Income Tax Appellate Tribunal - Lucknow
Hotel Arti Delux P. Ltd. vs Asstt. Commissioner Of Income-Tax on 29 July, 2005
Equivalent citations: (2005)97TTJ(LUCK)342
ORDER
Vimal Gandhi, President
1. This matter has been referred to me under Section 255(4) of the Income-tax Act on account of difference of opinion between Members of Lucknow Bench who heard this appeal. The controversy in the reference is as under:-
"Whether the income received by the assessee from letting out the building of the firm to M/s. Deva Nursing Home (P) Ltd. is assessable as income from house property as concluded by the ld. CIT(A) or is income from business as claimed by the assessee?"
2. The assessee company constructed a building complex with intention to carry on business of hotel, restaurant as per main object of the company. However, the building constructed was found to be far away from Railway Station and otherwise in remote area and it was felt that carrying on business of hotel was not feasible. Therefore, the Board of Directors of the company as per Resolution dated 12.3.1989 unanimously decided that company will run a hospital or a nursing home either under its own supervision or may lease out the building to any Doctor or Medical Institution. The Memorandum & Article of Association of the company at Sl. No. 28 also provides that the company may acquire, establish and maintain one or more nursing home, hospitals, clinics, dispensaries etc.
3. In the light of above resolution the company entered into lease agreement with Deva Nursing Home (P) Ltd. on 2.5.1989 effective from 10.5.1989 to lease out the building premises at monthly rent of Rs. 25,000/- per month. The building let out/given on lease was fitted with lift, generator set, tube-well and electrical fittings. However, the lessor maintained control over lift and the generator set.
4. In its return for the assessment year 1990-91, the assessee company showed rental receipt from above building amounting to Rs. 3,23,000/- as business income. However, the Assessing Officer held that above income was derived by giving building on hire and therefore, the same was to be assessed under the head "Other sources".
5. The assessee challenged above assessment in appeal before the CIT(A) and vehemently contended that lease rent received by the assessee was liable to be assessed under the head "business". It was submitted that the building simplicitor was not let out but the said building also had lift, generator set and tube-well and therefore it was a business asset let out for commercial exploitation. The learned CIT(A) had noted the contention of the assessee in paras 2 and 3 of his order. These were analyzed in the light of Memorandum & Article of Association of assessee company and the decision of the Hon'ble Supreme Court in the case of Sultan Brothers P. Ltd. v. CIT, 51 ITR 353. The learned CIT(A) noted that in the above case their Lordships after examining relevant facts of the case had held that letting out of the building did not amount to the carrying on of a business and income under the lease would not be assessed as "Income from business". The learned CIT(A) further observed that the facts in the case under appeal were almost similar except that no furniture or fixture had been fitted to the building that was leased out to Deva Nursing Home (P) Ltd. He accordingly held that claim of the assessee that rental income should be assessed under the head "business" was not justified.
6. The learned CIT(A) held that income from lease was liable to be assessed under the head "Income from house property". The reasoning is contained in para 5 of his order which is to the following effect: -
"5. But, I would differ from the action of the Assessing Officer as to under what head of income this rental income would be assessable. A perusal of the lease deed drawn up on 2/5/89 shows that what has been let out or leased is a building fitted with a lift, generator set, tube-well and electric fittings. For purposes of assessing income under the head 'Income from other sources', the only clause that may be applicable in the case of the appellant is Section 56(2)(iii) of the Income-tax Act, 1961. In the case under appeal there is no machinery, plant or furniture that has been let out alongwith the building. The lift, generator, tube-well and electric fittings are common conveniences without which the building could not have been let out. These amenities which the appellant has provided in the building form part of the building which the appellant agreed to provide for the lease of the building. No multi storeyed building would be fit for habitation without these amenities. Therefore, it cannot be said that by providing a lift and a generator the appellant has let out plant and machinery also along with the building. Here I place reliance upon the Kerala High Court decision in the case of Dr. P.A. Varghese v. CIT (80 ITR 180). Thus, in view of the above discussion, I hold that the lease rent received by the appellant company is assessable as income under the head 'Income from house property' only and under no other head. The Assessing Officer is directed to recompute the income from lease rent by assessing it under the head 'Income from house property' after allowing the deductions permissible Under Section 24 of the Income-tax Act, 1961."
7. The assessee being aggrieved challenged order of the CIT(A) in further appeal before the Appellate Tribunal. The learned Members of the Bench who heard the case were unable to agree on the relief to be allowed to the assessee. The learned Accountant Member agreed with the assessee that income from letting out was liable to be assessed as "business income". He held on facts that in the present case building simplicitor was not let out but there was leasing of business premises from where business had actually been carried out and the assets were conveniently put to use as a nursing home even if the said nursing home was not run by the assessee. The learned Accountant Member relied upon decisions in the cases of New Savan Sugar & further Refining Co. Ltd. (74 ITR 7); Vikram Cotton Mills Ltd. (169 ITR 597); & S.K. Sahana & Sons Ltd. (236 ITR 432). The learned Accountant Member has further observed as under in support of his views:-
"7. After considering the rival submission, the facts and circumstances as obtainable in the appellant-assessee's case we find that the appellant company entered into an agreement with another company and in order to make substituted use of its assets for the purpose of running a nursing home, leased out the property as the area was not found suitable for running a hotel business. Therefore, it was a case of a substituted usage of commercial asset and income earned on account of such substituted use can be nothing but 'business income' as has been held in large number of cases as mentioned by Shri Garg. Whereas from Revenue's side, it could not be established that the assessee has gone out of business whereas the assessee company established that it firmly remained in the business and in order to overcome the losses in hotel business, it entered into lease agreement temporarily and under these facts and circumstances, in our opinion, yielded income earned by the assessee company from leasing out its commercial assets to Deva Nursing Home (P) Ltd. the business income remained in tact and the same should have been assessed accordingly and in that case, the appellant-assessee is entitled to deductions as are admissible while computing the business income. The Assessing Officer has himself completed the assessment for the assessment year 1998-99 treating the assessee company enjoying income from business and has even allowed depreciation and other expenses as deduction and has also allowed unabsorbed depreciation to be carried forward and set off against profit of subsequent years, therefore, the order of the Assessing Officer supports the appellant-assessee's contention."
