Trust not entitled to exemption if carrying only incidental objects which are not charitable

HIGH COURT OF BOMBAY

M. Visvesvaraya Industrial Research & Development Centre

Versus

Commissioner of Income-tax

IT REFERENCE NO. 78 OF 1998

October 25, 2012

JUDGMENT

S.J. Vazifdar, J.  

This reference under section 256 (1) of the Income Tax Act, 1961 arises out of Reference Application Nos.306 and 307 filed by the assessee in respect of a common order of the Income Tax Appellate Tribunal dated 29th March, 1996 in ITA Nos.6351/B/93 and 1717/B/94 pertaining to assessment years 1989-90 and 1990-91.

(A)  The Tribunal on the assessee’s application drew up a statement of case and referred the following eight questions and an additional question for the year 1990–91 for the opinion of this Court :-

“(1)  Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the assessee was not entitled to exemption under section 11 of the Income Tax Act, 1961 ?

 (2)  Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion concerning clauses 2, 4, 5, 6, 7, 20 and 24 of the Memorandum of Association of the assessee are not objects of general public utility and thereby do not fall within the meaning of section 11 of the Income-Tax Act, 1961 ?

 (3)  Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the construction activity of World Trade Center, Centre 1 and IDBI Centre were activities of business ?

 (4)  Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the establishing of the World Trade Center cannot be object of public utility so as to be covered by the provisions of section 11 of the Income-Tax Act, 1961 ?

 (5)  Whether, on the facts and in the circumstances of the case, the Tribunal was right in coming to Its conclusion that the activity of the assessee would also be hit by the provisions of section 11 (4A) of the Income-Tax Act, 1961 ?

 (6)  Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the transaction was one of sale of lease-hold rights of use of space and not of leasing ?

 (7)  Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the primary basic rent and the parking rent were assessable as income from profits and gains of business or profession ?

 (8)  Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the amount appropriated towards a sinking fund was part of the rent received by the assessee and was in the nature of revenue receipt ?

Additional Question for A. Y. 1990-91.

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing to adopt the standard rent fixed by the Municipal Authorities as the annual value instead of the actual rent realised by the assessee ?”

(B)  By an order dated 21st March, 2003, in circumstances we will state later, Questions 1 and 6 were reframed as follows :–

“Question No. 1:- Whether on the facts and in the circumstances of the case, the applicant complied with the provisions of section 11 (Applicant of income, Accumulation), 11 (4A), 12 and 13 for the assessment year 1989-90 and 1990-91 and is therefore exempt from Tax ?

Question No. 6: Whether on the facts and or the circumstances of the case, the applicant was right that only 1/60th of the advance can be assessed as its income for the year as the tribunal had rightly held it as transaction of lease and not of sale ?”

2. The only questions that were pressed before us by Mr. Andhyarujina, the learned senior counsel appearing on behalf of the assessee, were questions 1, 6, 7 and 8 and the additional question for the A.Y. 1990-91.

3. By an order and judgment dated 15th March, 2001 (251 ITR 852), this Court remanded the matter to the Tribunal for its decision on two points. We will refer to the judgment in some detail later. Pursuant thereto the Tribunal on 29th November, 2001 made a remand report. The Reference is, therefore, now heard finally.

4. The questions referred to this court require a reference to the facts in some detail.

5. The All India Manufacturers Organisation and Industrial Foundation conceived the idea of establishing a World Trade Center in Mumbai. They convened a meeting of prominent industrialists in Mumbai on 14th April, 1969 under the presidentship of the then Finance Minister of the Government of Maharashtra.

This led to the formation of the assessee as a company under section 25 of the Companies Act, 1956. The Department of Company affairs granted the assessee a license under section 25 of the Companies Act on 12th June, 1970 and the certificate of incorporation was issued on 26th June, 1970.

6(A). The objects of the assessee are set out in Part III of its Memorandum of Association.

 (i)  The main object of the assessee as set out in clause A of Part III is as under :-

” III. A. THE MAIN OBJECTS OF THE CENTRE TO BE PURSUED BY THE CENTRE ON ITS INCORPORATION ARE :

1. 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)(l) 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.”

(ii)  Clause B of Part III of The Memorandum of Association also enumerates 28 incidental or ancillary objects. It is important to emphasise the very first clause which reads as under :-

“B. OBJECTS INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF MAIN OBJECTS:

To do generally all acts and undertake all activities which are conducive or incidental to the above-mentioned Main objects, and more particularly the following :”

The preface to the incidental or ancillary objects in clause 1 is followed by specific incidental or ancillary objects.

(B) It is also necessary to note some of the Articles in the Articles of Association of the assessee.

“1. Interpretation

In the interpretation of all these articles (that) the following words and expressions shall have the following meanings, unless repugnant to the subject or context: –

(iii) “the Council” shall mean the Council of Management of the Centre constituted in the manner prescribed in these Articles.

(xii) “Managing Committee” means the Committee appointed (by) the Council in the manner prescribed in these Articles.”

Article 18 provides for the Constitution of the Council of Management. The council comprises of 50 members elected from the members of the Centre and not more than 5 members co-opted by the elected members of the Council, presidents of certain chambers of commerce etc. nominees of the Government of Maharashtra, certain authorities/officers of the government etc. Article 19 reads as under :-

“19. The affairs of the Centre shall be managed by the Council who may exercise all such powers of the Centre and are not expressly directed by the constitution of the Centre or modification thereof for the time being in force or are not required by these articles to be exercised by the Centre in General Meeting.”

Article 30 which deals with various aspects relating to the Managing Committee constitution. It provides that The Council will delegate any or all of their powers to the Managing Committee and that the Managing Committee can constitute sub-committees for any specific purpose with such powers as it may delegate.

7. The Department of Revenue on 6th April 1970 notified the assessee as a Council of Scientific and Industrial Research for the purposes of section 35 (1) (ii) of the Act. The assessee had therefore been recognised as a scientific research institution by the CBDT from its inception. This recognition was however discontinued with effect from 31st March, 1981 in circumstances we will mention later.

8(A). By a resolution dated the 16th October, 1970 the Government of Maharashtra accorded sanction to lease an area of about 6 hectare and 96.49 ares of land to the assessee subject to the terms and conditions mentioned in an accompanying memorandum of terms and conditions. It is not necessary to set out the terms and conditions of this resolution as it was superseded by a resolution dated 18th November, 1974.

(B) However pursuant to this resolution the assessee was put in possession of the said land on 2nd May, 1972.

9. The Government of Maharashtra by a resolution dated 18th November, 1974 superseded the earlier resolution dated 16th October, 1970. By this resolution sanction was accorded to the grant of a lease to the assessee of the said land on the terms and conditions mentioned in Appendix “A” thereto, clauses 7 and 12 whereof read as under :-

“7 The lessees shall not assign underlet part with possession of the demise of land or transfer the lessees interest therein without the previous consent in writing of the Less or. The less or will be at liberty to refuse such consent granted subject to such condition including a condition requiring payment of premium as the Less or me in his discretion thinks it. The lessee will be at liberty to underlet any part or parts of the proposed buildings without such permission after the same are completed.

12 The land shall be used by the lessees only for electing or constructing their own buildings or structures to house or accommodate either for its own use or for letting out inter alia scientific research bodies, trade and/or industrial museums, research Centre and/or laboratories, libraries, bureaus, Shopping arcades exhibitions, a World Trade Center (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 cafeteria and/or restaurants but not a hotel.”

10. The assessee entered into agreements with various parties (referred to herein as lease agreements) on the terms and conditions contained therein. Our attention was invited to two samples of such lease agreements in respect of premises in Centre-1 and the Arcade. Most of the terms and conditions thereof are similar. We will refer to the relevant portions of the first sample extensively. Suffice it to note that whereas in the first sample, the rent for the premises has four components viz. primary basis rent, secondary basic rent, common outgoing rent and parking space rent in the second sample, the rent consists of three components viz. basic rent, common outgoing rent and parking space rent. We will refer to the relevant provisions of the lease agreements at the appropriate stages.

11. As stated earlier, the recognition granted on 6th April, 1970, under section 35(i)(ii) was withdrawn with effect from 31st March, 1981, in circumstances we will mention while answering Question 1.

12. On 8th February 1984 the Commissioner of Income Tax, Mumbai, issued a certificate in favour of the assessee under section 12A.

13. The assessee filed its return of income for the year 1989-90 showing a business loss of Rs. 9 14.42 lakhs.

14. The Assessing Officer held that the transaction between the assessee and the lessees was/constituted a sale of the premises and not a lease. He treated the difference between the “advance rent” received and the total cost of construction as income from the sale of the buildings under the head “profits and gains from business”; treated the sinking fund as taxable income and also treated the interest income from investments as the assessee’s income. He accordingly assessed the income under section 143 (3) at Rs. 10,71,18,176/-.

In the appeal before the Commissioner of Income Tax (Appeals) the assessee claimed exemption under section 11 on the ground that its activities constituted general public utility within the meaning of section 2 (15). The assessee challenged the finding that the transaction between itself and the lessees was a sale and not a lease. The CIT (Appeals) held the “advance rent” received by the assessee to be a premium and held it liable to tax as business income. Alternatively he held the “advance rent” as a capital receipt and the same was considered by him as short-term capital gain. The claim for exemption under section 11 was rejected.

By an order dated 29th March, 1996 the Tribunal held that the transactions between the assessee and the lessees were one of “sale of leasehold rights of use of space” and that the assessee retained only a right to charge monthly rent and transfer fees in respect of the right of space leased out. The Tribunal also rejected the claim for exemption under section 11 on the ground that the assessee had not obtained registration under section 12 A.

15. The above reference was made to this court in which the order dated 15th March, 2001 (MANU/MH//0504/01 = 251 ITR 852) was made remanding the matter on two questions. The court held that there was no concept in law of “sale of leasehold rights of use of space”. It was stated on behalf of the Department that it was unable to support such a proposition either. The court therefore remitted the matter to the Tribunal with a specific direction to reconsider this point in the light of the contentions of the parties in the assessment proceedings.

Secondly this court considered the issue of the certificate under section 12 A. As it would in any event be necessary for us to refer to the observations of the court in this regard in detail it would be convenient to set them out here.

