Allowed

Dudhsagar Investments Pvt. Ltd. v. the Asstt. Commissioner of Income Tax Cir I

Bombay HC5 Aug 2014TXA/20/2007

Case brief

AI extract

What is this about?

The High Court of Bom. at Goa allowed the appeals of the assessee against directions to tax rental income as 'house property'. Relying on Sultan Brothers, the court held that income from letting fully furnished premises, where building and furniture were inseparably let, is taxable under the head 'income from other sources' per Section 56(2)(iii) of Income Tax Act.

What did the court decide?

Impugned order set aside; Assessing Officer directed to assess income from letting fully furnished office premises under the head 'income from other sources'.

Dudhsagar Investments Pvt. Ltd. Vs the Asstt. Commissioner of… — Income Tax | Bombay HC (2014)

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IN THE HIGH COURT OF BOMBAY AT GOA

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TAX APPEALS NO. 20 and 21 of 2007

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Dudhsagar Investments Pvt. Ltd., a company set up under the Companies Act, 1956, with office at Vasco-Da-Gama, Goa. .. Appellant.

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Versus

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The Asst. Commissioner of Income-tax, Cir I, Margao, Goa. .. Respondent.

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Mr. A. F. Diniz, Advocate for the appellant in both the appeals.

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Ms. Asha Dessai, Advocate for the respondent in both the appeals.

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CORAM :- RANJIT MORE &

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U. V. BAKRE, JJ. Reserved on : 30th July, 2014

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Pronounced on : 5 th August, 2014

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JUDGMENT : (Per RANJIT MORE, J.)

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Heard learned Counsel appearing on behalf of the respective parties.

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2 . Both the appeals arise out of the common order dated 10/01/2007 passed by the Income Tax Appellate Tribunal (ITAT) in ITA Nos. 71 and 72/PNJ/1998 and, therefore, the same are being disposed of by this common judgment.

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3. Both the appeals were admitted on the following substantial question of law :

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“Whether income received by an investment company in the course of its business, towards letting of a fully furnished office premises, is not to be assessed as “business income”, failing which “income from other sources” as claimed by the Appellant, but as “income from house property” as assessed by the Respondent ?”

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4. The assessee let out its premises on the 15^th floor of Jolly Maker Chambers No. 2, Block No. III at Nariman Point, Mumbai along with four open garages, for compensation of 1,31,800/- per month for office premises and for garages and 8,000/- as hire charges for furniture, fixtures and fittings (Total `1,39,800/-). The assessee claimed that the office premises were fully furnished/equipped and the income should be taxed as income from business, as has been done in the earlier assessment years. The Assessing Officer held that rent, which the assessee had received was required to be assessed as income from the property. The Assessing Officer also rejected the assessee's claim of set off of depreciation on the ground that depreciation was not admissible in respect of the income from

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the property.

5. The Assessee, being aggrieved by the above order of Assessing Officer, thereafter, approached the Commissioner of Income Tax (Appeals). In the appeal, it was held by CIT(A) that the property in question was let out along with furniture, but the compensation for the office premises and garages was independent of hire charges of furniture, fixtures and fittings. The CIT(A), therefore, held that the compensation for office premises and garage is to be taxed as house property and to that extent confirmed the order of the Assessing Officer. However, insofar as the hire charges in respect of furniture, fixtures and fittings, is concerned, the same were held as income from other sources and the Assessing Officer was directed to recalculate the income accordingly and allow the deduction admissible under the respective heads.

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6. The assessee, being aggrieved by the above order of CIT(A), thereafter, approached the Income Tax Appellate Tribunal, Panaji Bench, Panaji (ITAT) by filing two appeals, namely ITA Nos. 71 and 72 of 1998 for the Assessment Years 1990-1991 and 1991-1992. These two appeals were disposed of by the common order dated 10/01/2007. It was the case of the

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assessee that the entire income by way of rent received by him by letting out the premises in question ought to have been assessed either as business income or income from other sources. The ITAT did not accept the assesse's claim and concurred with the decision of the CIT(A). These orders are challenged in the present Tax Appeals.

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7. Mr. Diniz, learned Counsel for the appellant took us through the Agreement dated 28/02/1986 entered into between the appellant and M/s. V. M. Salgaoncar & Brother Pvt. Ltd. under which the office premises at 15^th floor of Jolly Maker Chambers no. 2, Block No. III at Nariman Point, Mumbai was let out. He pointed out that the compensation for the office premises and four garages was agreed at 1,31,800/- per month and hire charges for the furniture, fixtures and fittings were 8,000/-. The total compensation of ` 1,39,800/- under the Agreement was to be paid by Salgaoncars to the appellant on or before 15^th day of the month following the month for which it relates. Mr. Diniz, referring to the schedule of the said Agreement, submitted that the intention of the parties was to let out the office premises and the furniture together. Mr. Diniz submitted the appellant is not pressing that the said income should be assessed as business income. He, however, submitted

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that the said income should be assessed from the head “income from other sources” under Section 56(1) of the Income Tax Act, 1961 ('the Act', for short). He relied upon the decision in “ Sultan Brothers (P) Ltd. Vs. Commissioner of Income Tax ” reported in (1964) 51 ITR 353 (SC) and the decision of Madras High Court in “ Commissioner of Income Tax Vs. P. Andal Ammal ” reported in (2001) 117 Taxman 747 (Madras).

