Commissioner of Income-Tax, Bombay
City-1, Bombay Vs. National Storage Pvt. Ltd., Bombay [1967] INSC 129 (26 April
1967)
26/04/1967 SIKRI, S.M.
SIKRI, S.M.
SHAH, J.C.
RAMASWAMI, V.
CITATION: 1968 AIR 70 1967 SCR (3) 813
CITATOR INFO :
R 1972 SC2315 (13)
ACT:
Indian Income-tax Act (11 of 1922), ss. 9
& 10-Assessee's premises hired out-Not an ordinary lease but for purposes
of its own business-Assessment under which head.
HEADNOTE:
The assessee-Company was promoted because the
Government of India promulgated the Cinematograph Rules, 1948, according to
which distributors of films were required to store films in godowns constructed
in conformity with the specifications laid down in the Rules. The assesses
constructed vaults of special design with special doors and electrical fittings
as required and entered into agreements with several distributors who became
vault-holders paying certain amounts for the use of the vaults. The key to each
vault was retained by the vault-holder, but the key to the entrance which
permitted access to the vaults was kept in the exclusive possession of the
assessee. The assessee rendered valuable service to the vault-holders by
installing a fire alarm, by opening Railway Booking Offices in the premises and
by employing a regular staff, and incurred the necessary expenditure. The
vaults were used for the specific purpose of storing films and other activities
connected with the examination, cleaning, waxing and rewinding of the films.
On the question whether the assessee was to be
assessed to Income tax under s. 9 or s. 10 of the Income-tax Act, 1922,
HELD : The assessee was carrying on business,
that is, carrying on an adventure or concern in the nature of trade in the
premises, and was therefore liable to be assessed under s. 10 and not under s.
9 of the Act.
The Act does not contemplate assessment of
property under s. 9 in respect of the rental income and assessment under s. 10
in respect of the extra income derived from the carrying on of an adventure or
concern in the nature of trade if the assessee is in occupation of the premises
for the purpose of the business. The scheme of the Act is that the various
heads of income, profits and gains enumerated in s. 6 are mutually exclusive,
each head being specific to cover the item arising from a particular source,
and whether an income falls under one head or another has to be decided
according to common notions of practical men. In the present case, the
agreements are licences and not leases, the assessee being in occupation of all
the premises for purposes of its own concern, namely, the hiring out of
specially built vaults and providing services to the vault-holders, who were
the licensees. The subject which was hired out was a complex one and the return
received by 'the assessee was not income derived from the exercise of property
rights, but was derived from carrying on an adventure or concern in the nature
of trade. [8l8C; [S20C-F] The Governors of the Rotunda Hospital, Dublin v.
Coman, 7 T.C. (H.L.) 517, applied.
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 1048- 1051 of 1966.
814 Appeals from the judgment and order dated
July 2, 3, 1962 of the Bombay High Court in Income-tax Reference No. 45 of
1960.
T. V. Viswanatha Iyer, A. N. Kirpal and R. N.
Sachthey, for the appellant (in all the appeals).
S. T. Desai, F. N. Kaka, S. K. Dholakia and
0. C. Mathur for the respondent (in all the appeals).
The Judgment of the Court was delivered by
Sikri, J. These appeals by certificate granted by the Bombay High Court under
S. 66A(2) of the Indian Income-tax Act, 1925 -hereinafter referred to as the
Act-are directed against its judgment in Income-tax Reference No. 45 of 1960 by
which it answered the first question of law referred to it by the Income-tax
Appellate Tribunal in favour of the National Storage Ltd., Bombay, hereinafter
referred to as the assessee. The following questions were referred to the High
Court by the Appellate Tribunal at the instance of the Commissioner of
Income-tax, Bombay City-1, Bombay :
"1. Whether on the facts and
circumstances of the case, the vaults were used for the purposes of the
business and income arising there from is assessable under Section 10 ?
2. If the answer to question I is in the
negative, whether the income is assessable under Section 9 or Section 12
?" The relevant facts and circumstances are as follows :-The assessee was
promoted because the Government of India promulgated the Cinematograph Film
Rules, 1948, hereinafter referred to as the Film Rules according to which the
distributors were required to store films only in godowns constructed strictly
in conformity with the specifications laid down in the Film Rules and in a
place to be approved by the Chief Inspector of Explosives, Government of India.