8. The learned Judicial Member did not agree with the learned Accountant Member. In his view the lease rent was liable to be assessed as income from house property. For reaching above conclusion, the learned Judicial Member examined Memorandum of Association of the assessee company. He also referred to Sub-clause 28 under which the assessee was authorized to acquire, establish and maintain one or more nursing homes, hospitals, clinics, dispensaries etc. He also referred to resolution passed by the Board of Directors dated 12.3.1989. The learned Judicial Member noted the submissions made before the learned CIT(A) in appeal and the finding recorded thereon. These are referred to in paras 8 & 9 of his order. Thereafter contentions of the parties advanced before the Tribunal, are taken note of in paras 10, 11 & 12 of the order. Thereafter the learned Judicial Member referred to lease agreement dated 2nd May, 1989 between the assessee and M/s Deva Nursing Home (P) Ltd. The portion of the same is reproduced by the learned Judicial Member to emphasize that only building was leased out for purposes of running a nursing home. The following pertinent observations have been made by the learned Judicial Member in para 15 of his order:-
"15. From perusal of the above recital of lease deed, it will be seen that assessee was aid to be owner of the building fitted with lift, generator, tube-well and electric fittings and it had decided to lease it out to the lessee for the purpose of running a Nursing Home. The recital of the above, read with the conduct of the assessee as well as lessee, go to establish that it was a simple case of letting out the building to M/s. Deva Nursing Home (P) Ltd. Except lift and generator set, there is no plant and machinery as ld. CIT(A) had taken note of this fact that it was lessee who have installed all the plant and machinery required for running the Nursing Home and not the assessee. These facts have not been rebutted. Accordingly, it is concluded that assessee had let out the building along with left and generator set."
9. Thereafter the learned Judicial Member extensively referred to the decision of the Hon'ble Calcutta High Court in the case of CIT v. CIT v. Shambhu Investment Pvt. Ltd. 249 ITR 47. He has further recorded that appeal against above decision has been dismissed by the Hon'ble Supreme Court as reported in 263 ITR 149. Applying the test laid down by the Hon'ble Calcutta High Court and the Hon'ble Apex Court the learned Judicial Member held that lease in question involved letting out of the building. This intention of the assessee was clear from the document. The tests laid down by their Lordships in the case of Sultan Brothers Pvt. Ltd., 51 ITR 353 were fully satisfied in this case. The learned Judicial Member accordingly held "it was a case of letting out the building and income is to be assessed from house property." He further observed as under :-
"21. No doubt, the assessee started with a concept of running a Hotel for which building was constructed and there may be a plea, though not raised, that Hotel building was let out and building was commercial asset to run a Hotel. This plea would have carried weight in case assessee had let out the building to lessee to run the business of Hotel, but it is not the case here as the purpose for which M/s. Deva Nursing Home (P) Ltd. has taken building is quite different to the main object of the assessee company.
22. So far as case laws cited by the ld. counsel for the assessee are concerned, in all those cases, commercial assets were let out and particular reference was to plant and machinery and not the building as in the case in hand. A perusal of the case of CIT v. Shri Lakshmi Silk Mills Limited (supra) will show that Dyeing Plant was let out. In the case of CIT v. Vikram Cotton Mills Ltd. (supra), the plant and machinery were let out and the same is not applicable to the facts of the case.
23. So far as last case relied upon by the ld. counsel for the assessee in the case of S.K. Sahana and Sons Ltd. & Others (supra) is concerned, the assessee was getting profit out of agreement entered in between assessee and the Managing Contractor. There was no lease deed executed in favour of the Managing Contractor as observed by the Apex Court. Here the facts are entirely different as assessee is not getting any profit out of the business being run by the lessee and I have already given out the details of the lease deed which go to show that property alone in the shape of building was let out to M/s. Deva Nursing Home (P) Ltd. to run the Nursing Home."
10. In the light of above, the learned Judicial Member agreed with the learned CIT(A). However, in the last line of his order, he has wrongly written that the AO was directed to assess rental income as income from business. The directions of the CIT(A) are that rental income be assessed as income from "house property". But above typing mistake does not make any difference and no reference to this error was made by the rival parties appearing before me.
11. After receipt of the reference from learned Members the case was fixed for hearing and both the parties have been heard. Shri Garg appearing for the assessee vehemently contended that the assessee had intended to set up a hotel and building was constructed for hotel purposes. However, running of hotel was not viable and therefore, the assessee decided to start a nursing home in the building under reference. For the first five years, the premises was let out to M/s. Deva Nursing Home (P) Ltd. as per the resolution of Board of Directors. The lease was for a limited purpose as the assessee was not in position to exploit the commercial asset. Even while letting out the commercial asset, the assessee retained possession and control of lift and the generator set. After the expiry of lease the property was resumed and the assessee has continued to run Nursing Home in the said premises. The building of "Nursing Home" was a plant as held by their Lordships in the case of CIT v. Dr. B. Venkata Rao . Shri Garg further submitted that intention of the assessee right from very beginning was to construct a hotel i.e. a commercial asset and the same was given for running a nursing home. Shri Garg emphasized that building constructed for hotel can be used as a nursing home as both the business involved hospitality of a kind and can provide facilities of the same nature. Only for a limited period and per force of circumstances exploitation of a commercial asset was allowed to be carried through the lessee. This would not convert a business receipt into receipt from "house property". It was not exploitation of ownership of building rights. Shri Garg further submitted that all the decisions cited by the learned Judicial Members against the assessee, in fact supported the case of the assessee.
