TaxTMI 
TaxTMI 
2001 (11) TMI 1014
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....r section 256(1), being R.A. Nos. 306 & 307/Mum./96, whereupon reference was made to Hon'ble Bombay High Court for their esteemed opinion. Hon'ble Bombay High Court have thereafter delivered judgment dated 15-3-2001 on the assessee's Writ Petition No. 2490 of 2000 and the reference under section 256(1) made to them, numbered as Income-tax Reference No. 78 of 1998. As per this judgment, Hon'ble Bombay High Court have remanded the matter back to the Tribunal on certain specified points. Hence this order being passed by us in compliance to the direction given by Hon'ble Bombay High Court as aforesaid. 2. The judgment of Hon'ble Bombay High Court was forwarded to the Tribunal by the assessee as per its letter dated 12-6-2001. Thereafter the case was fixed for hearing from time to time and both the learned counsel of the assessee and the learned Departmental Representative were heard. It is seen that during the previous year relevant to assessment year 1989-90 the assessee completed construction of Centre-1 and allowed possession of certain built-up space to be taken by various persons or entities, for consideration. During the previous year relevant to assessment year 1990-91 the as....
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....nstitution with effect from 1-1-1981 whereas the assessee was required to seek registration under section 12A of the Act within one year from the date of creation of the Trust. The Tribunal held that when the application was belated, mere taking on record of that application by the Commissioner did not mean that the registration had been granted. This aspect of the Tribunal order was challenged by the assessee in the writ petition. The Hon'ble High Court found that the certificate under section 12A stated that the delay had been condoned and such certificate had been issued by the Competent Authority. At the same time, Hon'ble Bombay High Court in their judgment on assessee's writ petition, following the judgment of Hon'ble Madras High Court in the case of New Life in Christ Evangelistic Association v. CIT [2000] 246 ITR 532 held that the issuance of the certificate does not prevent an Assessing Officer from considering whether in a given assessment year the assessee is entitled to claim benefits under sections 11 and 12 or, as the case may be, under section 80G of the Act. As, according to Hon'ble High Court, this aspect had not been gone into by the Tribunal, Their Lordships rema....
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....erely a monthly tenant in respect thereof. The Court therefore directed the Official Liquidator to hand over possession of the said premises to the assessee-company. Based on this judgment, the learned counsel for the assessee argued that in the absence of Registered Deed/Agreement, the relationship between the assessee-company and the occupants of building space in Centre-1 and other buildings constructed by the assessee-company was that of a landlord and a monthly tenant. In this view of the matter it was not open to assess the 'Advance Rent' received by the assessee-company from various occupants during the years under assessment as sale proceeds of the premises or even proceeds arising on transfer of a capital asset. The learned counsel insisted that the issue was clinched by the aforesaid judgment of Hon'ble Bombay High Court and in the assessments in question before us nothing more than rent attributable to the previous year could be charged to tax. 5. Thereafter the learned counsel for the assessee took us through various provisions of the Agreements of Lease. He referred to clause 26 as per paper book page 500 which provided that if the rent or any other monies payable b....
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.... Court have held that the assessee has been registered under section 12A after condonation of the delay. Registration under section 12A proved that the Commissioner of Income-tax had satisfied himself in respect of the objects of the institution being charitable. That being so, that issue is not open to further debate and in the assessment proceedings one can only look into application of income by the institution. The learned counsel relied on the judgment of Hon'ble Allahabad High Court reported in Fifth Generation Education Society v. CIT [1990] 185 ITR 634 1 in this respect. He further submitted that the assessee having been incorporated as a company and granted on 12-6-1970 Licence under section 25 of the Companies Act, 1956, and that licence not having been revoked and being in continuance, the fact that the assessee was a charitable institution could not be objected to. He took us through the Memorandum of Association as given at pages 403 to 414 of the paper book and pointed out that the main object of the Centre was to organize, sponsor, promote, establish, conduct or undertake scientific research. Clause B of the Memorandum enumerated 28 objects incidental or ancillary to....
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....on thereto. We also requested the assessee to furnish us with a written statement in respect of application of the income of the assessee for assessment years 1989-90 and 1990-91. 8. The learned Departmental Representative argued that the Hon'ble High Court have referred the matter for determination of the correct nature of the transaction and not merely whether it was sale or lease. Under the provisions of Income-tax Act, true nature of the transaction would determine the tax liability of an assessee. Though the agreements which the assessee entered into with flat occupants purported to grant lease for a term of 60 years, the fact remained that ordinarily no lessee would take an asset on lease for 60 years and at the same time pay the entire lease rent for the period of 60 years in advance. In the instant case, there was hardly any difference between the market price of the space and the amounts which were collected by the assessee. For the same amount of money the occupiers of the flat could outright purchase the property. Similarly, on the lessor's part, generally the tendency would be to agree for a period of lease as minimum as possible and one would not be keen to lease ou....
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....ed it would be difficult to treat the transaction as a lease simpliciter. Ordinarily, it was only in a sale transaction that the full payment was given. As compared to the 'Advance Rent' collected, what was payable month to month was minuscule. Thus the transaction was a sale dressed up as a lease. At any rate, even if the idea of sale was rejected, the 'Advance Rent' collected by the assessee could also be understood as a premium. 10. On second issue whether the assessee was entitled to exemption under section 11, the learned Departmental Representative argued that the Centre was established as a scientific research institution. Memorandum clause in this respect did not refer to anything specific. The clause was very widely worded so as to give a wide leverage to the organizers. Apart from the first clause, there was nothing in the Memorandum to clarify as to in what manner scientific research was to be conducted. At any rate, the assessee has not been able to establish the fact of any scientific research having been done or for that matter, any charitable purpose having been carried out. All that the assessee had pointed out was that huge expenditure was incurred on establishm....
