Sultan Brothers (P) Ltd vs Commissioner Of Income-Tax

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 63 of 1961

Decision Date: 6 December 1963

Coram: A.K. Sarkar, Bhuvneshwar P. Sinha, M. Hidayatullah, K.C. Das Gupta, N. Rajagopala Ayyangar

In the matter of Sultan Brothers (P) Ltd versus the Commissioner of Income‑Tax, the Supreme Court delivered its judgment on 6 December 1963. The judgment was authored by Justice A K Sarkar, who sat with Justices Bhuvneshwar P Sinha, M Hidayatullah, K C Das Gupta and N Rajagopala Ayyangar. The case is reported as 1964 AIR 1389 and 1964 SCR (5) 807, with subsequent citators including RF 1967 SC 193, R 1972 SC 2315, and the applicable provisions of the Income‑Tax Act, 1922 (11 of 1922), sections 10 and 12(4). The appellant, Sultan Brothers (P) Ltd, was a limited company that owned a building on Plot No 7 of the Church Gate Reclamation in Bombay, which it had furnished and equipped. The company let the entire premises on a six‑year lease to a lessee for the purpose of operating a hotel and carrying out ancillary activities. The lease stipulated a rent for the use of the building and a separate hire charge for the furniture and fixtures supplied.

The central question before the Court was whether the income derived from such letting should be treated as income from a business under section 10 of the Income‑Tax Act. The Court held that the characterization of a letting as a business must be determined on the facts of each case. It observed that mere exploitation of one’s own property by an owner does not constitute the doing of a business; a commercial asset is one that is used in a business, not an asset that is by its nature commercial. Accordingly, the Court found that the present lease of the building did not amount to the carrying on of a business by the assessee, and therefore the rent received could not be taxed as business income under section 10. The Court distinguished earlier decisions such as Commissioner of Income‑Tax v. Mangalagiri Sri Umamaheswara Gin and Rice Factory Ltd. (1927) I L R 50 Mad 529 and Commissioner of Income‑Tax v. Basotto Brothers Ltd. (1940) 8 I T R 41, as well as United Commercial Bank Ltd. v. Commissioner of Income‑Tax (West Bengal) 32 I T R 688.

Even assuming that the company’s objective of acquiring land and buildings for leasing was a business activity, the Court held that this intention did not transform the lease income into business income. The Court also referred to East Indian Housing & Land Development Trust Ltd. v. Commissioner of Income‑Tax (1961) 42 I T R 49 for support. It concluded that the income earned from the hire of furniture and fixtures was assessable under section 12 of the Act, subject to the allowances prescribed in subsection (3). Moreover, subsection (4) of section 12 was held not to be limited to cases where the building let out does not belong to the lessor; it applies to any income that does not fall within the earlier specific heads of income. Consequently, the income from the hire of furniture and fixtures fell within the scope of section 12(4).

It was explained that sub‑section (4) of section 12 does not require that the principal object of a lease be the machinery, plant or furniture, nor that a lease of such items must automatically include a lease of the building. The expression that “the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture” was interpreted to mean that the parties to the transaction must have intended the two lettings to be taken together. Such an intention was present when the parties intended that the building and the fittings be used jointly.

The appeal arose under civil appellate jurisdiction as Civil Appeal No. 63 of 1961. It challenged a judgment and order dated 2 July 1959 of the Bombay High Court in Income‑tax Reference No. 59/1958. Counsel for the appellant comprised senior legal representatives, while counsel for the respondent represented the tax authority. The judgment was delivered on 6 December 1963 by Justice Sarkar. The appellant was a limited company that owned a building erected on Plot No. 7 of the Church Gate Reclamation in Bombay. The company had fitted the building with furniture and fixtures for the purpose of operating a hotel. By a lease dated 30 August 1949, the appellant let the fully equipped building to a lessee identified as Voyantzis for a term of six years, commencing on 9 December 1946, for hotel operations and ancillary purposes. The lease stipulated a monthly rent of Rs 5,950 for the building and a monthly hire charge of Rs 5,000 for the furniture and fixtures. The central issue on appeal was the proper classification of the income derived from the rent and the hire under the Income‑Tax Act, 1922. The appellant argued that the entire receipt should be taxed under section 10 as business income, or alternatively under section 12 as income from a residuary source not covered by sections 7 to 11, with the deductions allowed under sub‑sections (3) and (4) of that provision. For the assessment year 1953‑54, the assessing authority had taxed the building rent under section 9 and the hire of furniture and fixtures under section 12. The Income‑Tax Officer held that the building rent fell within the specific provision of section 9, leaving no room for the residuary provision of section 12. The Appellate Assistant Commissioner observed that rent from a building could be assessed under section 12 only when the lease of the furniture and fixtures was indispensable to the lease of the building, which was not the case here; consequently, the building rent was correctly charged to section 9. The appellant then appealed to the Income‑Tax Appellate Tribunal, which affirmed the lower authorities’ decision.