12. The learned DR while opposing above submissions of Shri Garg drew my attention to the finding recorded by the learned CIT(A) as approved by the learned Judicial Member in his proposed order. He also submitted that observations of the learned Accountant Member at page 4 para 7 of his order were factually incorrect. There was no substituted use of any commercial asset in this case. Even in the lease deed it was clearly mentioned that building was being leased out and not any commercial asset. The learned DR accordingly supported proposed order of the learned Judicial Member.
13. I have given careful thought to the rival submissions of the parties. There is no dispute that the assessee had constructed this building to run a hotel but when it was found that running of hotel was not viable, the assessee decided to let it out to a nursing home. This was done in terms of the resolution passed by Board of Directors dated 12.3.1989 which is to the following effect:-
"It is unanimously decided that Company cannot run Hotel in the area of Acharya Nagar as per survey conducted by the Directors. The area is remote for Hotel business. Company may go into losses. Under this compelling situation, company decided to adopt other objects of memorandum and article of Association of Company mentioned in column para "C' point No. 28 at page 7 of other objects for which company was established. The company will run Hospital or Nursing Home in its either in own supervision or may lease out building with Plant Machineries, Generator, Lifts or other amenities for the said purposes to any Doctor's or medical Institutions. The Managing Director is being authorized to act in accordance with Board decision to the best interest in the company."
14. The factual situation narrated in the aforesaid resolution is not in doubt. There is further no dispute that the assessee company is entitled to run a nursing home as per its memorandum of association. The controversy between the parties in my view is whether building was let out and therefore, receipt was derived by the assessee on account of ownership of building or a commercial asset was let out for commercial exploitation. For resolving this controversy the primary document to be taken into consideration is lease dated 2nd May, 1989 between the parties under which the demised premises were leased. The relevant portion of the above lease is reproduced by the learned Judicial Member in para 13 of his proposed order. The preamble reflecting the intention of the parties relating to asset leased out is as follows:-
"And whereas the lessor has decided in its meeting held on 2.4.89 to lease out the building to the lessee for the purpose of running a nursing home and the lessee has agreed to take the said building from the lessor on lease on the terms and conditions contained herein:- xxxxxxx"
From the above recital of the lease deed it is evident that only building was leased out by the assessee. The rent fixed under the lease and payable by the lessee was for building and not for any other asset. Copy of lease deed is the only material placed by the assessee to decide the controversy. The mere fact that such building had lift, tube-well and electric fittings did not make any material difference. Above amenities are necessary for use of any building. These are not sufficient to convert an ordinary building into a commercial asset. The assessee has placed no material on record to show that building had peculiar amenities, which could be commercially exploited without any addition or alteration. Shri Garg has drawn my attention to decision of the Hon'ble Supreme Court in the case of Dr. B. Venkata Rao (supra) to argue that building of a nursing home is a plant. It is true but for holding that it was a plant and thus entitled to higher depreciation, their Lordships have observed as under (Head Note):-
"Held dismissing the appeal, that it was clear from the order of the Tribunal as also the assessment order that the assessee's nursing home was equipped to enable the sterilization of surgical instruments and bandages to be carried on. It was reasonable to assume in the circumstances, particularly having regard to the Tribunal's order which stated that the sterilization room covered about 250 sq. ft. that the nursing home was also equipped with an operation theatre. In the circumstances, the assessee was entitled to depreciation at 10 per cent, on the nursing home building on the ground that it was a "plant".
It is evident from above that the building held to be a "plant" was not a building simplicitor. It was equipped with facilities of sterilization of surgical instruments and bandages. It was equipped with an operation theatre. The same finding cannot be recorded in respect of building in question. It is nothing but a building simplicitor. Therefore, the assessee cannot derive any benefit from the above decision, which has no application to the facts of the case.
15. The other argument advanced on behalf of the assessee was that building was let out for a limited period and was resumed on the expiry of lease of 5 years. This fact in my view would make no material difference to the question whether rental income was business income or income to be assessed under the head "House property". The position as prevailing in April, 1989 is to be seen. At that relevant time building simplicitor was let out by the assessee and rent receipt was attributable to the ownership rights of the assessee only. No commercial asset existed at that relevant time which was let out to be exploited by his lessee. After 5 years and when other amenities were available and when the assessee actually carried on business of running a nursing home in the said building, the same could be treated as plant as per decision of the Apex Court. On the facts as prevailing in April, 1989 the building was let out for receiving rent which was liable to be assessed under the head "House property".
16. In my considered view the learned Judicial Member in his proposed order has rightly analyzed facts of the case and applied correct law to hold that income in question was liable to be assessed under the head "House property". For the reasons given above I agree with the view expressed by the learned Judicial Member.
17. The matter should now be placed before the regular Bench for passing an appropriate order.
ORDER UNDER SECTION 255(4) OF THE INCOME TAX ACT, 1961.
