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

Tax Publishers

Telekon Media India (P) Ltd. v. ITO [ITA No. 5352/Del./2019, dt. 21-7-2020] : 2020 TaxPub(DT) 2901 (Del.-Trib.)

Composite letting out whether income from house property or income from other sources?

Facts:

Assessee whose business stood closed; leased workstations, furniture along with the leasehold premises and returned the rent as income from house property for the said assessment year. This was confirmed in a scrutiny assessment by assessing officer with the assessee also being allowed the standard deduction of 30% under house property. The case was revised by commissioner under section 263 who read the rental income to be income from other sources under section 56(2)(iii) and thereby denied the standard deduction to assessee. On higher appeal by assessee -

Held against the assessee that the rental income was prima facie income from other sources as the dominant object was leasing of workstations, furniture fittings with the premises only incidental to it.

Applied :

Sultan Brothers (P) Ltd. v. CIT (1964) 51 ITR 353 (SC)

M/s. Shambhu Investment Private Limited v. CIT 263 ITR 143 (SC) read into.

Editorial Note: The dominant theory test and the intent of the parties was what was applied here. The issue of inseparable letting with which letting out being dominant is no longer res integra.

It needs to be remembered section 56 says only business income or income from other sources. The business of assessee being closed it could have not been read as business income either. That by itself is a debatable point as is it the first year of letting out etc. is not known from the decision. Will the assessee revive his business etc. are also points to be thought over in such circumstances. Reference be made to ACIT v. PTL Enterprises Limited/ITA No. 84/Coch/202/Assessment Year 2014-15/Against the revenue/Dated 6-7-2020 for more detailed discussion on similar topic.

Section 56(2)(iii) reads as under --

"(iii) Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head "Profits and gains of business or profession";

In Sultan Brothers case, what is this inseparable letting was explained as under --

What, then, is inseparable letting? It was suggested on behalf of the respondent Commissioner that the sub-section contemplates a case where the machinery, plant or furniture are by their nature inseparable from a building so that if the machinery, plant or furniture are let, the building has also necessarily to be let along with it. There are two objections to this argument. In the first place, if this was the intention, the section might well have provided that where machinery, plant or furniture are inseparable from a building and both are let etc. etc. The language however is not that the two must be inseparably connected when let but that the letting of one is to be inseparable from the letting of the other.

The next objection is that there can be no case in which one cannot be separated from the other. In every case that we can conceive of, it may be possible to dismantle the machinery or plant or fixtures from where it was implanted or fixed and set it up in a new building. As regards furniture, of course, they simply rest on the floor of the building it, which it lies and the two indeed are always separable are unable, therefore, to accept the contention that inseparable in the sub-section means that the plant, machinery or furniture are affixed to a building. It seems to us that the inseparability referred to in sub-section (4) is an inseparability arising from the intention of the parties. That intention may be ascertained by framing the following questions :--

1. Was it the intention in making the lease-and it matters not whether there is one lease or two, that is, separate leases in respect of the furniture and the building-that the two should be enjoyed together?

2. Was it the intention to make the letting of the two practically one letting?

3. Would one have been let alone a lease of it accepted without the other?

If the answers to the first two questions are in the affirmative, and the last in the negative then, in our view, it has to be held that it was intended that the lettings would be inseparable.

This view also provides a justification for taking the case of the income from the lease of a building out of section 9 and putting it under section 12 as a residuary head of income It then becomes a new kind of income, not covered by section 9, that is, income not from the ownership of the building alone but an income which though arising from a building would not have arisen if the plant, machinery and furniture had not also been let along with it."

In Shambhu Investments case it was held that --

"Taking a sum total of aforesaid discussions, it clearly appears that merely because income is attached to any immovable property cannot be the sole factor for assessment of such income as income from property; what has to be seen is what was the primary object of the assessee while exploiting the property. If it is found, applying such test, that main intention is for letting out the property, or any part thereof, the same must be considered as rental income or income from property. In case, it is found that the main intention is to exploit the immovable property by way of complex commercial activities, in that event, it must be held as business income."