The Tribunal affirmed the decision of the lower authorities that the allowances specified in sub‑section (4) of section 12 could not be permitted because that sub‑section authorises such allowances only where the letting of the building is incidental to the letting of the furniture and fixtures, a circumstance that did not obtain in the present case; consequently the rent could not be assessed under section 12. The appellant also raised before the Tribunal, for the first time, an argument that the entire income should have been assessed under section 10 of the Act on the ground that the income taxed arose from “the letting out of the totality of the assets which was the business of the assessee.” The Tribunal rejected this argument as well, holding that a specific head for income from property exists in section 9 and that the income from the leased property must be computed solely under that provision, relying on United Commercial Bank Ltd. v. Commissioner of Income‑Tax, West Bengal (1) for support. Subsequently, at the appellant’s request, the Tribunal referred a question under section 66(1) of the Act to the High Court at Bombay, asking: “Whether, on the facts and circumstances of the case, the income derived from letting of the building constructed on Plot No. 7 is properly to be computed under section 9, section 10 or section 12 of the Income‑Tax Act.” The High Court answered that the income from the building would be computed under section 9, the income from furniture and fixtures under section 12(3), and that no part of the income was taxable under section 10 (1 32 I.T.R. 688). The question framed by the Tribunal is somewhat inaccurate because the appellant’s original contention was that the entire income, not merely the building income, should be assessed under section 10. This inaccuracy did not mislead any party, and the matter was argued before this Court without objection from the respondent as if the question reflected the appellant’s actual claim. It is beyond dispute that the various heads of income enumerated in section 6 of the Act and dealt with separately in sections 7 to 12 are mutually exclusive, each head specifically covering income arising from a particular source, and that no one of these sections can be said to be more specific than another, as reiterated in United Commercial Bank Ltd. v. Commissioner of Income‑Tax (1). Accordingly, a particular category of income must be assigned to one of these sections. A broad reference to sections 9, 10 and 12 is therefore appropriate. Section 9 provides for tax on “Income from property” in respect of the bona‑fide annual value of buildings or lands appurtenant thereto of which the assessee is…

Section 9 of the Act requires that tax be levied on the income from property based on the bona‑fide annual value of the buildings or lands of which the assessee is the owner. Although certain buildings are exempt from this provision, the judgment does not need to enumerate those exemptions. Section 9 also prescribes the manner in which the annual value of the property is to be calculated for tax purposes. A key point emphasized is that, under this section, a building must be assessed on its annual value irrespective of whether any rent is actually received from it.

Section 10 of the Act governs profits and gains arising from business, profession or vocation. This provision delineates the method for computing such income and specifies the allowances that the assessee may deduct while making the computation. Section 12 serves as the residuary clause and encompasses all income, profits and gains of any kind that are not assessable under any of the earlier specified heads. Consequently, if the income under consideration falls within the ambit of either section 9 or section 10, it cannot simultaneously be taxed under section 12, a proposition that is not contested by the parties.

The appellant’s primary argument, as previously outlined, is that the assessment should be made under section 10, treating the receipt as income from a business. The appellant prefers this characterization because section 10 permits the deduction of substantially larger allowances in computing income than either section 9 or section 12 would allow. The appellant framed the issue by stating that letting out a commercial asset constitutes a business activity, and that the asset in question was a fully equipped hotel building. The appellant further contended that the covenants in the lease demonstrated that the appellant was engaged in a business rather than merely letting out property. This framing differs from the position presented before the Tribunal; the argument advanced before the Tribunal was not raised in this Court and therefore need not be examined here.