They read as under :-

“The said certificate is on record. It has been issued by the competent authority. It states that the delay has been condoned. Under Section 12A of the Act, the certificate was required to be issued by the competent authority. In the present case the certificate has not been revoked. Further, in the present case, we do not know the basis on which the Tribunal has come to the conclusion that normally, a certificate granting recognition is issued for a specific period. In the case of New Life in Christ Evangelistic Association v. CIT MANU/TN/0568/1998 : [2000]246ITR532(Mad), the assessee made an application under Section 12A for registration. It was rejected. Being aggrieved by the rejection, the assessee filed a writ petition against the Commissioner of Income Tax directing it to register the assessee under Section 12A of the Act. The Madras High Court held that two conditions are provided for registration under Section 12A of the Act. Firstly, that the persons should have made an application for registration in the prescribed form and in the prescribed manner to the prescribed authority within the specified time and the second condition provides for the keeping of the accounts in a particular manner and further that such accounts were required to be audited. The court held that the section did not show that in order to get registration under Section 12A, there is necessity of first establishing as to how the assessee would be able to claim exemption under Section 11 or Section 12. That there is nothing in the section to suggest that an institution of a religious nature is precluded from getting registration under Section 12A. That, the question of exemptions under Section 11 and Section 12 would come only when the exemptions are claimed at the time when the assessee is assessed to tax. That at the stage of registration to consider whether the said assessee would be entitled to the benefits under Section 11 and Section 12 would be prejudging the issue before the grant of certificate. That, at the stage of grant of certificate under Section 12A the only enquiry which could be made would be whether the society has actually made an application in time and whether the accounts of the society are maintained in the manner as suggested by Section 12A and beyond that the scope of the enquiry would not go. That, the only purpose for which the registration was required was for establishing its identity as an institution for being able to claim the benefits under Section 11 and Section 12. Therefore, at the stage of enquiry under Section 12A, the Commissioner would not insist upon the assessee to show that its income was not going to be spent for the earmarked purpose. We agree with the ratio of the said judgment. In the present matter, as stated above, the assessee applied for registration on October 1, 1982. As stated above, the certificate was issued on February 8, 1984, after condoning the delay. That certificate has not been revoked. As stated above, the Department accepted the tax returns filed by the assessee and made the assessments thereafter under Section 143 read with Section 11 up to the assessment year 1988-89, although exemption under Section 35(1)(ii) was withdrawn on March 31, 1981. In the circumstances, it cannot be said that the certificate has not been issued in this case. However, as stated in the above judgment of the Madras High Court, issuance of the certificate does not prevent an Assessing Officer from considering whether in a given assessment year the assessee was entitled to claim benefits under Sections 11 and 12 or, as the case may be, under Section 80G of the Income Tax Act. In the present matter, this aspect has not been gone into by the Tribunal. In the circumstances, we remand the matter back to the Tribunal on this second point also, viz., whether the assessee has applied its income for earmarked purposes and whether the assessee was entitled to claim benefits under the aforestated sections during the assessment years 1989-90 and 1990-91. In the present matter, there are numerous other points on which the Tribunal has given its findings. We do not wish to disturb those findings at this stage.

6. In the case of Fifth Generation Education Society v. CIT MANU/UP/0244/ 1990 : [1990]185ITR634(All) , the Division Bench of the Allahabad High Court took the view that Section 11 provides for exemption of income which is applied for charitable purposes. That, Section 12 is in the nature of an Explanation to Section 11. That, before a person can claim the benefit of Section 11 or Section 12, he must obtain registration under Section 12A. That, the authority to decide grant of certificate is vested in the Commissioner. That, it is the Commissioner who has to examine whether the application is made in accordance with Section 12A. That, it is for the Commissioner to see whether the objects of the trust are charitable or not. That, at that stage, the Commissioner is not required to examine the application of income. Hence, in the present matter, the Tribunal was certainly entitled to ascertain whether there was a proper application of income for charitable purposes during the assessment years 1989-90 and 1990-91.

7. To sum up, we are of the view that the Tribunal should have considered the miscellaneous application filed by the assessee in the context of the contention raised by the assessee that there is no legal concept propounded by the Tribunal, viz., sale of leasehold rights of the use of space. We are also of the view that, in the present case, the Commissioner did grant registration under Section 12A of the Act. However, such registration will not prevent the Tribunal from ascertaining whether there was proper application of income during the assessment years 1989-90 and 1990-91 and whether the assessee was entitled to avail of the benefit under Sections 11, 12 and 12A of the Income Tax Act. We are keeping the contentions on both sides open on the above points. Writ Petition No. 2490 of 2000 disposed of accordingly with no order as to costs.

8. We are not disposing of the present reference. We are remitting the matter to the Tribunal for its decision only on the above two points. We will consider the reference after we receive the findings from the Tribunal on the above two points. Therefore, the reference is kept pending on the file of this court. The said reference is adjourned to December 3, 2001.”

16. The Tribunal accordingly heard the matter afresh on the two points indicated by this court and filed a Remand Report dated 29th November, 2001.

17. The matter was thereafter placed before this court. We have already referred to the order dated 21st March 2003 by which the Division Bench reframed Questions 1 and 6. In paragraph 5 the Division Bench noted that the controversy whether original questions 2 to 5 need to be deleted in view of the order of this court dated 15th March, 2001 and the reframing and recasting of question Nos. 1 and 6 would be decided at the time of the hearing of the reference. As we indicated earlier Mr. Andhyrujina did not press questions 2 to 5 in any event. We therefore proceed to answer the remaining questions.

Re- Question 1:-

18. As noted in the order of the CIT (Appeals) the assessee first constructed a building called The Trade Centre which included a shopping mall and a conference hall. In 1979-80 the assessee constructed a 32 story building called Commerce Centre or Centre 1. Thereafter the assessee constructed another multistory building called IDBI Centre. At the material time the assessee had planned several other constructions including a building to house a five-star hotel, a modern business executive centre with infrastructure for sophisticated accommodation-cum-facilities on a day-to-day basis. During the assessment year 1989-90 the assessee completed construction of Commerce Centre and handed over possession of the premises therein to the various lessees. It received a sum of Rs. 45,99,84,721/- as primary basic rent and accounted for the year l/60th of the primary basic rent as rent for the period 1st October, 1988 to 31st March, 1989 and offered for taxation under the head profits and gains of business or profession and claimed deduction by way of depreciation of the building. It was noted that what was offered for tax was the gross rent of Rs. 38,33,206/- under the head business, the amount having been arrived at as a l/60th portion of the primary basic rent plus secondary rent etc. and after accounting for the various expenses as per the profit and loss account. A net profit before depreciation was shown at Rs. 3,40,592/- on which depreciation of Rs. 11,14,37,637/- had been claimed. The AO disallowed the depreciation for the reason that the entire cost of building had been adjusted against the receipt of basic primary rent.

19. It is necessary first to analyze section 11(1)(a) under which the assessee claimed an exemption.

Sections 2(15), 11(1)(a), 12, 12A, 13(1)(i)(ii) and 13(3) read as under :-

“2(15) “charitable purpose” includes relief of the poor, eduction, medical relief, and the advancement of any other object of general public utility

…………………………

Section 11(1)(a):

Income from property held for charitable or religious purposes –

(1) Subject to the provisions of Sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income –

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property

Section 11(4A):

Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income, being profits and gains of business, unless –

 (a)  the business is carried on by a trust wholly for public religious purposes and the business consists or printing and publication of books or publication of books or is of a kind notified by the Central Government in this behalf in the Official Gazette ;

 (b)  the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution and separate books of account are maintained by the trust or institution in respect of such business.

Section 12 :

Income of trusts or institutions from contributions, – Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.

Section 12 A:

Conditions as to registration of trust, etc. – The provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely –

 (a)  the person in receipt of the income has made an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Chief commissioner or Commissioner before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution, whichever is later :

Provided that the Chief Commissioner or Commissioner may, in his discretion, admit an application for the registration of any trust or institution after the expiry of the period aforesaid ;

 (b)  where the total income of the trust or institution as computed under this Act without giving effect to the provisions of section 11 and section 12 exceeds twenty-five thousand rupee in any previous year, the accounts of the trust institution for that year have been audited by an accountant as defined in the explanation below sub-section (20) of section 288 and the person in receipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting for such particulars as may be prescribed.

Section 13(1)(c)(ii):

Section 11 not to apply in certain cases – (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof –

 (c)  in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof –

 (i)  if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution any part of such income enures, or

(ii)  if any part of such income or any property of the trust or institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit or any person referred to in sub-section (3).

Section 13(3) :

The persons referred to in clause (c) of subsection (1) and sub-section (2) are the following, namely –

 (a)  the author of the trust or the founder of the institution ;

(cc)  any trustee of the trust or manager (by whatever name called) of the institution ;

 (d)  any relative of any such author, founder, person, member, trustee or manager as aforesaid ;

 (e)  any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest.”

20. The suggestion that nothing remains to be considered about the assessee’s activities as a charitable institution in view of the judgment of this Court in this reference remanding the matter to the Tribunal on the said two issues is not well founded. All that the judgment holds is that the provisions of section 12A were complied with and the registration thereof is valid and subsisting. The issue of compliance with section 12A was, in view of the judgment, not open to question before the Tribunal and is not open to question before us. That however, does not preclude this Court from considering all the other questions relevant for the purpose of answering the reference.

21. Compliance with the provisions of section 12A is not the only requirement for the applicability of section 11. It is only one of the requirements. Section 12A merely provides that the provisions of sections 11 and 12 would not apply in relation to the income of any trust or institution unless the person in receipt of the income has made an application for registration of the trust or institution in the prescribed form and manner to the relevant authority and within the time stipulated therein or any extension thereof as may be granted. There are other conditions in section 12A with which we are not concerned in this reference. Compliance with Section 12A does not entitle an assessee to the benefit of section 11, ipso facto. Non compliance with Section 12A bars an assessee from being granted the benefit of Sections 11 and 12. The compliance with the provisions of section 12A only indicates that the assessee is a trust or institution entitled to claim the benefit of sections 11 and 12. That however, is not the end of the matter. It would be entitled to be granted the benefit only if it complies with the other requirements of these sections. An assessee that has complied with the provisions of section 12A must also establish that the conditions of Sections 11 and 12 are satisfied before it is entitled to the exemption under sections 11 and 12.

22. A view to the contrary would lead to the most unusual consequences. A view to the contrary would mean the assessee can by merely complying with the provisions of section 12A claim an exemption under sections 11 and 12 even though the ingredients thereof are not satisfied. The fallacy of such a contention is obvious from the fact that an assessee may well acquire the properties even after it complies with section 12A. Such properties may not be held under trust wholly for charitable purposes. A view to the contrary would entitle the assessee to the benefit of sections 11 and 12 despite the same.

23. The question then is whether the assessee has satisfied the conditions stipulated in Section 11. Firstly, the exemption under section 11(1)(a) is in respect of the income derived from property held under trust wholly for charitable or religious purposes. Secondly the exemption is available only to the extent to which such income is applied to such purposes in India. Thirdly, where such income is accumulated or set apart for the application to such purposes in India, the exemption is applicable to the extent to which the income so accumulated or set apart is not in excess of 25% of the income from such property. The conditions are cumulative.

24. It is not the assessee’s case that it held the property for religious purposes. It is the assessee’s case that it held the property under the trust wholly for charitable purposes.

25. For section 11(1)(a) to apply, the assessee must therefore firstly hold the property under trust for a charitable or religious purposes. In other words, the exemption does not apply merely because the assessee is a trust. The property must be held under trust and such holding of the property under trust must be wholly for charitable or religious purposes. Thus even assuming that the assessee held the property under trust, it would not be entitled to exemption if such holding under trust was not wholly for charitable or religious purposes. The question then is whether the assessee held the property under trust wholly for charitable purposes. We think not.

