Commissioner of Income Tax vs Indian Metal and Metallurgical Corporation

Thanikkachalam, J.—At the instance of the Department, the Tribunal referred the following question u/s 256(1) of the Income Tax Act,

1961 (hereinafter referred to as ""the Act""), for our opinion :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the income from letting out

portions of the building known as TNK House should be assessed under the head ''Other sources'' and not under the head ''Property'' ?

Whether the conclusion of the Tribunal that the letting out of the building and provision of amenities are an inseparable part of the lease deed is

reasonable and supported by material on records ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that only the net interest paid to the

partners by the assessee-firm should be disallowed u/s 40(b) of the Income Tax Act, 1961 ?

The assessee is the owner of a multi-storeyed building called TNK House, in which its business in exhibition of cinema films was carried on. A

part of the building in the first, second and fourth floors have been let out with amenities. In the original assessment, for the assessment years 1972-

73 and 1973-74, the income from the portion that is let out with amenities had been taken as part of the income from the business activities of the

assessee. The Income Tax Officer changed his opinion and concluded that this income is assessable under the head ""House property"". The Income

Tax Officer has not given any reason for accepting the abovesaid income under the head ""House property"" income. For the assessment year under

consideration, the Income Tax Officer has subjected to tax the relevant income under the head ""House property"" deducting from the gross rents

received for the premises and hire charges for amenities a proportionate part of the property tax and the statutory deduction for repairs u/s 24(1)(i)

of the Act. In fact, the Income Tax Officer estimated the annual value of the portions let out with amenities. On appeal, before the Commissioner of

Income Tax (Appeals), the assessee contended that the income from the letting out of a portion of the property with amenities should be assessed

under the head ""Other sources"". The Commissioner of Income Tax (Appeals) accepting the argument put forward by the assessee held that the

income from the letting out a portion of the building should be assessed under the head ""Other sources"" and not under the head ""Property"".

Aggrieved, the Department filed an appeal before the Appellate Tribunal. The Appellate Tribunal, following the decision of the Supreme Court in

the case of Sultan Brothers (P) Ltd. Vs. Commissioner of Income Tax, , held that the income is assessable only under the head ""Other sources"" in

view of the provisions contained in section 56(2) of the Act.

Before us, learned standing counsel for the Department submitted that in order to assess the income from the property under the head ""Other

sources"" there must be two lease deeds for letting out the building and the amenities. The amenities provided by the assessee are part of the

building and, therefore, no separate plant, machinery or furniture was let out along with the building so as to comply with the provisions of section

56(2)(iii) of the Act. Therefore, according to learned standing counsel, the income from the property is assessable u/s 22 of the Act under the head

Property income"". Learned standing counsel further pointed out that amenities as stated by the assessee are not plant, machinery or furniture as

stated in section 56(2)(iii) of the Act. It was, therefore, pleaded that the Tribunal was not correct in holding that the income derived by the

assessee from the abovesaid building should be assessed under the head Other sources"".

On the other hand, learned counsel appearing for the assessee submitted that the income derived from the property and the amenities made

available to some of the tenants should be assessed under the head ""Other sources"". According to learned counsel, the amenities were let out

separately since the amenities were not forming part of the building. Since the assessee let out both the building and the amenities by issuing

separate receipts for rental income and the income for the amenities, the provisions of section 56(2)(iii) would be applicable to the facts of this

case. Accordingly, learned counsel appearing for the assessee supported the order passed by the Tribunal on this point.

We have heard the rival submissions.

The fact remains that a portion of the building was let out to several tenants. In the case of one Chandrahassam, who is in occupation of 280 sq.

ft. on the second floor, two wash basins and a sub-meter for recording electricity consumption have been provided and the other electrical fittings

and fixtures are provided by the tenant himself. In the case of Corporation Bank Ltd. which is in occupation of 2,980 sq. ft. on the first floor a

water closet has been provided by the assessee and the complete plumbing was done by it. The electrical fittings and other fixtures have been

provided by the tenant himself. Tirupathi Enterprises is in occupation of a portion in the fourth floor of the building. Another tenant, Indian

Investment Center is also in occupation of the said building. They have the benefit of having partitions, fans and lights and internal electrical fixtures

provided by the assessee. There are two lifts in TNK House. These are used not only by the employees of the assessee-firm, but also by the

employees of the tenants. This facility is common to all. The assessee is incurring an expenditure of Rs. 9,000 annually payable to Best and Co. for

lift maintenance services. An expenditure of Rs. 10,150 was also incurred for annual electrical inspection of the entire building which includes the

inspection of internal fittings and fixtures provided by some of the tenants. On these facts, the assessee claimed that the rental income received by

letting out the building and amenities should be assessed under the head ""Other sources"".

