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Petitioner: COMMISSIONER OF INCOME-TAX, BOMBAY VS Respondent: NATIONAL STORAGE (PRIVATE) LTD.Honorable Justice DESAIN. A. Palkhivala,G. N. Joshi
1969 P T D 245
1969 P T D 245
[Bombay (India)]
Before Y. S. Tambe and V. S. Desai, JJ
COMMISSIONER OF INCOME‑TAX, BOMBAY
versus
NATIONAL STORAGE (PRIVATE) LTD.
Income‑tax Reference No. 45 of 1960, decided on 3rd July 1962.
Business-----
---‑Company formed by film distributors for construc ting vaults for storing and preserving films and providing other amenities to film industry‑Income of company, whether' income from house property or business income‑Tests‑Income‑tax Act, 1422, Ss. 9 & 10.
Under the Cinematograph Film Rules, 1948, films were, required to be stored in specially constructed premises in conformity with the specifications laid down in the said Rules and situated at places to be approved by the Chief Inspector of Explosives. The assessee‑company was promoted by the film distributors of Bombay for the following objects, viz. (i) to carry on the business of storing and preserving films, chemi cals, cinema accessories and any articles of merchandise in cinema industry in suitable vaults specially constructed for the purpose and equipped with all the necessary arrangements ; (ii) to carry on the business of storage of articles in the cinema industry and for that purpose to build or construct such other vault or vaults as may be deemed necessary by the company ; (iii) generally, to carry on all sorts of business of safe deposit vaults in all its aspects and (iv) to acquire by purchase or lease a suitable plot of land and to construct thereon safe deposit vaults and other necessary buildings. The company purchased a place approved by the Chief Inspector and constructed some units on the said plot of land in conformity with the Rules and permitted the vaults to be used by the film distributors on payment of a monthly charge. The vault‑holder was given a key of the vault but the key of the entrance which permitted access to the vaults remained in the exclusive possession of the company. The company also rendered certain services to the vault‑holders such as fire service for which it paid an annual amount to the municipality, railway booking offices in the premises free of charge for the convenience of the vault‑holders for despatch and receipt of film parcels and a canteen and telephone. It maintained a regular staff for running the aforesaid services and the entire staff of the Indian Motion Pictures Distributors' Association was also paid Rs. 800 for the part‑time services rendered by them.
The Income‑tax Officer took the view that the income which the company obtained from these activities was to be assessed under section 9 of the Income‑tax Act (income from house property) and not under section 10 (business) Before the Appellate Tribunal, there was a difference of opinion between the members. The majority held that the agreements entered into by the company with the vault‑holders amounted to licences and not leases and, having regard to the terms of the agreements, the objects for which the company was incorporated and the conduct of the company including the various services rendered by it to the vault‑holders, the company was carrying on business in the premises and the income which it obtained was income from business assessable under section 10 of the Act. On a reference to the High Court :
Held, (agreeing with the view of the majority), that the income which the company obtained from the licence‑holders could not be regarded as income from property falling under section 9 of the 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 license holders, was not ownership of house property but its business and the income was, therefore, assessable under section 10 of the Act :
Held further, that though a key of the vault was given to each licence‑holder the company could be said to be in occupation of the said property for the purpose of its business within the meaning of section 9(1) and in this view also, the income was not assessable under section 9 but under section 10.
The principles to be applied in determining whether a certain income is income from house property or income from business laid down.
Ballygunge Bank Ltd. v. Commissioner of Income‑tax (1946) 14 I T R 409; Commercial Properties Ltd., In re I L R 55 Cal. 1057; East India Housing and Land Development Trust Co. Ltd. v. Commissioner of Income‑tax (1961) 42 I T R 49 (S C); Governors of the Rotunda Hospital, Dublin v. Coman (Surveyor of Taxes) (1920) 7 Tax Cas. 517; Jamshedpur Engineering & Machine Co. v. Commissioner of Income‑tax (1957) 32 I T R 41; Rohtas Industries Ltd. v. Commissioner of Income‑tax (1961) 41 I T R 524; Salisbury House Estate Ltd. v. Fry (1930) 15 Tax Cas. 266 and United Commercial Bank Ltd. v. Commissioner of Income‑tax (1957) 32 I T R 688 ref.
STATEMENT OF CASE
By these applications, the Commissioner of Income‑tax, Bombay City I, Bombay, requires the Appellate Tribunal to refer a question of law to the High Court of Judicature at Bombay, which is said to arise out of the Tribunal's order in I. T. As. Nos. 744 to 747 of 1958‑59. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order of the Tribunal, we hereby draw up a statement of the case agreed to by parties and refer it to the High Court of Judicature at Bombay under section 66(1) of the Income tax Act.
