2001-VIL-356-BOM-DT
Equivalent Citation: [2001] 251 ITR 852 (Bom)
BOMBAY HIGH COURT
Writ Petition No 2490 of , Income-tax Reference No 78 of 1998.
Date: 15.03.2001
M. VISVESVARAYA INDUSTRIAL RESEARCH AND DEVELOPMENT CENTRE
Vs
INCOME-TAX APPELLATE TRIBUNAL AND OTHERS
F. B. Andhyarujina with Mrs. M. A. Diwan, instructed by Little and Co. for the Appellant.
R. V. Desai with P. S. Jetley and J. P. Deodhar, instructed by H. D. Rathod, for the respondents.
BENCH
S. H. KAPADIA and V. C. DAGA, JJ.
JUDGMENT
S. H. Kapadia J.-
Facts :
On March 29, 1996, the Income-tax Appellate Tribunal dismissed the assessee’s appeal in respect of the assessment year 1989-90 and the assessment year 1990-91. Thereafter, on August 29, 1999, the assessee moved two miscellaneous applications being Miscellaneous Application No. 6351 of 1993 and Miscellaneous Application No. 1717 of 1994 on the ground that there were mistakes of law in the judgment of the Tribunal dated March 29, 1996. By order dated June 30, 2000, the said miscellaneous applications came to be rejected. Therefore, the assessee has filed the above Writ Petition No. 2490 of 2000. In the meantime, nine questions came to be referred to this court under section 256(1) in the above Income-tax Reference No. 78 of 1998. Hence, both the above matters are tagged together.
Briefly, the facts giving rise to the above dispute are as follows :
The assessee is a company under section 5 of the Indian Companies Act. The Regional Director of the Department of Company Affairs, Government of India, vide order dated June 12, 1970, granted a licence to the petitioners under section 25 of the Companies Act, 1956, on the ground that the assessee intended to apply its profits in promoting its objects. By the said order, payment of dividend to its members was prohibited. The Department of Revenue also notified the petitioner-assessee as Council of Scientific and Industrial Research for the purposes of section 35(1)(ii) of the Income-tax Act, 1961. Accordingly, the assessee was recognised as a scientific research institution by the Central Board of Direct Taxes right from its inception. This recognition continued till March 31, 1981. In order to implement its objectives, the assessee decided to construct the Trade Centre, the Commerce Centre and the IDBI Centre. The assessee decided to borrow loans from the LIC. However, that transaction did not materialise. Therefore, the assessee decided to raise the necessary finance for construction purposes by taking lease rent in advance from prospective lessees on a 60 year lease basis. The advance rent for 60 years was collected from such lessees in instalments based on the progress of construction and before giving possession to the lessees. The advance rent shown under the agreement to lease was treated as a liability of the assessee till the date of possession and from the year of possession, 1/60th portion of the total advance rent was apportioned as income in the annual accounts of the assessee and the balance portion was shown as liability. The Trade Centre was completed in 1977. The assessee considered 1/60th of the advance rent as income assessable under the head “Profits and gains of business” because the assessee was rendering systematic and composite services of providing air-conditioning and maintenance facilities. While filing the annual returns for the above assessment years and even prior thereto, the assessee had claimed its services as a charitable institution. They accordingly filed the return of income in the prescribed form. Accordingly, the assessee claimed exemption under section 11 of the Income-tax Act. Till the assessment years in question, the Department has accepted the tax returns and, had accordingly, made the assessments under section 143 read with section 11 of the Income-tax Act. This was up to the assessment year 1988-89. However, the exemption under section 35(1)(ii) came to be withdrawn subsequent to March 31, 1981. In order to protect its character as of general public utility, the assessee applied for registration on October 1, 1982, under section 12A of the Act. On February 8, 1984, the Commissioner of Income-tax, Bombay, issued a certificate to the assessee under section 12A of the Act after condoning the delay on the part of the assessee in filing the application. The Commerce Centre building was completed and possession was given to the lessees on October 1, 1988. Therefore, this aspect was taken in the accounts for the assessment year 1989-90 in question. Most of the lessees had paid advance rent for 60 years before taking possession. The IDBI building was completed and possession was handed over to the IDBI on April 1, 1989. Therefore, the IDBI building has come into assessment in the assessment year 1990-91. As stated above, we are concerned, in this case, with two assessment years, viz., 1989-90 and 1990- 91.
