1. The assessee is in appeal against separate orders of CIT(A)-XII, New Delhi dated 9-9-1992, 19-7-1993 and 20-7-1993 for the assessment years 1989-90 and 1990-91. As the three appeals involve common issues, the same are being decided by this composite order for the sake of convenience.
2. The assessee-company filed the return of income on 30-12-1989 declaring a loss of Rs. 13.14,010. The Assessing Officer noted that the company was engaged in the business through its various units which were furnishing Division for manufacturing and sale of wooden furniture, Arms & Ammunitions Division for purchase and sale of arms and ammunition and Model Division for the manufacture of model items for the manufacture of wooden furniture. Apart from the said activities, the assessee-company owned various properties from which it earned rental income. The Assessing Officer further noted that two of the premises owned by the assessee were M-7and M-15, Connaught Circus, New Delhi and that the said premises had been given by the assessee on hire/rent to M/s C.J. Hotels (Pvt.) Ltd. (CJHPL) which was an associate concern. The said concern was running hotels/restaurants, namely Dynasty, Bistro, Pantry and Mughlai Restaurant in the said premises.
The assessee had shown a sum of Rs. 48,000 as the annual let-out value of the said property and declared it under the head 'Income from house property'. The assessee had also claimed depreciation allowance of Rs. 2,57,831 in respect of the said premises which were let-out to M/s CJHPL. The assessee has further claimed deduction of Rs. 81,946 on the furniture and fixture provided in the said premises used by M/s CJHPL.
It further claimed depreciation on the equipments let out to M/s CJHPL in respect of the said restaurant premises.
2.1 On enquiry from the Assessing Officer, the assessee-company submitted that it had let out part of its premises at M-7, Connaught Circus to M/s CJHPL for running the Mughlai Restaurant and M-15, Connaught Circus to run Dynasty, Pantry and Bistro Restaurants. It further submitted that it was not engaged in any restaurant activities and it only provided furnished premises to Mughlai Restaurant and to Dynasty Restaurant and others. It submitted that depreciation had been claimed on the cost of furniture provided to the restaurant and the same had been allowed in the earlier years. It claimed that since the furniture was owned by the assessee-company it was fully justified to claim the depreciation on the said furniture and fixtures. It further submitted that the kitchen equipment had also been provided to the Dynasty, Pantry and Bistro Restaurants by the assessee being the owner to the said equipments, it was fully entitled for depreciation. It also submitted that the company had furnished the said restaurants in the premises owned by the company and the same have been let out to M/s CJHPL on a monthly rent of Rs. 4,000 per month.
2.2 The Assessing Officer observed that whereas the net income from the letting out of the part of the premises at M-7, Connaught Circus to Mughlai Restaurant had been shown by the assessee as income from house property; it had also claimed depreciation on the entire premises of M-7, Cannaught Circus as well as on its furniture and fixture and equipments. He also noted that in respect of the M-15, Connaught Circus, only an income of Rs. 481 had been shown under the head 'House property'. In this connection the Assessing Officer perused the agreement dated 26-12-1983 between the assessee and M/s CJHPL and noted : 1. M/s O.B.F. shall provide to CJHPL the said premises and necessary equipments, furniture, fixture and fittings, etc.
2. M/s. CJHPL shall run/operate a first class restaurant in the said premises.
3. In consideration of O.B.F. providing the above premises and facilities the CJHPL shall pay to OBF as under :- (a) a sum of Rs. 4,000 per month towards hire charges of the equipments, furniture, fixture and fittings, (b) an amount of 2 per cent of its turnover for the use of the premises.
The Assessing Officer observed that the business of the assessee was not running of restaurant, as has been stated by the assessee himself and that its business is also not to furnish the premises as restaurant and then to hire them out. He also observed that it is not a case where the assessee himself was running a restaurant or hotel which he had let out as a stop gap arrangement. He also observed that it was not a case where the premises with amenities and fixtures, etc., were let out by the assessee to carry on his business more efficiently and further it was not a case where letting of furniture or other equipments was subservient to letting accommodation and the letting of accommodation was only for facilitating the business of the assessee. He further observed that the assessee had not shown any income for the consideration received by it as 2 per cent of its turnover for the use of the premises as stipulated in the aforesaid agreement. He also observed that the assessee had incurred substantial expenditure on renovation of the premises as provided to the tenant. The assessee had incurred a sum of Rs. 12,45,944 in respect of Dynasty and other restaurants. The cost of furniture provided for the said restaurants was more than Rs. 6.43 lakhs. The equipments provided to Dynasty and other restaurants were of more than Rs. 7.79 lakhs. As against this, the assessee claimed to be receiving only a sum of Rs. 4,000 per month as hire charges of the furniture and equipments whose value exceeded Rs. 16 lakhs. He further observed that the said assets had been given by the assessee-company on hire to an associate concern of the assessee in which Directors of the company were directly or indirectly interested in substantial manner. He, therefore, held the arrangement between the assessee and M/s CJHPL is a 'make-believe' affair and not a genuine arrangement. So the consideration for the hiring of the equipments has been grossly understated. He further held that the above considerations for the two components, i.e., in respect of providing the premises and the necessary equipments, furniture and fixture & fittings were separately fixed. He observed that the rental income from the asset can be treated as business income only if the intention of the leasing out was to exploit them commercially. But in this case that was not the intention of the assessee as it was not running any restaurant. The Assessing Officer referred to the decision of the Delhi High Court in CIT v. Super Fine Cables (P.) Ltd. [1985] 154 ITR 532 and the Calcutta High Court in 114 ITR 876 (sic) wherein it had been observed that "to determine whether the income arising out of the letting out of a factory is to be assessed under the head 'Profits of business' or whether it is to letting out for the purposes of enjoying the rent. The distinction between the two is narrow one if it happened to be the owner of a commercial asset one can himself exploit it and enjoy the profits thereof. But these profits can vary. One might decide that the best way of exploiting the asset is to get a fixed return. It is the nature of the arrangement and the reasons for that are relevant for the purposes of determining whether one has let out the property for the business purposes or merely for enjoying the rent. This is the type of test which is common to all the cases. If the asset remained a commercial asset in the hands of the assessee after the letting out arrangement has been made, i.e., the letting out is commercially motivated and not motivated for getting rent, the income continued to be classed as business income. But if it ceases to be the commercial asset then the income has to be taxed as income from other sources.
2.3 In the light of the reasoning given in the aforesaid cases, the Assessing Officer held that in the case of the assessee, the equipments and furnitures and fixtures have not been let out for exploiting the commercial assets and in fact they were never commercial assets in the business of the assessee. Rather, the assesses has purchased them to give them on rent to the hotel and the assessee never ran the hotel or restaurant nor he did so even now. The Assessing Officer, therefore, concluded that the letting out to exploit the said assets was with a motive to earn rental income, and, therefore, the income was assessable as income from other sources.
He further held that the aforesaid agreement with M/s CJHPL clearly showed that the rent for the use of the premises and for the use of furniture, fixture and equipments was separately and distinctly provided. As such, the consideration received for the use of the premises was taxable as income from house property and that from leasing of equipments and furniture, etc., as income under the head "Other sources". He further held that as the assessee had not shown as to what was the turnover of the said restaurants during the year under consideration 2 per cent of which was receivable as the rent for the premises, he would estimate 2 per cent of the turnover of the said restaurant at Rs. 2 lakhs which will be taxed as income from house property.
2.4 The Assessing Officer, further noted that the assessee-company had obtained a loan of Rs. 20 lakhs from Canara Bank for furnishing the Chinese Restaurant of Deluxe type at an interest rate of 15 per cent.
