Income Tax Appellate Tribunal - Madras
S.I. Property Development (P.) Ltd. vs Inspecting Assistant Commissioner on 13 December, 1991
Equivalent citations: [1992]40ITD494(MAD)
ORDER
T.N.C. Rangarajan, Vice President
1. This appeal by the assessee is directed against the assessment of a sum of Rs. 26,80,640 collected as deposit, as a trading receipt, the disallowance of interest of Rs. 3,20,000 and the denial of deduction under Section 80HHC of the Income-tax Act, 1961.
2. The assessee is a company engaged in the construction and sale of residential flats and commercial units. In the previous year ended 31-3-1984, corresponding to the assessment year 1984-85, the assessee constructed a building at Bangalore known as "Highpoint-IV". All the units in that building except two were sold and the unsold units were let out. However, the assessee claimed that the entrance foyer, corridors, staircases and common facilities such as lifts etc. were kept as a reserved area in respect of which the assessee had granted a licence, charging a fee for the use of the reserved area. In order to secure the payment of the fee, the assessee had collected deposits totalling Rs. 26,80,640. The assessee claimed that this amount had to be excluded in computing the total income. The Assessing Officer, however, treated this amount as a trading receipt and brought it to tax.
3. On appeal, the CIT (Appeals) held that the amount was received as part of the trading transaction and could not cease to be income merely because it was called a security deposit.
4. In the further appeal before us, it was contended on behalf of the assessee that the security deposit was taken under a separate licence agreement for fulfilment of the conditions stipulated therein in respect of reserved areas which had not been sold to the licensees. It was submitted that in the circumstances particularly when the amount carried a liability to refund the amount on certain contingencies, it could not be treated as part of the trading receipts of the assessee. On the other hand, it was contended on behalf of the Revenue that the licence agreement was not independent of the sale of the office premises and since it was inextricably connected with the sale, the receipt was part of the trading receipt even if it was called a security deposit. According to the Revenue, the deposit actually represented part of the consideration for the entire transaction and could not be excluded from the trading receipts.
5. We have considered the submissions and perused the relevant documents which may be set out in detail.
6. It is stated that when the assessee advertised the project of construction of "High point-IV" in Bangalore, no particular mention was made about documentation. In the pamphlet issued by the assessee it was mentioned that all documents were first subjected to expert legal scrutiny and kept abreast of ever-changing legislation so that the purchaser gets an incontestable title. Therefore, the actual documentation was known only at the time when the transaction was entered into. It consisted of three documents. The first was an agreement under which the assessee undertook ,
(i) to execute a sale deed conveying undivided interest in the land;
(ii) to construct office space as described in Schedule 'A' as contractor;
(iii) to complete the construction within the stipulated period;
(iv) to set right structural defect, if any, within six months from the date of completion;
(v) a. to grant leave and licence to use the Reserved Areas in the building more particularly described in the Schedule 'C' thereto for a period of 10 years from the completion of the building, as per the terms of the Licence Deed, the draft of which has been shown to and accepted by the purchaser;
b. to transfer the ownership of the reserved areas described in Schedule 'C' after the completion of the period of licence to the nominees of the purchaser viz. the Association of Owners of Office Spaces/Show Rooms of which the purchaser proposes to become a member and the purchaser agrees that his nomination is irrevocable. The stamp charges for the transfer shall be borne by the builder;
(vi) to hand over possession of the construction within 15 days after completion or on receipt of the entire payment and to retain the documents of title for payment of amounts due.
The purchaser in turn undertook to pay the cost of the undivided interest in the land and the cost of construction of the flat as well as to give a security deposit for the licence fees for the reserved area mentioned in Schedule 'C'. This agreement also stipulated that the purchaser shall pay his share of the monthly maintenance charges of the common expenses.
7. The second document is a deed of Licence by which the assessee permitted the purchaser of the flat as a licensee to use the reserved area on payment of a licence fee per annum for a period of 10 years. The assessee also received a security deposit equivalent to 10 years' licence fee and it was stipulated that in each year l/10th of the deposit will be refunded. Admittedly, the practice of the assessee has been to adjust the refund of the security deposit due against the annual fee payable by the licensee. The licensee was to meet the expenditure for maintenance of the reserved areas and equipments installed therein. On the expiry of the period of licence, the assessee was to transfer all the rights and obligations of the licenser to any institution, establishments or body of persons as the licenser may decide and the licensee shall be free to renegotiate its terms with such institution, establishment or body of persons for the use of the reserved areas. The assessee also had a right to assign the licence agreement.
