9911796707
TMI Blog2001 (11) TMI 1014X X X X Extracts X X X X X X X X Extracts X X X X ..... 06 & 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 assessee allowed some further built-up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereas 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 remanded the matter back to the Tribunal on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eof. 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 by virtue of the Agreement should remain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 the attainment of main objects. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 out the property for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt 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 establishment. The expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 this aspect has been ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions 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 Indust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hotel, amusement 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 auditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 per sq.ft. 18. Apart from the Basic Primary Rent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT (A) accepted that the transactions in question did not amount to a sale. He, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se property". Based on the rateable value fixed by Bombay Municipal Corporation in respect of Trade Centre, Centre-1 and IDBI Centre, the Assessing Officer determined annual letting value at ₹ 4,05,51,455 and after various deductions computed income from house property at ₹ 3,57,41,449. In respect of monthly outgoings and other receipts, the Assessing Officer assessed an income of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Podar Cement (P.) Ltd. (supra), the question which came up for consideration before Hon'ble Apex Court was whether the rental income from the house property which had come to vest in the assessee, but as to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion itself. On assessee's appeals, in the earlier order the Tribunal found that the facts clearly went to show that the assessee had carried out the construction of Centre-1 and IDBI Centre as a business proposition. Therefore, 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. "Sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession of large areas in Centre-1 and possession of IDBI Centre to IDBI. While completing assessment order for assessment year 1989-90 the Assessing Officer found that the 'Advance Rent' corresponded and related more to the market price at which properties in prime locations were bought and sold. 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 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on when entire amount agreed upon as 'Advance Rent' was paid by the prospective space occupier. As a result, as on 31-3-1989 a sum of ₹ 7,29,88,941 was outstanding Advance Rent from 19 parties with whom the lease agreements had been made but possession not given in the absence of full payment. The Assessing Officer further 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Rent' received and corresponding cost of acquisition of the asset. 26. The assessee appealed against both the assessment orders for assessment years 1989-90 and 1990-91. The learned CIT(A), however, took up the assessee's appeal against the assessment order for assessment year 1989-90 first. It was argued that 'Advance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re required to take possession of the premises allotted to them by way of lease within a period of 30 days from the date of receipt of the notice after paying the balance of the 'Advance Rent' including arrears, if any, with interest. These terms brought out clearly the distinction drawn in the agreements between the Primary Basic 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 ₹ 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 Bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entre a further premium of ₹ 14,10,362 and it separately recovered consideration of about ₹ 2.74 crores from Great Eastern Shipping Co. whose name was substituted in place of Khatau Makhanji. Had Khatau Makhanji been legally entitled to refund of the so called 'Advance Rent' for the unexpired period of lease, this amount would have been refunded to Khatau Makhanji and Great Eastern Shipping Co. 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 ₹ 170 per sq.ft. ignoring the prevalent market price of about ₹ 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 ₹ 14 lakhs to The Centre and making killing of more than ₹ 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 le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned CIT(A) examined clauses 12, 15, 26 and 28 of the lease deed. Clause 12 provided that The Centre will be entitled to refuse to give permission to the lessees to transfer, assign, sell, mortgage, charge or encumber in any manner or otherwise dispose of the demised premises or any part thereof without being bound to give any reason for refusal, but at the same time clause 12 provided that such permission will not be unreasonably refused and that The Centre shall be 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 ₹ 170 per sq.ft. regardless of the extra consideration charged by the lessees from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rogramme would have to be so devised that the profits from selling leasehold rights in Trade Centre would help in the construction programme of Commerce Centre and cumulative profits in constructing more buildings and possibly a hotel. The assessee leased out large number of flats, shops etc. and carried out in a systematic manner business of maintaining such building and providing various services and setting up other profitable activities like Business Executive Centre, Conference Exhibition 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 busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 662 by way of additional premium. The enquiry into the staffing pattern of the assessee also showed that almost the entire office and the staff was exclusively engaged in the sale and management of the real estate of the assessee. There were very few persons who were responsible for co-ordinating the publication of in-house journal issued to the members of The Centre and for monitoring other activities funded by The Centre. On the basis of facts thus found, the learned CIT(A) held that the case of the assessee was no different 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also the need to maintain the buildings and to provide various related facilities which required considerable funds. The Tribunal considered various clauses of the lease agreement and the facts recorded