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TMI Blog2005 (7) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... ecided that the company cannot run hospital in the area of remote locality as per the survey conducted by the Directors. The area being far off from Railway head and being in remote for hotel business, therefore, the company, may go into losses. Under this compelling situation, company decided to adopt other objects of Memorandum and Articles of Association of the Company as mentioned at Sl. No. 28 and it was decided that the company will run hospital or nursing home either in its own supervision or may lease out the business asset being building with plant and machinery alongwith generator, lifts or other amenities for the said purposes to any Doctor(s) or medical institutions and for this purposes, the Managing Director was authorized to act in accordance with the Board's decision to do the needful in the best interests of the company and accordingly, after running the hotel for some time, the company entered into a lease agreement with Deva Nursing Home (P.) Ltd for running a nursing home from the said premises in terms of agreement dated 2-5-1989 which was made effective from 10-5-1989 for a limited period of five years. In the agreement itself, the company reserved for its use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsing home for gaining the required experience and to ensure some clientale from in and around areas, the premises were given on lease to Deva Nursing Home (P.) Ltd. for a limited period with a view to run its own business as soon as it was feasible not only for realizing the object of running a nursing home/hospital but also to earn profit and to serve the humanity. Therefore, the totality of circumstances were that the company had put its assets for substituted commercial use rather than going out of the business. Shri Garg further submitted that it was a case where the commercial asset of the company which were earlier meant for running of a hotel had been put to its substituted use, therefore, the facts distinguish the case from that of the Sultan Bros. (P.) Ltd. and the lease money received from the lessee was liable to be treated as business income of the assessee. He further submitted that the decision of the Hon'ble Supreme Court in the case of CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 support the assessee's case. 4. In the case of appellant-assessee, it was not a case of letting out the property or building simplicitor but a case of leasing out the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a hotel business. Therefore, it was a case of a substituted usage of commercial asset and income earned on account of such substituted use can be nothing but 'business income' as has been held in large number of cases as mentioned by Shri Garg. Whereas from Revenue's side, it could not be established that the assessee has gone out of business whereas the assessee company established that it firmly remained in the business and in order to overcome the losses in hotel business, it entered into lease agreement temporarily and under these facts and circumstances, in out-opinion, yielded income earned by the assessee company from leasing out its commercial assets to Deva Nursing Home (P.) Ltd. the business income remained in tact and the same should have been assessed accordingly and in that case, the appellant-assessee is entitled to deductions as are admissible while computing the business income. The Assessing Officer has himself completed the assessment for the assessment year 1998-99 treating the assessee company enjoying income from business and has even allowed depreciation and other expenses as deduction and has also allowed unabsorbed depreciation to be carried forward and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The relevant facts which may elucidate the controversy in detail are that assessee company, M/s. Hotel Arti Deluxe (P.) Ltd. was incorporated on 28-3-1987 and copy of Memorandum of Association which is appearing at pages 1 to 10 of the paper book go to reveal that the main object to be pursued by the company on its incorporation are as under:- 1. To carry on the business of Hotel, Restaurant, Cafe, Taverny, Bar, Refreshment-room, and Lodging, housekeepers, licensed victuallers, wine, beer, and spirit merchants, importers, and manufacturers of aerated and artificial waters and other drinks, purveyors, caterers for public amusement generally. 2. To purchase erect or otherwise acquire, establish and equip, act as collaborators, technicians, financiers of any of other hotels in India or in any other parts of the world. 3. To act as agents of any hotel/company or as buying and selling agents of any hotel/company, and to do and perform all and singular the several duties, services and offices -which the agents, buying and selling agents of any hotel/company usually do and perform and undertake and to become bound by conditions of any agreement or agreements entered into for any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 990-91, the year under consideration, the assessee filed return at a loss of Rs. 64,482. The Assessing Officer noted that assessee constructed a building complex which had been given on rent to M/s. Deva Nursing Home (P.) Ltd. from whom rental income is being enjoyed by the assessee company. The Assessing Officer was of the view that assessee had shown monthly hire charges of Rs. 3.23 lakhs in profit and loss account in respect of the properties so let out by it to M/s. Deva Nursing Home (P.) Ltd. for the purpose of running the said Nursing Home and all the equipments and instruments required for the purpose of Nursing Home have been brought in by the said M/s. Deva Nursing Home (P.) Ltd. The Assessing Officer was of the view that assessee was not justified to show the income from hire charges as income from business and he assessed it as income from other sources and doing so the Assessing Officer did not allow past year's losses to be set off in the year under consideration. 7. Being aggrieved, the assessee came in appeal and it was submitted that Assessing Officer was not justified to assess the income from letting out of the building as income from other sources, but it shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act, 1961 and the assessee's case is not covered as there was no machinery, plant or furniture that has been let out along with the building. The lift, generator, tube-well and electric fittings were said to be common convenience without which the building could not have been let out. The ld. CIT(A) was of the view that by providing a lift and generator, the assessee cannot be said to have made out plant and machinery along with building and for that he placed reliance on the decision of the Hon'ble Kerala High Court in the case of Dr. P.A. Varghese v. CIT [1971] 80 ITR 180 and on the basis of above discussion, he concluded that lease rent received by the assessee company was assessable as income under the head 'Income from house property'. The assessee, feeling aggrieved from the said finding is in appeal. 