Commissioner Of Income-Tax, Bombay City-I v. Associated Building Co. Ltd.

Kania, J.:— This is a reference under s. 256(1) of the Income-tax Act, 1961 (referred to hereinafter as “the said Act”).

2. The relevant facts are as follows:

The assessee-company owned a building known as “Bombay House” at Bruce Street, Bombay. The said building was constructed in 1920 and since that time was let out to different persons for office. In 1949, the assessee air-conditioned the whole building by installing an air-conditioning plant of the capacity of 50 to 60 tons at considerable cost. At that time the assessee also constructed an auditorium in the basement of the said building at a considerable cost and provided services therein like the use of a film projector, a tape-recorder, a microphone, a canteen and so on. The assessee employed a staff of about 25 persons, including technicians for the maintenance of the air-conditioning plant. There was also a staff to look after the maintenance of the auditorium and the maintenance of the machinery therein and servicing the said machinery. Various parts of the said building let out to different tenants were air-conditioned and the assessee charged these tenants separately for supplying cool air, namely, for air-conditioning. The auditorium was also given for use to the public on charging rent. Till the assessment year 1964-65 the assessee returned the income from the auditorium and air-conditioning services as income under the head “Other sources”, which position was accepted by the ITO. In the years under reference, namely, the assessment years 1965-66 and 1966-67 respectively the assessee claimed that the income from these two sources, namely from the supply of cool air from the air-conditioning unit and the use of auditorium and the aforesaid other services referred to earlier, was income from business. The ITO rejected this contention of the assessee and held that this income was income from “other sources” and not from “business”, as contended by the assessee. On appeals by the assessee, the AAC confirmed this conclusion, although he allowed certain expenses as permissible deductions. The assessee then preferred appeals before the Income-tax Appellate Tribunal. After considering the activities carried on by the assessee as aforesaid, the Tribunal held that the provision of the aforsaid facilities in a building already in existence could not normally be regarded as an exploitation of the property as an owner. It held that the underlying idea in providing these facilities and services was to carry on the business activity of providing these services for a return. The Tribunal held that the source of the income, which the assessee obtained from the supply of these services, was not the ownership of a house property but a business activity, which was carried on, namely, the provision of the services of air-conditioning and of a fully equipped auditorium. The letting was not of a bare property but of one of a complex nature and consisted of providing specialised services and facilities. It held that the receipts received by the assessee from the air-conditioning plant and the auditorium were from an activity carried on by the assessee which was in the nature of a business activity. The Tribunal emphasised that neither the auditorium nor the air-conditioning plant was let out as such. They were run by the assessee as and by way of providing services. On the basis of these conclusions, the Tribunal allowed the appeals preferred by the assessee. From the aforesaid decision of the Tribunal, the following questions have been referred to us for our determination;

“(1) Whether, on the facts and in the circumstances of the case, the income derived by the assessee-company from the auditorium constituted its income chargeable under the head ‘Business’ or under the head ‘Other sources’?

(2) Whether, on the facts and in the circumstances of the case, the income derived by the assessee-company from providing air-conditioning service to the tenants of the building was income chargeable to tax under the head ‘Other sources’ or under the head ‘Business’?

(3) Whether, the expenditure of Rs. 26,722 incurred in the assessment year 1965-66 and expenditure of Rs. 24,478 incurred in the assessment year 1966-67 were permissible deductions?”

3. Before entering into a consideration of the arguments advanced before us we may usefully take a note of some of the relevant provisions of the said Act. Clause (13) of s. 2, which is the definition section under the said Act, gives an extensive definition of the term “business” as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.

4. Section 14 deals with the heads of income under the said Act. The said section provides that there are six heads of income, that, unless otherwise provided by the said Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the said heads. One of these heads is “Profits and gains of business or profession”. The last head is “Income from other sources”. The aforesaid head, namely, “Income from other sources” is a residuary head and it is the well settled position in law that no income can be held to fall under that head, unless it is shown that it does not fall under any of the earlier heads and yet is liable to a charge of income-tax. The position which emerges is that the aforesaid income of the assessee from the use of the air-conditioning plant and the supply of the aforesaid services cannot be held to be income from other sources, unless it is shown that it could not be regarded as income derived from business.

5. The submission of Mr. Butani, the learned counsel for the Commissioner, is that providing the supply of air-conditioning and the use of the auditorium was nothing other than an exploitation of the building “Bombay House” by the assessee and hence the income derived by the assessee from these sources could not be regarded as business income. It was contended by him that these services were supplied by the assessee merely as incidental services to the tenants of the said building. It was, on the other hand, contended by Mr. Vyas, the learned counsel for the assessee, that the assessee carried on the business of running the air-conditioning plant and supplying of cool air to the tenants of the said building and also of maintaining and running the aforesaid auditorium with a view to make a profit therefrom, and hence the income derived from these activities should be regarded as business income.

