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Commissioner of Income-tax Vs. Russell Properties (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 210 of 1974
Judge
Reported in[1982]137ITR473(Cal)
ActsIncome Tax Act, 1961 - Sections 22, 56, 56(2), 256(1) and 256(2); ;Income Tax Act, 1922 - Sections 9(1), 10 and 12
AppellantCommissioner of Income-tax
RespondentRussell Properties (P.) Ltd.
Appellant AdvocateS.K. Mitra and ;R.C. Prosad, Advs.
Respondent AdvocateD. Pal and ;D. Dhar, Advs.
Cases ReferredKarnani Properties Ltd. v. Commissioner of Income
Excerpt:
- .....the ito noticed that that the assessee had declared receipts of service and maintenance charges as income from other sources and claimed various expenses amounting to rs. 1,73,601 for the assessment year 1965-66 and rs. 2,33,132 for the subsequent year. the ito found fault with the splitting up of the income derived by the assessee from properties into two categories, namely, income from property and income from other sources. he found that the lifts were an integral part of the building and the maintenance charges were collected by the assessee along with the rent. therefore, the service and maintenance charges were assessable under the head 'income from property'. thus, the ito treated the entire income from the property at no. 6, little russel street, calcutta, as income.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court:

'Whether, on the facts and in the circumstances of the case, and on a proper interpretation of the lease agreement, the Tribunal was correct in law in holding that the service and maintenance charges recovered from the lessees were not only towards the provision of lifts but towards other services as well rendered by the assessee as and for the assessment years 1965-66 and 1966-67 ?'

This reference relates to the assessment years 1965-66 and 1966-67. We may incidentally mention that the Revenue had sought to raise four different questions and one of the questions was question No. 3, viz., 'whether the Tribunal had misdirected itself in holding that the service and maintenance charges received from the tenants were assessable under the head 'Profits and gains from business' and not under the head 'Income from house property'.' This question along with other questions were disallowed by the Tribunal and no attempt was made to seek any direction from this court under Section 256(2) of the Act. We mention this fact because, it appears to us, that the question which has been referred to us, would be of academic interest because the finding of the Tribunal that the income would be assessed as business income would still remain.

2. However, as this point has been urged, we propose to go into this question and answer it. It appears that the assessee purchased on 27th February, 1964, a building constructed up to the second floor. The structural work from the 3rd floor to the 8th floor was taken up and almost completed during the financial year 1965-66, and the 4th, 5th and 8th floors were under construction and were finished during the financial years 1967-68 and 1968-69. The assessee maintained its books of account on the basis of the financial year and its accounting year was the financial year. During the financial year 1964-65, the expenses on the electric transformer and lifts came to Rs. 25,000 and Rs. 85,535 respectively. The electric fittings were installed from the financial year 1964-65, right up to the financial year 1968-69. The cost of the building stated to be about Rs. 8,17,640 in the assessee's letter to the ITO dated 3rd December, 1970, was spread over the financial years 1964-65 to 1968-69. The ground, 1st and 2nd floors were taken on 20 years' lease by M/s. Siemen's India Ltd. and the 3rd floor was taken up partly by Jamair, an airways company. The lift was erected some time in June, 1964. It was common ground that the agreement entered into by the assessee with M/s. Siemens India Ltd. in 1964 was a typical agreement and the other agreements entered into by the assessee with other tenants had been drawn up more or less on the same lines. It would be necessary to refer briefly to some of the relevant provision of the said agreement. The recital clause of the said agreement stated as follows :

'WITNESSETH that in consideration of the rent servicing and maintenance charges hereinafter reserved and of the loan and the covenants, conditions and agreements hereinafter contained and on the part of the lessee to be paid, observed and performed, the lessor doth hereby demise unto the lessee ALL THAT THE ground floor, first floor and second floor (consisting of and comprising a floor space of more or less eight thousand one hundred and eighty-nine square feet on the ground floor and eight thousand three hundred and sixteen square feet each on the first and second floor respectively aggregating to more or less twenty-four thousand eight hundred and twenty-one square feet as determined after actual joint measurement) of premises No. 6, Little Russell Street. ...'

