JUDGMENT
Ashim Kumar Banerjee , J.
1. In compliance with the direction of this court under Section 256(2) of the Income-tax Act, 1961, the following question has been referred by the Tribunal for our consideration :
“(a) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that there was no relationship of landlord and tenant between the assessee and the persons who hired the office accommodation from the assessee is based on any relevant evidence or authority?
(b) Whether, the finding of the Tribunal that considering the services and facilities offered by the assessee to the hirers of the office space the income should be assessed as business income is based on any relevant evidence or arbitrary ?
(c) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessment made by the Income-tax Officer was not erroneous and prejudicial to the interests of the Revenue and thereby cancelling the order under Section 263 of the Income-tax Act, 1961, passed by the Commissioner ?”
2. Shambhu Investment (P.) Limited, the assessee abovenamed, is the owner of a building at Raheja Chambers, Nariman Point, Mumbai. The said premises have been furnished by the assessee and have been let out to various persons and/or firms and/or organisations with all furniture, fixtures, light, air-conditioners for being used as “table space”. The said assessee under the agreement with those occupiers is to provide services like watch and ward staff, electricity, water and other common amenities. A copy of one of such agreement has been filed in the court in the course of hearing and the same has been kept on record. The income derived by the assessee from the said office premises was offered for taxation as business income and the same was assessed accordingly by the Assessing Officer. The Commissioner of Income-tax perused the same in detail and held that the income derived from the said property was actually rent received from the occupiers and not to be regarded as service charges and maintenance and cannot be termed as business income. According to the Commissioner, the assessment made under Section 143(3) was erroneous and prejudicial to the interests of the Revenue. Accordingly, a notice was issued to the assessee under Section 263 of the said Act as to why the assessment should not be set aside and fresh assessment should not be made by assessing the said income as rental income.
3. The Commissioner of Income-tax after giving hearing to the assessee remanded the matter back to the Assessing Officer with a direction to assess the said income as property income.
4. Being aggrieved by the order of the Commissioner, the assessee preferred an appeal before the Tribunal and the Tribunal after considering the facts and circumstances came to a conclusion that the order of the Assessing Officer was (not ?) erroneous and prejudicial to the interests of the Revenue and cancelled the order of the Commissioner passed under Section 263.
5. The moot question involved herein is whether the income derived from the said premises is rental income or business income.
6. Mr. Ram Chandra Prasad, learned Advocate appearing for the Revenue authority, has submitted that on a plain reading of the agreement it appears that although the occupiers were allotted table space in effect the right given to the occupiers was to enjoy furnished accommodation in the said immovable property. The other amenities like providing watch and ward staff, electricity and water were consequential to the principal right given to those occupiers under the said agreement. Hence, according to Shri Prasad, the income derived from the said property by way of realisation of the licence fees from the various occupiers should be assessed as rental income and not as business income.
7. Mr. R. K. Murarka, learned advocate appearing for the assessee, has submitted that tenancy means enjoyment of exclusive possession of a property or any portion thereof. Referring to the agreement, Mr. Murarka has submitted that it has only given permission to those occupiers to enjoy the table space during office hours and without having any right of exclusive possession, hence the income should not be taxed as rental income.
8. In support of his contention, Mr. Murarka has cited the following decisions :
(i) Sultan Brothers Pvt. Ltd. v. CIT ;
(ii) CIT v. National Storage Pvt. Ltd. ;
(iii) CIT v. Admiralty Flats Motel ;
(iv) CIT v. Associated Building Co. Ltd. [1982] 137 ITR 359 (Bom) ;
(v) CIT v. K. L. Puri (HUF) ;
(vi) Saswad Mali Sugar Factory Ltd. v. CIT [1999] 236 ITR 706 (Bom);
(vii) CIT v. Halai Nemon Association ; and
(viii) Mukherjee Estate (P.) Ltd. v. CIT .
9. Before taking a decision on the issue let us first deal with the decisions cited by Mr. Murarka.
(i) Sultan Brothers Pvt. Ltd. v. CIT : A five judges’ Bench of the apex court herein has considered a case wherein the assessee constructed a building and filled 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 for the building and a hire charge for the furniture and fixtures.
Dealing with the said case, the apex court held that the letting out of the said building did not amount to the carrying on of a business and the income under the lease would not, therefore, be assessed as income from business. The apex court directed the said income to be assessed accordingly.
To decide such an issue the apex court gave a guideline that to come to a conclusion one has to find out the answer on three issues, namely : (a) Was it the intention in making the lease–and it matters not whether there is one lease or two, i.e., separate leases in respect of the furniture and the building–that the two should be enjoyed together ? (b) Was it the intention to make the letting of the two practically one letting ? (c) 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 it has to be held that the lettings would be inseparable.
(ii) CIT v. National Storage Pvt. Ltd. : A three judges’ Bench of the apex court herein decided a case where the assessee had set up a film laboratory wherein the first floor had several vaults which were licensed to various film distributors for keeping the film negatives. The ground floor of the same building would be used only for the purpose for examination, cleaning, washing and rewinding of the films. The key of each vault was retained by the respective vault holders. However, the key to the main gate was in the exclusive possession of the asessee. The fire alarm charges and other maintenance were paid by the assessee.
While deciding the case, the apex court held that although it is a case of letting out such letting out was a “complex one” and the return received by the assessee was not an income derived from the exercise of the property rights only but was income received from carrying on an adventure or concern in the nature of trade and as such, such income is a business income.