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....e between assessee and the Department on taxability of the rent received by the assessee for a period of 60 years in respect of the Arcade. If 1/60th rent is accepted as annual income in that case, the position could not be different in respect of other buildings. Even otherwise, premium received in the case of a Lease is always to be assessed as capital receipt. The learned counsel relied upon the judgment of Hon'ble Bombay High Court in the case of Cadell Wvg. Mill Co. (P.) Ltd. v. CIT [2001] 249 ITR 2651 in this respect. 13. Regarding Charitable purpose, the learned counsel disputed the contention that the assessee was not a charitable institution. This plea could not be taken after registration under section 12A was granted. Once the registration was granted the question of the objects of the institution being charitable could no longer be in controversy. The learned counsel relied upon the Tribunal decisions reported in ITO v. Dwarika Prasad Trust [1989] 30 ITD 84 (Delhi) (TM) and the decision of Bombay Bench 'C' in the case of Audit Bureau of Circulations v. ADI, being order dated 28-4-1995 in [ITA Nos. 285 & 286 (Bom.) of 1995]. The learned counsel further argued that thi....
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....ovisions of Income-tax Act thereupon. As the disputes relate to correct inferences to be drawn, we emphasise, a proper appraisal of the facts of the case in their totality is the crux of the matter. These facts have been painstakingly collected and enumerated at length in the assessment order for assessment year 1990-91 and in the order of the learned CIT(A) for assessment year 1989-90. For the sake of brevity, we propose to refer to them in this order in a condensed form. Let it suffice to record here that for a proper appreciation of the same it would be prudent and beneficial to peruse the elaborate facts recorded in the orders of the authorities below (supra). Briefly, the facts are that All India Manufacturers' Organisation and Industrial Foundation under its aegis conceived the idea of establishing World Trade Centre in Bombay and for this purpose a meeting of prominent industrialists in Bombay was held on 14-4-1969 under the presidentship of Shri S.K. Wankhede, Finance Minister, Government of Maharashtra. These people met from time to time and drafted Memorandum and Articles of Association of an institution. This institution was named and styled as "M. Visvesvaraya Industria....
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....t park or children's park on the plot. A restaurant or cafeteria may be provided." Further, the Memorandum also provided that The Centre would have no right to transfer or assign the lease of the plot or any part thereof to anybody without the previous consent of the Government. It was also provided that The Centre would pay to Government 50% of its earning after all its expenses and for this purpose the donations and membership subscriptions would not be included in the income. 16. Thereafter, by Resolution dated 18-11-1974, Government of Maharashtra accorded permission to The Centre to grant a sub-lease of 10,000 sq.ms. of land to the LIC of India. Further, the clause relating to the use of land was somewhat modified as under :- "(12) The land shall be used by the lessees only for erecting or constructing thereon buildings or structures to house or accommodate either for its own use or for letting out inter alia scientific research bodies, trade and/or industrial museums, research Centre and/or laboratories, libraries, bureaus, Shopping arcades exhibitions, a World Trade Centre (inclusive of all the services provided by such a Centre), Offices auditoria and/or hall....
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.... or 'Advance Rent', the assessee further stipulated that the prospective allottees shall make monthly payment of the Secondary Basic Rent payable on or before the 5th of every month. Further, it was also agreed upon that the prospective allottees would pay Common Outgoings Rent in respect of their share in the actual expenditure incurred by The Centre in respect of the municipal rates and taxes, water charges, repairs, ground rent, air conditioning facilities and upkeep of other amenities and facilities. The assessee also charged the Parking Space Rent in the same manner as Basic Primary Rent or 'Advance Rent' in respect of the main premises. In this manner the assessee-company charged from the prospective allottees lumpsum payments for grant of leasehold rights for a period of 60 years. The Secondary Basic Rent was fixed at the rate of 20 Paise per sq.ft. per month and it appears that the same was provided for with a view to meet the ground rent payable by The Centre to the Government. The common outgoings were supposed to be charged only on the basis of actual expenditure incurred by The Centre in respect of common facilities and amenities and upkeep and maintenance of the premis....
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....e, however, held that the receipt accounted for by the assessee under the label "Primary Basic Rent" or 'Advance Rent' should be treated to be premium or salami and should be charged, on the facts and in the circumstances of the case, to tax under the head "Business". He further held that the premium charged by the assessee granting permission to transfer the leasehold rights was also chargeable to tax as business income. The learned CIT(A) also held that in case the 'Advance Rent' was held to be capital receipt, the same was to be treated as consideration received by the assessee on transfer of a capital asset and the resultant surplus was chargeable to tax as short-term capital gains. The learned CIT(A) also took note of the fact that the assessee had received 'Advance Rent' from the lessees occupying old and new buildings and had also received Secondary Monthly Rent at the rate of 20 Paise per sq.ft. Though the assessee had offered 1/60th of 'Advance Rent' and Secondary Monthly Rent as income from business and the Assessing Officer had also assessed both under the same head, the learned CIT (A) gave the finding that all the periodic rent collected by the assessee after charging ....
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.... annual letting value at Rs. 4,05,51,455 and after various deductions computed income from house property at Rs. 3,57,41,449. In respect of monthly outgoings and other receipts, the Assessing Officer assessed an income of Rs. 2,13,39,640 under the head "Profits and gains of business or profession". On assessee's appeal, the learned CIT(A) entirely concurred with the findings of the Assessing Officer. As a result, while for assessment year 1989-90 the learned CIT (A) held Advance Rent received during that year assessable under the head "Bussiness", for assessment year 1990-91 further Advance Rent received by assessee was held assessable under the head "Capital gains". 21. During the course of hearing, the learned counsel of the assessee has placed heavy reliance on the judgment of Hon'ble Bombay High Court in the case of Sreeniwas Cotton Mills Ltd. (in liquidation) (supra). He argued that Hon'ble jurisdictional High Court held in that case that the assessee's agreement of lease not being a registered document, the allottee-company had not acquired any leasehold interest in the premises in question and was merely a monthly tenant, in the absence of registered lease agreements in a....