He held that the assessee had under-stated the hire charges at Rs. 4,000 per month which was receivable by it from the sister-concern.
Considering the cost of the assets and the expenses on renovation, the Assessing Officer estimated the correct hire charges from the said letting out arrangement at Rs. 5,00,000 per annum and assessed the same under the head "Other sources".
2.5 The assessee had claimed interest liability as expenditure with reference to the aforesaid loan of Rs. 20 lakhs from Canara Bank. The Assessing Officer disallowed the expenditure on the ground that the same was not incurred for the purpose of business of the assessee but had been incurred to make the said assets available to M/s CJHPL. He further observed that the setting up of a restaurant for a sister-concern was not the business of the assessee and the said expenditure cannot be said to be for the purposes of the business so as to be allowable under Section 36(1)(iii). He thus disallowed the claim of Rs. 6,19,974 in this behalf.
2.6 The Assessing Officer further observed that no depreciation is allowable to the assessee in respect of the building which had been let out to M/s CJHPL as it was being assessed under the head 'Income from other sources'. Similarly, he held that no deduction for repairs will be available to the assessee because under the agreement M/s CJHPL, the hirer of the premises, had undertaken to maintain the premises.
3. On appeal, the CIT(A) restored the issue of addition of Rs. 2,00,000 as income from house property which was made by the Assessing Officer on the estimated turnover by applying the rate of 2 per cent as stipulated in the agreement. The CIT(A) observed that the Assessing Officer had not given the amount of turnover of the restaurant situated at Connaught Circus and, therefore, directed the Assessing Officer to find out the amount of turnover as disclosed by the hotel and restaurant to whom the premises, fixtures and furnitures were given on hire. However, the CIT(A), while restoring the issue to the Assessing Officer, confirmed that the income on the turnover calculated at the rate of 2 per cent would be assessed as income from house property because as per agreement the assets were not commercial assets.
3.1 The CIT(A), after considering the submissions of the learned counsel for the assessee with reference to non-allowance of depreciation on the part of the premises No. M-15, Connaught Circus, directed the Assessing Officer to verify the fact as to whether the premises are numbered as M-7 or M-15, Connaught Circus or they are the same premises having two numbers. He also directed the Assessing Officer to consider the past history of the case and decide the issue on merits after providing an opportunity of being heard to the assessee.
3.2 With reference to the addition of Rs. 5,00,000 and treating the same as income from other sources, the CIT(A) observed that it was an admitted fact both by the department and the assessee that the demand of interest claim at Rs. 6,19,974 was much more than the receipt of income as hire charges. He further observed that the transaction does not appear to be reasonable and genuine because no prudent businessman can afford to do so. He, therefore, confirmed the findings of the Assessing Officer together with the addition of Rs. 5,00,000 to be treated as income from other sources.
3.3 With reference to the claim of the assessee for deduction of Rs. 6,19,974 as interest under Section 36(l)(iii) of the Income-tax Act, the CIT(A) observed that the Assessing Officer had himself estimated the rental income of Rs. 5,00,000 on the investment and has taxed the same under the head "Income from other sources" and therefore, the claim of the assessee for deduction of interest had to be considered under Section 57(iii). Accordingly, he directed the Assessing Officer to consider the allowability of interest under Section 57(iii) of the Income-tax Act, 1961.
4. In the assessment order dated 30-12-1992, the Assessing Officer further considered the points which were restored to him by the CIT(A) with reference to the original assessment order.
4.1 As directed by the CIT(A), the Assessing Officer calculated the gross sales of M/s CJHPL for the financial year 1989-90 at Rs. 15,12,542. He worked out the income of the assessee at the rate of 2 per cent of the said gross sales at Rs. 30,277.85. He also observed that as claimed by the assessee, the said amount of Rs. 30,278 had actually been credited to the profit and loss account. He, therefore, deleted the addition of Rs. 2,00,000.
4.2 The Assessing Officer, further verified that the premises No. M-7 and M-15 are actually the same premises and that different numbers had been allotted by the Land Development Office and the NDMC. The assessee also submitted before the Assessing Officer that a part of the said premises was used by the assessee and another part was let out to M/s CJHPL. The Assessing Officer observed from the perusal of records that the assessee-company had been getting depreciation on the part of the premises held by it for its company. He, therefore, calculated the depreciation at the rate of 10 per cent of the written-down value of the premises (Rs. 7,148) at Rs. 715.
4.3 With reference to the directions of the CIT(A) to consider the claim of the assessee on merits for allowability of interest under Section 57(iii) of the Income-tax Act, the Assessing Officer referred to the observation of the CIT(A) to the effect that "the appellant also claimed deduction for such interest amounting to Rs. 6,19,974 as against income of Rs. 48,000 per annum. This clearly shows that it is not a genuine transaction and no prudent businessman can do so, in other words, it is a sham arrangement" and mentioned that in the light of the said observation, the direction of the CIT(A) to consider the allowability of interest under Section 57(iii) did not appear to be correct. He further mentioned that the provisions of the said Section 57(iii) allowed deduction of "any other expenditure not being in the nature of capital expenditure laid out and expended wholly and exclusively for purpose of making and earning such income". He, therefore, held that there has to be a direct nexus between expenditure and income earning activity and that in the instant case there was a complete absence of the same. The rental income was far less than compared with the interest paid. He, therefore, held that the assessee cannot be allowed any relief so far as CIT(A)'s directions are concerned in this behalf.
4.4 In view of the foregoing, the Assessing Officer computed the income of the assessee at Rs. 8,80,002 after allowing a relief of Rs. 2,00,715. On further appeal to the CIT(A) against the assessment order dated 30-12-1992, the CIT(A), after considering the detailed submissions made by the learned counsel for the assessee, which were almost the same as during the appellate proceedings relating to original assessment, confirmed the findings of the Assessing Officer that the assessee is not entitled to any deduction of interest under Section 57(iii) of the Income-tax Act and observed in the process that "by no stretch of imagination it can be held that the expenditure in the instant case has been let out wholly and exclusively for the purpose of making or earning income".
4.5 The CIT(A) also considered the submissions made by the learned counsel with reference to the estimates of the hire charges at Rs. 5,00,000 from the leasing out of the equipment, furniture, fixtures and fittings as against Rs. 48,000 shown by the assessee. The CIT(A) referred to his predecessor's orders in appeal No. 353 of 1992-93 dated 9-9-1992 and decided against the assessee and observed that the said point did not arise out of the order of the Assessing Officer dated 30-12-1992 which was the subject-matter of the appeal before him. He, therefore, declined to entertain the said point for adjudication.
5. In the assessment year 1990-91, the Assessing Officer on the same facts as for the preceding year held that the consideration received by the assessee for the use of the premises would be taxable as income from house property and that from letting out of furniture and fixtures would be taxable as income from other sources. Since the assessee had already shown a sum of Rs. 38,202 as commission, being 2 per cent of the total sales turnover of M/s CJHPL from 1-4-1989 to 31-1-1990, no addition was made in this behalf. The Assessing Officer further held that the hire charges for fixtures, furnitures and equipment shown at Rs. 48,000 per annum were grossly understated. He, therefore, estimated the hire charges at Rs. 5,00,000 per annum and taxed the same as income from other sources. In this connection he relied on the orders of the Assessing Officer and CIT(A) in the case of the assessee for the assessment year 1989-90. With reference to the claim of the assessee for interest of Rs. 7,30,329, as deduction under Section 36(1), the Assessing Officer relying on the earlier orders in the case of the assessee for assessment year 1989-90, disallowed the said claim of Rs. 7,30,338. He further disallowed the claim of the assessee for depreciation on the ground that the rental receipts are being assessed under the head 'Income from other sources'.
