Judgment:
1. These appeals by the Revenue relate to assessment years 1984-85, 1985-86 and 1986-87 and arise out of the separate orders of the CIT (Appeals) VII, Madras dated 20-6-89. For the sake of convenience the appeals are heard together and are being disposed of by a common consolidated order.
2. The only ground raised in all these appeals by the Revenue is that the CIT (Appeals) erred in directing the Assessing Officer to recompute the income of the assessee as income from other sources and not income from property as has been done in the original assessment proceedings.
The brief facts of the case are that the assessments for the assessment years 1984-85 and 1985-86 were originally completed on 31-7-1986 and for the assessment years 1986-87 on 29-1-1987 which were set aside by the Commissioner of Income-tax by his order dated 11-3-1988 with a direction to redo the same according to the provisions of law. The assessee owns a building at Conran Smith Road, Madras which is leased out to the Postal Department on a monthly rent of Rs. 48,105 as per lease agreement dated 18-5-1983. The assessee received Rs. 4,54,669 by way of rent during the assessment year 1984-85 and Rs. 5,77,260 during the assessment years 1985-86 and 1986-87. The assessee filed returns of income admitting Rs. 1,02,900, Rs. 2,26,467 and Rs. 2,79,450 under 'other sources' respectively for the assessment years 1984-85, 1985-86 and 1986-87, after claiming deductions towards payment of taxes, interest, etc. It was submitted before the Assessing Officer that the assessee had let out the property alongwith partitions, electrical fittings and lifts etc., and the rent received was not only for the building but also for the amenities provided therein. Therefore, it was requested to allocate the rent towards house rent and also towards amenities provided in the building. The assessee has allocated 3/4th of rent towards property and 1/4th rent towards amenities. The Assessing Officer did not accept the assessee's submissions. On a perusal of the lease agreement, the Assessing Officer found that the assessee has leased out the building only and there was no mention about the other amenities provided. According to the Assessing Officer the lift facility and electrical fittings etc., are only part of the property let out. Therefore, he assessed the rent received by the assessee as income from property. In appeal, the CIT (Appeals) accepted the contention of the assessee and held that the entire income is to be assessed as income from other sources and not as income from property.
The CIT (Appeals) referred to the decision of the Supreme Court in the case of Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353 and the decision of the Calcutta High Court in the case of CIT v. Model Mfg.
Co. (P.) Ltd. [1989] 175 ITR 374. The Revenue is aggrieved by the decision of the CIT (Appeals) and has preferred the present appeals before the Tribunal.
3. It is argued by the learned Departmental Representative before us that the assessee has claimed only 1/4th of the income to be assessed under the head 'Other sources' in the returns and 3/4th to be assessed as income from property, whereas the CIT (Appeals) held that the whole income should be assessed under the 'other sources', which is against the facts of the case. It is strongly contended that the assessee is enjoying the rent as owner of the building and lift, electricity facilities, etc. are part of the building. It is stated by the ld. D.R. that the assessee has not charged any separate rent for any other items like lifts, furniture, fittings etc. What is let out is the building and items like lifts and other amenities are part of the building and they are inseparable from the building. No lessee would take the building only on rent but he would also see that there are reasonable facilities in the building. It is strongly urged by the ld.D. R. that income from the building is to be assessed under the 'Income from property'. Reliance was placed on the decisions in the cases of Dr. P. A. Varghese v. CIT [1971] 80 ITR 180 (Ker.), CIT v. Kanak Investments (P.) Ltd. [1974] 95 ITR 419 (Cal.) and D. C. Shah 48 ITR 419 (SIC). The ld. D. R. also distinguished the decisions relied upon by the CIT (Appeals) namely, Sultan Bros. (P.) Ltd.'s case (supra) and Model Mfg. Co. (P.) Ltd.'s case (supra). For these reasons, the ld. D.R. submitted that the orders of the CIT (Appeals) be set aside and the assessment orders restored.
4. The ld. counsel for the assessee, on the other hand, supported the orders of the CIT (Appeals). It was contended that the Postal Department wanted certain other facilities such as partition etc. to accommodate maximum number of trainees and therefore, income should be assessed under head 'Income from other sources' because rent is chargeable not only for the building, but also for the other facilities provided by the assessee like partition, furniture, fittings etc. The ld. counsel for the assessee relied on the following decisions : 5. We have considered the rival submissions, facts of the case and material on record. Under section 14 of the Income-tax Act, 1961 "income" for the purpose of charge of income-tax and computation of total income has been classified under various heads. If a particular income falls under a particular head, then that income has to be assessed under that particular head and not under any other head.