8. The third document is a sale deed conveying the undivided interest in the lands. In the Profit & Loss account of the company for the year ended 31-3-1984, the net profit from "Highpoint-IV" was shown as Rs. 17,86,946. This was arrived at after setting off expenditure against sale of office space amounting to Rs. 84,77,236 and licence fee of Rs. 2,97,848.85. Besides this, the Karnataka Electricity Board connection charges came to Rs. 1,96,863 and the closing stock value shown as unsold shops Rs. 13,29,200, reserved area Rs. 15,35,500 and unsold office units Rs. 73,900. In the schedule of fixed assets the reserved area of Rs. 15,35,500 was capitalised and depreciation @ 5 per cent was taken. The working sheet for the valuation of the closing stock indicates that a ratio of 79.45 out of 605 was taken as the land share and that the ratio of 18,472 being common area out of70,934 being total built up area was applied to the construction cost and overhead cost to obtain proportionate figures of Rs. 59,080, Rs. 13,13,860 and Rs. 1,62,560 respectively totalling Rs. 15,35,500. The undivided share in the land transferred and left untransferred were in proportion to the built up area transferred and retained as common area. In the Balance Sheet under the current liabilities a sum of Rs. 84,32,757 was shown as sundry creditors in which was included a sum of Rs. 26,80,640 received as security deposit under the terms of the licence agreement mentioned above. Thus, the picture presented by the assessee was that only the units were sold, the reserved areas were kept unsold and security deposit was taken for due payment of the licence fees for the use of the reserved areas. Before we consider whether this picture reflects the correct legal position, we may recall the principles relating to the proper approach to the problem.
9. In the case of CIT v. Sir Homi Mehta's Executors [1955] 28 ITR 928 (Bom.) at 932 Justice Chagla observed:
It is a trite saying that in income-tax matters one must look at the real nature of the transaction. Whatever legal or technical form a transaction may take, the Court must try and determine what the real transaction was and not the form which the transaction took. It is equally true to say that a transaction for the purposes of income-tax must be looked at from a commercial point of view. In dealing with commercial men in income-tax matters, we must try and understand what is the real commercial result of a particular action taken by a commercial man. Equally so, in trying to determine whether a certain transaction resulted in profits. We must come to a conclusion that the transaction resulted in real profit, profits which from the commercial point of view meant a gain to the person who entered into the transaction, not profits from any narrow, technical or legalistic point of view.
10. The Supreme Court has observed in the case of CIT v. BM. Kharwar [1969] 72 ITR 603 :
It is now well-settled that the taxing authorities are not entitled, in determining whether a receipt is liable to be taxed, to ignore the legal character of the transaction which is source of the receipt and to proceed on what they regard as 'the substance of the matter'. The taxing authority is entitled, and is indeed bound, to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction'. This principle applies alike to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence - oral and documentary - and conduct of the parties to the transaction.
Since the word "device" has acquired certain overtones the assessee was at pains to point out that the entire transaction was motivated by a desire to keep the premises clean and properly managed particularly with reference to the common areas so that the neatly maintained building would itself be an advertisement for future projects as a well-maintained premises until the management of the reserved areas could be entrusted to an effective body of the residents. We do not think that it is necessary to adjudicate on the subjective motivation for the manner in which the transaction was put through by the assessee as we are concerned only with the tax advantage and whether the assessee is entitled to that advantage considering the legal effect of the transaction.
11. We must, therefore, first consider the true legal effect of the licence deed as entered into by the assessee and the purchasers of the units. Section 52 of the Easements and Licences Act defines a "licence" as follows :-
52. 'Licence' defined. Where one person grants to another, or to a definite number of other persons, a right to do or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a licence.
Therefore, this licence deed would be valid only if the unit owners did not have an easement and did not have a right to carry out the acts which were allowed by the deed.
