Income Tax Appellate Tribunal - Mumbai
Eighth Income-Tax Officer vs M. Vishvasaraya Industry Research And ... on 6 May, 1991
Equivalent citations: [1991]38ITD116(MUM)
ORDER
G.K. Israni, Judicial Member
1. This appeal by the revenue challenges the order of the learned CIT (A) dated 2-2-1987 in relation to the assessment year 1983- 84.
2. The following ground has been raised in this appeal, viz.:
On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the amount of Rs. 7,77,000 appropriated towards sinking fund is not a provision out of income includible in the total income and consequently erred in deleting the addition.
3. The arguments of the learned Departmental Representative and the learned counsel for the assessee were heard.
4. The assessee is a company registered under the Companies Act, 1956 and its primary object is to develop the World Trade Centre premises at Bombay which housed show-rooms, sales emporium, shopping arcades, etc. It took on lease a plot of land for 99 years from the Government of Maharashtra, and, after having built a building known as World Trade Centre thereon, leased out the shops, show-rooms, etc. to various lessees for a period of 60 years commencing from the date on which the lease premises were ready for occupation. For such lease, the assessee charged rent, which consisted of (a) 'basic rent'; (b) 'common outgoings rent'; and (c) 'parking space rent'. The provision relating to rent incorporated in the standard Articles of Agreement is found in Clause (2) of the said Agreement and reads as below :
(2)(i) The Rent of the said premises shall consist of :-
(a) 'basic rent' in respect of the said premises;
(b) 'common outgoings rent'; and
(c) 'parking space rent', all of which when collectively referred to will be hereinafter called 'the rent'.
(ii) The basic rent for the floor area on the ground/first floors of the said premises shall be Rs. 0.381944 per sq. ft. (Rs. 4.111211 per sq. meter) per month payable by the Lessees as hereinafter specified and Rs. 0.180556 per sq. ft. (Rs. 1.943481 per sq. meter) per month for the floor area on the mezzanine floors.
(iii) The common outgoings rent shall consist of such proportion of the actual expenditure incurred by the Centre in respect of the Trade Centre building with its environments on Municipal rates and taxes, water charges (inclusive of all charges for bringing water from outside) repairs cess, ground rent and other sums payable under the head-lease to the Government, charges for maintenance and upkeep of the common passages, foyers, corridors, courtyards, gardens, terraces, landscapes, lifts, lift halls, escalator halls, basements, marquee, air-conditioning plant and plant rooms, ventilation plant and plant rooms and fire fighting plants and plant rooms, all equipments or machines, sewages treatment plant and plant rooms, roads and pavings, car parks, lights, landscaping drains and sewers, all terraces, electricity charges, insurance premium, sinking fund at the rate of approximately 4% administrative expenses including wages and all expenses and all costs and expenses incurred by the Centre in discharging its obligations as Lessor, as the area of the premises hereby agreed to be leased bears to the total area of the Trade Centre building which the Centre shall decide to lease but which common outgoings shall be subject to increase or decrease by reason of any of the aforesaid expenses being increased or decreased. The common outgoings rent shall be paid by the Lessees to the Centre on or before the 5th of every month commencing from the date on which the said premises are ready for occupation as hereinafter specified.
5. During the course of the assessment proceedings, the ITO found that from the total amount of the common outgoings rent, the assessee had deducted a: sum of Rs. 7,77,000 as appropriation towards sinking fund. The ITO added back this amount to the total income as being appropriated from the profit. This addition was one of the grounds raised in the first appeal. It was pleaded before the learned CIT(A) that there was no nexus between the recoveries, monthly outgoings and contributions towards sinking fund. The appropriation out of the 'common outgoings rent' and consequent contribution towards sinking fund was with a view to utilising the amounts for major structural repairs as and when such repairs are required to be undertaken. Since the World Trade Centre had been constructed in 1977 there had been no occasion for utilising any amount out of this Fund. This, however, does not render the contributions to the sinking fund as income. Such contribution made is thus not includible in the total income of the assessee. This plea of the assessee has found favour with the learned CIT(A), who has allowed the assessee's claim giving rise to the present appeal by the revenue.
