1996 (3) TMI 165 - AT - Income Tax

Annual Value Assessing Officer Assessment Year Business Income Charitable Or Religious Trust Charitable Purpose General Public Utility House Tax Income From House Property Income From Property Let Out Profits And Gains Of Business Or Profession Rates And Taxes Scientific Research

Summary

Issues Involved:
1. Whether the assessee qualifies as a charitable institution under Section 2(15) of the Income-tax Act, 1961, and is eligible for tax exemption under Section 11.
2. The nature of primary basic rent received in advance and its taxability.
3. Taxability of additional rent received for allowing transfer of leasehold rights.
4. Whether income should be limited to one-sixtieth of primary basic rent and additional rent plus secondary basic rent.
5. Deductibility of amounts appropriated towards sinking fund and interest thereon.
6. Classification of income from the construction and leasing of buildings as business income or capital gains.
7. Assessment of income from house property based on municipal valuation.
8. Allowance of depreciation on buildings and repairs to buildings.
9. Set-off of brought forward unabsorbed business loss and unabsorbed depreciation.

Issue-wise Detailed Analysis:

1. Charitable Institution Status and Tax Exemption:
The assessee, a company registered under Section 25 of the Indian Companies Act, 1956, claimed exemption as a charitable institution under Section 2(15) of the Income-tax Act, 1961. The revenue department denied the exemption, arguing that the assessee diverted its activities towards constructing buildings (Trade Centre, Commerce Centre, and IDBI Centre) and leasing space, which was not a charitable activity. The authorities noted that the primary object of scientific research was not pursued, and the activities carried out were commercial in nature. The Tribunal upheld this view, stating that the construction and leasing activities did not align with the primary objective of scientific research and were conducted on a commercial level, thus disqualifying the assessee from being recognized as a charitable institution.

2. Nature and Taxability of Primary Basic Rent:
The primary basic rent received in advance from lessees was treated by the revenue as salami or premium, taxable as business income. The assessee argued that it was advance rent. The Tribunal concluded that the primary basic rent was indeed salami or premium, as it was a one-time payment made before the creation of tenancy, and thus taxable as business income. The Tribunal also noted that the primary basic rent was charged to put the lessees into possession, making it a capital receipt in the hands of the landlord.

3. Taxability of Additional Rent for Transfer of Leasehold Rights:
The additional rent received for allowing the transfer of leasehold rights was treated as business income by the revenue. The Tribunal upheld this view, stating that the premium charged for permitting transfers was an organized activity and thus assessable as income from profits and gains from business.

4. Limitation of Income to One-Sixtieth of Primary Basic Rent and Additional Rent:
The assessee argued that the income should be limited to one-sixtieth of the primary basic rent and additional rent plus the secondary basic rent. The Tribunal rejected this argument, stating that the entire primary basic rent and additional rent were taxable as business income in the year of receipt.

5. Deductibility of Sinking Fund and Interest:
The amounts appropriated towards the sinking fund and interest thereon were claimed as deductions by the assessee. The Tribunal rejected this claim, citing an earlier decision by the Tribunal that disallowed such deductions.

6. Classification of Income from Construction and Leasing:
The revenue treated the income from the construction and leasing of buildings as business income. The Tribunal upheld this classification, stating that the construction and leasing activities were carried out in an organized manner with a profit motive, making it a business activity. The Tribunal also rejected the alternative view of treating the income as short-term capital gains, as the assessee retained ownership of the buildings and only transferred leasehold rights.

7. Assessment of Income from House Property:
The income from house property was assessed based on municipal valuation by the revenue. The Tribunal upheld this approach, stating that the annual letting value (ALV) of the property could not be lower than the standard rent fixed by the municipal authorities. The Tribunal also noted that the secondary basic rent was illusory and upheld the assessment based on municipal valuation.

8. Allowance of Depreciation and Repairs:
The claim for depreciation on buildings was rejected by the Tribunal, as the income from property was assessed under the head 'Income from house property.' However, the Tribunal allowed the deduction for repairs to the extent of one-sixth of the ALV, as provided under Section 24(1) of the Act.

9. Set-off of Brought Forward Unabsorbed Business Loss and Depreciation:
The revenue department's objection to the set-off of brought forward unabsorbed business loss and unabsorbed depreciation was rejected by the Tribunal. The Tribunal noted that the assessee's income was assessed as business income, and thus, the set-off was permissible.

Conclusion:
The Tribunal concluded that the assessee did not qualify as a charitable institution under Section 2(15) of the Income-tax Act, 1961, and was not eligible for tax exemption under Section 11. The primary basic rent and additional rent were taxable as business income, and the income from house property was to be assessed based on municipal valuation. The claims for deductions towards the sinking fund and interest, depreciation on buildings, and repairs were largely rejected, except for the proportionate deduction for repairs. The set-off of brought forward unabsorbed business loss and depreciation was allowed. The appeals of the assessee were allowed in part, while the department's appeal for the assessment year 1989-90 was dismissed, and the cross-objection was allowed in part.