Income-tax--

----Head of income---Business income or income from property ---Assessee acting as managing agent for a large number of companies---Entire building belonging to assessee rented out to managed companies---Letting out was incidental to the carrying on of the business of the assessee---Rental income assessable as business income---Indian Income Tax Act, 1961, Ss. 22 & 28.

The assessee-company was the managing agent, secretaries and treasurers of a large number of companies. The assessee owned a building where it transacted its business. Furnished accommodation was provided to the managed companies in the same premises in which the registered office of the assessee-company was situated in terms of agreements entered into with the various managed companies. It was, therefore, submitted that the rental income from the portions of office space let out to the managed companies, including income from letting out furniture to such managed companies, is assessable as business income under the head "Profits and gains of business or profession". The Income Tax Officer assessed the income as income from property but the Tribunal held that it was business income. On a reference:

Held, that the distribution and allotment of space in the said building which was also the registered office of the assessee-company, was an essential and integral feature of the conduct of its own business and the letting out of accommodation, in the facts and circumstances of this case, was clearly subservient and incidental to the carrying on of the business of the assessee company itself. Hence, the income from letting out the property and from letting out furniture was assessable as business income. The Tribunal was also justified in allowing expenses pertaining to the portion of the property let out to managed companies against such income.

Jamshedpur Engineering and Machine Mfg. Co. Ltd. v. CIT (1957) 32 ITR 41 (Pat.); CIT v. Delhi Cloth and General Mills Co. Ltd. (1966) 59 ITR 152 (Punj.); CIT v. National Newsprint and Paper Mills Ltd. (1978) 114 ITR 388 (MP) and Addl. CIT v. Hindustan Machine Tools Ltd. (1980) 121 ITR 798 (Kar.) applied.

CIT v. Associated Building Co. Ltd. (1982) 137 ITR 339 (Bom.); CIT v. Kanak Investments (Pvt.) Ltd. (1974) 95 ITR 419 (Cal.); CIT v. Russell Properties (P.) Ltd. (1982) 137 ITR 473 (Cal.); Indian City Properties Ltd. v. CIT (1978) 111 ITR 19 (Cal.); Karnani Properties, Ltd. v. CIT (1971) 82 ITR 547 (SC) and Kavit Sanghi (Snit.) v. CIT (1982) 133 ITR 48 (MP) ref.

JUDGMENT

AJIT K. SENGUPTA, J.---In this reference under section 256(2) of the Income Tax Act, 1961, for the assessment year 1964-65, at the instance of the Commissioner of Income7tax, the following questions of law have been referred by the Income Tax Appellate Tribunal for the opinion of this Court:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income from the property of No.3, Netaji Subhas Road, Calcutta, acquired by the assessee and let out to its managed companies should be assessed under the head `Profits and gains of business or profession' and not under the head `Income from house property'?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing expenses pertaining to the portion of the property at No.3, Netaji Subhas Road, Calcutta, let out to the managed companies as deduction against profits or gains of business?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income from letting out furniture to the managed companies should be assessed under the head `Profits and gains of business or profession' and not under the head `Income from other sources'?"

The facts leading to the reference, are stated hereinafter. At the relevant time, the assessee was the managing agent, secretaries and treasurers of a number of limited companies. The assessee-company also dealt in jute goods. The assessee-company owns a building at No.3, Netaji Subhas Road, Calcutta, wherein the registered office is located. This is a four-storeyed building and the assessee-company was occupying the ground floor and the second floor of the said building for its own business purposes. The rest of the building, with the exception of two rooms on the ground floor, which were let out to D.L. Millar & Co. Ltd. was occupied by the various managed companies, which were more than 20 in number. The case of the assessee all along has been that the rental income derived by it from letting out a portion of its property at No.3, Netaji Subhas Road, Calcutta, to its various managed companies should be assessed under the head "Profits and gains of business or profession" and not under the head "Income from house property" and/or "Income from other sources". It was submitted on behalf of the assessee before the Income Tax Appellate Tribunal that the assessee-company was managing more than 20 companies and, for the proper conduct of its business, it was necessary that the managed companies should be situated in the same building in which the assessee had its own office and that under clause 12 of the terms of the managing agency agreement, it was incumbent on the assessee-company to provide the managed companies with suitable furnished accommodation. It was also submitted that the entire floor area was distributed on functional basis and such distribution was an essential and integral feature of the conduct of the assessee's business. It was further submitted that the letting out of the building alongwith furniture to the managed companies was merely incidental to the main business of the assessee-company.

