TMI Blog1991 (4) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... n not holding that, by construction of the building, the assessee had a capital asset which was not exhausted by the agreement with the shareholders ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the construction of the building 'Nirmal' was a business venture and the non-refundable deposit amounts of Rs. 40,07,676 and Rs. 31,61,218 received by the assessee during the relevant assessment years 1967-68 and 1968-69, respectively, partook of the character of trading receipts ? 4. Whether the Tribunal was justified in holding that the profit with reference to the trading receipts accrued or arose only in the assessment year 1969-70 when the floor area was actually allotted and consequently deleting the additions of Rs. 40,07,676 and Rs. 31,61,218 for the assessment years 1967-68 and 1968-69 ? 5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 50,000 for assessment year 1967-68 made by the Income-tax Officer as income of the assessee from undisclosed sources ?" Question No. 3 has been referred at the instance of the assessee, while the other four questions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be used as commercial premises. After securing possession of the land in or about 1964, the company was faced with the stupendous task of raising funds of about Rs. 80 lakhs, which was the estimated cost of construction of a commercial building on the said piece of land. Since the company did not have such an amount at its ready disposal, the company devised a scheme for raising such finances by incorporation of article 4A in its articles of association. Under the scheme, the shareholders of the company were to enter into standard form of agreement with the assessee-company which would confer on them "the right of occupation" of specified floor space in the building, either by themselves or by their nominees. The form of agreement was incorporated as a schedule to the articles of association. Clauses 3, 4 and 5 of the agreement, which are relevant, provide as under: "Clause 3. On or before the execution of these presents, the shareholders shall deposit with the company, a sum of Rs .... ( ). The company shall pay to the shareholders interest on the said initial deposit of Rs ... at such rates as the directors of the company may from time to time reasonably fix. Such interest s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect from November 1, 1967, provisionally, subject to finalisation of the municipal assessment. The resolution specifically stated that the compensation was "to meet the outgoing of the company" and that the said amount had been arrived at after due and careful consideration of and having due regard to various circumstances such as payment of municipal taxes, ground rent, maintenance of building, etc. This amount was subsequently revised to Rs. 1.20 per square foot per month, by a resolution dated August 7,1969. Most of the members of the company who had been allotted floor space, with the consent of the board of directors, transferred the right of occupation to their nominees. While the rate of compensation charged by the assessee-company to its members was Rs. 0.85 per square foot, the members charged compensation which varied from Rs. 1.85 to Rs. 2.50 per square foot per month. The accounting year of the assessee-company ended on June 30, each year and, in the years ending June 30, 1966, and June 30, 1967, the total deposits collected by the assessee were Rs. 40,07,676 and Rs. 31,61,218 respectively. The construction of the building was completed in October 1967, and, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year that the transactions were completed by the allotment of the floor space to the members. Secondly, that if the deposits were to be treated as sale proceeds of the floor space and hence as trading receipts, then the entire cost of construction of the building, or at least considerable portion of it, should be allowed as an admissible deduction as there could have been no floor space but for the outlay of such a consideration. Both these contentions were negatived by the Appellate Assistant Commissioner. He rejected the first contention by taking the view that though the amounts were initially recorded in the books as "shareholders' contributions" and were transferred to the head "non-refundable deposits" only in the accounting year relevant to the assessment year 1969-70, the Revenue was not bound to depend on the entries in the books of account of the company so long as the nature of the particular receipt was clear. In rejecting the second contention of the assessee, the Appellate Assistant Commissioner held that the assessee had several types of rights in the building and these rights, in their entirety, had not been parted with on allotment of the floor space as, by allotme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... although the income by way of compensation had been assessed by the Income-tax Officer under the head "Property", the same should have been assessed under the head "Business". He, however, did not accept the reasoning of the Income-tax Officer that the hypothetical value of what was the going rent in the locality should be adopted as the basis for computation and that there were contractual constraints which could not be ignored in determining the annual letting value. The net effect of the Appellate Assistant Commissioner's order was that, apart from the deletion of certain cash credits, the major additions of Rs. 40,07,676 and Rs. 31,61,218 as "income from business" were upheld for the assessment years 1967-68 and 1968-69 respectively. The Appellate Assistant Commissioner also directed the Income-tax Officer to recompute the income from compensation receipts on the footing that it was also "income from business". He deleted the sums of Rs. 18,970 and Rs. 75,000 which were added by the Income-tax Officer under the head "Income from other sources" for the assessment years 1968-69 and 1969-70 on the ground that no compensation had actually been charged by the assessee, to any of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich were received in the accounting periods relevant to the two assessment years 1967-68 and 1968-69 aggregated to Rs. 71,68,894 and, inclusive of further deposits received in the subsequent years, the total amount of deposits, as on June 30, 1971, stood at Rs. 80,50,455, as against which the total cost of construction was much higher and hence the assessee had not derived any profit in the transaction as the venture had resulted in a loss. The Department contended that the deposits accepted from the members of the assessee-company had been rightly held to be trading receipts which were income for the relevant assessment years and that the Appellate Assistant Commissioner was right in holding that the assessee who, as owner, had several rights in the building, had not parted with all its rights and thus there was no exhaustion of the asset. The Department also supported the finding of the Income-tax Officer that the amounts had been rightly assessed in the years in which they were received and that there was no warrant for the suggestion that their taxability, if at all, could arise only for the assessment year 1969-70, being the year in which the floor