Income Tax Appellate Tribunal - Mumbai
Visveswaraya Industrial Research ... vs Deputy Commissioner on 29 March, 1996
Equivalent citations: [1996]59ITD156(MUM)
ORDER
A. Kalyanasundharam, A.M.
1. The assessee, a registered as a company under section 25 of the Indian Companies Act, 1965 (hereinafter referred to as Cos'. Act) has filed the appeals fort the two assessment years 1989-90 & 1990-91 and the cross objection against the appeal filed for the assessment year 1989-90 by the revenue department. The appeals involve common issues and because, the cross objection is against the cross appeal filed by the revenue, these appeals have been group together and are being disposed of by this common order.
2. The common controversy in these appeals of the assessee are in regard to its claim as charitable institution covered by the provisions of section 2(15) of the Income-tax Act, 1961 (hereinafter referred to as the Act), that its income are therefore exempt from tax under section 11 of the Act. The revenue department had refused to grant the exemption because, the assessee diverted its attention to the activities of construction of buildings known as Trade Centre, Commerce Centre and IDBI Centre. The related reasons was that for the purposes of construction funds were collected from various applicants for space on said building on lease for a period of sixty years in the said buildings even before the start of the construction and during the construction but, before giving of possession, was not a charitable activity. The other related reason for refusal was that, the lessees were permitted to transfer the lease in favour of the another for a larger sum that what was paid by them on payment a transfer fee to the assessee, which indicated that the members made private profit by using the property of the assessee which defeats the purpose of charity. Another reasons that weighed in the minds of the authorities was that though, the assessee's primary object was scientific research for which it was established in 1970, the activities carried out by it for two decades was on construction of the abovementioned centres, building infrastructure for various services connected with the building like air-conditioning, common thoroughfares, watch & ward and the like and in building up infrastructure concerning the services on exhibitions, meetings, conferences, etc., which all activities were carried out in an organised manner and no attempt was ever made to build up the infrastructure necessary for carrying out its primary objective of scientific research. The objection of the revenue department is that the construction activities, activities concerning facilities for exhibitions, meetings, conferences, etc., and providing common facilities to the occupants of the building, carried on a commercial level, as are similarly provided by hotels too, indicated that such commercial activities of the assessee do not make it a charitable purpose.
2.1 The related common issues according to the appellate are that the CIT(A) should not have held the primary basic rent received in advance from its lessees is in the nature of salami from which the entire cost of construction is deductible and is assessable as business income. The other related common issue is that the CIT(A) should not have held that the entire additional rent received for allowing transfer of leasehold rights in taxable as business income. The third common issue is that the CIT(A) ought to have held that the income should have been limited to one-sixtieth of primary basic rent & the additional rent for allowing of transfers plus the secondary basic rent. The fourth common issue is that the amounts appropriated towards sinking fund & interest thereon should have been allowed as a deduction from the income as stated in its issue No. 3 above.
2.2 The department of revenue in its appeal for the assessment year (AY) 1989-90 through its Commissioner of Income-tax, Bombay City-IV, Bombay, has touched upon the following issues. First issue is identical to the one raised by the assessee and that is the primary basic rent including that a car park should not have been held as income from business but, as capital gains with the rider that CIT(A) ought to have upheld the contention of the Assessing Officer in his remand report that the proper head of income is capital gains despite the fact that in the assessment framed by him, he had treated it as income from business. The second relates to the area in Commerce Centre that was transferred and that the CIT(A) should have limited the area of 289405 sq. ft. instead of 461736 sq. ft. The third issue is that the cost of construction of the building and the plant & machinery, should have been taken as suggested by the Assessing Officer in his remand report for purposes of set off from the income at Rs. 1491,91,142 (proportionate cost of space of 289405 sq. ft.) in place of Rs. 3977,89,589. The last of the issue is that because the finally assessed income was a loss the CIT(A) should not have directed the Assessing Officer to also set off of brought forward unabsorbed business loss and unabsorbed depreciation.
2.3 The cross objection of the assessee involves the objection to the conclusion of CIT(A) that, any amount could be charged to tax under the head income from property and in taxing Rs. 2059,79,598 which was advance received from lessees to whom possession was yet to be given. The assessee has raised these very pleas as its additional grounds of appeal.
2.4 In the AY 1990-91, the assessee in addition to the common issues as brought out in para 2 above, has raised the following issues. In the first of such issues, the assessee has challenged the action of CIT(A) in assessing advance lease rent as premium of Rs. 2750,86,477 as short-term capital gains and the assessee is not entitled to any deduction under section 48(2) of the Act. The second of the claim that the receipt of Rs. 2059,79,589 is included in the capital gains amount of Rs. 2750,86,477 having been treated as income and assessed in assessment year 1989-90, could not have been treated as income under the head 'Capital gins' in the assessment year 1990-91. The third issue is that the income from house property could not have been based on the Municipal Valuation. The fourth claim is that the repairs to building should have been allowed to be deducted from its business income. The fifth claim is that the assessee should have been allowed depreciation on its building to the extent of Rs. 1093,52,057.
We shall briefly state the facts of the case so that the controversy arising in these appeals could be appreciated in their proper perspective.
3. The assessee is a company formed on 26th June, 1970 under section 25 of the Indian Companies Act, 1956 (referred to as the Cos. Act). The Regional Director of the Department of Company Affairs, Min. of ID., IT & C.A., Government of India vide his order dated 12-6-1970 had granted the licence under section 25 of the Cos. Act stating therein that he is satisfied that the assessee is to be registered as a company under the Cos.' Act for promoting objects of the nature specified in section 25(1)(a) of the cos.' Act and that it intends to apply its profits, if any, or other income in promoting its objects and to prohibit the payment of any dividend to its members and also directed that the company need not use the words in its name either 'limited' or 'Private Limited'. The Department of Revenue and Insurance on 25th April, 1970 had published in the Gazette of India the fact that the assessee has been granted approval by the Council of Scientific and Industrial Research, the 'Prescribed Authority' for purposes of section 35(1)(ii) of the Act. The main objects (clause A 1) of the company as contained in its Memorandum of Association reads as under :-
"To organise, sponsor, promote, establish, conduct or undertake scientific research in any way or by any means whatsoever and in any area or field.
'Scientific research' in the above clause shall mean any activities for the extension of knowledge in the fields of natural or applied science, including agriculture, animal husbandry or fisheries. If the definition of 'scientific research' in section 43(4)(1) of the Income-tax Act, 1961, or the corresponding provisions of any new law, is hereafter amended, the amendment shall apply to the connotation of 'scientific research' in this clause."
The assessee was recognised as a scientific research initially by Central Board of Direct Taxes in 1970, before formation of the appropriate authority, Department of Science & Technology (DST) and this recognition continued till 31-3-1981.
3.1 The Revenue & Forests Department of Govt. of Maharashtra passed a resolution No. LBR-2570/13594-A1 dated 16th October, 1970 issued with the concurrence of the Finance Department on Ref.No. 1180/III dated 29th March 1970, by which sanction was accorded to the lease of about 6 hectares & 96.49 areas (850' x 850') of reclaimed land from Block V, Backbay Reclamation to the assessee subject to the terms & conditions in the memorandum of terms and conditions. On 18th November, 1974, the Revenue and Forests Department of Government of Maharashtra passed a resolution in supersession of the resolution dated 16th October 1970 by means of which the assessee was granted the lease of the land in Block III as brought out above.
"In supersession of the orders issued in Government Resolution, Revenue and Forests Department No. LBR-2570/13594-A1, dated October 10, 1970 and the various other orders amending/substituting conditions in the said Government Resolution.
(i) Sanction is accorded to the grant of a direct lease (without entering into the usual Agreement to lease) of land measuring about 71071 square metres (882' x 850' reclaimed and 18' x 850' unreclaimed) from Block V, BB.R. to M. Visveswaraya Industrial Research and Development Centre on the terms and conditions mentioned in Appendix 'A'.
(ii) Permission is also accorded to the grant of a sub-lease of 10000 square metres of the land from out of the leased land by the lessee to the LIC of India on the terms and conditions mentioned in Appendix 'B' and to the mortgage of the leased land or any part thereof by the lessee to the LIC of India for obtaining a loan to the tune of Rs. 7.95 Crores subject to the terms and conditions mentioned in Appendix 'C'."
This was followed by another modification by a resolution dated 16th April, 1979 by means of which the assessee's surrender of 23046 metres was accepted by the Government of Maharashtra. By means of the resolution dated 16th April 1979 laid down basic conditions out of which few of essential conditions only are listed below :
(a) The existing No. of State Govt. representing on the Council of Management of the Centre (which is four) shall not be altered.
(b) The M. Visveswaraya Industrial Research and Development Centre (MVIRDC) shall always hereafter obtain the approval of the State Government for the following and for the purpose, shall make suitable amendments in the Memorandum and Articles of Association and other concerned documents as may be necessary :
(1) All capital investments and disposals including sale/lease of premises, and (2) Any change in the Memorandum and Articles of Association of the Centre including the aims, objects and Constitution of the Centre.
(c) The State Govt. should have power to give any directives to the MVIRDC in furtherance of its objectives for promotion of industrial export from Maharashtra State. The Centre should make suitable provision, if necessary, in its Memorandum, and Article of Association etc., for enabling compliance of such directives as and when issued.
(d) The building completion period of six years stipulated in condition No. 8 of Appendix 'A' to the Govt. Resolution, dated 18th November, 1974 should be extended up to 2nd May, 1980 should be extended up to 1980 without charging any premium.
(e) On the Centre's request to permit construction of a residential Hotel on portion of the land measuring about 8699 square metres, orders would be issued separately.
The terms and conditions as specified in Appendix 'A' of the resolution dated 18th November, 1974 are given below :
1. The lease will be for a period of 99 years from the date of possession renewable for only one term of 99 years on the same terms and conditions but on such ground rent as may be revised by Government.
2. The ground rent will be calculated at 61/2% per annum on the value of the land at Rs. 325 per square metre.
3. A rent free period of two years from the date of possession followed by a rebate of 50% in the ground rent for the next two years will be allowed.
4. The Centre shall pay to Govt. in addition to the stipulated rent, 50% of the earnings secured by the Centre after making deductions for and to the extent of the expenses incurred for securing the said earnings such as instalments for repayments of the secured loans interest on loans, maintenance of building, depreciation, remuneration or fees paid for the services, establishment expenses, salaries & wages, rates, taxes and carried forward losses. The donations and membership subscriptions should not however, be included in the income. The sum hereinbefore provided in this clause shall not be payable for a period of five years from the date of possession of the said land and that on the expiry of the said period of five years as aforesaid, the payment as aforesaid stated in this clause shall be made. Such payment will be made after the expiry of five years as aforesaid subject to a minimum amount of Rs. 6 lakhs per year.
5. The Centre will have to obtain access to the land from whatever existing means of access as may be available. Government does not guarantee the development of the surroundings area or construction of roads, sewers, drains, water mains, etc., within any specific time.
6. The Centre has been given possession of the land in its existing condition. Reclamation and development as may be required has to be done by the Centre at its cost. The least will be prepared by the Solicitor to the Govt. Law & Judiciary Department at the cost of the lessees including stamp duty and the registration charges.
7. The lessees shall not assign underlet or part with possession of the demised land or transfer the lessee's interest therein without the previous consent in writing of the lessor. The lessor will be at liberty to refuse such consent or grant it subject to such conditions including a condition requiring payment of premium as the lessor may in his discretion think fit. The lessee will be at liberty to underlet any part or parts of the proposed buildings without such possession after the same are completed.
8. The Centre will construct on the land necessary buildings and structures costing not less than Rs. Two Crores within a period of six years from the date of possession of the land. If the buildings are not so completed and the completion certificate from the Executive Engineer Presidency Division is not obtained within the said period of six years, Govt. may refuse any extension of the building completion period of grant such extension on such terms and conditions including a condition regarding the payment of any premium as Govt. may in its absolute discretion think fit.
9. A standing deposit of Rs. 20,000 will be paid by the Foundation and the same will be retained by Government throughout the term of the lease. This deposit or such portion of it as Govt. may finally determine will be liable to be forfeited by the Collector of Bombay, if there is any breach of the lease conditions. In case of such forfeiture the lessees will reinstate the deposit to the extent forfeited within 15 days of their being called upon to do so. This right of forfeiture of the deposit will be in addition to and without prejudice to the other rights & remedies of Govt. against the lessees under the lease.
10. The Centre will submit for the approval of the Architect to Govt. Buildings and Communications Department the layout of the entire area required for construction of the buildings and the roads, and the plans of the buildings within six months from the date of possession of the plot. No construction will be commenced unless the plans, elevation and sections drawn to a scale of not less than 96 cms. to 1 cm. (8 feet = 1 inch) have been approved by the Architect to Government. No additions or alternations to the buildings or structures, the plans of which have been approved will at any time be made except with similar previous approval of the Architect to Government.
11. Compulsory open spaces as required under the Development Control Rules will be kept on all sides of the plot within the plot boundary subject to a minimum of 20 feet.
