Income Tax Appellate Tribunal - Mumbai
Dy. Cit vs D.B.S. Financial Services Ltd. on 15 February, 2007
ORDER
1. These cross appeals arise from the order dated 22-2-1995 of Commissioner (Appeals) - XXXIII, Mumbai and are disposed off by this common order as under:
2. The first issue which is common for both the appeals pertains to the determination of assessee's income chargeable to tax and the head of income under which it can be so charged, on transfer by the assessee- company's business of entire credit card operations to City bank NA during the previous year relevant to the assessment year under appeal.
Ground No. 1 raised by the department and relevant to this issue is as A under:
On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in his decision that the applicant must have been taken to have transferred the intangible assets of its credit card business to Citibank 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 (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 C account, would constitute business receipts in appellant's hands.
2. The learned Commissioner (Appeals) failed to appreciate that the membership subscription received in advance amounting to Rs. 2,21,30,123 and magazine subscription received in advance amour* ting 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 26-10-1989 it was agreed that the appellant would retain these amounts on transfer of credit card business and accordingly these sums formed part of the sale consideration.
3. First of all the relevant facts may be set out. The assessee-company, formerly known as Diners Club of India Ltd., was engaged in the business of credit card operations under a franchise from Diners Club International Ltd. incorporated in USA, as per the agreement executed on 14-9-1979 between the aforesaid two companies. This agreement was initially made effective for a period of 1 0 years and was renewable upon the same E terms and conditions for a further period of 5 years, at the option of the franchisee. Either party had the right to terminate the agreement earlier in the event of certain specific defaults of breach of any of the requirements of the agreement committed by the other party. The period of 10 years expired on 14-9-1989 and the assessee-company opted for further extension of the agreement up to 31-3-1990 and finally up to 30-6-1990. Thus the assessee-company continued the business of credit card p operations within the territories of India and Nepal till 30-6-1990. In the meanwhile the assessee-company entered into an agreement with Citibank NA on 26-10-1989, agreeing to transfer to Citibank, subject to the consent of Diners Club International Ltd., the entire credit card operations of the assessee-company in India and Nepal. It was stipulated that the transfer would be effective from 1-2-1990 or within such extended period as may be mutually agreed upon. Para 4 of the Preamble of this agreement dated 26-10-1989 summarises the subject-matter of transfer in the following manner :
Diners and Citibank have prior to the execution of this Agreement for Sale, arrived at an arrangement pursuant to which Diners has agreed, subject to consent of Diners Club International Limited being obtained, to transfer to Citibank and Citibank, subject to such consent being granted, has agreed to acquire from Diners the entire Credit Card operation of Diners in India and Nepal including al! goodwill pertaining thereto, but not including movable and/or immovable properties of Diners, employees/ "personnel/workmen of Diners or its associate concerns, operational and technological systems/hardware of Diners.
4. Clause 1 of the agreement stipulates that the transfer would take place on "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 14-9-1979 between Diners Club Inc. (the predecessor-in-interest of Diners Club International Limited) as renewed up to 31 st December, 1989 by the letter dated 1-9-1989 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 belonging to Diners; and
(d) all payments, if any, due and outstanding by Diners to its Member Establishments and foreign franchises; and
(e) all receivables due to Diners from its Card Members including receivables from foreign franchises on account of overseas members having incurred a commercial charge in India.
6. The consideration was tentatively determined in Clause 2 of the agreement at approximately Rs. 6,75,00,000 subject to variation on fur ther scrutiny. This consideration of Rs. 6,75,00,000 was split as under :
S. No. Details Amount (Rs.)
(a) Transfer of Data Bank 2,00,00,000
(b) In consideration of the restrictive covenant contained in Clause 8(B) 90,00,000
(c) Transfer of all rights of Diners under and15,00,000 flowing from the franchise agreement dated 14-9-1979
(d) Being the residual purchase price of the business transfer 3,70,00,000 Total 6,75,00,000
7. The ultimate deed of transfer was executed on 16-6-1990 after receipt of permission from Diners Club International Ltd. and Reserve bank of India and the appointed date w as fixed as 15-6-1990. As per this deed the total consideration, after the verification and scrutiny, was re-deter- C mined at Clause 5 at Rs. 6,51,10,725. Other terms and conditions as per the agreement dated 26-10-1989 were reiterated. In the revised consideration only the last item was re-determined at Rs. 3,46,10,725 as against Rs. 3.7 crores stated in the agreement.
