Taxation Law

Sultan Brothers (P) Ltd. v. Commissioner of Income Tax

[1964] 51 ITR 353 (SC)

Facts

Sultan Brothers owned a building in Bombay which had been specially fitted and furnished for use as a hotel.
The company let the building, together with its furniture and fixtures, for six years.
The lessee used the premises for running a hotel and certain ancillary activities.
The lease separately stated:
monthly rent of ₹5,950 for the building; and
monthly hire of ₹5,000 for the furniture and fixtures.
The company had never itself carried on the business of running a hotel in the premises.
It claimed that the entire receipt should be assessed as business income.
Alternatively, it argued that the building and furniture had been inseparably let and the entire income should be assessed under the residuary head, with the relevant allowances.
The Income Tax Officer assessed:
the building rent as income from property; and
the furniture hire as income from other sources.
The dispute reached a Constitution Bench of the Supreme Court.

Whether letting the furnished hotel building amounted to carrying on a business.
Whether rent from the building and hire from furniture had to be assessed separately.
What test determines whether the letting of a building is inseparable from the letting of machinery, plant or furniture?

Whether a particular letting amounts to business depends upon the facts of each case.
The court must ask whether the assessee is:
commercially carrying on a business through the asset; or
merely exploiting property as an owner.
An asset is not inherently a “commercial asset.”
It becomes commercial through the way in which it is used in an actual business.
The objects clause of a company is relevant but not conclusive.
Where a building and furniture, machinery or plant are inseparably let, the combined receipt may fall under the residuary head rather than being divided between property income and other-source income.
Inseparability depends upon the intention of the parties:
Were the building and assets intended to be enjoyed together?
Did the parties intend one practical composite letting?
Would either have been let independently without the other?

Sultan Brothers had not previously conducted a hotel business.
It did not temporarily lease an already functioning hotel undertaking while intending to resume the business.
It simply constructed and furnished the building and allowed another person to operate the hotel.
The lessor’s obligations, such as:
maintaining insurance;
replacing certain furniture;
painting the building;
assuring quiet enjoyment, were normal obligations under a furnished-property lease.
They did not show that Sultan Brothers was participating in the lessee’s hotel business.
Therefore, the letting was exploitation of property by its owner and not the carrying on of a hotel business.
However, the Court disagreed with automatically separating the building rent from the furniture hire.
The fact that separate amounts were mentioned in the same lease did not prove that the lettings were commercially separable.
A lease may state separate prices for accounting purposes while the parties still intend that:
the furnished building must be taken as one unit;
neither the building nor furniture would be let alone.
The Court rejected the view that furniture or machinery had to be the “primary” letting and the building merely incidental.
The statute required only that the two lettings be inseparable in the parties’ intention.
Since the lower authorities had not properly applied this test, the matter required reconsideration on that basis.

The Supreme Court held that the letting did not amount to the carrying on of a hotel business.
The company’s primary claim for assessment as business income failed.
It laid down the intention-based test for inseparable letting.
Where the building and furniture are inseparably let:
the combined income falls under the residuary head;
it is not necessary that the letting of furniture be primary.
The matter was remitted for determination of whether the particular letting was inseparable under that test.