TMI Blog1991 (12) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... of the reserved area. In order to secure the payment of the fee, the assessee had collected deposits totalling Rs. 26,80,640. The assessee claimed that this amount had to be excluded in computing the total income. The Assessing Officer, however, treated this amount as a trading receipt and brought it to tax. 3. On appeal, the CIT (Appeals) held that the amount was received as part of the trading transaction and could not cease to be income merely because it was called a security deposit. 4. In the further appeal before us, it was contended on behalf of the assessee that the security deposit was taken under a separate licence agreement for fulfilment of the conditions stipulated therein in respect of reserved areas which had not been sold to the licensees. It was submitted that in the circumstances particularly when the amount carried a liability to refund the amount on certain contingencies, it could not be treated as part of the trading receipts of the assessee. On the other hand, it was contended on behalf of the Revenue that the licence agreement was not independent of the sale of the office premises and since it was inextricably connected with the sale, the receipt was par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll pay his share of the monthly maintenance charges of the common expenses. 7. The second document is a deed of Licence by which the assessee permitted the purchaser of the flat as a licensee to use the reserved area on payment of a licence fee per annum for a period of 10 years. The assessee also received a security deposit equivalent to 10 years' licence fee and it was stipulated that in each year 1/10th of the deposit will be refunded. Admittedly, the practice of the assessee has been to adjust the refund of the security deposit due against the annual fee payable by the licensee. The licensee was to meet the expenditure for maintenance of the reserved areas and equipments installed therein. On the expiry of the period of licence, the assessee was to transfer all the rights and obligations of the licenser to any institution, establishments or body of persons as the licenser may decide and the licensee shall be free to renegotiate its terms with such institution, establishment or body of persons for the use of the reserved areas. The assessee also had a right to assign the licence agreement. 8. The third document is a sale deed conveying the undivided interest in the lands. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction taken by a commercial man. Equally so, in trying to determine whether a certain transaction resulted in profits. We must come to a conclusion that the transaction resulted in real profit, profits which from the commercial point of view meant a gain to the person who entered into the transaction, not profits from any narrow, technical or legalistic point of view. " 10. The Supreme Court has observed in the case of CIT v. B.M. Kharwar [1969] 72 ITR 603 : " It is now well-settled that the taxing authorities are not entitled, in determining whether a receipt is liable to be taxed, to ignore the legal character of the transaction which is source of the receipt and to proceed on what they regard as 'the substance of the matter'. The taxing authority is entitled, and is indeed bound, to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction'. This principle applies alike to cases i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to use the reserved area and the equipment. As far as the reserved area is concerned, it consisted of the common areas such as foyer and courtyard, staircases and corridors. Under section 12 of the Easements Licences Act, one of two or more co-owners of immovable property may, with or without the consent of the other or others, acquire an easement for the beneficial enjoyment of such property. Under section 13, where one person transfers immovable property to another, if an easement in other immovable property of the transferor is necessary for enjoying the subject of the transfer, the transferee shall be entitled to such easement. Illustration (h) to that section indicates that if the owner of two adjoining houses sells one, the purchaser is entitled to the benefits of all the gutters and drains common to the two houses. Illustration (n) shows that if a person lets out a house which has no access without crossing the land belonging to that person, the purchaser is entitled to the right of way over that land. It will be clear from the words of section 13 as well as the illustrations thereunder that the purchasers of the office space in the building constructed by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by a separate document. It is significant that those documents do not stipulate any separate consideration for transferring the reserved area to a representative body of the unit owners. On the other hand, the original agreement for the sale of the unit specifies that the nomination of the body to whom the reserved area is to be transferred subsequently was irrevocable. This indicates that the consideration for the transfer of the reserved area was already embedded in the amounts paid by the flat owners under the agreements and the sale deed. Under section 2 of the Contract Act, the consideration for an agreement can come from a third person and, therefore, the nominee of the flat owners would be entitled to demand the transfer of the reserved area in consideration of the amounts already paid by the flat owners and in terms of the agreement of the assessee with them and without having to pay any further amount. In this context, the reservation in clause 13 of the licence deed to the assessee of the right to assign the licence assumes significance. Obviously, the assessee cannot assign the licence ignoring the nomination already made by the flat owners and, therefore, all that co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owners would be entitled to the refund of the proportionate amount. We are unable to accept this contention before us. There is no such stipulation in the agreement. Secondly, under the terms of the agreement, a refund is possible only if the licence fee is paid. Since the licence is not terminable before the period stipulated, there cannot be a refund of any portion of the deposit until the licence fee for the entire period is paid in full. Even in case of the property being destroyed, the agreement itself is discharged by frustration. Thus, in any case the assessee would be entitled to retain the full amount. 19. The Supreme Court has pointed out in the case of CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 that the essence of a deposit is that there must be a liability to return it to the party by whom it is made on the fulfilment of certain conditions. In the present case, we find that there is practically no situation in which the assessee would face a liability to return the amount. The Supreme Court has observed further that if a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te relates to the sum of Rs. 3,20,000 paid as interest on security deposit received from a firm called Southern Investments. The assessee had entered into an agreement on 5-1-1983 with Southern Investments for construction of a premises called 'Palm Tree Place' at Bangalore. The assessee was to put up the building at a cost of Rs. 75 lakhs on the land belonging to Southern Investments, which was to be sold by Southern Investments. Under the terms of that agreement, Southern Investments had deposited a sum of Rs. 15 lakhs with the assessee which was to carry interest at 24 per cent per annum. This interest came to Rs. 3,20,000, which the assessee showed as an outgoing in the profit and loss account as interest on loan ---- security deposit. The security deposit itself was shown as a current liability in the Balance Sheet. The Assessing Officer was of the opinion that this interest should have been capitalized as part of the work-in-progress and, therefore, it could not be allowed as a deduction in computing the income of the assessee. This was confirmed on appeal. In the further appeal before us it was pointed out on behalf of the assessee that in the agreement except for a willingn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness, no deductions could be given under Chapter VIA. On appeal, the CIT(A) also concluded that factually only Kaveri Sea Foods had exported the marine products and the assessee, therefore, was not entitled to the deduction. 23. In the further appeal before us it was contended on behalf of the assessee that the assessee has been recognised as an exporter and the export was made only in the name of the assessee. It was submitted that this was genuine transaction which could not be ignored in granting the deductions claimed. On the other hand, the Revenue relied on the orders of the authorities below and contended that the assessee was not entitled to the deduction. 24. We have considered the rival submissions and perused the relevant documents. We find that on 2-1-84 the assessee had entered into an agreement with Kaveri Sea Foods reciting that the assessee had procured orders abroad for export of certain Marine Products and Kaveri Sea Foods was to arrange the export of the marine products in the name of the assessee. The Reserve Bank of India had allotted a code number to the assessee as an exporter and it is not in dispute that one of the objects of the assessee-company was ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
