Izaj Rahman and his brother Ijaz are claiming£250,000 damages from the council for harassment and lost income of£150,000.
In a high court writ, the Rahman brothers accuse the council of using 'threats and unlawful means' to force them to apply for planning permission to change the hotel into a hostel.
Izaj Rahman claimed that such a move was racist because it forced him to discrimate between his guests. 'Why is it that if we have French or German guests we are a hotel, but if they are from Bosnia or Kosovo, we are a hostel?' he asked.
He said the hotel's problems with the council started two years ago when he took in about 20 asylum seekers are being approached by the immigration service. 'They gave us a rate that was lower than we would charge guests but is better than having an empty room,' he explained.
'But the council came down on us like a ton of bricks and said he would have to apply for a licence to become a hostel.'
The council's principal solicitor Peter Borley said that the matter had been referred to its insurers, which were now handling the case. 'Given that the matter is now before the court, it would not be appropriate to comment,' he said.