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.... which the assessee was not legal owner for want of deed of title, was liable to be assessed as "owner" or otherwise. The Hon'ble Court, having regard to the ground realities and further having regard to the object of the Income-tax Act, viz., 'to tax the income', held that for the purpose of section 22, 'owner' is a person who is entitled to receive income from the property in his own right. In the case of Mysore Minerals Ltd. (supra), once again the Hon'ble Apex Court dealt with a situation in which the assessee had not become owner for want of deed of conveyance. The Hon'ble Court took note of the fact that though the document of title was not executed by the Housing Board in favour of the assessee, the houses were allotted to the assessee by the Housing Board, part payment received and possession delivered so as to confer dominion over the property on the assessee. In this view of the matter, Hon'ble Court held that the assessee was entitled to depreciation in respect of the seven houses in question. In the case before us also, we find that the assessee had received stipulated payment in full and delivered possession to the flat occupants and conferred dominion over the propert....
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....erefore, the head of income in regard to the 'Advance Rent' or the "Primary Basic Rent" which represented price paid for acquiring space or lease-hold right of use of space was "Profits and gains of business or profession". The parking rent collected in lumpsum also fell in the same category. 23. Hon'ble High Court have found merit in the contention of the assessee that there was no such concept in law as sale of leasehold rights of the use of space. Hon'ble High Court have found that the order of the Tribunal is not clear in stating the above proposition and remanded the matter back to us with a specific direction to reconsider this point in the light of the contentions of the parties in the assessment proceedings and to decide the matter on this point. On reconsideration, we find that "Sale" and "Lease" are two separate categories of transfer of property. The distinction between them is well settled and demarcated. "Sale" involves transfer of ownership, while "Lease" involves transfer of right to enjoy property. In a lease, unlike sale, ownership in property is not transferred and only a right to enjoy the property is transferred. Having regard to this primary distinction, the....
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....d. The lease period was of 60 years during which the lessees were at liberty to enjoy the use of property in whatsoever manner they liked. They could make certain changes or alterations in the units they possessed and could even sub-lease them in the remaining part of the lease period. The Assessing Officer noted that technically the life of building is treated to be normally of 60 years and the assessee had collected the entire consideration of lease rentals of 60 years at one go. The case of the assessee was not different from that of an ordinary Society which retained the rights over the land and sold the flats constructed thereon on ownership basis. The learned Assessing Officer therefore held that the transactions of the assessee amounted to sale of the property and proceeded to compute profit arising to the assessee on such sale. However, while completing the assessment for assessment year 1990-91 the Assessing Officer held that in law Sale and Lease were two different concepts and the transactions of the assessee could be characterised as Lease and not as Sale. After analysing a number of judgments on the subject the Assessing Officer however rejected the contention of the a....
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.... found that while the lease agreement made such elaborate and strict arrangements for payment of 'Advance Rent' there was no corresponding provision in the lease agreement empowering the lessee to put an end to the lease at any time before the expiry of the lease period or for refund of the Advance Rent under any circumstances. In the absence of any right of refund of Primary Basic Rent by the lessees, in the opinion of the Assessing Officer, the deposit in effect was an unenforceable and unilateral obligation on the assessee Centre. He therefore held that the 'Advance Rent' was an appropriation, in full and complete, towards consideration money for agreement to lease space. The Assessing Officer also took note of the fact that irrespective of the date of possession, for the purpose of computing the Primary Basic Rent, the period of tenancy was taken by the assessee to be 60 years for all lessees reckoned from 1-10-1988. For example in the case of the lessee - Indian Banks Association - Although the lease was allotted on 21-8-1990, the total amount of Primary Basic Rent was charged for the entire period of 60 years reckoned from 1-10-1988. The Assessing Officer also found that in p....
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.... Rent' was received in three lumpsum instalments prior to handing over of the leasehold space because the assessee did not have any funds to construct the building and, therefore, construction of buildings had to be done on self-financing basis. Merely because the payments had been taken in three lumpsum instalments, the amounts received by the assessee did not partake the character of premium or salami. The assessee was a high profile body. Its Council of Management had representatives of the Government and various semi-Government bodies. There could not be any question of "device" or "manipulation". In lieu of 'Advance Rent' received, the assessee was obliged to keep the lessees in possession for the entire lease period of 60 years. The assessee did not charge apart from the Primary Basic Rent as 'Advance Rent' any other significant amounts. Secondary Basic Rent was very nominal, being charged on monthly basis at the rate of 20 Paise per sq.ft. Thus the assessee had taken the real rent in advance. As far as Common Outgoings Rent was concerned, the same only represented reimbursement of actual expenses incurred. The assessee also relied upon the judgment of Andhra Pradesh High Cou....
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....c Rent and Parking Space Rent collected as 'Advance Rent' on the one hand and Secondary Basic Rent and Common Outgoings Rent on the other. While the former was in the nature of premium or salami, the other two were in the nature of monthly rents. The learned CIT(A) took note of the fact that in the 1971 report, the Council of Management had described the Primary Basic Rent as "a consideration for agreement to lease space". It was only in 1973, on being given legal advice, the nomenclature was changed to "Advance Rent". He also took note of the fact that as on 31-3-1989 a sum of Rs. 7,29,88,941 was outstanding advances and these parties were not given possession of the premises, which was taken only subsequently after full payment of the agreed Primary Basic Rent. This could only lead to one conclusion, that the payment of Primary Basic Rent was absolutely essential before the lessor could be let into the possession of the premises under the lease agreement. Thus no landlord-tenant or lessor-lessee relationship was permitted to be created prior to the receipt of the full payment of the whole amount of the Primary Basic Rent by the lessor. Lease deeds were executed only upon payment ....