space was actually allotted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. On this reasoning, the Tribunal deleted the additions of Rs. 40,07,676 and Rs. 31,61,218 made for the assessment years 1967-68 and 1968-69 and allowed the assessee's appeals. As a follow through of its reasoning, the Tribunal dismissed the departmental appeal for the assessment year 1967-68 against the deletion of a sum of Rs. 50,000 added by the Income-tax Officer as income from undisclosed sources. In the appeal for the assessment year 1968-69, pertaining to the deletion of the sum of Rs. 18,970 relating to the compensation received for the period June 1, 1967 to October 31, 1967, the Tribunal held that there was nothing in the agreement containing any prohibition against the occupation from an earlier date by mutual consent, nor did it contain any provision to the effect that, in the event of such earlier occupation, the income derived by the occupants during such period was to be passed on to the assessee. In this view of the matter, the Tribunal rejected the contention of the Department and upheld the deletion of Rs. 18,970 made for the assessment year 1968-69. Turning next to the Department's appeal for the assessment year 1969-70 against the direction made by the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising out of the assessee having allotted their floor space to their nominees even before the date on which they had been allotted the floor space. On the aforesaid facts, the Tribunal has referred five questions, as stated herein above, for the opinion of this court, vide Income-tax reference No. 108 of 1977 and two questions, vide Income-tax Reference No. 216 of 1977. Income-tax Reference No. 108 of 1977: We have been taken through the entire record, including the lengthy orders of the two departmental authorities and that of the Tribunal in appeal. Though the parties shifted their stand from "business" to "property" and vice versa, in our opinion, the transaction must necessarily take its legal colour from its essence. The assessee was a company out to do business in construction and sale of property. Since it had paucity of funds, it chose to raise funds by seeking non-refundable deposits from its members. These deposits, proportionate to the floor area required by each member, were to be permanently held by the assessee-company as long as the member/shareholder was in occupation of the floor area allotted to him. Though it was said that these deposits would fetch inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cally continued to be the owner of the property, even after the entire floor area had been allotted to different members in consideration of the deposits received, the vestigial or residuary rights of ownership which remained with the assessee-company were negligible and of dubious value. Considering the transaction in its entirety, we agree with the Tribunal's assessment of the situation, namely, that it was a business transaction and, therefore, the deposits ought to be treated as revenue receipts in the hands of the assessee. The necessary corollary, therefore, is that what was outlaid by the assessee towards the construction of the floor space area or the building must be treated as revenue expenditure and the profits ascertained only after the cost of construction is entirely deducted from the trading receipts, namely, the so-called non-refundable deposits. Both Mr.Jetley and Dr. Balasubramanian, learned counsel appearing for the Revenue, vehemently contended that even if it be assumed that the cost of construction was legitimately to be deducted from the trading receipts to ascertain the profits of the transaction, since the assessee had retained at least some of the residu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, the Appellate Assistant Commissioner deleted it on the ground that the creditor having accepted the fact of the payment and the purpose for which it was made, there was no question of adding it as income from undisclosed sources. Before the Tribunal, the parties agreed that the Tribunal's decision in regard to the addition of Rs. 40,07,676 would equally govern the dispute regarding this sum of Rs. 50,000. The Tribunal having deleted the addition of Rs. 40,07,676, upheld the deletion of the sum of Rs. 50,000 also. In our view, the answer to this question is obvious. This amount of Rs. 50,000 must also be treated as a non-refundable deposit and payment towards acquisition of occupancy rights. Since this payment had the same character as the sum of Rs. 40,07,676, it could not have been treated differently, as income from undisclosed sources, and the Tribunal was right in deleting the addition of Rs. 50,000 during the said assessment year 1967-68. Hence, question No. 5 is to be answered in the affirmative. Income-tax Reference No. 216 of 1977: Though the factual matrix in which the questions arise is the same, the questions appear to have been referred on account of the apparen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material to indicate any fraud or collusion. Though, in view of our conclusions arrived at while answering the question referred to in Income-tax Reference No. 108 of 1977, pertaining to the assessment years 1967-68 and 1968-69, we should have no difficulty in answering the question referred in the present reference, we have to deal with an additional contention raised by Dr. Balasubramanian, learned counsel for the Revenue. To recapitulate, the whole transaction was a business venture of the assessee. The assessee raised monies by floating its schemes, constructed the, building "Nirmal" and allotted all the floor space area to its shareholders in consideration of different specified amounts of non-refundable deposits received by it. While dealing with the reference for the previous years, we have already held that, considering the transaction as a whole, the non-refundable deposits must be treated as trading receipts in the hands of the assessee. When it came to taxing the non-refundable deposits, the Revenue took the stand that they were trading receipts since the venture of the assessee was a business venture. Strangely, however, when taxing the amount of compensation receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 22 of the Act cannot arise. What is necessary for the charge under section 22 of the Act to arise is that the property be inherently capable of being let out. In this connection, we may refer to the judgment of the Supreme Court in CIT v. Official Liquidator, Palai Central Bank Ltd. [1984] 150 ITR 539, to which our attention was invited by Mr. Dastur, learned counsel for the assessee. The Supreme Court, in Palai Central Bank's case [1984] 150 ITR 539, cited with approval its earlier judgment in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294, and held that, under the scheme of the Income-tax Act, 1961, charge of tax will not get attracted unless the case or transaction falls under the governance of the relevant computation provisions. The Supreme Court observed (p. 544) : "The character of the computation provisions in each case bears relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section." Placing reliance on this judgment of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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