Bombay High Court
M/S.M. Visvesvaraya Industrial ... vs The Commissioner Of Income Tax on 25 October, 2012
Bench: M.S. Sanklecha
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vai
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX REFERENCE NO.78 OF 1998
M/s.M. Visvesvaraya Industrial Research &
Development Centre, World Trade Centre,
Cuffe Parade, Mumbai-400 005 ...Applicant
.Versus.
The Commissioner of Income Tax,
Mumbai City-III, Mumbai ...Respondent
Mr.Firoze B. Andhyarujina, Senior Counsel with Mr.Ajay
Khatlawala and Ms.Rajani Divkar I/b Little & Co. for the
Applicant.
Mr.P. Daniel for the Respondent.
Ms.P.S. Cardozo for the Appellant in Notice of Motion No.449 of
2010 in Writ Petition No.3284 of 2004.
CORAM : S.J. VAZIFDAR AND
M.S. SANKLECHA, JJ.
DATE OF RESERVING : 18TH SEPTEMBER, 2012.
DATE OF PRONOUNCEMENT : 25TH OCTOBER,
2012.
JUDGMENT: (PER S.J. VAZIFDAR, J.) :-
1. This reference under section 256 (1) of the Income Tax
Act,1961 arises out of Reference Application Nos.306 and 307
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filed by the assessee in respect of a common order of the
Income Tax Appellate Tribunal dated 29th March, 1996 in ITA
Nos.6351/B/93 and 1717/B/94 pertaining to assessment years
1989-90 and 1990-91.
(A) The Tribunal on the assessee's application drew up
a statement of case and referred the following eight questions
and an additional question for the year 1990-91 for the opinion
of this Court :-
"(1) Whether, on the facts and in the circumstances of the
case, the Tribunal was right in its conclusion that
the assessee was not entitled to exemption under
section 11 of the Income Tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of
the case, the Tribunal was right in its conclusion
concerning clauses 2, 4, 5, 6, 7, 20 and 24 of the
Memorandum of Association of the assessee are
not objects of general public utility and thereby do
not fall within the meaning of section 11 of the
Income-Tax Act, 1961 ?
(3) Whether, on the facts and in the circumstances of the
case, the Tribunal was right in its conclusion that
the construction activity of World Trade Center,
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Centre 1 and IDBI Centre were activities of
business ?
(4) Whether, on the facts and in the circumstances of the
case, the Tribunal was right in its conclusion that
the establishing of the World Trade Center cannot
be object of public utility so as to be covered by the
provisions of section 11 of the Income-Tax Act,
1961 ?
(5) Whether, on the facts and in the circumstances of the
case, the Tribunal was right in coming to Its
conclusion that the activity of the assessee would
also be hit by the provisions of section 11 (4A) of
the Income-Tax Act, 1961 ?
(6) Whether, on the facts and in the circumstances of the
case, the Tribunal was right in its conclusion that
the transaction was one of sale of lease-hold rights
of use of space and not of leasing ?
(7) Whether, on the facts and in the circumstances of the
case, the Tribunal was right in its conclusion that
the primary basic rent and the parking rent were
assessable as income from profits and gains of
business or profession ?
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(8) Whether, on the facts and in the circumstances of the
case, the Tribunal was right in its conclusion that
the amount appropriated towards a sinking fund
was part of the rent received by the assessee and
was in the nature of revenue receipt ?
Additional Question for A. Y. 1990 - 91.
(1) Whether, on the facts and in the circumstances of the
case, the Tribunal was right in directing to adopt the
standard rent fixed by the Municipal Authorities as
the annual value instead of the actual rent realised
by the assessee ?"
(B). By an order dated 21st March, 2003, in circumstances
we will state later, Questions 1 and 6 were reframed as
follows :-
"Question No. 1:- Whether on the facts and in the
circumstances of the case, the applicant complied with
the provisions of section 11 (Applicant of income,
Accumulation), 11 (4A), 12 and 13 for the assessment
year 1989-90 and 1990-91 and is therefore exempt
from Tax ?
Question No. 6: Whether on the facts and or the
circumstances of the case, the applicant was right that
only 1/60th of the advance can be assessed as its
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income for the year as the tribunal had rightly held it
as transaction of lease and not of sale ?"
2. The only questions that were pressed before us by
Mr.Andhyarujina, the learned senior counsel appearing on
behalf of the assessee, were questions 1, 6, 7 and 8 and the
additional question for the A.Y.1990-91.
3. By an order and judgment dated 15 th March, 2001
(251 ITR 852), this Court remanded the matter to the Tribunal
for its decision on two points. We will refer to the judgment in
some detail later. Pursuant thereto the Tribunal on 29 th
November, 2001 made a remand report. The Reference is,
therefore, now heard finally.
4. The questions referred to this court require a
reference to the facts in some detail.
5. The All India Manufacturers Organisation and
Industrial Foundation conceived the idea of establishing a World
Trade Center in Mumbai. They convened a meeting of
prominent industrialists in Mumbai on 14 th April, 1969 under the
presidentship of the then Finance Minister of the Government of
Maharashtra.
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This led to the formation of the assessee as a
company under section 25 of the Companies Act, 1956. The
Department of Company affairs granted the assessee a license
under section 25 of the Companies Act on 12 th June, 1970 and
the certificate of incorporation was issued on 26th June, 1970.
6(A). The objects of the assessee are set out in Part III of its
Memorandum of Association.
(i).
The main object of the assessee as set out in clause
A of Part III is as under :-
" III. A. THE MAIN OBJECTS OF THE CENTRE TO
BE PURSUED BY THE CENTRE ON ITS
INCORPORATION ARE:
1. To organise, sponsor, promote, establish,
conduct or undertake scientific research in any way or
by any means whatsoever and in any area or field.
"Scientific research" in the above clause shall mean
any activities for the extension of knowledge in the
fields of natural or applied science, including
agriculture, animal husbandry or fisheries. If the
definition of "scientific research" in section 43 (4) (I) of
the Income-Tax Act, 1961, or the corresponding
provision of any new law, is hereafter amended, the
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amendment shall apply to the connotation of
"scientific research" in this clause."
(ii). Clause B of Part III of The Memorandum of
Association also enumerates 28 incidental or ancillary objects. It
is important to emphasise the very first clause which reads as
under :-
"B. OBJECTS INCIDENTAL OR ANCILLARY TO THE
ATTAINMENT OF MAIN OBJECTS:
To do generally all acts and undertake all activities
which are conducive or incidental to the above-
mentioned Main objects, and more particularly the
following:"
The preface to the incidental or ancillary objects in
clause 1 is followed by specific incidental or ancillary objects.
(B). It is also necessary to note some of the Articles in the
Articles of Association of the assessee.
"1. Interpretation
In the interpretation of all these articles (that) the
following words and expressions shall have the
following meanings, unless repugnant to the subject
or context: -
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(iii) "the Council" shall mean the Council of
Management of the Centre constituted in the manner
prescribed in these Articles.
(xii) "Managing Committee" means the Committee
appointed (by) the Council in the manner prescribed
in these Articles."
Article 18 provides for the Constitution of the Council
of Management. The council comprises of 50 members elected
from the members of the Centre and not more than 5 members
co-opted by the elected members of the Council, presidents of
certain chambers of commerce etc. nominees of the
Government of Maharashtra, certain authorities/officers of the
government etc. Article 19 reads as under :-
"19. The affairs of the Centre shall be
managed by the Council who may exercise all
such powers of the Centre and are not expressly
directed by the constitution of the Centre or
modification thereof for the time being in force or
are not required by these articles to be exercised
by the Centre in General Meeting."
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Article 30 which deals with various aspects relating to
the Managing Committee constitution. It provides that The
Council will delegate any or all of their powers to the Managing
Committee and that the Managing Committee can constitute
sub-committees for any specific purpose with such powers as it
may delegate.
7. The Department of Revenue on 6 th April 1970 notified
the assessee as a Council of Scientific and Industrial Research
for the purposes of section 35 (1) (ii) of the Act. The assessee
had therefore been recognised as a scientific research institution
by the CBDT from its inception. This recognition was however
discontinued with effect from 31st March, 1981 in
circumstances we will mention later.
8(A). By a resolution dated the 16th October, 1970 the
Government of Maharashtra accorded sanction to lease an area
of about 6 hectare and 96.49 ares of land to the assessee
subject to the terms and conditions mentioned in an
accompanying memorandum of terms and conditions. It is not
necessary to set out the terms and conditions of this resolution
as it was superseded by a resolution dated 18th November,
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1974.
(B) However pursuant to this resolution the assessee was
put in possession of the said land on 2nd May, 1972.
9. The Government of Maharashtra by a resolution dated
18th November, 1974 superseded the earlier resolution dated
16th October, 1970. By this resolution sanction was accorded to
the grant of a lease to the assessee of the said land on the
terms and conditions mentioned in Appendix "A" thereto,
clauses 7 and 12 whereof read as under :-
"7) The lessees shall not assign underlet
part with possession of the demise of land or
transfer the lessees interest therein without the
previous consent in writing of the Less or. The
less or will be at liberty to refuse such consent
granted subject to such condition including a
condition requiring payment of premium as the
Less or me in his discretion thinks it. The lessee
will be at liberty to underlet any part or parts of the
proposed buildings without such permission after
the same are completed.
12) The land shall be used by the lessees
only for electing or constructing their own
buildings or structures to house or accommodate
either for its own use or for letting out inter alia
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scientific research bodies, trade and/or industrial
museums, research Centre and/or laboratories,
libraries, bureaus, Shopping arcades exhibitions,
a World Trade Center (inclusive of all the services
provided by such a Centre), offices auditoria
and/or halls for concerts or conferences or
recreational or cultural activities, or residential
quarters for the staff and visitors from upcountry
or abroad, planetarium and cafeteria and/or
restaurants but not a hotel."
10.
The assessee entered into agreements with various
parties (referred to herein as lease agreements) on the terms
and conditions contained therein. Our attention was invited to
two samples of such lease agreements in respect of premises in
Centre-1 and the Arcade. Most of the terms and conditions
thereof are similar. We will refer to the relevant portions of the
first sample extensively. Suffice it to note that whereas in the
first sample, the rent for the premises has four components viz.
primary basis rent, secondary basic rent, common outgoing rent
and parking space rent in the second sample, the rent consists
of three components viz. basic rent, common outgoing rent and
parking space rent. We will refer to the relevant provisions of
the lease agreements at the appropriate stages.
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11. As stated earlier, the recognition granted on 6 th April,
1970, under section 35(i)(ii) was withdrawn with effect from 31 st
March, 1981, in circumstances we will mention while answering
Question 1.
12. On 8th February 1984 the Commissioner of Income
Tax, Mumbai, issued a certificate in favour of the assessee
under section 12 A.
13. The assessee filed its return of income for the year
1989-90 showing a business loss of Rs. 9 14.42 lakhs.
14. The Assessing Officer held that the transaction
between the assessee and the lessees was/constituted a sale of
the premises and not a lease. He treated the difference between
the "advance rent" received and the total cost of construction as
income from the sale of the buildings under the head "profits
and gains from business"; treated the sinking fund as taxable
income and also treated the interest income from investments
as the assessee's income. He accordingly assessed the income
under section 143 (3) at Rs.10,71,18,176/-.
In the appeal before the Commissioner of Income Tax
(Appeals) the assessee claimed exemption under section 11 on
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the ground that its activities constituted general public utility
within the meaning of section 2 (15). The assessee challenged
the finding that the transaction between itself and the lessees
was a sale and not a lease. The CIT (Appeals) held the
"advance rent" received by the assessee to be a premium and
held it liable to tax as business income. Alternatively he held the
"advance rent" as a capital receipt and the same was
considered by him as short-term capital gain. The claim for
exemption under section 11 was rejected.
By an order dated 29th March, 1996 the Tribunal held
that the transactions between the assessee and the lessees
were one of "sale of leasehold rights of use of space" and that
the assessee retained only a right to charge monthly rent and
transfer fees in respect of the right of space leased out. The
Tribunal also rejected the claim for exemption under section 11
on the ground that the assessee had not obtained registration
under section 12 A.
15. The above reference was made to this court in which
the order dated 15th March, 2001 (MANU/MH//0504/01 = 251
ITR 852 ) was made remanding the matter on two questions.
The court held that there was no concept in law of "sale of
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leasehold rights of use of space". It was stated on behalf of the
Department that it was unable to support such a proposition
either. The court therefore remitted the matter to the Tribunal
with a specific direction to reconsider this point in the light of the
contentions of the parties in the assessment proceedings.
Secondly this court considered the issue of the
certificate under section 12 A. As it would in any event be
necessary for us to refer to the observations of the court in this
regard in detail it would be convenient to set them out here.