26. The assessee never engaged itself in any activity related to the professed charitable purposes. The assessee neither derived the income from the property held under trust for the alleged charitable purposes nor applied the income therefrom to such purposes. There is nothing on record which even remotely suggests that the said property i.e. the assessee’s right, title or interest in the said land and the construction put up by it thereon was held under trust wholly for charitable or religious purposes.

27. As we noted earlier, the assessee claims to have been engaged in activities relating to the advancement of objects of general public utility, which fall within the definition of the words “charitable purposes” in Section 2(15). The activities of general public utility the assessee claims to have been engaged in relation to “scientific research in any way or by any means whatsoever and in any area or field” as stated in the main objects set out earlier. We find this claim to be unfounded as we will now demonstrate.

28. As we mentioned earlier on 6.4.1970, the Department of Revenue notified the assessee as a Council of Scientific and Industrial Research for the purposes of section 35(1)(ii) of the Act. Section 35(1)(ii) reads as under :-

“35. Exemption on scientific research

(1) In respect of expenditure on scientific research, the following deductions shall be allowed :-

…………………..

(ii) an amount equal to one and three fourth times of any sum paid to a research association which has as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research;

Provided that such association, university or college or other institution for the purposes of this clause –

(A) is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be prescribed; and

(B) such association, university, college or other institution is specified as such, by notification in the Official Gazette, by the Central Government;”

However, in 1977, the Department of Science and Technology, the appropriate authority to monitor all the scientific research activities and to grant recognition to institutions as scientific research institutions, informed the assessee that before granting the extension of the said recognition, it would review the same. The recognition was extended till 31.3.1981. A three member team from the Department of Science and Technology thereafter assessed the assessee’s activities. They advised the assessee that its World Trade Centre Activities must be kept separate from its research activity by forming another organization to carry on the WTC activities, failing which the recognition would not be continued further. It also advised the assessee to carry out the research activities with laboratory facilities and academic research staff. As the assessee did not comply with these requirements, its recognition under section 35(1)(ii) was not continued with effect from 31.3.1981. It is only thereafter in February 1984 that the assessee made the application under section 12A.

29. This is the first indication that the assessee at least during the relevant assessment years viz. 1989-1990 and 1990- 1991 was not involved in the field of scientific research. The refusal to extend the recognition under section 35(1)(ii) was not challenged and attained finality. If indeed the assessee was involved in the field of scientific research at that time or at any time thereafter, it would have either challenged the decision or made a fresh application for recognition under section 35(1)(ii). It admittedly did not do so. The facts referred to in the order of the AO, CIT(A) and the Tribunal indicate that the assessee did not do so for it never carried out any scientific research and never intended carrying out scientific research.

30. There is not an iota of evidence to indicate that the assessee at any point of time since inception even had an intention of carrying out scientific research. The Department obviously cannot be required to prove the negative. It has however, we think, done so. It was for the assessee to establish the positive viz. that it had involved itself in the field of scientific research. Mr. Andhyarujina was unable to indicate any material to establish the same. On the contrary, the Department has discharged an onus not cast upon it by proving the negative.

31. For instance, the Department sought and received from the assessee particulars of the expenditure incurred by the assessee towards scientific research. The information was tabulated in the assessment order of the CIT(A), which reads as under :-

TABLE

Assessment Year (Row 1)	Expenditure on Research & Development (Row 2)	Income (Row 3)	Row (2) as % of Row (3) (Row 4)
71-72	Nil	962	Nil
72-73	Nil	1,925	Nil
73-74	Nil	6,520	Nil
74-75	Nil	6,922	Nil
75-76	Nil	96,676	Nil
76-77	Nil	32,651	Nil
77-78	Nil	43,288	Nil
78-79	27,111	28,92,672	0.93
79-80	28,730	8,63,991	3.32
80-81	1,47,975	64,37,766	2.30
81-82	1,11,405	72,55,650	1.53
82-83	1,36,291	72,56,995	1.88
83-84	1,02,736	83,43,320	1.23
84-85	1,60,768	1,02,29,302	1.57
85-86	2,31,256	1,02,02,949	2.27
86-87	1,79,516	1,14,13,489	1.57
87-88	2,31,719	1,60,67,010	1.44
88-89	3,19,183	1,56,54,332	2.04
89-90	5,49,232	4,65,97,060	1.17
90-91	6,14,579	6,26,00,517	0.98
91-92	5,29,492	8,75,63,550	0.60
92-93	3,22,031	9,43,83,443	0.34

32. The details furnished in the table speak for themselves – hardly any expenditure worth mentioning was incurred on research and development. The nature of the expenditure is discussed in paragraph 14 of the assessment order. These are findings of fact which have been confirmed by the Appellate Authority and in any event not set aside by them. Considering the facts of the case, it is impossible to term them perverse. The AO found that there was not even a modicum of activity in the form of scientific research. We find an absence of even an intention to by the assessee to undertake scientific research.

The assessee’s annual report for the year ending 31st December, 1977 reported that the Department of Science and Technology was contemplating a denial of exemption under section 35. The AO held that propelled by this threat, the assessee in the latter part of 1977 established a nuclear research department and initiated steps to undertake the publication of a quarterly review titled “World Trade Review”. Thereafter there was only a facade of being a scientific research institution by making claims in the annual report of scientific research activity. The AO, upon a detailed analysis of the facts, justifiably held that there was no scientific research activity. In respect of each of the claims regarding scientific research, he has in considerable detail, negated the same. The figures mentioned in the table negate any argument that the findings are perverse.

33. The assessee’s reliance upon section 2(15) is of no assistance to it. We proceed on the basis that activities involving scientific research are of general public utility and fall within the ambit of words charitable purposes in section 2(15). The only object of general public utility that can be claimed by the assessee is on account of its main object in the Memorandum of Association which we have set out earlier. The assessee never engaged itself in any activity connected to the main object viz. to organize, sponsor, promote, establish, conduct or undertake the scientific research in any way or by any means whatsoever and in any area or field. Mr. Andhyarujina fairly stated that the lease transactions were the only business of the assessee. The income therefore, was entirely from the assessee’s business unrelated to any charitable purposes whatsoever.

34. An assessee that engages itself only or predominantly in activities relating to its ancillary or incidental objects which do not relate to any charitable purpose and does not carry on any activity relating to its main object which pertains to a charitable purpose is not entitled to an exemption under Section 11. A view to the contrary would lead to the most startling results. An assessee could, by the simple devise of framing its main object to indicate a charitable purpose within the meaning of section 2(15), avail the benefit of sections 11 and 12 without engaging itself in any business relating to such charitable purpose by contending that the ancillary or incidental objects permit such activities although they, by themselves, are wholly unrelated to the charitable purpose. For instance, an assessee could frame any objects which would fall within the ambit of the words ‘charitable purpose’ in section 2(15) and include in the objects clause, several other objects such as construction activities, trading activities, manufacturing activities and processing activities. These ancillary activities could, in a given case, have a nexus with and be relatable and connected to the activities concerning the charitable purpose. If Mr. Andhyarujina’s submission is well founded, it would mean that the assessee could then involve itself only in the incidental or ancillary activities which by themselves do not fall within the ambit of section 2(15) without engaging itself in any activities relating to charitable purpose. The plain language of sections 11, 12, 12A does not even contemplate such a situation. It is impossible to believe that the Legislature could have intended such activities to be liable for exemption under sections 11 and 12.

35. Whether under the Companies Act, an assessee is entitled to carry on business in respect of the incidental and ancillary objects is a different matter altogether and cannot govern the scope or operation of section 11 of the Income Tax Act. That an assessee is entitled to carry on business in respect of the incidental and ancillary activities mentioned in its Articles of Association does not by itself entitle it to claim an exemption under section 11 even though the provisions thereof are not satisfied.

36. The assessee’s claim for exemption under section 11(1)(a) fails the first test viz. in establishing that its income was derived from the property held under trust wholly for the alleged charitable purposes. The property was not held by it under trust wholly for the alleged charitable purposes. It was in fact entirely for the objects other than the professed charitable purposes. It follows therefore, that the income derived from the property cannot be held to be from the property held under trust wholly for the stated or any other charitable purposes.

37. The assessee’s claim for exemption under section 11 also fails the second test under section 11(1)(a). It has not been able to establish that such income was applied to such purposes viz. charitable or religious purposes. Thus even assuming that the income was derived from the property held under trust wholly for the charitable purposes, the assessee has not established that such income was in fact applied to the charitable purposes.

38. The above facts and in particular the details mentioned in the table, set out above, establish that the assessee’s income was not applied to the charitable purposes. In the first eight years, the expenditure towards research and development was nil. We will presume that, that was on account of the income being minimal ranging from Rs. 962/- to Rs. 43,288/-. However, thereafter and till 1992-1993, the income increased enormously ranging from over Rs. 8,63,991/- to over crores of rupees in various years, the maximum being Rs. 9,43,83,443/-. The expenditure on the alleged research and development activities during these years ranged from as little as 0.34% to only 3.32%. In fact, during the period of twenty one years from 1971-1972 to 1992-1993, the average expenditure on research and development was only a little over 1% of the assessee’s income. The AO was, therefore, justified in coming to the conclusion that the alleged activities were merely a facade in view of the proposed action of the Department of Science and Technology.

39. Faced with this, Mr. Andhyarujina submitted that an assessee is entitled to the benefit of Section 11 even if it does not apply its income for charitable or religious purposes so long as it applies the same towards purposes ancillary or incidental thereto. The submission in connection with this rather broad proposition are these. The expenditure was in any event applied towards the incidental or ancillary objects. Relying upon a table detailing the purposes for which the expenditure was incurred, he submitted that the expenses were only in respect of the objects of the assessee albeit the incidental or ancillary objects stated in clauses 1, 2, 4, 5, 9, 13, 15, 19, 20, 24, 25, 28, and 67 of the Articles of Association. The expenses related for instance to the payment of professional fees, salaries, contribution to the provident fund, staff farewell expenses, lease rent, taxation, insurance, electricity charges, contractual services, expenses relating to the building including repairs and maintenance, telephone, advertisement, travelling, conveyance expenses and legal and professional charges. Amounts are also shown towards the research and development division expenses, which are really minimal for the two assessment years. The Department has not disputed the fact that the expenditure was incurred. Nor has the Department disputed the quantum of the expenditure.

He submitted that as the assessee has no other business, the question is only whether the income was applied to the objects of the assessee irrespective of whether it was the main object or the ancillary or incidental objects. He submitted that the term “applied” in section 11(1)(a) implies utilization of income on the activities of the assessee for furtherance of its objects and includes the income irrespective of whether it is revenue or capital nature. It is for this reason that instead of using the term expenditure, section 11(1)(a) uses the term “applies”.

Mr. Andhyarujina relied upon various judgments in respect of the proposition that the expenses incurred for running a trust should be treated as applied for the objects of a trust. Such expenses would include the expenses for repayment of a loan taken for construction of the buildings owned by the trust and depreciation on capital assets. It is sufficient only to mention the judgments. CIT v. Birla Janahit Trust [1994] 208 ITR 372 (Cal.), CIT v. Trustees of Ht. Nizam [1981] 127 ITR 378 (AP), Director IT (Exporters) v. Govinda Naikar [2009] 315 ITR 237 (Mad.), CIT v. Ganga Charity Trust [1986] 162 ITR 612 (Guj.), CIT Exemption v. Span Foundation [2008] 178 Taxman 436 (Delhi) and CIT v. Market Committee, Pipli [2011] 330 ITR 16 (P & H).