Whether an income is to be assessed under a particular head or not, has to be decided on legal principles and not on the basis of the view taken by a particular person or a businessman. There can be different views regarding the heads of income but on the basis of such views the heads under which the income is to be assessed, cannot be determined and the head under which the income is to be assessed has to be determined only on the basis of legal principles. When the asset is in the nature of land or building capable of being used for any other purpose and when the assessee ceases to use it as a commercial asset either himself or even through others, the income derived by him by renting out the same would more appropriately fall under the head 'Income from house property' as like any other owner of property, he gets income from that property as owner. In such cases, it is not the factum of his business or commercial activity which brings income to him but it is his investment in property or his ownership of property which brings income to him. In such cases, the leasing of property itself is the activity. It is leased with a view to produce income, a transaction quite apart from the ordinary business activities of the assessee.
6. In the case of the assessee before us, the Postal Department wanted the assessee's five storeyed building at No. 32 Conran Smith Rd, Madras on lease. For this purpose the Postal Department wrote a letter dated 17-12-1982 to the assessee to fulfil the following conditions : "1. The rent per sft. of carpet area may kindly be indicated. The carpet area will be calculated after deducting the portions like corridor, staircase, toilets, lift room pillars, etc. as per departmental rules.
2. General lighting and fans have to be provided by you as per our requirements.
3. Necessary wooden partitions shall be provided by you, the details of which will be indicated later.
4. A lease deed has to be executed by the owner for a period of 5 years renewable for a further period of one year. A specimen copy is enclosed for your perusal.
5. Drinking water supply as well as water supply shall be made available by you.
6. The MES account shall be transferred to the name of the department so that payment can be effected directly by the department to the MES. 7. Necessary sheds for parking cycles and scooters shall be provided by you".
On 15-2-1983 the Postal Department wrote to the assessee to the effect that it is agreeable for a rent of Rs. 4 per sq. ft. for the available carpet area excluding passage, FOL, urinals and pillars and the total rent for the accommodation as a whole on the above basis would be fixed on the above rent and that the Department agreed for the commencement of the tenancy after completion of the entire building work including provision of lights and fans. Subsequently vide letter date 28-3-1983 the Postal Department agreed for a rent of Rs. 4.50 per sq. ft. for the available carpet area of 10,368 sft. in all the five floors excluding stairs, FOL etc. as agreed upon by joint measurement. The Postal Department in its letter dated 5-5-1983 requested the assessee for certain facilities such as conversion of all European type of WCs into Indian type in each floor, provision of wire mesh type of partitions from the ceiling for about 2 feet for cross ventilation in the partitions provided to the inmates of the hostel etc. After considering the correspondence between the Post & Telegraph Department and the assessee and the provision of lights, fans etc. by the assessee, it is clear that the facilities provided by the assessee like partition, electrical fittings, lifts etc. are part of the building and they are not such items for which separate rent could be charged. The assessee has provided lifts in the building, which would not change the character of the building as such. Nobody will take a five storeyed building on rent unless and until there is provision for lift for the use of the tenant. Moreover, as per lease agreement date 18-5-1983 monthly rent of Rs. 48,105 was fixed in respect of the property in question and the relevant portion of the lease deed is reproduced below : "The consideration of the rent hereafter reserved and of the covenants and agreements by the lessee hereinafter contained.
The lessor do hereby demise to the lessee the 32 Conran smith Road, Madras-6 house and out houses together with the piece of land or part whereof they are erected and all the basements and appurtenances belonging thereto more particularly described in the schedule below : To hold the said premises unto the lessee for a period of three years commencing from 18th May, 1983 at a monthly rent of Rs. 48,105 one English Calendar month which amount shall cover and include all Government and Municipal taxes including the Urban Immovable Property tax and all which taxes shall be payable by the lessor, such rent to be paid to the lessor every month on or before the fifteenth day of the month following.
