Case: Sultan Brothers (P) Ltd Vs. Commissioner Of Income-Tax

1. The appellant which is a limited company is the owner of a certain building constructed on Plot No. 7 on the Church Gate Reclamation in Bombay which it had fitted up with furniture and fixtures for being run as a hotel. By a lease dated August 30, 1949, the appellant let out the building fully equipped and furnished to one Voyantzis for a term of six years certain from December 9, 1946 for running a hotel and for certain other ancillary purposes. The lease provided for a monthly rent of Rs. 5950/for the building and a hire of Rs. 5000/for the furniture and fixtures. The question in this appeal is how the income received as rent and hire is to be assessed that is, under which section of theAct, 1922 is it assessable? The appellant contends that the entire income should be assessed under S. 10 as the income of a business or, in the alternative, the income should be assessed under S. 12 as income from a residuary source, that is a source not specified in the preceding sections 7 to 11 with the allowances respectively specified in(3) and (4) of that section.2. For the assessment yearthe appellant was taxed under S. 9 of theAct in respect of the building and under S. 12 in respect of the hire received from the furniture and fixtures. TheOfficer held that the building had to be assessed under S. 9 as it was the specific section covering it and there was, therefore, no scope for resorting to the residuary section, S. 12, in respect of its income. The Appellate Assistant Commissioner held on appeal that the rent from a building could only be assessed under S. 12 with the allowances mentioned in(4) where for the letting of the furniture and fixtures it was indispensable to let the building also and as that was not the case here the building had been rightly assessed under S. 9. The appellant then appealed to theAppellate Tribunal. The Tribunal confirmed the decision of the authorities below holding that the allowances mentioned in(4) of S. 12 could not be allowed as thepermitted them only where the letting of the building was incidental to the letting of the furniture and fixtures and as that had not happened in the present case the rent could not be assessed under S. 12. It was also contended by the appellant before the Tribunala contention which does not appear to have been advanced at any earlier stagethat the entire income should really have been assessed under S. 10 of the Act inasmuch as the income taxed was from "the letting out of the totality of the assets which was the business of the assessee". The Tribunal rejected this contention also, holding that since there was a specific head in regard to income from property, namely S. 9, the income from the property leased had to be computed under the section alone and referred to United Commercial Bank Ltd. v. Commr. ofITR 688 : ((S) AIR 1957 SC 918  ) in support of this view.3. Thereafter at the request of the appellant the Tribunal stated a case under S. 66(1) of the Act to the High Court at Bombay for decision of the following questionon the facts and circumstances of the case, the income derived from letting of the building constructed on Plot No. 7 is properly to be computed under Ss. 9, 10 or under S. 12 of the

Court's reasoning:
8. The object of the appellant company no doubt was to acquire land and buildings and to turn the same into account by construction and reconstruction, decoration, furnishing and maintenance of them and by leasing and selling the same. The activity contemplated in the aforesaid object of the company, assuming it to be a business activity, would not by itself turn the lease in the present case into a business deal.That would follow from the decision of this Court in East India Housing and Land Development Trust Ltd. v. Commr. of(1961) 42 ITR 49 (SC) where it was observed that "the income derived by the company from shops and stalls is income received from property and falls under the specific head described in S. 9. The character of that income is not altered because it is received by a company formed with the object of developing and setting up markets."9. Now the cases on which learned counsel for the appellant especially relied were cases of the letting out of plant and machinery, in some instances along with the factory buildings in which they had been housed. In all of them, except one, which we will presently mention, the assessed had previously been operating the factory or mill as a business and had only temporarily let it out as it was not convenient for him at the time to carry on the business of running the mill or factory. In these circumstances, it was held that by letting out the plant, machinery and building the assessee was still conducting a business though not the business of running the mill ordo not think, it did. But in any case, by the lease none of the objects mentioned in this clause was sought to be achieved. We find nothing in the lessors covenants, to some of which we were referred to bring the matter within Cl. 3(b) of the memorandum. None of these clauses support the contention that by granting the lease, the appellant did anything like carrying on the business of running a hotel. Thus cl. (a) is a covenant for quiet enjoyment. Clause (b) provides for a renewal of the lease of the demised premises being granted to the lessee for a further term of six years at his request. Clause (c) deals with payment of municipal bills and similar charges and ground rent. Clause (d) provides that the lessor shall during the continuance of the lease and on its renewal provide various things which included furniture, pillows, mattresses,bottle coolers, refrigerators, lift, electric fittings and the like and also paint the outside of the building with oil once in five years and keep the building insured. These are ordinary covenants in a lease of a furnished building. These do not at all show that the lessor was rendering any service in the hotel business carried on by the lessee or in fact doing any business at all. On the facts of this case we are unable to agree that the letting of the building amounted to the doing of a business. The income under the lease cannot, therefore, be assessed under S. 10 of the Act as the income of a business.We have earlier said that S. 12 can only apply if no other section is applicable; because it deals with the residuary head of income. Now(4) of S. 12 only deals with certain allowances and it obviously proceeds on the basis that the income mentioned in it, namely, that