6. In CIT v. National Storage Private Ltd., [1963] 48 ITR 577 (Bom), the assessee-company was promoted by the film distributors of Bombay for several objects, including the object to carry on the business of storing and preserving films, chemicals, cinema accessories and articles of merchandise in cinema industry in suitable vaults specifically constructed for the purpose and equipped with all the necessary arrangements. The assessee purchased a place approved by the chief inspector and constructed some units on the said plot of land in conformity with the Cinematograph Film Rules, 1948, and permitted the vaults to be used by the film distributors on payment of a monthly charge. A vault holder was given a key to the vault but the key to the entrance which permitted access to the vaults remained in the exclusive possession of the assessee-company. The assessee also rendered certain services to the vault holders such as fire service for which it paid an annual amount to the municipality, railway booking offices free of charge for the convenience of the vault holders, a canteen and a telephone. It maintained a regular staff for running the aforesaid services and the entire staff of the Indian Motion Pictures Distributors' Association was also paid Rs. 800 for the part-time services rendered by it to the assessee. It was held by a Division Bench of this court that the income which the assessee-company obtained from the licence holders could not be regarded as income from property falling under s. 9 of the I.T Act, that the activity of the company in earning that income was a business activity and the source of the income which the company obtained from the licence holders was not an ownership of a house property but was a business and that the income was, therefore, assessable under s. 10 of the Indian I.T Act, 1922. On an appeal to the Supreme Court] this decision was confirmed in CIT v. National Storage P. Ltd., [1967] 66 ITR 596. It was held by the Supreme Court that the High Court was right in holding that the assessee was carrying on an adventure or concern in the nature of trade. The assessee not only constructed vaults of special design and special doors and electric fittings, but also rendered other services to the vault holders. It installed a fire alarm and incurred expenditure for the maintenance of the fire alarm by paying charges to the municipality. Two railway booking offices were opened in the premises: for the despatch and receipt of film parcels. These were valuable services. The assessee also maintained a regular staff and paid a certain amount to the entire staff of the Indian Motion Picture Distributors' Association for the services rendered to the licensees. The vaults given to the licensees could be used only for certain specific purposes. It may be mentioned that in this decision the Supreme Court has cited with approval the decision in Governors of the Rotunda Hospital, Dublin v. Coman, [1920] 7 TC 517; [1921] 1 A.C 1 (HL), where the Governors of a maternity hospital established for charitable purposes were the owners of a building, which comprised rooms adapted for public entertainments and which was connected with the hospital buildings proper by an internal passage. The hospital derived a substantial income from letting the rooms for public entertainments, concerts, etc., for varying periods and applied the income to the general maintenance of the hopital. The rooms were let upon terms which included the provision of seating, heating and attendance, but an additional charge was made for the gas and electricity consumed. It was held by the House of Lords in that case that the profits derived from the letting of the rooms were assessable to income-tax under Sch. D, as profits arising from a concern in the nature of trade under Sch. D.

7. It is in the light of the principles laid down in the aforesaid decisions that we have to resolve the controversy raised before us. We have already stated the facts earlier. It is important to recapitulate that the building in question was constructed as early as in 1920 and was let out at that time. The airconditioning plant was put up and the auditorium constructed several years later, in 1949. The maintenance of the air-conditioning plant requires the service of a sizable staff, some of whom would have to be specialised in the work of maintaining an air-conditioning plant. Similarly, along with the auditorium, which was constructed, additional services have been provided like the use of a film-projector, tape-recorder, microphone and so on. A canteen is also being run. Running of all these activities would necessarily involve the maintenance of a staff and close supervision. The object of these activities is to earn income. These services or facilities, namely, the use of the air conditioning plant, the use of the auditorium along with the equipment and the use of the canteen are all of a complex nature and the supply of these services can, in no sense, be regarded as a mere better exploitation of the property, namely the said building. In these circumstances, it appears to us that the Tribunal was, with respect, justified in holding that the carrying on of all these activities amounted to a carrying on of business and the income derived from the same was business income as claimed by the assessee.

8. We may now refer to some other decisions which were cited before us. Mr. Butani, the learned counsel for the Commissioner, strongly relied on the decision of a Division Bench of the Karnataka High Court in D.C Shah v. CIT, [1979] 118 ITR 419 and the decision of a Division Bench of the Calcutta High Court in Indian City Properties Ltd. v. CIT, [1978] 111 ITR 19. As far as these decisions are concerned, we are of the view that they are of no relevance in the determination of the questions before us, because in both the cases the only question considered was whether certain income could be regarded as income from “property” or income from “other sources”. The question as to whether the income in question was income derived from business or profession was not considered at all, and no arguments were advanced in that connection. We may point out that Mr. Vyas, the learned counsel for the assessee, referred us to the decision of a Division Bench of the Madhya Pradesh High Court in Smt. Kavit Sanghi v. CIT, [1982] 133 ITR 48, where it was held that the income derived by the assessee from hiring an air-conditioning plant was chargeable to tax as “profits and gains of business” and not as income from “other sources”. We may point out that this decision is also not of much relevance here, because, on the facts, it was found that the said air-conditioning plant was acquired by the assessee as a commercial asset in which case it would be natural that any income derived from the hiring out of the same should be regarded as business income.

9. In the result, questions Nos. 1 and 2 referred to us must be answered as follows:

Question No. 1: On the facts and in the circumstances of the case, the income derived by the assessee-company from the auditorium constituted its income chargeable under the head “Business” and not under the head “Other sources”.

Question No. 2: On the facts and in the circumstances of the case, the income derived by the assessee-company for providing air-conditioning service to the tenants of the building was income chargeable to tax under the head “Business” and not under the head “Other sources”.

10. As far as question No. 3 is concerned, it is common ground that the answer to that question depends on the answers to the aforesaid questions. In accordance with the aforesaid answers, question No. 3 is answered in the affirmative, that is, in favour of the assessee.

11. The Commissioner to pay the costs of the reference to the assessee.