1. By this reference under section 66(1) of the Indian Income-tax Act, 1922, the following two questions are referred to us for our determination :
'Whether the income from the lease of the Kohinoor Cinema building, which had been equipped as a cinema theatre, is assessable under section 12 of the Indian Income-tax Act, 1922, or under section 9 of the Ac ?'
'Whether the mortgage interest allocated to the building, K (Rs. 28,052 and Rs. 31,583, as the case may be), is an admissible deduction properties (other than 'the building, K') for the assessment years 1958-59 and 1959-6 ?'
2. Questions referred to us arise out of the reassessment made upon the assessee for the assessment year 1958-59 and 1959-60, the relevant accounting years being the corresponding financial years ending March 31, 1958, and March 31, 1959.
3. The assessee is the owner of three house properties. One of them has been equipped as a cinema theatre. All the three house properties were mortgaged with a view to secure repayment of losses in his speculation business. There were two mortgages in respect of these properties. Under the first mortgage deed all the three properties were mortgaged with a view to secure repayment of a loan of Rs. 3 1/2 lakhs and the interest payable thereunder. Later, on the assessee created a second mortgage in respect of the very same three mortgaged properties.
4. On June 29, 1956, a partnership was formed, consisting of three partners, viz. the assessee, his son, Madhukar, and a limited company known as Gouri Sons Pvt. Ltd., a company managed, controlled and owned by Kapurs. The partnership business was carried on under the name and style of Kay and Kay Exhibitors. The business of this partnership was that of running Kohinoor Cinema and of exhibiting the cinema films at the said cinema theatre and the management of the said Kohinoor Cinema. The partnership business was to be carried on at the partners may mutually decide. Clause 12 provided for calculation of the profits of the partnership business. In ascertaining the profits of the business, the amount that was to be paid for the hire of the cinema theatre was to be deducted as expenses.
5. As aforesaid, the building, Kohinoor Cinema, belonged to the assessee. Under an agreement of lease, dated June 27, 1956, made between the assessee as the landlord on the one hand and the partnership firm of Messrs. Kay and Kay Exhibitors on the other hand, the assessee as a landlord granted and the partnership accepted as tenant, a lease of the Kohinoor Cinema with all furniture, fixtures, articles and things lying therein for a term of 6 years commencing from the date on which the landlord was in a position to give possession after obtaining the possession from the present occupiers at a monthly rental of Rs. 4,000 payable every month. Two days later, a fresh agreement was entered into and by this agreement dated June 29, 1956, the assessee and the firm of Kay and Kay Exhibitors agreed to reduce the rent payable for Kohinoor Cinema from Rs. 4,000 per month to Rs. 2,800 per month.
6. In the relevant two accounting years, the assessee paid the sums of Rs. 55,320 and Rs. 58,072, respectively, as interest payable to the mortgagees under the aforesaid two indentures of mortgage. In making the original assessment for these two years, the Income-tax Officer computed the income from two buildings (other than the building of Kohinoor Cinema Theatre) under section 9 and allowed the above amount of interest to be deducted under section 9(1)(iv). At the same time, the income that was derived by the assessee from the hire of Kohinoor Cinema Theatre was assessed as income falling under section 12 of the Act. Later on, the Income-tax Officer took action under section 34(1)(b) of the Act and in making the reassessment, he found that the interest amount of Rs. 28,502 for the first year and Rs. 31,583 for the second year was properly allocable to the loan secured by the mortgage of Kohinoor Cinema Theatre building and hence he revised the computation of the assessee's property income under section 9 of the Act. He did not allow the interest amount of Rs. 28,052 and Rs. 31,583 against the income brought to tax in the assessee's hands from Kohinoor Cinema Theatre building under section 12 on the ground that the said outgo was not any expenditure incurred by the assessee solely for the purpose of making or earning the rental income concerned. On appeal by the assessee, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. On appeal before the Income-tax Tribunal, firstly, it was urged on behalf of the assessee that the assessments that were originally made by the Income-tax Officer for the first two years were correctly made and that the revised assessments were made erroneously, and, secondly, it was contended that the income from the Kohinoor Cinema Theatre building should have really been assessed to tax under section 9 and not under section 12. The Tribunal did not express any opinion on the first, of the above two contentions, but so far as the second contention was concerned, it accepted the assessee's contention and took the view that the income from the Kohinoor Cinema Theatre building should really have been assessed to tax under section 9 and not under section 12. In making this order, the Tribunal laid emphasis on the fact that there was a separate agreement of lease in respect of the building of kohinoor Cinema Theatre. It also emphasized the fact that, so far as the partnership business was concerned, the main business was of exhibition of films in the building of Kohinoor Cinema. It took the view that as there was an independent agreement of lease in respect of the building of Kohinoor Cinema Theatre, the income derived therefrom under this lease should be regarded as income from property falling under section 9 of the Act. It also considered the question that, by this lease, not only the building of Kohinoor Cinema Theatre was let out but also fixtures, plant, machinery and furniture were also let out. Following the decision of this court in the case of Sultan Brothers (Private) v. Commissioner of Income-tax it took the view that the primary object of the letting was to let the building of Kohinoor Cinema Theatre and the letting out of the machinery, plant, fixtures and furniture was merely secondary. Accordingly, it took the view that the income from the building of Kohinoor Cinema Theatre ought to be computed as income from property falling under section 9 of the Act.