12. The licence agreement refers to the common areas as well as certain equipment such as lift or motors and generator installed in the building. According to the assessee, since these common areas and the equipments have not been specifically transferred under the sale deed to the licensees, the assessee continues to be the owner and, therefore, the flat owners have no right to utilise the same. The licence deed purports to grant such a right which they lacked. However, apart from paying licence fee, the flat owners have to bear the maintenance and running cost of the reserved areas and the equipments. Therefore, the licence fee was meant only for the right to use the reserved area and the equipment. As far as the reserved area is concerned, it consisted of the common areas such as foyer and courtyard, staircases and corridors. Under Section 12 of the Easements & Licences Act, one of two or more co-owners of immovable property may, with or without the consent of the other or others, acquire an easement for the beneficial enjoyment of such property. Under Section 13, where one person transfers immovable property to another, if an easement in other immovable property of the transferor is necessary for enjoying the subject of the transfer, the transferee shall be entitled to such easement. Illustration (h) to that section indicates that if the owner of two adjoining houses sells one, the purchaser is entitled to the benefits of all the gutters and drains common to the two houses. Illustration (n) shows that if a person lets out a house which has no access without crossing the land belonging to that person, the purchaser is entitled to the right of way over that land. It will be clear from the words of Section 13 as well as the illustrations thereunder that the purchasers of the office space in the building constructed by the assessee had an easement of necessity over the common foyer area and the staircases for having access to the road. To that extent, therefore, there was no need for a licence.
13. It was argued on behalf of the assessee that with regard to the other common areas, there could not be an easement of necessity and, therefore, to that extent the licence was valid. For instance, it was pointed out that the owner of a unit in the first floor could not go up to the 8th floor, unless he was given a licence though he may have an easement of necessity for going to the ground floor and to have access to the road. We are of the opinion that this argument is far-fetched, because the owner of the first floor unit has no necessity to go to the 8th floor and if he were to go to the 8th floor for visiting a resident of that floor, then he will be an invitee and does not need a licence from the assessee. In Schedule 'D' of the licence deed it is stated that all rights of support and other casements, and all quasi-easements rights and benefits of a similar nature now enjoyed or intended to be enjoyed by the premises is included in the licence granted. It follows that the unit owners do not in fact obtain any right other than what they already in law possessed.
14. With regard to the equipment also, it is apparent that the purchasers of the units have paid for the same since the cost of that equipment has gone into the construction cost which is distributed among them, just as the cost of the entire land has also gone into the computation of the value of each unit sold by the assessee.
Moreover, the unit owners have to pay the charges for maintenance and running cost of the equipment. Thus, it would be seen that the licence deed really charges a licence fee for certain rights which the fiat owners already had and did not need to be granted by that particular document. We are of the considered opinion that the licence deed does not grant any right which the unit owners did not already enjoy as and by way of an easement of necessity, or as something which they could already lawfully do as the owners of the property for the beneficial enjoyment of the property and the equipment thereon.
15. It follows that the licence fee was in fact a supplement to the consideration paid for the purchase of the undivided share in the land and the office space constructed thereon which were transferred by a separate document. It is significant that those documents do not stipulate any separate consideration for transferring the reserved area to a representative body of the unit owners. On the other hand, the original agreement for the sale of the unit specifies that the nomination of the body to whom the reserved area is to be transferred subsequently was irrevocable. This indicates that the consideration for the transfer of the reserved area was already embedded in the amounts paid by the flat owners under the agreements and the sale deed. Under Section 2 of the Contract Act, the consideration for an agreement can come from a third person and, therefore, the nominee of the flat owners would be entitled to demand the transfer of the reserved area in consideration of the amounts already paid by the fiat owners and in terms of the agreement of the assessee with them and without having to pay any further amount. In this context, the reservation in clause 13 of the licence deed to the assessee of the right to assign the licence assumes significance. Obviously, the assessee cannot assign the licence ignoring the nomination already made by the flat owners and, therefore, all that could be done would be to transfer the reserved area to the nominee without transferring the security deposit received by the assessee.
16. The assessee was in fact a promoter and stood undoubtedly in a fiduciary position with regard to the purchasers of the office spaces. As a consequence, the assets and properties were acquired by the assessee with a view to transferring them to the said purchasers and the assessee was, therefore, a trustee for them within the meaning of Section 88 of the Indian Trusts Act and the assessee was accountable to them. It follows that the assessee had no right to transfer any part of the property to any other person or even a body representing the unit owners for any further consideration other than what was agreed to by the unit owners themselves. In other words, the assessee was entitled to receive from the unit owners the total amount actually received and nothing more. From a commercial point of view what was received was, therefore, a trading receipt. We are conscious of the fact that the undivided share of land attributable to the common areas and the common areas were not formally transferred and the legal title remained with the assessee. But the transaction as such was irrevocable and the assessee had the right to appropriate the deposits immediately. This position strengthens our view that the amount of security deposit constituted part of the consideration for the entire arrangement of transferring the flat with attendant rights.
