THE issue before the Bench is - Whether when the assessee lets out building with furniture and fixtures and their maintenance, the composite rent received is to be treated as 'income from other sources'. And the answer goes against the assessee.
Facts of the case
Assessee is an individual carrying on business in the name and style of Garg Dyeing and Processing Industries. During assessment, AO perused the rental agreements and found that the rent received consisted of three components i.e. (1) rent for building, (2) rent for the furniture, fittings and fixtures and (3) charges for the maintenance of the above. Since the
rent was composite, AO was of the view that it was assessable under the head “income from other sources” u/s 56 and consequently the deductions claimed by the assessee u/s 24 were not allowed. The assessee had contended that the rent received was not composite and it was the prevailing practice that commercial buildings were generally let out with additional facilities such as furniture and fixtures, air conditioner, electricity backup, false ceilings, generators, water tanks etc. The AO held that the premises were let out on condition that the assessee was to provide certain facilities and apart from these there were also specifications for sound-proofing for windows etc. AO therefore, took the view that the provisions of Section 56(2)(iii) were applicable and that the letting out of the machinery, plant and furniture and the letting out of buildings were inseparable and therefore the rental income was chargeable to tax under the residual head. Thus, AO brought the rental income to tax under the head “income from other sources” with the result that the deductions u/s 24 claimed by the assessee on the footing that the rental income was assessable under the head “income from house property” stood disallowed.
On appeal CIT(A), affirmed the order of the AO. On further appeal before Tribunal took the view that the assessee simply let out the ground and first floors in the building and the lessee was given a right to use the common facilities such as staircases, corridors and lifts which are normally permitted to be used by any lessee for enjoying the demised premises in a proper and efficient manner. The Tribunal further found that no machinery, plant or furniture was leased. Accordingly, the Tribunal agreed with the assessee that the rental income must be taxed under the head “income from house property” as per Section 22. The Tribunal held that it was clear that it was not a case of leasing building separately and other assets separately. Accordingly, it was held that the intention was to let the building, plant, fittings and furniture etc. together. It was also a matter of fact that one would not have let without the other as fittings etc. were made in accordance with desires of the lessees. Accordingly, the lease rent has to be assessed under the residuary head.
Further the assessee had filed an application to correct mistakes in the order of the Tribunal, which was partly accepted by the Tribunal. As regards the decision regarding the head of income under which the rental income fell to be assessed, the Tribunal had not modified or altered its earlier order passed in the appeal. Thus, no relief was obtained by the assessee from the Tribunal. Assessee contented that the fittings and fixtures and other installations in the let out premises were installed only at the desire of the lessee and in such circumstances, the income should properly be assessed under the head “income from house property” as mandated by Section 22. In order to test whether the letting is a composite or inseparable letting, SC in the case of Sultan Brothers Pvt. Ltd. Vs. CIT observed that 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 were 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 was 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 was 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, they simply rest on the floor of the building in which it lies and the two indeed are always separable. Thus it is unacceptable that inseparable in the sub-section means that the plant, machinery or furniture are affixed to a building and that was arising from the intention of the parties. 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 u/s 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.
Having heard the matter, the High Court held that:
++ by applying the aforementioned tests to the facts of the present case, the Tribunal held that the letting in the present case was a composite one. What was let out was the bare space with only a right given to the lessee to use the common facilities such as lift, lobby, staircases, corridors etc. in order that the property can be enjoyed effectively; there was no letting out of machinery, plant or furniture. However, in the disputed cases there was a letting of the fixtures, fittings, air-conditioning plant, furniture etc. together with the building and both were inseparable. This is what the Tribunal has found;
++ it further found that the intention of the parties was that there was to be a single inseparable letting as evidenced by a composite lease deed for which a consolidated lease rent was fixed. In these circumstances, we are of the view that the substantial question of law has to be answered in the affirmative and against the assessee. The controversy in the case before the Calcutta High Court was whether the rental income can be treated as property income or as business income. The provisions of Section 56(2)(iii) were not required to be considered. The controversy before us is different namely, whether the rental income is to be assessed as property income or “income from other sources”. Therefore, it cannot be said that the judgment of the Calcutta HC or the judgment of the SC which confirmed the judgment of the Calcutta HC are authorities for the proposition that is being canvassed before us on behalf of the assessee. We accordingly answer the substantial question of law in the affirmative, against the assessee and in favour of the revenue. The appeal filed by the assessee is accordingly dismissed
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