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Judgment
MAHAJAN J. - The assessee is a public limited company. It has various sources of income from interest on securities, rent from house property
and profits from various businesses such as cloth, chemicals, sugar distiller, printing, confectionery, tent making and manufacture of vanaspati. The
assessee owns several buildings, such as, chawls, quarters and shops near about it cloth mill at Delhi. These chawls, etc., are let out by the
assessee to its employees and also to some outsiders. It is common ground that out of the total rent recovered from these premises, a sum of Rs.
1,03,964 is deducted from the wages of its employees and only an amount of Rs. 8,163 as rent is recovered from persons other than the
employees, i.e., from out-siders. In the assessment years 1948-49 and 1949-50 (account years ending June, 1947, and June, 1948, respectively),
the department proceeded to assess its rental income from employees as ""income from property"" u/s 9 of the Indian Income Tax Act (hereinafter
referred to as the Act).
The assessees contention before the department was that the premises were let out to the empdoyees for the purposes of its business and the
rental income fell to be computed u/s 10 of the Act. This contention of the assessee was rejected by the Income Tax Officer, and in appeal, by the
Appellate Assistant Commissioner. On further appeal, the assessee succeeded in his contention; but here too, members constituting the Bench
hearing the assessees appeals differed. Mr. K. N. Rajagopal Sastri, Judicial Member, affirmed the order of the Appellate Assistant Commissioner
to the effect that the rental income in question was ""income from property"" and, thus, had to be assessed u/s 9 of the Act, whereas the Accountant
Member, Mr. P. C. Malhotra, took the view that the aforesaid income was not ""income from property"" but was ""income from business"" and,
therefore, was assessable u/s 10 of the Act.
There being difference of opinion between the two members constituting the Bench, the following points of difference were referred by the Bench
to the President of the Income Tax Appellate Tribunal, u/s 5A(7) of the Act :
(1) Whether the assessee-company was rightly assessed u/s 9 in respect of its income from buildings or lands appurtenant thereto, of which it is
the owner and which had been let to its own employees or wage earners ?
(2) Whether the undistributed profits earned by the assessee-company during the 12 months ending June 30, 1947, the amount of which was
subsequently ascertained at Rs. 65,30,195 was reserve and should be included in computing the capital as on July 1, 1947, for the purpose of
ascertaining the abatement allowable ?
We are not concerned in this reference with the decision on the second question. But so far as the first question is concerned, the President agreed
with the opinion expressed by the Accountant Member and held that the rental income of the assessee from the property let out to its employees
fell to be computed u/s 10 as ""profits and gains of business"". The department being dissatisfied with this order moved the Appellate Tribunal u/s
66(1) of the Act for referring the question of law arising out of the order of the Tribunal for a decision by this court. The Tribunal rejected this
application with the result that the department moved this court u/s 66(2) of the Act. That application was allowed by this court and by its order
dated the 6th October, 1955, the following two questions of law have been referred for our opinion along with the statement of the case, as
required to be drawn up u/s 66(2) of the Act :
Whether the assessee-company was chargeable to tax u/s 9 or u/s 10 of the Indian Income Tax Act, 1922, in the assessments for 1948-49 and
1949-50 in respect to income from buildings or lands appurtenant thereto ?
(2) Whether the assessee is entitled to a deduction of 7 per cent. commission on the rental income paid to its managing directors in computing its
assessable income for the assessment year 1949-50 ?
It is not disputed that the answer to the second question turns on the answer to the first question. Therefore it is really the first question that has to
be decided in this case.
The admitted facts are that the buildings in question are owned by the assessee. The bulk of the buildings is occupied by the employees and only a
small fraction of the buildings is occupied by non-employees. The annual rent recovered from employees is Rs. 1,03,964 and from the non-
employees Rs. 8,163. There is a post office, some shops and stalls, which according to annexure ""A"" are essential for the benefit of the employees.
The remaining buildings are chawls, single quarters, double quarters, upper-storey rooms and are occupied by the employees of the assessee for
residence. The rent of the residential accommodation is fixed rent and is deducted out of the pay or wages paid to the employees.