As difference of opinion had arisen between the Members who heard this appeal, we hereby state the points on which we differ and refer the matter to the Hon'ble President of the Income Tax Appellate Tribunal for further appropriate action:-
1) Whether the income received by the assessee from letting out the building of the firm to M/s Deva Nursing Home (P) Ltd. is assessable as income from house property as concluded by the ld.CIT(A) or is income from business as claimed by the assessee?
Mohan Singh, Accountant Member
1. The appellant-assessee has filed an appeal against the order of the ld. CIT(A)-II, Kanpur, dated 2.3.95. On behalf of the appellant-assessee, Shri S.K. Garg and Shri Amit Shukla, Advocates, attended whereas Shri M.K. Singhania, Sr.DR attended on behalf of the respondent-revenue and they made their respective submissions.
2. In brief, the relevant facts are that the assessee constructed a building complex for the purpose of carrying on the business of hotel, restaurant, cafe etc as per first main object of the assessee company. Besides the main objects, the assessee company has other objects which among other objects at Sl.No. 28 included "to acquire, establish and maintain one or more Nursing Home(s), Hospital(s), clinics, dispensaries, maternity homes, family planning centres etc" and in the Board Meeting resolution dated 12.3.89 it was unanimously decided that the company cannot run hospital in the area of remote locality as per the survey conducted by the Directors. The area being far off from Railway head and being in remote for hotel business, therefore, the company, may go into losses. Under this compelling situation, company decided to adopt other objects of Memorandum and Articles of Association of the Company as mentioned at Sl.No. 28 and it was decided that the company will run hospital or nursing home either in its own supervision or may lease out the business asset being building with plant and machinery alongwith generator, lifts or other amenities for the said purposes to any Doctor(s) or medical institutions and for this purposes, the Managing Director was authorized to act in accordance with the Board's decision to do the needful in the best interests of the company and accordingly, after running the hotel for some time, the company entered into a lease agreement with Deva Nursing Home(P) Ltd for running a nursing home from the said premises in terms of agreement dated 2.5.89 which was made effective from 10.5.89 for a limited period of five years. In the agreement itself the company reserved for its use the generator and lift installed in the premises including its operation and maintenance as well as the maintenance of the building, plant and machinery. Accordingly, the appellant-assessee claimed the lease money received from Deva Nursing Home(P) Ltd amounting to Rs. 3,23,000/- as business income, but the Assessing Officer treated the receipt as income from other sources. On appeal, the ld. CIT(A)-II, Kanpur, vide order dated 2.3.95 treated the lease money as income from house property on the ground that the running of hospital and nursing home is not as per the main object clause and in view of the decision of Hon'ble Supreme Court in the case of Sultan Brothers Pvt. Ltd reported in 51 ITR 353, income earned on leasing out on an asset was treated as property income, against which, the appellant-assessee is in present appeal before the Tribunal on the ground that the ld. CIT(A) is not justified in treating the income of the appellant-assessee as income from house property instead of business income whereas the Assessing Officer treated it as income from other sources. The ground is taken against disallowance of depreciation without giving an opportunity to the appellant-assessee. Ground is also taken that the ld. CIT(A) is not justified in sustaining Rs. 5,000/- out of expenses claimed for maintaining the lift and generator and also against disallowing the claim of director's remuneration at Rs. 36,000/-.
3. On behalf of the appellant-assessee, Shri S.K. Garg, Advocate, while referring to the paper book filed by the appellant-assessee, submitted that in view of other objects of the Memorandum & Articles of Association of the company, appearing at Clause 28, the company passed a resolution dated 12.3.89 in its Board Meeting for leasing out the premises to Deva Nursing home(P) Ltd for running a hospital. He further submitted that subsequent to resolution dated 12.3.89, running of nursing home was adopted as one of the main clause through resolution dated 15.3.89 and after complying with formalities, the appellant-assessee leased out the premises to Deva Nursing Home(P) Ltd for the purpose of running a nursing home owing to the appellant company found it difficult to run successfully a hotel, therefore, in order to exploit the assets for gainful substituted utilization and to avoid losses and in order to realize the object of running hospital and nursing home for gaining the required experience and to ensure some clientele from in and around areas, the premises were given on lease to Deva Nursing Home(P) Ltd for a limited period with a view to run its own business as soon as it was feasible not only for realizing the object of running a nursing home/hospital but also to earn profit and to serve the humanity. Therefore, the totality of circumstances were that the company had put its assets for substituted commercial use rather than going out of the business. Shri Garg further submitted that it was a case where the commercial asset of the company which were earlier meant for running of a hotel had been put to its substituted use, therefore, the facts distinguish the case from that of the Sultan Brothers Pvt Ltd and the lease money received from the lessee was liable to be treated as business income of the assessee. He further submitted that the decision of the Hon'ble Supreme Court in the case of Shri Lakshmi Silk Mills Ltd reported in 20 ITR 451 support the assessee's case.
4. In the case of appellant-assessee, it was not a case of letting out the property or building simplicitor but a case of leasing out the business premises from where business had actually been carried out and the assets were conveniently put to use as a nursing home even if the nursing home was not being run by the assessee. Therefore, the resultant income is liable to be treated as business income and in support of his contention, Shri Garg relied upon case laws reported in 74 ITR 7 (New Savan Sugar & Further Refining Co. Ltd), 169 ITD 597 (Vikram Cotton Mills Ltd) and 236 ITR 432 in the case of S.K. Sahana and Sons Ltd & Others wherein the Hon'ble Supreme Court has relied upon its decision in the case of Vikram Cotton Mills Ltd(169 ITR 597).
