1972 (10) TMI 27 - HC - Income Tax

Whether the income from the lease of the Kohinoor Cinema building which had been equipped as a cinema theatre is assessable under section 12 of the Indian Income-tax Act 1922 or under section 9 of that Act? and Whether the mortgage interest allocated to the building K (Rs. 28, 052 and Rs. 31, 583 as the case may be) is an admissible deduction under section 9(1)(iv) in computing the assessee s income from the two properties (other than the building K ) for the assessment years 1958-59 and 1959-60 ? Our answer to the first question is that the income from the lease of the Kohinoor Cinema building which has been equipped as a Cinema Theatre is assessable under section 12 of the Indian Income-tax Act 1922. So far as the second question is concerned it is answered in the affirmative.

Issues Involved:
1. Assessability of income from the lease of Kohinoor Cinema building under section 12 or section 9 of the Indian Income-tax Act, 1922.
2. Admissibility of mortgage interest as a deduction under section 9(1)(iv) in computing the assessee's income from other properties for the assessment years 1958-59 and 1959-60.

Detailed Analysis:

1. Assessability of Income from the Lease of Kohinoor Cinema Building

The primary issue was whether the income derived from the lease of the Kohinoor Cinema building, which was equipped as a cinema theatre, should be assessed under section 12 or section 9 of the Indian Income-tax Act, 1922.

The Tribunal initially ruled that the income should be assessed under section 9, emphasizing that there was a separate lease agreement for the building and the main business of the partnership was the exhibition of films. The Tribunal followed the decision in Sultan Brothers (Private) Ltd. v. Commissioner of Income-tax, concluding that the primary object of the lease was the building, and the letting of machinery, plant, and furniture was secondary.

However, the revenue argued that the income should be assessed under section 12, citing section 12(1) read with sub-section (4), which deals with income from other sources. The Supreme Court's decision in Sultan Brothers (Private) Ltd. v. Commissioner of Income-tax clarified that when a building and plant, machinery, or furniture are inseparably let, the rent from the building should be considered under the residuary head of income, not under section 9. The Court emphasized that the inseparability arises from the intention of the parties, and the lease of the building and the machinery, plant, or furniture should be practically one letting.

In the present case, the lease agreement between the assessee and the partnership firm explicitly stated that the lease was for the cinema theatre and all associated furniture, fixtures, and equipment, indicating inseparability. Therefore, the income from the Kohinoor Cinema building must be assessed under section 12 of the Act.

2. Admissibility of Mortgage Interest as Deduction

The second issue concerned whether the mortgage interest allocated to the Kohinoor Cinema building was an admissible deduction under section 9(1)(iv) in computing the assessee's income from other properties.

The assessee had mortgaged three properties, including the Kohinoor Cinema building, to secure repayment of business losses. The total interest payable for the two assessment years was Rs. 55,320 and Rs. 58,072. The Income-tax Officer initially allowed the interest deduction under section 9(1)(iv) but later revised the assessment, allocating specific interest amounts to the Kohinoor Cinema building and disallowing them under section 12.

The Court noted that the mortgage security was one and indivisible, allowing the mortgagee to proceed against any or all properties for the entire amount due. Therefore, the entire interest amount should be deductible from the income of the other two properties, not just proportionately allocated to each property.

The Court concluded that the interest payable under the mortgage should be allowed as a permissible deduction in respect of the income from the two properties other than the Kohinoor Cinema building.

Conclusion:

1. Assessability of Income: The income from the lease of the Kohinoor Cinema building, equipped as a cinema theatre, is assessable under section 12 of the Indian Income-tax Act, 1922.

2. Admissibility of Mortgage Interest: The mortgage interest allocated to the Kohinoor Cinema building is an admissible deduction under section 9(1)(iv) for computing the assessee's income from the other two properties for the assessment years 1958-59 and 1959-60.

The revenue shall pay the costs of the assessee.

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