They read as under :-
"The said certificate is on record. It has been
issued by the competent authority. It states that
the delay has been condoned. Under Section 12A
of the Act, the certificate was required to be issued
by the competent authority. In the present case the
certificate has not been revoked. Further, in the
present case, we do not know the basis on which
the Tribunal has come to the conclusion that
normally, a certificate granting recognition is
issued for a specific period. In the case of New Life
in Christ Evangelistic Association v. CIT
MANU/TN/0568/1998 : [2000]246ITR532(Mad),
the assessee made an application under Section
12A for registration. It was rejected. Being
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aggrieved by the rejection, the assessee filed a
writ petition against the Commissioner of Income
Tax directing it to register the assessee under
Section 12A of the Act. The Madras High Court
held that two conditions are provided for
registration under Section 12A of the Act. Firstly,
that the persons should have made an application
for registration in the prescribed form and in the
prescribed manner to the prescribed authority
within the specified time and the second condition
provides for the keeping of the accounts in a
particular manner and further that such accounts
were required to be audited. The court held that
the section did not show that in order to get
registration under Section 12A, there is necessity
of first establishing as to how the assessee would
be able to claim exemption under Section 11 or
Section 12. That there is nothing in the section to
suggest that an institution of a religious nature is
precluded from getting registration under Section
12A. That, the question of exemptions under
Section 11 and Section 12 would come only when
the exemptions are claimed at the time when the
assessee is assessed to tax. That at the stage of
registration to consider whether the said assessee
would be entitled to the benefits under Section 11
and Section 12 would be prejudging the issue
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before the grant of certificate. That, at the stage of
grant of certificate under Section 12A the only
enquiry which could be made would be whether
the society has actually made an application in
time and whether the accounts of the society are
maintained in the manner as suggested by Section
12A and beyond that the scope of the enquiry
would not go. That, the only purpose for which the
registration was required was for establishing its
identity as an institution for being able to claim the
benefits under Section 11 and Section 12.
Therefore, at the stage of enquiry under Section
12A, the Commissioner would not insist upon the
assessee to show that its income was not going to
be spent for the earmarked purpose. We agree
with the ratio of the said judgment. In the present
matter, as stated above, the assessee applied for
registration on October 1, 1982. As stated above,
the certificate was issued on February 8, 1984,
after condoning the delay. That certificate has not
been revoked. As stated above, the Department
accepted the tax returns filed by the assessee and
made the assessments thereafter under Section
143 read with Section 11 up to the assessment
year 1988-89, although exemption under Section
35(1)(ii) was withdrawn on March 31, 1981. In the
circumstances, it cannot be said that the certificate
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has not been issued in this case. However, as
stated in the above judgment of the Madras High
Court, issuance of the certificate does not prevent
an Assessing Officer from considering whether in a
given assessment year the assessee was entitled
to claim benefits under Sections 11 and 12 or, as
the case may be, under Section 80G of the Income
Tax Act. In the present matter, this aspect has not
been gone into by the Tribunal. In the
circumstances, we remand the matter back to the
Tribunal on this second point also, viz., whether
the assessee has applied its income for earmarked
purposes and whether the assessee was entitled
to claim benefits under the aforestated sections
during the assessment years 1989-90 and 1990-
91. In the present matter, there are numerous
other points on which the Tribunal has given its
findings. We do not wish to disturb those findings
at this stage.
6. In the case of Fifth Generation
Education Society v. CIT MANU/UP/0244/ 1990 :
[1990]185ITR634(All) , the Division Bench of the
Allahabad High Court took the view that Section 11
provides for exemption of income which is applied
for charitable purposes. That, Section 12 is in the
nature of an Explanation to Section 11. That,
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before a person can claim the benefit of Section 11
or Section 12, he must obtain registration under
Section 12A. That, the authority to decide grant of
certificate is vested in the Commissioner. That, it is
the Commissioner who has to examine whether
the application is made in accordance with Section
12A. That, it is for the Commissioner to see
whether the objects of the trust are charitable or
not. That, at that stage, the Commissioner is not
required to examine the application of income.
Hence, in the present matter, the Tribunal was
certainly entitled to ascertain whether there was a
proper application of income for charitable
purposes during the assessment years 1989-90
and 1990-91.
7. To sum up, we are of the view that the
Tribunal should have considered the
miscellaneous application filed by the assessee in
the context of the contention raised by the
assessee that there is no legal concept
propounded by the Tribunal, viz., sale of leasehold
rights of the use of space. We are also of the view
that, in the present case, the Commissioner did
grant registration under Section 12A of the Act.
However, such registration will not prevent the
Tribunal from ascertaining whether there was
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proper application of income during the
assessment years 1989-90 and 1990-91 and
whether the assessee was entitled to avail of the
benefit under Sections 11, 12 and 12A of the
Income Tax Act. We are keeping the contentions
on both sides open on the above points. Writ
Petition No. 2490 of 2000 disposed of accordingly
with no order as to costs.
8. We are not disposing of the present
reference. We are remitting the matter to the
Tribunal for its decision only on the above two
points. We will consider the reference after we
receive the findings from the Tribunal on the above
two points. Therefore, the reference is kept
pending on the file of this court. The said reference
is adjourned to December 3, 2001."
16. The Tribunal accordingly heard the matter afresh on
the two points indicated by this court and filed a Remand
Report dated 29th November, 2001.
17. The matter was thereafter placed before this court.
We have already referred to the order dated 21 st March 2003 by
which the Division Bench reframed Questions 1 and 6. In
paragraph 5 the Division Bench noted that the controversy
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whether original questions 2 to 5 need to be deleted in view of
the order of this court dated 15th March, 2001 and the reframing
and recasting of question Nos.1 and 6 would be decided at the
time of the hearing of the reference. As we indicated earlier
Mr.Andhyrujina did not press questions 2 to 5 in any event. We
therefore proceed to answer the remaining questions.
Re- Question 1:-
18. As noted in the order of the CIT (Appeals) the
assessee first constructed a building called The Trade Centre
which included a shopping mall and a conference hall. In 1979-
80 the assessee constructed a 32 story building called
Commerce Centre or Centre 1. Thereafter the assessee
constructed another multistory building called IDBI Centre. At
the material time the assessee had planned several other
constructions including a building to house a five-star hotel, a
modern business executive centre with infrastructure for
sophisticated accommodation-cum-facilities on a day-to-day
basis. During the assessment year 1989-90 the assessee
completed construction of Commerce Centre and handed over
possession of the premises therein to the various lessees. It
received a sum of Rs. 45,99,84,721/- as primary basic rent and
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accounted for the year 1/60th of the primary basic rent as rent
for the period 1st October, 1988 to 31st March, 1989 and
offered for taxation under the head profits and gains of business
or profession and claimed deduction by way of depreciation of
the building. It was noted that what was offered for tax was the
gross rent of Rs.38,33,206/- under the head business, the
amount having been arrived at as a 1/60th portion of the primary
basic rent plus secondary rent etc. and after accounting for the
various expenses as per the profit and loss account. A net profit
before depreciation was shown at Rs.3,40,592/- on which
depreciation of Rs.11,14,37,637/- had been claimed. The AO
disallowed the depreciation for the reason that the entire cost of
building had been adjusted against the receipt of basic primary
rent.
19. It is necessary first to analyze section 11(1)(a) under
which the assessee claimed an exemption.
Sections 2(15), 11(1)(a), 12, 12A, 13(1)(i)(ii) and 13(3) read as
under :-
"2(15) "charitable purpose" includes relief of the
poor, eduction, medical relief, and the
advancement of any other object of general public
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utility
........................
Section 11(1)(a) :
Income from property held for charitable or
religious purposes -
(1) Subject to the provisions of Sections 60
to 63, the following income shall not be included in
the total income of the previous year of the person
in receipt of the income -
(a)
ig income derived from property held
under trust wholly for charitable or religious
purposes, to the extent to which such income
is applied to such purposes in India; and,
where any such income is accumulated or
set apart for application to such purposes in
India, to the extent to which the income so
accumulated or set apart is not in excess of
twenty-five per cent of the income from such
property
Section 11(4A) :
Sub-section (1) or sub-section (2) or sub-section
(3) or sub-section (3A) shall not apply in relation to
any income, being profits and gains of business,
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unless -
(a) the business is carried on by a
trust wholly for public religious purposes and
the business consists or printing and
publication of books or publication of books
or is of a kind notified by the Central
Government in this behalf in the Official
Gazette ;
(b)
ig the business is carried on by an
institution wholly for charitable purposes and
the work in connection with the business is
mainly carried on by the beneficiaries of the
institution
and separate books of account are maintained by
the trust or institution in respect of such business.
Section 12 :
Income of trusts or institutions from
contributions, - Any voluntary contributions
received by a trust created wholly for charitable or
religious purposes or by an institution established
wholly for such purposes (not being contributions
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made with a specific direction that they shall form
part of the corpus of the trust or institution) shall
for the purposes of section 11 be deemed to be
income derived from property held under trust
wholly for charitable or religious purposes and the
provisions of that section and section 13 shall
apply accordingly.
Section 12 A:
Conditions as to registration of trust, etc. - The
provisions of section 11 and section 12 shall not
apply in relation to the income of any trust or
institution unless the following conditions are
fulfilled, namely -
(a) the person in receipt of the income
has made an application for registration of
the trust or institution in the prescribed form
and in the prescribed manner to the Chief
commissioner or Commissioner before the 1 st
day of July, 1973, or before the expiry of a
period of one year from the date of the
creation of the trust or the establishment of
the institution, whichever is later :
Provided that the Chief Commissioner or
Commissioner may, in his discretion, admit
an application for the registration of any trust
or institution after the expiry of the period
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aforesaid ;
(b) where the total income of the trust
or institution as computed under this Act
without giving effect to the provisions of
section 11 and section 12 exceeds twenty-
five thousand rupee in any previous year, the
accounts of the trust institution for that year
have been audited by an accountant as
defined in the explanation below sub-section
(20) of section 288 and the person in receipt
of the income furnishes along with the return
of income for the relevant assessment year
the report of such audit in the prescribed
form duly signed and verified by such
accountant and setting for such particulars
as may be prescribed.
Section 13(1)(c)(ii) :
Section 11 not to apply in certain cases - (1)
Nothing contained in section 11 or section 12 shall
operate so as to exclude from the total income of
the previous year of the person in receipt thereof -
(c) in the case of a trust for charitable
or religious purposes or a charitable or
religious institution, any income thereof -
(i) if such trust or institution has
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been created or established after the
commencement of this Act and under
the terms of the trust or the rules
governing the institution any part of
such income enures, or
(ii) if any part of such income or
any property of the trust or institution
(whenever created or established) is
during the previous year used or
applied,
directly or indirectly for the benefit or any
person referred to in sub-section (3).
Section 13(3) :
The persons referred to in clause (c) of sub-
section (1) and sub-section (2) are the
following, namely -
(a) the author of the trust or the
founder of the institution ;
(cc) any trustee of the trust or
manager (by whatever name called) of
the institution ;
(d) any relative of any such
author, founder, person, member,
trustee or manager as aforesaid ;
(e) any concern in which any of
the persons referred to in clauses (a),
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(b), (c), (cc) and (d) has a substantial
interest."
20. The suggestion that nothing remains to be
considered about the assessee's activities as a charitable
institution in view of the judgment of this Court in this reference
remanding the matter to the Tribunal on the said two issues is
not well founded. All that the judgment holds is that the
provisions of section 12A were complied with and the
registration thereof is valid and subsisting. The issue of
compliance with section 12A was, in view of the judgment, not
open to question before the Tribunal and is not open to question
before us. That however, does not preclude this Court from
considering all the other questions relevant for the purpose of
answering the reference.
21. Compliance with the provisions of section 12A is not
the only requirement for the applicability of section 11. It is only
one of the requirements. Section 12A merely provides that the
provisions of sections 11 and 12 would not apply in relation to
the income of any trust or institution unless the person in receipt
of the income has made an application for registration of the
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trust or institution in the prescribed form and manner to the
relevant authority and within the time stipulated therein or any
extension thereof as may be granted. There are other conditions
in section 12A with which we are not concerned in this
reference. Compliance with Section 12A does not entitle an
assessee to the benefit of section 11, ipso facto. Non
compliance with Section 12A bars an assessee from being
granted the benefit of Sections 11 and 12. The compliance with
the provisions of section 12A only indicates that the assessee is
a trust or institution entitled to claim the benefit of sections 11
and 12. That however, is not the end of the matter. It would be
entitled to be granted the benefit only if it complies with the other
requirements of these sections. An assessee that has complied
with the provisions of section 12A must also establish that the
conditions of Sections 11 and 12 are satisfied before it is entitled
to the exemption under sections 11 and 12.
22. A view to the contrary would lead to the most unusual
consequences. A view to the contrary would mean the assessee
can by merely complying with the provisions of section 12A
claim an exemption under sections 11 and 12 even though the
ingredients thereof are not satisfied. The fallacy of such a
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contention is obvious from the fact that an assessee may well
acquire the properties even after it complies with section 12A.