10. The ld. counsel for the assessee submitted that the ld. CIT(A) had not appreciated the factual position correctly as according to him, sub-clause 28 of Ancillary and other object in the Memorandum of Association clearly provides that assessee can establish and maintain one or more Nursing Homes. The contention was that by letting out the property to M/s. Deva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the facts in the present case as assessee had let out its building for utilization by the lessee to fulfil one of the objects of the assessee company and thus income so received will be income from business and the view taken by the Assessing Officer and the ld. CIT(A) are not tenable. 12. As against it, the ld. D.R. placed reliance on the order of the Assessing Officer and ld. CIT(A) and contended that running of Nursing Home under the lease agreement was not one of the objects of the assessee company and thus income received by the assessee out of lease deed executed in between assessee and M/s. Deva Nursing Home (P.) Ltd. was to be treated as income from business as rightly held by the ld. CIT(A) and his order is to be upheld. 13. After considering the rival submissions and going through the law on the point, it is to be noted that the Hon'ble Supreme Court of India in the case of Vikram Cotton Mills Ltd. has observed to this effect that whether a particular income is income from business or from investment must be decided according to the general commonsense view of those who deal with those matters in the particular circumstances and the conduct of the parties concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being used by the assessee and the reminder portion was let out to various occupants with furniture, fixtures, lights, air-conditioners for being used as table space. The assessee claimed the rental income as income from business and the Assessing Officer accepted this version of the assessee, but the CIT exercising power under section 263 of the Act was of the view that action of the Assessing Officer was erroneous and prejudicial to the interest of the Revenue. He set aside the assessment order to that extent and remanded the matter back to the Assessing Officer with the direction to assess the said income as property income. The assessee preferred an appeal and ITAT after considering all the facts and circumstances was of the view that order of the Assessing Officer was not erroneous and prejudicial to the interest of the Revenue and cancelled the order of the CIT recorded under section 263 of the Act. The moot question before the Hon'ble High Court was as to whether the income derived from the said premises was rental income or business income. The Lordships have discussed the case law cited before the Court and relevant portion is as under:- "(i) Sultan Bros. (P.) Ltd v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ralty Flats Motel [1982] 133 ITR 895 (Mad.): Here income of a partnership firm carrying on the business of 'lodging house keepers' has been directed to be assessed as business income by the Division Bench of the Madras High Court. (iv) CIT v. Associated Building Co. Ltd [1982] 137 ITR 339 (Bom.): In this case the assessee being the owner of the building was carrying on similar nature of business by providing office accommodation to various persons like the present case up to a certain period and allowed its income to be assessed under the head 'Other sources'. Subsequently, an auditorium was constructed in the basement of the building and the assessee had set up an air-conditioning plant not only for providing cool air to the auditorium but also to the entire office premises. There had been other facilities given by the assessee attached to such office accommodation and other portions of the building. The Bombay High Court deciding this case held that the nature of business subsequent to setting up of the air-conditioning plant and construction of auditorium became an activity of a complex nature and held that those activities amount to business and income should be assessed ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 143. 20. If we apply the above analogy of Hon'ble Calcutta High Court to the facts of the case which ultimately stand approved by the Hon'ble Supreme Court of India as referred to above, then the main intention of the assessee and that of lessee was letting out the property as evident from the recital of lease deed extracted above. Even if we apply the criteria laid down by the Apex Court in the case of Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353, then it is very clear that the intention of the assessee was to lease out the building. Secondly, there was one set of letting out the building along with lift, generator set and electric fittings and both the criteria laid down in that case are fulfilled and the obvious result will be that it was a case of letting out the building and income is to be assessed from house property. 21. No doubt, the assessee started with a concept of running a hotel for which building was constructed and there may be a plea, though not raised, that hotel building was let out and building was commercial asset to run a hotel. This plea would have carried weight in case assessee had let out the building to lessee to run the business of hotel, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reference is as under:- "Whether the income received by the assessee from letting out the building of the firm to M/s. Deva Nursing Home (P.) Ltd. is assessable as income from house property as concluded by the ld. CIT(A) or is income from business as claimed by the assessee?" 