TMI Blog1996 (3) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 2(15) of the Income-tax Act, 1961 (hereinafter referred to as the Act), that its income are therefore exempt from tax under section 11 of the Act. The revenue department had refused to grant the exemption because, the assessee diverted its attention to the activities of construction of buildings known as Trade Centre, Commerce Centre and IDBI Centre. The related reason was that for the purposes of construction funds were collected from various applicants for space on said building on lease for a period of sixty years in the said buildings even before the start of the construction and during the construction but, before giving of possession, was not a charitable activity. The other related reason for refusal was that, the lessees were permitted to transfer the lease in favour of the another for a larger sum than what was paid by them on payment a transfer fee to the assessee, which indicated that the members made private profit by using the property of the assessee which defeats the purpose of charity. Another reason that weighed in the minds of the authorities was that though, the assessee's primary object was scientific research for which it was established in 1970, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated it as income from business. The second relates to the area in Commerce Centre that was transferred and that the CIT(A) should have limited the area to 289405 sq. ft. instead of 461736 sq. ft. The third issue is that the cost of construction of the building and the plant machinery, should have been taken as suggested by the Assessing Officer in his remand report for purposes of set off from the income at Rs. 1491,91,142 (proportionate cost of space of 289405 sq. ft.) in place of Rs. 3977,89,589. The last of the issue is that because the finally assessed income was a loss the CIT(A) should not have directed the Assessing Officer to allow set off of brought forward unabsorbed business loss and unabsorbed depreciation. 2.3 The cross objection of the assessee involves the objection to the conclusion of CIT(A) that, any amount could be charged to tax under the head income from property and in taxing Rs. 2059,79,598 which was advance received from lessees to whom possession was yet to be given. The assessee has raised these very pleas as its additional grounds of appeal. 2.4 In the AY 1990-91, the assessee in addition to the common issues as brought out in para 2 above, has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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)(1) of the Income-tax Act, 1961, or the corresponding provision of any new law, is hereafter amended, the amendment shall apply to the connotation of 'scientific research' in this clause." The assessee was recognised as a scientific research initially by Central Board of Direct Taxes in 1970, before formation of the appropriate authority, Department of Science Technology (DST) and this recognition continued till 31-3-1981. 3.1 The Revenue Forests Department of Govt. of Maharashtra passed a resolution No. LBR 2570/13594-A1 dated 16th October, 1970 issued with the concurrence of the Finance Department on Ref. No. 1180/III dated 29th March 1970, by which sanction was accorded to the lease of about 6 hectares 96.49 areas (850' X 850') of reclaimed land from Block V, Backbay Reclamation to the assessee subject to the terms conditions in the memorandum of terms and conditions. On 18th November, 1974, the Revenue and Forests Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e should make suitable provision, if necessary, in its Memorandum, and Articles of Association etc., for enabling compliance of such directives as and when issued. (d) The building completion period of six years stipulated in condition No. 8 of Appendix 'A' to the Govt. Resolution, dated 18th November, 1974 should be extended up to 2nd May, 1980 should be extended up to 1980 without charging any premium. (e) On the Centre's request to permit construction of a residential Hotel on a portion of the land measuring about 8699 square metres, orders would be issued separately. The terms and conditions as specified in Appendix 'A' of the resolution dated 18th November, 1974 are given below : 1. The lease will be for a period of 99 years from the date of possession renewable for only one term of 99 years on the same terms and conditions but on such ground rent as may be revised by Government. 2. The ground rent will be calculated at 6 1/2% per annum on the value of the land at Rs. 325 per square metre. 3. A rent free period of two years from the date of possession followed by a rebate of 50% in the ground rent for the next two years will be allowed. 4. The Centre shall pay to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e any extension of the building completion period of grant such extension on such terms and conditions including a condition regarding the payment of any premium as Govt. may in its absolute discretion think fit. 9. A standing deposit of Rs. 20,000 will be paid by the Foundation and the same will be retained by Government throughout the term of the lease. This deposit or such portion of it as Govt. may finally determine will be liable to be forfeited by the Collector of Bombay, if there is any breach of the lease conditions. In case of such forfeiture the lessees will reinstate the deposit to the extent forfeited within 15 days of their being called upon to do so. This right of forfeiture of the deposit will be in addition to and without prejudice to the other rights remedies of Govt. against the lessees under the lease. 