12. The land shall be used by the lessees only for erecting or constructing thereon buildings or structures to house or accommodate either for is own use or for letting out, inter alia, scientific research bodies, trade and/or industrial museums, research centres and/or laboratories, libraries, bureaus, shopping arcades exhibitions, as 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 cafeterias and/or restaurants but not a hotel.
13. The other terms and conditions of the lease will generally be as laid down in the standard forms of Agreement to lease, Lease and the Building Rules and General Estates Regulations prescribed for the Back Bay Reclamation Estates, Block III.
14. The land will be liable to be resumed by Government without payment of any compensation for breach of any of the above conditions provided that except in the case of non-payment of rent to the power of resumption shall not be exercised unless and until a notice of such intention to enter and of the specific breach or breaches shall have been given.
Appendix 'B' relating to the portion of the land measuring 10000 square metres sub-leased to LIC clause 3 states that the Centre shall charge an annual ground rent of 6 1/2% per annum on the value of the land at Rs. 2,000 per square metre. It was stated in clause 4 that the Centre shall pay to the Govt. in addition to the lease rent of 6 1/2% per annum on the value of the land at Rs. 325 per square metre by way of additional ground rent an amount equal to the difference between the yearly charged from the sub-lessee less the proportionate amount of ground rent payable by the lessee however, that no such difference will be charged by the lessor for the first 25 years of the lease from the date from which the said difference would have been chargeable. LIC could use the sub-leased land for the purpose of construction of the building for office purposes only with no liberty to sublet any part of the building. The sub-lease was to be coterminous with the main lease.
Appendix 'C' is an extension for the grant of loan of Rs. 7.95 crores by LIC on the security & mortgage of the leased land indicating the rights of LIC in case of Centre defaults in its repayments. These being not relevant to the issues arising in the case before us in appeal, these are not reproduced.
3.2 The application moved by the assessee under section 35(1)(ii) of the Act for recognition as a scientific research institution received the assent of the Central Board of Direct Taxes on 6-4-1970. In 1977, Department of Science & Technology (DST), the appropriate authority to monitor all scientific research activity and to grant recognition authority to monitor all scientific research activity and to grant recognition as above, advised the assessee that before allowing extension of the recognition as a scientific research institution that it would be reviewing it. The recognition was extended till 31-3-1981 after considering the representations of the assessee. A three member team from DST visited the assessee and carried out on the spot study. The team advised the assessee that the World Trade Centre (WTC) activity must be kept separate from its research activity by forming another organisation to carry on the WTC activity, failing which the recognition would not be continued beyond 31-3-1981. It also advised that the assessee must carry out the research activities with laboratory facilities and adequate research staff. Since, the assessee did not separate the activity of WTC from its research activity, DST did not allow recognition after 31-3-1981. The assessee applied for registration under section 12A of the Act in 1982 which application was received in 1984 by the concerned authority under the said Act.
3.3 The assessee soon after the decision of Maharashtra Govt.'s decision to provide the land on long-term lease basis, proceeded with its plans for carrying out the proposals as spelt out in the terms of the lease. According to the plan drawn up in 1970, the assessee intended to construct, (1) a Trade Centre grouped on two levels around two water-linking courtyards; (2) a Commerce Centre comprising of 30 storied tower block housing a research institute, a library, an information centre and offices of agencies interested in the development of industry & trade, both national and international; (3) an Exhibition Centre for holding exhibitions, being a square building comprising of a ground & mezzanine floors and (4) the Service Centre to house all mechanical, electrical, hydro-mechanical & other services for all of the buildings. The buildings that were built are identified as Trade Centre, Commerce Centre and IDBI Centre.
3.4 The Council of Management in its report on the affairs of the assessee for the year ending 31-3-1971 & 31-3-1973 made specific references to the lease of space and the modifications to the lease respectively. The portions relating to the lease of space are extracted below :
Extract from the report for the year ended on 31-3-1971 :-
"With a view to generate the finance for the Trade Centre, it was further decided that space in the Trade Centre which was mostly utilised for accommodating shops selling consumer goods cross counter - would be let out on a long-term basis being almost coterminus with the lease to the Centre from the Govt. of Maharashtra. The terms & conditions under which space would be leased in the Centre were discussed at various meetings of the Council of Management and have since been finalised. According to the present calculations, they will not only provide funds for buildings the Trade Centre, but leave a sizable surplus to be utilised towards reducing the capital outlay for the Exhibition Centre or, if necessary, serve as a reserve for ensuring the repayment programme in respect of the loan from LIC. Consideration Money for agreement to lease space has been fixed on a raising scale, over a period and applications for space are now being received."
Extract from the report for the year ended on 31-3-1973 :-
"lease of space - the principle terms and conditions for leasing space in the Trade Centre have, upon the counsel's advice been modified, although this does not presently involve any change in the financial obligations of the lessees. It is now provided that the initial payment to be obtained from a lessee will be by way of advance rent instead of consideration for agreement to lease as originally proposed. The period of lease will not be sixty years, which in law is considered the life of a building but the lessees will have the option to renew if for a further period co-terminus with the 99 years' lease to the Centre from the Govt. of Maharashtra (less 10 days). The renewal will be made on the basis of a nominal payment of Re. 1 per year per shop plus out-of-pocket expenses proportionately shared among the lessees. These expenses are payable throughout the period of the lease and its renewal. The initial payment by way of advance rent is based upon the rent capitalised over a period of sixty years, the amounts now payable for the ground and the mezzanine floor area, being fared on a concessional basis. The Centre reserves the right to raise these rates up to the permissible levels at the appropriate time."
3.5 The lease agreement of both Trade Centre and Centre-I had three common terms and the latter having one additional terms which was 'secondary rent', the common terms being, (a) basic rent; (b) common outgoing rent and (c) parking space rent. He observed that the lease agreement provided the manner of payment of the instalment by he lessees as (1) 30 per cent on or before the execution of the lease; (2) 60 per cent in such instalments and at such times during the construction of the building that may be decided by the management and (3) 10 per cent subject to the adjustment on the basis of final area (based on actual measurement) on which the premises is ready for occupation with a rider that in case on actual measurement it is found that the actual area is more than that indicated in the lease agreement then, the lessee is required to pay the entire sixty years rental at the time when it is ready for occupation. The secondary rent, the common outgoing rent are indicated to be paid on or before the 5th of each month. He noted the parking space rental as in the nature of primary basic rent.
3.6 The primary basic rent was fixed for the years from 1971 onwards revised upwards with the passing of each year starting with Rs. 260 per sq. ft. in 1971 to Rs. 550 per sq. ft. in 1980 to Rs. 1,450 per sq. ft. in 1985 and to Rs. 5,000-6,000 per sq. ft. in 1990. He noted that the secondary basic rent had been fixed at 20 paise per sq. ft. per month for which bill was raised each month. He noted that the rates of common outgoings that started from Rs. 2.25 & Rs. 1.25 for air-conditioned and the non-air-conditioned area respectively had been revised upwardly to Rs. 5.15 & Rs. 2.60 in 1989 and to Rs. 5.65 & 2.75 in 1990. The lessees were allowed transfer of their leasehold rights on payment of transfer fee of Rs. 170 per sq. ft. of space taken on lease. The Founder Members paid Rs. 475 per sq. ft. when the cost of construction was Rs. 754.
3.7 The common outgoings rent comprised of charges for the following services, viz., maintain & repair the building, common passages, foyers, corridors, courtyards, gardens, terraces, landscapes, lifts, lift halls, escalators, escalator halls, basements marquee, air-conditioning, ventilation, fire fighting, electrical fittings, sewage treatment, watch & ward, etc., which were agreed to be provided by the assessee to the persons who had taken the space on lease on the terms specified in the lease agreement. For the purposes of providing the above-mentioned services & facilities, the assessee had a battery of staff and the administrative expenses (as 4% of all its administrative expenses) had been made part of the common outgoings rent.
3.8 The cost of construction on Commerce Centre which was complete during the financial year relevant to the assessment year 1989-90 aggregated to Rs. 39,77,89,589 (total area of 527,000 sq. ft.) 49 lessees had paid full consideration by 1-10-1988 @ Rs. 475 per sq. ft. (some were charged Rs. 500 & few others paid Rs. 550 per sq. ft.) to whom possession of 461,736 sq. ft. was handed over, and the total collection was Rs. 45,99,84,721 and the assessee retained for its own use 97,864 sq. ft. Of the lessees who were given possession of 13 of them were permitted immediately to transfer in favour of others by paying transfer fee and on which transaction the assessee collected Rs. 62,44,662. One such lessee M/s. Khatau Makhanji Spg. & Weav. Mills Co. which paid for 8296 sq. ft. @ Rs. 550 per sq. ft. i.e., Rs. 45,62,937 transferred the space to M/s. Great Eastern Shipping Co. by paying the transfer fee for Rs. 14,10,362 and received a consideration of Rs. 2,73,77,627.19 applicants for space from whom consideration was recoverable for a space of 99605 sq. ft., were indicated as loans in the final accounts for the year ended 31-3-1989 and the amount was Rs. 7,29,88,941. During the assessment year 1990-91 the construction of IDBI Centre was completed at a total cost of Rs. 2179,55,809 and the possession was handed over on receipt of the consideration of Rs. 3384,10,962.
3.9 The extent of application of income towards the primary objective over the years from 1971 as extracted by CIT(A) is brought out below :
Asst. Year Income as per Income & Expenditure on scientific
Expenditure a/c - Rs. research - Rs.
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1971-72 962 nil 1972-73 1,925 nil 1973-74 6,520 nil 1974-75 6,922 nil 1975-76 96,676 nil 1976-77 32,651 nil 1977-78 43,288 nil 1978-79 28,92,672 27,111 1979-80 8,63,891 28,730 1980-81 64,37,766 1,47,975 1981-82 72,55,650 1,11,405 1982-83 72,56,995 1,36,291 1983-84 83,43,320 1,02,736 1984-85 102,29,302 1,60,768 1985-86 102,02,949 2,31,256 1986-87 114,13,489 1,79,516 1987-88 160,67,010 2,31,719 1988-89 156,54,332 3,19,183 1989-90 465,97,060 5,49,232 1990-91 626,00,517 6,14,579 1991-92 875,63,550 5,29,492 1992-93 943,83,443 3,22,031
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3.10 Clause 20 of the memorandum of association permitted the purchase, take on lease or in exchange or other wise acquire any lands, buildings, easement right in common or property movable or immovable and to let out, give on lease a licence or acquire, demise, mortgage, sell, give in exchange or otherwise dispose of the same or any part thereof. Clause 23 permitted to maximise an establish branches or office of the centre.... and to make necessary arrangements for the transactions of the activities of the trust. Clause 24 permitted to construct upon any premises acquired by the centre and building/s for the purpose of the centre and to alter/add/repair/remove such building/s. The article of association defined the term 'members of the assessee' to mean 'firm, association or body corporate incorporated under any law or regulation for the time being in force interested directly or indirectly any specific research for the development of Indian Trade & Industry' and placed them into three types, viz. an ordinary or a life or a donor member and that such person is required to pay the prescribed free.
3.11 The assessee had filed its return of income under the head of income 'profits and gains from business or profession' for the assessment year 1989-90 showing a business loss of Rs. 914.42 lakhs. The claim for exemption under section 11 of the Act was raised for the first time before the CIT(A) that too as an additional ground of appeal, which was admitted being a pure question of law after noting the fact that return was filed in the form that is normally applicable to companies who claim that their incomes are exempt under section 11 of the Act. For the assessment year 1990-91 however had filed the return again at a loss but in the return form that is applicable for companies whose income is exempt under section 11 of the Act.
3.12 The assessee in its account had shown the primary basic rent collected as deposit and each year transferred one-sixtieth to the credit of profit & loss account. The credit to the profit & loss account comprised of one-sixtieth of primary basic rent including that received for car parking, secondary rent, common outgoings rent, income on account of rent for exhibitions, meetings, seminars and related services and of course interest. The administrative expenses were on staff & related expenses, 4% of which is collected from lessees as common outgoings rent and the depreciation on building at Rs. 11,14,57,637 were some of the charges against the income shown because of which the result in both the assessment years was a loss. The Assessing Officer (AO) computed the income for the AY 1989-90 by treating the entire collection of primary basic rent as income for the year from which the cost of construction was set off and the net amount was held as income from business. For the sake of convenience, the computation of business income as made by AO is extracted below :
Rs.
Total collection of primary basic rent
during the year 45,97,82,721
Add : Value of unoccupied floor area of 65264
sq. ft. @ Rs. 754.81 per sq. ft. 4,92,62,500
------------
50,90,47,221
Less : Total cost of construction of building
as per a/cs 39,77,89,589
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Income from business 11,14,57,637
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3.13 For the AY 1990-91, the AO had taken the view that in addition to the income from business as in AY 1989-90, to the extent of the space of Commerce Centre given possession of after the lessees had paid in full the agreed amount of consideration called by the assessee as 'primary basic rent' during the financial year relevant to the AY 1990-91, it was treated as short-term capital gain. In both of the assessment years, the basic reasons for rejection of the claim of exemption under section 11 of the Act had already been extracted in the initial para while dealing with the controversy as raised by the assessee.