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....o. and the assessee would have fixed fresh terms of premium and lease rent etc. Nothing of that sort was done. A new tenancy was created simply by the act of charging of premium of Rs. 170 per sq.ft. ignoring the prevalent market price of about Rs. 3,300 per sq.ft. Similar practice had been adopted in all other cases of transfer of leases by the original lessees. The learned CIT(A) found that within a couple of weeks of obtaining the possession of the flat, Khatau Makhanji paid just an additional premium of about Rs. 14 lakhs to The Centre and making killing of more than Rs. 2 crores was not a solitary instance. There were, in fact, a large number of such instances which the learned CIT(A) has further detailed in para 47 of his order. In view of these reasons, the learned CIT(A) held that Primary Basic Rent received by the assessee was not "Advance Rent" but receipt of "Premium/Salami". 30. The learned CIT(A) thus arrived at the same conclusion as the Assessing Officer in assessment year 1990-91, that the assessee's transactions were lease but Primary Basic Rent received by the assessee was "Premium" and not "Advance Rent". In the assessment order for assessment year 1990-91 the....
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.... entitled to stipulate payment of such fees/amount and such terms and conditions as The Centre deemed fit. Clause 15 provided that if the lessees ceased to be a member of The Centre, they shall either transfer the lease to The Centre or to any other party who is a member of The Centre, subject to the approval of The Centre. Clause 28, which dealt with the expiration or sooner determination of the lease provided the lessees two options, i.e., (1) either to transfer the lease to another member or (2) to forfeit the lease at his own cost. The learned CIT(A) found that in practice The Centre charged additional premium at the rate of Rs. 170 per sq.ft. regardless of the extra consideration charged by the lessees from the incoming members. The whole question of surrender of lease by the lessees was academic. No one surrendered, yet 60% of original members/lessees earned huge amounts running into crores by transferring their lease rights on payment of relatively smaller transfer fees to The Centre. The learned CIT(A) therefore reached the following conclusion in para 38 of his order :- "1. 'Primary Basic Rent' is in the nature of premium/salami charged by the assessee for letting....
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....xhibition Halls not only for the use of the members but for the world at large from whom full commercial tariffs were charged. This was a highly organised business activity. 31. The learned CIT(A) further found that the assessee always charged a very high premium on giving lease-hold space to late entrants. The flats were leased and not sold for the very simple reason that under the agreements with the State Government, the assessee was not entitled to make outright sale. However, by leasing out flats for a period of 60 years with renewal clause, the assessee got over this difficulty. Only a fraction of the floor area was retained by the assessee for its own use and that too only for running the business of providing various services like Central Air Conditioning, Express Elevators, Conference and Exhibition Halls for daily hire and the rest of the floor space (which was the fixed capital) had been used for "turning into account" by selling lease-hold rights prior to the completion of buildings and handing over of possession. The assessee employed large number of staff which was mainly engaged in maintaining and undertaking these activities. 32. The learned CIT(A) noticed tha....
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....t from that of any other builder who built flats for profit. The only difference was that instead of outright sale, the assessee resorted to leasing out the flats on a long-term of 60 years with renewal clause. The learned CIT(A), therefore, further held that initial premium and additional premium charged by the assessee was on the revenue account because the assessee as a owner had been turning the leases into accounts. Secondly, profits from such activity was chargeable to tax under the head "Profits and gains of business or profession". 33. The learned CIT(A) passed the impugned order for assessment year 1989-90 on 13-9-1993. The assessee's appeal against the assessment order for assessment year 1990-91 was taken up subsequently on 23-2-1994. In this relatively brief order, the successor CIT(A) has time and again relied upon the order of his predecessor for assessment year 1989-90. However, the learned CIT(A) for assessment year 1990-91 did not make much of the basic distinction between the approach of the learned CIT(A) for assessment year 1989-90 and that of Assessing Officer in the assessment order for assessment year 1990-91. While the learned CIT(A) treated the premium c....
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....ecution of the deed. The lessees were assured of a right to re-transfer, though subject to the sole discretion of The Centre, inasmuch as it was stated that refusal to give permission shall not be unreasonably done. On the facts of the case, there were two possibilities. First, to hold the assessee liable for rental income chargeable on a monthly basis and, second, to treat that the assessee had sold the space to the lessees by holding that the Primary Basic Rent was salami or premium. The argument of the assessee that the Primary Basic Rent was an 'Advance Rent' was based only on what was stated in the lease deed. If the totality of the facts were considered, they clearly indicated that the only proper view was to hold that the transaction was one of sale of lease-hold right of use of space and what the assessee retained only was the right to charge monthly rental, right to charge transfer fee and the right of space leased out. The Tribunal therefore held the view that the amount collected towards construction in the name of Primary Basic Rent was price for allowing lease-hold right of use of space for 60 years which bore the character of income at the time the possession was hand....
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....ss, cannot be said to treat them as landowner but as trader. The cases which have been cited in this case both for and against the assessee-company must be applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter." And again, at page 378, the Hon'ble Apex Court have further laid down as under :- "Where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation." 36. The principle laid down by Hon'ble Supreme Court in the case of Karanpura Development Co. Ltd. (supra) have been followed and applied in a plethora of subsequent judgments. In the case of S.G. Mercantile Corpn. (P.) Ltd. (supra), the Hon'ble Apex Court once again relied on their....
