- These three references under section 66(1) of the Indian Income-tax Act, 1922, and under section 256 (1) of the Income-tax Act, 1961, raise a common question of law and, therefore, they are disposed of by this common judgment.

In Miscellaneous Civil Case No. 49 of 1972, the Income-tax Appellate Tribunal, Indore Bench, Indore has referred a question of law, at the instance of the Commissioner of Income-tax, arising from its consolidated order dated June 25, 1971, in Income-tax Appeals Nos. 3047 (Bom) and 3048 (Bom) of 1968-69, pertaining to the assessment years 1960-61 and 1961-62, to the High Court for its opinion, namely :

"Whether, on the facts and the circumstances of the case, the Tribunal was justified in law in holding that the rent received by the assessee from the various departments of the Government for occupying the assessees buildings, are taxable receipts from the business and not as income form property, for each of the two assessment years 1960-61 and 1961-62 ?"

In Miscellaneous Civil Case No. 242 of 1972, the same question has been referred by the Income-tax Appellate-tribunal, Indore Bench, Indore, from its consolidated order in Income-tax Appeals No. 3590 and 3591 of 1968-69, dated September 10, 1971, pertaining to the assessment years 1964-65 and 1965-66, with the difference that they relate to the relevant assessment year.

In Miscellaneous Civil Case No. 332 of 1975, a similar question has been referred by the Income-tax Appellate Tribunal, arising out of its order in Income-tax Appeal No. 992 (Ind) of 1973-74, dated November 26, 1974, pertaining to the assessment year 1966-67.

The assessee, National Newsprint and Paper Mills Ltd., Nepanagar, is a Government undertaking in the public sector, incorporated under the Companies Act, 1956, engaged in the business of manufacture and sale of newsprint. Nepanagar is a huge industrial complex. The assessee not only built residential quarters for its employees but also made available to the Government accommodation for locating a branch of the State Bank of India, post office, police station, Central Excise and railway staff quarters, as it required these facilities for carrying on its business efficiently and smoothly. The assessee made available to these authorities its buildings and collected rent for them. The accommodation in question was let out to the Government and not to any private person unconnected with the assessment business.

The Income-tax Appellate Tribunal has held that the rent received by the assessee from the various departments of the Government on account of the location of bank, post office, police station, central excise office and railway staff quarters was incidental and subservient to the assessees business income, under section 10 of the Indian Income-tax Act, 1922, or under section 28 of the Income-tax Act, 1961, and not under section 9 of the Indian Income-tax Act, 1922, or section 22 of the Income-tax Act, 1961, as income from property.

Feeling aggrieved, the commissioner of Income-tax applied for reference under section 66(1) of the Indian Income-tax Act, 1922, for the assessment years, 1960-61, and 1961-62 and under section 256(1) of the Income-tax Act, 1961, for assessment years 1964-65, 1965-66 and 1966-67. Since a question of law does arise from its order for the various years in question, the Income-tax Appellate Tribunal has made these references.

Incidentally, we may mention that the department has throughout accepted that the residential quarters constructed by the assessee for, and let out to, its employees would be outside the scope of section 9 of the Indian Income-tax Act 1922, and section 22 of the Income-tax Act, 1961, as being incidental to the assessees business. A distinction is, however, tried to be drawn by the department with respect to the income derived from the accommodation let out of the Government for location of the State Bank of India, post office, police station, Central excise office, etc. On the ground that it was income derived by exercise of property rights properly so-called, and, therefore, such income was liable to be taxed under section 9 of the Indian Income-tax Act, 1922, and section 22 of the Income-tax Act, 1961.

Shri. Khirwadkar, learned counsel appearing for the Commissioner of Income-tax, contends that income, which is specifically made chargeable under a distinct head, cannot be brought to charge under a different head in lieu of, or in addition to, being charged under its specific head, inasmuch as the various heads of income enumerated in section 6 of the Income-tax Act, 1922, are mutually exclusive. He drew out attention to the different heads of income enumerated therein, and contends that the rent derived by the assessee by letting out the accommodation to the Government for providing facilities, like bank, post office, police station, central excise office, etc., is nothing but "income from house property" and, therefore, falls within head (iii) of section 6 of the 1922 Act and head "C" of section 14 of the 1961 Act, namely :

"Income from house property."