Such properties may not be held under trust wholly for
charitable purposes. A view to the contrary would entitle the
assessee to the benefit of sections 11 and 12 despite the same.
23. The question then is whether the assessee has
satisfied the conditions stipulated in Section 11. Firstly, the
exemption under section 11(1)(a) is in respect of the income
derived from property held under trust wholly for charitable or
religious purposes. Secondly the exemption is available only to
the extent to which such income is applied to such purposes in
India. Thirdly, where such income is accumulated or set apart
for the application to such purposes in India, the exemption is
applicable to the extent to which the income so accumulated or
set apart is not in excess of 25% of the income from such
property. The conditions are cumulative.
24. It is not the assessee's case that it held the property
for religious purposes. It is the assessee's case that it held the
property under the trust wholly for charitable purposes.
25. For section 11(1)(a) to apply, the assessee must
therefore firstly hold the property under trust for a charitable or
itr78-1998
religious purposes. In other words, the exemption does not
apply merely because the assessee is a trust. The property
must be held under trust and such holding of the property under
trust must be wholly for charitable or religious purposes. Thus
even assuming that the assessee held the property under trust,
it would not be entitled to exemption if such holding under trust
was not wholly for charitable or religious purposes. The question
then is whether the assessee held the property under
ig trust
wholly for charitable purposes. We think not.
26. The assessee never engaged itself in any activity
related to the professed charitable purposes. The assessee
neither derived the income from the property held under trust for
the alleged charitable purposes nor applied the income
therefrom to such purposes. There is nothing on record which
even remotely suggests that the said property i.e. the
assessee's right, title or interest in the said land and the
construction put up by it thereon was held under trust wholly for
charitable or religious purposes.
27. As we noted earlier, the assessee claims to have
been engaged in activities relating to the advancement of
objects of general public utility, which fall within the definition of
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the words "charitable purposes" in Section 2(15). The activities
of general public utility the assessee claims to have been
engaged in relation to "scientific research in any way or by any
means whatsoever and in any area or field" as stated in the
main objects set out earlier. We find this claim to be unfounded
as we will now demonstrate.
28. As we mentioned earlier on 6.4.1970, the Department
of Revenue notified the assessee as a Council of Scientific and
Industrial Research for the purposes of section 35 (1) (ii) of the
Act. Section 35(1)(ii) reads as under :-
"35. Exemption on scientific research
(1) In respect of expenditure on scientific
research, the following deductions shall be allowed :-
..............
(ii) an amount equal to one and three fourth
times of any sum paid to a research association
which has as its object the undertaking of scientific
research or to a university, college or other institution
to be used for scientific research;
Provided that such association, university
or college or other institution for the purposes of this
clause -
(A) is for the time being approved, in
accordance with the guidelines, in the manner and
itr78-1998
subject to such conditions as may be prescribed; and
(B) such association, university, college or
other institution is specified as such, by notification in
the Official Gazette, by the Central Government;"
However, in 1977, the Department of Science and
Technology, the appropriate authority to monitor all the scientific
research activities and to grant recognition to institutions as
scientific research institutions, informed the assessee that
before granting the extension of the said recognition, it would
review the same. The recognition was extended till 31.3.1981.
A three member team from the Department of Science and
Technology thereafter assessed the assessee's activities. They
advised the assessee that its World Trade Centre Activities must
be kept separate from its research activity by forming another
organization to carry on the WTC activities, failing which the
recognition would not be continued further. It also advised the
assessee to carry out the research activities with laboratory
facilities and academic research staff. As the assessee did not
comply with these requirements, its recognition under section
35(1)(ii) was not continued with effect from 31.3.1981. It is only
thereafter in February 1984 that the assessee made the
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application under section 12A.
29. This is the first indication that the assessee at least
during the relevant assessment years viz. 1989-1990 and 1990-
1991 was not involved in the field of scientific research. The
refusal to extend the recognition under section 35(1)(ii) was not
challenged and attained finality. If indeed the assessee was
involved in the field of scientific research at that time or at any
time thereafter, it would have either challenged the decision or
made a fresh application for recognition under section 35(1)(ii).
It admittedly did not do so. The facts referred to in the order of
the AO, CIT (A) and the Tribunal indicate that the assessee did
not do so for it never carried out any scientific research and
never intended carrying out scientific research.
30. There is not an iota of evidence to indicate that the
assessee at any point of time since inception even had an
intention of carrying out scientific research. The Department
obviously cannot be required to prove the negative. It has
however, we think, done so. It was for the assessee to establish
the positive viz. that it had involved itself in the field of scientific
research. Mr.Andhyarujina was unable to indicate any material
to establish the same. On the contrary, the Department has
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discharged an onus not cast upon it by proving the negative.
31. For instance, the Department sought and received
from the assessee particulars of the expenditure incurred by the
assessee towards scientific research. The information was
tabulated in the assessment order of the CIT (A), which reads
as under :-
TABLE
Assessment Expenditureig on Income Row (2) as
Year Research & % of Row
Development (3)
(Row 1) (Row 2) (Row 3) (Row 4)
71-72 Nil 962 Nil
72-73 Nil 1,925 Nil
73-74 Nil 6,520 Nil
74-75 Nil 6,922 Nil
75-76 Nil 96,676 Nil
76-77 Nil 32,651 Nil
77-78 Nil 43,288 Nil
78-79 27,111 28,92,672 0.93
79-80 28,730 8,63,991 3.32
80-81 1,47,975 64,37,766 2.30
81-82 1,11,405 72,55,650 1.53
82-83 1,36,291 72,56,995 1.88
83-84 1,02,736 83,43,320 1.23
84-85 1,60,768 1,02,29,302 1.57
85-86 2,31,256 1,02,02,949 2.27
86-87 1,79,516 1,14,13,489 1.57
itr78-1998
87-88 2,31,719 1,60,67,010 1.44
88-89 3,19,183 1,56,54,332 2.04
89-90 5,49,232 4,65,97,060 1.17
90-91 6,14,579 6,26,00,517 0.98
91-92 5,29,492 8,75,63,550 0.60
92-93 3,22,031 9,43,83,443 0.34
32. The details furnished in the table speak for themselves
- hardly any expenditure worth mentioning was incurred on
research and development. The nature of the expenditure is
discussed in paragraph 14 of the assessment order. These are
findings of fact which have been confirmed by the Appellate
Authority and in any event not set aside by them. Considering
the facts of the case, it is impossible to term them perverse.
The AO found that there was not even a modicum of activity in
the form of scientific research. We find an absence of even an
intention to by the assessee to undertake scientific research.
The assessee's annual report for the year ending
31st December, 1977 reported that the Department of Science
and Technology was contemplating a denial of exemption under
section 35. The AO held that propelled by this threat, the
assessee in the latter part of 1977 established a nuclear
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research department and initiated steps to undertake the
publication of a quarterly review titled "World Trade Review".
Thereafter there was only a facade of being a scientific research
institution by making claims in the annual report of scientific
research activity. The AO, upon a detailed analysis of the facts,
justifiably held that there was no scientific research activity. In
respect of each of the claims regarding scientific research, he
has in considerable detail, negated the same. The figures
mentioned in the table negate any argument that the findings
are perverse.
33. The assessee's reliance upon section 2(15) is of no
assistance to it. We proceed on the basis that activities involving
scientific research are of general public utility and fall within the
ambit of words charitable purposes in section 2(15). The only
object of general public utility that can be claimed by the
assessee is on account of its main object in the Memorandum of
Association which we have set out earlier. The assessee never
engaged itself in any activity connected to the main object viz. to
organize, sponsor, promote, establish, conduct or undertake the
scientific research in any way or by any means whatsoever and
in any area or field. Mr.Andhyarujina fairly stated that the lease
itr78-1998
transactions were the only business of the assessee. The
income therefore, was entirely from the assessee's business
unrelated to any charitable purposes whatsoever.
34. An assessee that engages itself only or predominantly
in activities relating to its ancillary or incidental objects which do
not relate to any charitable purpose and does not carry on any
activity relating to its main object which pertains to a charitable
purpose is not entitled to an exemption under Section 11. A
view to the contrary would lead to the most startling results. An
assessee could, by the simple devise of framing its main object
to indicate a charitable purpose within the meaning of section
2(15), avail the benefit of sections 11 and 12 without engaging
itself in any business relating to such charitable purpose by
contending that the ancillary or incidental objects permit such
activities although they, by themselves, are wholly unrelated to
the charitable purpose. For instance, an assessee could frame
any objects which would fall within the ambit of the words
`charitable purpose' in section 2(15) and include in the objects
clause, several other objects such as construction activities,
trading activities, manufacturing activities and processing
activities. These ancillary activities could, in a given case, have
itr78-1998
a nexus with and be relatable and connected to the activities
concerning the charitable purpose. If Mr.Andhyarujina's
submission is well founded, it would mean that the assessee
could then involve itself only in the incidental or ancillary
activities which by themselves do not fall within the ambit of
section 2(15) without engaging itself in any activities relating to
charitable purpose. The plain language of sections 11, 12, 12A
does not even contemplate such a situation. It is impossible to
believe that the Legislature could have intended such activities
to be liable for exemption under sections 11 and 12.
35. Whether under the Companies Act, an assessee is
entitled to carry on business in respect of the incidental and
ancillary objects is a different matter altogether and cannot
govern the scope or operation of section 11 of the Income Tax
Act. That an assessee is entitled to carry on business in respect
of the incidental and ancillary activities mentioned in its Articles
of Association does not by itself entitle it to claim an exemption
under section 11 even though the provisions thereof are not
satisfied.
36. The assessee's claim for exemption under section
11(1)(a) fails the first test viz. in establishing that its income was
itr78-1998
derived from the property held under trust wholly for the alleged
charitable purposes. The property was not held by it under trust
wholly for the alleged charitable purposes. It was in fact entirely
for the objects other than the professed charitable purposes. It
follows therefore, that the income derived from the property
cannot be held to be from the property held under trust wholly
for the stated or any other charitable purposes.
37. The assessee's claim for exemption under section 11
also fails the second test under section 11(1)(a). It has not been
able to establish that such income was applied to such
purposes viz. charitable or religious purposes. Thus even
assuming that the income was derived from the property held
under trust wholly for the charitable purposes, the assessee has
not established that such income was in fact applied to the
charitable purposes.
38. The above facts and in particular the details
mentioned in the table, set out above, establish that the
assessee's income was not applied to the charitable purposes.
In the first eight years, the expenditure towards research and
development was nil. We will presume that, that was on account
of the income being minimal ranging from Rs.962/- to
itr78-1998
Rs.43,288/-. However, thereafter and till 1992-1993, the income
increased enormously ranging from over Rs.8,63,991/- to over
crores of rupees in various years, the maximum being
Rs.9,43,83,443/-. The expenditure on the alleged research and
development activities during these years ranged from as little
as 0.34% to only 3.32%. In fact, during the period of twenty one
years from 1971-1972 to 1992-1993, the average expenditure
on research and development was only a little over 1% of the
assessee's income. The AO was, therefore, justified in coming
to the conclusion that the alleged activities were merely a
facade in view of the proposed action of the Department of
Science and Technology.
39. Faced with this, Mr.Andhyarujina submitted that an
assessee is entitled to the benefit of Section 11 even if it does
not apply its income for charitable or religious purposes so long
as it applies the same towards purposes ancillary or incidental
thereto. The submission in connection with this rather broad
proposition are these. The expenditure was in any event
applied towards the incidental or ancillary objects. Relying upon
a table detailing the purposes for which the expenditure was
incurred, he submitted that the expenses were only in respect of
itr78-1998
the objects of the assessee albeit the incidental or ancillary
objects stated in clauses 1, 2, 4, 5, 9, 13, 15, 19, 20, 24, 25, 28,
and 67 of the Articles of Association. The expenses related for
instance to the payment of professional fees, salaries,
contribution to the provident fund, staff farewell expenses, lease
rent, taxation, insurance, electricity charges, contractual
services, expenses relating to the building including repairs and
maintenance, telephone, advertisement, travelling, conveyance
expenses and legal and professional charges. Amounts are
also shown towards the research and development division
expenses, which are really minimal for the two assessment
years. The Department has not disputed the fact that the
expenditure was incurred. Nor has the Department disputed the
quantum of the expenditure.
He submitted that as the assessee has no other
business, the question is only whether the income was applied
to the objects of the assessee irrespective of whether it was the
main object or the ancillary or incidental objects. He submitted
that the term "applied" in section 11(1)(a) implies utilization of
income on the activities of the assessee for furtherance of its
objects and includes the income irrespective of whether it is
itr78-1998
revenue or capital nature. It is for this reason that instead of
using the term expenditure, section 11(1)(a) uses the term
"applies".
Mr.Andhyarujina relied upon various judgments in
respect of the proposition that the expenses incurred for running
a trust should be treated as applied for the objects of a trust.
