Thanikkachalam, J. - (1.) AT the instance of the Department, the Tribunal referred the following question under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), for our opinion : "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the income from letting out portions of the building known as TNK House should be assessed under the head 'Other sources' and not under the head 'Property' ? 2. Whether the conclusion of the Tribunal that the letting out of the building and provision of amenities are an inseparable part of the lease deed is reasonable and supported by material on records ? 3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that only the net interest paid to the partners by the assessee-firm should be disallowed under section 40(b) of the Income-tax Act, 1961 ?"
(2.) THE assessee is the owner of a multi-storeyed building called TNK House, in which its business in exhibition of cinema films was carried on. A part of the building in the first, second and fourth floors have been let out with amenities. In the original assessment, for the assessment years 1972-73 and 1973-74, the income from the portion that is let out with amenities had been taken as part of the income from the business activities of the assessee. THE Income-tax Officer changed his opinion and concluded that this income is assessable under the head "House property". THE Income-tax Officer has not given any reason for accepting the abovesaid income under the head "House property" income. For the assessment year under consideration, the Income-tax Officer has subjected to tax the relevant income under the head "House property" deducting from the gross rents received for the premises and hire charges for amenities a proportionate part of the property tax and the statutory deduction for repairs under section 24(1)(i) of the Act. In fact, the Income-tax Officer estimated the annual value of the portions let out with amenities. On appeal, before the Commissioner of Income-tax (Appeals), the assessee contended that the income from the letting out of a portion of the property with amenities should be assessed under the head "Other sources". THE Commissioner of Income-tax (Appeals) accepting the argument put forward by the assessee held that the income from the letting out a portion of the building should be assessed under the head "Other sources" and not under the head "Property". Aggrieved, the Department filed an appeal before the Appellate Tribunal. THE Appellate Tribunal, following the decision of the Supreme Court in the case of Sultan Brothers P. Ltd. v. CIT [1964] 51 ITR 353, held that the income is assessable only under the head "Other sources" in view of the provisions contained in section 56(2) of the Act. Before us, learned standing counsel for the Department submitted that in order to assess the income from the property under the head "Other sources" there must be two lease deeds for letting out the building and the amenities. The amenities provided by the assessee are part of the building and, therefore, no separate plant, machinery or furniture was let out along with the building so as to comply with the provisions of section 56(2)(iii) of the Act. Therefore, according to learned standing counsel, the income from the property is assessable under section 22 of the Act under the head "Property income". Learned standing counsel further pointed out that amenities as stated by the assessee are not plant, machinery or furniture as stated in section 56(2)(iii) of the Act. It was, therefore, pleaded that the Tribunal was not correct in holding that the income derived by the assessee from the abovesaid building should be assessed under the head Other sources". On the other hand, learned counsel appearing for the assessee submitted that the income derived from the property and the amenities made available to some of the tenants should be assessed under the head "Other sources". According to learned counsel, the amenities were let out separately since the amenities were not forming part of the building. Since the assessee let out both the building and the amenities by issuing separate receipts for rental income and the income for the amenities, the provisions of section 56(2)(iii) would be applicable to the facts of this case. Accordingly, learned counsel appearing for the assessee supported the order passed by the Tribunal on this point. We have heard the rival submissions. The fact remains that a portion of the building was let out to several tenants. In the case of one Chandrahassam, who is in occupation of 280 sq. ft. on the second floor, two wash basins and a sub-meter for recording electricity consumption have been provided and the other electrical fittings and fixtures are provided by the tenant himself. In the case of Corporation Bank Ltd. which is in occupation of 2,980 sq. ft. on the first floor a water closet has been provided by the assessee and the complete plumbing was done by it. The electrical fittings and other fixtures have been provided by the tenant himself. Tirupathi Enterprises is in occupation of a portion in the fourth floor of the building. Another tenant, Indian Investment Center is also in occupation of the said building. They have the benefit of having partitions, fans and lights and internal electrical fixtures provided by the assessee. There are two lifts in TNK House. These are used not only by the employees of the assessee-firm, but also by the employees of the tenants. This facility is common to all. The assessee is incurring an expenditure of Rs. 9,000 annually payable to Best and Co. for lift maintenance services. An expenditure of Rs. 10,150 was also incurred for annual electrical inspection of the entire building which includes the inspection of internal fittings and fixtures provided by some of the tenants. On these facts, the assessee claimed that the rental income received by letting out the building and amenities should be assessed under the head "Other sources".
(3.) A similar question came up for consideration before the Kerala High Court in the case of Dr. P. A. Varghese v. CIT [1971] 80 ITR 180. According to the facts arising in that case, the assessee agreed to let out the second floor of a building for a rent of Rs. 2,350 per month, agreeing to provide for partitions, lavatory, water closet, etc., air-conditioning of one room, one fluorescent tube light fitting, a separate electric meter, uninterrupted water supply and an electrical lift. The assessee contended that the above agreement evidenced the hire of machinery, plant and furniture along with the building and that the income received from the said transaction was income from other sources under section 56(2)(iii) of the Act. On these facts, it was held that (headnote) : "there was no letting of the machinery, plant or furniture, but only a letting of a building with certain amenities, section 56(2)(iii) of the Act was not applicable and the income from the letting out was chargeable as income from house property and not as income from 'other sources'." So also while considering the provisions of section 56(2)(iii) and section 22 of the Act in the case of Indian City Properties Ltd. v. CIT on the facts, where the assessee derived income, inter alia, from letting out house property with a lift, air-conditioning, etc., it was held that "the income derived from letting out the building was assessable as income from 'house property' under section 22. The lift charges and air-conditioning charges which have been shown separately in the Income-tax Officer's order were assessable under section 56 as income from 'other sources'." The Bombay High Court also had an occasion to consider the provisions of section 22 and section 56 of the Act in CIT v. Bhaktawar Construction P. Ltd. [1986] 162 ITR 452. According to the facts arising in this case, the assessee had constructed a building consisting of a ground and five upper floors. It was air-conditioned. The building was let out to three tenants by separate lease agreements. By another set of three agreements the air-conditioning facility was made available to the three tenants who were permitted to use the installation. The assessee charged for such use at a rate calculated per square foot. The assessee retained control over the installation and was obliged to service and maintain it. The assessee was entitled to shut the installation for repairs. The assessee claimed that the income from the use and lease of air-conditioning was assessable as income from "other sources". On these facts, the Bombay High Court held that there being no letting of the installation, the requirements of section 56(2)(iii) of the Act had not been met. Accordingly, the income derived by the assessee from the premises under the leases could not be taxed under the head of income from "Other sources", but it must be taxed as income from "property". ;