5.1 On appeal, the CIT(A), after considering the detailed submissions made by the learned counsel for the assessee to the effect that the assessee-company had provided the premises to exploit commercial assets and the income accruing therefrom should be regarded as income from business, upheld the following additions/disallowances made by the Assessing Officer : (a) Rs. 5,00,000 estimated as hire charges in respect of fixtures, furniture and equipment. He also observed that the assessee was never engaged in the business of running a restaurant and thus the furniture, fixture, etc., were never the commercial assets of the assessee-company. He further observed that the same were leased out for a period of 10 years and the assessee could not be said to have exploited commercial assets through others and held that the AO was justified in holding that the hire charges were not taxable as business income; (b) Disallowance of the claim of depreciation by the assessee to the extent of Rs. 2,08,265 as against the claim of Rs. 5,78,371 made by the assessee. He observed that the assessee had received commission of Rs. 38,202 which was assessed by the Assessing Officer under the head 'Income from house property'. Since the income had been assessed under the head 'Income from house property", the assessee was not entitled to depreciation under Section 32 of the Income-tax Act, 1961; and (c) Disallowance of the claim of interest at Rs. 7,30,329 as a deduction under Section 57(iii) of the Income-tax Act. The CIT(A) relied on the decision of the Hon'ble Supreme Court in the case of Smt Padmavati Jaikrishna v. Addl. CIT [1987] 166 ITR 176. While applying the said decision to the facts in the present case he observed that the loan from the bank had not been taken wholly and exclusively for the purpose of earning income but for some other purposes - for making the assets available to M/s CJHPL to reduce the tax liability of the assessee-company itself.
6. The learned counsel for the assessee, Shri C.S. Aggarwal, submitted that the assessment year 1984-85 was the initial year in which the assessee-company had provided the premises M-7, Connaught Circus, New Delhi to M/s CJHPL for running a first class restaurant as per Agreement executed on 26-12-1983. In this connection he invited our attention to the assessment order for the assessment year 1984-85 placed at pages 36-39 of the paper book and submitted that the said Agreement was never questioned and was never held as sham. He further invited our attention to the order of CIT(A)-V, New Delhi in the case of the assessee for the assessment year 1984-85, which is placed at pages 42-48 of the paper book and submitted that the claim of the assessee for interest and depreciation had been allowed during the assessment year 1984-85. He further invited our attention to the assessment order in the case of the assessee for the assessment year 1985-86 which is placed at pages 64-66 of the paper book and submitted that the income from the said premises had been treated as income from business.
6.1 The learned counsel further took us through the Agreement, placed at pages 19-21 of the paper book, in particular paragraph 2 of the Agreement at page 19 and Condition No. 3 of the Agreement at page 20 which are reproduced herein for facility of reference : Whereas OBF is the owner of a shop at M-7, Connaught Circus, New Delhi (hereinafter referred to as the 'premises') and is desirous of allowing the use of the said premises.
In circumstances of OBF providing the above premises and facilities, CJHPL shall pay to OBF as under : (a) a sum of Rs. 4,000 (Rupees Four thousand) per month towards hire charges for equipment, furnitures, fixtures and fittings; and (b) an amount of 2% (two per cent) of its turnover excluding the sales-tax and all other Government levies for the use of the premises.
6.2 The learned counsel submitted that a close reading of the Agreement will clearly show that it is a composite Agreement for leasing of premises on monthly charges of Rs. 4,000 plus an amount of 2 per cent of the turnover of the business of M/s CJHPL, excluding sales-tax etc.
He further submitted that up to the assessment year 1988-89, the said income has been treated as business income.
6.3 The learned counsel for the assessee relied on the following case law in support of his arguments :- 1. New India Construction Co. (P.) Ltd. v. Asstt. CIT [1991] 38 ITD 28 (Delhi)Smt. Godavari Devi Sehgal v. ITO 6.3-1 With reference to the case of New India Construction Co. (P.) Ltd. (supra) the learned counsel submitted that in the said case, the question was whether the income from building in which air-conditioning was installed could be assessed as income from house property or as income from other sources. It was held that income in relation to the assessment year 1986-87 from the composite unit, viz., building and the air-conditioning was assessable under the head "income from other sources" only, as provided by Section 56(2)(iii) and as a consequence, the assessee would be entitled to get depreciation on the building and the air-conditioning, deduction for house tax, ground rent, interest on borrowed funds to the extent they were relatable to the income from the said property. However, for the assessment year 1985-86, it was held that since the letting was only in relation to the building indicating that it was capable of being let out without the air-conditioning facility, the income from the property could not be assessed under any other head other than property. It was also held that there assessee would be entitled to all the deductions under Sections 23 and 24. The learned counsel submitted that in the present case, the premises had been given to M/s CJHPL for running first-class restaurants and the same amounted to exploitation of commercial properties and the income was assessable as business income.
6.3-2 In the case of Bosotto Bros. Ltd. (supra), a company which carried on hotel business at Madras and Ootacamund and which was empowered under its Articles of Association to lease its buildings leased its premises situated at Ootacamund along with furniture and fittings to a firm for the purposes of running a hotel and claimed depreciation on the building and furniture leased to the firm. It was held that the letting of the premises was part of the business of the company and so it was entitled to an allowance for depreciation in respect of the buildings and furniture under Section 10(2)(vi)of the Indian Income-tax Act, 1922. It was further observed by the Hon'ble Madras High Court that the Income-tax Act, being a taxing statute, should receive a strict construction, that is, a c6nstruction in favour of the subject and not in favour of the Crown. If a case appears to be governed by either of the two provisions, it is clearly the right of the assessee to claim that he should be taxed under that one which leaves him with a lighter burden. The learned counsel laid stress on the said observations of the Hon'ble High Court and submitted that in case the authorities below felt that the Agreement was not genuine then market rate of rent could be adopted. In this connection, he referred to the provisions of Section 23(1)(b) of the Income-tax Act, 1961.
6.3-3 In the case of M.M. Ipoh (supra) where Section 3 of the Income-tax Act. 1922 was challenged as offending Article 14 of the Constitution, the Hon'ble Supreme Court observed that the function of the Income-tax Officer is fundamentally quasi-judicial. The Income-tax Officer's discretion to bring to tax either the income of the association collectively or the shares of the members of the association separately is not final; it is subject to appeal to the Appellate Assistant Commissioner and to the Tribunal. Exercise of this power is from its very nature contemplated to be governed not by considerations arbitrary but judicial. The nature of the authority exercised by the Income-tax Officer in a proceeding to assess to tax income and his duty to prevent evasion or escapement of liability to pay tax legitimately due to the State, constitute adequate enunciation of principles and policy for the guidance of the Income-tax Officer in exercising his option under Section 3. The learned counsel submitted that the estimates of Rs. 5,00,000 by the lower authorities as hire charges for the fixtures, furnitures and equipment was arbitrary in nature and the said authorities have not acted in a judicious manner.
In this connection, he further submitted that up to the assessment year 1988-89 the department had accepted the income of Rs. 48,000 per annum from the leasing out of the said fixtures, furnitures and equipments.