Such expenses would include the expenses for repayment of a
loan taken for construction of the buildings owned by the trust
and depreciation on capital assets. It is sufficient only to mention
the judgments. CIT vs. Birla Janahit Trust 1994, 208 ITR 372
(Cal.); CIT vs. Trustees of Ht. Nizam, 1981, 127 ITR 378 (AP);
Director IT (Exporters) vs. Govinda Naikar, 2009, 315 ITR 237
(Mad.); CIT vs. Ganga Charity Trust, 1986, 162 ITR 612 (Guj.);
CIT Exemption vs. Span Foundation, 2008, 178 Taxman 436
(Del.), and CIT vs. Market Committee, Pipli, 2011, 330 ITR 16
(P & H).
40. In the facts of this case, even assuming that the
expenses were incurred towards the incidental or ancillary
objects, as alleged by the assessee, it would not be entitled to
an exemption under section 11.
We are unable to accept Mr.Andhyarujina's
itr78-1998
submission that once it is found that the expenses were
incurred towards the objects of the assessee, albeit only
towards the incidental or ancillary objects, the provisions of
section 11 would ipso facto apply. The submission stated in
such broad and absolute terms is ill founded and would lead to
the most startling results.
41. The income of an assessee derived from a property
held under trust wholly for charitable or religious purposes would
qualify for exemption under Section 11 even if it is applied to the
incidental and ancillary objects provided there is a nexus
between such incidental and ancillary objects and the charitable
purposes. Further such incidental or ancillary purposes must be
precisely that - incidental or ancillary purposes. They cannot be
the main or dominant purposes unconnected with or unrelated
to the charitable purpose. They must be in aid of, pursuant to, in
furtherance of and towards achieving the charitable purpose.
42. Thus, if in the present case, the assessee's activities
were in conformity with its main object, it would necessarily have
to incur expenditure in respect of its incidental and ancillary
objects. For instance to support research and scientific
activities, the assessee would necessarily have to incur
itr78-1998
expenditure on infrastructure, labour, professional services etc.
If however, the main objects are abandoned, it can hardly be
said that the expenditure towards the incidental objects was
towards a charitable purpose.
43. In the assessee's case, it's incidental or ancillary
objects on their own, they do not constitute charitable purposes.
Indeed it was rightly not even suggested by the assessee that
the ancillary objects by themselves constituted charitable
purposes. The title to Part-III B of the Articles of Association of
the assessee significantly is : "OBJECTS INCIDENTAL OR
ANCILLARY TO THE ATTAINMENT OF MAIN OBJECTS"
(emphasis supplied). Further the first clause entitles the
assessee to do generally all acts and to undertake all activities
which are incidental to the main objects. The assessee,
however, never engaged itself in any activity relating to its main
or dominant object which could be said to be for a charitable
purpose. The question, therefore, of its incidental or ancillary
objects even having a nexus to the main object does not arise.
The assessee has failed to establish that it applied its income
towards the charitable purpose.
44. The assessee's case, therefore, does not satisfy
itr78-1998
either the first or the second requirement of section 11(1)(a).
45. The assessee's claim for exemption under section 11
is also not sustainable in view of clause (b) of sub-section (4A)
thereof set out earlier. Clause (b) of section 11(4A) applies to
the assessee, as it is an institution.
46. We have already held that the business carried on by
the assessee was not wholly for the charitable purposes. On this
ground itself, the assessee's claim is barred by section 11(4A),
which at the outset provides that sub-sections 1, 2, 3 and 3A
shall not apply in relation to any income being profits and gains
of business unless inter-alia the business is carried on by the
institution wholly for the charitable purposes. Indeed if we are
right in the conclusion that the business carried on by the
assessee was not for charitable purposes, there could be no
question of there being any beneficiaries.
47. Apart from that, the expression "work in connection
with the business" relates not to any business but only to the
business carried on by the institution wholly for charitable
purposes and work incidental thereto or in connection therewith.
This is clear as the words used are "the work in connection with
the business" and not "work in connection with the business of
itr78-1998
the assessee". If we are right in our conclusion that the business
carried on by the assessee was not wholly for the charitable
purposes, there would be no question of the assessee's work
being in connection with the business i.e. the business wholly for
the charitable purposes.
48. The assessee's claim is also not maintainable as it
has not been established that the work in connection with the
assessee's business is mainly carried on by the beneficiaries of
the institution. Even assuming that the assessee carried on any
activity for "charitable purposes" it has not established that
business in connection therewith was carried on by the
beneficiaries - whoever they may be. The lease transactions
are factually the only business carried on by the assessee.
Mr.Andhyarujina understandably had considerable difficulty in
establishing that this business was carried on by the
beneficiaries of the institution - the assessee. He was unable
effectively to indicate who the beneficiaries of the institution
were.
49. It was mildly suggested that the assessee's members
were its beneficiaries and that it is these beneficiaries who
mainly carried on the work in connection with the assessee's
itr78-1998
business through the Council and/or the Managing Committee.
50. This argument does not appear to have been
advanced before the AO, the CIT(Appeals) or the Tribunal. The
record does not indicate that the members, assuming they can
be said to be the beneficiaries, carried on the work connected
with assessee's business. Article 18 of the Articles of
Association of the assessee which prescribes the composition
of the Council, does not comprise of only of the assessee's
members. It does not even suggest that the work of the Council
is mainly carried out by the members of the Council. These are
questions of fact. In absence of such facts, the question cannot
be decided on the basis of this argument for which the factual
basis is not established.
51. The assessee claims the exemption. It is therefore,
for the assessee to establish clearly who the beneficiaries of the
institution are and how such beneficiaries carried on "the
business" i.e. the business carried on wholly for the charitable
purposes.
52. The assessee has thus been unable to establish any
of the ingredients of section 11(4A).
53. Further even assuming that the assessee did
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undertake the scientific research, it would make no difference for
it admittedly did not maintain separate books of account as
required by section 11(4A) in respect of such business.
54. In this view of the matter, it is not necessary to
consider Mr.Daniel's submissions under section 13. What we
have held earlier itself is sufficient to answer Question No.1 in
favour of the revenue and against the assessee.
55. Question No.1 is therefore, answered in the negative,
in favour of the revenue and against the assessee.
Re : Question No.6 :-
Whether on the facts and or the circumstances of the
case, the applicant was right that only 1/60th of the
advance can be assessed as its income for the year
as the tribunal had rightly held it as transaction of
lease and not of sale ?
56. As stated earlier, one of the questions on which the
Division Bench had remanded the matter to the Tribunal
pertains to the nature of the transactions. The Tribunal on a
reconsideration held the agreements between the assessee
and the occupiers to be transactions of lease. The Tribunal held
itr78-1998
that there are no special modes of assessment prescribed
based on whether the transaction is a sale or lease; that
Chapter-IV of the Act which relates to the computation of total
income does not draw any distinction as such between a sale
and a lease and the classification therein is under the heads of
income ; that in law, there is no fixed head of income under
which the price received on sale of the property should be
brought in computation of the total income and that there is no
fixed head of income for computation or consideration received
on a lease of the property either. The Tribunal held that in this
view of the matter, the question is not as to whether the
transaction is of sale or a lease, but as to under what heads of
income, the income received by the assessee should be
assessed and further as to in what manner such income should
be computed.
57. The AO held that the premium received by the
assessee constituted a capital receipt on transfer of the capital
assets; that the transaction between the assessee and the
lessees was of lease which constituted a transfer of a right to
enjoy the property. In view of section 2(47), the AO held that the
same resulted in the transfer of capital assets within the
itr78-1998
meaning of section 45 and the profits and gains from such
transfers were assessable as capital gains. He held that the
capital asset was acquired by the assessee on 1.10.1988 and
was transferred on 1.10.1988 and therefore, the same resulted
in short term gains. The Tribunal noted that the AO had in
respect of assessment year 1990-1991 held that the alleged
"advance rent" received by the assessee was a premium or
salami. The AO rightly placed considerable importance on a
report of the Council of Management of the assessee for the
year ending 1971. We will refer to the same shortly.
58. The CIT (A) construed the lease agreements. He also
held that the amounts received by the assessee as "advance
rent" constituted a premium or salami; that the payment of the
primary basic rent was a condition precedent for the lessees to
be let into possession of the premises and that the lease
agreements were executed only upon the payment of the
primary rent. He too placed considerable reliance upon the
1971 report of the Council of Management and that it was only
in 1973 that the nomenclature was changed on legal advice. In
support of these conclusions, the CIT(A) referred to a
transaction between the assessee and Khatau Makhanji
itr78-1998
Spinning and Weaving Mills Limited (hereinafter referred to as
"Khatau Mills"). Khatau Mills was allotted a flat admeasuring
8296 sq. ft. on 1.10.1988 for the primary basic rent of
Rs.45,62,937/- calculated at the rate of Rs.550/- per sq. ft. On
28.10.1988, i.e. within less than a month. Khatau Mills obtained
the assessee's permission to sell the leasehold rights to Great
Eastern Shipping Company for a sum of Rs.2,73,77,625/-
subject to its paying a sum of Rs.14,10,362/- calculated at the
rate of Rs.170/-per sq. ft. to the assessee which it did. No part of
the primary basic rent was refunded to Khatau Mills. On the
contrary, Khatau Mills paid the centre a premium of Rs.170/-
per sq. ft. in consideration of the assessee's permission to it to
transfer the leasehold rights to Great Eastern Shipping
Company. Thus within less than a month, Khatau Mills made a
profit of more than Rs.2.00 crores. The CIT (A) noted that there
are several such instances which established that the primary
basic rent received by the assessee was not "advance rent" but
premium or salami. Therefore, in respect of the assessment
year 1990-1991, the CIT (A) came to the conclusion that the
transactions were a lease but that the primary basic rent
received by the assessee in advance was premium and not
itr78-1998
"advance rent". He however, did not decide the question as to
whether the premium should be brought to tax as capital receipt
or revenue receipt.
In respect of the assessment year 1989-1990, the CIT
(A) came to the conclusion that the premium received by the
assessee was in the nature of a business receipt. It is found that
even during this assessment year, about 60% of the original
members / lessees earned enormous amounts by transferring
the leasehold rights on payment of a comparatively negligible
premium to the assessee. Even if in respect of the assessment
year 1989-1990, the CIT (A) held that the primary basic rent was
in the nature of the premium / salami charged by the assessee
for letting the lessees into possession of the leased premises
and that the the premium so charge was in substance a receipt
and not a deposit. He agreed that the agreements did not
constitute a sale of the premises. The aforesaid activities of the
assessee were held to be a part of its business activity.
59. We have already referred to the order of the Tribunal
in respect whereof this reference was made and to the order of
this Court remanding the matter to the Tribunal on the said two
issues.
itr78-1998
60. The remand order passed by this Court noted that
there did not appear to be a dispute on the point that the correct
head of income is "profits and gains of business or profession".
It noted that the assessee had itself filed the returns of income
on that basis. The Tribunal's remand report also analyzes the
facts relating to the assessee's activities and comes to the
conclusion that the entire activity of leasing of space in Centre 1
was conducted as a highly organized business activity. It was
observed that the major area of dispute was whether the entire
primary basic rent is chargeable to tax as premium received by
the assessees in the year of receipt itself or whether the plea of
the assessee to treat the same as rent chargeable to tax over a
period of sixty years should be accepted.
61. Section 105 of Transfer of Property Act reads as
under:-
"105. Lease defined.--A lease of immovable
property is a transfer of a right to enjoy such property,
made for a certain time, express or implied, or in
perpetuity, in consideration of a price paid or
promised, or of money, a share of crops, service or
any other thing of value, to be rendered periodically
or on specified occasions to the transferor by the
itr78-1998
transferee, who accepts the transfer on such terms.
Lessor, lessee, premium and rent defined.--The
transferor is called the lessor, the transferee is called
the lessee, the price is called the premium, and the
money, share, service or other thing to be so
rendered is called the rent."
62.
It would be convenient at this stage to refer to the
judgment of the Supreme Court in Commr. Of Inc.-Tax vs.
Panbari Tea. Co. Ltd. (1965) 3 SCR 811 = (1965) 56 ITR 30
relied upon by Mr.Daniel. In that case, by a registered lease
deed dated 31.3.1950, the respondent - assessee leased two
Tea Estates along with machinery and the buildings owned and
held by it to a firm named M/s.Hiralal Ramdas for ten years from
1.1.1950. A sum of Rs.2,25,000/- was paid as a premium and
an annual rent of Rs.54,000/- was to be paid by the lessee to
the lessor. Out of the premium of Rs.2,25,000/-, Rs.45,000/-
was paid in one lump sum at the time of execution of the lease
deed and the balance of Rs.1,80,000/- was payable in sixteen
half yearly installments of Rs.11,250/- each. The annual rent of
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Rs.54,000/- was payable in installments of Rs.1000/- per month
and Rs.42,000/- was paid on or before 31 st December of each
year. For the assessment year 1952-1953, the ITO made the
assessment treating the installments of Rs.11,250/- towards the
premium as a revenue receipt. The Appellate Assistant
Commissioner confirmed the order. The Tribunal held that the
premium was really a rent payable under the lease deed and it
was therefore, chargeable to income tax. The Tribunal referred
the following question to the High Court :-
"Whether on the facts and in the circumstances of the
case and upon the construction of the terms of the
lease, dated 31st March,1950, the sum of Rs.11,250/-
received by the assessee during the year of account is
revenue or capital receipt ?"
