TMI Blog2007 (2) TMI 359X X X X Extracts X X X X X X X X Extracts X X X X ..... itibank for a consideration of Rs. 5,61,10,725 (15 lakhs + 3,46,10,725 + 2 crores) and these assets should be treated as long-term assets and long-term capital gains should be accordingly computed contrary to the decision of Assessing Officer treating this as short-term capital gain." On the other hand, the assessee has raised the following two grounds with regard to this issue : "1. The learned Commissioner of Income-tax (Appeals) erred in holding that membership subscription received in advance amounting to Rs. 2,21,30,123 and magazine subscription received in advance amounting to Rs. 11,50,944 which the appellant did not have to refund or transfer to Citibank as on the date of transfer and as such credited to profit and loss account, would constitute business receipts in appellant s hands. 2. The learned Commissioner of Income-tax (Appeals) failed to appreciate that the membership subscription received in advance amounting to Rs. 2,21,30,123 and magazine subscription received in advance amounting to Rs. 11,50,944 ought to have been taxed under the head "long-term capital gains" since, as per clause 6 of Agreement for Sale dated 26th October, 1989 it was agreed that the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appointed date" and that all credit card operations will be transferred on the appointed date including the following : "( i )The benefit of and the exclusive right to the Data Bank; ( ii )The benefit of the restrictive covenant contained in clause 8(B) hereto; ( iii )All rights of Diners under and flowing from the Franchise Agreement dated 14th September, 1979 between Diners Club Inc. (the predecessor-in-interest of Diners Club International Limited) as renewed up to 31st December, 1989 by the letter dated 1st September, 1989 addressed by Diners Club International Limited to Diners; ( iv )the benefit of all arrangements between Diners and its Member Establishments and the exclusive right to issue, service, continue and carry on the Credit Card operations of Diners in India and Nepal and all goodwill pertaining to the Credit Card operations;" 5. However, the following are excluded from this transfer. ( a )all premises and properties, both movable and immovable belonging to or in the occupation or use of Diners; and ( b )all personnel/employees/workmen of Diners and/or its associate concerns; and ( c )all operational and technological systems/hardware belongin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bscription of Rs. 11,50,944 which pertained to the period after the appointed date of 15th October, 1990 i.e., after the date of transfer. These amounts were not transferred to Citibank but were retained by the assessee and the Profit and Loss Account was credited during the year under consideration. 9. In the return of income filed, the assessee disclosed long-term capital gain of Rs. 2,75,45,166 on the transfer of the credit card business. For computing such capital gain, the total consideration was adopted at Rs. 7,93,88,532. For adopting the aforesaid total consideration, the consid-eration shown in the deed of transfer i.e., Rs. 6,51,10,725 was reduced by the consideration of Rs. 90,00,000 for restrictive covenant, and by adding the advance subscription retained by the assessee. From the sale consid-eration thus determined, the initial franchise fees paid by the assessee to Diners Club International in the year 1979, of Rs. 1,17,750 and expenditure in connection with the transfer of Rs. 10,69,080 were deducted to arrive at capital gain of Rs. 7,82,01,752. After claiming deduction under section 54E, net capital gain was disclosed at Rs. 2,75,45,166. 10. In the backd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against Diners in respect of the Credit Card operations of Diners prior to the Appointed Date will be the sole responsibility and liability of Diners and Diners specifically agrees to keep Citibank fully and effectually saved, harmless and indemnified thereagainst and all consequences and proceedings arising therefrom. ( b ) Citibank specifically agrees that all claims whatsoever arising against Diners pertaining to the credit card operations of Citibank on and from the Appointed Date shall be the sole liability of Citibank and Citibank specifically agrees to keep diners duly and effectually saved, harmless and indemnified thereagainst and all consequences and proceedings arising therefrom." 12. From the above it is seen that all liability for rendering services after the appointed date is on Citibank. The learned counsel also laid emphasis on the recitals contained in clause 6 of the aforesaid agreement, which is also reproduced below : "(6)(A) The consideration amount referred to in Clause 2 hereinabove appearing has been arrived at on the basis of classification of Current Card Members as holding Active Cards, Less Active Cards, Least Active Cards or Delinquent Cards. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transferee that the assessee would retain these amounts on transfer of the business, which is only a mode of settlement of accounts. He relied on the Supreme Court s decision in the case of J.B. Boda Co. (P.) Ltd. v. CBDT [1997] 223 ITR 271 and invited our attention to the facts and ratio of this case which are reproduced below from the head-note of the report : "The Oil and Natural Gas Commission had insured all their offshore oil and gas exploration and production operations with an Indian insurance company. In respect of this risk, the appellant, a reinsurance broker, contacted a company in London who were brokers for placement of reinsurance business. The appellant furnished all the details about the risk involved, the premium payable, the period of coverage and the portion of the risk sought to be reinsured. The London brokers contacted various underwriters and after getting confirmation about the portion of the risk the foreign reinsurers were prepared to undertake, informed the appellant about such reinsurance coverage. Thereafter the Indian ceding company handed over the total premium to be paid by it to the foreign reinsurance company, to the appellant for onward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the light of the principles laid down in the judgment.] By the court: A two-way traffic is unnecessary. To insist on a formal remittance first and thereafter to receive the commission from the foreign reinsurer, will be an empty formality and a meaningless ritual, on the facts of this case. The learned counsel argued that the revenue authorities were not justified in treating the advances as revenue receipts in the hands of the assessee. 