Commissioner Of Income-Tax v. Shankaranarayana Hotels (P.) Ltd.

K. Shivashankar Bhat, J.:— In all these references, an identical question has been referred for our consideration under section 256(1) of the Income-tax Act, 1961:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the composite rent received by the assessee from its tenants should be split and the amounts attributable to the property only should be assessed under the head ‘property income’, while the amount attributable to amenities provided/services rendered by the assessee to the tenants should be assessed under the head ‘Other sources’?”

2. The assessee owns a multi-storeyed building in Bangalore and different portions are leased to different tenants. The first floor is occupied by M/s. V.M Salgaonkar and Brothers Pvt. Ltd. The lease agreement, inter alia, provided for certain services to be rendered by the landlord such as providing two lifts on all days and keeping them in proper working condition; the lessor also shall keep the foyers, stair and landings leading to the premises clean and properly lit; the lifts shall be operated by the landlord at its own cost and the lessor shall employ attenders for the operation of the lifts; the lessor to keep outside and inside of the premises including foyers, stairs, etc., in condition there are usual clauses such as a clause pertaining to the provision regarding the supply of water, repairing of water taps, burst sanitary pipes and leakage in electricity, etc. Clause 5 of the lease deed provided for the consideration calling it as rent for the premises including the services rendered at Rs. 52,501.05 per month. Clause 35 of the lease deed specifically stated that 15 per cent. of the aforesaid rent agreed upon is to be paid towards the services to be provided by the landlord to the tenant in terms of the agreement and that the rent shall be inclusive and deemed always to be inclusive of such service charges. The assessee which is the landlord contended that the 15 per cent. of the so called rent is attributable to service charges and, therefore, cannot be treated as “income from house property” under section 22 of the Act. The assessing authority did not accept this claim of the assessee. On appeal, the Commissioner of Income-tax (Appeals) upheld the view of the assessing authority by holding that the landlord in the instant case would not have obtained a licence from the Bangalore Municipal Corporation to construct six floors without the provision of lift facility which, therefore, cannot be termed as an amenity to be provided for in the case of such a building. Similarly, it was held that the provision of a watchman or a guard is to provide for safety and it cannot be considered to be an amenity provided to the various tenants. The staircase, if not provided for in a multi-storeyed building, the Municipal Corporation would not have approved the plan for construction. The provision governing drinking water, cleaning facility of common places, etc., also cannot be termed as an amenity. According to the Commissioner, the crucial test is whether the so called amenity is such that it can be availed of by the tenant independently without the landlord providing for the same. The parties in the instant case, that is the landlord and the tenant, have specifically understood that the particular rent included the service charges and, therefore, the implication is that the entire receipt is “income from house property.”

3. The Appellate Tribunal did not agree with the contention of the Revenue. It held that the provision regarding the two lifts including the employment by the landlord of the liftmen, maintenance of staircase, foyers, landing, etc., providing security arrangement round the clock and the requirement to install and maintain, adequate fire-fighting equipment is part of the services for which separate charges are contemplated under the lease deed provided under clause 35 of the lease deed, referred to already. The Tribunal found that this part is separable from the rent payable as such from the premises leased.

4. Mr. H. Raghavendra Rao contended that the various alleged services are integrated with the property leased and without the said services, it was not possible for the tenant to enjoy the premises and these are services to be considered as part of the premises leased and, therefore, the entire rent including the service charges should be considered as “income from house property” under section 22. Learned counsel contended that it is impermissible in the instant case to split up the consideration payable by the tenant to the landlord-assessee, one representing “income from house property” and the other representing the income attributable to the amenities or services. Learned counsel relied on a decision of the Kerala High Court in Dr. P.A Varghese v. CIT, [1971] 80 ITR 180. The question referred in the said case itself indicates the distinguishing feature involved. The question was whether the income from letting of the building by the assessee to the Export Promotion Council was assessable under the head “Income from house property”. It was contended by the assessee there that the income should be treated as “income from other sources” under section 56(2) of the Act. The lease deed required the landlord to provide the necessary lavatories, closets, etc., as indicated in the drawing attached to the lease deed. The landlord also had to provide air-conditioning in respect of one room. There had to be three garages. There were other clauses pertaining to fluorescent tubes, separate electric meters, arrangement for water supply, etc., including the provision of lifts. The agreement was entered into at a time when the construction was in progress and obviously, therefore, the lease deed provided elaborately as to the various constructions to be put up by the landlord. A reading of the terms of the lease there would show that the assessee-landlord was not required to render separate services as such. The contention of the assessee did not pertain to the splitting up of the income by attributing a part to “income from house property” and the remaining as income from “other sources”. The entire income was sought to be brought under section 56(2) by the assessee in the said case. The Kerala High Court found that the income squarely came within the head.“Income from house property”. Since the income was income from house property, there was no occasion to apply the residuary provision of section 56(2)(iii).