2. Till March 1948, the film distributors in the City of Bombay were storing their films in godowns situate at different places in the city. Because of a series of fire accidents in such godowns the film distributors were compelled by the Government to remove their godowns from the residential areas. The Government of India promulgated the Cinemato graph Film Rules, 1948, according to which the distributors were required to construct new godowns strictly in conformity with the specifications laid down in the rules and in a place to be approved by the Chief Inspector of Explosives, Government of India. A place at Mahim was so ap proved.
3. Accordingly, the film distributors of Bombay promoted the assessee‑company, which was incorporated on October 23, 1948.
4. A plot of land at Mahim (which was approved by the Government, as stated above) was purchased and 13 units were constructed thereon. Twelve units were the members of the Indian Motion Picture Distributors' Association who had floated the company and one unit at the special request of the Chief Inspector of Explosives, Government of India, 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 re‑winding of films and an upper floor for storage of films. These units were constructed in con formity with the requirements of, and the specification laid down m, the Cinematograph Film Rules, 1948; the walls and ceilings had to be of a particular width ; and automatic fireproof door had to be installed in one wall which would close immediately on the outbreak of fire in the vault ; the other walls had to be without any opening or window ; and one ventilation had to be provided in the ceiling. The units had to be built at a distance of 50 feet from one another.
5. The vaults were permitted by the company to be used by the film: distributors on terms and conditions in the agreement arrived at between them and the company. According to the agreement the vaults had to be used only for storing films and for no other purpose. Under the agreements classi fied as "A" licence, entered into with those members who had subscribed a larger amount towards the share capital of the company, the charges were Rs. 40 per month ; and under the agreements which were classified as "B" licence entered into with those members who had subscribed a smaller amount towards the share capital, the charges were Rs. 140 per month. The foreign film distributors to whom four vaults were given were originally charged Rs. 300 per month for each vault but later on the charges were reduced to Rs. 101 These agreements had more or less identical terms with minor variations here and there. A sample form of the agreement classified as "A" licence is hereto annexed and marked Annexure "A". Under these agreements the vaults were given initially for a period of five years. 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 company.
6. The company 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 company opened in the premises two railway booking offices free of charge for the convenience 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.
7. For the assessment years 1950‑51, 1951‑52 and 1952‑53 the Department made assessments on the company under section 10 of the Income‑tax Act. For the assessment years 1953‑54 and 1954‑55 the Income‑tax Officer took the view that the company should be assessed under section 9 and pot under section 10. His view was confirmed, on appeal by the Appellate Assistant Commissioner, who also rejected the company's alternative submission that the income if not taxed under section 10 should be taxed under section 12.
8. On further appeal to the Tribunal, the Judicial Member took the view that the agreement in question amounted to a lease and not a licence and the buildings could not be treated as the commercial assets of the com pany ; and the income was taxable under section 9, neither section 10 nor section 12 being applicable. The then President took the view that the company was carrying on business in these premises and the business was of a similar type as that carried on by the bank in safe deposit vaults, and the income was taxable under section 10. 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 therefrom is assessable under section 10 or section 9 ?"
The third Member agreed with the view taken by the then President. He held that the agreement in question amounted to a licence and not a lease and that, looking to the terms of the said agreements, the objects for which the company was incorporated and the conduct of the company including the various services rendered by it to the vault‑holders, the company carried on business in the premises and the income arising therefrom was assessable under section 10 of the Act. The judgments of the then President and the two other Members are hereto annexed and marked Annexure "B" (collectively).
9. In view of the majority judgment of the Tribunal, the question whether the quantum of income as computed under section 9 should be reduced did not require consideration.
10. On the facts stated above, the questions that arise are :
"(1) Whether, on the facts and circumstances of the case, the vaults were used for the purposes of the business and in come arising therefrom is assessable under section 10?
(2) If the answer to question No. 1 is in the negative, whether the income is assessable under section 9 or section 12?"