4. The CIT(A) in his order for the assessment year (AY) 1989-90 had noted the following facts with which the assessee has no dispute. The appellant had carried massive advertisement campaign before the start of construction of Trade Centre in 1970-71 and of Commerce Centre in 1979-80 inviting applications for the allotment of leasehold rights for a period of sixty years. In 1970, the assessee issued advertisement calling interested persons to acquire leasehold rights in the building Trade Centre and indicated the amount payable as 'consideration for leasehold rights' in the building which was subsequently modified as 'primary basic rent', payable on application, followed by on instalments depending upon the progress of construction. He noted that he primary basic rent was revised upwards keeping pace with the market rates at the Nariman Point. The construction of Trade Centre was started in 1972.
4.1 He noted the contentions of the assessee in support of their claim that primary basic rent represented rent only as (a) to meet the funds needed for construction the scheme of receiving the rent for sixty years in advance in three lump sum instalments before handing over possession and hence, it could not convert the receipt into salami; (b) the secondary rent of twenty paise per sq.t. is such a ridiculously low amount so as to be treated as rent and this was so because, most of the rent is received in advance; (c) the parties to the contract had proceeded with the knowledge that it is rental in advance and further it is no device because, the council of management had representatives from various Govt. and semi-Govt. bodies; and (d) in view of the decision of the Andhra Pradesh High Court in Rajah Manyam Meenakshamma a v. CIT [1956] 30 ITR 286, the entire primary basic rent was to cover the lease for the period of sixty years could only be treated as advance and not as salami or premium. He observed that the said decision is of no assistance to the assessee because, in that case one of lessees had renewed the lease and the term 'lumpsum royalty' was interpreted to mean rent for the entire period of lease hence, revenue receipt and assessable as income.
4.2 He observed that there could not be two kinds of rents for the same premises. He worked the average rate per sq.t. of the primary basic rent (425' x 1 / 60) gave a figure of 59 paise which when compared to the secondary rent of 20 paise appeared reasonable but, it also showed that the primary basic rent was charged to but the lessees into the lease and the secondary rent represented the rent. He considered the aspect of adequacy of the secondary rent with reference to the recoveries made by the assessee from lessees 4% of all its administrative expenses to cover for services calling the receipts as 'common outgoing rent' and the municipal taxes covering all rates & taxes, for which proposition the assessee relied upon the decisions of English Courts in Lomax (Inspector of Taxes) v. Peter Dixon & Son Ltd. [1994] 12 ITR (suppl.) 1 (CA). He rejected as of no merit because, it concerned about the premium charged on debentures and commercial notes.
4.3 He referred to the decision of the Supreme Court in CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 which he observed as having laid down the test as to a particular receipt represented rent or salami stating "the real test of a salami or premium, whether the amount paid in a lumpsum or in instalments, is the consideration paid by the tenant for being let into possession". He also referred to the decision of the Supreme Court in Member of the Board of Agri. Income-tax v. Sindhurani Chaudhurani [1957] 32 ITR 169 where it was held that "elements of salami are (1) its single non-recurring character and (2) payment prior to the creation of tenancy. It is the consideration paid by the tenant for being let into possession and is neither rent nor revenue but is capital receipts in the hands of the landlord". He observed that the decision of the Supreme Court in Maharaja Chintamani Saran Nath Sah Deo v. CIT [1961] 41 ITR 506 was identical to the conclusion in Sindhurani Chaudhurani's case (supra).
4.4 He extracted from the remand report of the AO the extracts from the report of the council of management for the year ended 1971 and 1973 where it was stated that the primary basic rent was consideration for leasing out of premises. He observed that the facts showed clearly that payment of primary basic rent was absolutely essential before the lessee could be let into possession under the lease agreement which he concluded as a prior condition before the tenant landlord relationship could be created. He accordingly concluded that the tests as laid down by the Supreme Court (supra) for arriving at the true character of receipt as to whether it is salami or premium had been satisfied in the present case and it clearly led to the conclusion that it is salami or premium.
4.5 He rejected the contention of the assessee that primary basic rent should be treated advance rent because of law secondary rent by referring to the observations of the learned authors Kanga & Palkhivala in their books on Income-tax 8th edition at page 427 which stated "for instance, any premium originally paid by the lessee would have to be taken into account, and also the interest thereon". He further referred to the actions of the assessee and the lessees concerning the transfer of the lease and noted that all transfers were allowed on payment of premium of Rs. 170 per sq. ft. with no restriction on the lessees in regard to the quantum of consideration that they realise from the parties to whom they had transferred their leasehold rights. He indicated the case of M/s. Khatau Makhanji Spg. & Weav. Mills Ltd. that was allotted a flat measuring 8296 sq. ft. on 1-10-1988 on receipt of primary basic rent of Rs. 45,62,937 (at the rate of Rs. 550 per sq. ft.), was allowed to transfer it in favour of M/s. Great Eastern Shipping Co. by paying Rs. 14,10,362 @ Rs. 170 per sq. ft.) to the assessee while, it had received Rs. 273,77,625 as consideration for the transfer. He also noted that out of 49 original lessees as many as 13 had transferred their leasehold right by paying the premium of Rs. 62,44,662 to the assessee while, all of them received very high consideration from their respective buyers. This he noted as equivalent to allowing or permitting the lessees to make profit by using the property of the assessee which, he observed goes to violate the provisions of section 13 of the Act and thereby on that score alone the assessee had forfeited its right of recognition as a charitable trust.
4.6 He further noted that a receipt to be termed as a mere advance or a deposit should have a provision for its refund if the party surrenders its rights back to the assessee and that the lease agreement did not provide for any such clause. He also noted that the lessees were fully aware of the terms under which they were receiving the leasehold rights and related it being the provision of payment of transfer fee of Rs. 170 per sq. ft. that made it all the more clear that the lessees were not to be refunded their lumpsum payment and therefore, it was a one time and one way receipt though received in instalments. He accordingly concluded that the primary basic rent and the primary car parking rent are receipts that are liable to be taxed.
4.7 He noted that the AO who initially taxed it as business incomes had advanced an alternative argument in the appellate proceedings that it should be taxed as short-term capital gains because of the agitation raised by the appellate that they had not sold off the flats to anyone. He observed that to determine whether the income (receipts of primary basic rent and primary car parking rent) is business or is capital has to be examined with reference to its relation to the fixed capital investments. He referred to the decisions of Supreme Court in Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 and S. G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 to find out the proper course of action to be taken in the instant case. In the former case it was held that as under :
"There was no sale of its fixed capital assets at a profit. In acquiring the head leases and granting sub-lease the assessee-company carried on a business and the amounts received by way of salami were trading receipts and the profits therefrom were liable to income-tax. . . . Income does not include fixed capital or the realising of fixed capital turning them to some other form of capital or money, fixed capital is what the owner keeps in his possession but to profit; circulating capital is turned over in the process of profit making. . . . Ownership of property and leasing it out may be done as a part of business or it may be done as land owner. . . . In deciding whether a company dealt with its properties as owner; one must see not the form which it gave to the transaction but to the substance of the matter."
4.8 He observed that the assessee had turned the leased property to account by charging premium before giving possession which was so charged in the course of its integral business activity which it continued by charging premium for allowing transfers. He considered the fact that the premium or the lumpsum charged was at par with the market rate for sale of flats, the organised manner the various facilities in the buildings to be made available to members and to outsiders for fee, only a fraction of the space retained for own use all went to indicate that it was an activity of profit making and therefore, the proper head of income for purposes of assessment is profits and gains from business. Likewise he concluded that the charging of additional premium for permitting transfers of leasehold rights relating ownership with itself was an organised activity and hence, such premium are also assessable as income from profits and gains from business.
4.9 He also considered the alternative possibility of the income being as short-term capital gains and observed that considering from the time of completion of the building to the point of handing over possession, it could be so treated for which proposition he found support in R. K. Palshikar (HUF) v. CIT [1988] 172 ITR 311/38 Taxman 116 (SC). He noted the argument of the appellate that the transfer is always relatable to the execution of the lease deed and not on mere giving of possession. He considered the amendment to section 2(47) of the Act by the Finance Act, 1987 which added clause (vi) to the said section along with an Explanation which amendment was operative from 1-4-1988. He noted that because of the amendment which covered any transaction which has the effect of transferring, or enabling the enjoyment of, any immovable property and the term 'immovable property' had been given the same meaning as contained in clause (d) to section 269UA, the case of the assessee is squarely covered by the said amendment.
4.10 He considered the objection of the assessee that to decide whether a case falls into the category of charitable institution, it is to be limited to the examination of the objects and exemption should be allowed even when the trustees fail to pursue the objects. He also considered the arguments advanced that any abuse of power by the trustees, such misuse should be resolved through legal recourse by removing the trustees but, such misuse should not affect the grant of exemption to the assessee. He noted the contention of the assessee that the dominant object of the assessee to engage itself in scientific research which is a general purpose utility and that the other objects which by itself may not be charitable but, in view they being incidental or subservient to the primary or dominant object of scientific research, it should be held as a charitable institution.
4.11 He noted the objections of the AO as contained in his remand report wherein it was stated that the property must be held under trust and such property must be used to generate income in the manner laid down under the Act and the income too must be applied for such purpose which could be seen in the context of the conduct of the assessee. He also noted the objection of the AO that the department is not precluded from ascertaining the purpose of the trust with reference to the actual conduct but, should limit to the declaration in the deed. He noted the contention of the AO on the above where he pointed out that the expenses on scientific research activity was in the range of 0.93% to 3.32% of its income as worked out by the assessee itself which was between Rs. 28.93 lakhs and Rs. 943.83 lakhs, which clearly indicated that the intention of the assessee to carry on scientific research was always an idea only and was never intended to be carried out. He noted the objection of the AO that the assessee along with the construction of the Trade Centre and the Commerce Centre, never built up the necessary infrastructure for carrying out the scientific research and all it had done was to employ a few experts for coordinating research projects which were to be carried out by outside agencies and even the in-house training programmes, etc., were conducted on commercial level. He noted the argument of the AO that all activities of exhibitions, seminars, meetings, etc., were indiscriminate and it were open to anyone who was willing to pay the charges.
4.12 He noted the decisions of the various Courts including that of the Supreme Court in Dharmaposhanam Co. v. CIT [1978] 114 ITR 463 where it was held that "if there are several objects of a trust, some of which are charitable and some non-charitable, and the trustees in their discretion are to apply the income to any of the objects, the whole trust fails and no part of the income is exempt from tax". In the same decision it was also held that, "it would be, however, a different case where one or more of the specified objects were never intended to be undertaken. If there is evidence pointing to that conclusion, the Court will proceed to consider the case as if such object never existed". He also noted from the decision of the Supreme Court in Yogiraj Charity Trust v. CIT [1976] 103 ITR 777, these observations, "the distinction between the objects of the trust and the powers vested in the trustees for carrying out must be bone in mind."
4.13 He considered the primary object that was stated as carrying on of scientific research in the fields of natural or applied science including agriculture, animal husbandry, fishing and so on and the provision in its memorandum of association that the term 'scientific research' would also cover such fields a may be included in section 43(4)(1) of the Act as it stood at the relevant time and as may be amended from time to time. He also noted that the dominant objects included in addition to carrying on scientific research, setting up of research centre, aiding research institutes on industrial research, prosecuting scientific research for the development of Indian Trade & Industry. He noted that research is a systematic pursuit of knowledge that involved recognition & formulation of a problem, collection of data through observation & experiment, formulation, of hypothesis, testing & confirmation of hypothesis. He also noted that though, initially the assessee was granted recognition as a scientific research by the Department of Science & Technology within the meaning of section 35(1)(ii) of the Act, such recognition was refused to be extended from 31-3-1981 because the assessee had refused to separate its Trade Centre etc., activities from its scientific research activity.
4.14 He considered the object of scientific research of Indian Trade & Industry which was to facilitate, organise, promote, establish, etc., of (1) trade & industrial museums; (2) arcades; (3) expositions; (4) libraries; and (5) bureaus or World Trade Centres and he noted that no museums were set up at all. In regard to arcades, he noted that it included shopping centres where the concerns that have their shops were making private profit, offices also had similar objectives of private profit, the hiring of halls for conferences, meetings, etc., to private parties were all on commercial basis and all these were carried out by the assessee on a systematic manner which is not different from what various hotels also offer. He concluded that the so-called promotion of scientific research for Indian trade & industry defeats the primary purpose of research as such. He also noted that mere publication of journals that were circulated amongst its members do not result in the carrying on a scientific research in trade & industry. He also noted that the so called setting up of libraries was never even approached. He also noted that alone with the construction of the centres, the setting up of research centres of infrastructure was never undertaken but, all concentration was in its building activity combined with leasing, facilities concerning exhibitions, meetings, etc., only and none of these activities led towards its primary object that was scientific research. He relying upon the Supreme Court decision in CIT v. Indian Sugar Mills Association [1974] 97 ITR 486 where it was held that "certain objects which do not sub-serve the primary object cannot be treated as ancillary or incidental to the primary object." He concluded that if one of that objects which is not incidental to the primary object, is not charitable and the management has unlimited discretion to engage in activities falling under the object, the trust cannot be held to be charitable. He observed that the trust is not established for the promotion of trade of its members only and the promotion of trade of its members could not be an object of general public utility. He did note that the assessee had never applied its surplus on its primary object of scientific research and he noted that the application of its income on its trade centres could not be treated as applied for charitable purposes because it involved clear profit making as it was carried out in a systematic manner with large number of staff only employed to look after the work of construction, facilities to the occupants on thoroughfares, air-conditioning and so on, facilities for exhibitions, meetings and so on. He held that all these being business activities not permitted by section 11(4A) of the Act, the incomes from these activities are clearly taxable.