in the orders of the authorities below and held that the assessee was engaged in a planned and orderly development of the land granted by the Government by erecting a cluster of buildings. This activity was carried out in the nature as of any other builder or developer of land. 90% of the Primary Basic Rent was payable well in advance and even balance 10% was payable before the execution 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 le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of it to another on rent. Where this happens, the appropriate head to apply is "income from property" (section 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties is not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e lease transactions. There does not appear to be much dispute on the point that the correct head of income in the case before us is "Profits and gains of business or profession". The assessee has himself considered so and filed the returns of income for these two assessment years on that basis. Both the Assessing Officer as well as the learned CIT(A) for assessment year 1989-90, after detailed consideration of the facts of the case, as enumerated by us in the foregoing paragraphs, arrived at the conclusion that the transactions in question were by way of a business carried on by the assessee. The learned Assessing Officer who completed 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T v. National Storage (P.) Ltd. [1963] 48 ITR 577 (Bom.), the Hon'ble High Court held that in cases where the income received is not from the bare letting of the tenement or from the letting accompanied by incidental services or facilities, but the subject hired out is a complex one, the operations involved in such letting of the property would be in the nature of business or trading operations. This judgment was subsequently upheld by Hon'ble Supreme Court as reported in CIT v. National Storage (P.) Ltd. [1967] 66 ITR 596 (SC). Similarly, in a recent judgment in the case of Saswad Mali Sugar Factory Ltd. v. CIT [1999] 236 ITR 7061, Hon'ble Bombay High 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 Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations of Hon'ble Supreme Court in the case of Panbari Tea Company Ltd. should not be read in isolation but on the facts of that case. From the judgment of Hon'ble Supreme Court in the case of Karanpura Development Co. Ltd. (supra); S.G. Mercantile Corpn. (P.) Ltd. (supra) and a host of other judgments it is seen that the observations of Hon'ble Supreme Court in the case of Panbari Tea Co. Ltd. (supra) that premium shall be on capital account have been made in the context where the leasing itself is not the business of the assessee. The situation is the same as when many people purchase Shares as investment, some others deal in Shares as a trader. 42. In the case 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eposit would not carry any interest payable to the lessee by the lessor. The assessee claimed deduction of rent payment on annualised basis. Hon'ble Supreme Court took note of the fact that the deposit was adjustable against the rent of each month but following the earlier judgment of Supreme Court in the case of Pingle Industries Ltd. v. CIT [1960] 40 ITR 67 , the Hon'ble Supreme Court held that the deposit was not deductible. In other words, where the payment is made in lumpsum conferring right upon lessee for the entire term of lease, the same cannot be given the quality of rent payable on month to month basis. 44. In the case of Bharath Earth Movers Ltd. v. CIT [2000] 244 ITR 547 2 (Kar.) , the assessee, a public sector undertaking, took three flats on lease for 99 years on payment of ₹ 26,82,462 inclusive of registration charges of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w nomenclature "Advance Rent" (See para 24). There was no question of acquiring physical possession of property unless the entire Primary Basic Rent was paid in full. 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. In para 67 of the assessment order for assessment year 1990-91 the Assessing Officer has enlisted the statement of outstanding Advance Rent as on 31-3-1989 and found that these persons were not put into possession as late as 31-3-1989 even though lease agreements had been entered and major part of Primary Basic Rent had been paid by the parties. Further, the assessee 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 doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formula:- Net Present Value= (1+r)n - 1/r(1+r)n - 1 In this formula, 'r' being common ratio and 'n' being number of instalments. If a 12% annual discounting rate is taken, Net Present Value for monthly instalment of ₹ 100 for 720 months would be only ₹ 10,514 and not the value of ₹ 72,000 as per the calculation made in the assessee's return of income. If the discount rate is taken at 8% per annum, such Net Present Value would still be only ₹ 15,622. During the period relevant to assessment year 1989-90, Primary Basic Rent collected amounted to ₹ 45,99,84,721. At the conservative discount rate of 8% per annum, the monthly instalment of this amount would work out at ₹ 29,44,468. 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 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of exemption or otherwise under the provisions of section 11 did not come into focus as the assessee claimed losses. For assessment year 1989-90 also the assessee filed return of income declaring a loss of ₹ 9,14,41,770. During the course of assessment proceedings for assessment year 1989-90 the assessee placed reliance on the order under section 119(3) and argued that the sole purpose of leasing was to achieve assessee's business objective which was not to construct buildings and sell the same. In the past, the transaction of lease was accepted as a lease and not as a sale. The main debate during the course of assessment proceedings for assessment year 1989-90 therefore proceeded on the footing that while the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's representations, the approval was extended up to 31-3-1981. Later, a three member team from the Department of Science and Technology visited The Centre for on the spot assessment of its activity. After reviewing the activities of The Centre, the Department of Science and Technology refused to extend approval beyond 31-3-1981. In their view, it was necessary to separate the World Trade Centre activity from the research activity under two distinct organisations and to carry out the research activity by itself with laboratory facilities and adequate research staff. This suggestion of the Department of Science and Technology was considered to have the effect of defeating the very object of developing the World Trade Centre and, therefore, 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that