7. As regards the two questions referred to us for our determination, Mr. Hajarnavis, on behalf of the revenue, has contended that the Tribunal was in error in taking the view that the income from the building of Kohinoor Cinema Theatre building ought to be computed as income from property falling under section 9 of the Act. His submission was that such income is directly covered by the provisions of section 12(1) read with sub-section (4) thereof and that it ought to have been taxed as income under section 12. So far as the allocated interest of Rs. 28,052 and Rs. 31,583 for the two respective years was concerned, he has not controverted the fact that the mortgage is one and indivisible in nature; that the mortgagee will be entitled to proceed against each one of these three mortgaged properties for realisation of the amount due under the mortgage as well as for interest; that accordingly even if the income of the building of the Kohinoor Cinema Theatre is assessed as income under section 12 of the Act, the entire amount of interest payable under the mortgage for these two assessment years can be deducted from the income of the other two properties assessable under the Act.
8. It is not disputed in the present case that under both the indentures of mortgage the three properties were mortgaged with a view to secure the repayment of the principal amount due to the mortgagee together with interest. Thus the mortgage security is one and indivisible. It is always open under such circumstances to a mortgagee to proceed against any one or more or all the properties mortgaged for the purpose of realising the entire amount of principal and interest due to him under the mortgage. For the two assessment years, the total amount of interest payable to the mortgagee was Rs. 55,320 and Rs. 58,072. Under section 9(1) the tax shall be payable by an assessee under the head 'income from property' in respect of the bona fide annual value of property consisting of any buildings or lands of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him. The profits which are assessable to tax are subject to the allowances specified in the latter clauses of the said sub-section. We are concerned in the present case with the allowances permissible under clause (iv) of the said sub-section. Under that clause (iv) where the property is subject to a mortgage or other capital charge, the amount of any interest on such mortgage or charge is a permissible allowance while calculating the bona fide annual value of the property. Three immovable properties formed part of the security under both the indentures of mortgage. As the security is one and indivisible, it was open to the assessee while assessing his income from the two properties (other than the buildings of Kohinoor Cinema Theatre) to take into account as a permissible deduction the entire amount of interest of Rs. 55,320 and Rs. 58072 respectively, for the two assessment years. Thus, it was improper to allocate proportionate interest to the income of each of the mortgaged property. The whole of the interest payable under the mortgage to the mortgagee ought to have been allowed as a permissible deduction in respect of income of the two properties other than the building of Kohinoor Cinema Theatre.
9. Question then arises whether income from the building of Kohinoor Cinema Theatre is assessable under section 9 or section 12 of the Act. Section 12 is a residuary section dealing with the income from other sources. Under this section income could be brought to tax when it is not capable of falling under any of the specified heads of income. Sub-section (1) thereof provides that tax shall be payable by an assessee under the head 'income from other sources' in respect of income, profits and gains of every kind which may be included in his total income, if not included under any of the proceeding heads. Sub-section (4) of this section provides that where an assessee lets on hire machinery, plant or furniture belonging to him and also building and the letting of the building is inseparable from the letting of the said machinery, plant or furniture, he shall be entitled to allowances in accordance with the provisions of clauses (iv),(v),(vi) and (vii) of sub-section (2) of section 10 in respect of such building.