The description of the premises included, inter alia, as follows:

'TOGETHER WITH the electric installation including separate lines for the lessee's fixing up separate meters in the meter board of premises No. 6, Little Russell Street, Calcutta, AND all appurtenances and the lessor's fixtures and fittings thereinto belonging as fully described in the schedule hereto TOGETHER WITH the use in common with other tenants and occupiers of the said premises No. 6, Little Russell Street, Calcutta, of the main entrance compound, passages, staircases and the two lifts of the said premises No. 6, Little Russell Street, Calcutta, to be installed thereat on or before the 30th day of September, 1964..... '

The habendum clause of the lease stipulated, inter alia, as follows:

'TO HOLD exclusively the said ground floor, first floor and second floor of the said premises No. 6, Little Russell Street, Calcutta, TOGETHER with other premises hereby demised (hereinafter collectively, referred to as the demised premises) unto the lessee for a period of twenty-one years commencing on and from 1st day of March, 1964, but determinable earlier as hereinafter provided YIELDING AND PAYING unto the lessor therefor during the said term a clear monthly rent at the rate of sixty-seven naye paise per square feet for the aggregate floor space of twenty-four thousand eight hundred and twenty-one square feet more or less as determined after actual joint measurement rounded off in the monthly sum of rupees sixteen thousand six hundred and twenty and a monthly charge of rupees eight thousand and two hundred for servicing and maintenance of the two lifts to be installed thereat on or before the 30th day of September, 1964, and in all other respects as contained in the covenants on the part of the lessor to be observed and performed aggregating to Rs. 24,820 (rupees twenty-four thousand eight hundred and twenty) only on or before the tenth day of each and every current month notwithstanding the installation of the lifts at a future date as aforesaid inclusive (save as hereinafter provided) of all municipal rates, taxes, easements, liberties, rights and privileges but without any abatement or deduction whatsoever,the said rent and the servicing and maintenance charges for the month of March.'

One of the covenants undertaken by the lessee was to pay 'monthly rent for servicing and maintenance charges' on the day and in the manner mentioned hereinbefore. It also stipulated the obligation to pay for the electricity consumption in the demised premises and as recorded in the separate meters to be installed in the demised premises at the lessee's own cost. The lessor's obligations contained, inter alia, as follows;

'(a) Save as hereinbefore covenanted for on the part of the lessee, to bear pay and discharge all existing and future rates, taxes, assessments, dues, duties, impositions and outgoings whatsoever imposed or charged upon the demised premises and whether payable by the owner or occupier thereof.

(b) To repair, whitewash, colour wash and paint the entire external structure together with the outer walls as well as doors and windows and/or other external fittings or installations and/or other parts of the demised premises for common use before the commencement of the lease and every three years or earlier as may reasonably be requested by the lessee, during the subsistence or term of the lease.'

It further provided, inter alia, as follows :

'(e) The lessor shall at his own cost-

(1) Maintain the drains sufficiently clean and disinfected and in proper working order and tenantable repair and condition.

(2) Provide for twenty-four hours' supply of filtered and unfiltered water and also fix up or install minimum two electric pumps for the supply of water and install or fit in the requisite apparatus, appliances, pipes, etc., in connection therewith.

(3) To keep the electric pumps (for the supply of water) and the installation (including pipelines, electric motors and fittings) used in connection therewith in proper working order and condition.

(4) To maintain in proper working order and tenantable repair and condition the water drain, sanitary conservance and sewage drain connection and pipelines in the interior of the demised premises running from the exterior thereof.'