The Centre provided a number of trade services. The Centre issued a monthly circular known as "Trade Promotion Service" which was "for the benefit of members". Secondly, The Centre participated in various activities of the World Trade Association but the trade information gathered was forwarded to members only. Besides, The Centre organised exhibition and display facilities on an institutional basis. These facilities, both at the Trade Centre Arcade and the Commerce Centre were hired out from time to time to both the members and outside agencies for holding exhibition. Similarly, the seminar rooms were hired out for holding meetings, seminars and conferences. The Centre also organised a number of 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 commer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l sums towards profit mark-up. In other words, both the assessee-Centre and the lessees secured for themselves all the benefits arising from and exposed themselves to all the risks associated with any normal commercial transaction. 54. As in respect of the method of financing, the element of private profit was not excluded even in the manner of distribution of surplus. Although clause 5 of the Memorandum and Articles of Association of The Centre laid down that no portion of the income or property shall be paid or transferred, directly or indirectly, to members of The Centre, clause 12 of the Lease Agreement with the lessees of The Centre had different operation. The lessees were entitled to transfer, assign, sell, mortgage, charge 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 grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l these activities fell to be assessed under the head "Profits and gains of business or profession". 56. The learned Assessing Officer held that the assessee's case was hit not only by the provisions of section 11(4A) but also by the provisions of section 13. A number of the members of the Council of Management acquired private rights in the properties of The Centre in their capacity as the lessees. As substantial profits were embedded in the manner lease agreements were entered into with the lessees, the members of the Council of Management profited by the property of The Centre. Hence, according to the Assessing Officer, the case of the assessee was also hit by the provisions of section 13 of the Act. 57. For the reasons as 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the judgment of Hon'ble Madras High Court in the case of S.B. Adityan v. ITO [1964] 52 ITR 453 and argued that what was decisive was not phraseology of the trust deed but the conduct of the assessee. The fact that in earlier years no objection was taken could not be binding because during the assessment year the Assessing Officer brought out a large body of factual evidence which had never been brought on record or considered in the earlier assessments. The assessee's primary object of Scientific Research was only a dead letter. As far as the other objects were concerned, they included construction of office buildings and Shopping Arcade etc., which could not be construed to be an object of public utility. Since the trust deed 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 distingu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xploited by the founder members for their private profit. The founding members paid fixed premium of ₹ 475 per sq.ft. by way of Primary Basic Rent. As against this, the cost of construction of the building amounted to ₹ 754 per sq.ft. There was difference between the cost of construction and the premium paid by the founding members amounting to ₹ 279 per sq.ft. which was more than 50% of the amount paid by the founding members. Thus the founding memebrs clearly earned private profit. The same was made good by The Centre on recovery of higher amounts from the late entrants. The diversion of profit did not end here. A low rate of ₹ 170 per sq.ft. was fixed for a member to transfer its lease-hold rights. This additional premium at the rate of ₹ 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 ₹ 4,000 to ₹ 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 provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion thereafter was to carry out construction according to the plan of the Government. For the purpose of meeting construction cost and future costs required to maintain the buildings and provide various related facilities and amenities, the provi- sion for charging the rental in lumpsum and also some rent on regular basis was evolved. While allotting land, Government of Maharashtra had insisted on nominating its members to the Council of Management. Though this Council of Management was not directly responsible to the Government, it owed duty and obligation to the Government. Relying on the judgment of Hon'ble Karnataka High Court reported in Ecumenical Christian Centre v. CIT [1983] 139 ITR 226 1, the learned counsel emphasised that if the objects of the institution 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 Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... categorised as of general public utility. Hon'ble Supreme Court in the case of Dharmaposhanam Co. v. CIT [1978] 114 ITR 463 held that whether a trust is for charitable purpose is to be determined by reference to all the objects, though the mere existence of some non-charitable object would not deprive the trust the recognition as charitable institution. The insistence by the assessee that taking on record of the application under section 12A of the Act was conclusive of the assessee being a charitable institution was not correct. The general practice of the Department was to issue a certificate granting recognition for a specific period after which it is reviewed again and in the cases that were considered by the Tribunal the Department had issued certificate and on 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of transfer of their flats to outsiders instead of surrendering them to the assessee. The lease granted to them was for a very long period of 60 years which indicated that other persons could not even enter The Centre. All these facts indicated that The Centre did not serve any object of public utility. 