A similar question came up for consideration before the Kerala High Court in the case of Dr. P.A. Varghese Vs. Commissioner of Income Tax,

. According to the facts arising in that case, the assessee agreed to let out the second floor of a building for a rent of Rs. 2,350 per month, agreeing

to provide for partitions, lavatory, water closet, etc., air-conditioning of one room, one fluorescent tube light fitting, a separate electric meter,

uninterrupted water supply and an electrical lift. The assessee contended that the above agreement evidenced the hire of machinery, plant and

furniture along with the building and that the income received from the said transaction was income from other sources u/s 56(2)(iii) of the Act. On

these facts, it was held that (headnote) : ""there was no letting of the machinery, plant or furniture, but only a letting of a building with certain

amenities, section 56(2)(iii) of the Act was not applicable and the income from the letting out was chargeable as income from house property and

not as income from ''other sources''.

So also while considering the provisions of section 56(2)(iii) and section 22 of the Act in the case of Indian City Properties Ltd. Vs.

Commissioner of Income Tax, on the facts, where the assessee derived income, inter alia, from letting out house property with a lift, air-

conditioning, etc., it was held that ""the income derived from letting out the building was assessable as income from ''house property'' u/s 22. The lift

charges and air-conditioning charges which have been shown separately in the Income Tax Officer''s order were assessable u/s 56 as income from

''other sources''.

The Bombay High Court also had an occasion to consider the provisions of section 22 and section 56 of the Act in Commissioner of Income

Tax Vs. Bhaktawar Construction Pvt. Ltd., . According to the facts arising in this case, the assessee had constructed a building consisting of a

ground and five upper floors. It was air-conditioned. The building was let out to three tenants by separate lease agreements. By another set of

three agreements the air-conditioning facility was made available to the three tenants who were permitted to use the installation. The assessee

charged for such use at a rate calculated per square foot. The assessee retained control over the installation and was obliged to service and

maintain it. The assessee was entitled to shut the installation for repairs. The assessee claimed that the income from the use and lease of air-

conditioning was assessable as income from ""other sources"". On these facts, the Bombay High Court held that there being no letting of the

installation, the requirements of section 56(2)(iii) of the Act had not been met. Accordingly, the income derived by the assessee from the premises

under the leases could not be taxed under the head of income from ""Other sources"", but it must be taxed as income from ""property"".

According to the facts arising in the present case, the assessee while letting out the building provided amenities like electrical fittings, water

closets, partitions, fans, electrical fixtures, etc. The assessee was collecting separate rent for the building and amenities. The lift provided in the

building is for the common use of the tenants including the assessee. The assessee is repairing the lift and maintaining it. Therefore, the assessee is

having control over the lift. There is no material on record to show that the assessee was paying charges for using the lift separately. The facts

arising in this case would clearly go to show that the assessee has not hired machinery, plant or furniture belonging to the assessee along with the

building. Therefore, the hire charges said to have been collected for the purpose of providing amenities and the rent for the building would not

come under the purview of section 56(2)(iii) of the Act. The assessee contended that the word ""plant"" should be liberally construed so as to

include electrical fittings, water closets, partitions, etc., within the ambit of the word ""plant"". But it is not possible to give such a wide construction

as suggested by learned counsel for the assessee. The Tribunal placed reliance upon the decision of the Supreme Court in the case of Sultan

Brothers (P) Ltd. Vs. Commissioner of Income Tax, . According to the facts arising in that case what was let out to the tenant was a building fitted

up with furniture and fixtures, for being run as a hotel. Therefore, the Supreme Court has held that since the building was let along with furniture and

fixtures, the provisions of section 56(2)(iii) would be applicable and the income from the building should be assessed under the head ""Other

sources"". But according to the facts arising in the present case, plant or machinery or furniture was not hired by the assessee along with the

building. Therefore, the decision of the Supreme Court in Sultan Brothers (P) Ltd. Vs. Commissioner of Income Tax, will not be applicable to the

facts of the present case. Thus, on a plain reading of section 56(2)(iii) of the Act in the light of the judicial pronouncements cited supra, we hold

that the Tribunal was not correct in coming to the conclusion that the income derived by the assessee from the first, second and fourth floors of the

building called TNK House is assessable under the head ""Other sources"". Accordingly, we answer the questions referred to us as questions Nos.

1 and 2 in the negative and in favour of the Department. So far as question No. 3 is concerned, it is covered squarely by the decision of the

Supreme Court in Keshavji Ravji and Co. v. CIT : [1990]183ITR1(SC) in favour of the assessee. Accordingly, we answer this question in the

affirmative and against the Department.

Counsel fee is fixed at Rs. 1,000.