As we have mentioned before, the salient features of the agreement were that the tenant, viz., M/s. Siemens (India) Ltd. was required to pay Rs. 16,620 by way of rent and Rs. 8,200 for ' servicing and maintenance of two lifts to be installed thereat on or before 30th day of September, 1964, and in all other respects as contained in the covenants on the part of the lessor to be observed and performed'. Thus, the tenant was required to pay a sum aggregating to Rs. 24,820. This clause is the rootcause of the controversy between the parties. The lessee, on its part, had bounded itself to pay the monthly rent and the electric bills as and when they would fall due and also would advance a sum of Rs. 6 lakhs to the lessor to be adjusted against the amounts payable by the lessee. There are also clauses in the agreement requiring the lessee to afford due access to the workmen, agents, engineers, etc., into the demised premises. The lessee was required to pay due attention while using the demised premises and to keep and maintain the interior of the demised premises in good repair and condition. On the other hand, the lessor was obliged, by the terms of the agreement, to repair, whitewash, colour wash and paint the entire external structure together with the outer walls, doors and windows and permit the lessee to erect and fix up, from time to time at its own expense, such partitions, cubicles and other fixtures and fittings as were necessary. The lessee was also given the permission to dismantle and remove its installations before the expiry of the lease deed unless renewed. There were also other covenants which are not necessary for us to refer. In pursuance of the said lease deed, the assessee supplied, during the two financial years under appeal, filtered and unfiltered water, looked after the underground drainage and sewerage, supplied electricity to the lessee after purchasing it in bulk from the Calcutta Electric Supply Corporation at high voltage and converting it into low voltage. For this purpose, a transformer was duly erected, during the financial year 1964-65, and the assessee paid the electric bills in respect of those installations. Of course, there were lifts and the assessee had also maintained the regular staff which consisted of durwans providing watch and ward facilities to the lessee, sweepers, affording scavenging facilities, electricians and engineers, providing supply of water and electricity, liftmen operating the lifts and so on. In those circumstances, the ITO noticed that that the assessee had declared receipts of service and maintenance charges as income from other sources and claimed various expenses amounting to Rs. 1,73,601 for the assessment year 1965-66 and Rs. 2,33,132 for the subsequent year. The ITO found fault with the splitting up of the income derived by the assessee from properties into two categories, namely, income from property and income from other sources. He found that the lifts were an integral part of the building and the maintenance charges were collected by the assessee along with the rent. Therefore, the service and maintenance charges were assessable under the head 'Income from property'. Thus, the ITO treated the entire income from the property at No. 6, Little Russel Street, Calcutta, as income from property with the result that the assessee was not allowed the various expenses claimed by it, as for example, depreciation on the transformer, electrical installations, etc. The assessee went up in appeal before the AAC by which time the decision of the Supreme Courtin the case of Karnani Properties Ltd. : [1971]82ITR547(SC) was rendered. It was contended before the AAC that what was collected as rent should be treated as income from property and what was collected as service and maintenance charges should be assessed under the head 'Business'. The AAC accepted this position and directed the ITO to compute the income under the head 'Business'. The Revenue being aggrieved by the said decision went up in appeal before the Tribunal. The Tribunal referred to the different provisions of the lease and the rival contentions and observed, inter alia, as follows :

'We have heard both the parties at length, and we find substance in the submissions made by the assessee's counsel. We have already given the factual background of the issue involved in this case and have described the various services rendered by the assessee to the tenants. They are practically the same as those rendered by Karnani Properties Ltd., with one minor difference. Considering the elaborate services undertaken by the assessee in the form of watch and ward and scavenging facilities, maintenance of underground drainage for the benefit of the tenants, maintenance of electrical installation and electric pumps, constant supply of filtered and unfiltered water, conversion of electricity from high voltage to low voltage and its supply to the tenants, etc., we have no doubt in our mind that the AAC was right in the decision that he took. The services rendered by the assessee have to be viewed against time, expenses and energy involved in those services. They really partake of the nature of an organised business activity conducted in a systematic manner. In the words of the Bombay High Court decision in the case of CIT v. National Storage Pvt. Ltd. : [1963]48ITR577(Bom) , as approved by the Supreme Court, the services rendered by the assessee are 'complex' and not merely incidental to the ownership of the property. The other decisions relied upon by the departmental representative are strictly not germane to the issue before us and are easily distinguishable on facts.

