1. Lease of furnished building for hotel business — Dispute over tax assessment under Section 9, 10, or 12 of the Income-tax Act, 1922. (Para 1 , 2 )
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1963 Supreme(SC) 285
SUPREME COURT OF INDIA
6th December, 1963.
B.P. SINHA, C.J.I., A. SARKAR, M. HIDAYATULLAH, K.C. DAS GUPTA AND N. RAJAGOPALA AYYANGAR, JJ.
M/s. Sultan Brothers Private Ltd. Bombay, Appellant
Versus
The Commissioner of Income-tax, Bombay City II, Bombay, Respondent.
Civil Appeal No. 63 of 1961.
Advocates Appeared
Mr. A. V. Viswanatha Sastri, Senior Advocate, (Mr. T. S. Diwanji, Advocate, and M/s. O. C. Mathur, J. B. Dadachanji and Ravinder Narain, Advocates, of M/s. J. B. Dadachanji and Co., with him), for Appellant; Mr. K. N. Rajagopal Sastri, Senior Advocate, (Mr. R. N. Sachthey, Advocate, with him), for Respondent.
Advocates:
A.V.VISHWANATHA SASTRI, J.B.DADACHAN, K.N.B.SASTRI, O.C.MATHUR, R.N.SACH, Ravindra Narayan, T.S.DIVANJI
A.V.VISHWANATHA SASTRI, J.B.DADACHAN, K.N.B.SASTRI, O.C.MATHUR, R.N.SACH, Ravindra Narayan, T.S.DIVANJI
Income from a building let inseparably with furniture, based on the parties' intention to enjoy them together, is assessable under the residuary head (Section 12(4) of the Income-tax Act, 1922) rather than as income from property (Section 9) or business profits (Section 10).
Headnote:(A) Income-tax Act, 1922 - Sections 9, 10 and 12 - Assessment of income from letting out a furnished building - Whether such income is assessable as income from property, business profits, or under the residuary head - Income from business under Section 10 requires the activity to be a business venture rather than mere exploitation of property by an owner (Paras 7, 8) - Mere letting of a commercial asset does not automatically constitute a business (Para 7).
(B) Section 12(4) - Inseparable letting of building and furniture - For the purpose of this section, "inseparable" refers to the intention of the parties and not physical attachment (Paras 18, 19) - If the parties intended that the building and furniture be enjoyed together and one would not be let without the other, the letting is inseparable (Para 19) - In such cases, the rent from the building is treated as a residuary head of income under Section 12, overriding the general provisions of Section 9 (Para 15).
Facts of the case:
A company owning a building equipped with furniture and fixtures let the same for a fixed term for the purpose of running a hotel. The lease provided for separate monthly rent for the building and hire charges for the furniture and fixtures. The dispute arose as to whether the income should be assessed under the head "Income from property", "Profits and gains of business", or "Income from other sources".
Findings of Court:
The letting of the building did not amount to carrying on a business as the owner had never operated a hotel and the lease covenants were ordinary for a furnished building. However, the building and furniture were let inseparably as they were intended to be used together for the specific purpose of running a hotel.
Issues: Whether the income derived from the letting of a building and furniture should be computed under Section 9, Section 10, or Section 12 of the Income-tax Act.
Ratio Decidendi: The court held that when a building and furniture are let inseparably based on the intention of the parties, the rent from the building is assessable under the residuary head in Section 12(4) rather than Section 9. The activity of letting out a commercial asset is not a business unless it is conducted as a business venture.
Result: Appeal allowed.
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Table of Contents
2. Whether income from letting a furnished building constitutes business income under Section 10, income from property under Section 9, or residuary income under Section 12. (Para 1 , 2 , 6 )
3. Letting a commercial asset is not inherently a business; inseparability of building and furniture depends on the parties' intention to enjoy them together for a specific purpose. (Para 7 , 15 , 17 , 19 )
4. Income from a building let inseparably with furniture, based on the parties' intention, is assessable under the residuary head of Section 12 rather than Section 9. (Para 15 , 19 )
5. Appeal allowed — Income from building and furniture assessable under Section 12, with applicable allowances, and not under Section 9 or 10. (Para 22 )
6. When does letting a commercial asset constitute a business under Section 10?
Letting a commercial asset is not automatically a business. It depends on the circumstances of each case, viewed from a businessman's perspective, to determine if it is a business activity or merely the exploitation of property by an owner. (Para 7 , 8 )
7. How is inseparable letting interpreted under Section 12(4) of the Income-tax Act, 1922?
Inseparability is determined by the intention of the parties. If the parties intended that the building and furniture be enjoyed together and one would not be let without the other, the letting is considered inseparable. (Para 18 , 19 )
8. Does the primary nature of the letting (building vs. furniture) affect the application of Section 12(4)?
No. The statute does not require the letting of machinery, plant, or furniture to be primary and the building to be incidental; it only requires that the letting of the two be inseparable. (Para 16 , 17 )
9. Can income from a building owned by the assessee be taxed under the residuary head of Section 12?
Yes, when a building and plant, machinery, or furniture are let inseparably, the Act contemplates the rent from the building as a residuary head of income to avoid making Section 12(4) redundant. (Para 15 )
Judgment
SARKAR, J. : 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 the Income-tax Act, 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 sub-sections (3) and (4) of that section.
2. For the assessment year 1953-54, the appellant was taxed under S. 9 of the Income-tax Act in respect of the building and under S. 12 in respect of the hire received from the furniture and fixtures. The Income-tax Officer 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 sub-s. (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 the Income-tax Appellate Tribunal. The Tribunal confirmed the decision of the authorities below holding that the allowances mentioned in sub-s. (4) of S. 12 could not be allowed as the sub-section permitted 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 Tribunal - a contention which does not appear to have been advanced at any earlier stage - that 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. of Income-tax, West Bengal , 1957-32 ITR 688 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 question :
"Whether on 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 Income-tax Act."
The High Court answered the question as follows :
"The income from the building will be computed under S. 9, income from furniture and fixtures under S. 12(3) and that no part of the income is taxable under S. 10."
3A. The question framed is clearly somewhat inaccurate for what the appellant contends in the first place is that the entire income and not that from the building alone, should be assessed under S. 10. This inaccuracy has not however misled anyone and the matter has been argued before us without any objection from the respondent on the basis as if the question was in terms of the appellant s co