8. The assessee-company consistently followed a practice to collect membership subscription as well as subscription for the Signature magazine in advance, 4 months prior to beginning of the term of 2 years for which such subscription was payable. Such advance subscription was credited to separate accounts styled as "membership subscription received in advance" and "advance magazine subscription". Such advance subscriptions were shown by the assessee as part of current liabilities in the Balance Sheet. However, these amounts were transferred to the credit of the Profit and Loss Account in the relevant accounting year to which such subscriptions relate. It appears that the assessee-company was in possession of such advance membership subscription of Rs. 2,21,30,123 and advance magazine subscription of Rs. 11,50,944 which pertained to the period after the appointed date of 15-10-1990 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 consideration shown in the deed of transfer ie., R<\ 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 consideration 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 backdrop of the above-mentioned factual scenario, we come to Ground Nos. 1 and 2 raised by the assessee. The advance membership subscription of Rs. 2,21,30,123 and the advance magazine subscription of Rs. 11,50,944 as mentioned above were treated by the assessee as part of the consideration for transfer. During the course of assessment proceedings it was contended by the assessee that the Citibank by not taking over these amounts, had in fact constructively included such amounts as part of the total consideration for transfer. The assessee relied on the Supreme Court decision in the case of CIT v. West Coast Chemicals & Industries Ltd. (In Liquidation) . It was contended that the assessee had transferred its credit card business as a whole and it agreed with the transferee that it would retain these amounts, which in fact amounted to a payment of consideration by the transferee through a particular mode of settlement of accounts. The assessing officer rejected these arguments relying on the Bombay High Court's decision in the case of CIT v. Batliboi & Co. (P.) Ltd. , and held that the advance payments were in the nature of revenue receipts. Since the assessee did not refund these amounts to the customers and credited to the Profit and Loss Account, these advances were chargeable to tax as revenue receipts. The learned Commissioner (Appeals) concurred with the assessing officer.
11. The learned counsel appearing for the assessee contended before us that the aforesaid amount received by the assessee in the form of advances pertained to the period after the appointed date and, therefore, these amounts represented the assessee's liability to Citibank. With regard to the advance membership subscription, all services to such members after the appointed date have to be rendered by Citibank and not by the assessee-company. Similarly, the magazines have to be supplied by the Citibank after the appointed date against the advance subscription. It is argued that the assessee-company was thus under a legal liability to pay these advances to Citibank. However, as per mutual agreement, the assessee was allowed to retain these advances. The learned counsel invited our attention to Clause 5 of the agreement dated 26-10-1989 which is reproduced below :
5(a) Diners further specifically agrees that all claims whatsoever when so ever arising 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 A agrees to keep diners duly and effectually saved, harmless and indemnified there against 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 B 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. In respect of New card Members, their classification as aforesaid will be determined as on the Appointed Date and consideration paid accordingly.
(B) In relation to New Card Members :
(a) All entrance fees will be to the account and for the benefit of Diners; p
(b) All annual membership fees received shall be apportioned between Diners pro rata, with the Appointed Date being considered as the cut-off date for the purpose of determining the proportions applicable prior to and after the Appointed Date.
(C) In relation to Current Card Members, all membership fees for renewals due on or after the Appointed Date, whensoever collected, shall accrue for the benefit of Citibank.
(D) Subscriptions received in advance ior Signature magazine shall accrue and be to the benefit of Citibank in r cspect of the unexpired period, subject to Citibank taking over the contract.
(E) All monies received from new applicants pending approval of membership as on the Appointed Date shall be transferred to Citibank for further processing and necessary action.