Coming now to the provision in the agreement between the assessee and Siemens (I.) Ltd., which was relied upon by the departmental representative, he inadvertently overlooked the words that followed ' on or before 30th day of September, 1964'. These words are as follows:

'......and in all other respects as contained in the covenants on thepart of the lessor to be observed and performed aggregating to Rs. 24,820 (page 2 of the lease agreement, part of which has been extracted earlier in para. 3 of this order). On a careful reading of these words, we have no doubt that the service and maintenance charges recovered from the tenants were not only towards the provision of lifts but towards other services as well. We also appreciate the arguments advanced by the assessee's counsel that Messrs.Siemens (I.) Ltd. could not have agreed to pay as high an amount as Rs. 8,200 for the services of the lifts alone, especially when it was occupying the ground, first and second floors. No doubt, as the departmental representative stated, Messrs. Siemens (I.) Ltd. might require the lifts not only for its employees but for its clients and also for purposes of maintaining its prestige and glamour. Even then, the amount paid by Messrs. Siemens (I.) Ltd. towards service and maintenance charges could not be attributed merely to the provision of lifts. Considering the argument as a whole and the duties and obligations cast on the lessor and the lessee, We agree with the assessee that service and maintenance charges were not confined to the provision of lifts but covered other services as well. The losses incurred by the assessee for some time do not necessarily lead to the inference drawn by the departmental representative that there was no business activity. As for the municipal valuation, it is not determinative of the issue before us and, moreover, the matter is in dispute in a civil suit. It would not be out of place to mention here that the Income-tax Officer has himself accepted the assessee's plea for the assessment year 1967-68 though this by itself may not be conclusive of the issue as pointed out by the departmental representative.

For all these reasons, we hold that the Appellate Assistant Commissioner was right in the decision that he took. We may add here that the Appellate Assistant Commissioner has disallowed a part of the director's remuneration. That aspect is being separately dealt with by us in the assessee's appeal and we express no opinion on it in this order.'

From this order four questions were sought to be raised by the Revenue and as we have indicated above the Tribunal has referred to this court only one question. The question, as we have mentioned before, was whether the Tribunal was correct in law in holding that the service and maintenance charges recovered from the lessees were not only towards the provision of lifts but also for other services rendered by the assessee. As we have mentioned before, whatever the charges be characterised, they still remain, as found by the Tribunal, to be the business income. There being no question of challenging this finding, which was sought to be raised by the Revenue and refused by the Tribunal, in our opinion, the answer to this question would really be only of academic interest in this case. The principles to be applied in this case, in our opinion, are now well settled by the decision of the Supreme Court in the case of Karnani Properties Ltd. v. CIT : [1971]82ITR547(SC) . In that case the Supreme Court said that the services rendered by the assessee to its tenants were the result of the activities carried on continuously in an organised manner with a set purpose and with a view to earn profits and those activities were business activities and the income arising therefrom was assessable under Section 10 ofthe Act of 1922. But it is true, as the learned advocate for the Revenue drew our attention to the observations of the Supreme Court, that the decision was rendered in the background of the facts and circumstances of that case and in the background of the obligations undertaken in that lease. But in essential features we are of the opinion that the obligations in that lease were similar to those in the present one. It has to be noted that in this case there was no installation of the electric meter or the lift. There was only an obligation on the part of the lessor to maintain and service them and charges had been realised for those purposes. Therefore, the income would come as a result of an organised activity of the assessee.

