TaxTMI 
TaxTMI 
2007 (2) TMI 359
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....sideration of Rs. 5,61,10,725 (15 lakhs + 3,46,10,725 + 2 crores) and these assets should be treated as long-term assets and long-term capital gains should be accordingly computed contrary to the decision of Assessing Officer treating this as short-term capital gain." On the other hand, the assessee has raised the following two grounds with regard to this issue : "1. The learned Commissioner of Income-tax (Appeals) erred in holding that membership subscription received in advance amounting to Rs. 2,21,30,123 and magazine subscription received in advance amounting to Rs. 11,50,944 which the appellant did not have to refund or transfer to Citibank as on the date of transfer and as such credited to profit and loss account, would constitute business receipts in appellant's hands. 2. The learned Commissioner of Income-tax (Appeals) failed to appreciate that the membership subscription received in advance amounting to Rs. 2,21,30,123 and magazine subscription received in advance amounting to Rs. 11,50,944 ought to have been taxed under the head "long-term capital gains" since, as per clause 6 of Agreement for Sale dated 26th October, 1989 it was agreed that the appellant would retain ....
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....t all credit card operations will be transferred on the appointed date including the following : "(i )The benefit of and the exclusive right to the Data Bank; (ii)The benefit of the restrictive covenant contained in clause 8(B) hereto; (iii)All rights of Diners under and flowing from the Franchise Agreement dated 14th September, 1979 between Diners Club Inc. (the predecessor-in-interest of Diners Club International Limited) as renewed up to 31st December, 1989 by the letter dated 1st September, 1989 addressed by Diners Club International Limited to Diners; (iv)the benefit of all arrangements between Diners and its Member Establishments and the exclusive right to issue, service, continue and carry on the Credit Card operations of Diners in India and Nepal and all goodwill pertaining to the Credit Card operations;" 5. However, the following are excluded from this transfer. (a)all premises and properties, both movable and immovable belonging to or in the occupation or use of Diners; and (b)all personnel/employees/workmen of Diners and/or its associate concerns; and (c)all operational and technological systems/hardware belonging to Diners; and (d)all payments, if any, due and ....
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....retained by the assessee and the Profit and Loss Account was credited during the year under consideration. 9. In the return of income filed, the assessee disclosed long-term capital gain of Rs. 2,75,45,166 on the transfer of the credit card business. For computing such capital gain, the total consideration was adopted at Rs. 7,93,88,532. For adopting the aforesaid total consideration, the consid-eration shown in the deed of transfer i.e., Rs. 6,51,10,725 was reduced by the consideration of Rs. 90,00,000 for restrictive covenant, and by adding the advance subscription retained by the assessee. From the sale consid-eration thus determined, the initial franchise fees paid by the assessee to Diners Club International in the year 1979, of Rs. 1,17,750 and expenditure in connection with the transfer of Rs. 10,69,080 were deducted to arrive at capital gain of Rs. 7,82,01,752. After claiming deduction under section 54E, net capital gain was disclosed at Rs. 2,75,45,166. 10. In the backdrop of the above-mentioned factual scenario, we come to Ground Nos. 1 and 2 raised by the assessee. The advance membership subscription of Rs. 2,21,30,123 and the advance magazine subscription of Rs. 11,50....
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....y saved, harmless and indemnified thereagainst and all consequences and proceedings arising therefrom. (b) Citibank specifically agrees that all claims whatsoever arising against Diners pertaining to the credit card operations of Citibank on and from the Appointed Date shall be the sole liability of Citibank and Citibank specifically agrees to keep diners duly and effectually saved, harmless and indemnified thereagainst and all consequences and proceedings arising therefrom." 12. From the above it is seen that all liability for rendering services after the appointed date is on Citibank. The learned counsel also laid emphasis on the recitals contained in clause 6 of the aforesaid agreement, which is also reproduced below : "(6)(A) The consideration amount referred to in Clause 2 hereinabove appearing has been arrived at on the basis of classification of Current Card Members as holding Active Cards, Less Active Cards, Least Active Cards or Delinquent Cards. In respect of New card Members, their classification as aforesaid will be determined as on the Appointed Date and consideration paid accordingly. (B) In relation to New Card Members: (a) All entrance fees will be to the accou....