14. The learned DR forcefully supported the orders of the revenue authorities and argued that the advances received by the assessee by way of membership subscription and magazine subscription were in the nature of revenue receipts from the very beginning. These advances were credited by the assessee to the Profit and Loss Account and, therefore, it is obvious that the assessee did not pay these amounts to Citibank. These amounts were also not refunded to the members or subscribers of magazine. Thus the assessee-company appropriated these amounts. The learned DR relied on the Bombay High Court s decision in the case of CIT v. Batliboi Co. (P.) Ltd. [1984] 149 ITR 604 in support of his contention that receipt of money or deposits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been treated as capital receipt forming part of the overall consideration for transfer of the credit card business. There is no universal principle that the nature and character of such advances cannot change on happening of certain material event subsequent to the receipt of such advances. There is no dispute that the impugned amounts are advance payments to be adjusted against services rendered after the appointed date, which is the responsibility and liability of Citibank. This is clearly stipulated in the agreement, relevant part of which is reproduced ( supra ). Therefore, these amounts, as a matter of fact, were payable by the assessee-company to Citibank. However, as a part of the entire transaction of transfer of the credit card business and by mutual agreement, the assessee-company retained these amounts and the same were credited to the Profit and Loss Account. The assessee-company could have easily adopted the other method of paying these amounts to Citibank and then receiving back as part of the consideration. However, this was an exercise in futility because the assessee-company was already holding these amounts and it was allowed to retain the same. Considering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 10 years expired on 14-9-1989 and the assessee-company opted for extension up to 31-3-1990 and finally up to 30th June, 1990. The learned DR argued that each renewal of the original agreement is to be treated as a fresh grant of franchise. For this proposition he relied on the following cases : ( i )Ajmer High Court s decision in the case of Kanhaiyalal Azad v. District Magistrate AIR 1955 Ajmer 32. ( ii )Supreme Court judgment in the case of Delhi Development Authority v. Durga Chand Kaushish [1973] 2 SCC 825. The learned DR pointed out that in the above cases it has been held that renewal of lease shall be treated as fresh lease. He submitted that the assessee-company held the franchise and other intangible assets by virtue of renewal of the agreement, firstly up to 31st March, 1990 and again up to 30th June, 1990. It is argued that such renewals must be treated as fresh acquisition of franchise and, therefore, when the credit card business is transferred with effect from the appointed date i.e., 15th June, 1990, the assessee-company held the assets for a period of less than 36 months and, therefore, the income is in the nature of short-term capital gains. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined - Held , yes - Whether, therefore, assessee s possession extended from date of expiry of lease to date of surrender of tenancy rights and it was a long-term capital asset - Held , yes - Whether, therefore, exemption under section 54EA was to be allowed - Held , yes" 19. It is contended that the franchise and all other intangible assets including goodwill have been continuously held by the assessee for several years. It is also submitted that if the renewal is taken as grant of fresh franchise, there would be no cost of acquisition of such franchise and for that reason no income under the head Capital gain can be brought to the charge of income-tax. 20. We have carefully gone through the facts and have considered the elaborate submissions made before us by both the parties. The learned DR laid great emphasis on the argument that renewal of lease is tanta-mount to grant of fresh lease and, therefore, when the intangible assets acquired by the assessee on grant of such fresh lease are transferred within a period of less than 36 months, the capital gains arising from such transfer have to be treated as short-term capital gain. The learned DR strongly relied on the Ajm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e request and cost of the lessee at the end of the term execute to the lessee a new lease of the premises by way of renewal for further terms totalling to seventy years. The lease rent was however to be enhanced on such renewals. The deed had also mentioned that the total term of the lease including renewed periods would not exceed ninety years. The issue was whether the lease rent could be enhanced within the period of ninety years. The court held that in view of the specific recital in the deed regarding the initial term (ninety years) of the lease granted (at fixed rent) lease rent could not be enhanced within the period of ninety years. It could only be enhanced subsequently during the renewed periods of the lease. In the above connection the court had observed - "if the plaintiff was not entitled initially to a lease of ninety years for the rent agreed upon, but the rent was liable to be increased within that period, as appeared to be the real case of the defendants in the High Court, there was no question of grant of a fresh lease. A renewal of a lease is really the grant of a fresh lease. It is called a renewal simply because it postulates the existence of a prior lease whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 979, it would automatically follow that the assets have been held by the assessee since the year 1979 and the case of the Department would fall down. Considering the entire facts and circumstances, we confirm the finding of the learned CIT(A) that the capital gains are assessable as long-term capital gain. 22. Ground No. 2 of the Departmental appeal is as under : "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing that Assessing Officer could bring to tax during the year only the gross amount of interest on such IDBI bond which would accrue at the specific rate deeming the previous year under consideration and the balance amount received under the discount scheme would have to be ignored further for the purpose of taxation and the assessment should be modified accordingly." 