4.15 He further noted that the surplus as shown by the assessee in various years were not invested in the specified securities though, the assessee had claimed that re-utilisation of the surplus in its buildings satisfied to requirement of section 11(1A)(b) of the Act. He rejected the contention of the assessee that the capital gains are exempted under section 11(1A)(b) of the Act by referring to the decision of the Bombay High Court in CIT v. Jamnalal Bajaj Sewa Trust [1988] 171 ITR 568 where it was held that the expression 'income' as in sections 2(24) and 13(4) of the Act may be read as inclusive of capital gains arising from transfer of an asset.
4.16 H summarised his findings as (1) the receipt of primary basic rent represented salami and is taxable as business income; (2) even if the receipt is to be treated as capital gains, it would still be taxable as short-term capital gains; (3) the premium for allowing transfer of leasehold rights was business income; (4) the object of the trust was distributive and the primary object is still born and hence, the trust does not fall within the definition of charitable purpose; (5) the assessee cannot be entitled for exemption under section 11 of the Act because, it did not apply its income for charitable purposes, the activity carried on fell within the mischief of section 11(4A) of the Act and it is also caught by the mischief of section 13 of the Act; (6) the secondary rent realised @ 20 paise per sq. ft., and other periodic rent is liable to be taxed is income from property; (7) the claim for depreciation was rejected because the rent as owner was held as assessable under income from property and because, the cost of construction was allowed for set off against the primary basic rent; (8) upheld the allowing of depreciation on facilities including air conditioning; and (9) rejected the claim for deduction of provision of sinking fund because, it was rejected by the Tribunal in the earlier year.
5. AO for the AY 1990-91 had noted that the assessee had returned a loss of Rs. 17,67,95,316. AO had noted that the assessee had filed its return of income in the form applicable to assessee's claiming exemption under section 11 of the Act. AO after extracting the section 11 of the Act, Article V of the Memorandum of Association observed that the section contemplates that both the property and the income flowing from such property must be held for charitable purposes. He observed that the objects of the assessee did provide that the income derived from whatever sources shall be applied solely for the promotion of its objects. He referred to the definition of 'charitable purpose' as contained in section 2(15) of the Act and observed that the section engulfs advancement for general public utility. He reproduced the contentions of the assessee in support of its claim for exemption under section 11 of the Act. In para 7 of his order, he observed that the principal object of the assessee as stated in Memorandum of Association being scientific research which being advancement of an object for general public utility, the assessee could be said to have been established for charitable purposes and the property is also held for that purpose. He observed that AO in order to verify the true nature of the property held, he is not bound to confine to the terms of the trust deed but, to take into consideration other factors.
5.1 In para 8 of his order, he had noted that the first annual report of the assessee for the year ending 31st December, 1970 contained the development that led to the formation MVIRDC and its registration under section 25 of the Companies Act then, in para 10 the AO further observed that the intention of the assessee was to set up a permanent trade and exhibition centre as part of an industrial complex. He observed that because of the association to top industrialists, the assessee had the benefit of professional tax advice and the formation of a permanent trade and exhibition centre as its dominant object, was a non-charitable object. He reproduced the main object of the assessee as contained in its memorandum of association. In para 11 he reproduced the clause III of the memorandum of association in which it was stated that the definition of the term 'scientific research' as may be amended in section 43(1)(i) of the Act would equally to the term used in the said clause. He accordingly concluded that the term has not been given a definitive meaning and is unknown both in time and space and therefore an unknown object cannot be an object of general public utility. He further summoned up by referring to the annual report for December 1979 and observed that the true intention is not scientific research but use it as means to its real purpose.
5.2 He traced the history of scientific activity carried on over the years and noted that the activity was limited to publication of 'World Trade Review', 'Systems study of Marine Fisheries Industry in India', 'Socially relevant application of Electronics Technology in India', Extraction and utilisation of Fibres from the banana stems', 'Utilisation of the ideal capacities of small scale ferrous foundries', 'Development of Handloom Products using acrylic fibre and its blends with other synthetic and natural fibres' and 'survey of export packing for handicrafts'. He also traced the history of events that took place from, the time the assessee sought approval under section 35(1)(ii) of the Act which was granted to it on 6-4-1970, enquiry made by Deptt. of Science & Technology (DST) which is Competent Authority for grant of recognition as a scientific research association 1977, DST extending its recognition till 31-3-1981, followed by three-member team of DST carrying on the spot review of the assessee and recommending that assessee does not deserve recognition as a scientific research association and accordingly, the assessee did not get recognition from DST after 31-3-1981. He further noted that DST had suggested that the research and the Trade Centre activities should be kept separate and managed by two different institutions which was not accepted and chose to continue without the recognitions as scientific research association. He accordingly concluded that the conduct of the assessee showed that its dominant object was not advancement of scientific research so as to be classified as carrying on an object of general public utility but, to establish a permanent trade and exhibition centre that was covered under the mask of charitable purpose.
5.3 He proceeded to examine the dominant object of establishment of World Trade Centre (WTC) in the same lines as that in other countries formed on the guidelines issued by the World Trade Centres Association. He examined the package of facilities and services expected of WTC to members as well as to member of overseas WTC and to visitors of WTC some of them being, (a) meeting facilities; (b) display & exhibit facilities; (c) hotel; (d) trade education services; (e) World Trade Centre Club; (f) temporary secretaries; (g) temporary offices and (h) trade information services. He noted that the facilities listed under (b) to (h) required necessary infrastructure which is contained in the layout that as drawn up in 1970. He noted that the Trade Arcade Centre comprised of a ground, first, second, terrace floor, room in six tower blocks and on the terrace floor, whose construction commenced in 1972. It was also noted that the space in WTC was mostly to be utilised by shops to sell consumers goods across the counter. He observed that for the purpose of generation finance for construction of the Centre, a scheme of self-financing was evolved and to reduce the financial assistance needed from financial agencies according to which long term lease of space on first-cum-first served basis through intensive advertisements. He observed that the initial 10000 sq. ft. of area was taken by the members of the Council of Management. It was noted that the rest of the space required hard selling and mostly it was the Public Sector Companies that took the space. It was further noted that over sixty per cent of the original lessees had already transferred the said lease which made the AO to believe that the original lessees had opted to take the lease as an investment. He noted that the ground floor of WTC which is a shopping arcade housed numerous State Emporias, shops of reputed concerns where export quality goods were on display. He noted the space in the first and the second floors and in the rooms of the six tower locks were occupied by the same concern/person who had the shop in the ground floor though, it was to be occupied by State Bank of India, Reserve Bank of India and other organisations of the private and the public sector for their office purposes. It was also noted that 25,000 sq. ft. of space of the first floor was kept apart as Expo Centre to cater to the need of small to medium exhibitions and the hiring is to members as well to others.
5.4 AO also noted that Centre-I known as Commerce Centre, a 32 storied building was similarly leased on a long-term basis on the same self-financing scheme as of WTC. It was also noted that in this case too good number of original lessees had transferred in favour of others by making a huge profit in the process. It was noted that Centre-II is wholly taken by IDBI. He observed that the last phase of WTC was to house a hotel for the convenience of the participants of the activities of the Centre, an Exhibition Centre and a Convention Centre for holding of conference accommodating 1200/1500 persons.
5.5 AO noted that in 1980 a monthly circular on 'Trade Promotion Services' was circulated to its members and WTC participated in 'Market Match' organised by other WTC on behalf of its members and to non-members if they wish to avail of those services on an institutional basis. He noted that space earmarked for exhibitions & display, seminar rooms for holding of conferences, meetings & seminars were hired out to members and outside agencies. It was also noted that assessee had organised number of workshops, training programmes, seminars and exhibitions which was open to all sections of the public. AO considered the services concerning electricity, air-conditioning, lifts, water, maintenance of thoroughfares including staircases, watch and ward covering the whole WTC complex that is charged from every occupant/user of the space as 'Common outgoing rent' at 4% of its (WTC's) administrative expenses.
5.6 AO accordingly grouped the activities of the assessee under three heads : (a) provision of package of facilities & services on an institutionalised basis to any one; (b) construction of commercial buildings and leasing of space and (c) services concerning the running & maintenance of the building covering all spheres like thoroughfare maintenance, electricity, air-conditioning and so on. He then posed a question to himself as to whether any of the above classified activities could be said to fall within the term 'general public utility' and he noted that the term debars any activity that embeds in it profit making as its objective. He observed that it meant welfare of the general public should be the main objective and note merely incidental. He observed, "it is essential that the section of community sought to be benefited to make the purpose a charitable one must undoubtedly be sufficiently defined and identifiable by some common quality of a public of impersonal nature where there was no common quality uniting the potential beneficiaries into a class, it might not be regarded as valid". He noted that the common quality as found in the instant case was that all of them were engaged in commercial activity of trade & industry that cannot be said to possess the attributes of a public or impersonal nature.
5.7 He observed that it is necessary to be categorised as object of general public utility, it is necessary that each of the objects are invested with the attribute of charity, i.e., must result in a benefit to others rather than to oneself. He observed the very act of self-financing of the construction of the space indicated sharing by the members in the scheme in the ratio of space taken by them. He noted that the lease rights were different between persons that depended upon the time they agreed to the terms which covered the escalations, took into consideration prevailing market rates in the same manner as any builder exercises and it included some element of mark-up as well. He noted that clause V(2) of the memorandum of association prohibited distribution of any dividend to the members. He did note that clause 12 of the lease agreement of Centre-I provided for sub-letting only with the permission of the assessee for which charge was levied at the rate of Rs. 170 per sq. foot though the original lessee made a huge profit for the transfer from the transferee that led to private profit making by the members from and by the use of the property of the assessee. He observed that if the lessee did not need the space he should have surrendered it in favour of the assessee in consideration of receipt of unexpired portion of the lease which would have exhibited that the intention was not to make any profit and not to allow any profit accruing to its members from its property. He observed that the action of the assessee to charge Rs. 170 per sq. foot for allowing transfer, is only to realise a part of the unearned increase while most of it retained by the lessees.
5.8 He referred to the condition base on which space in the Centre was allowed to be leased out according to which a person was required to be a member first. AO viewed this condition as a way of allowing benefit to pass on to the members though, the assessee could not distribute any surplus of dividend to its members and accordingly concluded that the aspect of charity was only illusory. He concluded that the activity of the assessee was like any other commercial concern and therefore, it could not be treated as a charitable institution within the meaning of section 11 of the Act.
5.9 AO referred to the provisions of section 11(4A) of the Act that permitted business to be carried on by a trust wholly for charitable proposes and the work in connected with the business is mainly carried on by the beneficiaries of the institution and that separate books of account are maintained for such business. He referred to the various activities of the assessee like package facilities & services concerning meetings, trade education, club, temporary secretary & offices, translation, etc., on an institutionalised basis with the motive of profit making constituted business that is assessable under the head of income 'profit & gains from business' and concluded that such income are outside the scope of section 11 of the Act. He referred to the services concerning the maintenance of the buildings covering all thoroughfare, lifts, air conditioning, electricity, watch and ward, etc., for which army or staff is engaged also partakes the character of business.
5.10 He then proceeded to examine the issue by referring to the provisions of section 13 of the Act that prohibited direct or indirect benefit accruing to the trustee from the property of a trust. He noted that five of the Members of the council of Management were lessees either in their own right or having interest in the concern that is a lessee and that there were instance of members of the assessee had benefited from the property of the assessee, i.e., by transferring the lease in favour of another for a profit. He accordingly held that this contravened the provisions of section 13 of the Act and as a consequence had forfeited its charitable nature.
5.11 He noted that the assessee had taken the land on lease from Government of Maharashtra and had constructed three buildings on it, Trade Centre, Centre-I (5,27,018 sq. ft.) and IDBI centre (4,03,240 sq. ft.). He noted that the assessee had retained some units for the purposes specified in paras 45 & 46 of part 1 of the remand report and the remaining had given over to others on a long-term lease of sixty years. He noted that the lease agreement of both Trade Centre and Centre-I had three common terms and the latter having one additional term which was 'secondary rent,' the common terms being, (a) basic rent; (b) common outgoing rent; and (c) parking space rent. He observed that the lease agreement provided the manner of payment of the instalment by the lessees as (1) 30% on or before the execution of the lease; (2) 60% in such instalments and at such times during the construction of the building that may be decided by the management and (3) 10% subject to the adjustment on the basis of final area (based on actual measurement) on which the premises is ready for occupation with a rider that in case on actual measurement it is found that the actual area is more than that indicated in the lease agreement then, the lessee is required to pay the entire sixty years rental at the time when it is ready for occupation. The secondary rent, the common outgoing rent are indicated to be paid on or before the 5th of each month. He noted the parking space rental as in the nature of primary basic rent.