64. The Tribunal took note of the fact that the words "not involving the carrying on of any activity for profit" were omitted with effect form 1-4-1984. But the same were replaced by the simultaneous introduction of section 11(4A) of the Act. These provisions required that the work in connection with the business is mainly carried on by the beneficiaries. In the case of the assessee, the activities were carried out by the Council of Management comprising of members 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-beli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessments under section 143 read with section 11 up to assessment year 1988-89, although exemption under section 35(1)(ii) had been withdrawn on 31-3-1981. In these circumstances, it could not be said that the certificate had not been issued to the assessee. However, this certificate did not prevent the Assessing Officer from considering whether in a given assessment year the assessee was entitled to claim benefits under sections 11 and 12. As this aspect had not been gone into by the Tribunal, Hon'ble High Court has remanded the matter back to the Tribunal on this point also, viz., whether the assessee has applied its income for earmarked purposes and whether the assessee was entitled to claim benefits under the aforestated sections during the assessment years 1989-90 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 Trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade Promotion (13) Provision for Business Centre etc. These activities were intended to promote trade and trade-related matters. Even if a section of public only was benefited, charitable purpose could not be denied. The learned counsel placed reliance on the judgments reported in CIT v. Radhaswami Satsang Sabha [1954] 25 ITR 472 (All.); Ahmedabad Rana Caste Association v. CIT [1971] 82 ITR 704 (SC) and Girijan Co-operative Corpn. Ltd. v. CIT [1989] 178 ITR 3591 (AP) for this purpose. It therefore followed that the benefit need not be extended to the entire community. What was antithetical to charity 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to give us break-up of expenditure incurred by the assessee on its various activities. The learned counsel argued that it was not possible to give such break-up. For example, an expenditure of ₹ 82,47,065 was incurred on electricity charges. Electricity was consumed in all the activities. The same applied to other expenses such as salaries, telephone expenses, travelling expenses, miscellaneous expenses and so on. However, during the year an expenditure of ₹ 45,09,068 was booked under the head "Research & Development Expenses". This expenditure pertained to holding of General Assembly of World Trade Centres' Association in Mumbai during this year. For this purpose the total receipts of the assessee amounted to ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim exemption under section 11 or section 12. Even an institution of a religious nature was not precluded from getting registration under section 12A. The only purpsoe for which registration was required was for establishing its identity as an institution for being able to claim the benefits under section 11 and section 12. We may point out that similar view has been taken by Hon'ble Kerala High Court in their judgment in the case of Self Employers Service Society v. CIT [2001] 247 ITR 18. It is true that some High Courts, e.g., Gujarat High Court in the case of Hiralal Bhagwati v. CIT [2000] 246 ITR 188, have 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusive club of a few privileged traders and industrialists and, therefore, it fell short of attaining the stature of a public utility. It is seen by us that by clause 12 of Government of Maharashtra Resolution dated 18-11-1974, the use of the land was restricted 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 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore us to erase these findings. To sum up, while we find that the assessee did serve a public purpose inasmuch as it made the city proud of having a World Trade Centre, in its day to day operations and overall execution of its activities it does not appear to have aspired to benefit the public at large. 74. According to the authorities below, the case of the assessee is also hit by the provisions of section 13. The Centre entered into agreements with its members for lease of flats in its prestigious buildings. These members were entitled to transfer, assign, sell, mortgage etc., the demised premises or any part thereof subject 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 ₹ 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the premium paid. The Centre recovered this difference from the late entrants by charging increasingly exorbitant premium. This allegation in the order of the learned CIT(A) has not been refuted or displaced before us. We therefore hold that to this extent the diversion of profits of the Centre to the founding-members, many of whom were members of the Council of Management, sticks against the assessee. 75. There is yet another major hurdle which comes in the way of the assessee receiving the benefit of exemption under section 11. Admittedly, the assessee was engaged in the business of Real Estate. The assessee himself filed the return 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of prominent citizens, many of whom were engaged in trade and industry. The assessee was expected to comply with various requirements of the provisions of the Act, which has not been done. We therefore hold that the assessee's claim of exemption under section 11 is hit by the provisions of section 11(4A). 76. We shall now turn to the facts relating to the application of income by the assessee. Under the provisions of section 11(1) the exemption is in respect of income derived from property held under trust wholly for charitable or religious purposes, to the extent such income is applied to such purposes 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 378 (AP); CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad.); Parsi Zorastrian Anjuman Trust v. CIT [1987] 163 ITR 8321 (MP); CIT v. State Bank of India [1988] 169 ITR 298 2 (Bom.); Director of Income-Tax (Exemptions) v. Girdharilal Shewnarain Tantia Trust [1993] 199 ITR 215 3 (Cal.) ; Hindustan Welfare Trust v. Director of Income-tax (Exemption) 201 ITR 564 4 (Cal.) etc., we do not see any rationale as to why the large amount of funds were designated "Unsecured Loans". If the assessee had no difficulty in consuming the bulk of 'Advance Rent' in the construction of buildings, how could there be any problem, in utilisation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-1 and IDBI Centre in these two assessment years the Assessing Officer rejected them outright. We may at this stage mention the provisions of section 11(4) which clearly lay down that where "property held under trust" includes a business undertaking so held, the Assessing Officer shall have the power to determine the income of such undertaking in accordance with the provisions of the Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes. 79. We shall now turn to the application of income as per the claims which have been made by the assessee during the course of hearing before 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 activ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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