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8. Ms. A. Dessai, learned Counsel for the Revenue supported the impugned order and opposed the appeals vehemently. She submitted that furniture and office premises could have been let separately. She also submitted that if the provisions of Section 22 of the Act are applicable to the case of assessee, then, there is no question of application of provisions of Section 56 of the Act. She also heavily relied upon the decision in “ Sultan Brothers (P) Ltd.” (supra), the decision of Calcutta High Court in “CIT Vs. Shambu Investment (P) Ltd” reported in (2001)249 ITR 47 (Cal) and the decision of the Apex Court in “Shambu Investment (P) Ltd. Vs. CIT.” reported in (2003)263 ITR 143 (SC).

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9. Having considered the rival submissions and having gone through the impugned order along with the relevant

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documents and ratio of the decisions of the judgments cited at bar, we find merit in the appeals.

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10 . Section 14 of the Act which falls in chapter IV regarding computation of total income deals with the heads of income. Under this Section, for the purpose of charge of income tax and computation of total income, all income is classified under the following heads :

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(A) Salaries;

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(C) Income from house property;

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(D) Profits and gains of business or profession; (E) Capital Gains;

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(F) Income from other sources.

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11. Section 22 deals with income from house property. Section 28 deals with profits and gains of business or profession. Section 56 deals with income from other sources. Since Mr. Diniz has restricted the reliefs to income from other sources, we need not to go into the other heads of income. In the present case, we are concerned with clause (iii) of Section 56(2) which reads thus :

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“ 56 (2)- In particular, and without prejudice to the generality of the provisions of sub-section (1), the following income shall be chargeable to income-tax under the head Income from other sources, namely :-

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(iii)where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head “Profits and gains of business or profession;””.

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12. Mr. Diniz, relying upon the above provision, asserted that the rent income out of the office premises and furniture received by the appellant should be assessed under the head of income from other sources. Ms Dessai, on the contrary, asserted that the above provision has no application in the present facts and circumstances of the case and income received by the appellant by way of rent from office premises and furniture ought to be required to be assessed under Section 22 of the Act under the head of income from house property. Ms Dessai submitted that the provision of Section 22 of the Act is the rule and clause (iii) of Section 56(2) of the Act is an exception. She submitted that if the case falls under Section 22 of the Act, then, there is no question of application of clause (iii) of Section 56(2)

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of the Act.

13. The Constitution Bench in “ Sultan Brothers (P) Ltd.” (supra), had an occasion to consider the provisions of Sections 9, 10 and 22 of Income Tax Act, 1922 which provisions are pari materia with Sections 22, 28 and 56 of the Income Tax Act, 1961. In the said case, the appellant therein was limited a company and was the owner of a building fitted with furniture and fixtures for being run as a Hotel. By the lease dated 30/08/1949, the appellant let out the building fully equipped and furnished to Voyantzis for a term of six years from 1946 for running a Hotel and for certain other ancillary purposes. The agreed monthly rent was 5,950/- for the building and 5,000/for hire of furniture and fixtures. The question which fell for consideration before the Supreme Court was how the income received as a rent on hire is to be assessed i.e. under which section of Income Tax Act, 1922 is it assessable. The appellant in that case also contended that the entire income should be assessed under Section 10 as an income from business or in the alternative income should be assessed under Section 12 as income from residuary sources i.e. income from other sources. The Constitution Bench of Apex Court held that income under the lease cannot be assessed under Section 10 of the Income Tax

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Act, 1922 as the income from the business. Regarding the question whether income can be assessed under Section 12 as an income from residuary sources or income from other sources, the observations of the Apex Court in paragraphs 13, 15 and 16 are relevant which are reproduced as under :

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“13. The next question is, does the present letting come within the terms of sub-section (4) of section 12 ? That provision requires two conditions, namely, that the furniture should be let and also buildings and the letting of the buildings should be inseparable from the letting of the furniture. Now here both furniture and building have no doubt been let. The question is: Are they inseparably let? The High Court does not appear to have answered this question for it was of the view that not only must the two be inseparably let out but also that "the primary letting must be of the machinery, plant or furniture and that together with such letting or along with such letting, there is a letting of buildings". The High Court held that the primary letting in the present case was of the building and, therefore, deprived the appellant of the benefit of section 12(4). We may state here that the Tribunal had thought that by requiring that the letting of one should be inseparable from the letting of the other, the section really meant that the primary letting was of the machinery and the letting of the building was

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only incidental to the letting of the machinery. It also held that in the present case the primary letting was of the building.