13. The learned counsel submitted before us that the terms and conditions of the agreement clearly show that Citibank was entitled to receive advance subscriptions referable to the period after the appointed date. However, as a part of the entire transfer of credit card operations, the assessee-company was allowed to retain these amounts. It is, therefore, contended that such advances retained by the assessee are only in the nature of overall consideration receivable by the assessee for transfer of the business of credit card operations. It is; argued that the assessee had the option to pay these amounts to Citibank and then to receive back the p same amount forming part of the overall consideration and in that case the department could not have objected to such advances being treated as part of the consideration. The learned counsel relied on the Supreme Court's decision in the case of CIT v. West Coast Chemicals & Industries Ltd. (In Liquidation) . In this case the Apex court held that where a slump price is paid and no portion thereof is attributable to the sale of stock-in-trade it cannot be said that any profit has arisen other than what results from the appreciation of the capital. It is reiterated that the assessee transferred its credit card business as a whole and it was agreed with the 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 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 transmission. The appellant applied to the Reserve bank of India for permission with a statement showing a sum of 1,060,891.68 U.S. dollars as the total reinsurance premium payable to the foreign parties, and after deducting the brokerage of 71,004.48 U.S. dollars due to the appellant for technical services rendered, a sum of 989,887 U.S. dollars as the balance to be remitted. This balance amount after deducting the brokerage, was remitted to the London brokers with the permission of the Reserve bank of India. The appellant sought the approval of the Central Board of Direct Taxes in terms of Section 80-O of the Income Tax Act, 1961, on the ground that the reinsurance brokerage retained in India under agreement with the London brokers amounted to receipt of income in convertible foreign exchange. The Central Board of Direct Taxes refused approval. The High Court, dismissed a writ petition, filed by the appellant against the Board's order, holding that by retaining the fees, the appellant did not receive any foreign exchange in India. On appeal to the Supreme Court :
Held, allowing the appeal, that the remittance to the foreign reinsurance company was made through the Reserve bank of India in conforming with the agreement between the appellant and the foreign reinsurers, and that the remittance statement filed along with the application to the Reserve bank showed that the amount due to the foreign reinsurers as also the brokerage due to the appellant and the balance due to the foreign reinsurers were expressed and remitted in U.S. dollars. The entire transaction effected through the medium of the Reserve bank of India was expressed in foreign exchange and in effect the retention of the fee due to the appellant for the services rendered was in U.S. dollars. This was receipt of income in convertible foreign exchange. A formal remittance to the foreign reinsurers first and thereafter receipt of the commission from the foreign reinsurer was unnecessary. Moreover, the Central Board had A by circular dated 20-12-1995, clarified the real scope and impact of Section 80-O stating that the receipt of brokerage by a reinsurance agent in India from the gross premia before remittance to his foreign principal would also be entitled to the ded uction under Section 80-O of the Act. This was binding on the Board.
(The court directed the Board to process the agreement 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 D learned DR relied on the Bombay High Court's decision in the case of CIT v. Batliboi & Co. (P.) Ltd. in support of his contention that receipt of money or deposits to be adjusted in the price of goods or services to be supplied or rendered are merely advance payments and such amounts are in the nature of revenue receipts. The learned DR also drew support from the Allahabad High Court's decision in the case of the Bijli Cotton Mill (P.) Ltd. v. CIT , for the proposition that the taxability of a receipt is fixed with reference to its character at the moment it is received and merely because the recipient treats it subsequently in his own accounts as his own does not alter that character. The learned DR also relied on the Delhi High Court's decision in the case of CIT v. Motor & General Finance Ltd. . It is pointed out that the Delhi High Court observed that the quality and nature of a receipt for income-tax purposes is fixed on ce and for all, when it is received. Receipts of money or deposits for adjustment in the price of goods to be supplied p or services to be rendered, may be mere advance payments and, therefore, the revenue receipts and not borrowed money. Such receipts are an integral part of a commercial transaction and are related to the price of goods or to the charges for services. They are trade receipts and hence in the nature of revenue income.
15. We have given a careful consideration to the rival submissions and have gone through the relevant facts, the relevant stipulations of the agreement as also the judicial pronouncements cited before us. It may be mentioned that each case turns on its own facts and this issue requires adjudication in the light of the peculiar facts of the present case. The assessee-company has been following a consistent practice of receiving membership subscription and magazine subscription in advance. These amounts are shown on the liabilities side of the Balance Sheet. However, these receipts are credited to the profit and loss account in the year in which the services are rendered or magazines are supplied. The assessee-company received advance subscriptions which were bifurcated by the assessee in two parts i.e., the amount pertaining to the period before the appointed date and the amount pertaining to the period after the appointed date. The amount referable to the period up to the appointed date has been shown by the assessee as its revenue income. On the other hand, the amount referable to the period after the appointed date has 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 entire facts and circumstances, in our view these advances cannot be treated as revenue receipts in the hands of the assessee. Because of mutual agreement at the time of transfer, Citibank did not claim these amounts and the assessee was allowed to retain. In our view, these amounts must be treated as part of the overall sale consideration for the business of credit cards. We, therefore, set aside the finding of the learned Commissioner (Appeals) on this issue and the assessing officer is directed to compute income under the head 'Capital gain' by treating these amounts as part of the sale consideration.