6. Before us a copy of the Standard Lease Agreement and the certificate dated 9-4-1991 purportedly issued by Shri Vijay M. Gad, Chairman and Managing Director of Pheroze Kudianvala Consultants Pvt. Ltd. have been filed. On the basis of this cenificate and the relevant provisions of the standard Lease Agreement it was contended by the learned counsel that the contributions to the sinking fund were capital receipts and were, therefore, not liable to be included in the total income of the assessee for taxation purposes. According to the learned counsel, the amount of the sinking fund was intended to be utilised to replace, or, to carry out major structural repairs to, the building of the World Trade Centre as and when so required. The amount of the Fund was not available to the assessee to be utilised for any purpose other than the said purpose and, therefore, the amount of the Fund could not validly be treated as a revenue receipt of the assessee. In support of his contention, the learned counsel relied upon the following decisions, viz.:
1. CIT v. Bombay State Road Transport Corporation [1977] 106 ITR 303 (Bom.)
2. Keshkal Co-operative Marketing Society Ltd. v. CIT [1987] 165 ITR 437 (MP)
3. Hoshiarpur Electric Supply Co. v. CIT [1961] 41 ITR 608 (SC)
4. CIT v. Poona Electric Supply Co. Ltd. [1946] 14 ITR 622 (Bom.)
5. Monghyr Electric Supply Co. Ltd. v. CIT [1954] 26 ITR 15 (Pat.)
7. As against the above, it was submitted by the learned Departmental Representative that the receipt on account of common outgoings rent, which includes the contribution towards sinking fund, is part and parcel and a component of rent as described in the Standard Lease Agreement and is, therefore, liable to be treated as a revenue receipt.
8. We have considered the facts and circumstances of the case and studied with great care the certificate and the Standard Lease Agreement produced by the assessee and the aforesaid rulings cited on its behalf and have come to the conclusion that the amounts appropriated out of the common outgoings rent are essentially of revenue income and includible in the total income of the assessee. It is evident from the above extract of the Clause (2) of the Lease Agreement itself that 'rent consists of three components, one of which was common outgoings rent'. The common outgoings rent, in its turn, includes, inter alia, sinking fund. The common outgoings rent is not a one time payment, but a component of monthly recurring rent and is thus essentially a receipt of revenue nature. The mere giving of nomenclature of a 'Fund' or 'Sinking Fund' would not be decisive of the matter. For the purposes of taxation what is to be seen is the inherent and essential character of a receipt and not the nomenclature given to it by the recipient or, for that matter, by the payer. No one can be allowed to alter the inherent and essential character of a receipt by giving a nomenclature of its choice or convenience. In the Lease Agreement, the use of the words 'sinking fund' has been made only once and that too in an enumerative context. Neither the objects of the purposes of the Fund have been identified nor does the Agreement contain any stipulation or recital to the effect that the appropriation made towards the Fund shall not be used for purpose other than an identified or a designated purpose. Bilateralism, which is essential to the creation of mutual and reciprocal rights and obligations between the contracting parties, is also, conspicuous by its absence in its relation to 'sinking fund' in the standard Lease Agreement. There is no clause in the agreement to bind the assessee-recipicnt, to spend the sinking fund amount for any specified object or purpose. Similarly, no provision of the Lease Agreement entitles the lessees to enforce the deployment of the sinking fund amount for the reconstruction of the World Trade Centre building or for its structural repairs, etc. Thus the assessee is not legally bound, either under the terms of the Lease Agreement or under any statutory provisions of the Income-tax Act or other law, to spend the sinking fund amount only for the purpose of construction of a new World Trade Centre building in the place of the old one or for the structural repairs to the existing building and for no other purpose.
