2012 (12) TMI 191 - HC - Income Tax

Rent received - Income from other sources vs Income from house property - whether the letting is a composite or inseparable letting - Was the Tribunal correct in holding that the rent received by the appellant was assessable as income from other sources ? - held that - tribunal has found that these three cases are of composite leases in which a consolidated rent has been fixed. Contention of the assessee that the fittings and fixtures and other installations in the let out premises were installed only at the desire of the lessee and in such circumstances, the income should properly be assessed under the head income from house property as mandated by Section 22 of the Act was rejected by the ITAT. Applicability of Judgements - held that - The provisions of Section 56(2)(iii) were not required to be considered. The controversy before us is different namely, whether the rental income is to be assessed as property income or income from other sources . Therefore, it cannot be said that the judgment of the Calcutta High Court in CIT Vs. Shambhu Investment PVT Ltd. 2001 (3) TMI 77 - CALCUTTA HIGH COURT or the judgment of the Supreme Court 2003 (1) TMI 99 - SUPREME COURT which confirmed the judgment of the Calcutta High Court are authorities for the proposition that is being canvassed before us on behalf of the assessee. Here, the question that arises for decision is whether the letting was inseparable and therefore Section 56(2)(iii) was rightly invoked by the assessing officer. That question did not fall for decision either before the Calcutta High Court or before the Supreme Court in the judgments cited above. Income to be taxed under the head Income from other sources - substantial question of law has to be answered in the affirmative and against the assessee.

Issues Involved:
1. Whether the rent received by the appellant should be assessed as "income from house property" or "income from other sources."
2. Whether the letting was a composite and inseparable letting, thereby invoking Section 56(2)(iii) of the Income Tax Act.

Detailed Analysis:

Issue 1: Assessment of Rent Received

The primary issue addressed in this case was whether the rent received by the appellant should be assessed under the head "income from house property" or "income from other sources." The appellant contended that the rental income should be assessed as "income from house property" under Section 22 of the Income Tax Act. However, the assessing officer (AO) determined that the rent was composite, consisting of charges for the building, furniture, fittings, and maintenance, and thus should be assessed under "income from other sources" as per Section 56 of the Act. The AO's view was supported by the Supreme Court judgment in Sultan Brothers Pvt. Ltd. Vs. CIT, which established that composite lettings should be assessed under the residual head of income.

Issue 2: Composite and Inseparable Letting

The Tribunal and the High Court examined whether the letting was composite and inseparable. The Tribunal found that the letting to entities like Proton Links Systems Pvt. Ltd. and others included space, fittings, fixtures, air-conditioning, and furniture, making it a composite letting. The Tribunal applied the tests laid down by the Supreme Court in Sultan Bros. Pvt. Ltd., which involved determining whether the letting of the building and the machinery, plant, or furniture was intended to be enjoyed together and whether the letting was practically one letting. The Tribunal concluded that the intention was to let the building along with the plant, fittings, and furniture together, making it a composite and inseparable letting. Consequently, the rent was assessable under "income from other sources."

Tribunal's Findings:

The Tribunal contrasted the terms of letting to Haldirams, where only the bare space was let out with the right to use common facilities, with the disputed cases where fixtures, fittings, and furniture were also let out. The Tribunal found that the intention of the parties was to have a single inseparable letting, evidenced by a composite lease deed with a consolidated lease rent. The Tribunal's findings were based on the principles set out in Sultan Bros. Pvt. Ltd., which established that the inseparability referred to in Section 56(2)(iii) arises from the intention of the parties.

High Court's Conclusion:

The High Court upheld the Tribunal's decision, agreeing that the letting was composite and inseparable, and thus the rental income should be assessed under "income from other sources." The High Court also addressed the appellant's reference to the Supreme Court judgment in Shambhu Investments Pvt. Ltd. Vs. CIT, clarifying that the controversy in that case was different and did not involve the application of Section 56(2)(iii). The High Court answered the substantial question of law in the affirmative, against the assessee, and dismissed the appeal with no order as to costs.

Final Judgment:

The High Court concluded that the rent received by the appellant was correctly assessed as "income from other sources" under Section 56(2)(iii) of the Income Tax Act, affirming the decisions of the AO, CIT(Appeals), and the Tribunal. The appeal filed by the assessee was dismissed.

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