16. We now come to Ground No. 1 of the department's appeal which has been reproduced (supra). This ground has two parts. Firstly, the department is aggrieved on account of the finding of the Commissioner (Appeals) that the assessee transferred the credit card business for a consideration of Rs. 5,61,10,725 G (Rs. 15 lakhs + Rs. 3,46,10,725 + Rs. 2 crores). Secondly, the department is not happy with the finding of the learned Commissioner (Appeals) that the assets A transferred should be treated as long-term capital assets and not short-term as held by the assessing officer. The first part of the ground of appeal is rather vague. It may be mentioned that the assessing officer himself hac adopted the consideration at Rs. 3,76,10,725 and other item of Rs. 2 crores being consideration for transfer of the exclusive right to the data bank has been treated by the assessing officer as revenue receipt. The learned Commissioner (Appeals) has held that this cannot be a revenue receipt and the same is to be added to the total consideration. In the grounds of appeal raised by the revenue there is no challenge to this finding of the learned Commissioner (Appeals). Thus the only grievance which is reflected in the grounds raised by the revenue is that the learned Commissioner (Appeals) erred in directing the assessing officer to assess the income from transfer of credit card business as long-term capital gain as against short-term capital gain assessed by the assessing officer.
17. The learned DR forcefully contended before us that the assessee-company got franchise for carrying out credit enrd business from Diner's Club International Ltd., as per agreement executed on 14-9-1979. This agreement was for a period of 10 years and was renewable upon the same terms and conditions for a further period of 5 years at the option of the franchisee. The period of 10 years expired, on 14-9-1989 and the assessee-company opteci for extension up to 31-3-1990 and finally up to 30-6-1990. 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. urga Chand Kaushish .
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 31-3-1990 and again up to 30-6-1990. 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., 15-6-1990, 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.
18. The learned counsel appearing for the assessee argued that the cases relied upon by the learned DR have no relevance to the i acts of the present case. The assets have been continuously held by the assessee since 14-9- 1979 and when the agreement is renewed on the same terms and conditions it cannot be said that fresh franchise was acquired by the assessee on the date of such renewal. The learned counsel relied on ITAT Madras Bench decision in the case of Income Tax Officer v. R. Perumal (1980) 10 TTJ 182.
In this case it was held that where permit is held for a period longer than 60 months immediately preceding the transfer, capital gains resulting from such transfer is assessable as long-term capital gain and the fact that the licence was renewable is clearly irrelevant since what is material is the period for which it was held. The learned counsel also relied on the ITAT Delhi Bench decision in the case of Frick India Ltd. v. Joint CIT(2001) 79 ITD 582 and invited our attention to the brief head-note which is reproduced below :
Section 2(29A) of the Income Tax Act, 1961 - Capital gains - Long-term capital asset - Assessment year 1997-98 - Agreement of lease for tenancy rights in a building, which was entered into by assessee-company during financial year 1972-73 for a period of 3 years, was not renewed but assessee-company continued to occupy property on same terms and conditions - During financial year 1996-97, assessee surrendered tenancy rights and in consideration received an amount from third party - It claimed exemption on said amount under Section 54EA on ground that amount was received on account of transfer of long-term capital asset, being tenancy rights - assessing officer disallowed claim on ground that on expiry of lease, tenancy turned into one on 'month-to-month basis' and assessee always acquired a new right at beginning of each month on payment of rent and thus it was a short-term capital asset under Section 2(42A) - assessee claimed that though tenancy was from month-to-month, it did not come to an end on last day of each month and remained in rjexistence till its determination and as such assessee was 'tenant holding over' within meaning of Section 116 of Transfer of Property Act - whether, status of assessee was that of 'tenant holding over' which was to continue even after expiry of contracted tenancy till it was terminated as determined - 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 p elaborate submissions made before us by both the parties. The learned DR laid great emphasis on the argument that renewal of lease is tantamount 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 Ajmer High Court decision in the case of Kanhaiyalal Azad (supra) and the Supreme Court's decision in the case of Durga Chand Kaushish (supra). It may be mentioned that the assessing officer also supported his finding by the above mentioned two cases and the learned A Commissioner (Appeals) has considered the facts of these cases in great detail and has recorded a finding that these cases are not applicable to the case of the assessee. It may be appropriate to reproduce below the part of the order of the learned Commissioner (Appeals) dealing with these two cases.
