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TMI Blog1994 (7) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia/P T Deptt. 3. The assessee filed its return of income for the assessment year 1988-89 disclosing an income of Rs. 85,930 under the head 'Profits and gains of business'. The return was duly supported by an income and expenditure statement and balance-sheet. 4. The assessee's case before the Assessing Officer was that the building in question was earlier being used as a business asset in the lodging business of the assessee. On the lodging business being discontinued, the rooms in the building (including the units in the addition made in the building) were let on rent to various parties. Further, such letting entailed employment of a few persons for attending to the maintenance of the building ; and that, therefore, the rental income should be brought to charge under the head 'Profits and gains of business'. 5. The said arguments did not find favour with the Assessing Officer. He held that the rental income must be brought to charge under the head 'Income from house property' observing : " Every asset which is once used as a business asset or which is capable of being so used cannot be regarded as a commercial asset in order that an asset may be regarded as a commercia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd relied upon the decision of the ITAT Hyderabad Bench in K. Rami Reddy Sons v. ITO [1985] 14 ITD 108. 9. But the matter did not rest there. The CIT(A) further found that the assessee did not have any business activity at all. He, therefore, went on to observe : " Where a firm has got some other business income, the income from property should also be assessed in its hands. But where the firm has not done any business at all in view of the provisions of sec. 26 of the Income-tax Act the property income alone cannot be assessed to tax in the hands of the firm. In Ramniklal Sunderlal's case reported in 36 ITR 464 where the only income received by that firm was by way of collection of rent from certain properties, it was held that there was no firm in existence, in the eyes of law. The said decision will equally apply to the facts of the appellant's case. Since C.I.T. (Appeals) has plenary powers co-extensive with that of the Assessing Officer to do what he has faded to do or direct him to do what he has so failed to, I hold that the income from property should be only assessed to tax in the individual hands of the partners with reference to their definite share both for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efuse my assent to the proposition that because it happens that the owner of a property is a company which has been incorporated for the purpose of owning such property, therefore, the income derived from 'property' must be regarded as income derived from 'business'. In my judgment, income derived from 'property' is a more specific category applicable to the present case." 15. Secondly, mere management of property does not amount to a business, and income derived from such property cannot be regarded as the profits and gains of a business. To quote Rankin C.J. " The income of the assessee is income derived from its ownership of buildings and their cartilages. To obtain such income a certain amount of management is always necessary, but the Act does not regard such income as profit of management. To own houses one must buy or build them, but the Act does not regard such income as profits of investment." 16. In the English case of Salisbury House Estate Ltd v. Fry [1930] 15 TC 266-the assessee-company's main objects were acquisition, development, management, leasing and letting of land and property. It took over some lands with a block of buildings upon it in the City of London, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-company was formed by film distributors for the specific purpose of constructing premises for storing and preservation of films and for providing other related amenities to the film industry. The assessee-company accordingly purchased a piece of land with the approval of Chief Inspector of Explosives and constructed vaults on the said plot of land in conformity with the Cinematograph Film Rules, 1948 and permitted the vaults to be used by the film distributors on payment of a monthly charge. The vault-holder was given a key of the vault but the key of the entrance which permitted access to the vaults remained in the exclusive possession of the company. The company also rendered certain services to the vault-holders, such as fire fighting faculties, railway booking offices, telephones, a canteen, and watch and ward staff. The ITO took the line that the income in question was assessable under sec. 9 of the old Act. The Tribunal, by a majority, held that the income was chargeable to tax under sec. 10 of the Act. The High Court agreed with the view of the majority. In the process, on a review of reported cases, the High Court abstracted the following principles which are to be appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subject hired out is a complex one and the income obtained is not so much because of the bare letting of the tenement but because of the facilities and services rendered, the operations involved in such letting of the property may be of the nature of business or trading operations and the income derived may be income not from exercise of property rights properly so called so as to fall under sec. 9 but income from operations of a trading nature falling under sec. 10 of the Act ; and (7) In cases where the letting is only incidental and subservient to the main business of the assessee, the income derived from the letting will not be the income from property falling under sec. 9 and the exception to sec. 9 may also come into operation in such cases. 20. The Department thereafter took the matter to the Supreme Court, which affirmed the decision of the Bombay High Court-see CIT v. National Storage (P.) Ltd [1967] 66 ITR 596 (SC). The Supreme Court applied the ratio of the case of Governors of the Rotunda Hospital v. Coman 7 TC 517 in which Viscount Finlay, having regard to the fact that " the subject which is hired out is a complex one ", held that the return received by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under Schedule-D. It was found that the company had acquired the premises solely in the course of and for the purposes of its business as brewers. The licensed premises were let to 'tied tenants' who were bound under a contract to purchase beer, etc., from the company. In such circumstances, it was held that the cost of repairs and other items of expenditure relating to the houses could properly be claimed as deduction in the computation of the business profits of the assessee as being money wholly and exclusively laid out or expended for the purpose of the trade of the assessee. 25. In that regard, Lord Sumner observed that " On the findings here the brewer is a brewer first and a landlord only afterwards. His role as landlord is subsidiary, an incident of his trade as brewer ". He went on to point out : " Further, the fact that the publican sleeps over the bar does not in itself preclude the possibility that his bedroom when so used for the brewer's trade, if, as here, the brewer, in order to get the outlet for his beer which a tied house gives, must find a tenant who sleeps as well as sells on the premises." 26. Summarising the legal positions Patna High Court at page 55 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ominant role of the assessee as a trader is the determining factor. Recall Lord Sumner's observation in Usher's Wiltshire Brewery Ltd.'s case : " On the findings here the brewer is a brewer first and landlord only afterwards. His role as landlord is subsidiary, an incident of his trade as brewer". Here also, the rent received is treated as business income. TYPE C : CASES TO WHICH SALISBURY HOUSE RATIO APPLIES : The type subsumes cases of what is variously described as " mere letting ", " bare letting ", " ordinary letting ", " letting simpliciter ". Here ownership, and the attendant management of the property-and nothing more-is the source of rent. The landlord turns to profitable account his proprietary rights in the property. Here the rent received is treated as income from property. 29. As we see it, the rent received by the assessee by letting office space/shops and the like in the building properly falls under Type-C referred to above. It should, therefore, follow that the rental income in question must be brought to charge under the head 'Income from house property'. 30. One of the contentions urged by Shri Devanathan, it may be recalled, was that the assessee was m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a mere owner of the property. And when it let the property on rent, it was merely turning to profitable accounts its proprietary interest in the building. In such cases the well-settled legal position as pointed out earlier is that the rental income must be brought to charge under the head 'Income from house property'. This is exactly what the lower authorities have done. 33. In view of the foregoing, therefore, we decline to interfere with the order of the first appellate authority on this issue. 34. This brings us on to the question whether the CIT(A) was justified in cancelling the assessment of the firm and in directing the Assessing Officer to bring to tax the rental in come in the hands of the respective partners, of course in their profit sharing ratio. We fail to see how the CIT(A) could be faulted on this score. The concept of partnership postulates the carrying on of the business on the basis of mutual agency amongst the partners. In this case, the CIT(A) held first that the rental income received by the assessee cannot be regarded as business income. Secondly, he noticed that the assessee-firm was not carrying on any business at all. He, therefore, came to the concl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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