A place at Mahim was approved and the assessee, after purchasing a plot of land
there constructed 13 units thereon, 12 units meant for the Members of the
Indian Motion Picture Distributors' Association, who had floated the Company,
and one unit for Foreign Film Distributors in Bombay, who were not members of
the Association. Each unit was divided into four vaults, having a ground floor
for rewinding of films and an upper floor for storage of films.
These units were constructed in conformity
with the requirements of and the specifications laid down in the Film Rules.
The walls and ceilings were of a particular width and automatic fire proof door
was installed in one wall which would close immediately on the outbreak of 815
fire in the vault. Other walls had no opening or window and one ventilation was
provided in the ceiling. The units were built at a distance of 50 feet from one
another. The assessee entered into agreements with the film distributors.
There were two types of agreements; one was
classified as 'A' Licence and the other as 'B' Licence. The agreements were
more or less in identical terms with minor variations here and there. One
agreement has been annexed to the statement of the case as annexure 'A' and
some of the relevant clauses are as under:
Clause 2 provides that the licensee shall not
use the vault for any other purpose except for storing cinema films and shall
use the ground floor (examination room) only for the purpose of examination,
repairs, cleaning, waxing and rewinding of the films. According to clause 9,
the licensee could not transfer, assign, sublet, underlet or grant any licence
in respect of or part with the possession of the vault or any part thereof
without the written permission of the assessee. According to clause 12, the
assessee was entitled to revoke, determine and put an end to the licence by
giving the licensee at any time seventy days previous notice in writing.
Further, the licensee was not entitled to terminate the licence for a period of
five years except with the consent in writing of the assessee. According to
clause 13, the assessee was entitled to terminate the licence by giving two
days' notice in writing to the licensee and allocate to the licensee
alternative space in another vault of the said property. Clause 16 makes it
clear that nothing contained in the agreement shall be construed to create any
right other than the revocable permission granted by the assessee in favour of
the licensee of the licensed vault nor as conferring any right to quiet
enjoyment or other right except so far as the assessee has power to grant the
same and the assessee may of its mere motion and absolutely retain possession
of the licensed vault with all additions, fittings and fixtures thereto.
Apart from these conditions, the key to each
vault was retained by the vault-holder, but the key to the entrance which
permitted access to the vaults was kept in the exclusive possession of the
assessee. It is further stated in the statement of the case that the assessee
also rendered other services to the vault-holders. A fire alarm was installed
and an annual amount was paid to the municipality towards fire services. The
assessee opened in the premises two Railway Booking Offices free, of charge for
the con- venience of the members for despatch and receipt of film parcels. A
canteen was also run in the premises for the benefit of the vault-holders and a
telephone had been provided for them. 'A' licensees paid Rs. 40/- per month
while 'B' licensees paid Rs. 140/- per month. The Foreign Film Distributors
were originally charged Rs. 300/- per month but later on the charges were
reduced to Rs. 100/-.
816 For the assessment years 1950-51, 1951-52
and 1952-53, assessments were made on the assessee under S. 10 of the Act, but
for the assessment years 1953-54 and 1954-55, the Income-tax Officer took the
view that the assessee should be assessed under s. 9 and not under s. 1O. His
view was confirmed on appeal by the Appellate Assistant Commissioner, who also
rejected the assessee's alternative submission that the income if not taxed
under S. 10 should be taxed under s.
12. On further appeal to the Tribunal, there
was a difference of opinion between the Judicial Member, who was the.
President, and the Accountant Member. There being a difference of opinion, the
following question was referred to a third Member:- "Whether on the facts
and circumstances of the case, the vaults were used for the purposes of the
business and income arising there from is assessable under Section 10 or
Section 9." The third Member, agreeing with the President, held that the
assessee was carrying on business in these premises and -the business was of
similar type as carried on by a bank in letting safe deposit vaults, and income
was taxable under S.
10. As already stated, the Appellate
Tribunal, at the instance of the Commissioner referred the two questions which
we have already set out above. The High Court answered the first question in
favour of the assessee. The High Court after reviewing several cases deduced
seven propositions. The sixth and seventh propositions were these:
"6. In cases where the income received
is not from the bare letting of the tenement or from the letting accompanied by
incidental services or facilities, but the subject hired out is a complex one
and the income obtained is not so much because of the bare letting of the
tenement but because of the facilities and services rendered, the operations
involved in such letting of the property may be of the nature of business or
trading operations and the income derived may be income not from exercise of property
rights properly so- called. so as to fall under Section 9 but income from
operations of a trading nature falling under Section 10 of the Act.