For the assessment year 1989-90, the assessee filed its return of income showing a business loss of Rs. 914.42 lakhs. The assessment was completed under section 143(3) when the assessee’s income was assessed at Rs. 10,71,18,176. In doing so, the Assessing Officer held that the transaction of lease was, in effect, sale of premises. He treated the difference between the advance rent received and the total cost of construction as income from sale of buildings under the head “Profits and gains from business”. In respect of the sinking fund, the Assessing Officer treated it as taxable income. The interest income from investments was also treated as income of the assessee. Being aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) in which the assessee claimed exemption under section 11 of the Act on the ground that the activities of the assessee came under the purview of the general public utility as defined under section 2(15) of the Income-tax Act. The assessee also claimed that the transaction was in the nature of lease and not sale. The Commissioner of Income-tax (Appeals), however, came to the conclusion that the advance rent received was a premium and, accordingly, it should be taxed as business income. Alternatively, he held the advance rent as a capital receipt and the gain was considered by him as short-term capital gain. He also held that the assessee was not entitled to exemption under section 11 of the Act. Being aggrieved, the assessee carried the matter in appeal to the Tribunal. By judgment and order dated March 29, 1996, the Tribunal concluded that the transaction in question was a transaction of sale of leasehold rights of use of space and what the assessee retained was only a right to charge monthly rent and also transfer fees in respect of the right of space leased out. The Tribunal further held that the assessee had not obtained registration under section 12A of the Act and, therefore, it was not eligible for the benefit of section 11. Being aggrieved, the assessee moved the Tribunal for rectification of its order because, in law, there was no concept like transaction of sale of leasehold right of use of space. The miscellaneous application for rectification was dismissed by the Tribunal on June 13, 2000, principally on the ground that it was difficult for the subsequent members of the Tribunal to infer as to what had crossed the minds of the members of the Tribunal on March 29, 1996. It was held that the subsequent members of the Tribunal found it difficult to read the minds of the members, who heard the appeal in 1996. Hence, the miscellaneous application was dismissed. Being aggrieved, the assessee filed the above writ petition. As stated above, in the meantime, the Tribunal has referred eight plus one questions to this court under section 256(1) of the Act.
Findings :
At this stage, we do not wish to examine all the arguments advanced by learned counsel for both the sides. Under the judgment and order of the Tribunal, the transaction in question is one of sale of leasehold right of use of space with the assessee retaining only the right to charge monthly rent and the transfer fee. According to the Tribunal, the Department had treated the transaction of lease to be a transaction of sale. According to the Tribunal, there was another angle that the assessee had given the leasehold right of use of space with the right to transfer by paying transfer fees to the assessee. Therefore, according to the Tribunal, the above transaction was one of sale of leasehold right of use of space. In this connection, we find merit in the contention advanced on behalf of the assessee to the effect that there is no such concept in law. The judgment of the Tribunal is not clear in stating the above proposition. Secondly, this was not the case of the Department at any point of time. We need not go further on this point because learned counsel for the Department fairly states that he may not be able to support the above proposition particularly, when it was not the case of the Department at any point of time. In the circumstances, we remit the matter back to the Tribunal with a specific direction to reconsider the above point in the light of the contentions of the parties in the assessment proceedings.
Learned counsel for the assessee, however, urged that the entire matter should be remitted back to the Tribunal. This has been opposed by learned counsel for the Department. In the present case, as stated above, the assessee was refused recognition as a scientific research institution from April 1, 1981. Thereafter, the assessee sought recognition as a charitable institution. According to the Tribunal, the assessee had applied for the certificate under section 12A of the Act. However, it was belated by 12 years. According to the Tribunal, the assessee did not furnish the annual accounts for 12 years. According to the Tribunal, in the present matter, the competent authority has merely taken on record the application made for the issuance of certificate under section 12A of the Act. According to the Tribunal, a mere intimation given to the assessee that his application is taken on record does not mean that the assessee was recognised as a charitable institution by the competent authority. According to the Tribunal, the Department normally issues a certificate granting recognition for a specific period after which it is reviewed from time to time and since, in the present case, no such certificate has been issued for a specified period, the Tribunal came to the conclusion that in this case, the certificate has not been issued and mere intimation that the assessee’s application is taken on record will not constitute such a certificate under section 12A. 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 [2000] 246 ITR 532 (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.
In the case of Fifth Generation Education Society v. CIT [1990] 185 ITR 634, 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.
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.
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.
Office is directed to forward a copy of this judgment to the Tribunal without any delay. The copy of this judgment to be authenticated by the associate. Office is directed to return R and P to the Tribunal if such R and P is lying in the High Court.
Issuance of certified copy expedited.
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