The decision of Ajmer High Court cited by the assessing officer (Kanhaiyalal Azad v. District Magistrate), is with reference to interpretation of the provisions of Arms Act. Under the said Act, a person must ob tain a R licence from the district authorities before possessing Arms. The licence is valid for a specific period, after expiry of which the person must seek a renewal of such licences. The district authorities have the right either to refuse to grant the licence originally or refuse to renew the licence after expiry of the stipulated period, even without assigning any reason. The authorities were also entitled to cancel or suspend a licence already granted any time during its validity after assigning reasons. An issue had arisen in the said case whether an act of non-renewal of a 1 icence, amounts ~ to its cancellation. The court, while negating such claim had observed that - "The Indian Arms Act does; not deal with the case of grant of a licence. A renewal must ordinarily be deemed to be a fresh grant..."(page 102). Evidently, in view of the power of the district authorities to refuse to renew a licence, after its expiry, even without assigning any reason, every renewal of licence has to be logically treated as a fresh grant of licence. But such is not the situation in the present case, in view of the unquestionable right of the appellant to renew the agreem ent. In the other case before the ~ Supreme Court, cited by the assessing officer (D.D.A. v. Durga Chand KaushisH), the issue was interpretation of a deed of lease of immovable property. The plaintiff had taken an immovable property on lease from Govt, of India in 1931. The deed had mentioned at the outset that the lease was for a term of ninety years in consideration of a fixed annual rent, subject to certain conditions. One of the conditions was that the lessor would at the 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 which generally provides for renewals as of right. In all other respects it is really a fresh lease. Thus the initial term of a lease of ninety years could not coexist with the renewals of that very lease within ninety years." (page 829). The court was faced with the situation that while during the initial term of the lease agreement the lease rent was fixed and could not be enhanced, it could be raised during subsequent renewal of the lease agreement. As such if the renewal was considered as an extension and a part of the original lease agreement, a conclusion would arise that the lease rent cannot be enhanced. In the above light the court held that the renewal of the lease was the grant of a fresh lease. Evidently a renewal of lease upon different terms and conditions will not stand in the same light as a renewal upon the same terms and conditions. These are however cases under Arms Act and T.P. Act.
21. We have gone through both the cases, copies of which have been filed by the learned DR and we agree with the view of the learned Commissioner (Appeals) that the facts are totally different and these cases cannot be applied to the assessee's case. As already discussed above, the assessee-company acquired the business of credit card operations by virtue of the agreement dated 14-9-1979. This agreement was effective for a period of 10 years and was renewable upon same terms and conditions at the option of the franchisee. All rights accruing to the assessee-company by virtue of the aforesaid agreement including the intangible assets and goodwill have been continuously held by the assessee since 14-9-1979 without any interruption and these assets which have been transferred to Citibank are clearly in the nature of long-term capital assets. If the case of the department that a fresh lease was acquired by the assessee by virtue of the renewal agreement dated 1-4-1990, is accepted even for the sake of argument, the cost of acquisition would be nil and, therefore, by virtue of the Supreme Court's decision in the case of CIT v. B.C. Srinivasa Shetty , no capital gain can be brought to charge of tax. We see no merit in the observation made by the assessing officer that the original cost of acquisition in the year 1979 should be taken to be cost of acquisition of renewal of the agreement. Once it is accepted that the cost of acquisition was paid in the year 1979, 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 Commissioner (Appeals) 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 Commissioner (Appeals) 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 IB'BI the assessee opted for the entire interest receivable by it over a period of 3 years to be discounted and accordingly (during the present assessment year the assessee received discounted interest of Rs. 91,91,500. The assessee claimed that only such interest income can be brought to the charge of tax which had accrued during the previous year relevant to the assessment year 1991 -92. The assessing officer rejected the claim. The learned Commissioner (Appeals) accepted the assessee's claim and the department is aggrieved on that account. In our view the Supreme Court decision in the case of Madras Industrial Investment Corpn. Lid. v. CIT can be applied to the facts of the present case. In that case it was held by the Apex court that when the debentures are issued at discount, the debenture premium is allowable proportionately in each year during the total period of currency of debentures and such revenue expenditure cannot be allowed q in one year when the debentures are issued at discount. In our view, the learned Commissioner (Appeals) has rightly held that the interest should be brought tc the charge of tax on accrual basis each year. His order on this issue is, therefore, confirmed.