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....and invited our attention to the facts and ratio of this case which are reproduced below from the head-note of the report : "The Oil and Natural Gas Commission had insured all their offshore oil and gas exploration and production operations with an Indian insurance company. In respect of this risk, the appellant, a reinsurance broker, contacted a company in London who were brokers for placement of reinsurance business. The appellant furnished all the details about the risk involved, the premium payable, the period of coverage and the portion of the risk sought to be reinsured. The London brokers contacted various underwriters and after getting confirmation about the portion of the risk the foreign reinsurers were prepared to undertake, informed the appellant about such reinsurance coverage. Thereafter the Indian ceding company handed over the total premium to be paid by it to the foreign reinsurance company, to the appellant for onward transmission. The appellant applied to the Reserve Bank of India for permission with a statement showing a sum of 1,060,891.68 U.S. dollars as the total reinsurance premium payable to the foreign parties, and after deducting the brokerage of 71,004.....
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....aningless ritual, on the facts of this case.' The learned counsel argued that the revenue authorities were not justified in treating the advances as revenue receipts in the hands of the assessee. 14. The learned DR forcefully supported the orders of the revenue authorities and argued that the advances received by the assessee by way of membership subscription and magazine subscription were in the nature of revenue receipts from the very beginning. These advances were credited by the assessee to the Profit and Loss Account and, therefore, it is obvious that the assessee did not pay these amounts to Citibank. These amounts were also not refunded to the members or subscribers of magazine. Thus the assessee-company appropriated these amounts. The learned DR relied on the Bombay High Court's decision in the case of CIT v. Batliboi & Co. (P.) Ltd. [1984] 149 ITR 604 in support of his contention that receipt of money or deposits to be adjusted in the price of goods or services to be supplied or rendered are merely advance payments and such amounts are in the nature of revenue receipts. The learned DR also drew support from the Allahabad High Court's decision in the case of the Bijli Cot....
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....of such advances. There is no dispute that the impugned amounts are advance payments to be adjusted against services rendered after the appointed date, which is the responsibility and liability of Citibank. This is clearly stipulated in the agreement, relevant part of which is reproduced (supra). Therefore, these amounts, as a matter of fact, were payable by the assessee-company to Citibank. However, as a part of the entire transaction of transfer of the credit card business and by mutual agreement, the assessee-company retained these amounts and the same were credited to the Profit and Loss Account. The assessee-company could have easily adopted the other method of paying these amounts to Citibank and then receiving back as part of the consideration. However, this was an exercise in futility because the assessee-company was already holding these amounts and it was allowed to retain the same. Considering the entire facts and circumstances, in our view these advances cannot be treated as revenue receipts in the hands of the assessee. Because of mutual agreement at the time of transfer, Citibank did not claim these amounts and the assessee was allowed to retain. In our view, these am....
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....owing cases : (i)Ajmer High Court's decision in the case of Kanhaiyalal Azad v. District Magistrate AIR 1955 Ajmer 32. (ii)Supreme Court judgment in the case of Delhi Development Authority v. Durga Chand Kaushish [1973] 2 SCC 825. The learned DR pointed out that in the above cases it has been held that renewal of lease shall be treated as fresh lease. He submitted that the assessee-company held the franchise and other intangible assets by virtue of renewal of the agreement, firstly up to 31st March, 1990 and again up to 30th June, 1990. It is argued that such renewals must be treated as fresh acquisition of franchise and, therefore, when the credit card business is transferred with effect from the appointed date i.e., 15th June, 1990, the assessee-company held the assets for a period of less than 36 months and, therefore, the income is in the nature of short-term capital gains. 18. The learned counsel appearing for the assessee argued that the cases relied upon by the learned DR have no relevance to the facts of the present case. The assets have been continuously held by the assessee since 14-9-1979 and when the agreement is renewed on the same terms and conditions it cannot be....
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....her intangible assets including goodwill have been continuously held by the assessee for several years. It is also submitted that if the renewal is taken as grant of fresh franchise, there would be no cost of acquisition of such franchise and for that reason no income under the head 'Capital gain' can be brought to the charge of income-tax. 20. We have carefully gone through the facts and have considered the elaborate submissions made before us by both the parties. The learned DR laid great emphasis on the argument that renewal of lease is tanta-mount to grant of fresh lease and, therefore, when the intangible assets acquired by the assessee on grant of such fresh lease are transferred within a period of less than 36 months, the capital gains arising from such transfer have to be treated as short-term capital gain. The learned DR strongly relied on the Ajmer High Court decision in the case of Kanhaiyalal Azad (supra) and the Supreme Court's decision in the case of Durga Chand Kaushish (supra). It may be mentioned that the Assessing Officer also supported his finding by the above mentioned two cases and the learned CIT(A) has considered the facts of these cases in great detail and ....