(iii) CIT v. Admiralty Flats Motel : Here income of a partnership firm carrying on the business of “lodging house keepers” has been directed to be assessed as business income by the Division Bench of the Madras High Court.
(iv) CIT v. Associated Building Co. Ltd. [1982] 137 ITR 339 (Bom): In this case the assessee being the owner of the building was carrying on similar nature of business by providing office accommodation to various persons like the present case up to a certain period and allowed its income to be assessed under the head “Other sources”. Subsequently, an auditorium was constructed in the basement of the building and the assessee had set up an air-conditioning plant not only for providing cool air to the auditorium but also to the entire office premises. There had been other facilities given by the assessee attached to such office accommodation and other portions of the building.
The Bombay High Court deciding this case held that the nature of business subsequent to setting up of the air-conditioning plant and construction of auditorium became an activity of a complex nature and held that those activities amount to business and income should be assessed accordingly.
(v) CIT v. K. L. Puri (HUF) : In the instant case there had been two separate agreements one for rent for accommodation and the other for hire charges of the furniture and fixtures. The Division Bench of the Delhi High Court held that since the agreement for providing furniture and fixtures was done by a separate agreement, the rent realised pursuant to such agreement referable to the furniture and fixtures should not be treated as income from property.
(vi) Saswad Mali Sugar Factory Ltd. v. CIT [1999] 236 1TR 706 (Bom): In this case the Bombay High Court has held that the income from student hostel should be taxed as business income.
(vii) CIT v. Halai Nemon Association ; A building completely furnished including microphone, fittings, fixtures, etc., and letting out for limited period for marriage ceremony and other social functions has been considered by the Madras High Court as business and not letting out.
(viii) Mukherjee Estate (P.) Ltd. v. CIT : In this case the court has directed assessment of income from display of signboards as income from “other sources”.
10. Taking a sum total of the aforesaid decisions it clearly appears that merely because income is attached to any immovable property that cannot be the sole factor for assessment of such income as income from property. What has to be seen is what was the primary object of the assessee while exploiting the property. If it is found applying such test that the main intention is for letting out the property or any portion thereof the same must be considered as rental income or income from property. In case it is found that the main intention is to exploit the immovable property by way of complex commercial activities in that event it must be held as business income.
11. In the light of the above, let us now apply such test in the present case. From the copy of the agreement produced before us it appears that the assessee has let out the furnished office at a monthly rent payable month by month by the respective occupants. The services rendered to the various occupants according to the said agreement are not separately charged and the monthly rent payable is inclusive of all charges to the assessee.
12. To decide this issue we cannot overlook the fact that the cost of the property was Rs. 5,42,443. A portion of the said property is used by the assessee himself for his own business purpose. The rest of the said property has been let out to the various occupiers as stated hereinbefore. It further appears that the assessee had already recovered a sum of Rs. 4,25,000 as and by way of security free advance from three occupants. Hence, the entire cost of the property let out to those occupiers has already been recovered as and by way of interest-free advance by the assessee. Hence, it cannot be said that the assessee is exploiting the property for its commercial business activities and such business activities are prime motive and letting out the property is a secondary one.
13. Let us approach the problem from another angle by applying the lest suggested by the five judges’ Bench in the case of Sultan Brothers Pvt. Ltd. . The three questions framed by the apex court are applied in the instant case as follows (page 363) :
(A) Was it the intention in making the lease-and it matters not whether there is one lease or two, i.e., separate leases in respect of the furniture and the building-that the two should be enjoyed together ?
In the instant case there is no separate agreement for furniture and fixtures or for providing security and other amenities. The only intention, in our view, was to let out the portion of the premises to the respective occupants. Hence, the intention in making such agreement is to allow the occupants to enjoy the table space together with the furniture and fixtures. Hence, this question should be answered in the affirmative.
(B) Was it the intention to make the letting of the two practically one letting (page 363) :
From a plain reading of the agreement it appears that the intention of the parties to the said agreement is clear and unambiguous by which the first party has allowed the second party to enjoy the said table space upon payment of the comprehensive monthly rent. Hence, this question should be answered in the affirmative.
(C) Would one have been let alone, and a lease of it accepted, without the other (page 363) ?
As we have discussed hereinbefore that it is composite table space let out to various occupants, the amenities granted to those occupants including the user of the furniture and fixtures are attached to such letting out and the last question, in view of the same, must be answered in the negative.
14. Applying the said test we hold that by the said agreement the parties have intended that such letting out would be an inseparable one.
15. Hence, we hold that the prime object of the assessee under the said agreement was to let out the portion of the said property to various occupants by giving them additional right of using the furniture and fixtures and other common facilities for which rent was being paid month by month in addition to the security free advance covering the entire cost of the said immovable property.
16. In view of the facts and law discussed above we hold that the income derived from the said property is an income from property and should be assessed as such.
17. In the light of our aforesaid discussion we answer question No. 1, in the negative, i.e., in favour of the Revenue and against the assessee. In fact there was a relationship of landlord and tenant between the assessee and the persons who hired the office accommodation.
18. We answer question No. 2 also in the negative, i.e., in favour of the Revenue and against the assessee.
19. Question No. 3 also, we answer in the negative, that is, in favour of the Revenue and against the assessee.
Y.R. Meena, J.
20. I agree.
