Everest Hotels Ltd. v. Commissioner Of Income-Tax, West Bengal

The Judgment of the Court was delivered by

Sankar Prasad Mitra, C.J:— This is an appeal against the judgment and order of B.N Banerjee J., dated the 19th June, 1963. We have to decide “whether the assessee's rental income out of a lease should be taxed under section 10 or section 12(4) of the Indian Income-tax Act, 1922?”

2. The appellant, since 1927, has been carrying on the business of a hotel under the name and style of “Hotel Mount Everest” at Darjeeling. On the 23rd October, 1952, the appellant executed an indenture of lease in favour of Messrs. Hotels (1938) Private Ltd. with effect from 1st November, 1952, at a consolidated leasehold rent of Rs. 75,000 per annum for a period of 5 years. The entire business of Hotel Everest, its goodwill, buildings, furniture, equipments, etc., were let out to Messrs. Hotels (1938) Private Ltd. under this indenture. On the expiry of the period of the lease, the appellant resumed its business on the 1st April, 1958. Now, under section 9 of the Indian Income-tax Act, 1922, tax is payable by an assessee under the head “Income from property” in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax. Under section 10, tax is payable by an assessee under the head “Profits and gains of business, profession or vocation” in respect of the profits or gains of any business, profession or vocation carried on by him.

3. And section 12(4) provides:

“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, he shall be entitled to allowances in accordance with the provisions of clauses (iv), (v), (vi) and (vii) of sub-section (2) of section 10 in respect of such buildings.”

4. In the instant case, if the assessee, that is, the appellant, is taxed under section 12(4), it loses certain other allowances under section 10 by reason of depreciation.

5. The appellant's assessment for the assessment years 1954–55 to 1958–59, that is, the period of the lease, was completed by the Income-tax Officer, Companies District-I, Calcutta, and the income from the lease was assessed under section 12.

6. The assessee preferred appeals against the order of the Income-tax Officer to the Appellate Assistant Commissioner. The assessee's contention in the appeals was that its rental income should be taxed under section 10 of the Act. The Appellate Assistant Commissioner passed his order on the 9th April, 1959. He directed that a proportionate part of the assessee's rental income should be taxed under section 9 as income from house property and another proportionate part received by leasing out furniture, equipment, goodwill, etc., should be taxed under section 12.

7. The assessee then filed a revision petition under section 33A of the Act to the Commissioner of Income-tax. On the 5th November, 1960, the Commissioner of Income-tax affirmed the Appellate Assistant Commissioner's order.

8. Thereupon, the assessee moved this court under article 226 of the Constitution and obtained this rule on the 27th June, 1961. The rule has been disposed of by Banerjee J., on the 19th June, 1963, holding that the Commissioner's order under section 33A is an administrative order only and cannot be quashed by a writ of certiorari.

9. The view of the learned trial judge that the Commissioner's order is an administrative order cannot be sustained on the ground that the Supreme Court in Dwarka Nath v. Income-tax Officer, [1965] 57 ITR 349 has held that the jurisdiction conferred under section 33A(2) is a judicial one. We have, therefore, to go into the merits of this case. In our opinion, section 9 cannot apply to the facts herein. In Sultan Brothers Private Ltd. v. Commissioner of Income-tax, [1964] 51 ITR 353 (SC), the assessee was a private limited company. It constructed a building on a certain plot of land, fitted it up with furniture and fixtures and let out on lease fully equipped and furnished for the purpose of running a hotel. The lease provided for a monthly rent of Rs. 5,950 for the building and a hire of Rs. 5,000 for the furniture and fixtures.

10. The facts in our case are very similar to the facts set out above. The Supreme Court has held in this case, inter alia, that as the assessee and the lessee intended that the building and fixtures and furniture were to be used for one purpose, namely, for the purpose of running a hotel and not one separately from the other, notwithstanding that the sums payable for their enjoyment were fixed separately, the lease satisfied all the conditions for the applicability of section 12(4) and rent from the building had to be computed under section 12 after providing for allowance mentioned in subsection (4) thereof and section 9 did not apply.

11. Our case seems to be stronger than the case before the Supreme Court. In the instant case, the building along with furniture, goodwill, etc., were let out under the indenture of lease. The rent payable under each item has not been stated separately. The lessee in terms of the lease was to pay a consolidated rent of Rs. 75,000 per annum for the building, the equipments and the goodwill. In these circumstances, it seems to us, the Commissioner and the Appellate Assistant Commissioner were in error in applying section 9 to the proportionate part of the rent payable by the lessee. Similar conclusions, it may be noted, are reached also, in a decision of our court in Chitpore Golabari Co. P. Ltd. v. Commissioner of Income-tax, [1971] 82 ITR 753 (Cal).

