Composite letting of furnished hotel premises may fall under residuary income rules when building and fixtures are meant to be enjoyed together.
Income from letting a furnished hotel premises depends on the true character of the arrangement: if the owner is not carrying on a hotel business, the building receipt is not business income under section 10 but falls to be examined under the property and other-source heads. Where the lease shows that the building, furniture and fixtures were intended to be enjoyed together as one composite letting for hotel use, the letting is inseparable for section 12(4) purposes. In that event, rent attributable to the building and hire attributable to the furniture and fixtures are split accordingly, with the composite receipt assessed under section 12 rather than sections 9 or 10.
Issues: (i) Whether the income from the letting of the furnished hotel building was assessable as business income under section 10 of the Income-tax Act, 1922, or under the heads of property and other sources. (ii) Whether the letting of the building and the furniture and fixtures was inseparable so as to attract section 12(4) of the Income-tax Act, 1922.
Issue (i): Whether the income from the letting of the furnished hotel building was assessable as business income under section 10 of the Income-tax Act, 1922, or under the heads of property and other sources.
Analysis: The heads of income in the Act are mutually exclusive. The character of the receipt depends on whether the letting amounts to the carrying on of business or merely the exploitation of property by its owner. On the facts, the appellant did not carry on a hotel business in the premises; the lease covenants were ordinary covenants for a furnished building and did not amount to rendering hotel services or carrying on a business undertaking.
Conclusion: The income from the building was not assessable under section 10 as business income.
Issue (ii): Whether the letting of the building and the furniture and fixtures was inseparable so as to attract section 12(4) of the Income-tax Act, 1922.
Analysis: Section 12(4) contemplates a case where the letting of the building is inseparable from the letting of the furniture or machinery, on the footing that the composite letting is not covered by the specific head in section 9. Inseparability depends on the intention of the parties, namely whether the assets were meant to be enjoyed together as one letting. The lease showed that the building and the furniture and fixtures were to be used together for the running of the hotel and that neither was intended to be enjoyed separately from the other.
Conclusion: The letting was inseparable and the rent from the building was assessable under section 12(4), with the furniture and fixtures assessable under section 12(3).
Final Conclusion: The income from the furnished hotel premises had to be split between rent from the building and hire from the furniture and fixtures, with allowances allowed under section 12, and no part was assessable under sections 9 or 10.
Ratio Decidendi: Where a building and furniture or plant are let together under a single intended commercial arrangement for joint enjoyment, the composite letting may fall within the residuary head under section 12(4) even though the owner is also the landlord of the building.