It was pointed out to us that the matter in dispute has been set at rest by a circular issued by the Central Board of Revenue, containing the
following instructions to all the Commissioners of Income Tax. This communication is in these terms :
Doubts have recently been expressed regarding the admissibility of the depreciation allowance on the quarters built by employers for the
accommodation of their employees. In this connection, attention is invited to the instruction, Part III (10th edition), to the following effect :
Buildings belonging to the owner of a business and used by him in order to house his employees are buildings used for the purpose of business
where the occupation by the employees of property owned by the employer who carries on a business is subservient to an necessary for the
performances of their duties.
The Patna High Court has also approved this view in Jamshedpur Engineering and Machine Manufacturing Co. Ltd. v. Commissioner of Income
Tax. The above quoted instructions should be followed and buildings belonging to this category treated as falling u/s 10 and not section 9 of the
Act.
It is not disputed by the counsel for the counsel for the department that this instruction would bring the case of the assessee u/s 10 and not section
But, apart from this, on the correct interpretation of sections 9 and 10 of the Act, we have come to the conclusion that the majority decision of
Income Tax Appellate Tribunal is correct and the first question referred to us must be answered against the department so far as the rental income
arising out of the buildings owned by the assessee and let out to its employees or wage earners is concerned. In our opinion, such rental income
has to be assessed u/s 10 and not u/s 9.
The ambit of the first question covers ""rental income from strangers"", but it was conceded before us that we are not called in this reference to
determine whether such income would fall for assessment u/s 10. The Tribunal has held that the ""rental income from strangers"" would be ""income
from property"" and assessable u/s 9 of the Act. It is only that part of the rental income from property which is occupied by the employees or wage
earners of the company engaged in company business, which according to the majority decision of the Tribunal, has to be assessed u/s 10 of the
Act and not u/s 9. We agree with the majority decision. We may now state our reasons for having arrived at the same conclusion.
It is apparent from the statement of the case that the company is engaged in a number of manufacturing business, such as, cloth, chemicals, sugar,
distillery, printing and the manufacture of hydrogenated oils (vanaspati). A large number of employees are engaged in these businesses. The
premises where the employees are housed and for which they pay rental to the company are in the near vicinity of the mills. The rental of these
premises is fixed and does not change with the change of the occupant. The rental is deducted from the wages of the employee or employee
occupying the premises. These employees are engaged in the main business of the company and their residence in the buildings in dispute is
incidental to their main occupation, that is, the carrying on of the business of the company. In true perspective, these buildings are part of the
business equipment of the owner, or in other words, it is the business asset of the owner. It is also now well established that in a welfare State, it is
the duty of the employer to provide residential accommodation of employees. Not only that, certain facilities, such as, canteen, clubs for the
recreation of the employees and baths, lavatories and dispensaries have also to be provided for them. All this is done not because the company is
trying to earn or is engaged in business of earning rental income from the employees but for the purpose that the employees carry on efficiently the
business of the company. The housing accommodation is an amenity which is provided for the purposes of the business of the company and is not
dehors that business.
Moreover, in such cases, in order to arrive at a correct conclusion, one is to read sections 9 and 10 together and not in an isolated manner and as
divorced from one another. In section 9, and assessee is liable to pay tax on ""rental income from property"" under the head ""income from property
of which he is the owner other than the income from such portions of such property as he may occupy for the purposes of any of his business, etc.
The income from excepted property necessarily falls for assessment u/s 10. Therefore, in each case, where there is a conflict as to whether
income from property"" has to be assessed u/s 9 or section 10, what has to be determined is whether such income does or does not arise from
property occupied by him for purposes of his business. This question is essentially a question of fact. What has to be discovered is whether the
property is subservient to the main business of the assessee. In other words, is the provision of residential quarters to its employees a part of the
business of the company ? The question then arises - what does the word ""occupy"" mean in the context. It was contended by the learned counsel
for the department that the word ""occupy"" means ""actual physical occupation,"" while, on the other hand it was contended by the learned counsel
for the assessee that the word ""occupy"" has broader meaning and the ""physical occupation"" of an owners premises by a tenant would be
occupation by the owner,"" inasmuch as an owner can occupy his property through his tenants who attorns to him and do not lay any hostile claim
against him. In our opinion, the word ""occupy"" cannot be given a restricted meaning, as in contended by the counsel for the department. In the
context of sections 9 and 10, an occupation by a tenant would be occupation by the owner and, therefore, legally the property would be in the
occupation of the owner though not in his physical occupation.