10. The Centre will submit for the approval of the Architect to Govt. Buildings and Communications Department the layout of the entire area required for construction of the buildings and the roads, and the plans of the buildings within six months from the date of possession of the plot. No construction will be commenced unless the plans, elevation and section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the first 25 years of the lease from the date from which the said difference would have been chargeable. LIC could use the sub-leased land for the purpose of construction of the building for office purposes only with no liberty to sublet any part of the building. The sub-lease was to be coterminous with the main lease. Appendix 'C' is an extension for the grant of loan of Rs. 7.95 crores by LIC on the security mortgage of the leased land indicating the rights of LIC in case the Centre defaults in its repayments. These being not relevant to the issues arising in the case before us in appeal, these are not reproduced. 3.2 The application moved by the assessee under section 35(1)(ii) of the Act for recognition as a scientific research institution received the assent of the Central Board of Direct Taxes on 6-4-1970. In 1977, Department of Science Technology (DST), the appropriate authority to monitor all scientific research activity and to grant recognition as above, advised the assessee that before allowing extension of the recognition as a scientific research institution that it would be reviewing it. The recognition was extended till 31-3-1981 after considering the repres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The terms conditions under which space would be leased in the Centre were discussed at various meetings of the Council of Management and have since been finalised. According to the present calculations, they will not only provide funds for buildings the Trade Centre, but leave a sizable surplus to be utilised towards reducing the capital outlay for the Exhibition Centre or, if necessary, serve as a reserve for ensuring the repayment programme in respect of the loan from LIC. Consideration Money for agreement to lease space has been fixed on a raising scale, over a period and applications for space are now being received." Extract from the report for the year ended on 31-3-1973 : --- " lease of space---the principal terms and conditions for leasing space in the Trade Centre have, upon the 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 sixty years, which in law is considered the life of a build ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wardly to Rs. 5.15 Rs. 2.60 in 1989 and to Rs. 5.65 Rs. 2.75 in 1990. The lessees were allowed transfer of their leasehold rights on payment of transfer fee of Rs. 170 per sq. ft. of space taken on lease. The Founder Members paid Rs. 475 per sq. ft. when the cost of construction was Rs. 754. 3.7 The common outgoings rent comprised of charges for the following services, viz., maintain repair the building, common passages, foyers, corridors, courtyards, gardens, terraces, landscapes, lifts, lift halls, escalators, escalator halls, basements marquee, air-conditioning, ventilation, fire fighting, electrical fittings, sewage treatment, watch ward, etc., which were agreed to be provided by the assessee to the persons who had taken the space on lease on the terms specified in the lease agreement. For the purposes of providing the above-mentioned services facilities, the assessee had a battery of staff and the administrative expenses (as 4% of all its administrative expenses) had been made part of the common outgoings rent. 3.8 The cost of construction on Commerce Centre which was completed during the financial year relevant to the assessment year 1989-90 aggregated to Rs. 39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------------------------------------------------------------------------------- 3.10 Clause 20 of the memorandum of association permitted the purchase, take on lease or in exchange or otherwise acquire any lands, buildings, easement right in common or property movable or immovable and to let out, give on lease a licence or acquire, demise, mortgage, sell, give in exchange or otherwise dispose of the same or any part thereof. Clause 23 permitted to maximise and establish branches or office of the centre .... and to make necessary arrangements for the transactions of the activities of the trust. Clause 24 permitted to construct upon any premises acquired by the centre any building/s for the purpose of the centre and to alter/add/repair/remove such building/s. The articles of association defined the term 'members of the assessee' to mean 'firm, association or body corporate incorporated under any law or regulation for the time being in force interested directly or indirectly any scientific research for the development of Indian Trade Industry' and placed them into three types, viz., an ordinary or a life or a donor member and that such person is required to pay t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven possession of after the lessees had paid in full the agreed amount of consideration called by the assessee as 'primary basic rent' during the financial year relevant to the AY 1990-91, it was treated as short-term capital gain. In both of the assessment years, the basic reasons for rejection of the claim of exemption under section 11 of the Act had already been extracted in the initial para while dealing with the controversy as raised by the assessee. 4. The CIT(A) in his order for the assessment year (AY) 1989-90 had noted the following facts with which the assessee has no dispute. The appellant had carried massive advertisement campaign before the start of construction of Trade Centre in 1970-71 and of Commerce Centre in 1979-80 inviting applications for the allotment of leasehold rights for a period of sixty years. In 1970, the assessee issued advertisement calling interested persons to acquire leasehold rights in the building Trade Centre and indicated the amount payable as 'consideration for leasehold rights' in the building which was subsequently modified as 'primary basic rent', payable on application, followed by on instalments depending upon the progress of construc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d commercial notes. 