G. N. Joshi with R. J. Joshi for the Commissioner.
N. A. Palkhivala with B. A. Palkhivala and D. H. Dwarkadas for the Assessee.
JUDGMENT
DESAI, J.‑This is a reference under section 66(1) of the Indian Income‑tax Act (hereinafter referred to as the Act), and the questions which are raised thereon arise out of the orders of assessment of the National Storage Private Limited, Bombay (respondent herein), for the assessment years 1953‑54, 1954‑55, 1955‑56 and 1956‑57. The assessee‑company was promoted by the film distributors of Bombay and was incorporated on the 23rd of October 1948. The activity of the company, which was set out in clause (1) of the objects clause of the memorandum of association, "was to carry on the business of storing and preserv ing films, chemicals, cinema accessories and any articles of merchandise in cinema industry in suitable vaults specially constructed for the purpose and equipped with all the necessary arrangements." Clause 2 enabled the assessee‑company "to carry on the business of storage of articles in the cinema industry and for that purpose to build or construct such other vault or vaults as may be deemed necessary by the company". Clause (3) set out the objects of the company as "generally to carry on all sorts of business of sale deposit vaults in all its aspects". Clause (5) authorised the company "to acquire by purchase or lease a suitable plot of land and to construct thereon safe deposit vaults and other necessary buildings as may be thought fit by the company". What led to the incorporation of this company was the promulgation of the Cinematograph Film Rules, 1948, by the Government of India, under which films were required to be stored in specially constructed premises strictly in conformity with the specifications laid down in the said rules and situated at places to be approved by the Chief Inspector of Explosives, Government of India. Under these rules, a place at Mahim was approved by the Chief Inspector of Explosives, Government of India, as a suitable place for the construction of the film godowns. The company after its incorporation purchased a plot at Mahim, the place which was approved of by the Chief Inspector of Explosives, and constructed 13 units on the said plot of land in conformity with the specifications laid down in the Cinemato graph Film Rules of 1948. Twelve of these 13 units were constructed for members of the Indian Motion Pictures Distri butors Association, who had taken part in the floating of the company and the 13th unit was made available for the use of foreign film distributors in Bombay, who were not members of the Indian Motion Pictures Distributors Association. Each unit consisted of four vaults and each vault had a ground‑floor for re‑winding of films and an upper floor for storage of films. After the construction of these units, the vaults were permitted by the company to be used by the film distributors on terms and conditions of the agreements arrived at between them and the company. Some of these agreements which were entered into with the members of the Indian Motion Pictures Distributors Association, who had subscribed a large amount towards the share capital of the company, were classified as "A" licences and the charges for these. A licences were Rs. 40 per month. The other agreements, which were entered into with members of the Indian Motion Pictures Producers Association, who had only supplied a small share of capital, were classified as "B" licence‑holders and were charged at Rs. 140 per month. The licences granted to the foreign film distributors, for whom one unit of four vaults was reserved, were charged at Rs. 300 per month for each vault at the beginning but later on those charges were reduced to Rs. 100 per month. Under these agreements the right to use the vaults was given initially for a period of five years. The vault‑holder was given a key of the vault but the key of the entrances which permitted access to the vaults, remained in the exclusive posses sion of the company. The company also rendered certain services to the vault‑holders. It had installed a fire alarm and had obtained the fire service from the municipality for which it was paying a certain annual amount to the municipality. It had opened two railway booking offices in the premises free of charge for the convenience of the vault‑holders for dispatch and receipt of film parcels. It was also running a canteen in the premises and had installed a telephone. It also appears that it had maintained a regular staff for running the aforesaid services in the form of a secretary, a peon and two watchmen and a sweeper. Besides, the entire staff of the Indian Motion Pictures Distributors Association was paid Rs. 800 by the company for the part‑time services rendered by them. During the first three years after its incorpora tion, i.e. during the assessment years 1950‑51, 1951‑52 and 1952‑53, the Department assessed the company under section 10 of the Income‑tax Act. For the subsequent four assessment years, which is the period in question in the present reference the Income‑tax Officer took the view that the income which the company obtained was appropriately to be assessed under sec tion 9 and not under section 10 of the Act. He, accordingly, made the assessment for these years on that basis. In the appeal, which the assessee‑company filed before the Appellate Assistant Commissioner, the view taken by the Income‑tax Officer was confirmed. When the matter came before the Income‑tax Appellate Tribunal, there was a difference of opinion between the two Members of the Tribunal. According to the Judicial Member, the company had leased out its premises to the vault holders and the income which it obtained was the income from the house property, which appropriately fell under section 9 of the Act, and According to him, therefore, the Department was right in taxing the income under section 9 of the Act. In the view of the President, the agreements of the vault‑holders with the company were not leases but merely licences and that the company in granting these licences to the vault‑holders was carrying on business in the premises of a type similar to that carried on by banks in safe deposit vaults. According to him, therefore, the income, which the company obtained, was the income, from its business and was, therefore, taxable under section 10 of the Act. In view of this difference between the two Members of the Tribunal, the following question arising on the difference was referred to the third Member :
"Whether, on the facts and circumstances of the case, the vaults were used for the purposes of the business and, income arising therefrom is assessable under section 10 or section 9."
The third Member agreed with the view taken by the President. According to him, the agreements entered into by the company with the vault‑holders amounted to licences and not leases and having regard to the terms of the agreement, the objects for which the company was incorporated and the conduct of the company including the various services rendered by it to the vault‑holders, it was clear that the company was carrying on business in the premises and the income which it obtained was its income from business assessable under section 10 of the Act.
