and occupation of the premises. Fonseca died in August 1970. However, before his death Fonseca placed Spences and one AK Johar in occupation of the said premises, as they acquired all shares of Fonseca (P.) Ltd.
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Meanwhile, director of estates was taking steps to acquire the property. Since Spences and Johar had been put in possession by the lessee and they were in joint occupation of the premises, disputes arose with the director of estates regarding the lease.
Enter Indian Hotels
In March 1975, IHCL inked a memorandum of understanding with Spences and Johar. These parties agreed that IHCL shall take over the control and the operation of the undertaking of Fonseca and take possession of the premises with effect from 15 March 1975. IHCL also agreed to purchase equity shares of Fonseca at the rate of Rs 1,000 each valuing it at Rs 25 lakh.
Spences and Johar withdrew the pending disputes with the director of estates regarding the title of the director of estates to the property.
However, before the shares could be handed over and before the formal legal agreement could be executed, the ministry of works and housing, acting through the director of estates, took possession of the property. Thus, Spences had to close down Fonseca Hotel and lost possession of the property at Man Singh Road.
Subsequently, the ministry handed over the property to New Delhi Municipal Corporation (NDMC), which in turn was leased to IHCL in 1978 for 33 years.
According to the case files: “IHCL started contending that for reasons and circumstances beyond its control, it was not possible for them to fulfil the terms of the said agreement.” IHCL, the case documents show, projected that covenants made thereunder were not capable of being performed in view of various statutory restrictions and as such the said memorandum was frustrated and had come to an end.
In the meantime, IHCL managed to get the property to it by NDMC. Fonseca shareholders, therefore, took the matter before the Bombay High Court.
This dispute was referred to arbitrator, who under his award dated 17 March 1979 directed the entire payment of Rs 25 lakh be made by IHCL.
In addition to the same, another amount of Rs 3.75 lakh was also directed to be paid towards other claims of the assessee's including interest. This award was confirmed by the Bombay High Court on 20 March 1979 paving way for 23-room Fonseca metamorphose into 300-room five-star icon of luxury that came to be known as TajMansigh.