4.3 He referred to the decision of the Supreme Court in CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 which he observed as having laid down the test as to a particular receipt represented rent or salami stating " the real test of a salami or premium, whether the amount paid in a lump-sum or in instalments, is the consideration paid by the tenant for being let into possession ". He also referred to the decision of the Supreme Court in Member for the Board of Agrl. Income-tax v. Sindhurani Chaudhurani [1957] 32 ITR 169 where it was held that 'elements of salami are (1) its single non-recurring character and (2) payment prior to the creation of tenancy. It is the consideration paid by the tenant for being let into possession and is neither rent nor revenue but is capital receipts in the hands of the landlord ". He observed that the decision of the Supreme Court in Maharaja Chintamani Saran Nath Sah Deo v. CIT [1961] 41 ITR 506 was idential to the conclusion in Sindhurani Chaudhurani's case. 4.4 He extracted from the remand report of the AO the extracts from the report of the council of management for the year ended 1971 and 1973 where it was stated that the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posit should have a provision for its refund if the party surrenders its rights back to the assessee and that the lease agreement did not provide for any such clause. He also noted that the lessees were fully aware of the terms under which they were receiving the leasehold rights and related it being the provision of payment of transfer fee of Rs. 170 per sq. ft. that made it all the more clear that the lessees were not to be refunded their lumpsum payment and therefore, it was a one time and one way receipt though received in instalments. He accordingly concluded that the primary basic rent and the primary car parking rent are receipts that are liable to be taxed. 4.7 He noted that the AO who initially taxed it as business incomes had advanced an alternative argument in the appellate proceedings that it should be taxed as short-term capital gains because of the agitation raised by the appellant that they had not sold off the flats to anyone. He observed that to determine whether the income (receipts of primary basic rent and primary car parking rent) is business or is capital has to be examined with reference to its relation to the fixed capital investments. He referred to the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted the argument of the appellant that the transfer is always relatable to the execution of the lease deed and not on mere giving of possession. He considered the amendment to section 2(47) of the Act by the Finance Act, 1987 which added clause (vi) to the said section along with an Explanation which amendment was operative from 1-4-1988. He noted that because of the amendment which covered any transaction which has the effect of transferring, or enabling the enjoyment of, any immovable property and the term 'immovable property' had been given the same meaning as contained in clause (d) to section 269UA, the case of the assessee is squarely covered by the said amendment. 4.10 He considered the objection of the assessee that to decide whether a case falls into the category of charitable institution, it is to be limited to the examination of the objects and exemption should be allowed even when the trustees fail to pursue the objects. He also considered the arguments advanced that any abuse of power by the trustees, such misuse should be resolved through legal recourse by removing the trustees but, such misuse should not affect the grant of exemption to the assessee. He noted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be, however, a different case where one or more of the specified objects were never intended to be undertaken. If there is evidence pointing to that conclusion, the Court will proceed to consider the case as if such object never existed ". He also noted from the decision of the Supreme Court in Yogiraj Charity Trust v. CIT [1976] 103 ITR 777, these observations, " the distinction between the objects of the trust and the powers vested in the trustees for carrying out must be borne in mind ". 4.13 He considered the primary object that was stated as carrying on of scientific research in the fields of natural or applied science including agriculture, animal husbandry, fishing and so on and the provision in its memorandum of association that the term 'scientific research' would also cover such fields as may be included in section 43(4)(1) of the Act as it stood at the relevant time and as may be amended from time to time. He also noted that the dominant objects included in addition to carrying on scientific research, setting up of research centre, aiding research institutes on industrial research, prosecuting scientific research for the development of Indian Trade Industry. He no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bject ". He concluded that if one of that objects which is not incidental to the primary object, is not charitable and the management has unlimited discretion to engage in activities falling under the object, the trust cannot be held to be charitable. He observed that the trust is not established for the promotion of trade of its members only and the promotion of trade of its members could not be an object of general public utility. He did note that the assessee had never applied its surplus on its primary object of scientific research and he noted that the application of its income on its trade centres could not be treated as applied for charitable purposes because it involved clear profit making as it was carried out in a systematic manner with large number of staff only employed to look after the work of construction, facilities to the occupants on thoroughfares, air-conditioning and so on, facilities for exhibitions, meetings and so on. He held that all these being business activities not permitted by section 11(4A) of the Act, the incomes from these activities are clearly taxable. 