3. A contention was sought to be raised that before the ITO the assessee had claimed the income on the basis of income from other sources. Before the AAC it was sought to be changed. But the AAC, in our opinion, has jurisdiction to allow the assessee to raise this contention especially in view of the decision of the Supreme Court. As a matter of fact, in a decision in the case of CIT v. Kanak Investments (P.) Ltd. : [1974]95ITR419(Cal) , the Tribunal referred the question to this court whether the composite rent received by the assessee from its tenants could be split up and the amount attributable to the building only should be assessed under Section 9(1) of the Indian I.T. Act, 1922, while the amount attributable to the amenities provided by the assessee to the tenants should be assessed under Section 12 of the Act. At p. 421 of the report, we observed as follows:

'It appears from the two subsequent decisions of the Supreme Court that the proper controversy might have been to decide whether the amount received from the tenants could be attributed to either section 10 or section 12. In this connection reference may be made to the decision of the Supreme Court in Sultan Brothers Private Ltd v. Commissioner of Income-tax : [1964]51ITR353(SC) and the decision of the Supreme Court in the case of Karnani Properties Ltd. v. Commissioner of Income-tax : [1971]82ITR547(SC) . But we are not concerned with that controversy; since the question referred to us is a limited one and since the Tribunal has not found the facts necessary for deciding whether the amount could be apportioned between Section 10 and Section 12 of the Act, which seems to be, according to the aforesaid decisions of the Supreme Court, the appropriate heads under which the amount should be taxed, in our view, we should answer the question, in view of the facts found by the Tribunal in this case, in the affirmative and in favour of the assessee.'

The AAC had allowed the assessee to urge this point in this case and the case proceeded on that basis. We have mentioned about the question referred to us. It is quite clear from the agreement that the obligation was to pay monthly rents of Rs. 16,620 and Rs. 8,200 for servicing andmaintenance of the two lifts to be installed on the 30th September, 1964, and in all other respects as contained in the covenants on the part of the lessor to be observed and performed aggregating to Rs. 24,840. This express intention categorically and clearly indicates that these amounts have been paid not only for the lifts but also for the service charges and maintenance. Our attention was drawn to the decision of the Kerala High Court in the case of Dr. P.A. Varghese v. CIT : [1971]80ITR180(Ker) . In our opinion, the terms of the said lease were, significantly different and this decision we must observe, was rendered before the decision in the case of Karnani Properties : [1971]82ITR547(SC) and the Division Bench of the Kerala High Court did not have the advantage of the decision of the Supreme Court and the claim was also on a different basis, that is to say, whether the claim was allowed under Section 56(2)(iii) of the I.T. Act, 1961.

4. Our attention was also drawn to the decision in the case of Indian City Properties Ltd. v. CIT : [1965]55ITR262(Cal) . The controversy in that case was also very much different. Furthermore, we must also bear in mind that this decision was also rendered before the decision of the Supreme Court referred to above. In this case, as we have mentioned before, there was no two lettings, one the activity of letting out the premises and the other the activity of earning service charges. Indeed, as we have mentioned hereinafter in the case of the same assessee, namely, Indian City Properties Ltd. v. CIT : [1978]111ITR19(Cal) , this court, reviewing the lease, held that the income derived from letting out the buildings was assessable as 'income from house property' under Section 22 of the Act of 1961. The lift charges and air-conditioning charges which had been shown separately in the ITO's order were assessable under Section 56, as 'Income from other sources'.

5. In the aforesaid view of the matter in view of the obligations undertaken by the lessor and the manner in which the said obligation was discharged in the relevant year, we are of the opinion that the Tribunal arrived at a correct decision. This decision which we are making is also in consonance with the view taken by this court in Income-tax Reference No. 81 of 1970 (Al Haj Amir Hasan Properties (P.) Ltd. v. CIT) judgment delivered on July 7, 1975. In view of the above, the question is answered in the affirmative and in favour of the assessee.

6. In the facts and circumstances of the case, the parties will pay and bear their own costs.

7. The lease agreement which we have referred to was not annexed to the paper book. We are treating a xerox copy of the said agreement handed over to the court as part of the record of this court.

C.K. Banerji, J.

8. I agree.


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