The Income Tax Officer had decided this question against the assessee-company in the earlier year as well as in the years under reference. The view of the Income Tax Officer was upheld by the Appellate Assistant Commissioner till the assessment year 1961-62. When the matter came on appeal by the assessee before the Tribunal, the same was decided in favour of the assessee. The Tribunal, in its order for the assessment year 1961-62, held that the letting out of accommodation in the case of the assessee-company was subservient and incidental to the carrying on of its main business and, therefore, the rental income from the property as well as from the furniture was assessable as business income and not as income from property. The Tribunal also held that, for a proper and efficient conduct of the business of the managed companies which were about 20 in number, it was imperative that the offices of the managed companies should be situated as close to one another as possible and, under the managing agency agreement, there was an obligation on the assessee-company to provide suitable furnished accommodation in the same premises as the registered office of the assessee company itself. The assessee-company had also allocated the floor area of the building on functional basis. The Commissioner of Income-tax requested the Tribunal to make a reference to this Court in respect of the assessment year 1961-62, but the same was declined by the Tribunal in RA. Nos. 80 and 81/(Cal.) of 1971-72 by its order, dated July 24,1971.

In the assessment year, 1964-65, which is involved in the present reference, the Income Tax Officer had decided the aforesaid matter against the assessee, following his earlier orders and he assessed the rental income from the property at No.3, Netaji Subhas. Road, Calcutta, under the head "Income from house property". The rental income from furniture was, however, assessed under the head "Income from other sources". In making such assessments, the Income Tax Officer also disallowed proportionate expenses pertaining to the property at No.3, Netaji Subhas Road, Calcutta, let out to the managed companies, which was claimed as deductible in computing business income under the head "Profits and gains of business or profession".

When the matter came before the Appellate Assistant Commissioner, he by his order, dated May 6, 1971, held that the rental income received from the managed companies should be treated as business income. He also deleted the disallowance of proportionate expenses of Rs.21,621 and directed the same to be allowed in computing the business income. The Appellate Assistant Commissioner also held that income from hire of furniture should be assessed as part of assessed business income and admissible depreciation should be allowed to the assessee-company in respect of the let out portion of the building.

The Tribunal, following its earlier order for the assessment year 1961-62, upheld the said order of the Appellate Assistant Commissioner. The Tribunal held that the rental income was assessable as business income and the assessee-company was entitled to claim depreciation in respect of the let-out portion of the building. The Tribunal also held that the rental income from furniture let out to the managed companies was also assessable as business income. The Tribunal recorded that there was no change in the facts and circumstances as were found by it in the appeal for the assessment year 1961-62 which was earlier decided by the Tribunal in favour of the assessee company and in which year even the reference application moved by the Department was rejected by it under section 256(1) of the said Act.

Learned counsel appearing for the Revenue supported the order of the Income Tax Officer and submitted that the following decisions would suggest the view of the Revenue:

(a) Karnani Properties Ltd. v. CIT (1971) 82 ITR 547 (SC);

(b) CIT v. Kanak Investments (P.) Ltd. (1974) 95 ITR 419 (Cal.);

(c) Indian City Properties Ltd. v. CTT (1978) 111 ITR 19 (Cal.);

(d) Sint. Kavit Sanghi v. CIT (1982)133 ITR 48 (MP);

(e) CIT v. Associated Building Co. Ltd. (1982) 137 ITR 339 (Bom.)

(f) CIT v. Russell Properties (P.) Ltd. (1982) 137 ITR 473 (Cal.).

(a) In Karnani Properties' case (1971) 82 ITR 547 (SC), it was found that the assessee-company which owned the Karnani Mansion had let out residential flats and offered a dozen flats situated therein to various tenants who made monthly payments which included charges for electric current for the use of lifts, for the supply of hot and cold water, for the arrangement for scavenging, for providing watch and ward facilities as well -as other amenities. The Court held that the services rendered by the assessee to its tenants were the result of activities carried on continuously in an organised manner, with a set purpose and with a view to earn profits, those activities were business activities and its income arising therefrom was assessable under section 10 of the Indian Income Tax Act, 1922.