7. In cases where the letting is only
incidental and subservient to the main business of the assessee, the income
derived from the letting will not be the income from property falling under
Section 9 and the exception to Section 9 may also come into operation in such
cases." .lm0 Then the High Court after examining the facts and circumstances
concluded :
81 "The income, which is obtained by the
company in the present case, required considerable expenditure to be incurred
by the company, which is ordinarily not incurred by a landlord who turns his
house property to profitable account and which is also not taken into.
account in the deductions permissible under
Section 9. In our opinion, therefore, the income which the company obtained
from the licence-holders in the present case, could not be regarded as income
from property failing under Section 9 of the Indian Income-tax Act.
The activity of the company in earning that
income was a business activity and the source of the income, which the company
obtained from the licence-holders, was not the ownership of the house property
but its business." The Commissioner having obtained certificate of fitness
from the High Court, the appeal is now before us.
The learned counsel for the appellant, Mr. T.
V. Viswanatha Iyer, has put the following propositions before us :- ( 1) The
assessee is the owner of property and has to be, assessed as such under s. 9 of
the Act. Any incidental services rendered as owner do not alter the character
of the relationship between the assessee and the users of the vaults, and there
is no complexity as far as the services are concerned;
(2) In any event, assuming for a moment that
certain services are rendered, they are independent of and in addition to, the
ownership of the property;
(3) The assessee is not carrying on any trade
or business by way of letting or otherwise;
(4) The assessee is not in occupation of
these vaults for the purpose of his business, and if any room is occupied by
its staff, that occupation is different from the occupation by the users;
(5) There is no plant or machinery which has
been let to, the users and the building has been let as something inseparable
from the plant and machinery, if any, which exists; and (6) Even if the
assessee is carrying on business insofar as it is an owner it has to be taxed
under s. 9; additional income has, to be dealt with under S. 10.
Mr. S. T. Desai, the learned counsel for the
assessee formulated his proposition as follows :-Distinction has to be drawn
between income derived by exercise of property rights properly so called on the
one hand, and on the other hand income derived from licensees who are allowed
the use of any property, specially 818 constructed safe deposit vaults for
securely storing hazardous or inflammable films, or similar goods, or safe
deposit lockers for securely keeping valuables and for which purpose special
amenities, are given; in the latter class of cases the object is a complex ,one
and not merely letting of property and the activities amount to carrying on
trade or business, property being the subjectmatter of business. He further
says that propositions sixth and seventh as formulated by the High Court are
sound.
The answer to the question depends upon the
interpretation ,of ss. 9 and 1 0 of the Act, and the ascertainment of 'the
activities of the assessee. It is not disputed that the scheme of the, Indian
Income-tax Act, 1922, is that the various heads of income, profits and gains
enumerated in section 6 are mutually exclusive, each head being specific to
cover the item arising from a particular source.
Further "whether an income falls under
one head or another has to be decided according to the common notions of
practical men for the Act does not provide any guidance in the matter".
[vide Sarkar J., in Nalinikant Anbalal Mody v. Narayan Row(1)].
The relevant portion of S. 9 reads as follows
"9. (1) The tax shall be payable by an assessee under the head 'Income
from property' in respect of the bona fide annual value of property consisting
of any buildings or lands appurtenant thereto of which he is the owner, other
than such portions of such property as he may occupy for the purposes of any
business, profession or vocation carried on by him the profits of which are
assessable to tax, subject to the following allowances, namely........
'Section 10(1) reads :
"10. (1) The tax shall be payable by an
assessee under the head 'Profits and gains of business, profession or vocation'
in respect of the profit or gains of any business, profession or vocation
carried on by him.
The word "business" is defined in
2(4) to include "any trade. commerce, or manufacture or any adventure or
concern in the nature of trade, commerce or manufacture." The question
which really arises in the present case is whether the assessee is carrying on
any business i.e., is it carrying on any adventure or concern in the nature of trade,
commerce or manufacture ? If it is carrying on any adventure or concern in the
nature of trade, then S. 9 specifically excludes the income derived 'from
property from computation under S. 9, if the property is (1) 61 I.T.R. 428 at
p. 432.
