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Commissioner Of Income-Tax v. Bhaktawar Construction Pvt. Ltd.
Structured Summary of the Opinion (Bharucha, J.)
Factual and Procedural Background
The reference arises under section 256(1) of the Income-tax Act, 1961, made at the instance of the assessee. The stated question was:
“Whether, on the facts and in the circumstances of the case, the income of the building known as ‘Meher Chambers’ arising from lease and licence of the business premises was assessable under the head ‘Income from property’ or under the head ‘Income from other sources’?”
The assessment year in issue is 1969–70. The assessee owned and constructed Meher Chambers (ground plus five upper floors), a centrally air‑conditioned building. Three separate premises were leased to three tenants (by three leases). Separately, three agreements provided that the assessee would install, maintain and make available the building's central air‑conditioning installation for use by those tenants for specified periods; payment for that use was fixed and was stated before the Tribunal to be based on a rate of 75 paise per square foot. The agreements reserved control, maintenance and servicing of the installation to the assessee and permitted temporary shut‑off for repairs; they also contained remedies allowing the assessee to terminate the agreement and remove the installation on tenant default.
Procedurally, for earlier years (from 1962–63 with a revised return and subsequent years up to 1966–67) the assessee had initially declared lease income as “Income from property” and licence/agreement income as “Income from other sources,” but later revised returns and Tribunal findings resulted in the income being taxed under “Income from other sources.” For the year under reference, the Income‑tax Officer taxed lease income as income from property and the agreement income as income from other sources; the Appellate Assistant Commissioner and the Tribunal followed the Tribunal's earlier decision for the prior years. The reference requires resolution of the correct head of income for the receipts arising from the leases (and their relationship, if any, to the air‑conditioning agreements).
Legal Issues Presented
- Whether the income of the building known as "Meher Chambers" arising from lease and licence (agreements for use of air‑conditioning facility) is assessable under the head "Income from property" or under the head "Income from other sources".
- Whether section 56(2)(iii) of the Income‑tax Act, 1961 applies — i.e., whether there was (a) a letting of the air‑conditioning installation and (b) the letting of the building and letting of the installation were inseparable so as to attract section 56(2)(iii).
Arguments of the Parties
Revenue (Mr. Dhanuka)
- Section 56(2)(iii) contemplates the letting of both a building and plant/installation; in this case, there was no letting of the air‑conditioning installation, so section 56(2)(iii) does not apply.
- Alternatively, even if the facts are treated as two lettings, the tests in Sultan Brothers Private Ltd. v. CIT (1964) indicate the lettings are separable; thus section 56(2)(iii) should not apply.
Assessee (Mrs. Jagtiani)
- It was not open to the Revenue to contend that there was no letting of the installation because the income from the agreements had previously been taxed under “Income from other sources”—specifically under section 56(2)(ii) (income from machinery, plant or furniture let on hire).
- There were two lettings (building and installation) and they were inseparable, so section 56(2)(iii) should apply.
- Depreciation had been allowed on the installation (argued as evidence of letting), implying treatment under the provision for hire of plant/machinery.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sultan Brothers Private Ltd. v. CIT [1964] 51 ITR 353 (SC) | The Supreme Court's tests to determine whether lettings of building and plant/furniture are inseparable: (a) was it the intention that the two should be enjoyed together; (b) was it intended that the letting of the two be practically one letting; (c) would one have been let alone and a lease of it accepted without the other? | The court explained these tests and observed they were applied in cases where a letting of both building and plant was taken for granted; the court found Sultan Brothers' tests not decisive here because the antecedent question—whether there was any letting of the installation at all—had to be resolved first. |
| CIT v. D.L. Kanhere [1973] 92 ITR 535 | The court followed the tests in Sultan Brothers in a case concerning a fully equipped cinema theatre let out; it is an example where the letting of plant was accepted and inseparability was considered. | Cited to show prior application of Sultan Brothers' tests where a letting of plant was not in dispute; used to contrast the present factual situation where the existence of a letting of the plant was itself disputed. |
| D.C. Shah v. CIT [1979] 118 ITR 419 (Karnataka HC) | Held that a lease involves transfer of possession; where possession of plant (air‑conditioning) is not transferred and the owner retains control and maintenance, there is no lease of the plant. Payment calculated by floor area for provision of facility does not of itself create a lease of the plant. | The court relied on this decision as being of much assistance and consistent with the view that, where the owner retains control and merely provides the conditioned‑air facility for a charge, there is no letting of the installation; it distinguished Sultan Brothers on its facts. |