The lessor hereby covenants with the Lessee that she will at her own expense pay the taxes and keep the said premises wind and watertight and in good and tenantable repair and condition and in particular white or colourwash annually such parts thereof as are white or colour washed and will at all times keep the electric lights, plant and fittings installed in the said premises in good and serviceable order and condition and in the event of any leakage occurring or being suspected therein will forthwith make all necessary tests and repair any such leakage and that if the lessor shall fail or neglect to observe and perform her obligations under this covenant the Lessee may pay the taxes or carry out the necessary repairs to the building and to the electric installation and deduct the amount or cost from the rent...." No separate rent is chargeable for any facility provided by the assessee to the tenant such as lifts, fans, lights etc. and no separate rent could be charged for these facilities because they form part and parcel of the building. For instance, if a lessor has a big hall which he wanted to let out and the lessee may ask for making partition of the said hall to suit his convenience, then the lessor cannot claim that he is charging separate rent for the partitions, doors, windows, ventilation, bath rooms etc. All these things are part and parcel of the same building and constitutes part of the building. Income under the head 'House property' is assessable in respect of the rent receivable therefrom and house property does not mean only the wall, bricks, cement and it also includes doors, windows, fans and electrical fittings and such other amenities which are necessary for the proper enjoyment of the property. No separate rent can be attributable to the provision of amenities such as electrical fans, lights, water closet, manhole, soap tray, shower rose, tower rail, geyser etc. etc. because all these amenities are necessary for the enjoyment of the property. In a building consisting of five floors, lift is absolutely necessary as otherwise no tenant would take the building on rent. Therefore all the above amenities are part and parcel of the building which are necessary for the enjoyment of the building by tenants as otherwise, no tenant would occupy the building on lease. No doubt these facilities increase the cost of the building and also increase the rental value. Therefore, we hold that the Assessing Officer was right in assessing the income under the head 'Income from property' offer the original assessment was set aside by the Commissioner under section 263 of the Income-tax Act, 1961 in respect of the property in question. The CIT (Appeals) was unjustified in directing the Assessing Officer to recompute the income treating it as income under the head 'Other sources'.
7. In the case of CIT v. Indian Metal & Metallurgical Corpn. [1995] 215 ITR 424 (Mad.), the facts of the case were that the assessee was an owner of a multi-storeyed building. A part thereof in the first, second and fourth floors had been let out with amenities. The amenities included electrical fittings, water closets etc. the assessee maintained two lifts in the building. It contended that the income from the letting out of a portion of the building with amenities should be assessed under the head 'Other sources'. The Assessing Officer did not accept this contention but the Tribunal accepted it. On a reference, the Hon'ble Madras High Court held that the assessee had not hired out machinery, plant or furniture belonging to the assessee alongwith the building. Therefore, the hire charges said to have been collected for the purpose of providing amenities and the rent for the building would not come under the purview of section 56(2)(iii) of the Act. Their Lordships held that the Tribunal was not correct incoming to the conclusion that the income derived by the assessee from the first, second and fourth floors of the building was assessable under the head 'Other sources'. The Madras High Court decided the issue in favour of the Department that the income from letting out portions of the building is to be assessed under the head 'Property'. The ratio laid down by the Madras High Court in this case is clearly applicable to the case of the assessee before us.
8. The facts in the case of Sultan Bros. (P.) Ltd. (supra) relied upon by the first appellate authority were totally different from the facts in the present assessee's case. In that case machinery, plant and furniture were let out. The rent payable was fixed separately for building and separately for hire of furniture, fixtures etc. Therefore, in that case, the Hon'ble Supreme Court held that income from the hire of the furniture and fixtures had to be assessed under section 12 of the Indian Income-tax Act, 1922 after providing for the allowances mentioned in sub-section (3) of that section. 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 all together, and not one separately from the other, notwithstanding that the sums payable for their enjoyment were fixed separately. In that case building, plant and machinery and furnitures were inseparably let out. But in the assessee's case before us there is no letting out of the plant, machinery or furniture and whatever amenities were provided by the assessee are necessary for the enjoyment of the building and hence the decision of the Madras High Court in the case of Indian Metal or Metallurgical Corpn. (supra), reproduced above applies.