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....d the assessment for assessment year 1990-91 also held more or less similar view, but he proceeded on the basis that the transaction being lease and the lumpsum payment received as a pre-condition for grant of lease being premium, the same had to be assessed as a capital receipt in the hands of the assessee arising on transfer of a capital asset. In the order of the Tribunal made on 29-3-1996, the finding of business has been reached. 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. The assessee proceeded to exploit FSI (Floor Space Index) available on the land sanctioned to it by the State Government in the same manner as any other real estate developer or builder in Mumbai would with the only difference that instead of outright sale, the rights conferred on the customers were lease-hold rights for a period of 60 years. The space was allotted on first-come-first-served basis at market value so much so that while the Primary Basic Rent charged initially amounted to Rs. 475 per sq.ft., it kept on increasing year aft....
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....igh Court found that where the assessee leased hostel to students who were permitted to occupy pursuant to licence, income from lease was assessable as business income. We may also mention here that the fact that assessee charged additional premium or transfer fee on assignment of lease-hold rights by the original allottees also lends colour of business to the entire leasing operations of the assessee. It may be noted that Hon'ble jurisdictional High Court by their judgment in the case of CIT v. Presidency Co-operative Housing Society Ltd. [1995] 216 ITR 3212 (Bom.) treated such receipts to be revenue receipt. 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. 41. As pointed out by us, the finding given by us in the foregoing paragraphs is precisely what the assessee has himself done in his returns of income for both assessment years 1989-90 and 1990-91. The major area of dispute is whether the entire Primary Basic Rent is chargeable to tax as a premium received by the as....
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.... of Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. [1943] 11 ITR (Supplement) 10 (CA), Lessees of licensed premises, under a covenant in their lease, paid annually certain sums imposed by the licensing justices as instalments of the monopoly value on the grant and renewal of the licence for three-year period. It was contended that those sums were not capital payments, but must be regarded as revenue payments and, as such, deductible for income-tax purposes. It was held that monopoly value payments were imposed for the term of the licence on grant or renewal, though the fact that permission was given to pay by yearly instalments gave a false appearance of periodicity. The Hon'ble Court of Appeal observed at page 15 as follows :- "It appears to me that there can be no difference in principle between a payment out-and-out for monopoly value and a payment in respect of a term. Each licence granted for a term must stand by itself, since an application for its renewal falls to be treated as an application for a new licence. This is what I mean when I say that there is a false appearance of periodicity about these payments. Whenever a licence is granted for a term, the paym....
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....CIT [2000] 244 ITR 547 2 (Kar.) , the assessee, a public sector undertaking, took three flats on lease for 99 years on payment of Rs. 26,82,462 inclusive of registration charges of Rs. 4,14,569. The Tribunal held that the assessee was entitled to deduction of the rent payable in respect of the three flats for the year of account and directed the Assessing Officer to calculate the aggregate of the rent payable to the three landlords at rates mentioned in the documents of lease and allow deduction accordingly. Hon'ble High Court held that although no sale deed was executed and the transaction was clothed as lease, it was nothing but conferring ownership rights on the assessee. Hence the expenditure could not be considered to be revenue expenditure nor could the assessee claim the deduction treating the same amount as an advance rent. 45. From the judgments cited by us in the foregoing paragraphs, it follows that where the term of lease is granted for a price, the price paid is premium or salami while the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. There is a permanent quality about payment of premium and periodic....
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....ee operated on the basis of a fixed term of 60 years to be reckoned from 1-10-1988. This was done even in the cases of agreements of lease entered into long after 1-10-1988. This also indicates that Primary Basic Rent was consideration for agreement of lease and not advance collection of periodical rent. 46. Secondly, there is no clause whatsoever for any refund of Primary Basic Rent collected by the assessee. The lease agreement does talk of sooner expiry or determination of lease term but it does not provide for any refund of the rent for the unexpired period. In the case of CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 1, the Hon'ble Supreme Court have laid down that the essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfilment of certain conditions. But in the lease agreements before us, no liability to return has been assumed by the assessee and it is therefore crystal clear that Primary Basic Rent stood appropriated by the assessee on the very date the lessees were put into possession and no part of it awaited any further period to elapse, not to speak of expiry of the entire ....
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....68. No such exercise have been done either in the lease agreements between parties nor while accounting for the same in the books of account of the assessee. The reason for that is not far to seek. There was, as a matter of fact, no periodical rent in contemplation, only the lumpsum amount to be received for the entire term of 60 years taken together. 49. In view of the discussion in the foregoing paragraphs, we uphold the order of the learned CIT(A) for assessment year 1989-90 in this behalf. The assessment made for assessment year 1990-91 on a different basis is therefore directed to be modified accordingly. 50. We shall now turn to the second aspect for which Hon'ble High Court have directed us to reconsider the earlier order of the Tribunal, i.e., whether for the assessment years before us the assessee is entitled to the benefits of exemption under section 11 of the Act. As noted earlier, the assessee was earlier approved as a Scientific Research Association for the purposes of clause (ii) of sub-section (1) of section 35 and as such its income was not chargeable to tax by virtue of the provisions of section 10(21) of the Act. This approval was however withdrawn with effe....