The Court observed that the appellant’s contentions were not entirely clear and that, although a large number of cases were cited in support, those authorities did not provide decisive guidance. The determination of whether a particular letting amounts to a business must be made on the facts of each individual case. The Court noted that the cited cases do not articulate a definitive test for assessing when a letting constitutes a business. Rather, each case must be examined from the perspective of a businessperson to ascertain whether the letting represents the conduct of a business or merely the exploitation of property by its owner. The Court further rejected the notion that an asset can be inherently “commercial.” It clarified that a commercial asset is simply an asset used in a business and that virtually any asset can be employed in a business context. Accordingly, it is not possible to deem an activity a business solely because it involves an asset commonly used in trade. The Court therefore found the appellant’s argument on this point untenable.

The Court observed that none of the authorities cited by the appellant demonstrated that any particular asset could be regarded as a commercial asset merely by its nature. The appellant company’s stated purpose was to purchase land and buildings, to develop them through construction, reconstruction, decoration, furnishing and maintenance, and thereafter to lease or sell them. Even if this stated purpose were treated as a business activity, the Court held that it would not, by itself, convert the lease at issue in the present matter into a business transaction. This principle was supported by the earlier decision of this Court in East India Housing and Land Development Trust Ltd. v. Commissioner of Income‑tax, where it was observed that income derived from shops and stalls constituted income from property under the specific head described in section 9, and that the character of that income was not altered merely because it was received by a company formed with the object of developing and setting up markets. The appellant relied particularly on cases involving the letting out of plant and machinery, sometimes together with the factory buildings in which the machinery was housed. In all of those authorities, except one which the Court would later discuss, the assessee had previously been carrying on a factory or mill business and had only temporarily let out the premises because continuing the operation was inconvenient at that time. In those circumstances, the courts had held that by letting out the plant, machinery and building, the assessee was still engaged in a business, albeit not the business of running the mill or factory itself. A similar principle was applied in Commissioner of Income‑tax v. Mangalagiri Sri Umamaheswara Gin and Rice Factory Ltd., where the assessee owned a fully equipped rice mill that it had constructed for its own trade but had never actually operated, and it decided to lease the mill to another party. The Court held that the rent received was income from business, with one judge, Krishnan J, explaining that the rent covered not only the use of the mill but also the necessary wear and tear, and that the lease amounted to letting out a working concern. Justice Beasley concurred, though with some hesitation. In a later case, Commissioner of Income‑tax v. Bosotto Brothers Limited, Madras, which dealt with the letting out of a fully equipped hotel previously run by the assessee, Justice Krishnaswami Ayyangar felt bound by the reasoning in the Mangalagiri case and, for that reason, agreed that the matter might fall under section 10. Justice Mockett expressed the view that what had been undertaken was the lease of a hotel business. The Court therefore considered these precedents in assessing whether the present lease could be characterised as a business transaction.

In discussing the relevance of earlier cases, the Court observed that the Bosotto Brothers Ltd. decision could not be applied because the appellant had never let out any business undertaking, had never carried on a hotel business in the premises, and there was no evidence that it intended to operate such a business even though its memorandum allowed that power; considerable doubt remained about any such intention. The Court further explained that in the Mangalagiri Gin and Rice Factory case the subject of the lease was the plant and machinery, and the judgment was based on the wear and tear suffered by that equipment; moreover, the parties had not pleaded that section 9 was applicable. Consequently, the considerations that led to the decision in that case did not arise here, since there was no wear and tear to machinery and no letting of a working concern. The Court also noted that both the Mangalagiri and Bosotto decisions were rendered before sub‑section (4) of section 12 was enacted; that sub‑section deals with situations where a building and its furniture are let together inseparably, and it was impossible to say how those earlier cases would have been decided had the provision been in force. The Court therefore found it unhelpful to rely on other authorities cited at the bar, as they did not advance the discussion. Counsel for the appellant sought to rely on certain lease clauses and on clause 3(b) of the appellant’s memorandum, arguing that the memorandum gave the company the power to manage land, buildings and other property and to supply tenants with services such as refreshment, messengers, lighting, waiting rooms, libraries, laundry facilities, electricity, lifts, stables and other advantages, thereby constituting the business of running a hotel. The Court disagreed with that contention, observing that the lease did not aim to achieve any of the objects listed in clause 3(b), and that none of the lessor’s covenants, which had been pointed out, brought the matter within the scope of that memorandum clause. Accordingly, the Court found no support in the lease or in the memorandum for the argument that the appellant was carrying on a hotel business by granting the lease.