6.3-4 In the case of Dalhousie Investment Trust Co. Ltd. (supra) the assessee company was authorised by Clause 2 of its Memorandum of Association to acquire, hold, lease and transfer shares and during the previous years ending 31st March 1953-56, the assessee company sold 6,900 shares of McLeod and Co. and other shares in the companies managed by McLeod and Co. and some other companies. The 6,900 shares of McLeod and Co., were purchased by the assessee company during the years 1948-52 at a time when their market price was continuously falling. In order to make those purchases, the assessee company had taken loans amounting to Rs. 8 lakhs and the dividend declared on these shares was at a very low rate. The explanation given by the assessee company that the shares of McLeod and Co., were held as investment and were sold simply because the control of that company went out of the hands of its Directors was not proved. In years prior to the relevant assessment years the assessee company's case that the acquisition and sales of shares were in the nature of investments had been accepted by the department. The question was whether the profit made by the assessee company from the sale of the 6,900 shares of McLeod and Co., in the previous year ending 31st March, 1953 and shares in companies managed by McLeod and Co. and in other companies in the previous years, was income from business. It was held on facts that the assessee company dealt with the shares of McLeod and Co. and the allied companies as stock-in-trade, that they were in fact purchased even initially not as investments but for the purpose of sale at a profit and therefore, the transactions amounted to an adventure in the nature of trade. The profit derived by the assessee company from the sale of shares was therefore a revenue receipt and as such liable to income-tax. It was also held that the decision of the department in the earlier years that the transactions were in the nature of change of investments was not binding in the proceedings for the assessment during the subsequent years. The learned counsel submitted that in the case of the present assessee the whole arrangement, as per Agreement dated 26-12-1983, is for the exploitation of the commercial assets of the assessee and the income of Rs. 48,000 per annum on account of hiring charges for furnitures, fixtures and equipments and 2% of the total turnover of M/s CJHPL, as received by the assessee, should be treated as business income and depreciation and interest should be allowed in relation to such income.
6.3-5 In the case of Snam Progetti S.P.A. (supra), the assessee, an Italian company, placed its excess business funds in short term deposits with the banks and interest income was earned thereon. For the assessment year 70-71, the assessee company had incurred a net business loss of Rs. 122 lakhs. In the next assessment years 71 -72, the assessee company earned a profit of about Rs. 30 lakhs and interest income of about Rs. 5 lakhs and the question was whether the business loss for 1970-71 carried forward should also set off against the interest income. The Hon'ble Delhi High Court held that the assessee company had not come here to make bank deposits in India but had come to carry on business and the income earned by it by depositing spare funds in banks and earning interest thereon would also be business income and for the purposes of set off it could not be treated as separate from business income. Therefore, the loss brought forward from the assessment year 1970-71 had to be set off also against the interest income for the assessment year 1971-72. The Hon'ble High Court also observed that : The question to be seen in such a case is whether the interest income is derived also from what may be described as business activity. If it is so, derived, then the mere fact that it is taxed under a different section will make no difference. The approach to the problem has therefore to be disassociated from the Section under which the tax is imposed on the form of income.
The learned counsel relied on the said observations of the Hon'ble High Court and submitted that the assessee's case is of providing premises and fixtures and equipment to M/s CJHPL and giving the same for management and the said purpose is purely commercial. The income derived therefrom is, therefore, business income and not income from property.
6.3-6 In the case of Smt. Godavari Devi Sehgal (supra), the learned Third Member of the Tribunal, while discussing the application of the principles of res judicata to income-tax proceedings, observed that : This principle has, certain exceptions, namely, the earlier findings would be good and cogent evidence for subsequent years when the same question falls to be determined. If no fresh facts come to light on investigation, the Assessing Officer is not entitled to reopen the same question on mere grounds of suspicion or change of opinion.
This is based on the principles of natural justice and expediency.
There is a large amount of authority for the proposition that a finding arrived at in a subsequent year ignoring, without material, the conclusions arrived at earlier would be vitiated in law [see Ipoh (M.M.) v. CIT 67 ITR 106 (SC) and Dalhousie Investment Trust Co. Ltd. v. CIT 68 ITR 486 (SC)]. In other words, the application of the doctrine of res judicata depends upon the emergence or surfacing of new facts. In the absence of surfacing of new facts, it may not be expedient or possible to change the earlier decisions.
The learned counsel submitted that in the case of the present assessee also, the department had treated the income from the said premises and fixtures, furniture and equipments as business income up to the assessment year 1988-89 and that the same treatment should be given in the years under consideration.
7. The learned Departmental Representative, Smt. Surabhi Sinha, submitted that in the earlier years there was no specific finding or mention about the agreement entered into by the assessee with M/s CJHPL and that the Department had been accepting the income as returned by the assessee. She further submitted that now the Tribunal has to determine as to whether the income of 2% commission on the turnover of M/s CJHPL is to be taken as income from "house property" or "business income", irrespective of the fact how the department had been treating the said income in earlier years. In this connection she invited our attention to page 4 of the assessment order dated 18-3-1992 and submitted that it is necessary to examine as to whether the arrangement entered into by the Assessee with M/s CJHPL could be treated as its business activity. She mentioned that the Assessing Officer has analysed the terms of the Agreement and had observed as under : The terms of the Agreement show that the assessee was receiving hire charges for its premises and furniture, fixtures and equipments. The business of the assessee is not running of restaurant as has been stated by the assessee himself. The assessee's business is also not to furnish the premises as a restaurant and then to hire it out. It is not a case where the assessee was running himself a restaurant or hotel which he let out as a stop gap or temporary arrangement. It is also not a case where the premises with amenities and fixtures, etc., were let out by the assessee to cany on his business more efficiently. It is also not a case where letting of furniture or other equipments was subservient to letting accommodation and the letting of accommodation is only for facilitating the business of the assessee.
She further invited our attention to the assessment order for the assess-mentyear 1984-85, which is placed at pages 36-39 of the paper book and submitted that no dispute had been raised in the said assessment order with reference to the head of income under which the income is to be assessed. The Assessing Officer only made an addition of Rs. 25,000 on estimated basis, as the assessee had failed to file certificate regarding the receipts from M/s CJHPL. She further invited our attention to page 5 of CIT(A)'s order dated 20-7-1993 for the assessment year 1990-91 wherein the CIT(A) has observed that : The assessee was never engaged in the business of running a restaurant. Thus the furniture, fixtures, etc. were never commercial assets of the assessee company. The same were leased out for a period of 10 years and the assessee cannot be said to have exploited commercial assets through others. The Assessing Officer was, therefore, justified in holding that the hire charges were not taxable as business income. As held by the Hon'ble Supreme Court in the case of New Swan Sugar and Gur Refining Company Ltd. v. CIT if on the terms of lease deed the intention of the appellant was to part with the entire machinery of the factory and the premises with the obvious purpose of earning income and not to treat the factory and machinery as a commercial asset during the subsistence of lease the income from lease could be assessed under the head other sources only. Similar view has been held by the Delhi High Court in the case of CIT v. Superfine Cables (P.) Ltd. In view of the judgment of the Supreme Court and Delhi High Court, as cited above, the terms of Agreement between the appellant and the associated concern and the facts of the case I hold that the Assessing Officer was correct in treating the hire charges of furniture, fixture, etc., as income from other sources.
The learned DR further submitted that the assessee is the owner of the premises which have been provided to M/s CJHPL and any income from the said house property can only be treated as rent and is taxable as 'income from house property'. In this connection she relied on the decision of the Hon'ble Supreme Court in the case of S.G. Mercantile Corporation (P.) Ltd. v. CIT [1972] 83 ITR 700. With reference to the Agreement, she submitted that even if the Agreement is held as a composite agreement, the basic question as to whether the income is to be treated as income from house property or as business income will still have to be determined. In this connection she emphasised that the assessee is not running the hotel but it is the associate concern which is running the hotels and both the parties are connected. She also submitted that what requires to be examined is the intention of the parties. In this connection she also referred to Clause 5 of the Agreement wherein the word "tenancy" has been used. The said clause read as under : 5. This Agreement does not in any way give or tantamount or constitute transfer or cause to transfer any of the rights of OBF to CJPHL as to ownership or tenancy in the said premises.