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....he assessee's income was chargeable to tax under the head "Profits and gains of business or profession", the transaction of the assessee should be assessed as lease and not as sale. The assessee implied that as the lease was for a period of 60 years it was only 1/60th of the business receipts which were chargeable to tax. The Assessing Officer, however, held that the case of the assessee was no different from that of an ordinary Society or Builder which retained rights over the land and sold the flats constructed thereon on ownership basis. He therefore proceeded to assess profits earned by assessee from sale of portions of Centre-1 instead of assessing only the sum of Rs. 38,33,206 worked out by the assessee on 1/60th basis. 51. During the course of assessment proceedings for assessment year 1990-91 the Assessing Officer considered the question of exemption under section 11 at length. He held that in order to determine whether the property held under Trust is only for charitable purposes, the Assessing Officer was not bound to confine himself to the terms of the Trust Deed and could look outside the instrument to determine the true character of the income. From the first Annual....
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....their proposal was not accepted. The assessee therefore decided to live without an approval under section 35(1)(ii). The Assessing Officer found that the Apex Body of Government in relation to Scientific Research in the country, i.e., Department of Science and Technology, did not consider the activities of The Centre as falling in the category of Scientific Research. There was no change in the nature and composition of the activities of The Centre since 1981 to warrant a review of the decision of the Apex Body. The Assessing Officer therefore concluded that Scientific Research was not the dominant object of the assessee and proceeded to examine what then was underlying dominant objective and whether the same amounted to advancing of an object of general public utility. He found that the underlying dominant object was establishment of a World Trade Centre in Bombay along the lines in other parts of the world. It was expected to provide under a single complex, the package of facilities and services not only to its own members but also the members of other World Trade Centres all over the world and to the visitors of its World Trade Centre. For this purpose, an elaborate lay-out had b....
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....f workshops, training programmes, seminars and exhibitions. However, all these activities were undertaken on a commercial basis only. Participation in these activities was open only on payment of the requisite fees. The Assessing Officer noted that The Centre was providing services just like any agency for rendering a host of specialised services on a commercial basis would. In a modern economy, even provision of drinking water could become a well organised commercial activity. Viewed in this light, the services/activities of The Centre fell squarely within the domain of a commercial activity undertaken on considerations of profit-making. The same did promote the cause of trade and industry only in a remote and indirect manner. Thus the welfare of the general public was only incidental. It was true that for passing the test of an object of general public utility, it was not necessary that the object should be to benefit the whole mankind. It was sufficient even if the object was beneficial to a section of the public. However, it was essential that the section of the community sought to be benefited possessed some quality of a public and impersonal nature. The Assessing Officer ther....
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....rge or encumber the demised premises or any part thereof subject to the permission in writing of The Centre being first obtained. While the Centre reserved with itself the right to refuse permission without assigning any reasons and/or to stipulate such terms and conditions as The Centre in its absolute discretion thought fit, the agreement simultaneously provided that such permission shall not be unreasonably refused. Not only that such permission was granted to all the lessees so much so 60% of the original lessees changed hands, The Centre granted permission at a fixed sum of Rs. 170 per sq.ft. which formed only a small portion of the unearned increase in the value of lease rights, permitting its members to make profits running into crores of Rupees. If charity was the objective, the entire lease arrangement should have been differently motivated. In the absence of any need for the property by the lessee, the same should have rightly been required to be turned over to The Centre after recovering the balance of the 'Advance Rent' for the unexpired period of lease. However, since the lease of space was always intended to be a commercial transaction driven by considerations of prof....
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....s detailed in the foregoing paragraphs, the learned Assessing Officer for assessment year 1990-91 rejected the assessee's claim that The Centre having been established for a wholly charitable purpose, the income of it should be exempt under section 11. 58. During the course of appeal before the learned CIT(A) for assessment year 1989-90, the assessee argued that the approval as Scientific Research Association was not extended beyond 31-3-1981 for the reason that Department of Science and Technology required the assessee to separate the World Trade Centre activity from research activity under two distinct organisations. However, construction and establishment of World Trade Centre in itself being an object of general public utililty the assessee continued to be covered by the benefits of section 11. There was a prohibition up to 1983 against any activity for profit. Thereafter these words appearing in section 2(15) were dropped and, therefore, exemption under section 11 could not be denied on the ground only that the assessee carried on activities of Profit. Relying upon the judgments in the cases of Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 11 (SC); CIT ....
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.... gave full discretion to the Council of Management, regardless of the lack of any nexus with the primary object the trust could not be held charitable. The members of The Centre also did not exhibit any common quality so as to be called a section of public. The learned CIT(A) held that for the purpose of exemption under section 11, charity must be of a public character and it was necessary to benefit a sufficiently large section of the public as distinguished from body of specified individuals. The dominant purpose of the trust must be charitable and if there were several objects of trust, some of which were charitable and some non-charitable and the trustees in their discretion could apply the income to any of the objects, the whole trust must fail and its income could not be exempted under section 11. Neither the grant of a licence under section 25 of the Companies Act nor the recitals in the deed could be conclusive. The learned CIT(A) agreed with the Assessing Officer that Scientific Research was merely a pretext. The assessee came into being to implement the decision of the Industrial Foundation to set up a permanent trade and exhibition centre as part of the industrial comple....
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....um at the rate of Rs. 170 per sq.ft., in the case of original members, did not even make up for the cost of construction. This rate was sustained even when the assessee itself was charging premium of Rs. 4,000 to Rs. 6,000 per sq.ft. from the late entrants. Thus the benefit running into tens of crores of Rupees was passed on to the individual members. Thus the case of the assessee was clearly caught by the mischief of the provisions of section 13. The learned CIT(A) also found that the assessee had not complied with the provisions of section 11 for application of income. Factually, contention of the assessee was not correct. The annual accounts for the year ended 31-3-1989 showed that the assessee had investment of Rs. 1,43,02,726; Current assets and loans and advances of Rs. 6,57,60,409 and Rs. 9,73,68,896 respectivley. These investments had come out of accumulated surpluses for which no permission was ever sought, nor was there any plan for utilisation of these funds for any of the stated objects of the trust. Relying upon the judgment of Hon'ble Bombay High Court in the case of CIT v. Jamnalal Bajaj Sewa Trust [1988] 171 ITR 568 (At page 571), the learned CIT(A) held that the wo....