23. We have heard both the sides on this issue vis-a-vis the facts and the legal position. The assessee invested Rs. 3.89 crores in IDBI capital bonds with a maturity period of 3 years. Under the scheme of IDBI the assessee opted for the entire interest receivable by it over a period of 3 years to be discounted and accordingly during the present assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 11-3-1981. Bharat Hotels Ltd., was allowed to construct a five star hotel on the said land. After construction of the hotel, Bharat Hotels Ltd., entered into an agreement of sub-licence with the assessee-company for unexpired period of lease on 8th October, 1985 under which 8000 sft. of covered area on the first floor was leased out to the assessee-company and assessee-company was also allowed to sub-lease the property. In its turn the assessee-company sub-leased the premises for the unexpired period of lease and is receiving rental income. The Bangalore property was taken on lease by the assessee for an initial term of 12 years with option for renewal of lease. This lease agreement was not registered. In respect of both the properties, the assessee claimed that the rental income is assessable as business income. The Assessing Officer rejected the claim and held that the case of the assessee falls under section 27( iiib ) of the Income-tax Act and accordingly he assessed the income as income from house property. The learned CIT(A) concurred with the Assessing Officer. 26. The learned counsel appearing for the assessee argued before us that the provisions of section 27( iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to the charge of tax under section 23(1)( b ) of the Income-tax Act. The actual rent received by the assessee is only the net amount. For this proposition the learned counsel relied on the following ITAT decisions : (1) Varma Family Trust v. Sixth ITO [1984] 7 ITD 392 (Bom.) (2) Neelam Cable Mfg. Co. v. Asstt. CIT [1997] 63 ITD 1 (Delhi) (3) ITO v. Mrs. Niroben D. Choksi 1 SOT 608. 28. The learned DR argued that the case of the assessee is fully covered under section 27( iiia ) read with section 269UA( f ). It is submitted that a sub-lease obtained by the assessee will not change the legal position. He also contended that non-registration of the sub-lease agreement in respect of Bangalore property is also not relevant because the assessee is receiving the rental income and it has to be considered the owner for the purpose of section 22. For this proposition the learned DR relied on the following cases : (1) CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625 (SC) (2) R.B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570 (SC). Regarding deduction of lease rent paid by the assessee the learned DR contended that, once the income is brought to the charge of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired under a lease or a sub-lease, section 27( iiib ) shall apply. Section 27( iiib ) refers to clause ( f ) of section 269UA which applies to transfer of property by way of sale or exchange or lease for a term of not less than 12 years. In the present case the assessee acquired sub-lease in respect of Delhi property and lease in respect of Bangalore property for a period of not less than 12 years. Accordingly, the relevant provisions of the Income-tax Act referred to above will be applicable. The ITAT Cochin Bench decision in the case of M. Damodaran Nair ( supra ) cannot be applied to the facts of the assessee s case. In that case the facts were different. Firstly there was no intention to transfer the property and mere possession was given. There was no agreement for apparent consideration for transfer except giving immovable property on rent by real owners to the assessee and the assessee in turn, subletting the property. In the present case, the assessee acquired rights under agreement. In the case of Podar Cement (P.) Ltd. ( supra ), the Supreme Court held that "owner" for the purposes of section 22 is a person who is entitled to the rental income from the property in hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the managing agents had rendered services in respect of the properties, the remuneration paid to them in respect of such services should be allocated under the head "property" under section 9, and there being no provision for deducting such allowance under this section, such portion of the commission was not a deductible allowance; ( iv ) the Tribunal was right in holding that the interest paid on money borrowed for construction for new houses should be disallowed as the income itself was exempted under section 4(3)( iii ); and ( v ) the interest paid on the sum of Rs. 13,00,000 was rightly disallowed by the Tribunal as inadmissible under section 10(3)( iii ) of the Income-tax Act." 33. In the case of Piccadily Holiday Resorts Ltd. ( supra ), ITAT Delhi held that commission paid by assessee to property agent is not deductible in computing income from house property. Similarly in the case of Piccadily Hotels Pvt. Ltd. ( supra ) ITAT Chandigarh Bench held that brokerage paid is not an allowable deduction while computing income from house property. 34. From the cases cited by both the parties it may be seen that deductions admissible while computing income from house p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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