The High Court held it to be a capital receipt. The
Supreme Court upheld the judgment. The Supreme Court
observed that the question was whether the amount described
as premium is really the rent and therefore a revenue receipt.
The Supreme Court discussed the concept of premium as
under:-
"Before we look at the lease deed it will be
convenient to notice briefly the law pertaining to
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the concept of premium, which is also described
as salami.
3. The distinction between premium and
rent was brought out by the Judicial Committee in
Raja Bahadur Kamakshya Narain Singh of
Ramgarh v. CIT thus:
"It (salami) is a single payment made for the
acquisition of the right of the lessees to enjoy the
benefits granted to them by the lease. That
general right may properly be regarded as a
capital asset, and the money paid to purchase it
may properly be held to be a payment on capital
account. But the royalties are on a different
footing."
It is true that in that case the leases were granted
for 999 years; but, though it was one of the
circumstances, it was not a decisive factor in the
Judicial Committee coming to the conclusion that
the salami paid under the leases was a capital
asset. This Court in Member for the Board of
Agriculture Income tax, Assam v. Sindhurani
Chaudhurani defined "salami " as follows:
"The indicia of salami are (1) its single non-
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recurring character, and (2) payment prior to the
creation of the tenancy. It is the consideration paid
by the tenant for being let into possession and can
be neither rent nor revenue but is a capital receipt
in the hands of the landlord."
It is true that in that case the payment was paid in
a single lump sum, but that was not a conclusive
test, for salami can be paid in a single payment or
by instalments. The real test is whether the said
amount paid in a lump sum or in instalments is the
consideration paid by the tenant for being let into
possession. This Court again in Chintamani Saran
Nath Sah Deo v. CIT considered all the relevant
decisions on the subject in the context of licences
granted to the assesses to prospect for bauxite in
some cases for 6 months and in others for year or
two and observed:
"The definition of salami was a general one, in that
it was a consideration paid by a tenant for being
let into possession for the purpose of creating a
new tenancy."
Applying that test this Court held in that case that
under the said licences there was a grant of a right
to a portion of the capital of the licensor in the
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shape of a general right to the capital asset.
4. In view of these three decisions it is not
necessary to multiply citations.
5. Under Section 105 of the Transfer of
Property Act, a lease of immovable property is a
transfer of a right to enjoy the property made for a
price paid time, express or implied or in perpetuity,
in consideration of a price paid or promised, or of
money, a share of crops, service or any other
thing of value, to be rendered periodically or on
specified occasions to the transfer by the
transferee, who accepts the transfer on such
terms. The transferor is called the lessor, the
transferee is called the lessee, the price is called
the premium, and the money, share, service or
other thing to be so rendered is called the rent.
The section, therefore, brings out the distinction
between a price paid for a transfer of a right to
enjoy the property and the rent to be paid
periodically to the lessor. When the interest of the
lessor is parted with for a price, the price paid is
premium or salami. But the periodical payments
made for the continuous enjoyment of the benefits
under the lease are in the nature of rent. The
former is a capital income and the latter a revenue
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receipt. There may be circumstances where the
parties may camouflage the real nature of the
transaction by using clever phraseology. In some
cases, the so-called premium is in fact for
advance rent and in others rent is deferred price. It
is not the form but the substance of the
transaction that matters. The nomenclature used
may not be decisive or conclusive but it helps the
court, having regard to the other circumstances, to
ascertain the intention of the parties."
63. It is necessary therefore, now to analyze the terms of
the lease deed to ascertain whether the "advance rent" was
actually a premium/salami or whether it was in fact rent paid in
advance.
64. There are two sets of agreements. The terms and
conditions in both the sets are substantially the same as far as
the question under consideration is concerned. The main
difference is that in one set of agreements, the rent is divided
into three components viz. basic rent, common outgoing rent
and parking space rent. The agreement from which we will
quote the relevant clauses had four components viz. primary
basic rent, secondary basic rent, common outgoing rent and
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parking space rent. In the agreements, where the rent was
divided into three components, the basis rent and parking space
rent were to be paid in advance before execution of the lease in
installments similar to those under the first set of agreements.
Thus under both the agreements, substantial "rent" was payable
in advance.
65. Recitals 1 and 8 and clauses 1, 2, 7 and 16 of the
operative part of the lease agreements are relevant in this
regard and read as under :-
"WHEREAS :
(1) The Centre, with a view to achieving its
object which is to organise, sponsor, promote,
establish conduct or undertake scientific research
in any way or by any means whatsoever and in
any area or field and for prosecuting scientific
research to establish, inter-alia, a World Trade
Centre, in Bombay, hereinafter referred to as the
World Trade Centre, approached the Government
of Maharashtra for a plot of land.
(8) The lessees are a member of the
Centre and have applied to the Centre for grant to
them of a lease of office premises for their
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business on the ________ floor in the Centre I
building proposed to be constructed by the Centre
on the said land which the Centre has agreed to
grant on the terms and conditions hereinafter
contained.
NOW IT IS HEREBY AGREED BY AND
BETWEEN THE PARTIES HERETO AS
FOLLOWS :
The Centre hereby agrees to grant and
the Lessees hereby agree to accept Lease of the
office premises admeasuring ______ sq. ft. built-
up equivalent to _____ sq. metres built up or
thereabouts, on the _____ floor of the Centre I
(hereinafter referred to as "the said premises")
and ______ uncovered parking space /spaces in
the open spaces of the Centre I for a term of 60
(sixty) years commencing from the date on which
the said premises are ready for occupation.
Whereas an entire floor is leased to one lessee
built-up area will mean full area of the floor
including walls ( inside and outside), columns, lift
lobby, air handling unit room, toilets, pantries,
staircases, shifts and service shafts. Where a part
of the floor is leased to the lessee, the built-up
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area will include proportionate area of the floor,
including walls (inside and outside), columns, lift
lobby, air handling unit room, common passage,
toilets, pantries, staircases, lift shafts and service
shafts.
(2) The Rent of the said premises shall
consist of :
(a) Primary basic rent
(b) Secondary basic rent
(c)
Common outgoings rent and
(d) parking space rent
all of which when collectively referred to, will be
hereinafter called "the rent".
The primary basic rent of the said premises shall
be Rs.______ per sq. ft. built up area
(Rs.______ per sq. mt. built-up area) per month.
The secondary basis rent of the said premises
shall be Rs._____ per sq. ft. built-up area
(Rs.____ per sq. mt. built-up) per month. The
common outgoings rent shall consist of such
proportion of the actual expenditure incurred by
the Centre in respect of the Centre I building with
its environments on Municipal rates and taxes,
water charges (inclusive of all charges for bringing
water from outside) repairs, cess, all sums other
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than ground rent payable under the head-lease to
the Government, charges for maintenance and
upkeep of the common passages, foyers,
corridors, courtyards, gardens, terraces,
landscapes, lifts, lift hall &, escalators, escalator
halls, basements, marquee, air-conditioning plant
and plant rooms, ventilation plant and plant rooms
and fire fighting plants and plant rooms, all
equipments or machines, sewage treatment plant
and plant rooms, roads and pavings, car parks,
lights, landscaping drains and sewers, all terraces,
electricity charges, insurance premium,
contribution to the sinking fund to be instituted by
the Centre, overhead expenses and administrative
expenses including wages and all expenses
incurred for maintenance and upkeep of amenities
and ancillary expenses and all costs and
expenses incurred by the Centre in discharging its
obligations as Lessor, as the area of the premises
hereby agreed to be leased bears to the total area
of the Centre 1 building which shall be leased or
agreed to be leased by the Centre but which
common outgoings shall be subject to increase or
decrease by reason of any of the aforesaid
expenses being increased or decreased. The
common outgoings rent and the secondary basic
rent shall be paid by the Lessees to the Centre on
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or before the 5th of every month to which the said
rent relates commencing from the date on which
the said premises are ready for occupation as
hereinafter specified.
The common outgoings on account of
contributions to sinking fund shall mean such sum
to be determined by the Centre as being payable
by each intending lessee to the Centre from
month to month to the intent that such sums paid
by all the intending lessees in the building shall
accumulate with the Centre and shall, together
with interest earned at 4% p.a. on appropriate
investments of such accumulations, aggregate to
the original cost disbursed by the Centre to
acquire and/or install the building air-conditioning
plant, lift and any other plant or machinery over
the period determined by the Centre to be the life
of such building, air-conditioning plant, lift or any
other plant or machinery. Every determination
made by the Centre shall be final and conclusive
and shall be binding upon the intending lessees.
It is hereby agreed by and between the parties
that the contribution to the Sinking Fund intended
to be built heretobefore for the replacement of
each asset being the building, air-conditioning
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plant, lift and any other plant or machinery as the
case may be, shall not be adequate to replace
such building, air-conditioning plant, lift or plant or
machinery. If the cost of replacement of any such
asset shall in any event be more than the Sinking
Fund accumulated with and at the disposal of the
Centre in respect of that asset, the lessee shall on
demand by the Centre pay to the Centre his
proportionate share of such excess cost as his
further contribution to the Sinking Fund in respect
of that asset. Such proportionate share of the
excess cost shall be calculated in the proportion
which the area leased to him by the Centre bears
to the total area leased or agreed to be leased by
the Centre in the Centre I building. Such
contribution shall be payable by the lessee either
in one lump sum or in such instalments as may
be determined by the Centre. The lessee shall
deposit without interest and keep deposited with
the Centre throughout the term of the lease a
sum equivalent to 3 months common outgoings
rent and a sum equivalent to 3 months secondary
basic rent, agreed herein to be paid by the lessee
to the Centre. The Centre shall from time to time
determine such sum as is to be kept deposited on
account of 3 months common outgoings rent and
the Centre has for the time being determined such
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sum at Rs............ The determination of such sum
by the Centre shall be final, conclusive and
binding upon the lessee and in the event of any
further sum being payable on such determination
the lessee shall deposit and keep deposited with
the Centre such further sum within 7 days from
the service of demand in that behalf made by the
Centre. The said sum shall be adjusted by the
Centre towards the payment of the common
outgoings rent and secondary basis rent of the
last 3 months of the term of the lease. The parking
space rent for each parking space shall be
Rs............. per month payable by the lessees to
the Centre as hereinafter specified. Provided that
the lessee shall pay the entire parking space rent
payable during the lease term of 60 years as
hereinafter provided within a period of 30 days
from the date of the receipt of notice sent under
Clause 6 hereof notifying to the lessee that the
premises are ready for occupation. If the lessee
does not pay the entire parking space rent within
the said period of 30 days as aforesaid, the
agreement for lease of the parking space shall
stand cancelled and the Centre shall be entitled to
dispose of it at such rent and on such terms and
conditions as the Centre shall in its absolute
discretion think proper.
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In the event of the Centre being required to pay at
any time hereafter to the Municipal Corporation or
to the State Government whether prospectively or
retrospectively any amount or amounts by way out
premium, betterment charges, development tax or
any other tax, levy, cess or charge, the lessee
shall pay forthwith to the Centre on demand, their
proportionate share of such amount or amounts,
to be calculated by the Managing Committee of
the Centre in the proportion which the area of the
demised premises bears to the total area of the
Centre I building which the Centre shall decide to
lease and the decision of the Managing
Committee as to whether or not the lessees are
liable to pay a proportionate share of such
amount or amounts and the quantum of such
proportionate share shall be final and binding on
the lessees.
The primary basic rent and the parking space rent
shall become due on 1st day of every month.
Entire primary basic rent and the parking space
rent payable during the lease term of 60 years
shall be paid by the lessees to the Centre in
advance before the execution of the Lease in
instalments as under :
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Primary Basic Rent :
(a) 30% on or before the execution of this
agreement to be accounted, for on
commencement of the lease ;
(b) 60% in such instalments and at such
times during the construction of the Centre I
Building as may be decided upon by the
Managing Committee of the Centre ;
(c ) 10% subject to adjustment on the basis
of final are (ascertained on actual measurement)
on the date on which the said premises are ready
for occupation. Provided that if the area on which
measurement is found to be more than the area
mentioned under (1) above, the amount of
advance rent for 60 years in respect of area
found in excess shall be paid by the Lessees to
the Centre when the said premises are ready for
occupation.
Parking space Rent :
When the said premises are ready for occupation,
and shall be held by the Centre in deposit and
shall be adjusted and set off towards the monthly
instalments of the basic rent and the parking
space rent, on the respective due dates thereof.