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....on amounted to charitable purpose, merely because the object clause was very widely worded or that the assessee incidentally made some profits, exemption under section 11 could not be denied. The learned counsel also relied on the fact that the assessee had moved registration under section 12A and Commissioner of Income-tax had taken the application moved by the assessee on his record on 8-2-1984. This act of the Commissioner of Income Tax was conclusive of the fact that the assessee was a charitable institution. Once registration under section 12A having been granted, the authorities concerned with the assessment could not take a different view. For this purpose the learned counsel relied upon the decisions of Tribunal in the case of Dwarika Prasad Trust (supra) and Audit Bureau of Circulations (unreported). The Tribunal considered these contentions of the assessee. It found that Certificate of Incorporation under section 25 was granted on the basis of objects enumerated in Memorandum of Association and the argument that for that reason only the assessee should be regarded as a charitable institution was without merits. Further, even if an institution could be said to be covered b....
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.... that basis the Tribunal held that registration granted by the Commissioner or Director of Exemptions could not be questioned by assessing authorities. However, this certificate of recognition did not prevent any Assessing Officer to explore into the activities of a charitable institution, investments made by it and the use to which the properties of the trust were put. If the facts indicated that any of the provisions of section 11 or 12 or 13 were violated, the Assessing Officer could deny exemption. In the instant case, the assessee was refused recognition as a Scientific Research institution with effect from 1-1-1981 and it was only then that the assessee had woken up to seek recognition as a charitable institution. The assessee was expected to seek registration under section 12A of the Act within one year from the date of creation of the trust. The assessee's application for registration was delayed by over 12 years. Further, sub-clause (b) of section 12A required filing of audited accounts for the year on the basis that the application was moved within the year of formation. Since the assessee's application was late by 12 years, it was obvious that the audited accounts for al....
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....mbers some of whom were in occupation of the space, some continued to be members even after transferring the space allotted by them by making a huge profit. This indicated that conferring of benefit to a special section of the public was never the intention, let alone allowing some of the beneficiaries to carry on the work. The so-called main objective of Scientific Research activity was nothing more than a make-believe mask. The Tribunal thus rejected the contentions of the assessee relating to exemption under section 11. 65. Hon'ble High Court have in their judgment dated 15-3-2001 not found the arguments relating to the registration under section 12A of the Act in the order of the Tribunal to be correct. The fact of the matter was that a certificate under section 12A was issued to the assessee by the Competent Authority which stated that the delay had been condoned. The said certificate had not been revoked. It was not known on what basis the Tribunal held that normally a certificate granting recognition was issued for a specific period. Hon'ble High Court referred to the judgment of Madras High Court in the case of New Life in Christ Evangelistic Association (supra). In that....
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....90 and 1990-91. 66. During the course of hearing before us, the learned counsel of the assessee pointed out that the assessee was registered under the Companies Act, 1956, and was issued licence under section 25. The Government of Maharashtra allotted nearly 18 acres of land to the assessee and The Centre became a member of the World Trade Centres' Association, New York, which had a network of more than 300 World Trade Centres as members throughout the World. Construction of the Arcade was completed in 1977 and it housed various offices, emporia and Exhibition Centre. The Centre-1 building got completed in 1988 and it housed the offices of The Centre. Exim Bank, UTI, TELCO, Export Promotion Council etc., and the third building, IDBI Centre, which was completed in 1989, was occupied by IDBI. The Centre had in its occupation four floors in Centre-1 which carried out Trade Information Service Activity, international trade library, research division, World Trade Institute for educational services, Centre Point, Expo Centre Office, Video Conferencing, Conference Rooms etc. Though space was generally allotted on a 60 year basis, exceptions were made in the case of nine Export Promotio....
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....y was carrying on activities for private profit. The Centre did not carry on activities for private profit. In the earlier order, the Tribunal held that some of the objects of The Centre were not charitable. It could do so, if some of the objects were viewed in isolation. Even if it were so, there was no case to deny the assessee's claim for charity. For this purpose the learned counsel placed reliance on the judgments in Andhra Chamber of Commerce's case (supra) and 103 ITR 77 (sic) (SC). 67. The learned counsel for the assessee argued that profit making was not prohibited under the provisions of section 11. Section 11(4A) read with section 11(4) left no doubt that if the business was held under trust or legal obligation, the income from the same was not chargeable. The provisions of section 11(4A) are not to restrict the scope of charity but to enlarge its scope. The Courts have also held that if the business is carried on and its profits are applied to the objects of the charity, the same would not result in denial of exemption under section 11. 68. The learned counsel for the assessee emphatically argued that grant of registration under section 12A concluded the fact that....
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....Assembly of World Trade Centres' Association in Mumbai during this year. For this purpose the total receipts of the assessee amounted to Rs. 34,85,448 only. The balance expenditure was borne by The Centre. There was certain expenditure which was directly in relation to various purposes of buildings, such as Architects' fees, lease rent, rates and taxes, insurance, contractual services, repairs and mainte- nance etc. Besides, a large part of some other expenses such as salaries, contribution to Provident Fund, staff welfare, interest, electricity charges and so on pertained to the buildings. This expenditure was to a large extent compensated by corresponding receipts. Even otherwise, this represented application of income on the objects of the institution because these buildings formed part of the World Trade Centre. 72. The learned Departmental Representative argued that the main clause of the trust was rather vague. Nothing was specifically stated in relation to Scientific Research activity. Even then the assessee could not pinpoint any specific expenditure on Scientific Research. Almost entire expenditure was incurred by the assessee on its establishment which was mainly requi....