40. In the facts of this case, even assuming that the expenses were incurred towards the incidental or ancillary objects, as alleged by the assessee, it would not be entitled to an exemption under section 11.

We are unable to accept Mr. Andhyarujina’s submission that once it is found that the expenses were incurred towards the objects of the assessee, albeit only towards the incidental or ancillary objects, the provisions of section 11 would ipso facto apply. The submission stated in such broad and absolute terms is ill founded and would lead to the most startling results.

41. The income of an assessee derived from a property held under trust wholly for charitable or religious purposes would qualify for exemption under Section 11 even if it is applied to the incidental and ancillary objects provided there is a nexus between such incidental and ancillary objects and the charitable purposes. Further such incidental or ancillary purposes must be precisely that – incidental or ancillary purposes. They cannot be the main or dominant purposes unconnected with or unrelated to the charitable purpose. They must be in aid of, pursuant to, in furtherance of and towards achieving the charitable purpose.

42. Thus, if in the present case, the assessee’s activities were in conformity with its main object, it would necessarily have to incur expenditure in respect of its incidental and ancillary objects. For instance to support research and scientific activities, the assessee would necessarily have to incur expenditure on infrastructure, labour, professional services etc. If however, the main objects are abandoned, it can hardly be said that the expenditure towards the incidental objects was towards a charitable purpose.

43. In the assessee’s case, it’s incidental or ancillary objects on their own, they do not constitute charitable purposes. Indeed it was rightly not even suggested by the assessee that the ancillary objects by themselves constituted charitable purposes. The title to Part-III B of the Articles of Association of the assessee significantly is : “OBJECTS INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF MAIN OBJECTS” (emphasis supplied). Further the first clause entitles the assessee to do generally all acts and to undertake all activities which are incidental to the main objects. The assessee, however, never engaged itself in any activity relating to its main or dominant object which could be said to be for a charitable purpose. The question, therefore, of its incidental or ancillary objects even having a nexus to the main object does not arise. The assessee has failed to establish that it applied its income towards the charitable purpose.

44. The assessee’s case, therefore, does not satisfy either the first or the second requirement of section 11(1)(a).

45. The assessee’s claim for exemption under section 11 is also not sustainable in view of clause (b) of sub-section (4A) thereof set out earlier. Clause (b) of section 11(4A) applies to the assessee, as it is an institution.

46. We have already held that the business carried on by the assessee was not wholly for the charitable purposes. On this ground itself, the assessee’s claim is barred by section 11(4A), which at the outset provides that sub-sections 1, 2, 3 and 3A shall not apply in relation to any income being profits and gains of business unless inter-alia the business is carried on by the institution wholly for the charitable purposes. Indeed if we are right in the conclusion that the business carried on by the assessee was not for charitable purposes, there could be no question of there being any beneficiaries.

47. Apart from that, the expression “work in connection with the business” relates not to any business but only to the business carried on by the institution wholly for charitable purposes and work incidental thereto or in connection therewith. This is clear as the words used are “the work in connection with the business” and not “work in connection with the business of the assessee”. If we are right in our conclusion that the business carried on by the assessee was not wholly for the charitable purposes, there would be no question of the assessee’s work being in connection with the business i.e. the business wholly for the charitable purposes.

48. The assessee’s claim is also not maintainable as it has not been established that the work in connection with the assessee’s business is mainly carried on by the beneficiaries of the institution. Even assuming that the assessee carried on any activity for “charitable purposes” it has not established that business in connection therewith was carried on by the beneficiaries – whoever they may be. The lease transactions are factually the only business carried on by the assessee. Mr. Andhyarujina understandably had considerable difficulty in establishing that this business was carried on by the beneficiaries of the institution – the assessee. He was unable effectively to indicate who the beneficiaries of the institution were.

49. It was mildly suggested that the assessee’s members were its beneficiaries and that it is these beneficiaries who mainly carried on the work in connection with the assessee’s business through the Council and/or the Managing Committee.

50. This argument does not appear to have been advanced before the AO, the CIT(Appeals) or the Tribunal. The record does not indicate that the members, assuming they can be said to be the beneficiaries, carried on the work connected with assessee’s business. Article 18 of the Articles of Association of the assessee which prescribes the composition of the Council, does not comprise of only of the assessee’s members. It does not even suggest that the work of the Council is mainly carried out by the members of the Council. These are questions of fact. In absence of such facts, the question cannot be decided on the basis of this argument for which the factual basis is not established.

51. The assessee claims the exemption. It is therefore, for the assessee to establish clearly who the beneficiaries of the institution are and how such beneficiaries carried on “the business” i.e. the business carried on wholly for the charitable purposes.

52. The assessee has thus been unable to establish any of the ingredients of section 11(4A).

53. Further even assuming that the assessee did undertake the scientific research, it would make no difference for it admittedly did not maintain separate books of account as required by section 11(4A) in respect of such business.

54. In this view of the matter, it is not necessary to consider Mr. Daniel’s submissions under section 13. What we have held earlier itself is sufficient to answer Question No.1 in favour of the revenue and against the assessee.

55. Question No.1 is therefore, answered in the negative, in favour of the revenue and against the assessee.

Re : Question No.6 :-

Whether on the facts and or the circumstances of the case, the applicant was right that only 1/60th of the advance can be assessed as its income for the year as the tribunal had rightly held it as transaction of lease and not of sale ?

56. As stated earlier, one of the questions on which the Division Bench had remanded the matter to the Tribunal pertains to the nature of the transactions. The Tribunal on a reconsideration held the agreements between the assessee and the occupiers to be transactions of lease. The Tribunal held that there are no special modes of assessment prescribed based on whether the transaction is a sale or lease; that Chapter-IV of the Act which relates to the computation of total income does not draw any distinction as such between a sale and a lease and the classification therein is under the heads of income ; that in law, there is no fixed head of income under which the price received on sale of the property should be brought in computation of the total income and that there is no fixed head of income for computation or consideration received on a lease of the property either. The Tribunal held that in this view of the matter, the question is not as to whether the transaction is of sale or a lease, but as to under what heads of income, the income received by the assessee should be assessed and further as to in what manner such income should be computed.

57. The AO held that the premium received by the assessee constituted a capital receipt on transfer of the capital assets; that the transaction between the assessee and the lessees was of lease which constituted a transfer of a right to enjoy the property. In view of section 2(47), the AO held that the same resulted in the transfer of capital assets within the meaning of section 45 and the profits and gains from such transfers were assessable as capital gains. He held that the capital asset was acquired by the assessee on 1.10.1988 and was transferred on 1.10.1988 and therefore, the same resulted in short term gains. The Tribunal noted that the AO had in respect of assessment year 1990-1991 held that the alleged “advance rent” received by the assessee was a premium or salami. The AO rightly placed considerable importance on a report of the Council of Management of the assessee for the year ending 1971. We will refer to the same shortly.

58. The CIT (A) construed the lease agreements. He also held that the amounts received by the assessee as “advance rent” constituted a premium or salami; that the payment of the primary basic rent was a condition precedent for the lessees to be let into possession of the premises and that the lease agreements were executed only upon the payment of the primary rent. He too placed considerable reliance upon the 1971 report of the Council of Management and that it was only in 1973 that the nomenclature was changed on legal advice. In support of these conclusions, the CIT(A) referred to a transaction between the assessee and Khatau Makhanji Spinning and Weaving Mills Limited (hereinafter referred to as “Khatau Mills”). Khatau Mills was allotted a flat admeasuring 8296 sq. ft. on 1.10.1988 for the primary basic rent of Rs. 45,62,937/- calculated at the rate of Rs. 550/- per sq. ft. On 28.10.1988, i.e. within less than a month. Khatau Mills obtained the assessee’s permission to sell the leasehold rights to Great Eastern Shipping Company for a sum of Rs. 2,73,77,625/- subject to its paying a sum of Rs. 14,10,362/- calculated at the rate of Rs. 170/- per sq. ft. to the assessee which it did. No part of the primary basic rent was refunded to Khatau Mills. On the contrary, Khatau Mills paid the centre a premium of Rs. 170/- per sq. ft. in consideration of the assessee’s permission to it to transfer the leasehold rights to Great Eastern Shipping Company. Thus within less than a month, Khatau Mills made a profit of more than Rs. 2.00 crores. The CIT (A) noted that there are several such instances which established that the primary basic rent received by the assessee was not “advance rent” but premium or salami. Therefore, in respect of the assessment year 1990-1991, the CIT (A) came to the conclusion that the transactions were a lease but that the primary basic rent received by the assessee in advance was premium and not “advance rent”. He however, did not decide the question as to whether the premium should be brought to tax as capital receipt or revenue receipt.

In respect of the assessment year 1989-1990, the CIT (A) came to the conclusion that the premium received by the assessee was in the nature of a business receipt. It is found that even during this assessment year, about 60% of the original members/lessees earned enormous amounts by transferring the leasehold rights on payment of a comparatively negligible premium to the assessee. Even if in respect of the assessment year 1989-1990, the CIT (A) held that the primary basic rent was in the nature of the premium/salami charged by the assessee for letting the lessees into possession of the leased premises and that the the premium so charge was in substance a receipt and not a deposit. He agreed that the agreements did not constitute a sale of the premises. The aforesaid activities of the assessee were held to be a part of its business activity.

59. We have already referred to the order of the Tribunal in respect whereof this reference was made and to the order of this Court remanding the matter to the Tribunal on the said two issues.

60. The remand order passed by this Court noted that there did not appear to be a dispute on the point that the correct head of income is “profits and gains of business or profession”. It noted that the assessee had itself filed the returns of income on that basis. The Tribunal’s remand report also analyzes the facts relating to the assessee’s activities and comes to the conclusion that the entire activity of leasing of space in Centre 1 was conducted as a highly organized business activity. It was observed that the major area of dispute was whether the entire primary basic rent is chargeable to tax as premium received by the assessees in the year of receipt itself or whether the plea of the assessee to treat the same as rent chargeable to tax over a period of sixty years should be accepted.

61. Section 105 of Transfer of Property Act reads as under:-

“105. Lease defined.—A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.

Lessor, lessee, premium and rent defined.—The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.”