24. Reverting back to the assessee's appeal, Ground Nos. 3 and 4 are as under :
3. The learned Commissioner (Appeals) erred in law in j) upholding the action of the learned Deputy Commissioner of Income-tax in taxing the compensation ol Rs. 31,23,900 received in respect of Delhi & Bangalore property as income under the head "Income from house property" as against income under the head "Profits & gains of business or profession" as per the return of income filed by the appellant and further erred in law in upholding the action of the learned Deputy Commissioner of Income-tax in disallowing a sum of Rs. 5,48,300 under the head "Profits & gains of business or profession" as expenses relating - to house properties for separate consideration.
4. The learned Commissioner (Appeals) holding the appellant to be the owner of Delhi and Bangalore properties under Section 27(0 and (Hi) of the Income Tax Act, 1961.
25. These grounds pertain to bringing to the charge of tax rental income as income from house property. The facts are that the assessee is receiving rental income from two properties located in Delhi and Bangalore. The p property at Delhi was originally in the form of land which was leased out by New Delhi Municipal Committee to Bharat Hotels Ltd., for a period of 99 years as per agreement dated 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 8-10-1985 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 Commissioner (Appeals) concurred with the assessing officer.
26. The learned counsel appearing for the assessee argued before us that the provisions of Section 27\iiib) would apply to a case of lease and not sub lease or sub-licence. It is pointed out that the Delhi property is only sub-leased to the assessee and, therefore, the income from such property cannot be treated as income from house property. With regard to the Bangalore property it is contended that the lease agreement was not registered and, therefore, the assessee cannot be treated to have acquired any legal lease rights. The learned counsel relied on ITAT Cochin SMC Bench decision in the case of M. Damodaran Nair v. ITO (2004) 90 ITD 758. He invited our attention to the short head-note of this case which reproduced below :
Section 27(iiia)/(iiib), read with Section 269UA, of the Income Tax Act, 1961 - Income from house property - Owner of house property - Assessment year 1995-96 - Whether Section 269UA(?) gives extended meaning of 'transfer', which makes it very clear that lease for a term of not less than 12 years includes allowing possession of such property to be taken or retained in part performance of a contract of nature referred to in Section 53A of Transfer of Property Act, 1881 - Held, yes - Whether if there is no intention to transfer building, mere possession of same for twelve years or more will not constitute change of ownership -Held, yes - assessee had taken buildings on lease and derived income from subletting them -Whether, according to Section 27(iiib), transaction should be one referred to in Section 269UA(/), and then only person concerned will be owner of building or part thereof on basis of extended meaning of 'transfer' in Section 269C A -Held, yes - Whether, therefore taking of building on lease, in instant case, had no relevance in absence of any agreement or apparent pconsiderations for transfer except giving immovable property on rent by real owners to assessee who, in turn, sub-iet it - Held, yes - Whether, therefore, it being not a transfer or transaction under Section 269UA, extended meaning of 'ownership' could not be applied and, hence, income derived by assessee from subletting of said building was 'business income' and not 'income from house property' - Held, yes.
27. Alternatively the learned counsel submitted that the lease rent paid by the assessee in respect of both the properties should be deducted from the lease rental income received by the assessee and only net income can be brought to the charge of tax under Section 23(1)(&) of the Income Tax Act. A 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 Income Tax Officer (1984) 7 ITD 392 (Bom.) (2) Meelam Cable Mfg. Co. v. Asstt. CIT(1997) 63 ITD 1 (Delhi) (3) ITO v. Mrs. Niroben D. Choksi 1 SCIT 608.