17. We may now consider the terms of the licence deed with regard to the security deposit. While the assessee is entitled to receive an annual fee for a period of 10 years, the whole amount payable for the period of 10 years, is received as a security deposit. Even though it is stipulated that the unit owner is to pay a licence fee annually and the security deposit is to be returned in annual instalments 1/10th of the deposit, it is seen that in practice the assessee was merely appropriating 1/10th of the security deposit for each year as the licence fee. The fact remains that the assessee has received the total amount of licence fee of 10 years which in practice is not to be returned at all, since the licence can never be terminated earlier than the period of 10 years stipulated.
18. It was also argued that in case the building is destroyed, the licence is to be terminated and the flat owners would be entitled to the refund of the proportionate amount. We are unable to accept this contention before us. There is no such stipulation in the agreement. Secondly, under the terms of the agreement, a refund is possible only if the licence fee is paid. Since the licence is not terminable before the period stipulated, there cannot be a refund of any portion of the deposit until the licence fee for the entire period is paid in full. Even in case of the property being destroyed, the agreement itself is discharged by frustration. Thus, in any case the assessee would be entitled to retain the full amount.
19. The Supreme Court has pointed out in the case of CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 that the essence of a deposit is that there must be a liability to return it to the party by whom it is made on the fulfilment of certain conditions. In the present case, we find that there is practically no situation in which the assessee would face a liability to return the amount. The Supreme Court has observed further that if a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as a trading receipt and that it is the true nature and quality of the receipt and not the head under which it is entered in the account books that would prove decisive. We, therefore, come to the irresistible conclusion that the licence deed was ineffective as a deed of licence and the assessee was entitled to retain the full amount of the security deposit from the date of its receipt without any real obligation to return it.
20. Since the rights which were purportedly to be conferred by the deed of licence had already flowed to the flat owners from their ownership of the flats acquired under the registered deed for transfer of the undivided share in the land and the agreement for the construction of the flats, the amount of security deposit must be considered as a consideration for those rights of easement of necessity thus acquired. Since the entire transaction of the purchase of the undivided land, the construction of the building and the acquisition of the rights of easement of necessity and the right to use the equipment which was part of the building was one integrated transaction, we have to accept the contention of the Revenue that the amount received really represented a trading receipt as part of the consideration for acquisition of all the rights in the property transferred by the assessee. Since no part of those rights which had been transferred by the assessee could at any time be extinguished or withdrawn, there is no question of postponement of the accrual of the right of the assessee to appropriate the entire security deposit as consideration for the transfer of all the rights in the property transferred by the assessee. We, therefore, hold that the security deposit amount of Rs. 26,80,640 was part of the sale consideration and should have been brought into the profit and loss account as part of the sale proceeds and not shown as a current liability in the Balance Sheet. As a consequence, we also hold that the question of showing the value of the reserved area as a fixed asset belonging to the assessee does not arise and the assessee is not entitled to any depreciation thereon. It would follow that the annual licence fee would have to be excluded. The Assessing Officer is directed to make the necessary adjustments in ascertaining the correct amount that is to be brought to tax.
21. The second item in dispute relates to the sum of Rs. 3,20,000 paid as interest on security deposit received from a firm called Southern Investments. The assessee had entered into an agreement on 5-1-1983 with Southern Investments for construction of a premises called 'Palm Tree Place' at Bangalore. The assessee was to put up the building at a cost of Rs. 75 lakhs on the land belonging to Southern Investments, which was to be sold by Southern Investments. Under the terms of that agreement, Southern Investments had deposited a sum of Rs. 15 lakhs with the assessee which was to carry interest at 24 per cent per annum. This interest came to Rs. 3,20,000, which the assessee showed as an outgoing in the profit and loss account as interest on loan -security deposit. The security deposit itself was shown as a current liability in the Balance Sheet. The Assessing Officer was of the opinion that this interest should have been capitalized as part of the work-in-progress and, therefore, it could not be allowed as a deduction in computing the income of the assessee. This was confirmed on appeal. In the further appeal before us it was pointed out on behalf of the assessee that in the agreement except for a willingness to deposit a substantial sum as an interest-bearing security deposit to help the builders to finance the project, there was nothing to establish a nexus between the amount and the actual project. On the other hand, it was contended on behalf of the Revenue that since the deposit was received in connection with the project, it should be taken as a finance for the project, and therefore, the interest paid should be capitalized. We are unable to accept this contention of the Revenue because the assessee was already engaged in the business and the funds borrowed would naturally be the capital borrowed for the purpose of the business as such particularly when there is no stipulation in the agreement that the deposit received under the agreement should be capitalised only for that particular project. We find that the obligation of Southern Investments in the agreement was only to pay as security deposit a sum of Rs. 10 lakhs on the execution of the agreement and a sum of Rs. 5 lakhs at the time of approval of the plans for construction. On the other hand, the obligation of the assessee was to arrange additional finance required to continue and complete the proposed construction at the risk and cost of the agent. Thus it is clear that the funds made available to the assessee were not so inextricably connected with the project so as to say that the interest paid thereon was the cost of construction of the project. Hence we delete this addition of Rs. 3,20,000.