62. It would be convenient at this stage to refer to the judgment of the Supreme Court in Commr. of Inc. Tax v. Panbari Tea. Co. Ltd. [1965] 3 SCR 811 = [1965] 56 ITR 30 relied upon by Mr. Daniel. In that case, by a registered lease deed dated 31.3.1950, the respondent – assessee leased two Tea Estates along with machinery and the buildings owned and held by it to a firm named M/s. Hiralal Ramdas for ten years from 1.1.1950. A sum of Rs. 2,25,000/- was paid as a premium and an annual rent of Rs. 54,000/- was to be paid by the lessee to the lessor. Out of the premium of Rs. 2,25,000/-, Rs. 45,000/-was paid in one lump sum at the time of execution of the lease deed and the balance of Rs. 1,80,000/- was payable in sixteen half yearly installments of Rs. 11,250/- each. The annual rent of Rs. 54,000/- was payable in installments of Rs. 1000/- per month and Rs. 42,000/- was paid on or before 31st December of each year. For the assessment year 1952-1953, the ITO made the assessment treating the installments of Rs. 11,250/- towards the premium as a revenue receipt. The Appellate Assistant Commissioner confirmed the order. The Tribunal held that the premium was really a rent payable under the lease deed and it was therefore, chargeable to income tax. The Tribunal referred the following question to the High Court :-

“Whether on the facts and in the circumstances of the case and upon the construction of the terms of the lease, dated 31st March, 1950, the sum of Rs. 11,250/-received by the assessee during the year of account is revenue or capital receipt ?”

The High Court held it to be a capital receipt. The Supreme Court upheld the judgment. The Supreme Court observed that the question was whether the amount described as premium is really the rent and therefore a revenue receipt. The Supreme Court discussed the concept of premium as under:-

“Before we look at the lease deed it will be convenient to notice briefly the law pertaining to the concept of premium, which is also described as salami.

3. The distinction between premium and rent was brought out by the Judicial Committee in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT thus:

“It (salami) is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease. That general right may properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account. But the royalties are on a different footing.”

It is true that in that case the leases were granted for 999 years; but, though it was one of the circumstances, it was not a decisive factor in the Judicial Committee coming to the conclusion that the salami paid under the leases was a capital asset. This Court in Member for the Board of Agriculture Income tax, Assam v. Sindhurani Chaudhurani defined “salami” as follows:

“The indicia of salami are (1) its single non-recurring character, and (2) payment prior to the creation of the tenancy. It is the consideration paid by the tenant for being let into possession and can be neither rent nor revenue but is a capital receipt in the hands of the landlord.”

It is true that in that case the payment was paid in a single lump sum, but that was not a conclusive test, for salami can be paid in a single payment or by instalments. The real test is whether the said amount paid in a lump sum or in instalments is the consideration paid by the tenant for being let into possession. This Court again in Chintamani Saran Nath Sah Deo v. CIT considered all the relevant decisions on the subject in the context of licences granted to the assesses to prospect for bauxite in some cases for 6 months and in others for year or two and observed:

“The definition of salami was a general one, in that it was a consideration paid by a tenant for being let into possession for the purpose of creating a new tenancy.”

Applying that test this Court held in that case that under the said licences there was a grant of a right to a portion of the capital of the licensor in the shape of a general right to the capital asset.

4. In view of these three decisions it is not necessary to multiply citations.

5. Under Section 105 of the Transfer of Property Act, a lease of immovable property is a transfer of a right to enjoy the property made for a price paid time, express or implied or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transfer by the transferee, who accepts the transfer on such terms. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent. The section, therefore, brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact for advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties.”

63. It is necessary therefore, now to analyze the terms of the lease deed to ascertain whether the “advance rent” was actually a premium/salami or whether it was in fact rent paid in advance.

64. There are two sets of agreements. The terms and conditions in both the sets are substantially the same as far as the question under consideration is concerned. The main difference is that in one set of agreements, the rent is divided into three components viz. basic rent, common outgoing rent and parking space rent. The agreement from which we will quote the relevant clauses had four components viz. primary basic rent, secondary basic rent, common outgoing rent and parking space rent. In the agreements, where the rent was divided into three components, the basis rent and parking space rent were to be paid in advance before execution of the lease in installments similar to those under the first set of agreements. Thus under both the agreements, substantial “rent” was payable in advance.

65. Recitals 1 and 8 and clauses 1, 2, 7 and 16 of the operative part of the lease agreements are relevant in this regard and read as under :-

“WHEREAS:

(1) The Centre, with a view to achieving its object which is to organise, sponsor, promote, establish conduct or undertake scientific research in any way or by any means whatsoever and in any area or field and for prosecuting scientific research to establish, inter-alia, a World Trade Centre, in Bombay, hereinafter referred to as the World Trade Centre, approached the Government of Maharashtra for a plot of land.

(8) The lessees are a member of the Centre and have applied to the Centre for grant to them of a lease of office premises for their business on the ________ floor in the Centre I building proposed to be constructed by the Centre on the said land which the Centre has agreed to grant on the terms and conditions hereinafter contained.

NOW IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS :

(1) The Centre hereby agrees to grant and the Lessees hereby agree to accept Lease of the office premises admeasuring ________ sq. ft. built-up equivalent to ________ sq. metres built up or thereabouts, on the ________ floor of the Centre I (hereinafter referred to as “the said premises”) and ________ uncovered parking space/spaces in the open spaces of the Centre I for a term of 60 (sixty) years commencing from the date on which the said premises are ready for occupation.

Whereas an entire floor is leased to one lessee built-up area will mean full area of the floor including walls ( inside and outside), columns, lift lobby, air handling unit room, toilets, pantries, staircases, shifts and service shafts. Where a part of the floor is leased to the lessee, the built-up area will include proportionate area of the floor, including walls (inside and outside), columns, lift lobby, air handling unit room, common passage, toilets, pantries, staircases, lift shafts and service shafts.

(2) The Rent of the said premises shall consist of:

(a)  Primary basic rent

(b)  Secondary basic rent

(c)  Common outgoings rent and

(d)  parking space rent

all of which when collectively referred to, will be hereinafter called “the rent”.

The primary basic rent of the said premises shall be Rs. ________ per sq. ft. built up area (Rs. ________ per sq. mt. built-up area) per month. The secondary basis rent of the said premises shall be Rs. ________ per sq. ft. built-up area (Rs. ________ per sq. mt. built-up) per month. The common outgoings rent shall consist of such proportion of the actual expenditure incurred by the Centre in respect of the Centre I building with its environments on Municipal rates and taxes, water charges (inclusive of all charges for bringing water from outside) repairs, cess, all sums other than ground rent 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 hall & escalators, 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, sewage treatment plant and plant rooms, roads and pavings, car parks, lights, landscaping drains and sewers, all terraces, electricity charges, insurance premium, contribution to the sinking fund to be instituted by the Centre, overhead expenses and administrative expenses including wages and all expenses incurred for maintenance and upkeep of amenities and ancillary 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 Centre 1 building which shall be leased or agreed to be leased by the Centre 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 and the secondary basic rent shall be paid by the Lessees to the Centre on or before the 5th of every month to which the said rent relates commencing from the date on which the said premises are ready for occupation as hereinafter specified.

The common outgoings on account of contributions to sinking fund shall mean such sum to be determined by the Centre as being payable by each intending lessee to the Centre from month to month to the intent that such sums paid by all the intending lessees in the building shall accumulate with the Centre and shall, together with interest earned at 4% p.a. on appropriate investments of such accumulations, aggregate to the original cost disbursed by the Centre to acquire and/or install the building air-conditioning plant, lift and any other plant or machinery over the period determined by the Centre to be the life of such building, air-conditioning plant, lift or any other plant or machinery. Every determination made by the Centre shall be final and conclusive and shall be binding upon the intending lessees.

It is hereby agreed by and between the parties that the contribution to the Sinking Fund intended to be built hereto before for the replacement of each asset being the building, air-conditioning plant, lift and any other plant or machinery as the case may be, shall not be adequate to replace such building, air-conditioning plant, lift or plant or machinery. If the cost of replacement of any such asset shall in any event be more than the Sinking Fund accumulated with and at the disposal of the Centre in respect of that asset, the lessee shall on demand by the Centre pay to the Centre his proportionate share of such excess cost as his further contribution to the Sinking Fund in respect of that asset. Such proportionate share of the excess cost shall be calculated in the proportion which the area leased to him by the Centre bears to the total area leased or agreed to be leased by the Centre in the Centre I building. Such contribution shall be payable by the lessee either in one lump sum or in such instalments as may be determined by the Centre. The lessee shall deposit without interest and keep deposited with the Centre throughout the term of the lease a sum equivalent to 3 months common outgoings rent and a sum equivalent to 3 months secondary basic rent, agreed herein to be paid by the lessee to the Centre. The Centre shall from time to time determine such sum as is to be kept deposited on account of 3 months common outgoings rent and the Centre has for the time being determined such sum at Rs……… The determination of such sum by the Centre shall be final, conclusive and binding upon the lessee and in the event of any further sum being payable on such determination the lessee shall deposit and keep deposited with the Centre such further sum within 7 days from the service of demand in that behalf made by the Centre. The said sum shall be adjusted by the Centre towards the payment of the common outgoings rent and secondary basis rent of the last 3 months of the term of the lease. The parking space rent for each parking space shall be Rs……… per month payable by the lessees to the Centre as hereinafter specified. Provided that the lessee shall pay the entire parking space rent payable during the lease term of 60 years as hereinafter provided within a period of 30 days from the date of the receipt of notice sent under Clause 6 hereof notifying to the lessee that the premises are ready for occupation. If the lessee does not pay the entire parking space rent within the said period of 30 days as aforesaid, the agreement for lease of the parking space shall stand cancelled and the Centre shall be entitled to dispose of it at such rent and on such terms and conditions as the Centre shall in its absolute discretion think proper.

In the event of the Centre being required to pay at any time hereafter to the Municipal Corporation or to the State Government whether prospectively or retrospectively any amount or amounts by way out premium, betterment charges, development tax or any other tax, levy, cess or charge, the lessee shall pay forthwith to the Centre on demand, their proportionate share of such amount or amounts, to be calculated by the Managing Committee of the Centre in the proportion which the area of the demised premises bears to the total area of the Centre I building which the Centre shall decide to lease and the decision of the Managing Committee as to whether or not the lessees are liable to pay a proportionate share of such amount or amounts and the quantum of such proportionate share shall be final and binding on the lessees.

The primary basic rent and the parking space rent shall become due on 1st day 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:

Primary Basic Rent:

(a)  30% on or before the execution of this agreement to be accounted, for on commencement of the lease ;

(b)  60% in such instalments and at such times during the construction of the Centre I Building as may be decided upon by the Managing Committee of the Centre ;

(c)  10% subject to adjustment on the basis of final are (ascertained on actual measurement) on the date on which the said premises are ready for occupation. Provided that if the area on which measurement is found to be more than the area mentioned under (1) above, the amount of advance rent for 60 years in respect of area found in excess shall be paid by the Lessees to the Centre when the said premises are ready for occupation.

Parking space Rent:

When the said premises are ready for occupation, and 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.

(7) The lessees shall execute with the Centre a Deed of Lease in duplicate containing the terms set out in Annexure hereto of the said premises and in the parking space.

If the Lessees enter into the possession of the said premises and parking space before executing a Deed of Lease the Lessees shall use and occupy the said premises and parking space subject to the terms and conditions set in Annexure hereto.

(16) The Lease shall contain the terms and conditions, among others, specified in Annexure ‘A hereto.”