12. We are, therefore, to decide whether, on the facts of this case, the assessee ought to be taxed under section 10 or under section 12(4). Numerous decisions have been placed before us on behalf of the appellant as well as on behalf of the department. These decisions are Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., [1951] 20 ITR 451 (SC); Lakshmi Industries (Private) Ltd. v. Commissioner Of Income-Tax, Madras., [1961] 41 ITR 645 (Mad); Sadhucharan Roy Chowdhry, In re, [1935] 3 ITR 114 (Cal); Sultan Brothers P. Ltd. v. Commissioner of Income-tax, [1964] 51 ITR 353 (SC); C.P Pictures Ltd. v. Commissioner of Income-tax, [1962] 46 ITR 1181 (Bom); Dal Chand & Sons v. Commissioner of Income-tax, [1968] 69 ITR 247 (Punj); Sutherland v. IRC, [1918] 12 TC 63; Coringa Co. Ltd. v. Commissioner Of Income-Tax, A.P, [1966] 62 ITR 523 (AP); G.R Narasimier & Co. v. Commissioner Of Income-Tax, Madras*, [1969] 73 ITR 257 (Mad); Chitpore Golabari Co. P. Ltd. v. Commissioner of Income-tax, [1971] 82 ITR 753 (Cal); New Savan Sugar & Gur Refining Co. Ltd. v. Commissioner of Income-tax, [1969] 74 ITR 7 (SC); Narain Swadeshi Weaving Mills v. Commissioner Of Excess Profits Tax, [1954] 26 ITR 765 (SC); Aruna Mills Ltd., Ahmedabad…Applicant; v. Commr. Of Income-Tax, Bombay,…., [1957] 31 ITR 153 (Bom) and Commissioner of Income-tax v. National Mills Co. Ltd., [1958] 34 ITR 155 (Bom).

13. We do not intend to discuss in detail the points decided in the above cases. Whether a particular letting is business or not depends on the circumstances of each case. And each case, as the Supreme Court points out in Sultan Brothers P. Ltd. v. Commissioner of Income-tax, [1964] 51 ITR 353 (SC), has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of its property by an owner. But from the decisions cited above certain broad principles relevant to the facts of the instant case can be enunciated. These principles are as follows:

(1) In order to be a business income within the meaning of section 10 there must be evidence of exploitation of a commercial asset.

(2) Exploitation of a commercial asset does not necessarily mean exploitation by the assessee himself at all material times. The assessee may temporarily cause it to be exploited by another person against payment of consideration and for this purpose may also execute a lease for a fixed period even with clauses of option to renew.

(3) But in order that the income derived from the lease may be taxable under section 10 it must be shown that the lessor's intention was that during the period of the lease the asset leased out must remain and be treated as a commercial asset and exploited as such.

(4) This intention of the lessor referred to above has to be ascertained from the cumulative effect of all the terms of the lease and other material circumstances.

14. If we apply the above principles to the facts of this case we find that by the agreement of lease dated the 23rd September, 1952, the lessee covenanted, inter alia, (a) to use the demised premises including the fittings, fixtures, furniture in proper manner, reasonable wear and tear excepted; (b) at the expiry of the lease to hand over and deliver all furniture, fittings, plates, crockeries and other articles in the same state and condition as it was let, reasonable wear and tear excepted; and (c) to carry on the said hotel business in a proper and customary manner and to make over the said business at the termination or earlier determination of the lease.

15. It is provided further that if any covenant on the lessee's part is not performed and observed it shall be lawful for the lessor at any time to reenter the demised premises or any part thereof and thereupon the demise shall absolutely determine but without prejudice to the right of action of the lessee in respect of any breach of the lessor's covenants.

16. In this agreement, the lessor has covenanted, inter alia, that it shall on the request of the lessee lay out such sum for capital investment for improvement and better carrying on of the hotel business provided an estimate of the cost of such addition to or alteration in the demised premises or purchase of any fittings, installations, plates, wares or other goods has been approved by the lessee. These clauses containing the respective covenants of the lease and the lessor and the provision for determination of the lease and right of re-entry in the event of breach of any of the lessee's covenants lead us to the conclusion that the lessor intended that during the period of the lease the building along with the fittings, furniture, goodwill, equipments, etc., which were leased out should be used for the purpose of a hotel business. Coupled with these facts we have the further evidence in this case that the lease has expired and on the expiry thereof the lessor has resumed possession and is carrying on the hotel business as before. And the resumption of possession took place before the Income-tax Officer could make his orders. Taking all these facts into consideration, we are of the opinion that in the present case, the rental income derived from the lease should be taxed under section 10 of the Indian Income-tax Act, 1922.

17. In the result, this appeal is allowed. The orders of the Appellate Assistant Commissioner and the Commissioner of Income-tax referred to above are set aside and the Income-tax Officer concerned is directed to make the assessments in accordance with law. Let appropriate writs issue. There will be no order as to costs.

Sabyasachi Mukharji, J.:— I agree.