28. The learned DR argued that the case of the assessee is fully covered under Section 27(iiia) read with Section 269UA(/). 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 6251 (SC) (2) R.B. Jodha Mai 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 tax under the head "Income from house property", only such deductions can be allowed as are admissible under Section 24 of the Income Tax Act. For this proposition he relied on the following case:
(1) Indian City Properties Ltd. v. CIT (2) Piccadily Holiday Resorts Ltd. v. Dy. CIT(2005) 94 ITD 267 (Delhi) (3) Dy. CIT v. Piccadily Hotels (P.) Ltd. (2006) 97 ITD 564 (Chd.).
29. We have given a careful consideration to the rival submissions and have gone through the facts about which there is no dispute. The only question is whether the income arising to the assessee can be assessed as income from house property by virtue of Section 27(iiib) read with Section 269UA(f). under Section 27(iiib), for the purposes of Sections 22 to 26 "owner of house property" is defined as under :
a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in Clause (f) of Section 269UA, shall be deemed to be the owner of that building or part thereof.
30. The aforesaid provision stipulates that a person who acquires any rights by virtue of any transaction referred to in Clause (/) of Section 269UA, shall be deemed to be the owner and accordingly the relevant income has to be taxed as income from house property. Section 269UA defines "transfer" and Sub-clause (i) thereto reads as under :
(f) transfer
(i) in relation to any immovable property referred to in Sub-clause (i) of Clause (d), means transfer of such property by way of sale or exchange or lease for a term of not less than twelve years, and includes allowing the possession of such property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 (4 of 1882).
Explanation.-For the purpose of this sub-clause, a lease which provides for the extension of the term thereof by a further term or terms shall be deemed to be a lease for a term of not less than twelve years, if the aggregate of the term for which such lease is to be granted and the further term or terms for which it can be so extended is not less than twelve years.
31. In our view, irrespective of whether the rights have been acquired under a lease or a sub-lease, Section 21(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 his own right and the requirement of registration of sale deed is not warranted. In the case of R.B. Jodha Mai Kuthiala (supra), the Supreme Court observed that owner must be that person who can exercise the rights of owner in his own right. In the present case the agreements executed between the assessee and the sub-lessees have been duly acted upon and the assessee is receiving rental income by virtue of these agreements. In our view Section 27(iiib) would apply in the present case.
32. Regarding the alternative claim of the assessee that the lease rent paid by the assessee should be deducted from the lease rent received, there can be no dispute that the .income under the head 'Income from house property' is to be computed in accordance with the provisions of Sections 22 to 27 of the Income Tax Act. A reference may be made to the cases relied upon by the learned counsel for the assessee. In the case of Varma Family Trust (supra), the Mumbai ITAT held that the annual value for the purposes of Section 2(f)(b) should be determined after deducting from the actual rent, the outgoings like stamp charges and legal fees for G executing lease deed. It was observed by the Tribunal in this case that such expenditure was similar to services charges like security, passage light, operation of lift, etc., which are in any case allowable under Section 24. In the case of Neelam Cable Mfg. Co. (supra) the ITAT Delhi held that security service charges were deductible from gross rent received, Similarly it was held that in view of proviso to Section 23, house tax should be allowed as deduction. In the case of Mrs. Niroben D. Choksi (supra) the Tribunal observed that service charges for common amenities including insurance of property are deductible. We may now refer to the cases cited by the learned DR. The case of Indian City Properties Ltd. (supra) arose under the Indian Income Tax Act, 1922. In this case the Calcutta High Court laid down the following principles :
Held, (i) the assessment of rent income arising out of the properties should be made under Section 9, as income from property and not as income from business under Section 10 of the Act;
(ii) as the assessment of the income derived from property has to be made under Section 9, the question of allowing any depreciation of buildings under Section 10(2) did not arise;
(iii) as 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 thore 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)(m); 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)(m) 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 property have to be within the parameters of Sections 22 to 27. There is no specific provision in any of these sections warranting deduction of lease rent paid by the p assessee. Such deduction is neither available while determining ALV under Section 23 or while considering deductions under Section 24. Considering the entire facts and circumstances, we confirm the order of the learned Commissioner (Appeals) on this issue.
35. In the result, assessee's appeal is partly allowed and departmental appeal is dismissed.