She further emphasised that Clause 3 of the said Agreement provides for separate incomes depending on use. Whereas Sub-clause (a) of Clause 3 provided for a sum of Rs. 4,000 per month towards hire charges for equipments, furnitures and fittings, Sub-clause (b) thereto provides for an amount of 2 per cent of the turnover of M/s CJHPL, excluding sales tax, etc., for use of the said premises. In view of the foregoing, the learned DR submitted that the Assessing Officer had rightly held the amount of 2% of the said turnover as income from house property. With reference to the estimate of Rs. 5 lakhs by the Assessing Officer as hire charges for equipments, furnitures, fixtures and fittings, the learned DR submitted that the observations of CIT (A) in his order for the assessment year 1990-91, together with the case of law relied upon by him may be treated as part of her submissions.
7.1 With reference to the question of allowability of interest on funds borrowed by the assessee from Canara Bank and spent on fixtures, furniture and equipment, the learned DR invited our attention to pages 28 and 51 of the paper book and submitted that out of the loan of Rs. 20 lakhs, a major portion of the loan had been spent on renovation of the restaurants, which were not business assets and as such the provisions of Section 36(1)(iii) will not apply. She further submitted that under the provisions of Section 57(iii), it is necessary that the expenditure (not being in the nature of capital expenditure), is laid out or expended wholly and exclusively for the purpose of making or earning the income which is taxable under the head "income from other sources". Since in this case the loan obtained from the bank is for composite purpose and a major portion of the said loan has been spent on renovation (as is clear from page 28 of the paper book wherein the break-up of expenditure on renovation has been given), it cannot be said that the whole of the expenditure out of the borrowed funds has been laid out or expended wholly and exclusively for the purpose of earning the income of Rs. 4,000 per month towards hire charges for equipments, furniture, fixtures and fittings. Thus the deduction of interest claimed by the assessee with reference to the aforesaid borrowed funds cannot be allowed even under Section 57(iii).
7.2 The learned Departmental Representative relied upon the following case laws in support of her arguments referred to in paragraphs 7 and 7.1 : (5) New Savan Sugar and. Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 (SC) 7.2-1 In the case of Sir Homi M. Mehta (supra) the assessee who was the promoter, managing director and principal share holder of a company, made a gift of Rs. 3 lakhs to the company when it was in financial difficulties and claimed the said amount as deduction from his assessable income on the ground that if he had not made the gift, the company would have failed and he would have lost his capital invested in the company, his salary and his business reputation and credit. It was held by the Hon'ble Bombay High Court that the sum of Rs. 3 lakhs paid by the assessee to the company was not expenditure allowable under Section 10(2)(ix) of the Income-tax Act, 1922 or under the provisions of Section 7 or Section 12 of that Act.
7.2-2 In the case of Sultan Bros. (P.) Ltd. (supra) the assessee constructed a building on a certain plot of land, fitted it up with furniture and fixtures and let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease provided for a monthly rent of Rs. 5,950 for the building and a hire of Rs. 5,000 for the furnitures and fixtures. It was held that: (i) Although the object of the assessee was to acquire land and buildings and to turn them into account by letting and selling them, the activity contemplated did not by itself turn the lease into business deal. As the assessee never carried on any business of a hotel in the premises let out, or otherwise at all and, there was nothing to show that it intended to carry on a hotel business itself in the same building, the letting of the building did not amount to carrying on of a business and the income under the lease could not, therefore, be assessed under Section 10 of the Income-tax Act, 1922, as income from business; (ii) Income from the hire of the furniture and fixtures had to be assessed under Section 12 after providing for the allowances mentioned in Sub-section (3) of that Section 12; (iii) As the assessee and the lessee intended that the building and the fixtures and furniture were to be used for one purpose, namely, for the purpose of running a hotel altogether and not one separately from the other, notwithstanding that the sums payable for their enjoyment were fixed separately, the lease specified all the conditions for the applicability of Section 12(4) of the 1922 Act and rent from the building had to be computed under Section 12 after providing for the allowances mentioned in Sub-section (4) thereof and Section 9 did not apply.
The Hon'ble Supreme Court also observed that "whether a particular letting is business has to be decided in the circumstances of each case. Each case has to be looked at from businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. A thing is not by its very nature a commercial asset. A commercial asset is only an asset used in a business and nothing else and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trace is commonly carried on". The Apex Court also observed that "when a building and plant, machinery or furniture are inseparably let the Income-tax Act contemplates the rent from the building as a residuary head of income and not one to be computed under Section 9".
The Apex Court further observed that "the letting of a building can never be incidental to the letting of furniture contained in it. and therefore, no consideration of primary and secondary lettings arises in construing the section : what must apply when furniture is let and also buildings must equally apply when plant and machinery are let out and also buildings. All that Section 12(4) contemplates is that the letting of machinery, plant or furniture should be inseparable from the letting of the building. The term "inseparable" in that section does not contemplate either that the machinery, plant or furniture should by its very nature be inseparable from the building so that the building has also necessarily to be let along with it, or that the plant, machinery or furniture is fixed to the building. The inseparability referred to in Section 12(4) is one that arises from the intention of the parties".
7.2-3 In the case of Jagmohandas J. Kapadia (supra) it was held that the interest paid towards the general balance in the overdraft account of a person carrying on business as a share and stock broker who had income falling under the heads 'business', 'interest on securities' and 'dividends', cannot be deducted from income from dividends, but only from business income inasmuch as, under the special provisions contained in Section 12(2) of the Income-tax Act, 1922, only expenditure incurred solely for the purpose of earning such dividend income can be deducted from income from dividends.
7.2-4 In the case of Kasturbhai Lalhhai (supra), the assessees, who were directors of A & Co. Ltd., has sent out two circulars to the shareholders pointing out the mismanagement in K.N. Co. Ltd., which was the managing agent of A & Co. Ltd. They also collected proxies for a meeting of A & Co. Ltd., requisitioned in the meantime. Before the said meeting could be held, the differences were settled and ultimately, the first assessee was elected Chairman of Board of Directors of A & Co.
Ltd. The assessees jointly had spent about Rs. 33,299 for sending out the circulars and collecting the proxies and claimed deduction of the relevant amount in the assessment both under Section 10(2)(xv) and under Section 12(2) of the Income-tax Act, 1922. The departmental authorities disallowed the claim but the Tribunal allowed the expenditure as a permissible deduction under Section 12(2). On a reference to the Hon'ble Gujarat High Court, it was held that the assessees had incurred the expenditure in issuing the circulars on the ground of commercial expediency in order to indirectly facilitate the earning of the director's fees, the expenditure relating thereto was an expenditure incurred solely for earning the director's fees and hence was allowable under Section 12(2). However, the expenditure incurred in collecting the proxies from the share holders was disallowed as the same could not be regarded as expenditure connected with the earnings of the director's fees.
7.2-5 In the case of New Savan Sugar & Gur Refining Co. Ltd. (supra) the assessee company was carrying on the business of crushing sugarcane and gur refining. Its managing agents wrote a letter to its share holders advising the acceptance of an offer of the lease of the company as a running concern. At an extra-ordinary general meeting on March 5, 1946 the directors were authorised to enter into a lease and the lease was given with effect from June 1, 1945. The consideration of the lease was royalty payable on the manufacture of sugar and gur at rates specified therein subject to a minimum royalty of Rs. 65,000 per annum.
