Telekon Media India (P) Ltd. v. ITO [ITA
No. 5352/Del./2019, dt. 21-7-2020] : 2020 TaxPub(DT) 2901 (Del.-Trib.)
Composite letting out whether income from house property or
income from other sources?
Facts:
Assessee whose business stood closed; leased workstations,
furniture along with the leasehold premises and returned the rent as income
from house property for the said assessment year. This was confirmed in a
scrutiny assessment by assessing officer with the assessee also being allowed
the standard deduction of 30% under house property. The case was revised by
commissioner under section 263 who read the rental income to be income from
other sources under section 56(2)(iii) and thereby denied the standard
deduction to assessee. On higher appeal by assessee -
Held against the assessee that the rental income was prima
facie income from other sources as the dominant object was leasing of
workstations, furniture fittings with the premises only incidental to it.
Applied :
Sultan Brothers (P) Ltd. v. CIT (1964) 51 ITR 353 (SC)
M/s. Shambhu Investment Private Limited v. CIT 263 ITR
143 (SC) read into.
Editorial Note: The
dominant theory test and the intent of the parties was what was applied here.
The issue of inseparable letting with which letting out being dominant is no
longer res integra.
It needs to be remembered section 56 says only business
income or income from other sources. The business of assessee being closed it
could have not been read as business income either. That by itself is a
debatable point as is it the first year of letting out etc. is not known from
the decision. Will the assessee revive his business etc. are also points to be
thought over in such circumstances. Reference be made to ACIT v. PTL Enterprises
Limited/ITA No. 84/Coch/202/Assessment Year 2014-15/Against the revenue/Dated
6-7-2020 for more detailed discussion on similar topic.
Section 56(2)(iii) reads as under --
"(iii) Where an assessee
lets on hire machinery, plant or furniture belonging to him and also buildings,
and the letting of the buildings is inseparable from the letting of the said
machinery, plant or furniture, the income from such letting, if it is not
chargeable to income-tax under the head "Profits and gains of business or
profession";
In Sultan Brothers case, what is this inseparable
letting was explained as under --
What, then, is inseparable
letting? It was suggested on behalf of the respondent Commissioner that the
sub-section contemplates a case where the machinery, plant or furniture are by
their nature inseparable from a building so that if the machinery, plant or
furniture are let, the building has also necessarily to be let along with it.
There are two objections to this argument. In the first place, if this was the
intention, the section might well have provided that where machinery, plant or
furniture are inseparable from a building and both are let etc. etc. The
language however is not that the two must be inseparably connected when let but
that the letting of one is to be inseparable from the letting of the other.
The next objection is that there
can be no case in which one cannot be separated from the other. In every case
that we can conceive of, it may be possible to dismantle the machinery or plant
or fixtures from where it was implanted or fixed and set it up in a new
building. As regards furniture, of course, they simply rest on the floor of the
building it, which it lies and the two indeed are always separable are unable,
therefore, to accept the contention that inseparable in the sub-section means
that the plant, machinery or furniture are affixed to a building. It seems to
us that the inseparability referred to in sub-section (4) is an inseparability
arising from the intention of the parties. That intention may be ascertained by
framing the following questions :--
1. Was it the intention in
making the lease-and it matters not whether there is one lease or two, that is,
separate leases in respect of the furniture and the building-that the two should
be enjoyed together?
2. Was it the intention to make
the letting of the two practically one letting?
3. Would one have been let alone
a lease of it accepted without the other?
If the answers to the first two
questions are in the affirmative, and the last in the negative then, in our
view, it has to be held that it was intended that the lettings would be
inseparable.
This view also provides a
justification for taking the case of the income from the lease of a building
out of section 9 and putting it under section 12 as a residuary head of income
It then becomes a new kind of income, not covered by section 9, that is, income
not from the ownership of the building alone but an income which though arising
from a building would not have arisen if the plant, machinery and furniture had
not also been let along with it."
In Shambhu Investments case it was held that --
"Taking a sum total of
aforesaid discussions, it clearly appears that merely because income is
attached to any immovable property cannot be the sole factor for assessment of
such income as income from property; what has to be seen is what was the
primary object of the assessee while exploiting the property. If it is found,
applying such test, that main intention is for letting out the property, or any
part thereof, the same must be considered as rental income or income from
property. In case, it is found that the main intention is to exploit the
immovable property by way of complex commercial activities, in that event, it
must be held as business income."