4.15 He further noted that the surplus as shown by the assessee in various years were not inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee did provide that the income derived from whatever sources shall be applied solely for the promotion of its objects. He referred to the definition of 'charitable purpose' as contained in section 2(15) of the Act and observed that the section engulfs advancement for general public utility. He reproduced the contentions of the assessee in support of its claim for exemption under section 11 of the Act. In para 7 of his order, he observed that the principal object of the assessee as stated in Memorandum of Association being scientific research which being advancement of an object for general public utility, the assessee could be said to have been established for charitable purposes and the property is also held for that purpose. He observed that AO in order to verify the true nature of the property held, he is not bound to confine to the terms of the trust deed but, to take into consideration other factors. 5.1 In para 8 of his order, he had noted that the first annual report of the assessee for the year ending 31st December, 1970 contained the development that led to the formation MVIRDC and its registration under section 25 of the Companies Act then, in para 10 the AO f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate and managed by two different institutions which was not accepted and chose to continue without the recognition as scientific research association. He accordingly concluded that the conduct of the assessee showed that its dominant object was not advancement of scientific research so as to be classified as carrying on an object of general public utility but, to establish a permanent trade and exhibition centre that was covered under the mask of charitable purpose. 5.3 He proceeded to examine the dominant object of establishment of World Trade Centre (WTC) in the same lines as that in other countries formed on the guidelines issued by the World Trade Centres Association. He examined the package of facilities and services expected of WTC to members as well as to members of overseas WTC and to visitors of WTC some of them being, (a) meeting facilities ; (b) display exhibit facilities ; (c) hotel ; (d) trade education services ; (e) World Trade Centre Club ; (f) temporary secretaries ; (g) temporary offices and (h) trade information services. He noted that the facilities listed under (b) to (h) required necessary infrastructure which is contained in the layout that as drawn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a monthly circular on 'Trade Promotion Services' was circulated to its members and WTC participated in 'Market Match' organised by other WTC on behalf of its members. He noted that WTC provided several promotional services to its members and to non-members if they wish to avail of those services on an institutional basis. He noted that space earmarked for exhibitions display, seminar rooms for holding of conferences, meetings seminars were hired out to members and outside agencies. It was also noted that assessee had organised number of workshops, training programmes, seminars and exhibitions which was open to all sections of the public. AO considered the services concerning electricity, air-conditioning, lifts, water, maintenance of thoroughfares including staircases, watch and ward covering the whole WTC complex that is charged from every occupant/user of the space as 'Common outgoing rent' at 4% of its (WTC's) administrative expenses. 5.6 AO accordingly grouped the activities of the assessee under three heads : (a) provision of package of facilities services on an institutionalised basis to any one ; (b) construction of commercial buildings and leasing of space and (c) s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of receipt of unexpired portion of the lease which would have exhibited that the intention was not to make any profit and not to allow any profit accruing to its members from its property. He observed that the action of the assessee to charge Rs. 170 per sq. foot for allowing transfer, is only to realise a part of the unearned increase while most of it retained by the lessees. 5.8 He referred to the condition based on which space in the Centre was allowed to be leased out according to which a person was required to be a member first. AO viewed this condition as a way of allowing benefit to pass on to the members though, the assessee could not distribute any surplus of dividend to its members and accordingly concluded that the aspect of charity was only illusory. He concluded that the activity of the assessee was like any other commercial concern and therefore, it could not be treated as a charitable institution within the meaning of section 11 of the Act. 5.9 AO referred to the provisions of section 11(4A) of the Act that permitted business to be carried on by a trust wholly for charitable purposes and the work in connected with the business is mainly carried on by the benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment on the basis of final area (based on actual measurement) on which the premises is ready for occupation with a rider that in case on actual measurement it is found that the actual area is more than that indicated in the lease agreement then, the lessee is required to pay the entire sixty years rental at the time when it is ready for occupation. The secondary rent, the common outgoing rent are indicated to be paid on or before the 5th of each month. He noted the parking space rental as in the nature of primary basic rent. 5.12 He tabulated the primary basic rent as fixed for the years from 1971 onwards revised upwards with the passing of each year starting with Rs. 260 per sq. ft. in 1971 to Rs. 550 per sq. ft. in 1980 to Rs. 1,450 per sq. ft. in 1985 and to Rs. 5000-6000 per sq. ft. in 1990. He noted that the secondary basic rent had been fixed at 20 paise per sq. ft. per month for which bill was raised each month. He noted that the rates of common outings that started from Rs. 2.25 Rs. 1.25 for air-conditioned and the non-air-conditioned area respectively had been revised upwardly to Rs. 5.15 Rs. 2.60 in 1989 and to Rs. 5.65 Rs. 2.75 in 1990. 