66. The AO and the CIT(A) have referred to several factors in respect of their conclusion that the “advance rent” was in fact a premium for parting with the leasehold rights in favour of the lessees. Even assuming that these factors are not in all cases conclusive of whether the payment was a premium/salami or rent taken in advance, the same viewed in the totality of the circumstances establishes that the “advance rent” was nothing but a premium or salami.

67. The intention of the parties is an important factor in answering the question whether the “advance rent” was in fact rent or a premium/salami. The following extract from the report of the Council of Management of the assessee for the year ending 1971 is important and reads as under :-

“Lease of space :- The principal terms and conditions for leasing space in the Trade Centre have, upon 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 60 years, which is considered in law the life of a building but the lessees will have given the option to renew it 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 Rs. 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 present value of a part of the rent capitalised over a period of 60 years, the amounts now payable for the ground and the mezzannine floor area, being offered on a concessional basis. The Centre reserves the right to raise these rates upto the permissible levels at the appropriate time.” (emphasis supplied)

68. The importance of the Council of Management of the assessee is apparent from its Articles of Association, the relevant parts whereof were set out earlier.

69. The report of the Council of Management is an indication if not a clear admission by the assessee that the payment of “advance rent” was in fact a premium or salami. The assessee’s intention quite clearly was that the payment was “consideration mentioned for agreement to lease the spaces”. Had the matter stopped there, there could be no doubt that the payment was a premium paid for the transfer of the right to enjoy the property. In other words, the payments were made by the lessees for being let into possession.

It is not that subsequently there was a change in the nature of the transaction. The transactions remained the same. The change was only in the description. The change in the description was pursuant to the legal advice received by the assessee. This is clear from the report itself. It is of vital importance to note certain aspects/admissions contained in the report. In the second sentence, it is clearly admitted that “advance rent” was received by the assessee as “consideration for agreement to lease as originally proposed”. The second sentence provides that “It is now provided that the initial payment to be obtained from a lessee will be by way of “advance rent”. Thus while the intention of the assessee was to receive the “advance rent” as consideration for agreement to lease, the assessee subsequently merely “provided” that such payment would be by way of “advance rent.” There was no change in the structure of the financial terms of the leases. This change was in the description without any change in substance or in the legal effect and nature of the payment. This is clear from the latter part of the first sentence which admits that the modification did not involve any change in the financial obligations of the assessee. The modification referred to in the first sentence was regarding the term of the lease which is also reflected in the report. The modification was not in respect of the nature or legal effect of the “advance rent”. Further still this change in the words was only upon Counsel’s advice. It is not even suggested that the assessee was under a misapprehension as to the nature and legal effect of the receipt of the “advance rent”.

70. Mr. Andhyarujina was unable to indicate anything from the record that explained these crucial admissions by the assessee itself in the report of its Council of Management.

71. The other factors referred to by the authorities also indicate that the “advance rent” was nothing but a premium for being let into possession of the lease premises. Even if each of these factors by themselves do not establish the same, taken together, they certainly do. The doubt if any, is set at rest when these factors are added to the report of the assessee’s Council of Management. For instance, the report indicates that the period of the leases would not be for sixty years, as originally provided but that the lessees would have an option to renew the lease for a further period co-terminus with the 99 years’ lease to the assessee from the government of Maharashtra (less 10 days). It is significant that the consideration for renewal would be a nominal payment of Re. 1/- per year per shop plus out-of-pocket expenses proportionately shared among the lessees. Thus the consideration for the extended period was only Re. 1/-. This itself would indicate that the advance payments were made not by way of rent per month but by way of a premium for being let into possession. If the payments were genuinely monthly rentals and no more such payments would have continued during the relevant period.

That the lease agreements subsequently entered into may have provided otherwise is another matter. The proposal stated in the report indicates the intention of the assessee and the lessees when they had entered into the lease agreements.

72. Mr. Andhyarujina relied upon two sentences in paragraph 7.29 of the original order of the Tribunal, which read as under:

“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.”

He submitted that the Tribunal has, therefore, held that if the transaction is held to be a lease, the assessee would be liable to have only 1/60th of the advance rent brought to tax each year.

73. This is not a correct reading of the order. The second sentence merely states that if the transaction is held to be a lease, the assessee would be liable for the rental income that is chargeable on a monthly basis. The words “the rental income that is chargeable on a monthly basis” refer to the term of the lease agreements to that effect and not to the question when the advance rent is deemed to have accrued to the assessee. This does not indicate that the Tribunal held that only 1/60th of the advance rent would be taxable in each year. This paragraph did not deal with the issue regarding whether the entire advance to rent was taxable in the year of receipt or only 1/60th thereof was taxable each year. The paragraph dealt with an entirely different questions, including the provisions of Sections 22 and 23 of the Act.

74. Mr. Andhyarujina also relied upon a certificate issued by the lessees to the effect that they had, in turn, claimed a deduction only of the annual rent i.e. 1/60th of the advance rent relating to the year in computing their income under the Act. Apart from the certificate from the lessees to this effect, nothing else was relied upon. Even the assessment orders were not relied upon. It is not possible, therefore, to state on what basis the same was done. In the circumstances, this fact, by itself, is not conclusive of the issue before us in this reference.

75. Mr. Daniel’s submission that the transactions also constitute a transfer of a capital asset in view of section 2(47)(vi) read with section 269UA(d) and (f) of the Act is also well founded. These sections read as under :-

“2(47) “transfer”, in relation to a capital asset, includes –

        (i), (ii) and (iii)**                                      **                                  **

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

Explanation : For the purposes of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA.

269-UA. Definitions.—In this Chapter, unless the context otherwise requires,—

        (a), (b) and (c)**                                      **                                  **

(d) “immovable property” means—

 (i)  any land or any building or part of a building, and includes, where any land or any building or part of a building is to be transferred together with any machinery, plant, furniture, fittings or other things, such machinery, plant, furniture, fittings or other things also.

Explanation.— For the purposes of this sub-clause, “land, building, part of a building, machinery, plant, furniture, fittings and other things” include any rights therein;

(ii)  any rights in or with respect to any land or any building or a part of a building (whether or not including any machinery, plant, furniture, fittings or other things therein) which has been constructed or which is to be constructed, accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company or other association of persons or by way of any agreement or any arrangement of whatever nature), not being a transaction by way of a sale, exchange or lease of such land, building or part of a building;

        (e) **                                                        **                                  **

(f) “transfer”, —

 (i)  in relation to any immovable property referred to in sub-clause (i) of clause (d), means transfer of such property by way of sale or exchange, or lease for a term of not less than twelve years, and includes allowing the possession of such property to be taken or retained in part performance of a contract of the nature referred to in Section 53-A of the Transfer of Property Act, 1882 (4 of 1882).

Explanation. — For the purposes of this sub-clause, a lease which provides for the extension of the term thereof by a further term or terms shall be deemed to be a lease for a term of not less than twelve years, if the aggregate of the term for which such lease is to be granted and the further term or terms for which it can be so extended is not less than twelve years;

(ii)  in relation to any immovable property of the nature referred to in sub-clause (ii) of clause (d), means the doing of anything (whether by way of admitting as a member of or by way of transfer of shares in a cooperative society or company or other association of persons or by way of any agreement or arrangement or in any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of such property.”

76. A lease is a transfer within the meaning of section 2(47), as it is a transaction which has the effect of transferring or enabling the enjoyment of immovable property. The explanation to section 2(47) provides that for the purposes of sub-clauses (v) and (vi) thereof, immovable property shall have the same meaning as in section 269UA(d). Section 269UA(f)(i) defines immovable property inter-alia to mean any land or building or part of a building and the explanation thereto provides that the land, building, part of a building include any right therein. Section 269UA(f)(i) further provides that the transfer in relation to any immovable property referred to in sub-clause (i) of clause (d) means transfer of such properties inter-alia by way of a lease for a term of not less than twelve years. Admittedly, the leases were for a period of not less than twelve years.

77. The Tribunal observed that in the lease agreements there was no legal obligation on the part of the assessee to refund any part of the “advance rent” and that the word “refund” has not been used anywhere in the lease agreements. The Tribunal held that, the same indicated that the “advance rent” constituted the business receipt of the assessee of the year in which they were received.

78. This finding is doubtful. Merely because the lease agreements do not use the word “refund”, it would make no difference. Nor will it make any difference that the lease agreements do not stipulate a legal obligation on the assessee’s part to refund any part of the “advance rent”. If indeed there was a breach on the part of the assessee, it could well be required in law to refund the “advance rent”.

79. This however, was not the only basis on which the Tribunal decided the issue against the assessee. The Tribunal noted in paragraph 77 of the remand report that in any event the paramount fact remains that these funds were available to the assessee to the extent not consumed by the construction of the buildings in question. The assessee itself agrees that the only 1/60th of the primary basic rent and car parking rent collected from the occupiers/lessees had been recognized as the income and the unadjusted “advance rent” had been treated as unsecured loans. Thus, as noted by the Tribunal, substantial funds had not been either used or set apart for the object of the centre.

80. In paragraph 80(v), the Tribunal held as under :-

“(v) a large portion of the assessee’s income was unreasonably treated to be “Unsecured Loans” resulting into huge unutilised funds with the assessee for which neither any concrete plan to “accumulate” was made nor the required intimation for the same was given to the Assessing Officer”.

81. Mr. Andhyarujina submitted that it was not necessary for the assessee to give the accumulation notice as the “advance rent” was not the income. We have already held that the amount received as “advance rent” was in fact a premium and therefore constituted the assessee’s income. We are therefore, unable to accept this submission.

82. (A) Mr. Andhyarujina relied upon a judgment of a learned Single Judge of this Court dated 2nd December, 1992 in M/s. M. Visvesvaraya Industrial Research & Development Centre, World Trade Centre v. The Official Liquidator, High Court, Mumbai in Company Application No. 27 of 1991 in Company Petition No. 642 of 1983. The Official Liquidator was appointed as Liquidator of Shreenivas Cotton Mills Ltd. – one of the lessees. The assessee filed the said company application for an order directing the Official Liquidator to hand over possession of the premises leased to Shreenivas Cotton Mills Ltd. in liquidation and to make payment of arrears till then. The learned Judge observed that after the execution of the lease agreement, no further documents had been executed in favour of the company in liquidation and that the lease agreement itself had not been registered. Accordingly, the learned Judge held that the agreement did not create a demise in respect of the premises in favour of the company and that the company had not acquired any leasehold interest in the said premises. It was further held that the agreement of lease did not amount to unqualified or unconditional demise in presenti in respect of the premises in favour of the company and it only entitled the company to claim execution of the lease from the applicant which also had not been done. Accordingly, the learned Judge held that the company had not acquired any lease-hold interest in the premises and was merely a monthly tenant in respect thereof. Finally, it was held that the Official Liquidator did not require the premises for the purpose of beneficial winding up of the company and, therefore, directed him to hand over possession thereof to the assessee.