5.12 He tabulated the primary basic rent as fixed for the years from 1971 onwards revised upwards with the passing of each year starting with Rs. 260 per sq. ft. in 1971 to Rs. 550 per sq. ft. in 1980 to Rs. 1,450 per sq. ft. in 1985 and to Rs. 5000-6000 per sq. ft. in 1990. He noted that the secondary basic rent had been fixed at 20 paise per sq. ft. per month for which bill was raised each month. He noted that the rates of common outings that started from Rs. 2.25 & Rs. 1.25 for air-conditioned and the non-air-conditioned area respectively had been revised upwardly to Rs. 5.15 & 2.60 in 1989 and to Rs. 5.65 & Rs. 2.75 in 1990.
5.13 He referred to the provisions of sections 54 & 105 of the Transfer of Property Act for the terms 'sale' and 'lease of immovable property. He referred to the decision of the Full Bench of the Allahabad High Court in Sohan Lal v. Mohan Lal AIR 1928 All. 726 and noted that 'the ownership of a material thing comprises of a bundle of rights constitute a property in itself. Thus, the right to enjoy, comprised in the bundle of rights constitute ownership, is also a property in itself and therefore, a capital asset. A sale is therefore distinguishable from a lease. While under the former the transfer is of ownership, in the latter, the transfer is restricted to the property in the nature of right to enjoy vested in the ownership. He observed that the plain reading of the lease agreements suggest that it is a lease of space and the ownership retained by the assessee but, considering the fact that the consideration was received even before the space was parted with suggest that the consideration was in the nature of a premium.
5.14 He referred to the report of the Council of Management on the affairs of the assessee for the year ending 31-3-1973 that made specific reference to the lease of space and the modifications to the lease. He observed that "accordingly". The basic rent under the lease agreement for the Trade Centre, also called advance rent, is only a deceptive device camouflaging what is actually a consideration money for agreement to lease space with the underlying objective of tax avoidance. He noted that clause 2 of the agreement that provided for payment of both primary basic rent and parking space rent payable during the lease term of sixty years shall be paid in advance of execution of the agreement and in instalments and to the provision of additional amount payable in case of actual measurement the space is found in excess to the agreed area that also needed to be paid before the execution. He noted that the lease was silent in regard to surrender of the lease before its expiry and the refund of the advance rent and therefore, observed that the advance rent that is a deposit is entirely left to the unilateral of the assessee, is an appropriation in full against the terms of the space. He concluded that the primary basic rent does not carry the traits of rent and therefore it could not be treated as advance rent. He noted that the final accounts for the year ended on 31-3-1989 showed 'outstanding advance rent' from 19 parties to the tune of Rs. 729,88,941 to whom possession are yet to be given and the corresponding credit shown under 'unsecured loans'.
5.15 He observed that though receipts were issued in respect of common outgoing rent and secondary basic rent received, no receipts were issued in respect of primary basic rent that was adjusted every month in the accounts and the reason he noted as because it did not possess the attributes of rent. He concluded that because the primary basic rent was received in full and in advance of even before the relationship of landlord and the tenant came into being, it should be treated as premium and since, it was received for a transfer of a capital asset, it should be treated as a capital receipt.
5.16 He summarised the facts of space in occupation of the assessee, leased out in the years 1989 and 1990. He had noted that in the previous year relevant to the assessment year 1990-91, possession was handed of 99605 sq. ft. in Centre I to 19 lessees for a total consideration of Rs. 20,59,79,589, IDBI Centre was handed over for Rs. 33,84,10,062. He noted that the total construction cost of Centre I and IDBI Centre were Rs. 27,67,39,907 and Rs. 21,79,55,810 respectively. He had also noted that assessee retained for its own use in Centre I and Trade Centre 65876 sq. ft. and 27753 sq. ft. respectively. He further observed that the capital asset of Centre I, IDBI Centre acquired on 1-10-1988 and during financial year ending 31-3-1990, respectively. The right to enjoy IDBI Centre was transferred in the financial year ending 31-3-1990.
5.17 He considering the various facilities in consideration of which it charged common outgoing rent, concluded that it was a business activity and chargeable under the head 'Profit and gains from business. Likewise the income from package service facilities provided on institutional basis was also held as chargeable as income from business. Since, AO held that assessee continued to be the owner of all the properties, Centre I, Trade Centre and IDBI Centre, considering that Bombay Municipal Corporation (BMC) had determined the ratable value for levy of municipal taxes that was based on standard rent, he adopted them for computing the income from house property. The deduction for municipal taxes was however limited to the portion under own occupation which was calculated with reference to the area. Since, secondary basic rent of Centre I was treated as income from property based on the ratable value along with the ratable value of Trade Centre and IDBI Centre, in the computation of income, he excluded the amounts shown as rental incomes. Insofar as the primary basic rent is concerned he concluded as capital gain and worked out the same as under :
Full value of consideration -
99605 sq. ft. of Centre I 205979589
IDBI Centre 338410962
----------- 544389651
Less :
Cost of acquisition -
Centre I 99605 sq. ft. 51347365
IDBI Centre 217955809
----------- 269303174
---------
Balance 275086477
Less : Deduction under section 48(2) Nil
Income chargeable under the head 275086477
'Capital gains'
6. CIT(A) in his order dated 23-2-1994, rejected the claim of treatment as a charitable trust for the same reasons as in AY 1989-90. The claim against treating the advance rent of Rs. 27,50,86,477 being treated as short-term capital gains and that deduction under section 48(2) of the Act is not permissible was rejected on the same reasoning as in AY 1989-90. On the claim that Rs. 11,14,57,437 of Centre-I is being taxed twice, i.e., first time in AY 1989-90 as income from business and again as short-term capital gain because it is included in the amount of Rs. 2750,86,477 was rejected on the finding that the transfer having taken place in the previous year relevant to the AY 1990-91, the action of the AO was confirmed. On the claim that the assessee could not been assessed in respect of the building when the lessee is deemed to be the owner by virtue of section 27(iii)(b) of the Act, and that, income from property should not have been based on municipal valuation, was rejected. The claim for deduction for repairs to building under business under business income was rejected because the income was held as assessable under the head 'Income from house property'. The claim for set off of sinking fund and interest on it was rejected because in an earlier year, Tribunal had rejected such a claim. On the claim for depreciation, the order for AY 1989-90 was followed.
7. The learned counsel for the assessee Mr. Sonde, submitted that the assessee was incorporated on 26-6-1970 under section 25 of the Indian Companies Act, 1956. He submitted that section 25 of the Indian Companies Act allows formation of companies that have similar objects like the assessee and because, the said section prohibits distribution of dividend to the members, it recognises the true character of the company under that section as non-profit making organisation. Since, the assessee was so formed with no profit motive, it primarily satisfied the condition for being recognised as a charitable institution.
7.1 The standing counsel for the revenue department Dr. V. Balasubramanian contended that mere formation of a company under section 25 of the Cos.' Act does not result in an automatic conclusion that the company is a non-profit organisation so as to be given the status of a charitable institution. He pleaded that though, the section prevented a company from distribution of its profits to its members, the company in the instant case had allowed its members to profit out of its property.
For the sake of facility we extract the provisions of section 25 of the Cos.' Act.
"Power to dispense with 'Limited' in name of charitable or other company. - (1) Where it is proved to the satisfaction of the Central Government that an association -
(a) is about to be formed as a limited company for promoting commerce, art, science, religion, charity or any other useful object; and
(b) intends to apply its profits, if any, or other income in promoting its objects, and to prohibit payment of any divided to its members, the Central Government may, by licence, direct that the association may be registered as a company with limited liability, without the addition to its name of the word 'Limited' or the words 'Private Limited'."
7.2 The reading of the above section indicates that companies having objects of research, etc., may be registered under the said section in the same manner as charitable association because, charity is one of the objects under the said section. Therefore, the claim of the assessee that, assessee being a company registered under section 25 of the Cos.' Act with limitation of distribution of dividends to its members satisfies the basic condition of being a non-profit organisation and hence, is a charitable institution, is without any merit and is accordingly rejected.
7.3 Mr. Sonde, the learned Advocate drew our attention to the primary object and the various object clauses of the memorandum of association and submitted that the primary objective being scientific & industrial research, with a view to support its primary objective, it needed to proved related or incidental objects. He contended that scientific research activity is a general public utility because, it brings about newer and improved products. He contended that the assessee is well covered by the definition of charitable purpose as contained in section 2(15) of the Act and, therefore, the department was in error in holding that the assessee does not satisfy to be a charitable institution.
7.4 He contended that the Government of Maharashtra floated the scheme of leasing its land with a view to provide parallel service as are available across the world concerning commerce, trade and industry and on examination of the objects of the assessee was satisfied that the assessee is the probable instrument in achieving this end which was why they came forward to lease the land, suggested to lease the land, suggested the scheme of financing for the construction of the building including arrangement of loan from LIC. He contended that the Government of Maharashtra considering various aspects including the objects of the of the assessee had come forward to modify twice in 1974 and 1979 and that the low lease rental of Rs. 325 has been so fixed because of the reason of assisting the assessee in furthering its objective. He submitted that the lease remains to be executed in favour of the assessee though, all other aspects had been completed. He referred to the resolution passed by the Government by which it permitted subleasing of 10000 sq. ft. to LIC for which the lease rent was fixed at Rs. 2,000, that gave the assessee a clear income of Rs. 1625 per sq. mtr. which was one of the ways of providing finance to the assessee for achieving its objective.
7.5 The assessee having accepted the lease, had the only option of proceeding with the construction according to the plan of the Government the Centres to house various facilities and in order to make it feasible had to float a scheme that was similar to self-financing schemes. Since, the assessee was only a lessee of the land, the assessee with a view to let them on a long term lease invited applications from interested persons and as called, for, with the condition that all applicants would become members of the assessee. Considering the amount of advance payable or receivable from the applicants for a certain space proportionate to the total space, which is based on the cost of construction, the period for which the lease of space should be given was worked out as sixty years. In addition to the construction cost sine, there was the need to main the buildings and provided various related facilities and maintain them which required working funds, the provision for charging the rental in lump sum and on regular basis was evolved.
7.6 He submitted that the Government of Maharashtra had ensured that the objective behind the leasing of the land to the assessee is achieved and is not mis-applied had insisted on nominating its members in the Council of Management which carried out all decision making and in implementing them. He pleaded that the Council of Management though, was not directly responsible to the Government but, owed a duty & obligation to it and at the same time, it had the onerous duty of ensuring that the path chosen by the assessee is strictly in line with it its objectives and is intended in achieving its primary objective that is advancement in the research in scientific & industrial fields. He contended by referring to the decision of the Karnataka High Court in Ecumenical Christian Centre v. CIT [1983] 139 ITR 226/[1982] 8 Taxman 175 and submitted that the wordings of objects clause have to be appreciated in their proper perspective and it was held that merely for the reasons that the objects clause is widely worded, it should not be concluded that the objects are inexact or indeterminate, and the assessee incidentally making some profits with a view to achieve its objective, the profit so earned could not be treated as a trading activity and accepted the claim by granting it the status of charitable institution. He submitted that the principle enunciated by the Karnataka High Court (supra) is to the effect that the end that was meaning to achieve the objective should be evaluated with the end that was achieved. Mr. Sonde pointed out that the assessee had moved for registration under section 12A of the Act on 1-10-1982 and contended that since, the office of the Commissioner of Income-tax had taken the application moved by the assessee for registration on his record on 8-2-1984, it is conclusive of the fact of recognition having been granted to the assessee. Mr. Sonde, the learned advocate insisted that in the city of Bombay there is no system followed by the Income-tax Department of issuing certificate of registration and this is an accepted fact both by the assessee and the department. The copy of the acknowledgment of the application which the assessee is insisting should be treated as equivalent to grant of registration certificate has been placed on our records to which the CIT(A) had also referred in para 56 of his order. Mr. Sonde submitted that the registration having been granted under section 12A, the authorities concerned with the assessment cannot take a different view is the conclusion taken by Third Member in ITO v. Mrs. Dwarika Prasad Trust [1989] 30 ITD 84 (Delhi) and the observations are contained in pages 99 and 101 of the said report. The copy of the order of the Tribunal in Audit Bureau of Circulations 'C' Bench, Bombay dated 20-4-1995 has also been filed and our attention was drawn to para 19 of the said order.