5. Shri Garg further submitted that in view of the facts and circumstances, the appellant-assessee's income for the assessment year 1998-99 has been assessed as income from running a nursing home for which he invited the attention of the Bench to pages 26 and 27 of the paper book being the assessment order dated 22.3.2000 for the assessment year 1998-99 passed by the ITO, Ward 2(1), Kanpur, wherein even the Assessing Officer has allowed unabsorbed depreciation of Rs. 1,34,154/- to be carried forward for set off against profit of subsequent years. Therefore, Shri Garg pleaded that during the period relevant for the assessment year the facts and circumstances remaining the same, the income of the appellant-assessee should be assessed as income under the head of 'business income'.
6. On the other hand, Shri M.K. Singhania, Sr.DR submitted that running of nursing home under lease agreement is not one of the object of the assessee company but he could not answer the query of the Bench in respect of the resolution dated 12.3.89, a copy of which appears at page 20 of the paper book filed by the assessee. But in order to reply and to find out the correct position and for making the reference to case laws his request for adjournment was granted even on the subsequent date of hearing, he could not rebut the submissions made by the learned counsel for the assessee.
7. After considering the rival submissions, the facts and circumstances as obtainable in the appellant-assessee's case we find that the appellant company entered into an agreement with another company and in order to make substituted use of its assets for the purpose of running a nursing home, leased out the property as the area was not found suitable for running a hotel business. Therefore, it was a case of a substituted usage of commercial asset and income earned on account of such substituted use can be nothing but 'business income' as has been held in large number of cases as mentioned by Shri Garg. Whereas from Revenue's side, it could not be established that the assessee has gone out of business whereas the assessee company established that it firmly remained in the business and in order to overcome the losses in hotel business, it entered into lease agreement temporarily and under these facts and circumstances, in our opinion, yielded income earned by the assessee company from leasing out its commercial assets to Deva Nursing Home(P) Ltd the business income remained in tact and the same should have been assessed accordingly and in that case, the appellant-assessee is entitled to deductions as are admissible while computing the business income. The Assessing Officer has himself completed the assessment for the assessment year 1998-99 treating the assessee company enjoying income from business and has ever allowed depreciation and other expenses as deduction and has also allowed unabsorbed depreciation to be carried forward and set off against profit of subsequent years, therefore, the order of the Assessing Officer supports the appellant-assessee's contention.
8. Regarding the disallowance of Rs. 5,000/- out of lift and generator expenses, as the same is based on account of unverifiable expenses, therefore, we do not find any infirmity in the order of the ld. CIT(A), hence, ground against the same is treated as rejected.
9. The next issue in the appellant-assessee's appeal is against disallowance of directors' remuneration. As we have held that the appellant-assessee is retaining the character of business income and the business is being carried on by its Directors and there were submissions before the ld. CIT(A) that the Directors looked into the proper upkeep and maintenance of the assets and they devoted sufficient time not only to realize the lease rent but also in order to get the lift and generator in the proper condition for which the payment of salary was obvious, as the Directors are required to be paid salary even when the company is not working to its full capacity, therefore, the remuneration of Rs. 36,000/- to its four directors cannot be said to be excessive or arbitrary. The fact remains that the appellant company enjoyed substantial income even by way of lease and it is also a fact that the Assessing Officer considered the appellant company to have been carrying on the business which is evident from the subsequent order of the Assessing Officer for the assessment year 1998-99, the reference of which appears in para 5 and 7 above, therefore, the ld. CIT(A) is not justified in confirming the disallowance of the same. Under the facts and circumstances and there being a meager allowance as remuneration we direct it to be allowed as deduction to the appellant company because the corporate entity works through its Directors who assume a number of responsibilities and are required to discharge a lot of obligations. Therefore, the ground of the appellant-assessee in this respect is treated as allowed.
10. As a result, the appellant-assessee's appeal is treated as partly allowed.
1. I have gone through the proposed draft prepared by my esteemed colleague and inspite of best of effort on my part, I am not able to convince myself with the finding recorded by the learned colleague that is why I am writing this order of dissent.
2. The relevant facts which may elucidate the controversy in detail are that assessee company, M/s Hotel Arti Deluxe (P) Ltd. was incorporated on 28.3.1987 and copy of Memorandum of Association which is appearing at pages 1 to 10 of the paper book go to reveal that the main object to be pursued by the company on its incorporation are as under: -
1. To carry on the business of Hotel, Restaurant, Cafe, Taverny, Bar, Refreshment-room, and Lodging, housekeepers, licensed victuallers, wine, beer, and spirit merchants, importers, and manufacturers of aerated and artificial waters end other drinks, purveyors, caterers for public amusement generally.
2. To purchase erect or otherwise acquire, establish and equip, act as collaborators, technicians, financiers of any of other hotels in India, or in any other parts of the world.
3. To act as agents of any hotel/company or as buying and selling agents of any hotel/company, and to do and perform all and singular the several duties, services and offices which the agents, buying and setting agents of any hotel/company usually do and perform and undertake and to become bound by conditions of any agreement or agreements entered into for any of the purposes aforesaid.
3. The objects incidental or ancillary to the attainment of main objects are elucidated in Clause 'B' and running into 21 Sub Clauses and these are in respect of business relating to Hotel activities. Clause 'C' of the Memorandum of Association provides other objects for which the company is established and Sub-clauses 28 relevant for deciding the controversy reads as under:-
"28. To acquire, establish and maintain one or more nursing name(s), hospitals, clinics, dispensaries, maternity homes, family planning ceulres for reception and treatment of persons suffering from illness or mental defects or for the reception and treatment of persons requiring medical attention or provide medical relief to the public in all the branches of medical services by all available means or improved/lates means and to run all types of laboratories for carrying on investigations all to run X-ray, E.C.G., Ultra Scan, Ultra sound clinics and sneh labolations means any for treatment of human diseases."