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(7) The lessees shall execute with the Centre a
Deed of Lease in duplicate containing the terms
set out in Annexure hereto of the said premises
and in the parking space.
If the Lessees enter into the possession of the
said premises and parking space before executing
a Deed of Lease the Lessees shall use and
occupy the said premises and parking space
subject to the terms and conditions set in
Annexure hereto.
(16) The Lease shall contain the terms and
conditions, among others, specified in Annexure
'A' hereto."
66. The AO and the CIT(A) have referred to several
factors in respect of their conclusion that the "advance rent" was
in fact a premium for parting with the leasehold rights in favour
of the lessees. Even assuming that these factors are not in all
cases conclusive of whether the payment was a premium /
salami or rent taken in advance, the same viewed in the totality
of the circumstances establishes that the "advance rent" was
nothing but a premium or salami.
67. The intention of the parties is an important factor in
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answering the question whether the "advance rent" was in fact
rent or a premium / salami. The following extract from the report
of the Council of Management of the assessee for the year
ending 1971 is important and reads as under :-
"Lease of space :- The principal terms and
conditions for leasing space in the Trade Centre
have, upon Counsel's advice been modified,
although this does not presently involve any
change in the financial obligations of the lessees.
It is now provided that the initial payment to be
obtained from a lessee will be by way of advance
rent instead of consideration for agreement to
lease as originally proposed. The period of lease
will not be 60 years, which is considered in law
the life of a building but the lessees will have
given the option to renew it for a further period
co-terminus with the 99 years' lease to the Centre
from the Govt. of Maharashtra (less 10 days).
The renewal will be made on the basis of a
nominal payment of Rs.1/- per year per shop plus
out-of-pocket expenses proportionately shared
among the lessees. These expenses are payable
throughout the period of the lease and its
renewal. The initial payment by way of advance
rent is based upon the present value of a part of
the rent capitalised over a period of 60 years, the
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amounts now payable for the ground and the
mezzannine floor area, being offered on a
concessional basis. The Centre reserves the right
to raise these rates upto the permissible levels at
the appropriate time." (emphasis supplied)
68. The importance of the Council of Management of the
assessee is apparent from its Articles of Association, the
relevant parts whereof were set out earlier.
69.
The report of the Council of Management is an
indication if not a clear admission by the assessee that the
payment of "advance rent" was in fact a premium or salami. The
assessee's intention quite clearly was that the payment was
"consideration mentioned for agreement to lease the spaces".
Had the matter stopped there, there could be no doubt that the
payment was a premium paid for the transfer of the right to
enjoy the property. In other words, the payments were made by
the lessees for being let into possession.
It is not that subsequently there was a change in the
nature of the transaction. The transactions remained the same.
The change was only in the description. The change in the
description was pursuant to the legal advice received by the
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assessee. This is clear from the report itself. It is of vital
importance to note certain aspects / admissions contained in the
report. In the second sentence, it is clearly admitted that
"advance rent" was received by the assessee as "consideration
for agreement to lease as originally proposed". The second
sentence provides that "It is now provided that the initial
payment to be obtained from a lessee will be by way of
"advance rent". Thus while the intention of the assessee was to
receive the "advance rent" as consideration for agreement to
lease, the assessee subsequently merely "provided" that such
payment would be by way of "advance rent." There was no
change in the structure of the financial terms of the leases.
This change was in the description without any change in
substance or in the legal effect and nature of the payment. This
is clear from the latter part of the first sentence which admits
that the modification did not involve any change in the financial
obligations of the assessee. The modification referred to in the
first sentence was regarding the term of the lease which is also
reflected in the report. The modification was not in respect of the
nature or legal effect of the "advance rent". Further still this
change in the words was only upon Counsel's advice. It is not
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even suggested that the assessee was under a
misapprehension as to the nature and legal effect of the receipt
of the "advance rent".
70. Mr.Andhyarujina was unable to indicate anything from
the record that explained these crucial admissions by the
assessee itself in the report of its Council of Management.
71. The other factors referred to by the authorities also
indicate that the "advance rent" was nothing but a premium for
being let into possession of the lease premises. Even if each of
these factors by themselves do not establish the same, taken
together, they certainly do. The doubt if any, is set at rest when
these factors are added to the report of the assessee's Council
of Management. For instance, the report indicates that the
period of the leases would not be for sixty years, as originally
provided but that the lessees would have an option to renew the
lease for a further period co-terminus with the 99 years' lease to
the assessee from the government of Maharashtra (less 10
days). It is significant that the consideration for renewal would
be a nominal payment of Re.1/- per year per shop plus out-of-
pocket expenses proportionately shared among the lessees.
Thus the consideration for the extended period was only Re1/-.
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This itself would indicate that the advance payments were made
not by way of rent per month but by way of a premium for being
let into possession. If the payments were genuinely monthly
rentals and no more such payments would have continued
during the relevant period.
That the lease agreements subsequently entered into
may have provided otherwise is another matter. The proposal
stated in the report indicates the intention of the assessee and
the lessees when they had entered into the lease agreements.
72. Mr.Andhyarujina relied upon two sentences in
paragraph 7.29 of the original order of the Tribunal, which read
as under :
" First is that the assessee gives the lease hold
right of the space for a period of 60 years and
the second, the assessee had sold the space to
the lessees. If it is the former, then the
assessee retains the ownership of the building
and would be liable for rental income that is
chargeable on a monthly basis."
He submitted that the Tribunal has, therefore, held that if the
transaction is held to be a lease, the assessee would be liable
to have only 1/60th of the advance rent brought to tax each year.
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73. This is not a correct reading of the order. The second
sentence merely states that if the transaction is held to be a
lease, the assessee would be liable for the rental income that is
chargeable on a monthly basis. The words "the rental income
that is chargeable on a monthly basis" refer to the term of the
lease agreements to that effect and not to the question when the
advance rent is deemed to have accrued to the assessee. This
does not indicate that the Tribunal held that only 1/60 th of the
advance rent would be taxable in each year. This paragraph did
not deal with the issue regarding whether the entire advance to
rent was taxable in the year of receipt or only 1/60 th thereof was
taxable each year. The paragraph dealt with an entirely different
questions, including the provisions of Sections 22 and 23 of the
Act.
74. Mr.Andhyarujina also relied upon a certificate issued
by the lessees to the effect that they had, in turn, claimed a
deduction only of the annual rent i.e. 1/60 th of the advance rent
relating to the year in computing their income under the Act.
Apart from the certificate from the lessees to this effect, nothing
else was relied upon. Even the assessment orders were not
relied upon. It is not possible, therefore, to state on what basis
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the same was done. In the circumstances, this fact, by itself, is
not conclusive of the issue before us in this reference.
75. Mr.Daniel's submission that the transactions also
constitute a transfer of a capital asset in view of section 2(47)(vi)
read with section 269UA(d) and (f) of the Act is also well
founded. These sections read as under :-
"2(47) "transfer", in relation to a capital asset,
includes -
(i) ..........
(ii) ..........
(iii) ..........
(vi) any transaction (whether by way of
becoming a member of, or acquiring shares in a co-
operative society, company or other association of
persons or by way of any agreement or any
arrangement or in any other manner whatsoever)
which has the effect of transferring, or enabling the
enjoyment of, any immovable property.
Explanation : For the purposes of sub-clauses (v) and
(vi), "immovable property" shall have the same
meaning as in clause (d) of section 269UA.
269-UA. Definitions.--In this Chapter, unless the
context otherwise requires,--
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(a) .....................
(b) .....................
(c) .....................
(d) "immovable property" means--
(i) any land or any building or part of a building,
and includes, where any land or any building or
part of a building is to be transferred together with
any machinery, plant, furniture, fittings or other
things, such machinery, plant, furniture, fittings or
other things also.
Explanation.--For the purposes of this sub-
clause, "land, building, part of a building,
machinery, plant, furniture, fittings and other
things" include any rights therein;
(ii) any rights in or with respect to any land or any
building or a part of a building (whether or not
including any machinery, plant, furniture, fittings or
other things therein) which has been constructed
or which is to be constructed, accruing or arising
from any transaction (whether by way of
becoming a member of, or acquiring shares in, a
cooperative society, company or other association
of persons or by way of any agreement or any
arrangement of whatever nature), not being a
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transaction by way of a sale, exchange or lease of
such land, building or part of a building;
(e) ..............
(f) "transfer",--
(i) in relation to any immovable property referred
to in sub-clause (i) of clause (d), means transfer of
such property by way of sale or exchange, or
lease for a term of not less than twelve years, and
includes allowing the possession of such property
to be taken or retained in part performance of a
contract of the nature referred to in Section 53-A
of the Transfer of Property Act, 1882 (4 of 1882).
Explanation.--For the purposes of this sub-
clause, a lease which provides for the extension
of the term thereof by a further term or terms shall
be deemed to be a lease for a term of not less
than twelve years, if the aggregate of the term for
which such lease is to be granted and the further
term or terms for which it can be so extended is
not less than twelve years;
(ii) in relation to any immovable property of the
nature referred to in sub-clause (ii) of clause (d),
means the doing of anything (whether by way of
admitting as a member of or by way of transfer of
shares in a cooperative society or company or
other association of persons or by way of any
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agreement or arrangement or in any other manner
whatsoever) which has the effect of transferring or
enabling the enjoyment of such property."
76. A lease is a transfer within the meaning of section
2(47), as it is a transaction which has the effect of transferring or
enabling the enjoyment of immovable property. The explanation
to section 2(47) provides that for the purposes of sub-clauses
(v) and (vi) thereof, immovable property shall have the same
meaning as in section 269UA(d). Section 269UA(f)(i) defines
immovable property inter-alia to mean any land or building or
part of a building and the explanation thereto provides that the
land, building, part of a building include any right therein.
Section 269UA(f)(i) further provides that the transfer in relation
to any immovable property referred to in sub-clause (i) of clause
(d) means transfer of such properties inter-alia by way of a
lease for a term of not less than twelve years. Admittedly, the
leases were for a period of not less than twelve years.
77. The Tribunal observed that in the lease agreements
there was no legal obligation on the part of the assessee to
refund any part of the "advance rent" and that the word "refund"
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has not been used anywhere in the lease agreements. The
Tribunal held that, the same indicated that the "advance rent"
constituted the business receipt of the assessee of the year in
which they were received.
78. This finding is doubtful. Merely because the lease
agreements do not use the word "refund", it would make no
difference. Nor will it make any difference that the lease
agreements do not stipulate a legal obligation on the assessee's
part to refund any part of the "advance rent". If indeed there
was a breach on the part of the assessee, it could well be
required in law to refund the "advance rent".
79. This however, was not the only basis on which the
Tribunal decided the issue against the assessee. The Tribunal
noted in paragraph 77 of the remand report that in any event
the paramount fact remains that these funds were available to
the assessee to the extent not consumed by the construction of
the buildings in question. The assessee itself agrees that the
only 1/60th of the primary basic rent and car parking rent
collected from the occupiers / lessees had been recognized as
the income and the unadjusted "advance rent" had been treated
as unsecured loans. Thus, as noted by the Tribunal, substantial
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funds had not been either used or set apart for the object of the
centre.
80. In paragraph 80(v), the Tribunal held as under :-
"(v) a large portion of the assessee's income
was unreasonably treated to be "Unsecured
Loans" resulting into huge unutilised funds with
the assessee for which neither any concrete plan
to "accumulate" was made nor the required
intimation for the same was given to the
Assessing Officer".
81. Mr.Andhyarujina submitted that it was not necessary
for the assessee to give the accumulation notice as the
"advance rent" was not the income. We have already held that
the amount received as "advance rent" was in fact a premium
and therefore constituted the assessee's income. We are
therefore, unable to accept this submission.
82. (A) Mr.Andhyarujina relied upon a judgment of a learned
Single Judge of this Court dated 2 nd December, 1992 in M/s.M.
Visvesvaraya Industrial Research & Development Centre,
World Trade Centre vs. The Official Liquidator, High Court,
Mumbai in Company Application No. 27 of 1991 in Company
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Petition No. 642 of 1983. The Official Liquidator was appointed
as Liquidator of Shreenivas Cotton Mills Ltd. - one of the
lessees. The assessee filed the said company application for
an order directing the Official Liquidator to hand over
possession of the premises leased to Shreenivas Cotton Mills
Ltd. in liquidation and to make payment of arrears till then. The
learned Judge observed that after the execution of the lease
agreement, no further documents had been executed in favour
of the company in liquidation and that the lease agreement itself
had not been registered. Accordingly, the learned Judge held
that the agreement did not create a demise in respect of the
premises in favour of the company and that the company had
not acquired any leasehold interest in the said premises. It was
further held that the agreement of lease did not amount to
unqualified or unconditional demise in presenti in respect of the
premises in favour of the company and it only entitled the
company to claim execution of the lease from the applicant
which also had not been done. Accordingly, the learned Judge
held that the company had not acquired any lease-hold interest
in the premises and was merely a monthly tenant in respect
thereof. Finally, it was held that the Official Liquidator did not
itr78-1998
require the premises for the purpose of beneficial winding up of
the company and, therefore, directed him to hand over
possession thereof to the assessee.