9. Let us now discuss the various rulings cited on behalf of the assessee. The case dealt with by the Bombay High Court in Bombay State Road Transport Corporation 's case (supra) related to the contributions by the State Road Transport Corporation to the Insurance Fund under Rule 11 of the Bombay State Road Transport Corporation Rules, 1952 framed under Section 44 of the Road Transport Corporations Act, 1950. The contributions out of the revenue of the Corporation were made towards the third party liability fund. The contributions were made under the legal obligation cast upon the Corporation under a statutory rule. It was in this background of the law that the High Court held that the contributions to the Fund were admissible as a deduction in computing the income of the Corporation. This ruling was rendered in the context of the statutory provisions and it does not in any way support the assessee's contention in the present case to the effect that contributions of the nature as in the present case are capital receipts or that such contributions are liable to be deducted out of the rent income of the asscssee.
10. In the second case Keshkal Co-operative Marketing Society Ltd. (supra) the basic features were more or less of the same nature as those of the case before the Bombay High Court. In that case before the M.P. High Court it was held that the amounts transferred to the Reserve Fund under the M.P. Co-Operative Societies Act were deductible as business expenditure mainly for the reason that the Reserve Fund created under the Act was a statutory reserve and was created at the instance of the Registrar of the Co-operative Societies, who was again a statutory authority. The present case before us is thus clearly distinguishable from the one dealt with by the M.P. High Court.
11. In Hoshiarpur Electric Supply Co.'s case (supra) the amount contributed by the consumers was in direct recoupment of the expenditure for bringing into existence an asset of lasting character enabling the asscssee to conduct its business of supplying electrical energy. The amount was, therefore, essentially reimbursement of capital expenditure and the excess that remained after expending the cost of installation of service connection was clearly part of a capital receipt in the hands of the assessee and was, therefore, not convertible into a trading profit. The excess over the cost of installation was essentially not a trading profit and was, therefore, not taxable income in the hands of the asscssee. Here again, the facts of the case are clearly distinguishable from those of the assessee's case and, therefore, the ruling of the Supreme Court cannot in any way help the assessee before us.
12. In Poona Electric Supply Co. Ltd.'s case (supra) the contributions by the wouldbe consumers of electricity were made towards and represented only a part of the capital cost of constructing the New supply lines, which works were regarded by the assessee as unremuncrative and would not have been undertaken without the contributions in question. It was in that context that the Bombay High Court held that such contributions were not trading receipts, but were only capital receipts and were, therefore, not assessable to tax. It would be needless to say that the facts of that case before the Bombay High Court are clearly distinguishable from the facts of the case before us.
13. The last case-law cited on behalf of the assessee was that in Monghyr Electric Supply Co. Ltd.'s case (supra) before the Patna High Court the assessee was making no charge to the consumer for laying a service which did not exceed 100 feet. Where the service line exceeded the limit of 100 feet the extra cost was charged to compensate the electric supply company for defraying expenses of copper and galvanized wire, the cost of brackets, insulators, meter wires, etc. The dispute in that case related only to the small excess or surplus which remained after defraying the additional expenses on a service line exceeding 100 feet each. Since the receipt in the hands of the electric supply company was essentially of a capital nature it was in that background that the Court held that the small sums, which remained unspent in the hands of the electric supply company continued to occupy that character of capital receipt.
14. Looking to the above discussion of the facts and circumstances, the provisions of the standard Lease Agreement and the various rulings cited at the Bar, we hold that the sums appropriated by the assessee towards the sinking fund are essentially receipts of revenue nature and are part and parcel and a component of rent received by it for the premises leased out to the lessees. The amounts appropriated towards sinking fund thus continue to occupy their essential character of a revenue receipt and did not constitute a receipt of capital nature. We further hold that the amounts appropriated to the sinking fund were not deductible out of revenue and are includible in the total income of the assessee. The amounts appropriated towards sinking fund shall, for all intents and purposes, be treated as part and component of the rent received by the assessee for the premises leased out to the lessees. In this view of the matter, this appeal by the revenue should succeed. The appeal is, therefore, allowed.