22. The third point in dispute relates to the claim of the assessee for deduction under Section 80HHC. In the previous year the assessee had also entered into the business of sale of fish foods. 'T he profit and loss account showed export sales of Rs. 5,10,724 and purchases of equal value. The assessee had incurred expenses and commission on export sales of Rs. 19,982 and claimed deduction under Section 80HHC in the sum of Rs. 49,956. The Assessing Officer found that the assessee had entered into an agreement with a sister concern of Kaveri Sea Foods on 2-1-1984 and since Kaveri Sea Foods directly exported the goods contracted by the assessee, the Assessing Officer came to the conclusion that this was only an arrangement for tax avoidance and accordingly disallowed not only the deduction under Section 80HHC but also the expenses claimed at Rs. 19,982. He also added that since there is no profit from this business, no deductions could be given under Chapter VIA. Or. appeal, the CIT(A) also concluded that factually only Kaveri Sea Foods had exported the marine products and the assessee, therefore, was not entitled to the deduction.
23. In the further appeal before us it was contended on behalf of the assessee that the assessee has been recognised as an exporter and the export was made only in the name of the assessee. It was submitted that this was genuine transaction which could not be ignored in granting the deductions claimed. On the other hand, the Revenue relied on the orders of the authorities below and contended that the assessee was not entitled to the deduction.
24. We have considered the rival submissions and perused the relevant documents. We find that on 2-1-84 the assessee had entered into an agreement with Kaveri Sea Foods reciting that the assessee had procured orders abroad for export of certain Marine Products and Kaveri Sea Foods was to arrange the export of the marine products in the name of the assessee. The Reserve Bank of India had allotted a code number to the assessee as an exporter and it is not in dispute that one of the objects of the assessee-company was to enter into the marine foods export trade. The Marine Products Export Development Authority has also registered the assessee as an exporter. The shipping documents clearly indicate that the assessee was the exporter and the packing credit account was negotiated in the Bank of America in the name of the assessee. The telex messages in regard to the contract were also in the name of the assessee as well as the contracts themselves with the foreign buyers. The entire documentation thus establishes that this export business was done only by the assessee and Kaveri Sea Foods acted as an agent of the assessee. It has been held by the Madras High Court in the case of Addl. CIT v. Gordon Woodroffe & Co. (Madras) (P.) Ltd. [1977] 110 ITR 880 under similar circumstances that when the exports are made by the dealers from whom the assessee purchased goods in India for and on behalf of the assessee and the dealer acted only as an agent, it was the assessee who was really the exporter entitled to the deduction of the expenses incurred. It has also been held by the Cochin Bench of the Tribunal in the case of Sea Pearl. Industries v. ITO [1988] 26 ITD 380 that where right from export application up to final clearance by customs and putting goods in ship and subsequently receiving sale price, everything was done by the assessee, it should be termed as a real exporter eligible for deduction under Section 80HHC. The other objection that the deduction under Section 80HHC is not available where there is no profit from the export business is also untenable, because the reference in Section 80AB is only to the gross total income and not to the profit from the export business alone. This is self-evident from a reading of Section 80AB and it has been so held by the Delhi Bench of the Tribunal in the case of Expo Machinery Ltd. v. IAC[1989] 31 ITD 41. In the circumstances, we have to accept the claim of the assessee that the expenses incurred for the export business as well as the deduction claimed under Section 80HHC had to be allowed to the assessee in computing the total income. The Assessing Officer is directed to re-compute the income accordingly.
25. The appeal is partly allowed.