In the present matter the Court observed that the lease did not amount to the carrying on of a hotel business. Clause (a) of the lease was described as a covenant for quiet enjoyment. Clause (b) was seen to provide for a renewal of the lease of the demised premises, allowing the lessee, on his request, to obtain a further term of six years. Clause (c) dealt with the payment of municipal taxes, similar charges and the ground rent. Clause (d) required the lessor, during the continuance of the lease and on any renewal, to supply various items such as furniture, pillows, mattresses, gas‑stoves, bottle coolers, refrigerators, lifts, electric fittings and similar articles; it also obligated the lessor to paint the exterior of the building with oil once every five years and to keep the building insured. The Court characterised these provisions as ordinary covenants that are normally found in a lease of a furnished building. The Court held that none of these covenants demonstrated that the lessor was rendering any service in the hotel business that the lessee was running, nor did they show that the lessor was engaged in any business activity at all. On the facts, the Court could not agree that the letting of the building amounted to the doing of a business. Consequently, the income derived from the lease could not be assessed under section 10 of the Act as income of a business.

The Court then turned to the question of sub‑section (4) of section 12. It set out the relevant portion of section 12 as follows: “Section 12. (1) The tax shall be payable by an assessee under the head ‘Income from other sources’ in respect of income, profits and gains of every kind which may be included in his total income if not included under any of the preceding heads. x x x x x (3) Where an assessee lets on hire machinery plant or furniture belonging to him, 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. (4) 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 the clauses (iv), (v), (vi) and (vii) of sub‑section (2) of section 10 in respect of such buildings.” The Court clarified that once section 10 is found inapplicable, there is no dispute that the income from the hire of furniture and fixtures is correctly assessed under section 12 after allowing the deductions mentioned in sub‑section (3) of that section. The remaining dispute, the Court noted, was whether the building should be assessed under section 9 on the basis of its annual value, or whether the rent received from the building should be assessed under section 12 after the deductions provided in sub‑section (4) are taken. The Court reiterated its earlier statement that section 12 can apply only where no other specific provision is applicable, because it deals with the residuary head of income.

In this case, the Court explained that section 12 dealt with the residuary head of income. It observed that subsection (4) of section 12 addressed only certain allowances and operated on the assumption that the income referred to – namely, rent from a building that was let inseparably together with plant, machinery or furniture – did not fall under any of the specific heads enumerated in sections 7 to 11. Consequently, such income was to be taxed under the residuary head contained in section 12. The Court then identified a preliminary difficulty. With respect to buildings, and only with respect to buildings, subsection (4) of section 12 was concerned, the owner was liable to tax under section 9 on the basis of the building’s annual value, not on the actual rent received, and this liability existed regardless of whether the building had been let out. The Court therefore asked how it could be said that rent received from a building could fall within section 12. In other words, the Court questioned why it could not simply be held that the specific provision, section 9, covered the situation, that the income from the building could not be assessed under section 12, and that consequently no question arose about granting any allowances under subsection (4) of section 12.