4. A perusal of the above shall show that assessee company came into existence to carry on the business of Hotel, Restaurant, Cafe, Bar, etc and for that purpose, it constructed a building. It appears that assessee company could not run the business of Hotel and a Resolution was passed at General Meeting held on 12.3.1989 which reads as under:-
"It is unanimously decided that Company cannot run Hotel in the area of Acharya Nagar as per survey conducted by the Directors. The area is remote for Hotel business. Company may go into losses. Under this compelling situation, company decided to adopt other objects of memorandum and article of Association of Company mentioned in column para 'C' point No. 28 at page 7 of other objects for which company was established. The company will run Hospital or Nursing Home in its either in own supervision or may lease out building with Plant Machineries, Generator, Lifts or other amenities for the said purposes to any Doctor's or medical Institutions. The Managing Director is being authorized to act in accordance with Board decision to the best interest in the company."
5. In pursuance of this, assessee let out the building of the Hotel to M/s Deva Nursing Home (P) Ltd., another company through a Lease Deed dated 2.5.1989, copy of which is appearing at pages 20 to 21 of the paper book.
6. For assessment year 1990-91, the year under consideration, the assessee filed return at a loss of Rs. 64,482/-. The A.O. noted that assessee constructed a building complex which had been given on rent to M/s Deva Nursing Home (P) Ltd. from whom rental income is being enjoyed by the assessee company. The A.O. was of the view that assessee had shown monthly hire charges of Rs. 3.23 lakhs in profit and loss account in respect of the properties so let out by it to M/s Deva Nursing Home (P) Ltd. for the purpose of running the said Nursing Home and all the equipments and instruments required for the purpose of Nursing Home have been brought in by the said M/s Deva Nursing Home (P) Ltd. The A.O. was of the view that assessee was not justified to show the income from hire charges as income from business and he assessed it as income from other sources and doing so the A.O. did not allow past year's losses to be set off in the year under consideration.
7. Being aggrieved, the assessee came in appeal and it was submitted that A.O. was not justified to assess the income from letting out of the building as income from other sources, but it should have been assessed as income from business because the assessee had put the business assets to use for better utilization of letting it out on rent instead using it as a Hotel which was the original objective behind construction of the building. The alternative plea of the assessee was that in case income was to be assessed as income from other sources, the A.O. should have allowed all the outgoings claimed by the assessee as deduction.
8. The ld.CIT(A) considered the submission and after going through the Memorandum of Article of Association of the assessee company, observed that main object for which the company was set up was to carry on business of Hotel, Restaurant, Cafe, Bar, etc along with lodging. He further observed that incidental or ancillary objects to the attainment of the main objects were also similar relating to running of the Hotel. He recorded a categorical finding that there was not a single object in the Memorandum of Association which authorized the assessee company to derive income by letting out any immovable property on lease or rent. The ld.CIT(A) concluded that since the assessee company was not authorized to carry on such an activity in its Memorandum of Association, it cannot be said that income derived from letting out of the building to M/s Deva Nursing Home (P) Ltd. constituted income from business. He also concluded that no doubt, building was an asset owned by the assessee company, but it did not become a commercial asset whose letting out constituted a business activity. For this, he derived support from the decision of the Apex Court in the case of Sultan Brothers Pvt. Ltd. v. CIT, 51 ITR 353 and concluded that the facts in that case were identical to the facts of the case before him. Accordingly, the ld.CIT(A) affirmed the action of the A.O. that rental income did not constitute income from business.
9. However, the ld.CIT(A) proceeded further and noted from the Lease Deed executed on 2.5.1989 between the assessee company and M/s Deva Nursing Home (P) Ltd. that what had been let out or leased was a building fitted with lift, generator, tube-well and electric fittings. The ld.ClT(A) was of the view that for the purpose of assessing the income under the head "income from other sources", the only Clause that can be applicable in the case of the assessee was Section 56(2)(iii) of the Income-tax Act, 1961 and the assessee's case is not covered as there was no machinery, plant or furniture that has been let out along with the building. The lift, generator, tube-well and electric fittings were said to be common convenience without which the building could not have been let out. The ld.CIT(A) was of the view that by providing a lift and generator, the assessee cannot be said to have made out plant and machinery along with building and for that he placed reliance on the decision of the Hon'ble Kerala High Court in the case of Dr. P. A. Varghese v. CIT , 80 ITR 180 and on the basis of above discussion, he concluded that lease rent received by the assessee company was assessable as income under the head income from house property. The assessee, feeling aggrieved from the said finding is in appeal.
10. The ld.counsel for the assessee submitted that the ld.CIT(A) had not appreciated the factual position correctly as according to him, Sub-clause 28 of Ancillary and other object in the Memorandum of Association clearly provides that assessee can establish and maintain one or more Nursing Homes. The contention was that by letting out the property to M/s Deva Nursing Home (P) Ltd., the assessee is fulfilling the very object and thus it can be easily said that leasing out of the property was also covered under the object. The ld.counsel for the assessee also submitted that the circumstances under which the property was let out is also to be looked into and for that learned counsel pointed out the copy of Resolution passed in the General Meeting of the Board of Directors held on 12.3.1989, in which the assessee was authorized to rent out the Hotel either in its own supervision or may lease out the building with plant and machinery, generator and other amenities. It was also pointed out in that very Resolution, as per report of Directors, the Hotel cannot be run in the area of Acharya Nagar where the building was constructed that is why they have again changed the very object and forced to let out the building.