(b) In Kanak Investments'(P.) Ltd.'s case (1974) 95 ITR 419 (Cal.), this Court held that, where composite rent is received by an assessee from its tenants, it should be split up and only the amount attributable to the building should be computed as income from house properties and the amount attributable to the amenities provided to the assessee should be assessed as "Income from other sources". It may be noted that the question referred to this Court did not envisage any enquiry as to whether any portion of such income was assessable as business income and no arguments were at all advanced before this Court in regard to assessment of any portion of the rental income as business income.

(c) In Indian City Properties Ltd.'s case (1978) 111 ITR 19 (Cal.), it was found that the assessee-company derived the income from letting out house properties. It also received lift charges and air-conditioning, charges. The Tribunal had held that the entire rent received was assessable under section 22 of the Income Tax Act, 1961, as income from house property. This Court held that the income derived from letting out the buildings was assessable as income from house property and the lift charges and air-conditioning charges were assessable under section 56 as income from "other sources". No arguments appear to have been advanced before this Court that any portion of rental income was assessable as business income. There was no finding of fact that letting out of property was subservient and incidental to the carrying on of business by the assessee-company.

(d) In Smt. Kavit Sanghi's case (1982) 133 ITR 48 (MP), the only question before the Madhya Pradesh High Court was whether the income received by the assessee from the hiring of the air-conditioning plant should be assessed as "business income". The Court held that it was not the case of the Revenue that the air-conditioning equipment wasacquired by the assessee for personal use and not as a commercial asset. Since the assessee acquired the air-conditioning plant as a commercial asset and gave it on hire, it was held that the rental income was assessable as business income.

(e) In Associated Building Co. Ltd.'s case (1982) 137 ITR 339 (Bom.), the assessee-company which owned a building known as "Bombay House" carried out 'air-conditioning of the whole building and it also constructed an auditorium in the basement at a considerable cost and provided services like the use of a film projector, a tape-recorder, a microphone, a canteen, etc. It also employed staff to look after the maintenance of the auditorium and the machinery installed therein. Various parts of the said building were let out to different tenants and the assessee-company charged separately for supplying cool air. The auditorium was also given for use to the public on charging rent. The question referred by the Tribunal before the Bombay High Court was whether the rental income derived by the assessee-company from the auditorium as well as the income derived from maintaining air conditioning service for the tenants in the building was business income or assessable as income from other sources. The Court found that the use of the air-conditioning plant, the use of the auditorium alongwith the equipment and use of the canteen were all of a complex nature and the services and facilities and provision of these services would in no sense be regarded as better exploitation of the property. The Court, therefore, held that the carrying on of all these activities amounted to the carrying on of a business and the income derived from the same was business income. The Court also referred to the decision of this Court in Indian City Properties Ltd.'s case (1978) 111 ITR 19 (Cal.) and held that case was not relevant inasmuch as the only question raised there was whether certain income could be regarded as income from property or income from other sources. The question as to whether the income in question was assessable as business income was not considered at all and no arguments were advanced in that connection.

(f) In Russell Properties (P.) Ltd.'s case (1982) 137 ITR 473 (Cal.), this Court was concerned with the question whether the income derived by the assessee-company by way of service. and maintenance charges was assessable as business income. The Court found that the various services rendered by the assessee-company in that case partook of the nature of an organised business activity conducted in a systematic manner, the services rendered were complex and not merely incidental to the ownership of the property. It was, therefore, held that the receipts in question were assessable as business income.

In our view, none of the cases cited on behalf of the Revenue deal with the controversy raised before this Court in the present reference.

The facts found by the Tribunal have not been challenged by the Department. The admitted facts are that, at all material times, the assessee Company was the managing agent and secretaries and treasurers of a large number of companies which were more than 20 in number. In addition, the assessee-company itself was carrying on business in jute goods. In terms of clause 12 of the various agreements entered into with the managed companies, the assessee-company had provided the managed companies with suitable. furnished accommodation and the entire floor area of the property at No.3, Netaji Subhas Road, was distributed amongst the various managed companies on functional basis. Such distribution and allotment of space in the said building which was also the registered office of the assessee-company, was an essential and integral feature of the conduct of its own business and the letting out of accommodation in the facts and circumstances of this case was clearly subservient and incidental to the carrying on of the business of the assessee company itself. For a proper and efficient conduct of the business of the managed companies, it was imperative that their offices should also be situated as close to one another as possible. Furnished accommodation was provided to the managed companies in the same premises in which the registered office of the assessee-company was situated in terms of the agreements entered into with the various managed companies. It is, therefore, submitted that the rental income from the portion of office space let out to the managed companies, including income from letting out furniture to such managed companies, is assessable as business income under the head "Profits and gains of business or profession", and in that event, there can be no disallowance of any expenditure pertaining to the portions of properties let out to the managed companies in computing the business income as aforesaid. Reliance, in this connection, is placed on the decisions in the following cases:

(a) Jamshedpur Engineering and Machine Mfg. Co. Ltd. v. CIT (1957) 32 ITR 41 (Patna);

(b) CIT v. Delhi Cloth and General Mills Co. Ltd. (1966) 59 ITR 152(Punj.);

(c) CIT v. National Newsprint and Paper Mills Ltd. (1978) 114 ITR 388 (MP), and

(d) Addl. CIT v. Hindustan Machine Tools Ltd. (1980) 121 ITR 798 (Kar.).

(a) In Jamshedpur Engineering and Machine Mfg. Co. Ltd.'s case (1957) 32 ITR 41, the Patna High Court noted that the assessee-company which was carrying on business of manufacturing and selling agricultural implements had constructed residential quarters for its employees. These quarters had been let out to the employees as incidental to the main business carried on by the assessee-company. The question before the High Court was whether the expenses incurred by the assessee-company for repairs and maintenance of the residential quarters was incidental as business income. The Court held that as the letting out of residential quarters was subservient to and incidental to its main business, section 9 of the Indian Income Tax Act, 1922, corresponding to sections 22 and 23 of the Income Tax Act, 1961, did not apply and the expenditure incurred by the assessee-company for the repair and maintenance of the residential quarters was allowable as a deduction in computing the business income under section 10(2)(xv) of the 1922 Act corresponding to section 37 of the Income Tax Act, 1961.

(b) In CIT v. Delhi Cloth and General Mills Co. Ltd.'s case (1966) 59 ITR 152, the Punjab High Court found that the assessee-company which carried on various manufacturing businesses had let out portions of the properties owned by it to the large number of employees engaged in the businesses. The Court held following the decision of the Patna High Court in Jamshedpur Engineering Co.'s case (1957) 32 ITR 41, that since the letting out of the buildings to the employees was subservient to the main business carried on by the assessee-company, the rental income derived by it was assessable as "income from business" and not as "income from property".

(c) In CIT v. National Newsprint and Paper Mills Ltd.'s case (1978) 114 ITR 388 (MP), the assessee was a Government undertaking in the public sector and was engaged in the business of manufacture and sale of newsprint. It had a huge industrial complex and it built not only residential quarters for its employees, but also made available to the Government authorities its buildings for locating a branch of the State Bank of India, post office, police station, central excise office and the railway staff quarters, as the assessee-company required these facilities for carrying on its business efficiently and smoothly. On these facts, it was held by the Madhya Pradesh High Court that thedominant purpose of letting out the accommodation was to enable the assessee to carry on its business more efficiently and smoothly and the activity of letting out had a definite nexus with the business that the assessee was carrying on. It was, therefore, held that rent received from the employees as well as the Government Departments being incidental to the assessee's business was taxable as business income under section 28 of the 1961 Act and not as income from property under section 22 of the 1961 Act.

(d) In Additional CIT v. Hindustan Machine Tools Ltd.'s case (1980) 121 ITR 798 (Kar.), the assessee-company had constructed 50 sheds forming an industrial estate with the object of having ancillary units which would manufacture components required for the purpose of the machines in the manufacture of which it was engaged and these had been leased out to several persons on a rental basis. It was found as a matter of fact by the Tribunal in the said case that the dominant object in the construction of sheds and letting them out to several entrepreneurs was to have a ready source of supply of components which the assessee itself might have found it convenient to manufacture and which it preferred the ancillary units to manufacture for it, and the leasing out of the premises in the industrial estate, therefore, was incidental to and for the purpose of the assessee's business of manufacture of various machines. It was, therefore, held that the income by leasing out the premises was part of its income from business. This conclusion of the Tribunal was upheld by the Karnataka-High Court.

All the aforesaid decisions clearly support the case of the assessee company.

Having regard to the facts and circumstances of these cases and the principles laid down, in the aforesaid decisions, we are of the view that the Tribunal came to a correct conclusion. We, therefore, answer all the three questions in this reference in the affirmative, and in favour of the assessee.

There will be no order as to costs.

K.M. YUSUF, J.--I agree.

M.BA./157/T.F.

Reference answered.