9. In the case of Model Mfg. Co. (P.) Ltd. (supra), the Calcutta High Court held that the services rendered by the assessee in providing electricity, use of lifts, supply of water, maintenance of staircase and watch and ward facilities to tenants were not incidental to letting out property and service charges were assessable as income from other sources. The facts in the present assessee's case are totally different. The assessee is not charging any service charges for electricity, lifts, supply of water, maintenance of staircase and watch and ward facilities. No separate rent is charged for facilities by the assessee because the facilities like lift, electricity, fans etc.
constitutes part and parcel of the building let out by the assessee.
The facts, in the assessee's case are totally different from the case of Model Mfg. Co. (P.) Ltd (supra) relied on by the CIT (Appeals).
Therefore, we hold that the CIT (Appeals) went wrong in relying on the decisions in Sultan Bros. (P.) Ltd.'s case (supra) and Model Mfg. Co.
(P.) Ltd.'s case (supra).
10. In the case of Assam Biscuit Mfg. Co. Ltd. (supra) relied on by the assessee's counsel, the assessee-company was manufacturing biscuits and other bakery products. From the inception, the company proved to be a non-starter. In June 1973, the Board of Directors in a report to the shareholders stated that the company had suffered heavy losses and the company did not manufacture biscuits after 1-3-1973. The plant, machinery etc. of the Company were sold and the sale proceeds were utilised to liquidate the liabilities of the company. The factory premises alongwith the furniture and fixtures were leased out and the assessee claimed that the rent from factory premises was assessable as income from business. The Gauhati High Court held that there was no evidence to show that the assessee had not discontinued the business and hence it was not entitled to carry forward and set off earlier losses, and it was not also entitled to current depreciation allowance and deduction of interest on borrowings. The High Court further held that since the building had been let out alongwith the furniture and fixtures and the lease agreement showed that the two were inseparable, the income from the lease was assessable as 'income from other sources'. The facts in the present assessee's case are thus different.
Not a single item of furniture of fixtures has been let out by the assessee. Therefore, the assessee's case are totally distinguishable and different from the facts decided by the Gauhati High Court in the case of Assam Biscuit Mfg. Co. Ltd. (supra).
11. In the case of Dr. P. A. Varghese (supra) relied on by the ld.Departmental Representative, the facts of the case were that there were lettings, a letting out of the machinery, plant and furniture, and also a letting of the building. The question arose whether, the two letting form part and parcel of the same transaction or the two lettings are inseparable so that the rent may be assessed as "income from other sources" and the Kerala High Court held that there was no letting of the machinery, plant or furniture but only a letting of a building with certain amenities and section 56(2)(iii) of the Income-tax Act, 1961 was not applicable and the income from the letting out was chargeable as "income from house property" and not as "income from other sources".
Similarly, in the case of the assessee before us, there was not letting out of any amenities provided but only letting out of the building as whole. No rent is charged or chargeable by the assessee on account of use of lifts provided in the building, etc. Other amenities like lights, fans WCs., etc. are necessary for the enjoyment of the property and therefore, they form part of the building. Since there is no separate letting out of the lights, fans, doors, etc. and there cannot be separate letting out of such items, the income from letting out of the building by the assessee as envisaged by the lease deed dated 18-5-1983 is correctly assessable under the head 'Income from property'.
Similarly, in the case of Kanak Investments (P.) Ltd. (supra) relied on by the ld. D. R., the facts of the case were that the assessee undertook to maintain, cleaning and lighting of the lift, stairs and compound and the charges were estimated at a lump sum of rupees two thousand and five hundred per month. The Calcutta High Court held that the rent received by the assessee from the tenants attributable to the building should be assessed under section 9(1) of the Indian Income-tax Act, 1922, while the amount attributable to the amenities provided by the assessee to the tenants should be assessed under section 12 of the said Act. But in the case before us, no amenities are provided by the assessee and no expenditure incurred by her on such provision. A query was specifically raised by the Bench whether the assessee was providing any service on monthly or annual basis. It was revealed by the learned counsel for the assessee that no such services are provided by the assessee. Therefore, after taking into consideration the decisions of the Kerala High Court in the case of Dr. P. A. Varghese and of the Madras High Court in the case of Indian Metal & Metallurgical Corpn.
(supra), income received by the assessee from letting out of the building in question is assessable only under the head 'Income from property' and not as 'Income from other sources'. We, therefore, reverse the orders of the first appellate authority and restore and confirm the assessment orders.