(B) Mr.Andhyarujina also relied upon similar orders
passed by the Gujarat High Court in O.L. of Rustam Mills &
Industries Ltd., vs. Visvesvaraya Industrial Research &
Development Centre and ors. dated 8th September, 2004 in
O.J. Appeal No. 9 of 2004 in Company Application No. 184 of
2002 with Civil Application No.18 of 2004. The Division Bench
held that the learned Single Judge had rightly rejected the
Official Liquidator's contention that the lease was for 60 years
and that the lessee was only a monthly tenant. The Supreme
Court by an order dated 28 th August, 2006 dismissed in limine
Petition (s) for Special Leave to Appeal (Civil) filed by the
Official Liquidator.
83. The judgments are of no assistance to the assessee.
The Income Tax Department was not a party to those
proceedings. Further the consequence of the agreements not
being registered as required by law, operated between the
parties thereto. A party that was entitled to have an agreement
drawn up and registered in accordance with law cannot set up
itr78-1998
its failure to do so to its advantage against the Revenue. If it
was so, parties could avoid their liability under the Income Tax
Act by not having agreements registered in accordance with
law. Non-registration of a document cannot prejudice the
Revenue. That a lease was not executed as required is of no
consequence to the interest of the Revenue.
84. Mr.Daniel further submitted that the transactions were
in effect a sale of the properties and not of a lease thereof. This
submission is not well founded.
85. The provisions of the agreements are consistent with
a lease. Some of the provisions thereof are consistent with a
sale of the property as well as a lease thereof. There are
however, several provisions which are consistent only with a
lease and militate against the agreements constituting a sale of
the property.
Firstly, there could be no question of the assessee
having sold the land as it was only the lessee thereof. The
government is the owner of the land. The assessee therefore,
could not have conveyed the same to anyone else. This is clear
from the Government Resolutions granting a lease of the said
land in favour of the assessee. The GR dated 18.11.1974 which
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superseded the earlier GR dated 16.10.1970 also makes this
clear. The sanction was accorded to the grant of a direct lease
subject to the terms and conditions mentioned in Appendix-A,
Clauses 7 and 12 whereof which are relevant in this regard have
been set out earlier. Clause 7 of the Appendix-A grants the
assessee liberty to underlet any part or parts even of the
proposed buildings only with the permission of the government.
Clause 12 provides that the land shall be used by the assessee
"only for erecting or constructing thereon the buildings or the
structures to house or accommodate either for its own use or
for letting out "to...........". Thus the assessee was not even
entitled to sell the construction to be put up on the land.
86. Clause 16 of the lease agreements provide that the
lease shall contain the terms and conditions inter-alia specified
in Annexure-A thereto. The terms and conditions of the lease
agreements admittedly did not contain any provision for the sale
of the land or the construction thereon by the assessee to the
lessees. The terms and conditions stipulated in Annexure-A
militate against the same. For instance, under clause 1, the
lessees are not entitled to use the premises except as office
premises for their own business. If it was a sale, the vendor after
itr78-1998
the sale would not be concerned regarding the nature of the
use. Clause 3 prohibits the lessees from allowing their
employees or servants to stay in the premises beyond the hours
stipulated therein. Clause 4 requires the lessees to keep the
premises in good condition. Clause 5 requires the lessees not to
make any changes without the previous consent in writing of the
lessor. Even assuming that these clauses are also consistent
with the lease in certain circumstances in the facts of this case,
they are not. Clause 12 prohibits the lessees from transferring,
assigning, selling, mortgaging, charging or encumbering in any
manner the premises without the assessee's premises. The
reference to sale obviously was to the sale of the leasehold
rights.
87. The doubt, if any, is set at rest by clauses 27 and 28
which clearly militate against the transaction being one of a sale.
They read as under:-
"(27) On the expiry of the term hereby
created, this Lease shall be renewed at the
option of the Lessees for such further period as
may be co-terminus with the expiry of the Lease
of the land granted to the Centre by the
Government of Maharashtra except the last ten
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days thereof on the same terms and conditions as
are herein contained, except this clause of option
for renewal at rent which in the opinion of the
Centre would then be a fair and reasonable rent
provided the Lessees shall have given to the
Centre three months' previous notice in writing of
their desire to exercise such option, and provided
the Lessees shall have in the meantime paid to
the Centre all rents and other moneys due and
payable by them to the Centre under these
presents and there shall not be outstanding any
breach of any of the conditions and covenants
herein contained and on the part of the Lessees to
be observed and performed. In the event of the
Lessees becoming entitled to obtain a renewal of
the Lease as aforesaid, the Centre shall, at the
request of the Lessees, execute and deliver to the
Lessees a fresh Lease as aforesaid, the cost
whereof including stamp duty and registration
charges shall be wholly borne and paid by the
Lessees.
(28) On the expiration or sooner
determination of the Lease hereby granted or the
renewal thereof, in case the Lease is not renewed
under the provisions thereof herebefore contained
the Lessees shall deliver up to the Centre
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peaceful and vacant possession of the said
premises and the parking space in the same good
condition and state of repairs in which they are at
present, reasonable wear and tear excepted.
Provided that the Lessees shall be entitled to
remove and carry away all fixtures, fittings,
alterations and additions made by them in the
demised premises and to restore the demised
premises to their original condition."
No purchaser of property would agree to such
clauses.
88. In the circumstances, Question No.6 is answered in
the negative, against the assessee and in favour of the
department.
Re : Question No.7 :-
(7) Whether, on the facts and in the circumstances
of the case, the Tribunal was right in its conclusion
that the primary basic rent and the parking rent were
assessable as income from profits and gains of
business or profession ?
89. Mr.Andhyarujina fairly stated that so far as the
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assessee is concerned, the nature of income is not in dispute. It
is income from profits and gains of business. The only disputed
question is as regards the quantum that is liable to be brought to
tax viz. the entire "advance rent" or only 1/60 th thereof per
annum.
90. Question No.7 is answered in the affirmative.
Re : Question No.8 :-
Whether, on the facts and in the circumstances of the
case, the Tribunal was right in its conclusion that the
amount appropriated towards a sinking fund was part
of the rent received by the assessee and was in the
nature of revenue receipt ?
91. The provision in the lease agreement relating to a
sinking fund is part of clause 2 set out earlier. It would be
convenient however, to set out again the following portion
thereof relied upon by Mr.Andhyarujina :-
"The common outgoings on account of
contributions to sinking fund shall mean such sum
to be determined by the Centre as being payable
by each intending lessee to the Centre from
month to month to the intent that such sums paid
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by all the intending lessees in the building shall
accumulate with the Centre and shall, together
with interest earned at 4% p.a. on appropriate
investments of such accumulations, aggregate to
the original cost disbursed by the Centre to
acquire and/or install the building air-conditioning
plant, lift and any other plant or machinery over
the period determined by the Centre to be the life
of such building, air-conditioning plant, lift or any
other plant or machinery. Every determination
made by the Centre shall be final and conclusive
and shall be binding upon the intending lessees.
It is hereby agreed by and between the parties
that the contribution to the Sinking Fund intended
to be built heretobefore for the replacement of
each asset being the building, air-conditioning
plant, lift and any other plant or machinery as the
case may be, shall not be adequate to replace
such building, air-conditioning plant, lift or plant or
machinery. If the cost of replacement of any such
asset shall in any event be more than the Sinking
Fund accumulated with and at the disposal of the
Centre in respect of that asset, the lessee shall on
demand by the Centre pay to the Centre his
proportionate share of such excess cost as his
further contribution to the Sinking Fund in respect
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of that asset."
92. Mr.Andhyarujina submitted that the contribution to
sinking fund never constituted the assessee's income. It is at the
highest a deposit held in trust to be used for specific purpose.
He submitted that the amount collected towards sinking fund is
for the specific earmarked purpose as stated in the agreement
and cannot be utilized for any purpose other than as stipulated
in the agreement. Mr.Andhyarujina relied upon the annual
report and accounts for the year ended 31.12.1989 which
showed the provision relating to sinking fund as a liability. Note
7 to the notes forming part of the accounts stated :-
"7. Sinking Fund represents monies collected
towards specific purposes. Income earned from
Sinking fund investments, is therefore directly
credited to the Sinking Fund Account".
93. The AO and the CIT (A) held against the assessee on
the ground that the issue was covered by the decision of the
Tribunal for the earlier year. He therefore, upheld the order of
the AO and added back Rs.92,88,867/- and interest thereon of
Rs.16,58,947/- by treating the same as the assessee's income.
itr78-1998
The Tribunal upheld the decision also on the same basis.
Neither the assessee nor the Department furnished a copy of
the decision of the Tribunal for the earlier year during the
hearing. They stated their inability to do so even before we
pronounced this judgment.
94. Mr.Andhyarujina submitted that the authorities were in
error in following the decision of the Tribunal dated 6.5.1991 for
the assessment year 1983-1984 rejecting the assessee's claim
with respect to Arcade building, which was the only functioning
building at that time. The decision was, according to him, in view
of the agreement to lease in those cases not elaborately dealing
with the purposes of the sinking fund. The present agreements
to lease specify the purposes of sinking fund and the manner in
which the monies lying in the fund are to be utilized.
95. We will presume that the decision of the Tribunal for
the earlier year was in the context of a clause relating to a
sinking fund which was entirely different from the clauses
relating to a sinking fund in the present case. We will, therefore,
decide this issue in the context of the provisions of the lease
agreements which we have referred to.
96. Based on the provisions relating to the sinking fund in
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the agreements under consideration, Mr.Andhyarujina submitted
that in view of the doctrine of diversion of income by over-riding
title contribution towards the sinking fund cannot be brought to
tax. He submitted that such contributions are diverted and never
reached the assessee.
97. Mr.Andhyarujina relied upon the judgment of the
Supreme Court in CIT v. Sitaldas Tirathdas, (1961) 2 SCR 634 =
41 ITR 367. The Supreme Court after reviewing several
judgments held as under :-
"16. These are the cases which have considered
the problem from various angles. Some of them
appear to have applied the principle correctly and
some, not. But we do not propose to examine the
correctness of the decisions in the light of the
facts in them. In our opinion, the true test is
whether the amount sought to be deducted, in
truth, never reached the assessee as his income.
Obligations, no doubt, there are in every case, but
it is the nature of the obligation which is the
decisive fact. There is a difference between an
amount which a person is obliged to apply out of
his income and an amount which by the nature of
the obligation cannot be said to be a part of the
income of the assessee. Where by the obligation
itr78-1998
income is diverted before it reaches the assessee,
it is deductible; but where the income is required
to be applied to discharge an obligation after such
income reaches the assessee, the same
consequence, in law, does not follow. It is the first
kind of payment which can truly be excused and
not the second. The second payment is merely an
obligation to pay another a portion of one's own
income, which has been received and is since
applied. The first is a case in which the income
never reaches the assessee, who even if he were
to collect it, does so, not as part of his income, but
for and on behalf of the person to whom it is
payable. In our opinion, the present case is one in
which the wife and children of the assessee who
continued to be members of the family received a
portion of the income of the assessee, after the
assessee had received the income as his own.
The case is one of application of a portion of the
income to discharge an obligation and not a case
in which by an overriding charge the assessee
became only a collector of another's income. The
matter in the present case would have been
different, if such an overriding charge had existed
either upon the property or upon its income, which
is not the case. In our opinion, the case falls
outside the rule in Bejoy Singh Dudhuria case
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(1933) 1 ITR 135, and rather falls within the rule
stated by the Judicial Committee in P.C. Mullick
case( 1938) 6 ITR 206."
98. Mr.Andhyarujina also relied upon the judgment of a
Division Bench of this Court in CIT vs. Shri Chhatrapati
Sahakari Sakhar Karkhana Ltd., 2000(9) LJSOFT 19 = 218 ITR
195. The Division Bench held as under :-
"B)
Deductions from the cane price in
respect of Area Development Fund, Hutment
Fund, Cane Development Fund:
It is contended on behalf of Karkhana
that funds under above heads are collected by
way of deductions to enable the sugar Karkhana
to spend within their area of operation expenditure
on amenities such as running of schools, colleges,
maintenance of roads, irrigation, supply of
fertilizers and to provide huts to homeless families.
It is urged that the assessee acts as an agent on
behalf of the Government. It is contended that the
above deductions are made pursuant to the
instructions given by the Government. These
contentions were rejected by the A.O. on the
ground that they stood on the same footing as
itr78-1998
non-refundable deposits and since these
deductions were also made in the course of
trading operations and since they were used for
meeting the assessee's own liabilities, they
constituted trading receipt. On the other hand, it
has been urged on behalf of Karkhana that under
the various directions issued by State Government
from time to time, the Karkhana was required to
make the above deductions. A trading receipt
means assessee's own money which can be put
to any use. In our view as regards the deposits
towards Area Development, Cane Development,
and Hutment Fund are concerned, the principle of
diversion of income by overriding title would
squarely apply. The various directions given by
the State Government show that the Karkhana is
required to deduct from the cane price the above
amounts towards the said funds. It is clear case of
diversion of income at source by overriding title.