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....The issue was whether the lease rent could be enhanced within the period of ninety years. The court held that in view of the specific recital in the deed regarding the initial term (ninety years) of the lease granted (at fixed rent) lease rent could not be enhanced within the period of ninety years. It could only be enhanced subsequently during the renewed periods of the lease. In the above connection the court had observed - "if the plaintiff was not entitled initially to a lease of ninety years for the rent agreed upon, but the rent was liable to be increased within that period, as appeared to be the real case of the defendants in the High Court, there was no question of grant of a fresh lease. A renewal of a lease is really the grant of a fresh lease. It is called a renewal simply because it postulates the existence of a prior lease which generally provides for renewals as of right. In all other respects it is really a fresh lease. Thus the initial term of a lease of ninety years could not coexist with the renewals of that very lease within ninety years." (page 829). The court was faced with the situation that while during the initial term of the lease agreement the lease rent w....
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....s under : "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing that Assessing Officer could bring to tax during the year only the gross amount of interest on such IDBI bond which would accrue at the specific rate deeming the previous year under consideration and the balance amount received under the discount scheme would have to be ignored further for the purpose of taxation and the assessment should be modified accordingly." 23. We have heard both the sides on this issue vis-a-vis the facts and the legal position. The assessee invested Rs. 3.89 crores in IDBI capital bonds with a maturity period of 3 years. Under the scheme of IDBI the assessee opted for the entire interest receivable by it over a period of 3 years to be discounted and accordingly during the present assessment year the assessee received discounted interest of Rs. 91,91,500. The assessee claimed that only such interest income can be brought to the charge of tax which had accrued during the previous year relevant to the assessment year 1991-92. The Assessing Officer rejected the claim. The learned CIT(A) accepted the assessee's claim and the Department is aggrieved o....
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....ny was also allowed to sub-lease the property. In its turn the assessee-company sub-leased the premises for the unexpired period of lease and is receiving rental income. The Bangalore property was taken on lease by the assessee for an initial term of 12 years with option for renewal of lease. This lease agreement was not registered. In respect of both the properties, the assessee claimed that the rental income is assessable as business income. The Assessing Officer rejected the claim and held that the case of the assessee falls under section 27(iiib) of the Income-tax Act and accordingly he assessed the income as income from house property. The learned CIT(A) concurred with the Assessing Officer. 26. The learned counsel appearing for the assessee argued before us that the provisions of section 27(iiib) would apply to a case of lease and not sub-lease or sub-licence. It is pointed out that the Delhi property is only sub-leased to the assessee and, therefore, the income from such property cannot be treated as income from house property. With regard to the Bangalore property it is contended that the lease agreement was not registered and, therefore, the assessee cannot be treated to ....
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.... the case of the assessee is fully covered under section 27(iiia) read with section 269UA(f). It is submitted that a sub-lease obtained by the assessee will not change the legal position. He also contended that non-registration of the sub-lease agreement in respect of Bangalore property is also not relevant because the assessee is receiving the rental income and it has to be considered the owner for the purpose of section 22. For this proposition the learned DR relied on the following cases : (1)CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625 (SC) (2)R.B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 (SC). Regarding deduction of lease rent paid by the assessee the learned DR contended that, once the income is brought to the charge of tax under the head "Income from house property", only such deductions can be allowed as are admissible under section 24 of the Income-tax Act. For this proposition he relied on the following case : (1)Indian City Properties Ltd. v. CIT [1965] 55 ITR 262 (Cal.) (2)Piccadily Holiday Resorts Ltd. v. Dy. CIT [2005] 94 ITD 267 (Delhi) (3)Dy. CIT v. Piccadily Hotels (P.) Ltd. [2006] 97 ITD 564 (Chd.). 29. We have given a careful consideration to the ri....
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.... Cochin Bench decision in the case of M. Damodaran Nair (supra) cannot be applied to the facts of the assessee's case. In that case the facts were different. Firstly there was no intention to transfer the property and mere possession was given. There was no agreement for apparent consideration for transfer except giving immovable property on rent by real owners to the assessee and the assessee in turn, subletting the property. In the present case, the assessee acquired rights under agreement. In the case of Podar Cement (P.) Ltd. (supra), the Supreme Court held that "owner" for the purposes of section 22 is a person who is entitled to the rental income from the property in his own right and the requirement of registration of sale deed is not warranted. In the case of R.B. Jodha Mal Kuthiala (supra), the Supreme Court observed that owner must be that person who can exercise the rights of owner in his own right. In the present case the agreements executed between the assessee and the sub-lessees have been duly acted upon and the assessee is receiving rental income by virtue of these agreements. In our view section 27(iiib) would apply in the present case. 32. Regarding the alternati....