To illustrate our point, we may mention an illustration that was put by us to the counsel for the department and the counsel was constrained to
admit that the ""income from property"" in the illustration would be ""income from business"" and not ""income from property"". This was the illustration :
A company like the respondents company constructs a ""club house"" for the recreation of its employees and gives it on rent to the association of the
employees, would the rental income from this club house be ""income from business"" or ""income from property"" ? The learned counsel for the
department conceded that in this illustration, the income would be treated as ""income from business"" and not ""income from property"". This
illustration is, more or less, analogous to the question in dispute in the present reference.
It will be appropriate at this stage to mention that Mr. Rajagopal Sastri decided against the assessees contention on the basis that the word
occupy"" in section 9 means ""physical occupation"" or, in the other words, ""actual occupation"" and not ""legal occupation."" In law, whenever
premises are let out to a tenant, it is the tenant who is in physical occupation of the premises; but against the entire world, the landlord is in
occupation of the premises, for the tenants occupation is treated as landlords occupation. The landlords occupation through his tenant would only
come to an end, when the tenant sets up a hostile title to the landlord; otherwise the occupation of the tenant is occupation of the landlord. If both
sections 9 and 10 of the Act are read together, it will be apparent that where the property is held and used for the purposes of business, income
therefrom would be ""income from business"" and not ""income from property"". In the present case, there can be no manner of doubt that the
company holds the property in the occupation of its employees for the purposes of its business. If it be held, as was held by the Judicial Member,
that income from that part of the property only can be assessed u/s 10 which is in the actual occupation of the assessee for the purposes of its
business, this would create an anomaly because property which is admittedly the business asset of the assessee but not in the physical occupation
of the assessee would not entitle him to claim depreciation thereon, while on the other hand, its income would not be treated as ""income from
property."" But if the narrow interpretation placed by the Judicial Member is not accepted, full effect can be given to sections 9 and 10, and this
anomaly would disappear. The property held by the assessee for his business, though not in his actual occupation, will entitle the assessee to
depreciation u/s 10. Therefore, the income from such property would fall to be assessed u/s 10 and not 9. We are not prepared to put a narrow
and pedantic construction on the word ""occupy,"" as has been done by Mr. Rajagopal Sastri, the Judicial Member of the Tribunal.
The view we have taken finds support from the decision of the Patna High Court in Jamshedpur Engineering and Machine Manufacturing Co. Ltd.
v. Commissioner of Income Tax, wherein somewhat similar circumstances, the rental income from buildings let out to its employees by a
manufacturing concern was held not to be covered by section 9. In the Jamshedpur Engineering and Machine Manufacturing Co.s case the
assessee made a claim for allowance of certain expenditure on account of repairs and maintenance of the residential quarters let out to its
employees as ""business expenditure"" u/s 10(2) (xv) of the Act and the assessees contention was allowed and the view of the Tribunal to the
contrary that such income fell to be assessed u/s 9 was repelled.
The learned counsel for the department relied upon the decisions in Queen v. Assessment Committee of St. Pancras, Peglere v. Cravan and
Brown v. Ministry of Housing and Local Government : Ford v. Same for his contention that the word ""occupy"" must be restricted to ""actual
physical occupation"". These decisions are clearly distinguishable and have no application to the facts of the present case. The word ""occupy"" has
various shades of meaning and that meaning is to be assigned to it which fits in with the context in which this word is used. We are clearly of the
opinion that in the context of section 9 and 10 of the Act, it would be wrong to give a limited and restricted meaning to the word ""occupy.
For the reasons given above, we answer the first question against the department and hold that the income of the assessee is income of the
assessee from the buildings or lands appurtenant thereto rented out to its employees is income from business and falls for assessment u/s 10 and
not u/s 9 of the Income Tax Act, 1922. In view of the answer to the first question, the second question must necessarily be answered against the
department. However, we leave the parties to bear their owns costs of this reference.
KAPUR J. - I agree.
Reference answered accordingly.