As stated above, in every matter, the Court has to
examine the nature and the quality of the receipt.
As stated hereinabove, the Court has to see the
facts of each case. There is a difference between
an amount which a person is obliged to apply out
of his income and an amount which by the nature
of the obligation cannot be said to be a part of the
income of the assessee. Where, by obligation,
itr78-1998
income is diverted before it reaches the assessee,
it is deductible; but where the income is required
to be applied to discharge an obligation which is
self imposed, after such income reaches the
assessee, then, such income is taxable. Diversion
of income by overriding title can be created by a
contract between two parties before the income
reaches the hands of the assessee. These are the
basic principles which are required to be kept in
mind. In the case of C.l.T. v. Madras Race Club
219 I.T.R 39, the assessee was a Company
carrying on the business of horse racing. At the
instance of the Government, the assessee was
asked to conduct races for two days on behalf of
Chief Minister's Relief Fund and for one day on
behalf of Beggars Rehabilitation Fund. The
assessee claimed that the net collections for the
above three days were not assessable as income
in its hands as the assessee had no power to deal
with the said collections. The Department did not
accept the claim of the assessee. The matter
came by way of reference to the High Court which
took the view that obligations are there in every
case but it is the nature of the obligation which is
the decisive fact. Where by the obligation, income
is diverted before it reaches the assessee, it is
deductible but where the income is required to be
itr78-1998
applied to discharge an obligation, after such
income reaches the assessee, then, it is taxable.
On facts, looking to the nature of the obligations,
the Madras High Court came to the conclusion
that the collections for charitable purpose effected
during three days under instructions of the
Government were not taxable as it was a case of
diversion of income by overriding title. Therefore
the real question in all the above matters is:
whether the income has accrued to the assessee
and whether the profits on the scheme form the
income of the assessee. Applying the above test
to the facts of this case, we hold that the
deductions i.e. deposits made by the Karkhana on
account of Area Development Fund, Cane
Development Fund and Hutment Fund do not
constitute trading receipt. We are of the view that
as regards these funds the Karkhana acted as an
agent and collections were made as per the
directions of the Government to be spent on the
purposes specified by the State Government and
that the collections were made by way of retention
of money from the cane price payable and hence
they are not trading receipts. To that extent, we
agree with the view of the Tribunal. However, the
Department has heavily relied upon the Judgment
of the Madhya Pradesh High Court in the case of
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Jiwajeerao Sugar Co. Limited vs. C.I.T. 176 I.T.R.
182, in which it has been held on facts that there
was no diversion of income by overriding title
when part of price of molasses is set apart under
Molasses Control Order to be utilised for erection
of storage facilities particularly as the assessee
did not loose title to the fund. As stated by us
earlier, the basic test to be applied in such cases
is the nature of the obligations. No one particular
test could be said to be conclusive in such cases.
In that matter, on facts, Madhya Pradesh High
Court found that there was no material on record
to show that the title to the fund was separately
kept by the assessee as enjoined by the Control
Order. Further, the above judgment of the Madhya
Pradesh High Court has been expressly dissented
from by this Court in the case of Somaiga Orgeno-
Chemicals Ltd. v. C.l.T. Bombay 216 I.T.R. 291. In
which this Court has laid down that what was
necessary was to see whether there was diversion
at source and whether the assessee had lost
domain and control over the amount so diverted.
Hence, the Judgment of the Madhya Pradesh
High Court was expressly dissented from by this
Court in 216 I.T.R. 291. In the present case, the
test laid down by this Court in 216 I.T.R. 291 is
applicable with regard to Cane Development
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Fund, Area Development Fund and Hutment Fund
as there is diversion of income at source and on
deduction of the amount towards the said funds,
the assessee lost domain and control over the
amounts so diverted."
99. The question therefore, is whether in the present
case, it can be said that the contributions towards the sinking
fund were diverted and never constituted the assessee's
income.
100. In this regard, it is also important to note a part of
Clause 2 and Clauses 12 and 16 of the lease agreements and
Clauses 2 and 24 of Annexure A thereto, which read as under :
"The common outgoings rent shall consist of such
proportion of the actual expenditure incurred by
the Centre in respect of the Centre I building with
its environments on......charges for maintenance
and upkeep of ......lifts, lift hall & escalators.......
air-conditioning plant and plant rooms, ventilation
plant and plant rooms and fire fighting plants and
plant rooms, all equipments or machines, sewage
treatment plant and plant rooms......
(12) The electrical fittings will be provided in
the said premises by the Centre. Any changes in
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the electrical fittings so provided will be carried
out by the lessees at their cost with the permission
of the Centre. The Centre will also reserve the
right to require the lessees to restore the fittings in
which changes are made by the lessees to their
original state at the lessees' cost.
(16) The Lease shall contain the terms and
conditions, among others, specified in Annexure
"A" hereto.
Annexure "A"
The Centre I building is centrally air-
conditioned. The air-conditioning plant will
function for about eight hours on all weeks days
during such hours as may be decided by the
Centre except on Sundays and holidays as
approved by the Centre unless there is a failure or
imposed cut of electric power supply or any
breakage or failure of the said plant.
..................
(24) The working hours of lifts in the Centre I
building will be such as shall be decided by the
Centre. The Centre shall not be responsible for
running the lift if there is a failure or imposed cut
of electric power supply or any breakage or failure
of the machinery of any of the lifts. The
passenger lifts will be available for the common
itr78-1998
use of all the Lessees, their agents, servants and
visitors at their own risk and subject to the
regulations and restrictions (including restrictions
as to hours of use) that may be prescribed by the
Centre from time to time. No goods or
merchandise, luggage or heavy articles or
materials or dogs or animals shall be allowed to
be carried in the passenger lifts. A separate
goods lift is provided in the building and all
movement of goods, merchandise, luggage and
heavy articles and materials shall only be allowed
by such goods lift. The Centre will be at liberty to
close all or any of the lifts for such time as it may
from time to time think fit. The Centre shall not be
liable for any injury fatal or otherwise to any
person or for any loss or damage to any property
that may be caused in any way by the use of the
lifts or by their break-down or otherwise
howsoever or through any act of commission or
omission wrongful or otherwise or negligence of
the lift attendants or any other employee."
101. In view of the above provisions, the doctrine of
diversion of income by over-riding title does not operate in the
assessee's favour. The mere use of the term `sinking fund' and
the manner in which the assessee treats the same in its
itr78-1998
accounts is not decisive of the matter. The assessee is not a
co-operative society in which case the question may well be
answered entirely differently depending upon the facts of the
case. The assessee is in the position of a lessor who has
leased various portions of the premises constructed by it as a
part of its business activities. The above clauses of the lease
agreement establish that the assessee was obliged to provide
the facilities such as lifts, air-conditioning. It was also obliged to
provide the plant and machinery in respect of various other
facilities to be extended by it under the lease agreements.
These are the very facilities and equipment in respect whereof
the sinking fund is required/agreed to be created under the
lease agreement. The amounts accumulated in the sinking fund
are to be used in respect of these very securities and for the
purchase of the plant and machinery referred to in clause 2
insofar as it relates to sinking fund. Thus, the amount lying in
the sinking fund is to be used for discharging the assessee's
obligations under the lease agreements. The assessee had
complete control over these funds. It was entitled to determine
the quantum thereof although the basis is provided under the
agreement. The funds were, in fact used and, in any event, are
itr78-1998
admittedly to be used in respect of the said facilities and plant
and machinery. Mr.Andhyarujina fairly admitted that the
assessee had claimed and was granted depreciation in respect
of the plant and machinery and the equipment in respect of the
said facilities originally installed as well as any replacement in
respect thereof.
102. In the circumstances, there is no question of diversion
of the amounts collected by the assessee towards the sinking
fund. Nor is there any question of the lessee having an over-
riding title in respect of the said fund. The fact that depreciation
has been claimed by the assessee in respect of the plant and
machinery and other equipment required for extending the
facilities indicates that the sinking fund was utilized for
acquiring and maintaining the same for the benefit of the
assessee. The income was, therefore, used by the assessee
and for the assessee and the assessee retained the benefit
arising therefrom. The doctrine of diversion of income by over-
riding title, therefore, does not operate in the assessee's favour
in the facts and circumstances of this case.
103. Question 8 is, therefore, answered in the affirmative,
in favour of the Revenue
itr78-1998
Re : Additional Question for A. Y. 1990 - 91 :-
(1) Whether, on the facts and in the circumstances of
the case, the Tribunal was right in directing to adopt
the standard rent fixed by the Municipal Authorities as
the annual value instead of the actual rent realised by
the assessee ?
104. Mr.Andhyarujina submitted that the question does not
arise at all and is academic in view of the authorities having
held that the agreements to lease constituted a sale.
105. The question is in a sense academic though not on
the basis of Mr.Andhyarujina's submissions. He submitted that
the question is academic as the AO and the Appellate
Authorities held the agreements of lease to be agreements for
sale. He submitted that once the owner sells the property,
there would be no question of applying the provisions of
Sections 22, 23, etc. for the determination of income from
house property. The question is, however, not academic for this
reason.
106. The AO indeed applied the provisions of Sections 22
and 23 and observed that house-owning, however profitable,
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cannot be a business or a trade under the Act and where
income is derived from house property by exercise of property
rights, the income falls under the head "income from property"
chargeable under Section 22. For instance in paragraph 5 of
the AO's order, it is observed that where house property is
given on lease or licence basis for earning income therefrom,
the true character of the income derived is the income from
property falling under Section 22.
There is some degree of contradiction in the findings
to the above effect and the findings to the effect that the
assessee carried on business of leasing the premises.
107. As mentioned earlier, the additional question was a
part of the original reference. Thereafter, this Court by the
remand order (251 ITR 852), remanded the matter to the
Tribunal for its decision on two points, including as regards the
nature of the transactions. The Tribunal filed the said remand
report. It must, therefore, be presumed that what is held in the
remand report overrides what is stated in the original order,
pursuant to which the reference was made.
108. The remand report is clear on this issue as is evident
from paragraphs 35 to 41. The report expressly holds that there
itr78-1998
does not appear to be much dispute on the point that the correct
head of income is "profits and gains of business or profession".
In fact, in paragraph 38, the Tribunal holds: "On the facts of the
case we have no difficulty or hesitation in arriving at the
conclusion that leasing of space by the assessee both in Centre
1 and IDBI Centre was essentially the business carried on by
the assessee." In paragraph 39, the Tribunal held that the
amounts received have to be treated not in the shape of rents,
but profits of a business. In paragraph 40, after analysing the
fact and the judgments, the Tribunal held : "We therefore, hold
that the consideration received by the assessee on its
transactions of lease of space in Centre 1 and IDBI Centre are
chargeable to tax under the head "Profits and gains of business
or profession" for both assessment years 1989-90 and 1990-
91."
109. Thus, after the remand report, we are left with the
situation where the Tribunal has held not only that the
transactions constituted the assessee's business, but that the
consideration received by the assessee in respect thereof are
chargeable to tax under the head "Profits and gains of business
or profession" for both the assessment years. It is in this view of
itr78-1998
the matter that the additional question referred to us becomes
academic. In view of the remand report, there is no question
now of the Department assessing the consideration received
by the assessee under the head "income from property".
110. The additional question for the assessment year
1990-91 is, accordingly, answered in favour of the assessee in
view of the above clarification, viz. that the Tribunal has itself
held that the said income is to be taxed as income from "Profits
and gains of business or profession". The issue of consideration
received in respect of the transactions for the assessment year
1990-91 under the head "income from property" does not
survive in view of the remand report made by the Tribunal in
which it is expressly held that the same has to be assessed
under the head "Profits and gains of business or profession".
111. In the circumstances, we answer the reference as
follows :
(i) Question 1 is answered in the negative, in favour of the
Revenue and against the assessee so far as Section 11 is
concerned. In view thereof, it is not necessary to answer the
question qua Section 12 for the assessee has not made any
claim under Section 12.
itr78-1998
(ii) The reference is returned unanswered in respect of
questions 2 to 5 as they were not pressed by the assessee at
whose instance they were referred for the opinion of this Court.
(iii) Question 6 is answered in the negative, in favour of the
Revenue and against the assessee.
(iv) Question 7 is answered in the affirmative, in favour of the
Revenue and against the assessee.
(v) Question 8 is answered in the affirmative, in favour of the
Revenue and against the assessee.
(vi) Additional question for the assessment year 1990-91 is
answered in the negative, against the Revenue and in favour of
the assessee.
(M.S. SANKLECHA, J.) (S.J. VAZIFDAR, J.)