10. While the matter was being considered by the Tribunal, on behalf of the assessee reliance was placed upon a decision of this court in Sultan Brothers (Private) Ltd. v. Commissioner of Income-tax In this case the court made a distinction between a primary letting and secondary or subsidiary letting. The High court observed that if the primary letting is of machinery, plant or furniture and the secondary letting is of the buildings and the two lettings are inseparable, then only will the provisions of subsection (4) of section 12 apply. The Tribunal, following these observations, took the view that there was an irresistible conclusion that the letting of the building of Kohinoor Cinema was not a secondary one but it was the secondary one. According to the Tribunal, the phrase 'cinema theatre' in the lease transaction was the cinema theatre as the Kohinoor Cinema and the other things such as furniture, machinery, etc., were mentioned as subsidiary items. According to the Tribunal, the income from the cinema theatre should be computed under section 9 of the Art and left it to the department the question of apportionment of the rent of the theatre receivable for machinery and plant.
11. The argument of Mr. Hajarnavis is that such approach is not permissible if regard be had to the provisions of section 12(1)(iv) thereof. Reliance was placed by him upon the decision of the Supreme Court in that every matter. The judgment of the Supreme Court is Sultan Brothers (Private) Ltd. v. Commissioner of Income-tax The Supreme Court took the view that when a building and plant, machinery or furniture are inseparably let the Income-tax Act contemplates the rent from the building as a residuary head of income and not one to be computed under section 9. Upon the construction of section 12(4) of the Income-tax Act, the Supreme Court points out that there is no warrant for saying that section 12(4) of the Indian Income-tax Act, 1922, contemplates that the primary letting should be of machinery, plant or furniture, and that the letting of the building has to be incidental to the letting of the plant, machinery or furniture. The letting of a building can never be incidental to the letting of furniture contained in it, and, therefore, no consideration of primary and secondary lettings arises in construing the section; what must apply when furniture is let and also buildings must equally apply when plant and machinery are let out and also buildings. All that section 12(4) contemplates is that the letting of machinery, plant or furniture should be inseparable from the letting of the building. The term 'inseparable' in that section does not contemplate either that the machinery, plant or furniture should by its very nature be inseparable from the building, so that the building has also necessarily to be let along with it, or that the plant, machinery or furniture is fixed to the building. The inseparability referred to in section 12(4) is one that arises from the intention of the parties. That intention may be ascertained by framing the following questions : 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 Was it the intention to make the letting of the two practically one letting Would one have been let alone, and 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 it has to be held that it was intended that the lettings would be inseparable.
12. If regard be had to the facts of the present case, there cannot be much controversy that the letting of the building and that of plant, machinery, furniture and fixtures was inseparable. A building built for cinema theatre by way of necessity has to be equipped with furniture, fixtures, plant and machinery required for the purpose of conducting the business of exhibition of films. It will be impossible for an owner of the cinema theatre not to let out inseparably building and plant and machinery. The matter, however, is simpler still if regard be had to the provisions of the agreement of lease arrived at between the assessee and the partnership of Messrs. Kay and Kay Exhibitors. The operative part of this document shows that the assessee as lessor or landlord has granted and the partnership has accepted a lease of the cinema theatre known as Kohinoor Cinema and all furniture, fixtures, articles and things lying therein for a term of six years at a monthly rent of Rs. 4,000 payable every month. Such being the operative part of the document, there is no room for controversy. The letting of machinery, plant and furniture and that of the building is inseparable and a composite consideration is provided for both of them, without any apportionment. In view of the decision of the Supreme Court above referred to, the income of the building of Kohinoor Cinema Theatre has to be assessed as income falling under the provisions of section 12 or the Act.
13. Our answer to the first question is that the income from the lease of the Kohinoor Cinema building which has been equipped as a Cinema Theatre is assessable under section 12 of the Indian Income-tax Act, 1922. So far as the second question is concerned, it is answered in the affirmative.
14. As there was one and indivisible mortgage, it was not permissible to the taxing authority to allocate the amount of interest payable to the mortgagee separately in respect of each one of the properties mortgaged. The revenue shall pay the costs of the assessee.