7.7 Dr. V. Balasubramanian, the learned Standing Counsel for the revenue department referred to the memorandum of association and submitted that though, the primary object of the assessee does indicate scientific research, the perusal of the incidental object clauses of the memorandum of association clearly go to indicate that the assessee has total freedom to act in regard to any of them. He contended that the decisions of the Courts are to the effect that all incidental objects must be in support of the primary objective though, they by themselves have independent character. He contended that the objective must not be merely on paper but, need to be implemented upon because, without implementation it would not be possible to evaluate the implementation with reference to the objectives. He contended that the charitable purpose as defined in section 2(15) of the Act has an inclusive meaning and it is necessary for one to fall into any one of them to be recognised as such and such objects must be wholly by charitable purpose and at the same time, if any of its objects do not fall in any one of them in that event it would only partially satisfy the requirement of the section and such an institution could not be given the recognition as a charitable institution. He pleaded that there are decisions to the effect that have refused the status of charitable institution on the basis of some of the objects being not relatable to charitable purpose. He contended that merely because the Government of Maharashtra had allowed the lease of the land at a low rental of Rs. 325 cannot lead to the conclusion that the assessee is a charitable institution. He contended that the claim that the Government only allowed the construction of the building with the only intention of letting out is not borne out of the resolutions of the Government. He contended that the Government leased the land to the assessee with the only intention of building all infrastructure similar to the one that is available all over the World in connection with information on trade, commerce and industry along with various shopping centres, exhibition halls, meeting & seminar halls, secretarial & related services which are all commercial activities because, it directly benefits the owner of the building, member occupying the building though, it might benefit the public too. He submitted that the assessee which is stating that it is an industrial research unit, in fact had never carried out any such research and in the later years when it did carry out the extent of research activity was very minimal.
7.8 He further submitted with reference to clause 12 of the resolution dated 18-11-1974 which substantially is effective insofar as the assessee is concerned, the low lease rental of Rs. 325 does not necessarily mean the Government of Maharashtra had treated the assessee as a charitable institution or that the Government intended some general public utility to be brought into effect, which is evident from the reading of clause 3A of the resolution. He submitted that the general public utility service has to be examined with reference to the usage for which the AO in this regard. He drew our attention to the fact that the persons who have taken space in the building by giving large sums of money to the assessee have come forward to do so only with a view to acquire the rights in the space. He referred to Appendix A of the resolution and submitted that the Government of Maharashtra has not placed any restriction on sale of any part of the building constructed by the assessee. He submitted that if the Government of Maharashtra had intended to not to permit the assessee to make a sale, it would not have permitted the assessee to carry on with the construction by obtaining amounts from various persons including the State Government and Central Government undertakings.
7.9 An institution to be stated to be covered by section 2(15) of the Act, it is only required to be seen whether its objects are wholly charitable in nature and at this point of time, the actual action is inconsequential because, the institution though, may fall within the definition of charitable purpose, if its property is not held for the charitable purpose as indicated in section 13 of the Act, it lose its right to claim for applicability of section 11 of the Act and if the property is found to be held for charitable purpose but its income is not applied for charitable purpose as specified in section 11 of the Act, its income would not get exempted. To put it in order words, any institution claiming exemption under section 11 of the Act, must satisfy the primary condition of being squarely covered by the definition of charitable purpose in section 2(15) of the Act and if it fails in this test, the conclusion is obvious and that is it could not be granted any exemption under section 11 of the Act. The main object, incidental objects as specified in clauses 1 to 7, 10, 13, 20 and 24 as referred to by the learned counsel for the assessee are reproduced below for the sake of appreciating the claim that the objects are all of general public utility :
1. To organise, sponsor, promote, establish, conduct or undertake scientific research in any way or by any means whatsoever and in any area or filed.
'Scientific research' in the above clause shall mean any activities for extension of knowledge in the fields of natural or applied science, including agriculture, animal husbandry or fisheries. If the definition of 'scientific research' in section 43(4)(i) of the Income-tax Act, 1961, or the corresponding provision of any new law, is hereafter amended, the amendment shall apply to the connotation of 'scientific research' in this clause.
2. To organise, promote or establish and conduct a Research Centre in Bombay, to perpetuate the memory of the late Dr. M. Visvesvaraya as an object of general pubic utility not involving the carrying on of any activity for profit.
3. To establish, organise, promote or conduct agencies or research institutes, or advisory or consultative services as are calculated to promote the cause of industrial as objects of general public utility not involving the carrying on of any activity for profit.
4. With a view to prosecuting scientific research for the development of Indian trade or industry and with a view to facilitating the same, to organise, promote, establish or conduct trade and/or industrial museums, arcades, expositions, libraries, bureaus or World Trade Centres in India, or abroad, and more particularly in Bombay, as an object of general public utility not involving in the carrying on of any activity for profit.
5. To maintain liaison and co-operation with domestic or foreign organisations having objects similar to those of the Centre.
6. To hold, organise, promote or participate in national or international conferences, symposia, forums or seminars likely to facilitate the cause of research for the promotion of Indian trade or industry.
7. To propagate, in India or abroad, the cause of research for the extension of Indian or industry by the use of any media of publicity or communication in general and through the media of printed literature in particular, whether periodical or otherwise.
10. To borrow or raise any moneys required for the purpose of the Centre upon such terms and in such manner and on such securities as may be determined and in particular by accepting Fixed Deposits or by the issue of debentures or debentures stock charged upon all or any of the property of the Centre.
13. To pay the costs, charges and expenses preliminary or/and incidental to the formation, establishment and registration of the Centre, and all expenses, which the Centre may lawfully pay, having regard to the provisions of the Companies Act, 1956, for or incidental, to the raising of money for the Centre.
20. To purchase, take on lease or in exchange or otherwise acquire any lands, buildings, easement rights in common or property movable or immovable and to let out, give on leave and licence or on hire, demise, mortgage, sell, give in exchange or otherwise dispose of the same or any part thereof.
24. To construct upon any premises acquired for the Centre any buildings, for the purpose of the Centre and to alter, add or help to repair or remove such building or buildings.
7.10 Since, the department has no dispute that the primary or the dominant object, viz., scientific research is an object of general public utility, we proceed from there. The clauses 2 to 4 specially have used the words "as an object of general public utility not involving the carrying on of any activity for profit" (italicised words were deleted from section 2(15) of the Act with effect from 1-4-1984). The clause 2 is for establishing of a research centre in the memory of Dr. Visvesvaraya and this could generate no utility to the general public because, the public can derive no benefit whatsoever except knowing what he was and what were his achievements which are all historical. The third clause talks of promotion of the cause of industrial research on which object the department had not commented upon and therefore, we do not express any opinion on this object.
7.11 The fourth clause is on similar lines as the third clause though little more elaborate and includes establishing of World Trade Centres in Bombay which is a place to bring together all industrialists and the traders, the plain reading of this clause suggests that the Centre is intended to be a meeting place for industrialists to enable them to promote their interests intended to give benefit only to persons who interact with each other but no common benefit accrues even to the community of industrialists or traders and there would be no contribution from the assessee in the promotion of trade, etc., by the assessee. The Supreme Court in CIT v. Andhra Chambers of Commerce [1965] 55 ITR 722 had clearly held that to be called a public utility it should be identifiable by some common quality of a public or impersonal nature. Despite the assessee using the words as were contained in section 2(15) of the Act up to 31-3-1983, "as an object of general public utility not involving the carrying on of any activity for profit", does not make it an institution intended for general public utility unless there is some real contribution or service for the common cause is intended.
7.12 Clause 24 allows construction upon any premises, any building or building for the purpose of the Centre including for establishing of World Trade Centre (WTC) as specified in its incidental object clause No. 4. We had earlier observed that WTC is a meeting place of industrialists and traders intended to give benefit only to persons who interact with each other but no common benefit accrues even to the community of industrialists or traders, as the case may be and this could not be object of general public utility and as a consequence, the intention to construct buildings to house WTC also is to benefit the traders and industrialists and, therefore, could not be an object of general public utility. We may observe that unlike the Stock Exchanges which require members to carry out all activities concerning stock and shares within the Exchange building because, the Stock Exchange controls the shares, etc., activities relating to shares are necessarily to take place in the said premises, there is no such compulsion so as to make the assessee's activities possible only in the building constructed by it or possible only with the aid of services available from the assessee, though, it might make it slightly comfortable. Therefore, the said objective does in no way suggest to be a public utility.
7.13 On the point of WTC the undisputed fact is that it is a place where traders, industrialists or commercial persons can come together or have uplinking facilities with persons in similar lines or in capital goods needed by the Indian industrialists, etc., from whom it could be imported or exported or in consumer goods from whom or to whom good could be imported or exported, as the case may be and for which services or facilities fee is levied the quantum of which differs with the kind of service or facility enjoyed by the commercial community. This WTC is intended to provide facilities of complete information of the products available at any part of the World so that any of the commercial establishments need not have to expend money on exploring the World for available market. These facilities are open to members only and any person desirous of using these facilities is required to become a member. The above description makes it obvious that WTC is a centre for business activity amongst the particular business concern within the said community comprising of industrialists, etc., and is to benefit the particular concern and not generally any of them. These facilities are similar in nature to the various food grain market places called mandis at various places from where both wholesales and the Food Corporation of India procure the food grains for which the State Government impose mandi tax. To say that building of a market place for making available goods at that place for the traders for sale by them to the public is a general public utility would be stretching the definition too much because almost all of items produced by the industrialists, sold through the traders with the assistance of commercial establishments is towards the end of meeting the need of the people and by this proposition every industrialist, trader and commercial person would become an object of general public utility. The law makers realising that anything that ultimately results in some benefit to the public at large, could be claimed as a general public utility had always in mind that the benefit that is to accrue to the public must be direct and must not be filtered through organised section of what is known as the business community because, no business can survive without the basis element of profit motive while, public utility is based on service to the human cause or beings as such without expecting anything in return. In realisation of this feature, the law makers had used the words till 31-3-1983 "not involving the carrying on of any activity for profit" and from 1-4-1984 had introduced section 11(4A) into the Act with a view to ensure that for achieving the objective of general public utility, an institution is permitted to carry on certain business activities only.
7.14 The object envisaged in clause 5 to maintain liaison & co-operation with domestic & foreign organisations with similar objects as of the assessee has no public utility at all because, no benefit could accrue to the public. Likewise participating in conferences (clause 6) have no public utility at all and the propagation of research by publishing literature (clause 7) may be a source of information but to call it a public utility is a difficult proposition. The clauses 20 & 24 are intended to support the primary objective and other incidental clauses spelt out in clauses 2 to 7 of the memorandum. We had observed that the not all of the objects 1 to 7 could be categorised as of general public utility, i.e., to confer any benefit to the public at large and therefore, any object that is to support these objects that could not be called public utility, do not fall into the category public utility. In our opinion the objects of the assessee contain some objects that could be for general public utility and few others that cannot be categorised as of general public utility. We may observe that Supreme Court in Dharmaposhanam's case (supra) had held that whether a trust is for charitable purpose falls to be determined by reference to all the objects for which the trust has been brought into existence and if any of the objects do fall into the category of non-charitable purpose and if the trust does not undertake on such non-charitable purpose, then their mere existence could not deprive the trust the recognition of charitable institution.
7.15 The first of the proposition is that the assessee satisfying the tests for being recognised as a charitable institution as defined in section 2(15) of the Act, then all that is required to be seen is that it had not flouted the provisions of sections 11 & 13 of the Act, in either in the manner of investments or holding of property or in the application of its income for the charitable purpose. However, if the assessee fails in the preliminary test for consideration of as established for a charitable purpose and for being treated as an charitable institution within the meaning of section 2(15) of the Act, as a natural corollary it is conclusive that the income of the assessee could not be considered with reference to section 11 of the Act.
7.16 The insistence by the learned counsel for the taking on record of the application under section 12A of the Act moved by the assessee belatedly almost twelve years from the formation of the assessee, is conclusive of registration having been granted, recognising the assessee to be a charitable institution, in our opinion deserves to be rejected. The counsel insisted that in the city of Bombay there is no practice of the department to issue any certificate of registration against which the departmental representatives had no reply to offer. However, it was brought to the attention of the parties that the department normally issues 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 because of which only, the Tribunal had made those observations that a registration granted by the Commissioner or Director of Exemption acting as a Commissioner, could not be questioned by the department.
7.17 Section 12A of the Act is not a formality either for the assessee or for the department because, it requires the examination of the objects as contained in the memorandum along with the annual accounts which would give the facts on the aspects of income & expenses which would reveal whether the objects of the assessee is only for display or is in fact practiced. However, this certificate of recognition does not prevent any Assessing Officer (AO) to explore into the activities of a charitable institution, investments made, to what use is put to of the properties of a trust. If the facts indicate that the assessee had contravened any of the provisions of section 11 or 12 or 13 of the Act which as an implementor of the statute has to necessarily consider, then the certificate of registration given for a specified period could not come in his way and the assessee could not place fetters to his powers because the Act expects the AO to apply his mind independently the Act on the given facts of the case, then, he would have failed in his duty as a quasi-judicial officer that is cast upon him by the Act.