5. Learned counsel for the Revenue further relied on Commissioner Of Income-Tax v. Bhaktawar Construction Pvt. Ltd., [1986] 162 ITR 452 (Bom). The building therein had five upper floors. It was centrally air-conditioned. Separate premises in the building were leased to three tenants. Similarly, under three separate sets of three agreements, the air-conditioning facility was made available to the three tenants. The assessee claimed the income derived from the lease agreement as well as the other agreements as“income from other sources”. The Income-tax Officer held that the entire income was income from property. The High Court pointed out at page 453 that the question really was whether the income which arose to the assessee from the leases was assessable under the head “Income from other sources” or under the head “Income from house property”. It may be noted here that the assessee claimed the entire income as income from other sources and did not restrict the claim to any part of the income for a different treatment treating it as different from the income from house property. It is in these circumstances that the Bombay High Court held that section 56(2)(iii) was not attracted. It was pointed out that air-conditioning installation was not let out to the tenants and, therefore, it was not a case where the assessee had let on hire air-conditioning and also the buildings together and, if so, section 56(2)(iii) would not be attracted. The air-conditioning plant was under the control of the lessor in the said case as in the instant case before us. But the assessee had not claimed a separate treatment regarding the alleged income from the air-conditioning plant in the said case and had such a claim been made, we do not know what view the Bombay High Court would have taken. In fact, the Bombay High Court referred to and accepted the decision of this court in D.C Shah & Others v. Commissioner Of Income-Tax, Karnataka., [1979] 118 ITR 419.

6. In the aforesaid decision of this court in D.C Shah's case, [1979] 118 ITR 419, the air-conditioning plant was to be maintained by the lessor and the lessee paid for the said provision of air-conditioning facility on the basis of the floor area. The air-conditioning plant Was also under the control of the landlord-assessee; the service charges were sought to be treated by the assessee as falling under section 56(2)(iii), as happened in the above Bombay case. This court held that there was no leasing of the air-conditioning plant because no transfer of interest therein was effected under the lease. This court at page 431 quoted certain observations of the House of Lords in Salisbury House Estate Ltd. v. Fry, [1930] 15 TC 266, which reads thus:

“It is necessary, however, to make it quite clear that the income from property which is taxable under, and only under, Schedule A is income derived from the exercise of property rights properly so called.

7. Property is regarded as yielding income from the exercise by the proprietor of the right either of himself enjoying the possession or of parting with the possession by letting his property to tenants. The owner of property may make profit out of it in other ways and by doing so he may render himself liable to taxation under Schedule D. The case of Governors of the Rotunda Hospital v. Coman, [1921] 1 AC 1; 7 TC 517, 576 (HL) is an excellent example. There, as Lord Chancellor Lord Birkenhead pointed out at page 8, the arrangements between the owners of the premises and the persons who paid for their use for the purpose of entertainments were not such as to constitute the relation of landlord and tenant, and the owners remained in possession and occupation of their property.

8. The receipts derived from hiring out their, premises along with various movable fittings, and affording services in the way of heating, lighting and attendance, were receipts of an enterprise quite distinct from the ordinary receipts which a landlord derives from letting his property.