The lessee was made responsible for all the running expenses of the factory and excise duty on sugar etc. The cumulative effect of Clauses 11 to 14 of the lease deed was that the assessee would have no concern with the production of the factory. The question was whether the income which arose to the assessee for the assessment year 1955-56 from the lease should be assessed under Section 10 or Section 12 of the Income-tax Act, 1922 and the assessee should be allowed additional depreciation under Clause (via) and development rebate under Clause (vib) of Section 10(2). It was held that : (i) On the terms of the lease deed the intention of the assessee was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as commercial asset during the subsistence of the lease. The intention of the appellant was to go out of the business altogether so far as the factory and machinery was concerned w.e.f. June 1, 1945. The income from the lease could not be assessed under Section 10 but was liable to be assessed under Section 12.
(ii) That Clauses (via) and (vib) were not ancillary to Clause (vi) of Section 10(2). They introduced a new scheme and could not be treated as an integral part of Clause (vi) by implication. It was, therefore, not possible to read the two clauses by implication in Section 12(3) or Section 12(4). The assessee, was not therefore entitled to the allowance of additional depreciation or development rebate.
7.2-6 In the case of S.G. Mercantile Corpn. Ltd. (supra), the assessee company was incorporated in January 1955 and one of the objects specified in its memorandum of association was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially. The assessee company took on lease a market place for an initial term of 50 years, undertaking to spend Rs. 5 lakhs for the purpose of re-modelling and repairing the structure on the site. It was also given the right to sub-let the different portions. The assessee's activity during the period covered by the assessment years 1956-57 to 1958-59 consisted of developing the property and letting out portions thereof as shops, stalls and ground spaces to shop keepers, stall holders and daily casual market vendors. The question Was whether the assessee's income from sub-letting the stalls was assessable as business income under Section 10 of the Income-tax Act, 1922 or as income from other sources under Section 12, it was held that : (i) Since the assessee company was not the owner of the property or any part thereof, no question of making the assessment under Section 9 arose; (ii) The definition of "business" in Section 2(4) was of wide amplitude and it could embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out shops and stalls in the market; (iii) That on the facts, the taking of the property on lease and subletting portions thereof was part of the business and trading activity of the assessee and the income of the assessee fell under Section 10 of the Act; and (iv) That where, as in this case, the income could appropriately fall under Section 10 as being business income, no resort could be made to Section 12.
It was further observed that the liability to tax under Section 9 of the Income-tax Act, 1922, is of the owner of the buildings or land appurtenant thereto. In case, the assessee is the owner of the buildings and lands appurtenant thereto, he would be liable to pay tax under Section 9 even if the object of the assessee in purchasing the landed property was to promote and develop a market thereon. It was further observed that the residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question; it comes into operation only after the preceding heads are excluded.
7.2-7 In the case of Super Fine Cables (P.) Ltd. (supra) the assessee company had set up its factory in 1959 for the manufacture of cables.
For some reason, the manufacture of cables could not be started till the year 1961 when the factory building was leased out on a rent of Rs. 750 per month. The income from the lease of the factory was assessed as income from other sources after allowing reasonable expenses from year to year. In the assessment year under consideration, the assessee claimed that the income arising from the letting out should be treated as income from the business of exploiting a commercial asset, but the claim was not accepted by the ITO or the AAC. The Tribunal, however, came to the conclusion that the income from the lease should be assessed under the head "business". On a reference, the Hon'ble Delhi High Court held that there were no facts indicating that the asset in question, that is, the factory continued to be a commercial asset even after the letting out. There was nothing to show that there was any commercial motivation in the letting out. Therefore, the income of the assessee had to be assessed as income from "other sources". In this case, the Hon'ble Delhi High Court considered the provisions of Section 56(2)(iii) of the Income-tax Act, 1961 and observed that the said provisions indicate that where a building, containing machinery such as a factory, is let out, it is income from other sources if it is not income from business or profession. The Hon'ble Delhi High Court also referred to the decision of the Hon'ble Supreme Court in the cases of Sultan Bros. (P.) Ltd. (supra) and New Savan Sugar & Gur Refining Co.
Ltd. (supra), while observing that in each case, what has to be seen is whether the asset is being exploited commercially by the letting out or whether it is being let out for the purpose of enjoying the rent. It further observed that the distinction between the two is a narrow one and has to depend on certain facts peculiar to each case.
7.2-8 In the case of Smt. Padmavati Jaikrishna (supra), the assessee derived the income from other sources in the shape of interest, dividends, etc. For the assessment year 1966-67, out of the interest of Rs. 26,986, paid by her on monies borrowed by her, the ITO disallowed a sum of Rs. 10,279 on proportional basis on the ground that to the extent, the loan was taken by the assessee to discharge her liabilities for income-tax and wealth-tax and to pay annuity deposit, the interest thereon was not allowable under Section 57(iii) of the Income-tax Act, 1961. The Tribunal recorded a factual finding that the expenditure had been incurred to meet the assessee's personal liability of payment of income-tax and wealth-tax and annuity deposit and confirmed the disallowance. On a reference, the Hon'ble High Court confirmed the decisions of the Tribunal. On appeal, the Hon'ble Supreme Court held, affirming the decision of the High Court, that the sum of Rs. 10,279 was not an admissible deduction under Section 57(iii) and that the High Court was right in holding that meeting the liability for income-tax and wealth-tax was a personal one and the dominant purpose for paying annuity deposit was not to earn income but to meet the statutory liability of making the deposit. The expenditure was not wholly and exclusively for the purpose of earning income.
8. In reply, the learned counsel for the assessee submitted that the basic question is as to whether the amount of 2% of the turnover and the other income of Rs. 4,000 per month is to be assessed under the head "Income from house property" or under the head "Profits and gains of business". He submitted that in the assessment order dated 18th March, 1992, an amount of Rs. 3,98,400 has been added on account of rent receipt. He further invited our attention to page 2 of the paper book and submitted that the amount of Rs. 48,000, which represents hire charges for leasing out fixtures, furniture and equipment, has been included as income from house property and has been shown as annual letting value of property of M-15, Connaught Circus, New Delhi. He further invited our attention to page 26 of the paper book, wherein it has been shown that the amount of Rs. 48,000 received as lease rent for fixtures, furnitures and equipment has been taxed as business income from the assessment years 1984-85 to 1989-90 and similarly the amount received as 2% commission on turnover of M/s CJHPL had been assessed as business income for the said assessment years. He further submitted that the addition of Rs. 2 lakhs originally made by the Assessing Officer on estimate basis towards income from house property was subsequently deleted. He submitted that similarly, the amount of Rs. 5 lakhs estimated by the Assessing Officer as hire charges for furniture, etc. and taxed as income from other sources, is actually in the nature of income from business and merely because the assessee had included the said income of Rs. 48,000 under the head "Income from house property", it should not be a reason for not treating the said income as business income.
8.1 With reference to the reliance of the learned DR on the case of Sultan Bros. (P.) Ltd. (supra), the learned counsel submitted that the situation in the said case was almost similar as in the present case of the assessee. In the said case, a fully equipped hotel building was leased out whereas in the case of the assessee, a fully equipped restaurant building has been leased out. He invited our attention to page 28 of the paper book and submitted that Rs. 8,93,785 were spent in the first year in raising fixtures, equipment and on renovation of the premises and an amount of Rs. 25,86,353 was spent in the second year on the raising of furniture, fixture and equipment and the renovation of the shops where the restaurants were to run the business and stressed that the whole expenditure was for business purposes and that no owner will spend more than Rs. 34 lakhs except for the sake of business. He submitted that it was a commercial transaction on the whole and the parties had that intention while entering into the agreement and that Clause 3 of the Agreement provided for a composite consideration for giving the property for business purposes.
8.2 With reference to the claim for deduction of interest, the learned counsel invited our attention to page 54 of the paper book, wherein the details of interest accrued but not paid have been given. For the period from 1-4-1988 to 31-3-1989, relevant for the assessment year 1989-90, the amount of interest accrued has been shown as Rs. 6,19,013.