819 occupied for the purpose of adventure or
concern. Similar questions have arisen under the English Income-tax Act.
Though the scheme of the English Income-tax
Act is different, some of the cases throw light on the question as to
"what is adventure or concern in the nature of trade." In the
Governors of the Rotunda Hospital, Dublin v. Coman(1), the Governors of a
maternity hospital established for charitable purposes were owners of a
building- which comprised rooms adapted for public entertainments, and which
was connected with the hospital buildings proper by an internal passage. The
hospital derived a substantial income from letting the rooms for public
entertainments, concerts, etc., for periods varying from one night to six
months and applied the income to the general maintenance of the hospital. The
rooms were let upon terms which included the provision of seating heating-, and
attendance, but an additional charge was made for gas and electricity consumed.
The House of Lords held that the profits
derived from the letting of the rooms were assessable to Income Tax under
Schedule D, either under Case 1, as the profits of a trade or business, or
under Case VI of that Schedule.
The learned counsel for the assessee strongly
relies on this case. It seems to us that the reasoning of the Law Lords in
their speeches does assist the assessee. The Lord Chancellor observed ,it p.
582 "Profits are undoubtedly received in the present case which are
applied to charitable purposes, but they are profits derived not merely from
the letting of the tenement but from its being let properly equipped for
entertainments, with seats, lighting, heating and attendance. The subject which
is hired out is a complex one. The mere tenement as it stands, without
furniture, etc., would be almost useless for entertainments. The business of
the Governors in respect of those entertainments is to have the hall properly
fitted and prepared for being hired out for such uses. The profits fall under
Schedule D, and to such profits the allowance in question has no application,
as they cannot be properly described as rents or profits of lands, tenements,
here ditaments or heritages. They are the proceeds of a concern in the nature
of a trade which is carried on by the Governors, and consists in finding
tenants and having the rooms so equipped as to be suitable for letting."
In our view the High Court was right in holding that the assessee was carying
on an adventure or concern in the nature of trade, The assessee not only
constructed vaults of special design and special doors and electric fittings,
but it also rendered 1) 17 T.C. 517.
820 other services to the vault-holders. It
installed fire alarm and was incurring expenditure for the maintenance of fire
alarm by paying charges to the Municipality. Two Railway Booking Offices were
opened in the premises for the despatch and receipt of film parcels. This, it
appears to us, is a valuable service. It .also maintained a regular staff
consisting of a Secretary, a peon. a watchman and a sweeper, and apart from
that it paid for the ,entire staff of the Indian Motion Picture Distributors'
Association an amount of Rs. 800/- per month for services rendered to tile
licensees. These vaults could only be used for the specific purpose ,of storing
of films and other activities connected with the examination, repairs,
cleaning, waxing and rewinding of the films.
But the learned counsel for the Commissioner
says that s. 9 ,applies because the assessee cannot be said to be in occupation
,of the premises for the purpose of any concern of its own. He says that the
licensees were in possession of the vaults as lessees and not merely as
licensees. But, in our opinion, the agreements are licences and not leases.
The assessee kept the key of the entrance
which permitted access to the vaults in its own exclusive possession. The
assessee was thus in occupation of all the premises for the purpose of its own
concern, the concern being the hiring out of specially built vaults and
providing special services to the licensees. As observed by the Lord Chancellor
in the Governors of the Rotunda Hospital, Dublin v. Coman(1), "'tile
subject which is hired out is a complex one" and the return received 'by
the assessee is not the income derived from the exercise ,of property rights
only but is derived from carrying on adventure or concern in the nature of
trade.
There is no force in the sixth submission of
the learned counsel for the appellant because the Indian Income-tax Act does
not contemplate assessment of property under S. 9 in respect of the rental
income and assessment under s. 10 in respect of the extra income derived from
the carrying on of an adventure or concern in the nature of trade if the
assessee is in occupation of the premises for the purposes of the business. The
scheme of the English Act is different and special statutory provisions exist
in the English Income-tax Act (see Rule 5, Schedule D, English Income tax Act,
1918).
A number of other cases have been cited
before us but it is not necessary to deal with them because the answer to the
question whether an activity is an adventure or concern in the nature of trade
or business must depend upon the facts of each case.
Accordingly the appeals fail and are
dismissed with costs.
V.P.S. Appeals dismissed.
(1) 7 T.C. 517.
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