5.13 He referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts for the year ended on 31-3-1989 showed 'outstanding advance rent' from 19 parties to the tune of Rs. 729,88,941 to whom possession are yet to be given and the corresponding credit shown under 'unsecured loans'. 5.15 He observed that though receipts were issued in respect of common outgoing rent and secondary basic rent received, no receipts were issued in respect of primary basic rent that was adjusted every month in the accounts and the reason he noted as because it did not possess the attributes of rent. He concluded that because the primary basic rent was received in full and in advance of even before the relationship of landlord and the tenant came into being, it should be treated as premium and since, it was received for a transfer of a capital asset, it should be treated as a capital receipt. 5.16 He summarised the facts of space in occupation of the assessee, leased out in the years 1989 and 1990. He had noted that in the previous year relevant to the assessment year 1990-91, possession was handed of 99605 sq. ft. in Centre 1 to 19 lessees for a total consideration of Rs. 20,59,79,589, IDBI Centre was handed over for Rs. 33,84,10,062. He noted that the total construc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim that Rs. 11,14,57,437 of Centre-1 is being taxed twice, i.e., first time in AY 1989-90 as income from business and again as short-term capital gain because it is included in the amount of Rs. 27,50,86,477 was rejected on the finding that the transfer having taken place in the previous year relevant to the AY 1990-91, the action of the AO was confirmed. On the claim that the assessee could not been assessed in respect of the building when the lessee is deemed to be the owner by virtue of section 27(iii)(b) of the Act, and that, income from property should not have been based on municipal valuation, was rejected. The claim for deduction for repairs to building under business income was rejected because the income was held as assessable under the head 'Income from house property'. The claim for set off of sinking fund and interest on it was rejected because in an earlier year, Tribunal had rejected such a claim. On the claim for depreciation, the order for the AY 1989-90 was followed. 7. The learned counsel for the assessee Mr. Sonde, submitted that the assessee was incorporated on 26-6-1970 under section 25 of the Indian Companies Act, 1956. He submitted that section 25 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the primary objective being scientific industrial research, with a view to support its primary objective, it needed to provide related or incidental objects. He contended that scientific research activity is a general public utility because, it brings about newer and improved products. He contended that the assessee is well covered by the definition of charitable purpose as contained in section 2(15) of the Act and, therefore, the department was in error in holding that the assessee does not satisfy to be a charitable institution. 7.4 He contended that the Government of Maharashtra floated the scheme of leasing its land with a view to provide parallel services as are available across the world concerning commerce, trade and industry and on examination of the objects of the assessee was satisfied that the assessee is the probable instrument in achieving this end which was why they came forward to lease the land, suggested the scheme of financing for the construction of the building including arrangement of loan from LIC. He contended that the Government of Maharashtra considering various aspects including the objects of the assessee had come forward to modify twice in 1974 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended by referring to the decision of the Karnataka High Court in Ecumenical Christian Centre v. CIT [1983] 139 ITR 226/[1982] 8 Taxman 175 and submitted that the wordings of objects clause have to be appreciated in their proper perspective and it was held that merely for the reasons that the objects clause is widely worded, it should not be concluded that the objects are inexact or indeterminate, and the assessee incidentally making some profits with a view to achieve its objective, the profit so earned could not be treated as a trading activity and accepted the claim by granting it the status of charitable institution. He submitted that the principle enunciated by the Karnataka High Court is to the effect that the meaning to achieve the objective should be evaluated with the end that was achieved. Mr. Sonde pointed out that the assessee had moved for registration under section 12A of the Act on 1-10-1982 and contended that since, the office of the Commissioner of Income-tax had taken the application moved by the assessee for registration on his record on 8-2-1984, it is conclusive of the fact of recognition having been granted to the assessee. Mr. Sonde, the learned advocate ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to charitable purpose. He contended that merely because the Government of Maharashtra had allowed the lease of the land at a low rental of Rs. 325 cannot lead to the conclusion that the assessee is a charitable institution. He contended that the claim that the Government only allowed the construction of the building with the only intention of letting out is not borne out of the resolutions of the Government. He contended that the Government leased the land to the assessee with the only intention of building all infrastructure similar to the one that is available all Over the World in connection with information on trade, commerce and industry along with various shopping centres, exhibition halls, meeting seminar halls, secretarial related services which are all commercial activities because, it directly benefits the owner of the building, members occupying the building though, it might benefit the public too. He submitted that the assessee which is stating that it is an industrial research unit, in fact had never carried out any such research and in the later years when it did carry out the extent of research activity was very minimal. 