It is also mentioned that such interest has been allowed as deduction up to the assessment year 1988-89. The learned counsel further submitted that the Agreement could be examined by the department only in the initial year and that the department has not questioned the agreement in the first year. In this connection, he relied on the decision of the then Hon'ble Punjab High Court at Delhi in the case of CIT v. Ganeshi Lal Sham Lal [1966] 61 ITR 408 and also submitted that no order under Section 263 has been made by the Commissioner of Income-tax with reference to the income assessed in the earlier years.
He further submitted that the amount of Rs. 5 lakhs estimated by the Assessing Officer should in any case be assessed as business income and not as income from other sources. Even if the said amount is assessed as income from other sources, the interest of Rs. 6,19,013 ought to be allowed under Section 57(iii). He further submitted that the judgments relied upon by the learned DR in the eases of Sir Homi M. Mehta (supra) and Jagmohandas J. Kapadia (supra) are not on the point.
9. We have carefully considered the submissions made by both the parties, the case law relied upon by. both of them and have also carefully perused the relevant record to which our attention has been invited. The basic three issues to be considered in the present case are : (i) the nature of the Agreement - whether it is of composite nature or it provides for separate receipts in the hands of the assessee for hire charges for equipments, furnitures, fixtures and fittings and for use of the premises at M-7, Connaught Circus, New Delhi, which could be taxed separately under different heads of income mentioned in the Income-tax Act, 1961; (ii) whether the arrangement entered into by the assessee with M/s CJHPL amounts to exploitation by the assessee of a commercial asset for the purposes of business; and (iii) the head of income under which the income received by the assessee from the said arrangement should be taxed.
9.1 It is observed from the Agreement dated 26-12-1983, placed at pages 19-21 of the paper book, that the assessee was desirous of letting the use of premises M-7, Connaught Circus, New Delhi and M/s CJHPL were desirous of running a first class restaurant in the said premises of the assessee. Both the parties agreed that the assessee will provide to M/s CJHPL the said premises and necessary equipment, furnitures, fixtures and fittings (Clause 1 at page 2 of the Agreement). They further agreed that M/s CJHPL will run a first class restaurant at the said premises. It was further agreed that in consideration of the assessee providing the above premises and facilities, M/s CJHPL shall pay to the assessee : (a) a sum of Rs. 4.000 per month towards hire charges for equipment, furniture, fixtures and fittings; and (b) an amount of 2 per cent of its turnover excluding sales-tax and other Government levies for use of the premises.
Both the parties further agreed that M/s CJHPL will maintain by all means the premises in good and usable condition. We have carefully examined the aforesaid provisions of the Agreement between the parties and we have no doubt that the assessee undertook to provide both the premises and necessary equipments, etc., in order to enable M/s CJHPL to run a first class restaurant at the said premises. We have also no doubt that the payments stipulated by M/s CJHPL at the rate of Rs. 4,000 per month towards hire charges for equipment, etc. and an amount of 2 per cent of its turnover excluding sales-tax, etc., for use of the premises, though have been reflected separately in Clause 3 of the Agreement, in fact forms a package payment for the use of the premises and the equipments etc. This will be clear if Clauses 1 to 3 of the Agreement are read together under which the assessee is under obligation to provide both the premises and the equipment, etc., for which M/s CJHPL agreed to make the said payments. We see force in the arguments of the learned counsel that the amount of 2 per cent of the turnover had been mentioned separately, as the assessee expected at the time of the Agreement that there will be good profits from the business of running a restaurant and that 2 per cent of the turnover plus the amount of Rs. 4,000 per month, will be sufficient to cover the expected yield from the said arrangement. In view of the foregoing, we hold that the Agreement is of a composite nature and both the payments stipulated by M/s CJHPL constitute a package.
9.2 We now proceed to examine the second issue as to whether the arrangement entered into by the assessee with M/s CJHPL amounts to exploitation by the assessee of a commercial asset for the purposes of business of the assessee. In this connection it will be useful to refer to the following extracts from the decision of the Hon'ble Supreme Court in the case of Sultan Bros. (P.) Ltd. (supra) : Whether a particular letting is business has to be decided in the circumstances of each case. We do not think that the cases cited lay down a test for deciding when a letting amounts to a business. We think each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. We do no further think that a thing can, by its very nature, be a commercial asset. A commercial asset is only an asset used in a business and nothing else and business may be carried on with practically all things.
Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition (hat certain assets are commercial assets in their very nature.
In the said case, the Hon'ble Supreme Court, after examining the various clauses of the lease deed, further observed that "these are ordinary covenants in a lease of a furnished building. They do not at all show that the lessor was rendering any service in the hotel business carried on by the lessee or in fact have 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". A reference may also be made to the decision of the Hon'ble Supreme Court in the case of New Savan Sugar & Gur Refining Co. Ltd. (supra) wherein the Apex Court, after examining the various clauses of the lease deed, held that the intention of the assessee-company was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as a commercial asset during the subsistence of the lease. The Apex Court further observed that the intention of the assessee-company was to go out of the business altogether so far as the factory and machinery was concerned w.e.f. June 1, 1945 and that the income from the lease could not be assessed under Section 10 of the Income-tax Act, 1922 but was liable to be assessed under Section 12 of that Act. A further reference may be made to the decision of the Hon'ble Delhi High Court, which is the jurisdictional High Court, in the case of Super Fine Cables (P.) Ltd. (supra). In the said case, the assessee-company, which had been set up for manufacture of cables, but could not start the said manufacture of cables, leased out the factory building on a rent of Rs. 750 per month, the Hon'ble Delhi High Court, after examining the various case laws, observed at page 535 as under : As indicated above, the test in all these cases is whether the income arises from the exploitation of a commercial asset or merely because the property has been let out and the assessee is enjoying the income by way of rent. There are no circumstances in the present case which indicate that the property was being exploited in a commercial sense by the assessee. In fact the assessee has not, at any stage, run the factory itself.
The question before us is whether there are any facts to indicate that the letting out of the factory in this particular case can be described as a commercial exploitation of the factory. If you happen to be the owner of a commercial asset, you can exploit it yourself and enjoy the profits thereof. At the same time, these profits can vary. They may be sometimes high, sometimes low and there may sometimes even be a loss. You might decide that the best way of exploiting the asset is to get a fixed return and as a commercial venture an arrangement may be made with somebody else to run the asset giving a fixed return. It is the nature of that arrangement and the reason for that that are relevant for the purpose of determining whether you have let out the property for business purposes or merely for enjoying the rent. This is the type of test which is common to all the cases.
As stated in some of the judgments, it is not necessary that the assessee must himself exploit the commercial asset. It may be exploited by himself or through the agency of somebody else. There are circumstances which prevent or make it impossible for an assessee to exploit the asset himself or, it may be more convenient to exploit the asset in the hands of the assessee after the letting out arrangement has been made, the income continues to be classed as business income. But if it ceases to be a commercial asset, then the income has to be taxed as income from 'Other Sources'.
9.2-1 When we examine the arrangement entered into by the assessee with M/s CJHPL in the light of the above-mentioned case law, we cannot help but agree with the Assessing Officer that the business of the assessee was not running of a restaurant or to furnish the premises as restaurant and then to hire them out. We also find no evidence placed before us to the effect that the assessee was rendering any service in the business of running the restaurant carried on by M/s CJHPL, as observed by the Hon'ble Supreme Court in the case of Sultan Bros. (P.) Ltd. (supra). On the facts and in the circumstances of the case, we, therefore, hold that the leasing out of the premises in question together with equipments, etc., did not amount to exploiting the commercial assets and that they were never commercial assets in the business of the assessee. The assessee had in fact never done the business of running a hotel or restaurant.