from the buildings when inseparably let with plant, machinery or furniture is not income falling under any of the specific heads dealt with by Ss. 7 to 11 and is, therefore, income falling under the residuary head contained in S. 12. There a preliminary difficulty arises. In respect ofwith them alone(4) of S. 12 isalready seen, the owner is liable to tax under S. 9 not on the actual income received from it but on its annual value and in fact quite irrespective of whether he has let it out or not. How then can it be said the rent received from a building could at all come under S. 12? In other words, why can it not be said that the specific section, that is, S. 9, covers the case and the income from the building cannot be assessed under S. 12 and no question of giving any allowances under Section 12(4) arises ? It has sometime been suggested as a solution for this difficulty that(4) of S. 12 applies only when the building is let out by a person who is not the owner because such a case would not come under S. 9. Counsel for neither party however was prepared to accept that suggestion. Indeed that suggestion has its own difficulty. Under(4) of S. 12 the assessee becomes entitled among others to an allowance in accordance with S. 10(2)(vi) which is on account of depreciation of the building "being the property of the assessee" from which it follows that(4) of S. 12 contemplates the letting of the building by the owner.(4) of S. 12 must, therefore, be applicable when machinery, plant or furniture are inseparably let along with the building by the owner. If(4) of S. 12 isto have anyit is the duty of the court so to construe every part of a statute that it hasmust be held that the income arising from the letting of a building in the circumstances mentioned in it is an income coming within the residuary head. If a person cannot be assessed under S. 12 in respect of the rent of a building owned by him,(4) will become redundant; there will be no case in which the allowances mentioned by it can be granted in computing the actual income from a building. An interpretation producing such a result is not natural. We must, therefore, hold that when a building and plant, machinery or furniture are inseparably let, the Act contemplates the rent from the building as a residuary head ofhere both furniture and building have no doubt been let. The question is, are they inseparably let? The High Court does not appear to have answered this question for it was of the view that not only must the two be inseparably let out but also that "the primary letting must be of the machinery, plant or furniture and that together with such letting or along with such letting, there is a letting of buildings". The High Court held that the primary letting in the present case was of the building and, therefore, deprived the appellant of the benefit of S. 12(4). We may state here that the Tribunal had thought that by requiring that the letting of one should be inseparable from the letting of the other the section really meant that the primary letting was of the machinery and the letting of the building was only incidental to the letting of the machinery. It also held that in the present case the primary letting was of theis true that the rent for the building and the hire for the furniture were separately reserved in the lease but that does not, in our view, make the two letting separable. We may point out that the Tribunal has taken the same view and the High Court has not dissented from it. In spite of the sums payable for the enjoyment of two things being fixed separately, the intention may still be that the two shall be enjoyed together. We will now refer to the provisions in the lease to see whether the parties intended that the furniture, fixtures and the building shall all be enjoyed together. Clause 1 of the lessees covenant, in our opinion, puts the matter beyondBefore we conclude we think we should refer to two other covenants. First, there is a lessors covenant No. II(b) to renew the lease of the demised premises which term, it may be conceded, means the building only, for a further term of six years. This clause says nothing about the renewal of any lease in respect of furniture or fixtures. Likewise, Cl. III(2) provides that if the demised premises, that is to say, the building, be destroyed or damaged by fire it shall be the option of the lessee to determine the lease and in any event the rent shall be suspended until the premises shall again be rendered fit for occupation and use. Here also there is no mention of the furniture. It was said on behalf of the respondent that these two clauses indicate that the building and the furniture were being treated separately and therefore the letting of them were not inseparable. We are unable to accept this contention. As regards renewal of the lease of the building, there is Cl. II(d) making substantially a similar provision in respect of the furniture and fixtures. It requires the lessor to provide at all times during the continuance of the lease and the renewal thereof, the furniture and fixtures mentioned in the lease. Therefore, though the renewal clause in Cl. II(b) does not mention the lease of furniture or fixtures being renewed. Cl. II(d) makes it incumbent on the lessor to supply and maintain them during the renewed term of the lease of the building. Clause II(d) would also cover a case where by fire the furniture was destroyed. In such a case the lessee could under that clause require the lessor to provide and if necessary to replace, the destroyed furniture. To the same effect is Cl. I(e) which says that the major repair to or replacement of the furniture, shall be made by the lessor. Such repair or replacement may, of course, be necessitated in a case where the furniture or fixtures are damaged by fire. We, therefore, think that the clauses in the lease on which the respondent relies do not indicate that the letting of the building was separable from the letting of the furniture and fixtures. We think that the lease satisfies all the conditions for the applicability of S. 12(4) and is covered by it.In the result we answer the question framed thus : The rent from the building will be computed separately from the income from the furniture and fixtures and in the case of rent from the building the appellant will be entitled to the allowances mentioned in(4) of S. 12 and in the case of income from the furniture and fixtures, to those mentioned in(3), and that no part of the income can be assessed under S. 9 or under S. 10.