7.8 He further submitted with refere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecified in clauses 1 to 7, 10, 13, 20 and 24 as referred to by the learned counsel for the assessee are reproduced below for the sake of appreciating the claim that the objects are all of general public utility : 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 amendment shall apply to the connotation of 'scientific research' in this clause. 2. To organise, sponsor, promote or establish and conduct a Research Centre in Bombay, to perpetuate the memory of the late Dr. M. Visvesvaraya as an object of general public utility not involving the carrying on of any activity for profit. 3. To establish, organise, promote or conduct agencies or research institutes, or advisory or consultative services as are calculated to promot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral public utility, we proceed from there. The clauses 2 to 4 specifically have used the words " as an object of general public utility not involving the carrying on of any activity for profit " (italicised words were deleted from section 2(15) of the Act with effect from 1-4-1984). The clause 2 is for establishing of a research centre in the memory of Dr. Visvesvaraya and this could generate no utility to the general public because, the public can derive no benefit whatsoever except knowing what he was and what were his achievements which are all historical. The third clause talks of promotion of the cause of industrial research on which object the department had not commented upon and therefore, we do not express any opinion on this object. 7.11 The fourth clause is on similar lines as the third clause though little more elaborate and includes establishing of World Trade Centres in Bombay which is a place to bring together all industrialists and the traders, the plain reading of this clause suggests that the Centre is intended to be a meeting place for industrialists to enable them to promote their interests intended to give benefit only to persons who interact with each oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to whom goods could be imported or exported, as the case may be and for which services or facilities fee is levied the quantum of which differs with the kind of service or facility enjoyed by the commercial community. This WTC is intended to provide facilities of complete information of the products available at any part of the World so that any of the commercial establishments need not have to expend money on exploring the World for available market. These facilities are open to members only and any person desirous of using these facilities is required to become a member. The above description makes it obvious that WTC is a centre for business activity amongst the particular business concern within the said community comprising of industrialists, etc., and is to benefit the particular concern and not generally any of them. These facilities are similar in nature to the various food grain market places called mandis at various places from where both wholesalers and the Food Corporation of India procure the food grains for which the State Government impose mandi tax. To say that building of a market place for making available goods at that place for the traders for sale by them to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Dharmaposhanam's case had held that whether a trust is for charitable purpose falls to be determined by reference to all the objects for which the trust has been brought into existence and if any of the objects do fall into the category of non-charitable purpose and if the trust does not undertake on such non-charitable purpose, then their mere existence could not deprive the trust the recognition of charitable institution. 7.15 The first of the proposition is that the assessee satisfying the tests for being recognised as a charitable institution as defined in section 2(15) of the Act, then all that is required to be seen is that it had not flouted the provisions of sections 11 13 of the Act, in either in the manner of investments or holding of property or in the application of its income for the charitable purpose. However, if the assessee fails in the preliminary test for consideration of as established for a charitable purpose and for being treated as an charitable institution within the meaning of section 2(15) of the Act, as a natural corollary it is conclusive that the income of the assessee could not be considered with reference to section 11 of the Act. 7.16 The ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d favour of the CIT(A) as well as our approval for our reasoning. It may not be out of place to mention that the assessee was refused recognition as a scientific research institution by the appropriate authority DST from 1-4-1981 and it was only thereafter that the assessee had woken up to seek recognition as a charitable institution. We may also observe that the assessee is expected to seek for registration under section 12A of the Act within one year from the date of creation of the trust or its establishment whichever date is