Supreme Court Upholds Commissioner of Income-Tax in Appeal Concerning Assessment of Income from Letting of Fully Equipped Hotel Building. Letting of Building and Furniture Does Not Constitute Business; Income Assessable Under Section 9 for Building and Section 12(3) for Furniture and Fixtures Under Income Tax Act, 1922.

Case Note & Summary

The appeal before the Supreme Court arose from a reference made by the Income-tax Appellate Tribunal to the Bombay High Court under Section 66(1) of the Income Tax Act, 1922. The appellant, Sultan Brothers (P) Ltd., a limited company, owned a building on Plot No. 7, Church Gate Reclamation, Bombay, which it had fitted with furniture and fixtures to operate as a hotel. By a lease dated August 30, 1949, the appellant let out the fully equipped and furnished building to one Voyantzis for a term of six years from December 9, 1946, for running a hotel and ancillary purposes. The lease provided for a monthly rent of Rs. 5,950 for the building and a hire of Rs. 5,000 for furniture and fixtures. For the assessment year 1953-54, the Income-tax Officer assessed the building rent under Section 9 as income from property and the furniture hire under Section 12 as residuary income. The Appellate Assistant Commissioner upheld this, and the Income-tax Appellate Tribunal confirmed, also rejecting the appellant's new contention that the entire income should be assessed under Section 10 as business income. The Tribunal referred the question to the Bombay High Court, which answered that the building income should be computed under Section 9, furniture and fixtures income under Section 12(3), and no part was taxable under Section 10. The appellant then appealed to the Supreme Court. The core legal issues were whether the letting of a fully equipped hotel building amounted to business under Section 10, whether the income from the building was assessable under Section 9 or Section 12, and the interpretation of Section 12(4) regarding inseparable letting of building and furniture. The appellant argued that letting out a commercial asset, i.e., a fully equipped hotel building, constituted business, entitling it to larger deductions under Section 10. Alternatively, it contended that the entire income should fall under Section 12 as residuary income with allowances under sub-sections (3) and (4) because the building and furniture were let inseparably. The appellant also relied on its memorandum objects, which included acquiring, constructing, decorating, furnishing, and leasing buildings, to show that the lease was a business transaction. The respondent Commissioner argued that the building income was specifically covered by Section 9, furniture hire by Section 12(3), and that Section 12(4) did not apply because the letting of the building was not inseparable from the furniture; the activity was mere exploitation of property by an owner. The Supreme Court, speaking through Sarkar J., held that whether a particular letting is business must be decided on the circumstances of each case, viewing it from a businessman's point of view to determine if it was the doing of a business or mere exploitation of property by an owner. The Court rejected the notion that a thing can by its very nature be a commercial asset; a commercial asset is only an asset used in a business. It distinguished cases where the assessee had previously operated the factory or hotel and temporarily let it out, noting that in the present case the appellant had never run the hotel. The Court also held that the company's objects, even if assumed to be business activities, did not convert the lease income into business income, relying on East India Housing and Land Development Trust Ltd. v. Commissioner of Income-tax. On Section 12(4), the Court interpreted the phrase 'the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture' to mean that the parties intended the building and furniture to be enjoyed together; it did not require the primary letting to be of the machinery, plant or furniture. On the facts, no such inseparability existed. Accordingly, the Supreme Court dismissed the appeal, affirming that the income from the building was assessable under Section 9, income from furniture and fixtures under Section 12(3), and no part was taxable under Section 10.

Headnote

Issue of Consideration

Final Decision

The Supreme Court dismissed the appeal and affirmed the High Court's answer. Income from the building was assessable under Section 9, income from furniture and fixtures under Section 12(3), and no part of the income was taxable under Section 10. The Court held that the letting did not amount to business, as it was exploitation of property by the owner; the company's object to acquire and lease property did not change the character of the income; and Section 12(4) was not applicable because the letting of the building was not inseparable from the letting of furniture and fixtures in the sense that parties intended them to be enjoyed together.

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