9.3 In view of our decisions in the preceding sub-paragraphs on the first two issues, now we have to examine as to under which head of income the payments received from M/s CJHPL by the assessee should be taxed. In view of our decision in sub-paragraph 9.2-1, the only relevant heads of income to be considered are "income from house property" and "income from other sources". The learned Departmental Representative had laid stress on the fact of ownership of the premises by the assessee and submitted that 2 per cent of the total turnover received by the assessee from M/s CJHPL should only be taxed under the head "income from house property". However, in view of our decision in sub-paragraph 9.1 holding that the Agreement is of a composite nature and the payments made by M/s CJHPL form a package, we feel that, in spite of the fact that the assessee is the owner of the premises and equipment, etc., the income cannot be assessed under the head "income from house property". We feel that the said income will have to be taxed under the provisions of Clause (iii) of Sub-section (2) of Section 56 under the head "income from other sources". The decision of the Hon'ble Supreme Court in the case of Sultan Bros. (P.) Ltd. (supra) lends support to this view. The relevant extracts from the said case occurring at pages 361-362 of 51 ITR are reproduced for facility of reference : It has sometimes been suggested as a solution for this difficulty that Sub-section (4) of Section 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 Section 9. Counsel for neither party however was prepared to accept that suggestion. Indeed that suggestion has its own difficulty. Under Sub-section (4) of Section 12 the assessee becomes entitled among others to an allowance in accordance with Section 10(2)(vi) which is on account of depreciation of the building 'being the property of the assessee' from which it follows that Sub-section (4) of Section 12 contemplates the letting of the building by the owner. Sub-section (4) of Section 12 must, therefore, be applicable when machinery, plant or furniture are inseparably let along with the building by the owner. Sub-section (4) of Section 12 is to have any effect - and it is the duty of the court to construe every part of a statute that it has effect - it must 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 Section 12 in respect of the rent of a building owned by him, Sub-section (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 of income.
Similar view has also been taken by the Hon'ble Delhi High Court in the case of Super Fine Cables Put. Ltd. (supra).
10. We now proceed to decide the grounds of appeal of the assessee in the appeals for the assessment years 1989-90 and 1990-91 in the light of our decisions in paragraph 9.
Ground Nos. 1 and 2 in appeal No. ITA 8008 relate to the taxing of the amount of 2% of the turnover of the restaurants. In the original assessment order, the AO had made an addition of Rs. 2 lakhs as income from house property on estimate basis. The CIT (A) vide his order dated 9-9-1992, restored this issue to the Assessing Officer as the Assessing Officer had not given the amount of turnover of the restaurant. The Assessing Officer further examined the issue so restored and calculated the turnover from 1-4-1988 to 31-3-1989 at Rs. 15,12,542 two per cent whereof was computed at Rs. 30,278. As the said amount of Rs. 30,278 had already been credited to the profit and loss account under the head "Commission receipts", the Assessing Officer deleted the addition of Rs. 2 lakhs. Thus Ground Nos. 1 and 2 taken by the assessee in appeal No. 8008/Del/92 do not subsist.
10.2 Ground No. 3 in appeal No. ITA 8008/Del/92 relates to addition of Rs. 5 lakhs on estimate basis and taxed as income from Other sources.
The CIT(A) vide his order dated 9-9-1992 confirmed the said addition of Rs. 5 lakhs made by the Assessing Officer on account of hire charges of equipment, etc., on the ground that the payment of interest claimed by the assessee on loans obtained from Canara Bank was much more than the receipt of income as higher charges and that the transaction did not appear to be reasonable and genuine because no prudent businessman could afford to do so. We have carefully considered the submissions made by both the parties on this ground of appeal and in view of our decision in paragraph 9.1 holding that the agreement is a composite Agreement and both the payments constitute a package, we feel that the addition of Rs. 5 lakhs is on a very high side. We cannot ignore the submissions made by the learned counsel that payment of Rs. 4,000 per month for the use of equipments and 2 per cent of the total turnover have to be taken into account and further that at the time of agreement, the assessee really believed that two per cent of the turnover will be sufficiently high to compensate him for the investments made by him in providing the equipment, etc. which he was under an obligation to provide in terms of Clause 1 of the Agreement.
It is another matter that the expectations of the assessee have been belied and he has turned out to be a loser in the entire transaction.
At the same time, the pleas of the department that the assessee has not acted as a prudent businessman cannot be brushed aside. On the facts and in the circumstances of the case, we feel that an addition of Rs. 3 lakhs would meet the ends of justice. Accordingly, the assessee will get a relief of Rs. 2 lakhs on this account. In view of our decisions in paragraphs 9.2-1 and 9.3, this income will be taxable under other sources.
10.3 Ground No. 4 in ITA No. 8008 and Ground Nos. 1 to 5 in ITA No.5530 relate to the claim of deduction of Rs. 6,19,974 under Section 36(1)(iii) of the Income-tax Act, 1961. The CIT(A) had restored this issue to the Assessing Officer with the observations that "the Assessing Officer has himself estimated rental income of Rs. 5 lakhs on such investment under the head 'income from other sources', therefore, deduction for interest has to be considered under Section 57, Clause (iii). The AO again disallowed the claim of the assessee under Section 57(iii) which was confirmed by CIT(A). We have carefully considered the submissions made by both the parties. In view of our decisions in paragraphs 9.2-1 and 9.3, we hold that the assessee is entitled for relief under Section 57(iii) of the Income-tax Act as the expenditure by way of interest payable on the amount of loan, which has been utilised by the assessee in providing the equipments, furniture, fixtures and fittings and on the renovation of the premises, has been laid out and expended wholly and exclusively for the purposes of earning the income, which we have held is taxable under the head "income from other sources". The Assessing Officer, is therefore, directed to allow the claim of the assessee for interest in accordance with the provisions of Section 57(iii).
10.4 In the result, the said appeals are allowed in part. 11. ITA No.5531/Del/93 Ground Nos. 1 and 2 in this appeal relate to taxability of the income from hire charges of equipments, furniture and fixtures as 'business income' instead of under the head 'income from other sources'. We have carefully considered the submissions made by both the parties. In view of our decision in paragraph that the entire income received from M/s CJHPL in terms of the Agreement is assessable under the head "income from other sources we reject the said grounds of appeal.
11.1 Ground No. 3 also relates to the assessment of the commission earned by the assessee under the head "income from other sources" and also that the assessee has not been granted any depreciation under Section 32 of the Income-tax Act. In view of our decision that the entire income received from M/s CJHPL in terms of the Agreement is assessable under the head "income from other sources", the Assessing Officer is directed to consider the claim of the assessee for depreciation in terms of the provisions of Clause (ii) of Section 57.
11.2 Ground Nos. 4 and 5 relate to the addition of Rs. 5 lakhs made by the AO as income from other sources on an estimated basis. In view of our decision in par,agrah 10.2 relating to appeal No. ITA 8008/Del/92, we reduce the addition from Rs. 51akhs to Rs. 3 lakhs. The assessee, will get a relief of Rs. 2 lakhs.
11.3 Ground No. 6 relates to the claim of deduction of depreciation aggregating to Rs. 5,78,371. In view of our decision in paragraph 11.1, the AO is directed to consider the claim of the assessee in terms of the provisions of Clause (ii) of Section 57.
11.4 Ground No. 7 relates to the claim of the assessee for interest aggregating to Rs. 7,30,338 on loans obtained by the assessee. In view of our decision in paragraph 10.3 the Assessing Officer is directed to consider the claim of the assessee under Section 57(iii) and allow the deduction in accordance with the said provisions.