2. The assessee company constructed a building complex with intention to carry on business of hotel, restaurant as per main object of the company. However, the building constructed was found to be far away from Railway Station and otherwise in remote area and it was felt that carrying on business of hotel was not feasible. Therefore, the Board of Directors of the company as per Resolution dated 12-3-1989 unanimously decided that company will run a hospital or a nursing home either under its own supervision or may lease out the building to any Doctor or Medical Institution. The Memorandum Articles of Association of the company at Sl. No. 28 also provides that the company may acquire, establish and maintain one or more nursing homes, hospitals, clinics, dispensaries etc. 3. In the light of the above resolution the company entered into lease agreement with Deva Nursing Home (P.) Ltd. on 2-5-1989 effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tube-well and electric fittings. For purposes of assessing income under the head 'Income from other sources', the only clause that may be applicable in the case of the appellant is section 56(2)(iii) of the Income-tax Act, 1961. In the case under appeal there is no machinery, plant or furniture that has been let out alongwith the building. The lift, generator, tube-well and electric fittings are common conveniences without which the building could not have been let out. These amenities which the appellant has provided in the building form part of the building which the appellant agreed to provide for the lease of the building. No multi storeyed building would be fit for habitation without these amenities. Therefore, it cannot be said that by providing a lift and a generator the appellant has let out plant and machinery also along with the building. Here I place reliance upon the Kerala High Court decision in the case of Dr. P.A. Varghese v. CIT [1971] 80 ITR 180. Thus, in view of the above discussion, I hold that the lease rent received by the appellant company is assessable as income under the head 'Income from house property' only and under no other head. The Assessing Officer is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to deductions as are admissible while computing the business income. The Assessing Officer has himself completed the assessment for the assessment year 1998-99 treating the assessee company enjoying income from business and has even allowed depreciation and other expenses as deduction and has also allowed unabsorbed depreciation to be carried forward and set off against profit of subsequent years, therefore, the order of the Assessing Officer" supports the appellant-assessee's contention." 8. The learned Judicial Member did not agree with the learned Accountant Member. In his view the lease rent was liable to be assessed as income from house property. For reaching above conclusion, the learned Judicial Member examined Memorandum of Association of the assessee company. He also referred to sub-clause 28 under which the assessee was authorized to acquire, establish and maintain one or more nursing homes, hospitals, clinics, dispensaries etc. He also referred to resolution passed by the Board of Directors dated 12-3-1989. The learned Judicial Member noted the submissions made before the learned CIT(A) in appeal and the finding recorded thereon. These are referred to in paras 8 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere may be a plea, though not raised, that Hotel building was let out and building was commercial asset to run a Hotel. This plea would have carried weight in case assessee had let out the building to lessee to run the business of Hotel, but it is not the case here as the purpose for which M/s. Deva Nursing Home (P.) Ltd. has taken building is quite different to the main object of the assessee company. 22. So far as case laws cited by the ld. counsel for the assessee are concerned, in all those cases, commercial assets were let out and particular reference was to plant and machinery and not the building as in the case in hand. A perusal of the case of Shri Lakshmi Silk Mills Ltd will show that Dyeing Plant was let out. In the case of Vikram Cotton Mills Ltd, the plant and machinery were let out and the same is not applicable to the facts of the case. 23. So far as last case relied upon by the ld. counsel for the assessee in the case of S.K. Sahana Sons Ltd. is concerned, the assessee was getting profit out of agreement entered in between assessee and the Managing Contractor. There was no lease deed executed in favour of the Managing Contractor as observed by the Apex Court. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property'. It was not exploitation of ownership of building rights. Shri Garg further submitted that all the decisions cited by the learned Judicial Members against the assessee, in fact supported the case of the assessee. 12. The learned DR while opposing above submissions of Shri Garg drew my attention to the finding recorded by the learned CIT(A) as approved by the learned Judicial Member in his proposed order. He also submitted that observations of the learned Accountant Member at page 4 para 7 of his order were factually incorrect. There was no substituted use of any commercial asset in this case. Even in the lease deed it was clearly mentioned that building was being leased out and not any commercial asset. The learned DR accordingly supported proposed order of the learned Judicial Member. 13. I have given careful thought to the rival submissions of the parties. There is no dispute that the assessee had constructed this building to run a hotel but when it was found that running of hotel was not viable, the assessee decided to let it out to a nursing home. This was done in terms of the resolution passed by Board of Directors dated 12-3-1989 which is to the following effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o convert an ordinary building into a commercial asset. The assessee has placed no material on record to show that building had peculiar amenities, which could be commercially exploited without any addition or alteration. Shri Garg has drawn my attention to decision of the Hon'ble Supreme Court in the case of Dr. B. Venkata Rao to argue that building of a nursing home is a plant. It is true but for holding that it was a plant and thus entitled to higher depreciation, their Lordships have observed as under:- "Held dismissing the appeal, that it was clear from the order of the Tribunal as also the assessment order that the assessee's nursing home was equipped to enable the sterilization of surgical instruments and bandages to be carried on. It was reasonable to assume in the circumstances, particularly having regard to the Tribunal's order which stated that the sterilization room covered about 250 sq. ft. that the nursing home was also equipped with an operation theatre. In the circumstances, the assessee was entitled to depreciation at 10 per cent on the nursing home building on the ground that it was a 'plant.'" It is evident from above that the building held to be a 'plant' wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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