later. The proviso to the said section states that " Chief Commissioner (CC) or Commissioner (C) may, is his discretion, admit an application for the registration of any trust or institution after the expiry of the period aforesaid ". This indicates that the assessee is required to explain the reasons for delay in applying for the application for registration which would have to be examined by CC or C and if he finds the reasons acceptable then he may admit the belated application, which is possible only on conscious application of mind. The reasons if any for delay in submitting of the application for registration by over 12 years is obviously could have n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation provided to the applicants for the space in the above buildings. Clause 5 of the agreement of lease states, " the Centre is engaged in a planned and orderly development of the said land by erecting a cluster of buildings to offer services available in a World Trade Centre Complex ". This clause clearly spells out the intention is in the development of the land and construction of building thereupon and it is a planned and orderly activity. In our view, the claim of assessee is a very far fetched proposition because, the assessee had no funds even to carry on its scientific research activity and it was venturing into something that required still larger funds. The assessee had prescribed for entrance fee and membership fee under different categories but, had not claimed contributions from amongst them or from the public for setting up of infrastructure for scientific industrial research while, it claimed that its members were from industry, trade commerce. An association of a community comprising of industrialists, traders commercial institutions for promoting their common interests or improving them as a lot could be an object of general public utility but, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its objective has to necessarily carry on various activities and the Courts all along had appreciated the fact that it is not the income that is earned, nor the manner in which it is earned is important but, what is important is that the income as such should be applied for charitable purposes only, in which case the trust could not be denied exemption. In support of this submission he placed reliance on the Supreme Court decisions in Andhra Chamber of Commerce's case, CIT v. Federation of Indian Chambers of Commerce Industry [1981] 130 ITR 186/6 Taxman 7 and the High Court decisions in Addl. CIT v. South India Hire Purchase Association [1979] 116 ITR 793 (Mad.), CIT v. Ganesh Ram Laxminarayan Goel [1984] 147 ITR 468/[1983] 14 Taxman 1 (MP), Satya Vijay Patel Hindu Dharamshala Trust v. CIT [1972] 86 ITR 683 (Guj.), Southern India Mill Owners' Association v. CIT [1977] 110 ITR 871 (Mad.) and the two Tribunal decisions in SOS Children's Village of India v. ITO [1990] 34 ITD 476 (Mad.) and National Engg. Coordination Committee v. Asstt. CIT [1992] 43 ITD 612 (Pune). He submitted that the charitable trust satisfying the condition of general public utility was examined by the Andhra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of transfer to outsiders but were to surrender and the assessee was to refund the amount contributed for construction, then perhaps the submission of the counsel Mr. Sonde that, the construction was to aid the research activity may have gained some weight. In one case of transfer, the department had intervened by initiating acquisition proceedings which the Assessing Officer in his order for assessment year 1989-90 had brought out. Further, the lease is for a long period indicating that no person other than the occupant of the space in the building could ever enter it which establishes beyond doubt that the construction followed by giving of space has no involvement of public utility and not even remote connection to its primary objective of research. The other services connected with the building like maintenance, air-conditioning also fall in the same category of non-charitable object. The other activities such as providing of secretarial, meeting, conference, exhibition, information by connection with various parts of the world are business ventures. These are services specific to a member, facilitating him to have connection with his customer/s or supplier/s and do not ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achieving the main objective and the so-called main objective is nothing more than a make belief mask. Therefore application of income on the construction activity cannot be said to be an application as warranted by section 11 of the Act and exemption from tax had properly been denied to it. 7.27 The lease agreement has a few clauses that explains the background of the land, buildings to be constructed thereon, etc., of which the relevant clause (5) throws some light on the intentions of the assessee, that reads, " the Centre is engaged in a planned and orderly development of the said land by erecting a cluster of buildings to offer services available in a World Trade Centre Complex ". The aspect of the amount paid by various applicants in instalments before the start of the construction, while the construction is in process is governed by the provisions of the conditions spelt out in clause 8 of the agreement. For the sake of facility, we reproduce it below : (1) The Centre hereby agrees to grant and lessees hereby agree to accept a lease of the office premises admeasuring ... sq. ft. built up equivalent to .... sq. mtrs. built up or thereabouts, on the ... floor of the Centre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essees shall execute with the Centre a deed of lease in duplicate.... (16) the lease shall contain the terms and conditions, among others, specified in Annexure 'A' hereto. Annexure 'A' (12) the lessees shall not transfer, assign, sell, mortgage charge, or encumber in any manner or otherwise dispose of the demised premises or any part thereof, nor shall they let, sub-let, underlet or allow to be occupied by any other party, the demised premises or any part thereof without the permission in writing of the Centre being the first had and obtained and the Centre will be entitled to refuse to give such permission without being bound to give any reason for such refusal but such permission shall not be unreasonably refused ........................ (15) if the lessees shall cease to be a member of the Centre for any reason whatsoever, they shall if so required by the Centre either transfer this lease and all their right title and interest therein to any other party who is a Member of the Centre subject to the approval of the Centre and subject also to the provisions of clause 12 hereof or surrender the lease to the Centre at their own costs. (27) on the expiry of the term hereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g value (ALV) as in sections 22 23 of the Act, the rates and taxes would have to be added to it or alternatively, rates taxes representing proportionate share of the assessee based on the space under its occupation would be allowed to be deducted from its income, of course, not from income from property. Strangely enough, the Annexure 'A' to the deed of lease does not contain any clause that makes it compulsory for the lessee to insure the space taken by him, nor does the lease deed lay any emphasis on the assessee to insure against any calamity. 7.30 The department had chosen to follow the second alternative of treating it a sale on the basis that the primary basic rent compares well with the market rate at the various times when the leases were entered into by holding that the primary basic rent is salami or premium. The counsel Mr. Sonde had contested that the Explanation 1 to section 18 of the Bombay Rent Control Act does not allow charging of salami by landlords in support of which be referred to the observations of the learned author Kanga Palkhiwala in his book on Income-tax Law, 8th edition, Volume 1, page 1195 and the decisions of Bombay, Madras, Kerala High Courts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed in two possible angles, the department had chosen to take the angle of treating it a sale by following the Bombay High Court decision in Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694. The other angle is that the assessee had given the leasehold rights of use of space with the inbuilt right to transfer, sell, assign, etc., by paying a transfer fee to the assessee. The argument of the assessee that the primary basic rent is an advance rent only is based on what is stated in the lease deed. When we consider the totality of the facts from the start of the taking of the lease of land, followed by the invitation to the public to take the space by paying the specified amounts in advance, the intention of the assessee being engaged in a planned orderly development of the said land by erecting buildings, the assessee constructing the buildings with the funds provided by the various lessees, all go to clearly indicate that there are only two possible view points as observed by us earlier. In fact we are of the view that it is only proper to hold that the transaction is one of sale of leasehold right of use of space and what the assessee retains only is the right to charge mont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d right of space and not the space itself which sale price is assessable as business income only. 7.35 The last issue relating to the setting aside for the sinking fund and the interest thereupon as not income, is squarely covered by the decision of the Tribunal for the earlier year in the case of the assessee and we would therefore sustain the disallowance or treating it as income. 7.36 The claim in assessment year 1990-91 the claim of the assessee is that the income from house property could not be based on municipal valuation. Mr. Sonde, the learned counsel fairly conceded that the assessee had not disputed the levy of house-tax by the municipal authorities but, pleaded that this feature should not come on the way of deciding the income from property owned by the assessee. He insisted that the income from property should be limited to the actual rental realised. The plea of the standing counsel Dr. Balasubramanian and the CIT Mr. Prasad was that the secondary rent is illusory. 7.37 Section 23 of the Act provides two alternatives for what should be taken as the ALV of a let out property, the first being that it is the sum for which the property might be reasonably be expect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above claim of the revenue nor the department has placed any material on our record to suggest that the area given possession was wrongly worked out based on which the revenue department had rectified the order under section 154 of the Act and we therefore do not find substance in the claim of area, cost of construction, etc., and hence it is rejected. The other claim of the revenue department of allowing of unabsorbed depreciation and unabsorbed business is without any merit because, the assessee's income is assessed from business which business is carried on for the last several years. The cross objection of the assessee of including that part of the receipt against which possession was yet to be given is fully justified because, the advance would get converted to income only when the assessee completes its part of the contract of handing over possession of space to the person who had advanced the amount. We accordingly delete the inclusion of Rs. 2059,79,598 as income. The additional ground of appeal as raised by the assessee is the same as has been raised in its cross objection. 7.39 For the assessment year 1990-91, the first claim is based on the alternative consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