| Dr. P.A. Varghese v. CIT [1971] 80 ITR 180 (Kerala HC) | High Court view aligned with the proposition that providing and charging for an air‑conditioning facility (with owner control) does not amount to letting of the plant. | Cited as one of the High Court authorities adopting a similar view; used to support the conclusion that there was no letting of the installation in the present case. |
| Indian City Properties Ltd. v. CIT [1978] 111 ITR 19 (Calcutta HC) | High Court view similarly holding that providing and charging for a facility without transfer of possession does not constitute a lease of the plant. | Also cited as authority consistent with the court's conclusion that the agreements did not effect a letting of the air‑conditioning installation. |
Court's Reasoning and Analysis
The court proceeded by focusing on the fundamental question whether the agreements effected a letting of the air‑conditioning installation. The statutory context examined was section 56 of the Income‑tax Act, 1961:
- Section 56(1) is a general provision charging to tax under the head "Income from other sources" any income not chargeable under specified heads in section 14.
- Section 56(2) is a specific provision identifying particular categories of income chargeable under "Income from other sources", including (ii) income from machinery, plant or furniture let on hire, and (iii) income where an assessee lets on hire both machinery/plant and buildings and the letting of the buildings is inseparable from the letting of the machinery/plant.
The Revenue argued that clause (iii) would apply only if there was a letting of the installation; they contended there was no such letting. The assessee argued both that the installation had been let (pointing to previous taxation under "other sources" and claimed depreciation) and that, even if two lettings existed, they were inseparable under the tests in Sultan Brothers.
The court rejected the assessee's estoppel contention that Revenue could not now argue there was no letting, reasoning that nothing on the record demonstrated the earlier taxation rested specifically on clause (ii) of section 56(2); income may have been taxed under the general provision of section 56(1). The court also noted the assessee could not show on the record that depreciation had in fact been allowed under section 57(ii), and therefore that argument did not establish a letting.
Turning to the terms of the agreements, the court identified salient contractual features: (a) the agreements did not transfer possession of the installation to the tenants; (b) tenants were permitted only to use the product of the installation (cold/conditioned air) for specified days and hours and the charging was on a per‑square‑foot basis; (c) the owner retained control and was responsible for maintenance and service; (d) the owner could shut off the installation for repairs; and (e) on tenant default the owner could end the agreement and remove the installation.
From those facts the court concluded that the agreements gave the tenants a facility to utilise the conditioned air but did not amount to a letting of the installation itself. Because there was no letting of the installation, the preconditions of section 56(2)(iii) were not satisfied and that clause could not be invoked to treat the lease income as income from other sources.
The court considered the assessee's reliance on Sultan Brothers and related cases. It observed that Sultan Brothers and the D.L. Kanhere decision involved situations in which a letting of both building and plant was assumed and the only issue was inseparability; by contrast, the present case raised the antecedent question whether there was any letting of the plant at all. The court found the Karnataka, Kerala and Calcutta High Court authorities (notably D.C. Shah, Dr. P.A. Varghese and Indian City Properties Ltd.) supportive in holding that provision of an air‑conditioning facility with retained control by the owner is not a lease of the plant.
Holding and Implications
Holding: The court answered the reference by holding that the income derived by the assessee from the premises under the leases cannot be taxed under the head "Income from other sources" but must be taxed as income from property.
Implications:
- The direct effect on the parties is that the receipts from the leases (given the factual characterisation of the separate air‑conditioning agreements) are to be assessed as income from property rather than as income from other sources under section 56(2)(iii).
- The court determined there was no letting of the air‑conditioning installation on the facts, so the specific provision in section 56(2)(iii) is inapplicable.
- No broader legal consequences or new rule of law are articulated beyond the application of established principles to these facts; the decision rests on the factual conclusion that possession/control of the plant was not transferred and that tenants were given only a facility to utilise the conditioned air.
There shall be no order as to costs.