The Court noted that a suggestion had sometimes been advanced to resolve this difficulty: that subsection (4) of section 12 applied only when the building was let by a person who was not the owner, because such a letting would not come within section 9. Neither counsel for the petitioner nor counsel for the respondent was prepared to accept that suggestion. Moreover, the Court pointed out that the suggestion contained its own difficulty. Subsection (4) of section 12 gave the assessee, among other things, an allowance under section 10(2)(vi) on account of depreciation of the building “being the property of the assessee.” From this, the Court derived that subsection (4) of section 12 necessarily contemplated the letting of the building by its owner. Accordingly, the Court held that subsection (4) must be applicable when the owner lets machinery, plant or furniture together with the building in an inseparable manner. The Court further explained that, for subsection (4) to have any effect – and it is the duty of the Court to construe every part of a statute so that it has effect – the income arising from the letting of a building in the circumstances described must be regarded as income falling within the residuary head. If a person could not be assessed under section 12 on the rent of a building that he owned, subsection (4) would become redundant; there would be no situation in which the allowances mentioned in it could be granted while computing the actual income from a building. The Court found such an interpretation to be unnatural. Consequently, the Court held that when a building and plant, machinery or furniture are let inseparably, the Act contemplated the rent from the building as a component of income under the residuary head. The Court then turned to the next question of whether the present letting fell within the scope of subsection (4) of section 12.

The provision in sub‑section (4) of section 12 sets out two requisites: first, that furniture must be let; second, that buildings must also be let, and the letting of the buildings must be inseparable from the letting of the furniture. In the present matter, both the furniture and the building were undeniably let. The remaining issue is whether the two lettings were inseparable. The High Court, according to the record, did not address directly the question of inseparability. Instead, it adopted the view that inseparability required not only that both items be let together, but also that the primary letting be of the machinery, plant or furniture, with the letting of the building occurring only as a consequence of that primary letting. The High Court concluded that, because the primary letting in the facts was of the building, the appellant could not invoke the benefit of sub‑section (4) of section 12. The Court of the Tribunal had expressed a similar interpretation. It held that the requirement that one let be inseparable from the other meant that the primary letting must be of the machinery, plant or furniture, and that the building let was merely incidental to that primary letting. Applying that reasoning, the Tribunal also found that the primary letting in this case was of the building. The present Court finds difficulty in accepting the reasoning advanced by the High Court and the Tribunal because the language of sub‑section (4) of section 12 does not support such a view. The sub‑section indeed mentions first the letting of machinery, plant or furniture and subsequently refers to the letting of the building, using the term “also” in connection with the building. However, the Court considers that this textual sequence is insufficient to infer that the legislature intended the primary letting to be of the machinery, plant or furniture and that the building let be merely incidental. In the absence of a clear and stronger indication in the statutory language, there is no justification for construing the sub‑section as requiring that the letting of the building be incidental to the letting of the plant, machinery or furniture. A natural question arises: if the intended scheme was that the letting of plant, machinery or furniture should be primary, why did the provision not expressly state that requirement? Moreover, the Court finds it practically impossible to conceive a scenario in which the letting of a building could be merely incidental to the letting of the furniture contained within it, although it is conceivable that the letting of a factory building might be incidental to the letting of the machinery or plant installed therein, where the real purpose is to operate the machinery. If the Court’s view is correct, namely that the letting of a building can never be incidental to the letting of the furniture it houses, then the distinction between primary and secondary lettings does not arise in the construction of the sub‑section. Consequently, the rule that applies when furniture and buildings are let together must also apply equally when plant and machinery are let together with a building.

The Court observed that sub‑section (4) of section 12 was intended to require that the letting of machinery, plant or furniture be inseparable from the letting of the buildings in which they are situated. To explain “inseparable letting,” the Court considered the argument advanced on behalf of the respondent Commissioner, which suggested that the sub‑section contemplated situations where the machinery, plant or furniture were by their very nature inseparable from a building, so that the lease of the equipment would necessarily include the lease of the building. The Court raised two objections to this submission. Firstly, if the legislature had meant such a mandatory link, the provision could have expressly stated that where machinery, plant or furniture were inseparable from a building, both must be let together. Instead, the language used indicated that the letting of one must be inseparable from the letting of the other, not that the two must be physically inseparable. Secondly, the Court noted that it could conceive of no circumstance in which the equipment could not be separated from the building. Machinery or plant can be dismantled and relocated to another premises, and furniture merely rests on the floor and can be moved at will; therefore, the notion that inseparability meant the items were affixed to the building was rejected. The Court concluded that the term “inseparability” in sub‑section (4) must be understood as arising from the intention of the parties to the lease. To determine that intention, the Court proposed three inquiries: whether the parties intended, regardless of whether they executed a single lease or separate leases for the furniture and the building, that the two were to be enjoyed together; whether they intended the two lettings to function as a single, practical letting; and whether either would have been accepted without the other. If the answers to the first two questions are affirmative and the answer to the third is negative, the Court held that the lettings are to be regarded as inseparable. This interpretation also supports the classification of income derived from the lease of a building, when let together with plant, machinery or furniture, under section 12 as a residuary head of income, distinct from the income covered by section 9, because such income would not arise if the equipment had not been let along with the building. The Court then turned to the question of whether, in the present case, the building and the furniture and fixtures were let in the inseparable manner contemplated by the sub‑section.