According to the learned counsel, since a specific head of charge is provided for income from the ownership of house property, rent or other income form ownership of house property cannot be brought to tax under any other head. Assessment under head (iii) of section 6 of the 1922 Act or head "C" of section 14 of the 1961 Act, is not only proper but obligatory. He further contends that it is not the assessees business to let out house properties and, therefore, the rental income cannot be taxed under section 10 of the 1922 Act or section 28 of the 1961 Act business income. Placing reliance on the words "as he may occupy" in the otherwise provision in section 9(1) of the 1922 Act and section 22 of the 1961 Act, he further contends that since the accommodation was let out to the Government the assessee was not in occupation thereof, and, therefore, the rent was an income taxable as property income under section 9 of the 1922 Act and section 22 of the 1961 Act. We are afraid, none of these contentions can prevail.

It is true that income which is specifically chargeable under a distinct head cannot be brought to charge under a different head in lieu of or in addition to, being charged under its specific head. There is no overlapping between one head of income and another, inasmuch as they are mutually exclusive. This follows from the language of section 14 of the 1961 Act, which is as follows :

14. Heads of income-Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income be classified under the following heads of income :

A - Salaries. B - Interest on Securities. C - Income from house property. D - Profits and gains of business or profession. E - Capital gains. F - Income from other sources.

It must be noticed that the opening words of the section "Save as otherwise provided by this Act" no doubt make the section subject to section 22. it is however, significant to observe that both section 9 of the 1922 Act and section 22 of the 1961, act are themselves subject to the otherwise provision contained therein.

The different heads of income enumerated in section 6 of the 1922 Act and in section 14 of the 1961 Act are mutually exclusive. That being so, if there is nexus with business, then section 9 of the 1922 Act or section 22 of the 1961 Act does not come into play. The dominant purpose of letting of the accommodation in question, on the facts found by the Appellate Tribunal was to enable the assessee to carry on its business more efficiently and smoothly. If that so, then the activity of letting has a definite with the business that the assessee is carrying on. It will be noticed that both section 9 of the 1922, Act and section 22 of the 1961 Act, as well as both section 12 of the 1922 Act and section 56 of 1961 Act, steer clear of section 10 of the 1922 Act or section 28 of the 1961 Act. If section 10 of the 1922 Act or section 28 of the 1961 Act applies, then section 9 of the 1922 Act or section 22 of the 1961 Act as well as section 12 of the 1922 Act or section 56 of the 1961 Act are necessarily excluded.

When the residential quarters were built at Nepanagar, they were essential and indispensable parts of the industrial complex. Similarly, when accommodations was let out to the Government for providing certain facilities in aid of the business carried on by the assessee. i.e. for locating a branch of the State Bank of India, post office, police station, central excise office, etc., the motivation was facility of business. This is also the finding reached by the Appellate Tribunal.

We fail to appropriate the distinction that the department is trying to draw between income derived from the letting out of residential quarters by the assessee to its employees and the accommodation let out of the Government for providing certain facilities in connection with the assessees business. We fond no distinction in principle between the letting of the two classes of accommodation in the facts and circumstances of the present case.

In Jamshedpur Engineering and Machine Manufacturing Co. Ltd. v. Commissioner of Income-tax [1957] 32 ITR 41 (Pat) the assessee-company, which carried on business of manufacturing and selling agricultural implements, had constructed residential quarters for its employees and let out quarters to its employees, as incidental to its main business. The assessee incurred expenditure for the repair and maintenance of the residential quarters. The question before the Patna High Court was whether such expenditure incurred by the assessee was allowable as deduction from the profits of the business of assessee under section 10(2)(xv). The Patna High Court held that as letting out of residential quarters was subservient and incidental to the main business, section 9 of the Income-tax Act did not apply to the case and so assessment should be made under section 10 of the Act.

In Rohtas Industries Ltd. v. Commissioner of Income-tax [1961] 41 ITR 524, The patna High Court reiterated its earlier view and held that the rent derived by the assessee by letting out of its residential quarters to its employees was assessable not under section 9 of the Act, but under section 10(1) of the Act.