(B) Mr. Andhyarujina also relied upon similar orders passed by the Gujarat High Court in O.L. of Rustam Mills & Industries Ltd. v. Visvesvaraya Industrial Research & Development Centre dated 8th September, 2004 in O.J. Appeal No. 9 of 2004 in Company Application No. 184 of 2002 with Civil Application No.18 of 2004. The Division Bench held that the learned Single Judge had rightly rejected the Official Liquidator’s contention that the lease was for 60 years and that the lessee was only a monthly tenant. The Supreme Court by an order dated 28th August, 2006 dismissed in limine Petition (s) for Special Leave to Appeal (Civil) filed by the Official Liquidator.

83. The judgments are of no assistance to the assessee. The Income Tax Department was not a party to those proceedings. Further the consequence of the agreements not being registered as required by law, operated between the parties thereto. A party that was entitled to have an agreement drawn up and registered in accordance with law cannot set up its failure to do so to its advantage against the Revenue. If it was so, parties could avoid their liability under the Income Tax Act by not having agreements registered in accordance with law. Non-registration of a document cannot prejudice the Revenue. That a lease was not executed as required is of no consequence to the interest of the Revenue.

84. Mr. Daniel further submitted that the transactions were in effect a sale of the properties and not of a lease thereof. This submission is not well founded.

85. The provisions of the agreements are consistent with a lease. Some of the provisions thereof are consistent with a sale of the property as well as a lease thereof. There are however, several provisions which are consistent only with a lease and militate against the agreements constituting a sale of the property.

Firstly, there could be no question of the assessee having sold the land as it was only the lessee thereof. The government is the owner of the land. The assessee therefore, could not have conveyed the same to anyone else. This is clear from the Government Resolutions granting a lease of the said land in favour of the assessee. The GR dated 18.11.1974 which superseded the earlier GR dated 16.10.1970 also makes this clear. The sanction was accorded to the grant of a direct lease subject to the terms and conditions mentioned in Appendix-A, Clauses 7 and 12 whereof which are relevant in this regard have been set out earlier. Clause 7 of the Appendix-A grants the assessee liberty to underlet any part or parts even of the proposed buildings only with the permission of the government. Clause 12 provides that the land shall be used by the assessee “only for erecting or constructing thereon the buildings or the structures to house or accommodate either for its own use or for letting out “to……….”. Thus the assessee was not even entitled to sell the construction to be put up on the land.

86. Clause 16 of the lease agreements provide that the lease shall contain the terms and conditions inter-alia specified in Annexure-A thereto. The terms and conditions of the lease agreements admittedly did not contain any provision for the sale of the land or the construction thereon by the assessee to the lessees. The terms and conditions stipulated in Annexure-A militate against the same. For instance, under clause 1, the lessees are not entitled to use the premises except as office premises for their own business. If it was a sale, the vendor after the sale would not be concerned regarding the nature of the use. Clause 3 prohibits the lessees from allowing their employees or servants to stay in the premises beyond the hours stipulated therein. Clause 4 requires the lessees to keep the premises in good condition. Clause 5 requires the lessees not to make any changes without the previous consent in writing of the lessor. Even assuming that these clauses are also consistent with the lease in certain circumstances in the facts of this case, they are not. Clause 12 prohibits the lessees from transferring, assigning, selling, mortgaging, charging or encumbering in any manner the premises without the assessee’s premises. The reference to sale obviously was to the sale of the leasehold rights.

87. The doubt, if any, is set at rest by clauses 27 and 28 which clearly militate against the transaction being one of a sale.

They read as under:-

“(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 co-terminus with the expiry of the Lease of the land granted to the Centre by the Government of Maharashtra except the last ten days thereof on the same terms and conditions as are herein contained, except this clause of option for renewal at rent which in the opinion of the Centre would then be a fair and reasonable rent provided the Lessees shall have given to the Centre three months’ previous notice in writing of their desire to exercise such option, and provided the Lessees shall have in the meantime paid to the Centre all rents and other moneys due and payable by them to the Centre under these presents and there shall not be outstanding any breach of any of the conditions and covenants herein contained and on the part of the Lessees to be observed and performed. In the event of the Lessees becoming entitled to obtain a renewal of the Lease as aforesaid, the Centre shall, at the request of the Lessees, execute and deliver to the Lessees a fresh Lease as aforesaid, the cost whereof including stamp duty and registration charges shall be wholly borne and paid by the Lessees.

(28) On the expiration or sooner determination of the Lease hereby granted or the renewal thereof, in case the Lease is not renewed under the provisions thereof herebefore contained the Lessees shall deliver up to the Centre peaceful and vacant possession of the said premises and the parking space in the same good condition and state of repairs in which they are at present, reasonable wear and tear excepted. Provided that the Lessees shall be entitled to remove and carry away all fixtures, fittings, alterations and additions made by them in the demised premises and to restore the demised premises to their original condition.”

No purchaser of property would agree to such clauses.

88. In the circumstances, Question No.6 is answered in the negative, against the assessee and in favour of the department.

Re : Question No.7 :-

(7) Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the primary basic rent and the parking rent were assessable as income from profits and gains of business or profession ?

89. Mr. Andhyarujina fairly stated that so far as the assessee is concerned, the nature of income is not in dispute. It is income from profits and gains of business. The only disputed question is as regards the quantum that is liable to be brought to tax viz. the entire “advance rent” or only 1/60th thereof per annum.

90. Question No.7 is answered in the affirmative.

Re : Question No.8 :-

Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the amount appropriated towards a sinking fund was part of the rent received by the assessee and was in the nature of revenue receipt ?

91. The provision in the lease agreement relating to a sinking fund is part of clause 2 set out earlier. It would be convenient however, to set out again the following portion thereof relied upon by Mr. Andhyarujina :-

“The common outgoings on account of contributions to sinking fund shall mean such sum to be determined by the Centre as being payable by each intending lessee to the Centre from month to month to the intent that such sums paid by all the intending lessees in the building shall accumulate with the Centre and shall, together with interest earned at 4% p.a. on appropriate investments of such accumulations, aggregate to the original cost disbursed by the Centre to acquire and/or install the building air-conditioning plant, lift and any other plant or machinery over the period determined by the Centre to be the life of such building, air-conditioning plant, lift or any other plant or machinery. Every determination made by the Centre shall be final and conclusive and shall be binding upon the intending lessees.

It is hereby agreed by and between the parties that the contribution to the Sinking Fund intended to be built heretobefore for the replacement of each asset being the building, air-conditioning plant, lift and any other plant or machinery as the case may be, shall not be adequate to replace such building, air-conditioning plant, lift or plant or machinery. If the cost of replacement of any such asset shall in any event be more than the Sinking Fund accumulated with and at the disposal of the Centre in respect of that asset, the lessee shall on demand by the Centre pay to the Centre his proportionate share of such excess cost as his further contribution to the Sinking Fund in respect of that asset.”

92. Mr. Andhyarujina submitted that the contribution to sinking fund never constituted the assessee’s income. It is at the highest a deposit held in trust to be used for specific purpose. He submitted that the amount collected towards sinking fund is for the specific earmarked purpose as stated in the agreement and cannot be utilized for any purpose other than as stipulated in the agreement. Mr. Andhyarujina relied upon the annual report and accounts for the year ended 31.12.1989 which showed the provision relating to sinking fund as a liability. Note 7 to the notes forming part of the accounts stated :-

“7. Sinking Fund represents monies collected towards specific purposes. Income earned from Sinking fund investments, is therefore directly credited to the Sinking Fund Account”.

93. The AO and the CIT (A) held against the assessee on the ground that the issue was covered by the decision of the Tribunal for the earlier year. He therefore, upheld the order of the AO and added back Rs. 92,88,867/- and interest thereon of Rs. 16,58,947/- by treating the same as the assessee’s income. The Tribunal upheld the decision also on the same basis. Neither the assessee nor the Department furnished a copy of the decision of the Tribunal for the earlier year during the hearing. They stated their inability to do so even before we pronounced this judgment.

94. Mr.Andhyarujina submitted that the authorities were in error in following the decision of the Tribunal dated 6.5.1991 for the assessment year 1983-1984 rejecting the assessee’s claim with respect to Arcade building, which was the only functioning building at that time. The decision was, according to him, in view of the agreement to lease in those cases not elaborately dealing with the purposes of the sinking fund. The present agreements to lease specify the purposes of sinking fund and the manner in which the monies lying in the fund are to be utilized.

95. We will presume that the decision of the Tribunal for the earlier year was in the context of a clause relating to a sinking fund which was entirely different from the clauses relating to a sinking fund in the present case. We will, therefore, decide this issue in the context of the provisions of the lease agreements which we have referred to.

96. Based on the provisions relating to the sinking fund in the agreements under consideration, Mr. Andhyarujina submitted that in view of the doctrine of diversion of income by over-riding title contribution towards the sinking fund cannot be brought to tax. He submitted that such contributions are diverted and never reached the assessee.

97. Mr. Andhyarujina relied upon the judgment of the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 2 SCR 634 = 41 ITR 367. The Supreme Court after reviewing several judgments held as under :-

“16. These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. In our opinion, the present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The case is one of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of another’s income. The matter in the present case would have been different, if such an overriding charge had existed either upon the property or upon its income, which is not the case. In our opinion, the case falls outside the rule in Bejoy Singh Dudhuria case [1933] 1 ITR 135, and rather falls within the rule stated by the Judicial Committee in P.C. Mullick case [1938] 6 ITR 206.”

98. Mr. Andhyarujina also relied upon the judgment of a Division Bench of this Court in CIT v. Shri Chhatrapati Sahakah Sakhar Karkhana Ltd. [2000] (9) LJSOFT 19 = 218 ITR 195. The Division Bench held as under :-

“(B) Deductions from the cane price in respect of Area Development Fund, Hutment Fund, Cane Development Fund:

It is contended on behalf of Karkhana that funds under above heads are collected by way of deductions to enable the sugar Karkhana to spend within their area of operation expenditure on amenities such as running of schools, colleges, maintenance of roads, irrigation, supply of fertilizers and to provide huts to homeless families. It is urged that the assessee acts as an agent on behalf of the Government. It is contended that the above deductions are made pursuant to the instructions given by the Government. These contentions were rejected by the A.O. on the ground that they stood on the same footing as non-refundable deposits and since these deductions were also made in the course of trading operations and since they were used for meeting the assessee’s own liabilities, they constituted trading receipt. On the other hand, it has been urged on behalf of Karkhana that under the various directions issued by State Government from time to time, the Karkhana was required to make the above deductions. A trading receipt means assessee’s own money which can be put to any use. In our view as regards the deposits towards Area Development, Cane Development, and Hutment Fund are concerned, the principle of diversion of income by overriding title would squarely apply. The various directions given by the State Government show that the Karkhana is required to deduct from the cane price the above amounts towards the said funds. It is clear case of diversion of income at source by overriding title. As stated above, in every matter, the Court has to examine the nature and the quality of the receipt. As stated hereinabove, the Court has to see the facts of each case. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where, by obligation, income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation which is self imposed, after such income reaches the assessee, then, such income is taxable. Diversion of income by overriding title can be created by a contract between two parties before the income reaches the hands of the assessee. These are the basic principles which are required to be kept in mind. In the case of CIT v. Madras Race Club 219 I.T.R 39, the assessee was a Company carrying on the business of horse racing. At the instance of the Government, the assessee was asked to conduct races for two days on behalf of Chief Minister’s Relief Fund and for one day on behalf of Beggars Rehabilitation Fund. The assessee claimed that the net collections for the above three days were not assessable as income in its hands as the assessee had no power to deal with the said collections. The Department did not accept the claim of the assessee. The matter came by way of reference to the High Court which took the view that obligations are there in every case but it is the nature of the obligation which is the decisive fact. Where by the obligation, income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation, after such income reaches the assessee, then, it is taxable. On facts, looking to the nature of the obligations, the Madras High Court came to the conclusion that the collections for charitable purpose effected during three days under instructions of the Government were not taxable as it was a case of diversion of income by overriding title. Therefore the real question in all the above matters is: whether the income has accrued to the assessee and whether the profits on the scheme form the income of the assessee. Applying the above test to the facts of this case, we hold that the deductions i.e. deposits made by the Karkhana on account of Area Development Fund, Cane Development Fund and Hutment Fund do not constitute trading receipt. We are of the view that as regards these funds the Karkhana acted as an agent and collections were made as per the directions of the Government to be spent on the purposes specified by the State Government and that the collections were made by way of retention of money from the cane price payable and hence they are not trading receipts. To that extent, we agree with the view of the Tribunal. However, the Department has heavily relied upon the Judgment of the Madhya Pradesh High Court in the case of Jiwajeerao Sugar Co. Limited v. CIT 176 I.T.R. 182, in which it has been held on facts that there was no diversion of income by overriding title when part of price of molasses is set apart under Molasses Control Order to be utilised for erection of storage facilities particularly as the assessee did not loose title to the fund. As stated by us earlier, the basic test to be applied in such cases is the nature of the obligations. No one particular test could be said to be conclusive in such cases. In that matter, on facts, Madhya Pradesh High Court found that there was no material on record to show that the title to the fund was separately kept by the assessee as enjoined by the Control Order. Further, the above judgment of the Madhya Pradesh High Court has been expressly dissented from by this Court in the case of Somaiga Orgeno-Chemicals Ltd. v. CIT Bombay 216 I.T.R. 291. In which this Court has laid down that what was necessary was to see whether there was diversion at source and whether the assessee had lost domain and control over the amount so diverted. Hence, the Judgment of the Madhya Pradesh High Court was expressly dissented from by this Court in 216 I.T.R. 291. In the present case, the test laid down by this Court in 216 I.T.R. 291 is applicable with regard to Cane Development Fund, Area Development Fund and Hutment Fund as there is diversion of income at source and on deduction of the amount towards the said funds, the assessee lost domain and control over the amounts so diverted.”

99. The question therefore, is whether in the present case, it can be said that the contributions towards the sinking fund were diverted and never constituted the assessee’s income.

100. In this regard, it is also important to note a part of Clause 2 and Clauses 12 and 16 of the lease agreements and Clauses 2 and 24 of Annexure A thereto, which read as under:

“The common outgoings rent shall consist of such proportion of the actual expenditure incurred by the Centre in respect of the Centre I building with its environments on …… charges for maintenance and upkeep of …. lifts, lift hall & escalators …….. air-conditioning plant and plant rooms, ventilation plant and plant rooms and fire fighting plants and plant rooms, all equipments or machines, sewage treatment plant and plant rooms ……

(12) The electrical fittings will be provided in the said premises by the Centre. Any changes in the electrical fittings so provided will be carried out by the lessees at their cost with the permission of the Centre. The Centre will also reserve the right to require the lessees to restore the fittings in which changes are made by the lessees to their original state at the lessees’ cost.

(16) The Lease shall contain the terms and conditions, among others, specified in Annexure “A” hereto.

Annexure “A”

(2) The Centre I building is centrally air-conditioned. The air-conditioning plant will function for about eight hours on all weeks days during such hours as may be decided by the Centre except on Sundays and holidays as approved by the Centre unless there is a failure or imposed cut of electric power supply or any breakage or failure of the said plant.

        **                                           **                                           **

(24) The working hours of lifts in the Centre I building will be such as shall be decided by the Centre. The Centre shall not be responsible for running the lift if there is a failure or imposed cut of electric power supply or any breakage or failure of the machinery of any of the lifts. The passenger lifts will be available for the common use of all the Lessees, their agents, servants and visitors at their own risk and subject to the regulations and restrictions (including restrictions as to hours of use) that may be prescribed by the Centre from time to time. No goods or merchandise, luggage or heavy articles or materials or dogs or animals shall be allowed to be carried in the passenger lifts. A separate goods lift is provided in the building and all movement of goods, merchandise, luggage and heavy articles and materials shall only be allowed by such goods lift. The Centre will be at liberty to close all or any of the lifts for such time as it may from time to time think fit. The Centre shall not be liable for any injury fatal or otherwise to any person or for any loss or damage to any property that may be caused in any way by the use of the lifts or by their break-down or otherwise howsoever or through any act of commission or omission wrongful or otherwise or negligence of the lift attendants or any other employee.”

101. In view of the above provisions, the doctrine of diversion of income by over-riding title does not operate in the assessee’s favour. The mere use of the term ‘sinking fund’ and the manner in which the assessee treats the same in its accounts is not decisive of the matter. The assessee is not a co-operative society in which case the question may well be answered entirely differently depending upon the facts of the case. The assessee is in the position of a lessor who has leased various portions of the premises constructed by it as a part of its business activities. The above clauses of the lease agreement establish that the assessee was obliged to provide the facilities such as lifts, air-conditioning. It was also obliged to provide the plant and machinery in respect of various other facilities to be extended by it under the lease agreements. These are the very facilities and equipment in respect whereof the sinking fund is required/agreed to be created under the lease agreement. The amounts accumulated in the sinking fund are to be used in respect of these very securities and for the purchase of the plant and machinery referred to in clause 2 insofar as it relates to sinking fund. Thus, the amount lying in the sinking fund is to be used for discharging the assessee’s obligations under the lease agreements. The assessee had complete control over these funds. It was entitled to determine the quantum thereof although the basis is provided under the agreement. The funds were, in fact used and, in any event, are admittedly to be used in respect of the said facilities and plant and machinery. Mr. Andhyarujina fairly admitted that the assessee had claimed and was granted depreciation in respect of the plant and machinery and the equipment in respect of the said facilities originally installed as well as any replacement in respect thereof.

102. In the circumstances, there is no question of diversion of the amounts collected by the assessee towards the sinking fund. Nor is there any question of the lessee having an overriding title in respect of the said fund. The fact that depreciation has been claimed by the assessee in respect of the plant and machinery and other equipment required for extending the facilities indicates that the sinking fund was utilized for acquiring and maintaining the same for the benefit of the assessee. The income was, therefore, used by the assessee and for the assessee and the assessee retained the benefit arising therefrom. The doctrine of diversion of income by overriding title, therefore, does not operate in the assessee’s favour in the facts and circumstances of this case.

103. Question 8 is, therefore, answered in the affirmative, in favour of the Revenue

Re : Additional Question for A. Y. 1990–91 :-

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing to adopt the standard rent fixed by the Municipal Authorities as the annual value instead of the actual rent realised by the assessee ?

104. Mr. Andhyarujina submitted that the question does not arise at all and is academic in view of the authorities having held that the agreements to lease constituted a sale.

105. The question is in a sense academic though not on the basis of Mr. Andhyarujina’s submissions. He submitted that the question is academic as the AO and the Appellate Authorities held the agreements of lease to be agreements for sale. He submitted that once the owner sells the property, there would be no question of applying the provisions of Sections 22, 23, etc. for the determination of income from house property. The question is, however, not academic for this reason.

106. The AO indeed applied the provisions of Sections 22 and 23 and observed that house-owning, however profitable, cannot be a business or a trade under the Act and where income is derived from house property by exercise of property rights, the income falls under the head “income from property” chargeable under Section 22. For instance in paragraph 5 of the AO’s order, it is observed that where house property is given on lease or licence basis for earning income therefrom, the true character of the income derived is the income from property falling under Section 22.

There is some degree of contradiction in the findings to the above effect and the findings to the effect that the assessee carried on business of leasing the premises.

107. As mentioned earlier, the additional question was a part of the original reference. Thereafter, this Court by the remand order (251 ITR 852), remanded the matter to the Tribunal for its decision on two points, including as regards the nature of the transactions. The Tribunal filed the said remand report. It must, therefore, be presumed that what is held in the remand report overrides what is stated in the original order, pursuant to which the reference was made.

108. The remand report is clear on this issue as is evident from paragraphs 35 to 41. The report expressly holds that there does not appear to be much dispute on the point that the correct head of income is “profits and gains of business or profession”. In fact, in paragraph 38, the Tribunal holds: “On the facts of the case we have no difficulty or hesitation in arriving at the conclusion that leasing of space by the assessee both in Centre 1 and IDBI Centre was essentially the business carried on by the assessee.” In paragraph 39, the Tribunal held that the amounts received have to be treated not in the shape of rents, but profits of a business. In paragraph 40, after analysing the fact and the judgments, the Tribunal held : “We therefore, hold that the consideration received by the assessee on its transactions of lease of space in Centre 1 and IDBI Centre are chargeable to tax under the head “Profits and gains of business or profession” for both assessment years 1989-90 and 1990-91.”

109. Thus, after the remand report, we are left with the situation where the Tribunal has held not only that the transactions constituted the assessee’s business, but that the consideration received by the assessee in respect thereof are chargeable to tax under the head “Profits and gains of business or profession” for both the assessment years. It is in this view of the matter that the additional question referred to us becomes academic. In view of the remand report, there is no question now of the Department assessing the consideration received by the assessee under the head “income from property”.

110. The additional question for the assessment year 1990-91 is, accordingly, answered in favour of the assessee in view of the above clarification, viz. that the Tribunal has itself held that the said income is to be taxed as income from “Profits and gains of business or profession”. The issue of consideration received in respect of the transactions for the assessment year 1990-91 under the head “income from property” does not survive in view of the remand report made by the Tribunal in which it is expressly held that the same has to be assessed under the head “Profits and gains of business or profession”.

111. In the circumstances, we answer the reference as follows :

(i)  Question 1 is answered in the negative, in favour of the Revenue and against the assessee so far as Section 11 is concerned. In view thereof, it is not necessary to answer the question qua Section 12 for the assessee has not made any claim under Section 12.

(ii)  The reference is returned unanswered in respect of questions 2 to 5 as they were not pressed by the assessee at whose instance they were referred for the opinion of this Court.

(iii)  Question 6 is answered in the negative, in favour of the Revenue and against the assessee.

(iv)  Question 7 is answered in the affirmative, in favour of the Revenue and against the assessee.

(v)  Question 8 is answered in the affirmative, in favour of the Revenue and against the assessee.

(vi)  Additional question for the assessment year 1990-91 is answered in the negative, against the Revenue and in favour of the assessee.