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....ave taken a different view but as the Hon'ble Jurisdictional High Court have approved the judgment of Hon'ble Madras High Court (supra ), this issue stands concluded. We, therefore hold that the assessee cannot argue that with the certificate of registration under section 12A, the fact that the assessee was a charitable institution stood concluded and the taxing authorities cannot question it. In the assessment order for assessment year 1990-91 the learned Assessing Officer held that in order to determine whether the property held under Trust is only for charitable purposes, the Assessing Officer was not bound to confine himself to the terms of the Trust Deed and could look outside the instrument to determine the true character of the income. The same view has been taken by the learned Commissioners of Income Tax (Appeals). We find ourselves substantially in agreement with the position taken by them. The fact whether an institution is a public chairtable institution or not is not only a question of the Trust Deed or Memorandum of Association etc., but also how the institution has conducted its activities. The authorities below have found a serious breach in this regard inasmuch as ....
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....), 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 cafetaria and/or restaurants but not a hotel. Although sprawling buildings were constructed on the land in question, very little has been done in respect of the land use, as envisaged in clause 12 of the Government Resolution. Further, in the assessment order for assessment year 1990-91, the learned Assessing Officer has noted that although it was intended that in allotting space, The Centre must ensure that (a) a fairly good cross-section of consumer goods is represented, (b) small scale industries given due prominence, and (c) due consideration given to the representations of various regions in India, nevertheless, in the ultimate analysis, space was allotted on a first-come-first-served basis through intensive advertisement campaign. As a consequence, an assortment of lessees came to occupy space in various buildings not by design but incidental. Various other activities of The Centre such as the monthly circular known as "Trade Promotion Service", collection and dissemination of trade i....
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....ct of course to the permission in writing of The Centre being first obtained. While The Centre reserved with itself the right to refuse permission and to stipulate conditions, it was made out in the lease agreement itself that such permission shall not be unreasonably refused. The Centre granted permission at a fixed sum of Rs. 170 per sq.ft. which formed only a small portion of the unearned increase in the value of lease rights, permitting its memebrs to make profits running into crores of rupees. If charity was the objective, in the absence of any need for the property by the lessee, the same should have rightly been required to be turned over to The Centre after recovering the balance of the 'Advance Rent' for the unexpired period of lease. The learned counsel for the assessee has disputed these findings and argued that it has been admitted in the assessment order itself that at the initial stages there were no takers of space because of various parameters which went with the lease of space. In these circumstances no fault could be found if many of the members of the Council of Management took office space on lease. On consideration of the matter we are of the view that this cha....
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.... of income wherein its receipts from the flat occupiers in various buildings constructed by it have been treated as business income. We have also upheld the impugned order of the learned CIT(A) for assessment year 1989-90 in this respect and held that for assessment year 1990-91 the assessment as short-term capital gains is not correct and the income is required to be assessed as business income. Finance Act, 1983, inserted with effect from 1-4-1984 sub-section (4A) to section 11 which reads as under :- "(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, unless - (a )the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or is of a kind notified by the Central Government in this behalf in the Official Gazette; or (b)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 ....
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.... 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 does not exceed 25% of the income from such property. However, the provisions of section 11(2) lay down that where 75% of the income referred to in sub-section (1) read with the Explanation is not applied or is not deemed to have been applied to charitable or religious purposes in India during the previous year but is accumulated or set apart for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year provided such person specifies, by notice in writing given to the Assessing Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, not exceeding ten years and the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5). The learned CIT(A) has in the impugned order for assessment year 1989-90, in para 92 noted that the annual accounts for the year ended 31-3-1989 show....
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....ation of balance funds for the activities of The Centre, for the reason only that the term of lease granted was for a period of 60 years. If these funds were being "accumulated", it should have been made out very clear in the report of the Council of Management for both the years ended 31-3-1989 and 31-3-1990 respectively. On perusal of these reports, we do not find any statement in this respect. In the case of H.E.H. Nizam's Religious Endowment Trust v. CIT [1966] 59 ITR 582, the Hon'ble Supreme Court have held that the expression "accumulated for a purpose" involves a conscious act 'in praesenti' and posits a clear indication on the part of the trustees to set apart the income for that purpose. In the case of CIT v. Nagpur Hotel Owners' Association [2001] 247 ITR 2015 , the Hon'ble Supreme Court have held that notice for accumulation of income must be given before the completion of assessment by the Assessing Officer. In the instant case, we are being asked to consider only a small portion of the income derived from the property held under trust while large portions of the same have been excluded on the unsubstantiated ground of being "Unsecured Loans". This resulted into substan....
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....efore us. It was stated that a major part of expenditure during the years was on buildings-related matters but then there were corresponding collections under the head "Monthly outgoings". The other expenditure was incurred partly on the Establishment and mainly on various activities of the Trade Centre as enumerated in para 66 above. When called upon to give the break-up of expenditure incurred on each of these activities, the learned counsel for the assessee argued that it was not possible to give such break-up. We have enumerated this aspect in para 71 above. On perusal of the accounts for the year ended on 31-3-1989 it is seen that the gross income worked out by the assessee is Rs. 4,65,97,060. The collection of "Monthly outgoings" amounting to Rs. 3,20,01,979 constituted the major part of these receipts. However, in the absence of break-up, it is not possible to find out whether there was any profit or loss on the assessee's buildings-related activities which cannot be construed as application of income for charitable purposes. It is also not possible to find out as to how much was the expenditure on Establishment and how much was the net expenditure on the other activities of....