7.18 In the instant case, the AO had investigated into the facts of the case and had given his reasoning for refusing recognition to the assessee as a charitable institution which had found favour of the CIT(A) as well as our approval for our reasoning. It may not be out of place to mention that the assessee was refused recognition as a scientific research institution by the appropriate authority DST from 1-4-1981 and it was only thereafter that the assessee had woken up to seek recognition as a charitable institution. We may also observe that the assessee is expected to seek for registration under section 12A of the Act within one year from the date of creation of the trust or its establishment whichever date is later. The proviso to the said section states that "Chief Commissioner (CC) or Commissioner (C) may, is his discretion, admit an application for the registration of any trust or institution after the expiry of the period aforesaid". This indicates that the assessee is required to explain the reasons for delay in applying for the application for registration which would have to be examined by CC or C and if he finds the reasons acceptable then he may admit the belated application, which is possible only on conscious application of mind. The reasons if any for delay in submitting of the application for registration by over 12 years is obviously could have never been adequate or reasonable. Further sub-clause (b) of section 12A of requires filing of audited accounts for the year on the basis that the application is moved within a year of formation. Since, the application is belated by twelve years, it is obvious that the audited account for all of the years from the formation, are required to be filed. It is not the case of the assessee that it had furnished all the annual accounts from its formation despite the fact that the Cos.' Act requires compulsory audit of the accounts because the assessee is a company registered under that Act and the council of management has each year approved the accounts for each of the year. Further, the filing of an application is belated as is in the instant case, mere taking on record does not mean that registration had been granted. Mere intimation as take on record does not mean that the assessee is recognised as a charitable institution. If the C or CC had granted recognition then nothing prevented the assessee moving an application to CC or C and bringing to his notice that the lower authorities are flouting with his order and in fact it is not the case of the assessee either CC or C had advised the AO of the having granted recognition because, it was never granted. Therefore, this plea of the assessee is bereft of any substance.
7.19 In Dharmaposhanam Co.'s case (supra), the Supreme Court had held that for determining whether a trust satisfies the condition to be recognised as a charitable institution what is necessary to be examined is the activity actually conducted by it and not is open to it under its memorandum of association. We accordingly proceed to examine the activities carried out by the assessee keeping in mind the ratio of Dharmaposhanam Co.'s case (supra), if the assessee had not carried out any activity on those objects that cannot be called charitable purpose, then, the assessee cannot be denied the benefit of section 11, so long as it satisfies the requirements of that section.
7.20 The plea advanced by the assessee is that it had accepted the proposition of the Govt. to take the land on lease and build on it the Centres that are similar in nature as other World Trade Centres only with a view to achieve its main or primary objective, viz., scientific research. This plea need to be evaluated in the light of information provided to the applicants for the space in the above buildings. Clause 5 of the agreement of lease states, "the Centre is engaged in a planned and orderly development of the said land by erecting a cluster of buildings to offer services available in a World Trade Centre Complex". This clause clearly spells out the intention is in the development of the land and construction of building thereupon and it is a planned and orderly activity. In our view, the claim of assessee is a very far fetched proposition because, the assessee had no funds even to carry on its scientific research activity and it was venturing into something that required still larger funds. The assessee had prescribed for entrance fee and membership fee under different categories but, had not claimed contributions from amongst them or from the public for setting up of infrastructure for scientific & industrial research while, it claimed that its members were from industry, trade & commerce. An association of a community comprising of industrialists, traders & commercial institutions for promoting their common interests or improving them as a lot could be an object of general public utility but, the assessee is no such institution mooted by the common effort of the community of industrialists in mind and other objectives some of which was considered earlier. The facts as are on record indicate that the effort of the assessee in the direction of its primary objective which is carrying on of scientific research was minimal or negligible as is brought out in the earlier para of expenses incurred on research activity over the years. Scientific research is a systematic on research activity over the years. Scientific research is a systematic effort to a particular field or fields, i.e., when more than one filed is explored at the same time but, there could be no general research so as to benefit all of the persons in a particular community of industrialists because, every industry has its own peculiarity. Any benefit that is to accrue to a specific person from amongst the community can never be a public utility because, it always implies a general application without any reference to any particular person.
7.21 We had observed earlier that the objective of establishing WTC cannot be an object of public because, there is no law under which it is governed like the Stock Exchanges compelling the members to carry out their activities in line with WTC and within its premises only. We had also expressed that WTC is a meeting place of industrialists or traders so that they could arrange mutual dealings between themselves to the exclusion of others or by including a few of them but not of them, which makes it a service department like and therefore, it does not serve the purpose so as to be called a general public utility. The Commerce Centre is a 32 storied building with office space for various persons who had paid the primary basic rent in full before the possession is given to them, has no general public utility at all because, it is identical to a builder readying a building for office use for various flat buyers and further substantial income from the building are spent on building maintenance and on providing various facilities to the occupants of the building and as stated in an earlier para the application of income on the scientific research activity falls below 5% of its income according to its annual accounts.
7.22 Mr. Sonde submitted that a trust with a view to achieve its objective has to necessarily carry on various activities and the Courts all along had appreciated the fact that it is not the income that is earned, nor the manner in which it is earned is important but, what is important is that the income as such should be applied for charitable purposes only, in which case the trust could not be denied exemption. In support of this submission he placed reliance on the Supreme Court decisions in Andhra Chamber of Commerce's case (supra), CIT v. Federation of Indian Chambers of Commerce & Industry [1981] 130 ITR 186/6 Taxman 7 and the High Court decisions in Addl. CIT v. South Indian Hire Purchase Association [1979] 116 ITR 793 (Mad.), CIT v. Ganesh Ram Laxminarayan Goel [1984] 147 ITR 468/[1983] 14 Taxman 1 (MP), Satya Vijay Patel Hindu Dharmashala Trust v. CIT [1972] 86 ITR 683 (Guj.), Southern India Mill Owners' Association v. CIT [1977] 110 ITR 871 (Mad.) and the two Tribunal decisions in SOS Children's Village of India v. ITO [1990] 34 ITD 476 (Mad.) and National Engg. Coordination Committee v. Asstt. CIT [1992] 43 ITD 612 (Pune). He submitted that the charitable trust satisfying the conditions of general public utility was examined by the Andhra Pradesh High Court in Hyderabad Stock Exchange Ltd. v. CIT [1967] 66 ITR 195, the Supreme Court in CIT v. Bar Council of Maharashtra [1981] 130 ITR 28/6 Taxman 1 Bombay High Court in CIT v. Western India Chamber of Commerce Ltd. [1982] 136 ITR 67 at page 78/8 Taxman 81. Mr. Sonde submitted that the Bombay High Court in Western India Chamber of Commerce Ltd.'s case (supra) had considered the clause which provided for distribution of assets to members on winding up, whether it would disentitle the company from exemption during its lifetime and had concluded that it would not come in the way of evaluation of the assessee satisfying the condition as being a general public utility.
7.23 The Commerce Centre is an office complex and various applicants for space had provided the funds with which the building was constructed and as soon as it was completed, possession was given to the applicants. The Supreme Court in Andhra Chambers of Commerce's case (supra) had clearly held that a charitable purpose with general public utility must have some impersonal nature in it and where it involves a conferring benefit on the members for a consideration, it could not be a public utility. It is no the case of the assessee that the persons who are supposed to have taken it on lease rental, if they wish to surrender the lease had to do so with the assessee, collected the advance rental from it and it would be for the assessee to further lease the space to a totally new tenant. It is an admitted position that the space got exchanged between the persons who had taken the space initially and with the new persons at a price mutually agreed upon by the original occupant and the new occupant and the assessee in fact charges some transfer charges only. Mr. Prasad insisted that this kind of providing the members to earn profit with the aid of the property belonging to the assessee in fact defeats the provisions of section 25 of the Companies Act and this should be taken to mean as indirect transfer of distribution of dividend by the company to its members. At this point of time the submission of Mr. Prasad need to be appreciated which is that a few of the persons who had taken the space from the assessee, have sold off their space to new persons at a phenomenal value and in the process the assessee also received a transfer of fee of Rs. 170 per sq. ft. from all of them. If the members were given any right of transfer to outsiders but were to surrender and the assessee was to refund the amount contributed for construction, then perhaps the submission of the counsel Mr. Sonde that, the construction was to aid the research activity may have gained some weight. In one case of transfer, the department had intervened by initiating acquisition proceedings which the Assessing Officer in his order for assessment year 1989-90 had brought out. Further, the lease is for along period indicating that no person other than the occupant of the space in the building could ever enter it which established beyond doubt that the construction followed by giving of space has no involvement of public utility and not even remote connection with the building like maintenance, air-conditioning also fall in the same category of non-charitable, object. The other activities such as providing of secretarial, meeting, conference, exhibition, information by connection with various parts of the world are business ventures. These are services specific to a member, facilitating him to have connection with his customer/s or supplier/s and do not serve any common purpose because, exports are governed by the rules made by the Govt. and most of them channelised and similarly imports of items are also channelised and the claim of the assessee that it is a public utility is clearly false. The activities of the assessee is identical to a business where all these services are made available to any person for a fee and such commercial activity with the intention of making a profit cannot be a public utility.
7.24 We may point out that section 2(15) of the Act, had omitted the words 'not involving of carrying on any activity of profit' and simultaneously introduced section 11(4A) of the Act by which a charitable association wholly for charitable purpose was permitted to carry on any business placing a condition that the work in connection with the business is mainly carried on by the beneficiaries. In the instant case, the activities are carried out by the council of management comprising of members, some of whom are in the occupation of the space, some continue to be members even after transferring the space allotted to them by making a huge profit in the process, indicating that conferring of benefit to a section of public was never the intention let alone allowing some of the beneficiaries to carry on the work.
7.25 The counsel Mr. Sonde, in support of his argument that acquisition of capital assets by a charitable institution, with view to facilitate in carrying on the objectives of the trust, as an application towards the objectives of the trust had placed reliance on the decisions of Gujarat High Court in Satya Vijay Patel Hindu Dharmashala Trust's case (supra), Madras High Court in South India Hire Purchase Association's case (supra), CIT v. Kannika Parameshwari Devasthanam & Charities [1982] 133 ITR 779 (Mad.) and the Kerala High Court decision in CIT v. St. George Forana Church [1988] 170 ITR 62. We had observed earlier that the construction activity, followed by its leasing of space, its maintenance and support services, services relating to exhibitions, meetings, etc., had no remote connection to public utility activities and therefore, the above decisions are in no ways of any assistance in the light of facts of the case.
7.26 In view of the above observation we are satisfied that the construction of WTC, Centre I and IDBI Centre has no connection to the research activity and it is not undertaken to help in achieving the main objective and the so-called main objective is nothing more than a make belief mask. Therefore, application of income on the construction activity cannot be said to be an application as warranted by section 11 of the Act and exemption from tax and properly been denied to it.
7.27 The lease agreement has a few clauses that explains the background of the land, building to be constructed thereon, etc., of which the relevant clause (5) throws some light on the intentions of the assessee, that reads, "the Centre is engaged in a planned and orderly development of the said land by erecting cluster of buildings to offer services available in a World Trade Centre Complex". The aspect of the amount paid by various applicants in instalments before the start of the construction, while the construction is in process is governed by the provisions of the conditions spelt out in clause 8 of the agreement. For the sake of facility, we reproduce it below :
(1) The Centre hereby agrees to grant and lessees hereby agree to accept a lease of the office premises admeasuring ... sq. ft. built up equivalent to .... sq. mtrs. built up or thereabouts, on the ... floor of the Centre I and uncovered parking space/spaces in the open spaces of the Centre I for a term of sixty years commencing from the date on which the said premises are ready for occupation.
(2) The rent of the premises shall consist of (a) primary basis rent; (b) secondary basic rent; (c) common outgoings rent; and (d) parking space rent, all of which collectively referred to, will be hereinafter called 'rent'.
The primary basic rent of the said premises shall be Rs. ... per sq. ft. built up area per month.
The secondary basic rent of the said premises shall be Rs. ... per sq. ft. built up area per month.
The common outgoings rent shall consist of such proportion of the actual expenditure incurred by the Centre in respect of Centre I buildings with its environments on Municipal rates and taxes, water charges, .... charges for maintenance and upkeep of common passage, lifts, escalators, ....
The parking space rent for each parking space shall be Rs. .... per month payable by the lessees to the Centre as hereinafter specified ....
The primary basic rent and the car parking space rent shall become due on the 1st of every month. Entire primary basic rent and the parking space rent payable during the lease term of 60 years shall be paid by the lessees to the Centre in advance before the execution of the lease in instalments as under :-
(a) 30 per cent on or before the execution of this agreement to be accounted for on commencement of the lease.
(b) 60 per cent in such instalments and as such times during the construction of the Centre I building as may be decided upon by the Managing Committee of the Centre.
(c) 10 per cent subject to adjustment on the basis of final area (ascertained by actual measurement) on the date on which the aid premises are ready for occupation............