In accordance with the view taken by the President and the third Member, to whom the question was referred, the Tribunal allowed the assessee's appeal, set aside the orders of assessment passed by the department and directed that the income be computed under section 10 of the Act. On an application by the Department under section 66(1), the Tribunal has drawn up a statement of the case and referred the following two questions to this Court :
"(1) Whether, on the facts and circumstances of the case, the vaults were used for the purposes of the business and income arising therefrom is assessable under section 10?
(2) If the answer to question No. 1 is in the negative, whether the income is assessable under section 9 or section 12?"
The dispute, which arises on the present reference, is whether, on the facts and circumstances of the case, the income of the company is taxable under the head "income from business" under section 10 or under the head "income from property" falling under section 9 of the Act. The contention of the assessee- company is that it falls under the former, while the Department contends that it falls under the latter. Counsel for the revenue has contended that the income falls under section 9 because the source of the income is ownership of the property. According to him, the company has invested money in the construction of certain special type of buildings and in granting the licences to the vault‑holders, it has exploited its property and earned income therefrom. There is no business activity of the company other than the activity of any property owner letting out his property and earning income therefrom. According to him, therefore, the income which the company gets from its property is income which falls under section 9 of the Act.
It is contended on behalf of the assessee‑company on the other hand that the income in the present case is not derived either wholly or even substantially from the ownership of the property. The income is not derived from the mere letting of a tenement but the income is derived from a complex of letting the substantial part of which is other than the bare tenement. It is argued that the income is obtained for providing facilities for the storage of the films and for the services rendered in that connec tion, the providing of the vault for storage of the films being merely a small part of the transaction. The further argument is that the arrangement in the present case is in the course of and as a part of the business of the company and the enterprise which it has entered upon is of providing special facilities for the storage of films in accordance with the rules and specifications of the Indian Cinematograph Film Rules, 1948, and thus carry on the business of storage of films, etc. The activity of the company, therefore, in granting licence for the use of the vaults to the vault‑holders on the facts and circumstances of the case is a business activity and the income derived by the company is its income from business. The alternative argument of the assessee- company is that even if the income would have otherwise fallen under section 9, its case is covered by the exception to the said section since the premises are occupied by the assessee for its own business.
The counsel for the revenue in support of his submission that the income in the present case falls under section 9 of the Act has argued that the classification of the heads of income under section 6 of the Income‑tax Act is exclusive and exhaustive and the income which falls under each of these specific heads must be computed in the manner as provided in sections 7 to 12 and no other. Thus, according to him, if the income falls under the head "income from property", it must be brought to tax under section 9 and could not be taxed either under section 10 or section 12 of the Act. It does not matter, he contends, whether the property is held in the course of trade or the business of the assessee consists of dealing in property. The income so long as it is income from property, its source is the ownership of the property and not the business and must, there fore, be taxed under section 9 of the Act. In the present case, he argues, the income is from property : the company might have been started with the object of constructing property of the kind which it had constructed and given on licences to the vault‑holders and it may be that that is the business of the com pany. However, since the income, which the company is get ting, is from the letting of the property or giving it for use and occupation on licence basis, its income is income from property tax able under section 9 of the Act. The primary nature of the source of the income, according to the learned counsel, is the ownership and that nature is not in any way altered or changed because of certain additional services rendered by the property owner to the persons to whom it is let or given for use and occupation. According to him the services rendered by the company in the present case to the licence‑holders are incidental and of a minor character and are not such as would render the transaction not one of letting of property but carrying on a business activity apart from the letting of property. In support of these submissions he has invited our attention to the following cases :
(1) United Commercial Bank Ltd. v. Commissioner of Income‑tax (1957) 32 I T R 688.
(2) Commercial Properties Ltd., In re I L R 55 Cal. 1057.
(3) Ballygunge Bank Ltd. v. Commissioner of Income- tax (1946) 14 I T R 409.
(4) Salisbury House Estate Ltd. v. Fry (1930) 15 Tax Cas. 266.
(5) East India Housing & Land Development Trust Co. Ltd. v. Commissioner of Income‑tax (1961) 42 I T R 49 (S C).
United Commercial Bank Ltd. v. Commissioner of Income tax was a case not under section 9 but under section 8 of the Indian Income‑tax Act. The question considered in that case was whether the income from interest on securities which were held by the assessee as part of its trading assets in the course of its business fell under section 8 or under section 10 of the Indian Income‑tax Act. It was held in that case that it fell under section 8, which was a specific bead and not under section 10. Mr. Joshi has relied on this case for…
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