Bharucha, J.:— The question to be considered in this reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the assessee reads thus:
“Whether, on the facts and in the circumstances of the case, the income of the building known as ‘Meher Chambers’ arising from lease and licence of the business premises was assessable under the head ‘Income from property’ or under the head ‘Income from other sources’?”
2. The assessment year involved is 1969–70. The assessee had constructed a building called “Meher Chambers” consisting of a ground and five upper floors. It was centrally air-conditioned. By three leases, separate premises in the building were leased to three tenants. By another set of three agreements, the air-conditioning facility was made available to the three tenants. We shall refer to the agreements in some detail. The assessee filed a return for the assessment year 1962–63 declaring the income received from the leases under the head “Income from property” and the income from the agreements under the head “Income from other sources Subsequently, it filed a revised return declaring the income from the leases and the agreements under the head “Income from other sources”. For the subsequent assessment years up to 1966–67, the income from the leases and the agreements was again declared under the head “Income from other sources”. The Income-tax Officer rejected the asses-see's claim and treated the income wholly as income from property. The Appellate Assistant Commissioner upheld his decision. The assessee went up in appeal to the Income-tax Appellate Tribunal which held that this income fell wholly under the head “Income from other sources”.
3. For the year under reference, the Income-tax Officer treated the income received from the leases as income from property and the income received from the agreements as income from other sources. The Appellate Assistant Commissioner and the Tribunal followed the latter's decision for the earlier years.
4. The question really is whether the income arising to the assessee from the leases is assessable under the head “Income from other sources” or under the head “income from property”. The three leases are substantially identical in terms. It is enough to note that they make no mention of the air-conditioning installation or facility. The three agreements are also substantially similar. Thereunder, it is recited that the assessee (referred to therein as the owner) had agreed at the request of the tenants (thereunder referred to as the licensees) to get installed on the premises air-conditioning equipment, machinery and auxiliary installations. Under the agreements, the assessee allowed the tenants to use the installation, such use to be made by the tenants for six days during each week and for ten hours during each day. Amounts payable by the tenants for such use of the installation were fixed under the agreements. It may be noted that the assessee had stated before the Tribunal that this payment was based on the rate of 75 paise per square foot. The agreements provided that, in the event the tenants renewed the leases of the premises, they would be bound to extend the terms of their agreements for the like period, the intention being that both terms should run concurrently. Clause 5 of the agreements made it clear that the assessee was to be in control of the installation and was to be responsible for its maintenance and service. Under clause 7, the assessee was at liberty to temporarily shut off the installation for repairing and such like. Under clause 9, it was provided that if the tenants made default in punctually paying the amounts specified in the agreements or failed to observe any of the terms thereof, the assessee would be entitled immediately to put an end to the concerned agreement and enter upon the premises to seize and take away the installation.
5. To appreciate the argument, it is necessary to set out the relevant portion of section 56. The said section provides as follows:
“56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head ‘Income from other sources’, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(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:—…
(ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head ‘Profits and gains of business or profession’;
(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;”
6. It was contended on behalf of the Revenue by Mr. Dhanuka that section 56(2)(iii) of the Income-tax Act, 1961, contemplated both the letting of a building and the letting of a plant. In the instant case, there was no letting of the installation. Section 56(2)(iii), therefore, did not apply. In the alternative, Mr. Dhanuka submitted that, having regard to the tests laid down by the Supreme Court in Sultan Brothers Private Ltd. v. CIT, [1964] 51 ITR 353, to which we shall refer and assuming that there were two such lettings, they were separable and the provision did not apply.
7. Mrs. Jagtiani, learned counsel for the assessee, submitted, first, that it was not open to the Revenue to contend that there was no letting of the installation. She then submitted that there were two lettings and that they were inseparable.
8. Mrs. Jagtiani pointed out that the income derived by the assessee from the agreements had been taxed under the head “Income from other sources According to her, it had been so taxed under the provisions of section 56(2)(ii) of the Income-tax Act, 1961. These provisions applied when the plant or machinery had been let on hire. Having so taxed it, Mrs. Jagtiani submitted, it was not now open to the Revenue to contend that the installation had not been let.