Parking space rent is payable when the said premises are ready for occupation.
and such advance shall be held by the Centre in deposit and shall be adjusted and set off towards the monthly instalments of the basic rent and the parking space rent on the respective due dates thereof (3)....., (4)......, (5)......., (not brought out) (6) one month prior to the anticipated date on which the Centre I building is likely to be completed, the Centre will send a notice to the lessees by registered AD post at the lessees office/registered office for the time being.......
(7) the lessees shall execute with the Centre a deed of lease in duplicate....
(16) the lease shall contain the terms and conditions, among others, specified in Annexure 'A' hereto.
Annexure 'A' (12) the lessees shall not transfer, assign, sell, mortgage, charge, or encumber in any manner or otherwise dispose of the demised premises or any part thereof, nor shall they let, sub-let, underlet or allow to be occupied by any other party, the demised premises or any part thereof without the permission in writing of the Centre being the first had and obtained and the Centre will be entitled to refuse to give such permission without being bound to give any reason for such refusal but such permission shall not be unreasonably refused.............
(15) if the lessees shall cease to be a member of the Centre for any reason whatsoever, they shall if so required by the Centre either transfer this lease and all their right little and interest therein to any other party who is a Member of the Centre subject to the approval of the Centre and subject also to the provisions of clause 12 hereof or surrender the lease to the Centre at their own costs.
(27) on the expiry of the term hereby created, this lease shall be renewed at the option of the lessees for such further period as may be coterminous with the expiry of the lease of land granted to the Centre by the Govt.....
(31) the stamp duty and registration charges payable on this lease and its duplicate shall be borne and paid by the lessees.
7.28 The reading of the above indicates that the assessee is engaged in a planned and orderly development of the said land by erecting a cluster of buildings, which activity is identical in nature as of any other builder or developer of land. The primary basic rent to the extent of 90 per cent is payable well in advance of the execution of the lease deed and even the balance of 10 per cent is also payable before the execution of the deed. In exchange of the said payment, the assessee gets the right in the space that allows him to transfer, assign, sell, mortgage charge, or encumber in any manner or otherwise disposes of the demised premises or any part thereof, let, sub-let, underlet or allow to be occupied by any other party, the demised premises or any part thereof though, with the permission in writing of the Centre and the Centre reserving the right to refuse to give such permission without being bound to give any reason for such refusal but such permission shall not be unreasonably refused. The reading of the above in sequence clearly goes to show that, the cost for the space to be constructed is paid for by the lessees in return for which they get the right to transfer, assign, sell, etc., of the said space though, he needs to seek the permission and for grant of which the assessee charges a fee of Rs. 170 per sq. ft. and this leads to only two possibilities.
7.29 First is that the assessee gives the lease hold right of the space for a period of 60 years and the second, the assessee had sold the space to the lessees. If it is the former, then the assessee retains the ownership of the building and would be liable for rental income that is chargeable on a monthly basis. The common outgoings rent that is recovered from the lessees consists of apart from other items, a share of municipal rates and taxes which again leads to two possibilities. First being that the lessee is the owner and the second, the lessee is made to share the rates & taxes in addition to the monthly rental, which means that for purposes of annual letting value (ALV) as in sections 22 & 23 of the Act, the rates and taxes would have to be added to it or alternatively, rates & taxes representing proportionate share of the assessee based on the space under its occupation would be allowed to be deducted from its income, of course, not from income from property. Strangely enough, the Annexure 'A' to the deed of lease does not contain any clause that makes it compulsory for the lessee to insure the space taken by him, nor does the lease deed lay any emphasis on the assessee to insure against any calamity.
7.30 The department had chosen to follow the second alternative of treating it a sale on the basis that the primary basic rent compares well with the market rate at the various times when the leases were entered into by holding that the primary basic rent is salami or premium. The counsel Mr. Sonde had contested that the Explanation I to section 18 of the Bombay Rent Control Act does not allow charging of salami by landlords in support of which he referred to the observations of the learned author Kanga & Palkhiwala in his book on Income-tax Law, 8th edition, Volume I, page 1195 and the decision of Bombay, Madras, Kerala High Courts and the Supreme Court in Mrs. Hirabai D. Desai & Sons v. CIT [1936] 4 ITR 95, A.S. Sivan Pillai v. CIT [1958] 34 ITR 328, CAIT v. M. J. Cherian [1979] 117 ITR 371 and Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 respectively. He filed a certificate from TELCO stating that it had treated in its book the amount paid for space as advance rent and had been adjusting one-sixtieth each year as rental and on the decision of Andhra Pradesh High Court in Rajah Manyam Meenakshamma's case (supra). He drew our attention to page 50 containing the Notes on accounts, Item 4, in this regard. He contended that the true perspective was rental and pleaded that the issue may be examined in the light of decisions in Vanguard Fire & General Insurance Co. Ltd. v. CIT [1966] 60 ITR 496 (SC) at pages 506, 511 and 513; in CIT v. Madras Auto Service Ltd. [1985] 156 ITR 740 (Mad.) in Panbari Tea Co. Ltd.'s case (supra); in CIT v. Anderson Wright & Co. [1993] 200 ITR 596 (Cal.) and in CIT v. H.M.T. Ltd. (No. 3) [1993] 203 ITR 820 (Kar.) at pages 825 and 826 and the decisions of the Tribunal in Peter G. Goelho dated 26-9-1986 (copy on our records); in Purshottam V. Raheja v. Second ITO [1988] 27 ITD 54 (Bom.) and in Puranmall Narayan Prasad Kedia (HUF). v. Asstt. CIT [1994] 48 ITD 439 (Cal.) Mr. Sonde also provided copies of the resolutions by which primary and the secondary rent were calculated and fixed. He submitted that notwithstanding the fact that the assessee had filed its return on a particular basis it is entitled to modify the same subsequently on proper appreciation of the facts. In support of this argument reliance was placed in Pt. Sheo Nath Prasad Sharma v. CIT [1967] 66 ITR 647 (Allahabad) at page 651 and in CIT v. Bharat General Reinsurance Co. Ltd. [1971] 81 ITR 303 (Delhi).
7.31 The arguments of Dr. Balasubramanian was that the one-sixtieth of the primary basic rent together with the secondary basic rent is so low when compared with the market rental of similarly sized space in the areas. He further contended that no person desirous of renting space would pay the cost for constructing the space knowing fully well that he can own the space at the same price. He pleaded that merely because the assessee had termed the payment as primary basic rent does not change its true character of price for the space to be sold.
7.32 As we had observed that the transaction could be viewed in two possible angles, the department had chosen to take the angle of treating it a sale by following the Bombay High Court decision in Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694. The other angle is that the assessee had given the leasehold rights of use of space with the inbuilt right to transfer, sell, assign, etc., by paying a transfer fee to the assessee. The argument of the assessee that the primary basic rent is an advance rent only is based on what is stated in the lease deed. When we consider the totality of the facts from the start of the taking of the lease of land, followed by the invitation to the public to take the space by paying the specified amounts in advance, the intention of the assessee being engaged in a planned & orderly development of the said land by erecting buildings, the assessee constructing the buildings with the funds provided by the various lessees, all go to clearly indicate that there are only two possible view points as observed by us earlier. In fact we are of the view that it is only proper to hold that the transaction is one of sale of leasehold right of use of space and what the assessee retains only is the right to charge monthly rental, right to charge a transfer fee of the right of space leased out. In our view the amount collected towards construction in the name of primary basic rent is price for allowing of leasehold right of use of space for 60 years, which bears the character of income at the time the possession is handling over and there is no question of allowing any deduction of cost of construction because, there is no sale of space. However, because the department had allowed deduction for the cost of construction both when considering it a sale and alternatively as a short-term capital gain, we are unable to withdraw the deduction despite our views as above.
7.33 The next point in issue is what is the proper head of income under which the receipt of primary basic rent is assessable. The elucidation of the facts as above clearly go to show that the a had carried out the construction as a business proposition as is evident from clause 5 of the lease deed which is reproduced here again, "the centre is engaged in a planned and orderly development of the said land by erecting a cluster of building". Therefore, the head of income in regard to the primary basic rent which represented price paid for acquiring space for leasehold right of use of space, is profits and gains from business or profession. The parking rent collected in lump sum falls into the same category as the primary basic rent for the same reason though, it is collected only after the construction is completed.
7.34 The common outgoings rent excluding that part covering proportionate rates and taxes on the space occupied, and the receipt for various services, viz., exhibition halls hiring, meeting halls hiring, conference hiring, etc., are all organised activities and with no benefit to public in general but specific to the customer asking for those services, are therefore, assessable as profits and gains from business only. The secondary basic rent together with the proportionate rates & taxes on the space, are assessable as income from property. The alternative contention of the income from primary basic rent being assessable as short-term capital gain related to the period from the time the assessee completed the construction and handed over possession, in our view is not maintainable because, the assessee had carried out its activity though, similar to that of a builder, had sold the leasehold right of space and not the space itself which sale price is assessable as business income only.
7.35 The last issue relating to the setting aside for the sinking fund and the interest thereupon as not income, is squarely covered by the decision of the Tribunal for the earlier year in the case of the assessee and we would therefore sustain the disallowance or treating it as income.
7.36 The claim in assessment year 1990-91 the claim of the assessee is that the income from house property could not be based on municipal valuation. Mr. Sonde, the learned counsel fairly conceded that the assessee had not disputed the levy of house-tax by the municipal authorities but, pleaded that this feature should not come on the way of deciding the income from property owned by the assessee. He insisted that the income from property should be limited to the actual rental realised. The plea of the standing counsel Dr. Balasubramanian and the CIT Mr. Prasad was that the secondary rent is illusory.
7.37 Section 23 of the Act provides two alternatives for what should be taken as the ALV of a let out property, the first being that it is then sum for which the property might be reasonably be expected to be let from year to year and the second is where the property is let and the annual rent received or receivable exceeds to the reasonably expected rent, then such excess amount. The first alternative had been a point of controversy and a series of decisions of the Supreme Court had held that the annual value cannot exceed the standard rent fixed by the municipal authorities. In other words, the ALV of any property let out could not be lower than the standard rent fixed by the municipal authorities and therefore, we uphold the order of the authorities below in taking the ALV at the figure of standard rent fixed for purpose of collecting the house tax. As a consequence we are of the opinion that the assessee is rightly denied depreciation on the let out portion of the property. Because, the assessee is the owner of the property and is maintaining the property for its occupants, the income from which is being assessed as income from property, according to section 24(1) the repairs to the extent of one-sixth of the ALV of course after deduction of house tax is allowable as a deduction, assessee cannot claim further deduction of repairs, excepting on a proportionate basis of the portion retained by it for its own use. We accordingly direct the Assessing Officer to allow deduction for repairs on a proportion of the space in occupation of the assessee.
7.38 The department had raised the issue in assessment year 1989-90 that the CIT(A) should have limited the area to 289405 sq. ft. instead of 461736 sq. ft. and the cost of construction of the building and the plant & machinery, should have been taken as suggested by the Assessing Officer in his remand report for purposes of set off from the income at Rs. 14,91,91,142 (proportionate cost of space of 289405 sq. ft.) in place of Rs. 39,77,89,589. In this connection we may bring out the fact as noted by Assessing Officer assessment order. Assessing Officer had noted that out of the total area of 527000 sq. ft. an area of 65264 sq. ft. is in own occupation which may be leased out and he held that this unleased area should be treated as work-in-progress and arrived at the proportionate amount of Rs. 492,63,500 (based on total area of 527000 sq. ft. compared with the cost of construction of Rs. 3977,89,589) and included it for working out the income of the assessee. The order of CIT(A) does not bring about the above clime of the revenue nor the department has placed any material on our record to suggest that the area given possession was wrongly out based on which the revenue department had rectified the order under section 154 of the Act and we therefore do not find substance in the claim of area, cost of construction, etc., and hence it is rejected. The other claim of the revenue department of allowing of unabsorbed depreciation and unabsorbed business is without any merit because, the assessee's income is assessed from business which business is carried on for the last several years. The cross objection of the assessee of including that part of the receipt against which possession was yet to be given in fully justified because, the advance would get converted to income only when the assessee completes its part of the contract of handing over possession of space to the person who had advanced the amount. We accordingly delete the inclusion of Rs. 2059,79,598 as income. The additional ground of appeal as raised by the assessee is the same as has been raised in its cross objection.
7.39 For the assessment year 1990-91, the first claim is based on the alternative consideration by the CIT(A) in assessment year 1989-90 from which the AO had taken the cue and considered the alternative aspect of short-term capital gain and involved it to the extent of possession was handed over, which was upheld by the CIT(A). We had earlier observed that the activity of construction of space and giving it on leasehold right basis was a business activity and the income from such activity accrues at the point of time when possession is handed over and such income is assessable as profits and gains from business. Therefore, treating the receipt as on account of capital asset and therefore, assessable as short-term capital gain being erroneous, we hold that the proper head of income is profits and gains from business. The related claims is that it includes that portion which is already included and assessed in assessment year 1989-90 which is a matter of verification which we direct the AO to carry out the necessary rectification keeping our finding above.
7.40 In the result the appeals of the assessee are allowed in part while that of the department for the assessment year 1989-90 is dismissed and the cross objection is allowed in part.