9. Consequently, the owners of the premises were rightly held to be engaged in the carrying on of a trade or business in their premises, ‘the trade or business’ in Lord Shaw's language at page 37 (ibid at page 593) ‘of providing, or providing for, public entertainments’. There is nothing to prevent a landlord who has been assessed under Schedule A in respect of his income as a property owner being also assessed under Schedule D in respect of a trade, business or other enterprise carried on by him on his premises.”

10. Apart from the ultimate decision in D.C Shah's case, [1979] 118 ITR 419 (Kar), the ratio therein shows that the owner of a property is chargeable to tax on the income therefrom and the income derived in the exercise of his proprietary rights and if the income is derived in any other capacity, the same is not attributable to the income from the said property as such. If the owner of the property was realising any profit through some entertainment to the lessee, the income attributable to the said entertainment cannot be treated as income from the property. It is a separate service charge.

11. In Karnani Properties Ltd. v. Commissioner Of Income Tax, West Bengal, [1971] 82 ITR 547, the Supreme Court had an occasion to consider the question which has a bearing on the present question before us. It was pointed out that the services rendered by the assessee to its tenants were the result of its activities carried on continuously in an organised manner, with the set purpose and with a view to earn profits and those activities were business activities and, therefore, the income arising therefrom was assessable under section 10 of the old Indian Income-tax Act, 1922 (which is similar to section 28 of the present Act). The Supreme Court had in fact referred to the decision of the House of Lords in Salisbury House Estate Ltd.'s case, [1930] 15 TC 266, observations from which we have already quoted above. The decision in Karnani Properties Ltd.'s case, [1971] 82 ITR 547 (SC) highlights the principle that all income derived by the owner of the premises irrespective of the capacity in which the income is derived cannot be treated as income from the said property. The capacity in which the income is derived will have to be looked into.

12. There are three decisions of the Calcutta High Court wherein a similar view has been upheld. In Commissioner Of Income-Tax, West Bengal-1 v. Kanak Investments (Pvt.) Ltd., [1974] 95 ITR 419, it was held that where composite rent is received by the assessee from its tenants, it should be split up and the amount attributable to the building alone should be computed under section 9(1) of the old Act (similar to section 22 of the present Act), while the amount attributable to the amenities provided by the assessee to the tenants should be assessed under section 12 of the old Act. Accordingly, the receipts attributable to the various amenities provided by the landlord in the shape of electric fittings, lift, gas, sanitation, etc., were separately treated under section 12 of the old Income-tax Act.

13. Indian City Properties Ltd. v. CIT, [1978] 111 ITR 19 (Cal) also involves a similar question. The lift charges and air-conditioning charges were held to be assessable under section 56 treating them separately from the income derived from the building under section 22.

14. Commissioner Of Income-Tax, Central-Ii v. Model Manufacturing Co. Pvt. Ltd., [1986] 159 ITR 270 (Cal) also stated that the services rendered by the assessee in providing electricity, use of lifts, supply of water, maintenance of staircases and watch and ward facilities to the tenants constituted separate activities distinct from the letting out of the property. The service charges realised by the assessee were held to be not assessable under section 22 but were assessable under the head “Income from other sources.” Sultan Brothers Private Ltd. v. CIT, [1964] 51 ITR 353 is a decision of the Supreme Court referred to in most of the other cases. While considering the scope of section 12(4) of the old Act (similar to section 56(2) of the present Act), the Supreme Court pointed out that the inseparability referred to in the said section regarding machinery, plant or furniture with reference to the buildings is the inseparability that arises from the intention of the parties. Inseparability is not confined to the physical aspect of the matter. At page 363, it was held by the Supreme Court thus:

“What, then, is inseparable letting? It was suggested on behalf of the respondent Commissioner 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, it 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.

It seems to us that the inseparability referred 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.”

15. In case there is inseparability, as stated above, then it will not be income from house property at all but would be income falling under the present section 56(2)(iii). Further, what follows from this is that in case of separability, the two sets of income attributable to the two separate entities also should be assessed under the respective heads. In other words, the income that should be attributed to the property as such alone should be assessed under section 22.

16. In view of the above discussion, we have no hesitation in holding that the composite rent received by the assessee could be split up in the instant case and, consequently, the question referred to us is answered in the affirmative and against the Revenue.