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15. What, then, is inseparable letting? It was suggested on behalf of the respondent CIT that the sub-section contemplates a case where the machinery, plant or furniture are by their nature inseparable from a building so that if the machinery, plant or furniture are let, the building has also necessarily to be let along with it. There are two objections to this argument. In the first place, if this was the intention, the section might well have provided that where machinery, plant or furniture are inseparable from a building and both are let, etc. The language however is not that the two must be inseparably connected when let but that the letting of one is to be inseparable from the letting of the other. The next objection is that there can be no case in which one cannot be separated from the other. In every case that we can conceive of, it may be possible to dismantle the machinery or plant or fixtures from where it was implanted or fixed and set it up in a new building. As regards furniture, of course, they simply rest on the floor of the building in which it lies and the two indeed are always separable. We are unable, therefore, to accept the contention that inseparable in the sub-section means that the plant, machinery or furniture are affixed to a building.

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16. It seems to us that the inseparability referred

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to in sub-section (4) is an inseparability arising from the intention of the parties. That intention may be ascertained by framing the following questions: Was it the intention in making the lease and it matters not whether there is one lease or two, that is, separate leases in respect of the furniture and the building that the two should be enjoyed together? Was it the intention to make the letting of the two practically one letting? Would one have been let alone and a lease of it accepted without the other? If the answers to the first two questions are in the affirmative, and the last in the negative then, in our view, it has to be held that it was intended that the lettings would be inseparable. This view also provides a justification for taking the case of the income from the lease of a building out of section 9 and putting it under section 12 as a residuary head of income. It then becomes a new kind of income, not covered by section 9, that is, income not from the ownership of the building alone but an income which though arising from a building would not have arisen if the plant, machinery and furniture had not also been let along with it.”

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14. It is abundantly clear from the above observations that the appellant's income is required to be assessed under Section 56 as contended by the assessee. As far as the answers to three questions, which are mentioned in paragraph 16 of the

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judgment in “ Sultan Brothers (P) Ltd.” (supra), quoted above, are concerned, there is no dispute amongst the learned Counsel appearing for the respective parties that answers to first two questions were in affirmative. In the present case, the dispute is regarding answer to the third question, namely would one have been let alone and a lease of it accepted without the other ? In our considered opinion, the answer to this question would be in the negative, considering the intention of the appellant- assessee coupled with clauses of the Agreement. The Agreement, unequivocally, makes the intention of the assessee clear to let out the office premises along with furniture. In our view, letting of the office premises was intended to be inseparable from the letting of the furniture. The ratio of the Constitution Bench is, therefore, perfectly applicable to the present case.

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15. In “Smt. P. Andal Ammal” (supra), the Division Bench of Madras High Court, in similar facts, held that the intention of the parties was that though there were two separate leases in respect of furniture and the building, both the species of the properties were enjoyed by payment of one lump sum which also gave indication that letting of the building and letting of the furniture was one letting. The Division Bench found that the assessee would not have let out the building alone without

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the lease of furniture or other amenities and one did not exist without the other. Consequently, the Division Bench held that the proper head of income would be income from other sources. The decision of the Division Bench of the Calcutta High Court in “Shabhu Investment (P) Ltd” (supra), is confirmed by the Apex Court in Civil Appeal No. 6459 and 6466 of 2001 i.e. “Shabhu Investment (P) Ltd Vs. CIT” reported in (2003) 263 ITR 143 (SC). The Apex Court refused to interfere in the conclusion arrived at by the Calcutta High Court on the question framed under Section 56(2) of the Act and, therefore, Civil Appeals came to be dismissed. The question fell for consideration before the Division Bench of Calcutta High Court was “whether the income derived from the premises in question is rental income or business income ?” The Division Bench, in Calcutta High Court, in the facts of that case, held that the income derived from the property in question is income from the property and should be assessed as such. The decision of this case does not apply to the facts and circumstances of the present case.

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16 . In the above facts and circumstances of the case and especially, in the light of the decision of the Constitution Bench in “ Sultan Brothers (P) Ltd.” (supra), we hold that the income

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received by the assessee by letting out fully furnished office premises and furniture is required to be assessed under the head income from other sources. The appeals are, accordingly, allowed. Consequently, the impugned order is set aside to that extent. The Assessing Officer is directed to assess the assessee's income accordingly in the light of the above observations.

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17. The appeals stand disposed of accordingly.

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RANJIT MORE, J.

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U. V. BAKRE, J.

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SMA

Dudhsagar Investments Pvt. Ltd. v. the Asstt. Commissioner of Income Tax Cir I

Case brief

What is this about?

What did the court decide?

Dudhsagar Investments Pvt. Ltd. v. the Asstt. Commissioner of Income Tax Cir I

Case brief

What is this about?

What did the court decide?

What the court decided

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