The Court observed that although the rent for the building and the hire charge for the furniture were stipulated separately in the lease, this separation of monetary amounts did not, in its view, render the two lettings separable. It noted that the Tribunal had reached the same conclusion and that the High Court had not expressed any dissent. The Court explained that even when the sums payable for the enjoyment of two items were fixed independently, the parties could still intend that the items be enjoyed together. Accordingly, the Court examined the specific provisions of the lease to determine whether the parties intended the furniture, fixtures and the building to be used jointly. Clause 1(a) of the lessee’s covenant, the Court held, removed any doubt on this point. The clause required the lessee to use the demised premises together with the furniture and fixtures “for the purpose of running a hotel, boarding and lodging house, restaurant, confectionery and such other ancillary businesses as are usually or otherwise can be conveniently carried on with the said business in the said premises,” and expressly prohibited any other use without the prior written permission of the lessors. From this wording, the Court concluded that the building and the fixtures and furniture were intended to be employed for a single purpose, namely the operation of a hotel, and therefore were to be enjoyed collectively. The Court further referred to clause 1(h) of the lessee’s covenant, which forbade the lessee from removing any article from the premises except for purposes connected with the hotel business, such removal being permissible only for repair or replacement when the lease imposed that duty on the lessee. This provision reinforced the view that the lease clearly manifested the parties’ intention that the furniture, fixtures and the building be enjoyed together and not separately. Before arriving at its final conclusion, the Court also considered two additional covenants. The first was the lessor’s covenant No 11(b), which provided for the renewal of the lease of the demised premises – that is, the building – for a further term of six years, without mentioning any renewal of a lease concerning the furniture or fixtures. The second was clause III(2), which stipulated that in the event the demised premises were destroyed or damaged by fire, the lessee could terminate the lease and the rent would be suspended until the premises were fit for occupation again, again making no reference to the furniture. The respondent had argued that these two clauses demonstrated that the building and the furniture were being treated separately and therefore the lettings were not inseparable. The Court, however, was unable to accept that contention.

The Court rejected the submission that the lease treated the furniture and the building as separate lettings, and therefore that the two were not inseparable. The Court explained that, although the lease contains a renewal provision for the building in clause 11(b), the lease also includes clause II(d), which imposes a duty on the lessor to supply and keep in good condition the furniture and fixtures described in the lease throughout the term of the lease and any renewal of that term. Consequently, even though clause 11(b) does not expressly refer to the renewal of a lease of furniture or fixtures, clause II(d) obliges the lessor to provide and maintain those items during the renewed period of the building lease. The Court further observed that clause II(d) would also operate where the furniture is destroyed by fire, because the clause enables the lessee to require the lessor to replace the destroyed furniture. In the same vein, clause 1(e) provides that major repair or replacement of the furniture must be carried out by the lessor, a requirement that would likewise arise if the furniture or fixtures were damaged by fire. On this basis, the Court held that the provisions relied upon by the respondent do not demonstrate a separation between the letting of the building and the letting of the furniture and fixtures. The Court found that the lease satisfied every condition for the application of section 12(4) and therefore fell within its scope. Accordingly, the Court answered the question posed by the parties: the rent attributable to the building is to be calculated separately from the income derived from the furniture and fixtures; for the building rent the appellant is entitled to the deductions specified in sub‑section (4) of section 12, and for the income from the furniture and fixtures the appellant may claim the deductions mentioned in sub‑section (3) of the same section; moreover, no portion of either the building rent or the furniture income may be assessed under sections 9 or 10. The judgment of the High Court was set aside, the appellant was awarded costs both in this Court and below, and the appeal was allowed.