9. Mrs. Jagtiani's argument does not take account of section 56(1) of the Income-tax Act, 1961. Thereunder, income of every kind which is taxable but is not chargeable to income-tax under any of the heads specified in section 14 of the said Act is chargeable under the head “Income from other sources This is a general provision. Section 56(2) of the said Act makes a specific provision that income of the kind therein mentioned is chargeable under the head “Income from other sources.” There is nothing on record which indicates that the income derived by the assessee from the agreements was taxed under the head “Income from other sources” by reason of clause (ii) of sub-section (2) of section 56 of the said Act. It was not Mrs. Jagtiani's case that this was income which was chargeable under any of the heads specified in section 14 of the said Act. The income from the agreements could well have been taxed under the head “Income from other sources” because it fell within the purview of section 56(1) of the said Act. Mrs. Jagtiani submitted that depreciation had been allowed on the installation and that could have been allowed only under section 57(ii) of the said Act, but she was unable to show upon the record that such depreciation had, in fact, been allowed. In the circumstances, we cannot preclude the Revenue from arguing that there was no letting of the installation.
10. The assessee had entered into the three agreements with the tenants in respect of the same installation. The tenants were, under the agreements, permitted to use the same installation. Such use was to be made for a stated period per day for a stated period per week. The assessee charged for such use at a rate calculated per square foot. The assessee retained control of the installation and was obliged to service and maintain it. The assessee was entitled to shut the installation off for repairs and the like. The true purport of the agreements, gleaned from a reading of all parts thereof, was that the tenants were given thereby only the facility of utilising the product of the installation, viz., the cold or conditioned air. There was no letting of the installation to the tenants.
11. There being no letting of the installation, the requirements of section 56(2)(iii) of the Income-tax Act, 1961, were not met. Accordingly, the income derived by the assessee from the leases cannot be taxed under the head “income from other sources”. It must be taxed as income from property.
12. Great reliance was placed by Mrs. Jagtiani upon the aforesaid decision of the Supreme Court in Sultan Brothers' case, [1964] 51 ITR 353. This was a case in which a building fitted with furniture and fixtures was let out on lease, fully equipped and furnished, for the purposes of running a hotel. The question was whether the letting of the plant and furniture was inseparable from the letting of the building. To determine whether the two lettings were separable or not, the Supreme Court laid down certain tests thus: Was it the intention in making the lease, and it mattered not that there were 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 were in the affirmative and the last in the negative, then it had to be held that it was intended that the lettings would be inseparable.
13. The decision of this court in CIT v. D.L Kanhere, [1973] 92 ITR 535, in which the decision in Sultan Brothers' case, [1964] 51 ITR 353 (SC) has been followed, was a case of a cinema theatre fully equipped and let.
14. In both the, aforesaid cases, the issue was not whether there was a letting of the building and a letting of the plant. That was taken for granted. The issue was whether the two lettings were inseparable so as to attract the provisions of section 56(2)(iii) of the Income-tax Act, 1961.
15. The decision of the Karnataka High Court in D.C Shah v. CIT, [1979] 118 ITR 419 is of much assistance here. A lease was given to the State Bank of India of a building. Air-conditioning facilities were thereafter provided. The bank paid for the air-conditioning facility at a rate per square foot. The facility was maintained by the owners. The question that was considered was whether the owners had leased out the air-conditioning plant to the bank. The court observed that a lease involved the transfer of possession of the property in question which could be made use of by the lessee in any way he liked, provided he took reasonable care of it. There had been no transfer of possession of the air-conditioning plant. The bank was paying charges for the provision of the facility depending upon the floor area to which the facility was provided. There was, therefore, no lease. The decision in Sultan Brothers' case, [1964] 51 ITR 353 (SC) was clearly distinguishable.
16. The Kerala and Calcutta High Courts have taken a similar view in Dr. P.A Varghese v. CIT, [1971] 80 ITR 180 (Ker) and Indian City Properties Ltd. v. CIT, [1978] 111 ITR 19 (Cal). In the result, we find that there has been no letting under the agreements of the air-conditioning installation. The provisions of section 56(2)(ii) of the Income-tax Act, 1961, do not, therefore, apply. Accordingly, the income derived by the assessee from the premises under the leases cannot be taxed under the head “Income from other sources” but must be taxed as incoma from property. The question is so answered.
17. There shall be no order as to costs.
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