In commissioner of Income-tax v. Delhi Cloth and General Mills Co. Ltd. [1966] 59 ITR 152 (Punj), the Punjab High Court the view of the Patna High Court that such income was outside the scope of section 9 of the 1922 act. It rejected the contention of the revenue, based upon the use of the word "occupy" in section 9 of the Act, as meaning "actual physical occupation" only and not legal occupation. In rejecting the contention, it adverted to the opinion of the Judicial Member, who had affirmed the order of the Appellate Assistant Commissioner, to the effect that the rental income in question was "income from property" and thus had to be assessed under section 9 of the Act, and observed (pages 156, 157) :

It will be appropriate at this stage to mention that Mr. Rajagopal Sastri decided against the assessees contention on the basis that the word "occupy" in section 9 means "physical occupation" or in other words "actual occupation" and not "legal occupation". In law whenever premises are let out to a tenant, it is the tenant who is in physical occupation of the premises, but against the entire world, the landlord is in occupation of the premises for the tenants occupation is treated as landlords occupation. The landlords occupation through his tenant would only come to an end, when the tenant sets up a hostile title to the landlord, otherwise the occupation of the tenant is occupation of the landlord. If both sections 9 and 10 of the Act are read together, it will be apparent that where the property is held and used for the purposes of the business, income therefrom would be "income from business" and not income from property. In the present case, there can be no manner of doubt that the company holds the property in the occupation of its employees for the purposes of its business. If it be held as was held by the Judicial Member, that income from that part of the property only can be assessed under section 10 which is in the actual occupation of the assessee for the purposes of its business, this would create an anomaly because property which is admittedly the business asset of the assessee but not in the physical occupation of the assessee would not entitle him to claim depreciation thereon, while on the other hand, its income would not be treated as "income form property" But if the narrow interpretation placed by the Judicial Member is not accepted, full effect can be given to sections 9 and 10, and this anomaly would disappear. The property held by the assessee for his business, though not in his actual occupation, will entitle to him to depreciation. In other words, property held and used by the assessee for his business, though not in his physical possession, would entitle the assessee to depreciation under section 10. Therefore, the income from such property would fall to be assessed under section 10 and not section 9. We are not prepared to put a narrow and pedantic construction on the word "occupy"as has been done by Mr. Rajagopal Sastri, the Judicial Member of the Tribunal.

The view taken by the Punjab High Court that the word "occupy" in section 9 of the 1922 act did not mean actual physical occupation alone, stands fortified by the decision of their Lordships of the Supreme Court in Commissioner of Income-tax v. National Storage Pvt. Ltd. [1967] 66 ITR 596, 603 (SC) where they observe :

But the learned counsel for the commissioner says that section 9 applies because the assessee cannot be said to be in occupation of the premises for the purposes of any concern of its own. He says that the licensees were in possession of the vaults as lessees and not merely as licensees. But, in our opinion, the agreements are licenses and not leases. The assessee kept the key of the entrance which permitted access to the vaults in its own exclusive possession. The assessee was thus in occupation of all the premises for the purpose of its own concern, the concern being the hiring out of specially built vaults and providing special services to the licensees."

It is stated as the bar by both the learned counsel appearing for the assessee as well as the commissioner of Income-tax, that there is no authority directly in point. The only authority, which us nearest to the point, is the decision of their Lordships in Commissioner of Income-tax v. National Storage Pvt. Ltd. [1967] 66 ITR 596 (SC). There, the assessee purchased a plot of land at an approved place and constructed thereon godowns for the storage of films, in conformity with the requirements and specifications laid down in the Cinematograph Films Rules, 1948. Under the licence, the vaults could not be used for any purpose other than storing cinema films. A key to each vaults was retained by the vault-holder but they key to the entrance which permitted access to the vaults was in the exclusive possession of the assessee. The assessee not only constructed vaults of special design and special doors and electric fittings, but it also rendered other services to the vaults-holder. It installed a fire alarm and was incurring expenditure for the maintenance of fire alarm, by paying in the premises for the municipality. Two railway booking officers were opened in the premises for the despatch and receipt of film parcels. A contained was also run in the premises for the benefit of the vault-holder and a telephone had been provided for them. It also maintained a regular staff, consisting of a secretary, a peon, a watchman, etc. It would, therefore, appear that the subject, which was let out or given on licence, was not a bare tenement but was a complex and preserving films, including special device facilities and service were provided. The contention of the department before their Lordships was that the income derived by the assessee was by exercise of property right properly so called and was, therefore, assessable under section 9 of the 1922, act while the contention of the assessee was that it was business income chargeable to tax under section 10(1) of the Act. The learned counsel for the assessee formulated his proposition as follows : Distinction has to be drawn between income derived by exercise of property rights properly so called, on the one hand and on the other hand, income derived from licensees who are allowed the use of any property, specially constructed safe deposit vaults for securely storing hazardous or inflammable films, or similar foods or safe deposit lockers for surely keeping valuables and for which purpose special amenities are given; in the latter class of cases, the object is a complex one and not merely letting of property and the activities amount to carrying on trade or business of property being the subject-matter of business.