11. The next contention of the ld.counsel for the assessee is that Hotel building was a commercial asset and it is being utilized by the assessee in letting out to M/s Deva Nursing Home (P) Ltd. and thus substitute use of the commercial asset will tantamount to business activities of the assessee and the income so earned is liable to be assessed under the head "income from business". The learned counsel referred to the decision of the Hon'ble Supreme Court of India in the case of Commissioner of Excess Profits Tax, Bombay City v. Shri Lakshmi Silk Mills Limited, 20 ITR 451, in which the income derived from letting out Dyeing Plant was held to be income from business activity. The learned counsel also referred to the decision of Jurisdictional High Court in the case of CIT, Lucknow v. Vikram Cotton Mills Ltd, 106 ITR 829, in which the same view was taken which stand duly affirmed by the Hon'ble Supreme Court of India in the case of CIT v. Vikram Cotton Mills Ltd., 169 ITR 597. The learned counsel also referred to the decision in the case of S.K. Sahana and Sons Ltd. and Ors. v. CIT, 236 ITR 432, in which the assessee company let out its colliery to Managing Contractor and assessee was to be paid profit at a certain rate on the amount of coal raised. The question was about the nature of income arose out of contractual relationship between the principal and the agent and it was held that income received under agreement was to be assessed as income from business. The ld. counsel for the assessee submitted that same ratio is applicable to the facts in the present case as assessee had let out its building for utilization by the lessee to fulfill one of the objects of the assessee company and thus income so received will be income from business and the view taken by the A.O. and the ld.CIT(A) are not tenable.
12. As against it, the ld. D.R. placed reliance on the order of the A.O. and ld.CIT(A) and contended that running of Nursing Home under the lease agreement was not one of the objects of the assessee company and thus income received by the assessee out of lease deed executed in between assessee and M/s Deva Nursing Home (P) Ltd. was to be treated as income from business as rightly held by the ld.ClT(A) and his order is to be uphold.
13. After considering the rival submissions and going through the law on the point, it is to be noted that the Hon'ble Supreme Court of India in the case of CIT v. Vikram Cotton Mills Ltd. (supra) has observed to this effect that whether a particular income is income from business or from investment must be decided according to the general commonsense view of those who deal with those matters in the particular circumstances and the conduct of the parties concerned. To apply the above observation to the facts of the present case, I have to reproduce some relevant portion of the lease deed dated 2.5.1989, the copies of which are appearing at pages 20 & 21 of the paper book of the assessee. The same is as under:-
" LEASE DEED This lease deed made this 2nd day of May in the year nineteen hundred and 1989 between :-
1. M/s Hotel Arti Delux (P) Ltd, a company formed and incorporated under Companies Act, 1956 having its registered office at 87/36, Acharya Nagar, Kanpur through its director Smt. Kiran Lata Divedi hereinafter called the lessor (Party of the first part) and
2. M/s Deva Nursing Home (P) Ltd, a company incorporated under Companies Act, 1956 through its director Dinesh Shanker Divedi hereinafter called the lessee (Party of the second part).
And whereas the lessor is owner of building fitted with lift, generator set, tube-well and electric fittings.
And whereas the lessor has decided in its meeting held on 2.4.89 to lease out of the building to the lessee for the purpose of running a nursing home and the lessee has agreed to take the said building from the lessor on lease on the terms and conditions contained herein:- xxxxxxxx"
14. The remaining portion of the lease deed deal with the monthly rent which will be Rs. 25,000/- and other clauses which as usual are formed part of such lease deed.
15. From perusal of the above recital of lease deed, it will be seen that assessee was said to be owner of the building fitted with lift, generator, tube-well and electric fittings and it had decided to lease it out to the lessee for the purpose of running a Nursing Home. The recital of the above, read with the conduct of the assessee as well as lessee, go to establish that it was a simple case of letting out the building to M/s Deva Nursing Home (P) Ltd. Except lift and generator set, there is no plant and machinery as ld.CIT(A) had taken note of this fact that it was lessee who have installed all the plant and machinery required for running the Nursing Home and not the assessee. These facts have not been rebutted. Accordingly, it is concluded that assessee had let out the building along with lift and generator set.
16. Law on the point was discussed by the Hon'ble Calcutta High Court in the case of CIT v. Shambhu Investment Pvt. Ltd., 249 ITR 47 and in that case a portion of the property was being used by the assessee and the reminder portion was let out to various occupants with furniture, fixtures, lights, air-conditioners for being used as table space. The assessee claimed the rental income as income from business and the A.O. accepted this version of the assessee, but the CIT exercising power under Section 263 of the Act was of the view that action of the A.O. was erroneous and prejudicial to the interest of the Revenue. He set aside the assessment order to that extent and remanded the mater back to the A.O. with the direction to assess the said income as property income. The assessee preferred an appeal and ITAT after considering all the facts and circumstances was of the view that order of the A.O. was not erroneous and prejudicial to the interest of the Revenue and cancelled the order of the CIT recorded under Section 263 of the Act. The moot question before the Hon'ble High court was as to whether the income derived from the said premises was rental income or business income. The Lordships have discussed the case law cited before the Court and relevant portion is as under:-
"(i) Sultan Brothers Pvt. Ltd. v. CIT : A five judges' Bench, of the apex court herein has considered a case wherein the assessee constructed a building and filled it up with furniture and fixtures and let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease provided for a monthly rent for the building and a hire charge for the furniture and fixtures.
Dealing with the said case, the apex court held that the letting out of the said building did not amount to the carrying on of a business and the income under the lease would not, therefore, be assessed as income from business. The apex court directed the said income to be assessed accordingly.
