SENGUPTA, J. - (1.) IN this reference under S. 256 (1) of the IT Act, 1961 ('the Act') for the asst. yr. 1982-83 the following question of law has been referred to this Court: "Whether, on the facts and in the circumstances of the case and on a correct interpretation of the two lease deeds dt. 1st Dec., 1980 and 17th Feb., 1981, the Tribunal was justified in law in holding that investments of Rs. 2,15,755 made by the lessees in the construction of the third and fourth floors of the building did not have any characteristic of rent and in that view, in further holding that 1/10th of the said amount is not assessable in the hands of the assessee as rent ?"S. 256 (1) of the IT Act, 1961 ('the Act') ss. 22 and 23 of the Act
(2.) SHORTLY stated, the facts are that the assessee owns a house property at 30, Circus Avenue, Calcutta-17. She undertook the construction of a five-storeyed building in the said premises but could complete the construction up to the second floor. Roofs of the third and fourth floors were laid but the construction could not be completed owing to lack of funds. The assessee leased out the third and fourth floors to A.B. Chowdhury and S.A. Salim by means of two several lease deed dt. 1st Dec., 1980 and 17th Feb., 1981, respectively. The terms of the two lease deeds are similar and they, inter alia, provided that the lessees would complete the construction of the third and fourth floors. They were permitted to sub-let the demised premises to tenants. It was further stipulated that A.B. Chowdhury and S.A. Salim would pay Rs. 2,500 and Rs. 1,500 per month, respectively, as rent to the lessor. The lessees in turn sub-let the third and fourth floors to a common sub-lessee, namely, Ceat Tyres of India Ltd., under two separate tenancy agreements, both dt. 17th March, 1981 and obtained interest-free advances from the sub-lessee for the purpose of completing the construction of third and fourth floors. The two lessees invested Rs. 1,17,480 and Rs. 98,000, respectively, in the construction of the two floors. The total investments made by them in the construction amounted to Rs. 2,15,755. In accordance with the terms of the sub- leases, A.B. Chowdhury and S.A. Salim were to receive monthly rent of Rs. 5,600 and Rs. 4,400, respectively, from the common sub-tenant besides service charges at the rate of Rs. 2,800 and Rs. 1,650 per month. The ITO was of the view that the expenses incurred by the lessees in completing the construction of the third and fourth floors should be treated as advance of loan for ten years which was the period of lease fixed under the two lease deeds and that 1/10th portion of the amount should be treated as rental income of the assessee for the asst. yr. 1982-83. The ITO thus added Rs. 21,575 being 1/10th of the total investments made by the lessees in the construction of the two floors as rent in the total income of the assessee.
(3.) THE assessee appealed to the AAC before whom it was contended on behalf of the assessee that since the lessees took lease of the third and fourth floors under valid lease agreements from the assessee and obtained advance to fund from their common tenant, the ITO was not justified in treating the expenses incurred by the lessees as advance of loan for ten years and treating 1/10th thereof as rental income of the assessee. It was further contended that the investments made by the lessees were capital in nature and the same would not be taxed even in the hands of the lessees.;