The question before their Lordships was whether the assessee was carrying on any business, i.e. was it carrying on any adventure or concern in the nature of trade of commerce ? Their Lordships [1967] 66 ITR 596, 601 (SC) at first quoted with approval the following observations of Sarkar C.J. in Nalinikant Ambalal Mody v. S. A. L. Narayan Row, Commissioner of Income-tax [1966] 61 ITR 428 at page 432 (SC).

"Whether an income falls under one hand or another has to be decided according to the common notions of practical men for the Act does not provide any guidance in the matter.

Then they ([1967] 66 ITR 596, 602 (SC) relied upon the following observations of Viscount Finally in Governors of the Rotunda Hospital v. Coman ([1920] 7 TC 517, 582, (HL), to the effect :

"Profits are undoubtedly received in the present case which are applied to charitable purposes, but they are profits derived not merely from the letting of the tenement but from its being let properly equipped for entertainments, with seats, lighting, heating and attendance. The subject which is hired out is a complex one. The mere tenement as it stands, without furniture etc., would be almost useless for entertainments. The business of the Governors in respect of those entertainments is to have the fall under Schedule D, and to such profits the allowance in question has no application, as they cannot be properly described as rents or profits of lands, tenements, hereditaments, or heritages. They are the proceeds of a concern in the nature of a trade which is carried on by the Governors and consists in finding tenants and having the rooms so equipped as to be suitable for letting."

Their Lordships held that High Court was, therefore, right in holding that the assessee was carrying on an adventures or a concern in the nature of trade.

In that case ([1967] 66 ITR 596, 599 (SC) the sixth and seventh propositions as enumerated by the High Court, were these :

"6. In cases where the income received is not firm the bare letting of the tenement or from the letting accompanied by incidental services or facilities but the subject hired out is a complex one and the income obtained is not much because of the bare letting of the tenement but because of facilities and services rendered, the operations involved in such letting of the property may be of the nature of business or trading operations and the income derived may be income not from exercise of property rights properly so called so as to fall under section 9, but income from operations of a trading nature falling under section 10 of the Act.

7. In cases where the letting is only incidental and subservient to the main business of the assessee, the income derived from the letting will not be the income from property falling under section 9 and the exception to section 9 may also come into operation in such cases."

In their Lordships view, as observed by Viscount Finlay in Governors of the Rotunda Hospital, Dublin v. Coman [1920] 7 TC 517 (HL) "the subject which is hired out is a complex one", and the rent received the assessee was not in an income derived from the exercise of property rights, but was derived from carrying on an adventure or concern in the nature of trade. The judgment indicates that their Lordships approved the sixth and seventh propositions formulated by the High Court, as quoted above.

We are, therefore, of the opinion that, in the facts and circumstances of the present case, the Income-tax Appellate Tribunal was right in holding that the letting out of the accommodation to the Government for locating a branch of the State Bank of India, Post office, police station, central excise office, railway staff quarters etc. was incidental to the assessees business and, therefore, rightly taxable under section 10 of the Indian Income-tax Act, 1922, or section 28 of the Income-tax Act, 1961, as business income.

The result, therefore, is that the references are answered against the revenue and in favour of the assessee. In our view, the Income-tax Appellate Tribunal was right in holding that rent received from letting out of the accommodation to the Government departments, being incidental to the assessees business, is taxable as income from business and not as income from property. The assessee shall have the costs of these references. Hearing fee Rs. 150 in each case.