To decide such an issue the apex court gave a guideline that to come to a conclusion one has to find out the answer on three issues, namely : (a) Was it the intention in making the lease--and it matters not whether there is one lease or two, i.e., separate leases in respect of the furniture and the building--that the two should be enjoyed together ? (b) Was it the intention to make the letting of the two practically one letting ? (c) 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 the lettings would be inseparable.
(ii) CIT v. National Storage Pvt. Ltd. : A three judges' Bench of the apex court herein decided a case where the assessee had set up a film laboratory wherein the first floor had several vaults which were licensed to various film distributors for keeping the film negatives. The ground floor of the same building would be used only for the purpose for examination, cleaning, washing and rewinding of the films. The key of each vault was retained by the respective vault holders. However, the key to the main gate was in the exclusive possession of the assessee. The fire alarm charges and other maintenance were paid by the assessee.
While deciding the case, the apex court held that although it is a case of letting out such letting out was a "complex one" and the return received by the assessee was not an income derived from the exercise of the property rights only but was income received from carrying on an adventure or concern in the nature of trade and as such, such income is a business income.
(iii) CIT v. Admiralty Flats Motel : Here income of a partnership firm carrying on the business of "lodging house keepers" has been directed to be assessed as business income by the Division Bench of the Madras High Court.
(iv) CIT v. Associated Building Co. Ltd. : In this case the assessee being the owner of the building was carrying on similar nature of business by providing office accommodation to various persons like the present case up to a certain period and allowed its income to be assessed under the head "Other sources". Subsequently, an auditorium was constructed in the basement of the building and the assessee had set up an air-conditioning plant not only for providing cool air to the auditorium but also to the entire office premises. There had been other facilities given by the assessee attached to such office accommodation and other portions of the building.
The Bombay High Court deciding this case held that the nature of business subsequent to setting up of the air-conditioning plant and construction of auditorium became an activity of a complex nature and held that those activities amount to business and income should be assessed accordingly.
(v) CIT v. K.L. Puri (HUF) : In the instant case there had been two separate agreements one for rent for accommodation and the other for hire charges of the furniture and fixtures. The Division Bench of the Delhi High Court held that since the agreement for providing furniture and fixtures was done by a separate agreement, the rent realised pursuant to such agreement referable to the furniture and fixtures should not be treated as income from property.
(vi) Saswad Mali Sugar Factory Ltd. v. CIT, : In this case the Bombay High Court has held that the income from student hostel should be taxed as business income.
(vii) CIT v. Halai Nemon Association : A building completely furnished including microphone, fittings, fixtures, etc., and letting out for limited period for marriage ceremony and other social functions has been considered by the Madras High Court as business and not letting out.
(viii) Mukherjee Estate (P.) Ltd. v. CIT : In this case the court has directed assessment of income from display of sign boards as income from "other sources"."
17. After going through the above, the Lordships arrived at the following sum total of the aforesaid decisions:-
"Taking a sum total of the aforesaid decisions it clearly appears that merely because income is attached to any immovable property that 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 the main intention is for letting out the property or any portion 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."
18. Their Lordships further applied the above analogy to the facts of the case and concluded that income derived by the assessee was to be treated as income from property.
19. It is to be noted that assessee being aggrieved from the finding of the Hon'ble Calcutta High Court preferred an appeal before the Hon'ble Supreme Court of India and his appeal has been dismissed as reported in 263 ITR 143.
20. If we apply the above analogy of Hon'ble Calcutta High Court to the facts of the case which ultimately stand approved by the Hon'ble Supreme Court of India as referred to above, then the main intention of the assessee and that of lessee was letting out the property as evident from the recital of lease deed extracted above. Even if we apply the criteria laid down by the Apex Court in the case of Sultan Brothers Pvt. Ltd., 51 ITR 353, then it is very clear that the intention of the assessee was to lease out the building. Secondly there was one set of letting out the building along with lift, generator set and electric fittings and both the criteria laid down in that case are fulfilled and the obvious result will be that it was a case of letting out the building and income is to be assessed from house property.
21. No doubt, the assessee started with a concept of running a Hotel for which building was constructed and there may be a plea, though not raised, that Hotel building was let out and building was commercial asset to run a Hotel. This plea would have carried weight in case assessee had let out the building to lessee to run the business of Hotel, but it is not the case here as the purpose for which M/s Deva Nursing Home (P) Ltd. has taken building is quite different to the main object of the assessee company.
22. So far as case laws cited by the ld.counsel for the assessee are concerned, in all those cases, commercial assets were let out and particular reference was to plant and machinery and not the building as in the case in hand. A perusal of the case of CIT v. Shri Lakshmi Silk Mills Limited (supra) will show that Dyeing Plant was let out. In the case of CIT v. Vikram Cotton Mills Ltd. (supra), the plant and machinery were let out and the same is not applicable to the facts of the case.
23. So far as last case relied upon by the ld.counsel for the assessee in the case of S.K. Sahana and Sons Ltd & Others (supra) is concerned, the assessee was getting profit out of agreement entered in between assessee and the Managing Contractor. There was no lease deed executed in favour of the Managing Contractor as observed by the Apex Court. Here the facts are entirely different as assessee is not getting any profit out of the business being run by the lessee and I have already given out the details of the lease deed which go to show that property alone in the shape of building was let out to M/s Deva Nursing Home (P) Ltd. to run the Nursing Home.
24. On the basis of the above discussion and on the totality of the facts and circumstances, I am of the view that the ld.CIT(A) had taken a correct view of the issue and he rightly directed the A.O. to assess rental income as income from business. Ground Nos. 1 & 2 of the assessee are rejected accordingly.