Shree Nirmal Commercial Ltd. vs Commissioner of Income Tax

B.N. Srikrishna, J.—These two references can be conveniently disposed of by a common judgment:

income tax Reference No. 108 of 1977 pertains to the assessment years 1967-68 to 1969-70 of the assessee. The questions referred to this Court for its opinion in this reference are as under:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the rights which remained with the assessee-company after the execution of the agreement with the shareholders were of negligible or dubious value and consequently the assessee would be entitled to deduct the cost of construction from the trading receipts for the purpose of determining the profit, if any, resulting from the transaction ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not holding that by the construction of the building, the assessee had a capital asset which was not exhausted by the agreement with the shareholders ?

Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the construction of the building ''Nirmal'' was a business venture and the non-refundable deposit amounts of Rs. 40,07,676 and Rs. 31,61,218 received by the assessee during the relevant assessment years 1967-68 and 1968-69 respectively partook the character of trading receipts ?

Whether the Tribunal was justified in holding that the profit with reference to the trading receipts accrued or arose only in the assessment year 1969-70 when the floor area was actually allotted and consequently deleting the additions of Rs. 40,07,676 and Rs.31,61,218 in the assessment years 1967-68 and 1968-69?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 50,000 for the assessment year 1967-68 made by the income tax Officer as the income of the assessee from undisclosed sources ?"

Question No. 3 has been referred at the instance of the assessee, while the other four questions have been referred at the instance of the revenue.

income tax Reference No. 216 of 1977 pertains to the assessment year 1970-71 of the assessee. The following two questions are referred therein for the opinion of this Court:

"1. Whether, on the facts and in the circumstances of the case and in law the Appellate Tribunal was justified in holding that the compensation received from the shareholders was to be taxed as income from business and not as income from property and also in holding that the income tax Officer was not entitled to enhance the compensation to the extent of the compensation received by the shareholders in their own right ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the construction of the building ''Nirmal'' was a business venture and the non-refundable deposits of Rs. 5,99,861 received by the assessee partook the character of trading receipts ?"

Out of these, the first question has been referred at the instance of the revenue and, the second, at the instance of the assessee.

The assessee, Shree Nirmal Commercial Ltd., was originally registered as a private limited company on 14-7-1964, which was later converted into a public limited company on 13-8-1970. Its objects were manifold and included, inter alia, the right "to purchase or to obtain land on lease from the Government and to build and construct houses, to purchase, take on lease or in exchange or otherwise acquire, improve, manage, cultivate, work, sell, exchange, surrender, lease, mortgage, charge, convert, turn to account, dispose of and deal with movable and immovable property and rights and privileges; of all kinds and particular lands, buildings..., licences... and claims, privileges;... to construct buildings on any land belonging to or in which the company has any interest to grant licences or concessions over or in respect of any property of the company to accept payment for any property or rights sold or otherwise disposed of or dealt with by the company, either in cash by instalments or otherwise, or in fully or partly paid up shares...and generally in such terms as the company may adopt."

In pursuance of the objects, the company obtained a lease of a piece of land belonging to the Government of Maharashtra with the intention of constructing a building or buildings which could be used as commercial premises. After securing possession of the land in or about 1964, the company was faced with the stupendous task of raising funds of about Rs. 80 lakhs, which was estimated cost of construction of a commercial building on the said piece of land. Since the company did not have such an amount at its ready disposal, the company devised a scheme for raising such finances by incorporation of article 4A in its articles of association. Under the Scheme, the shareholders of the company were to enter into a standard form of agreement with the assessee-company which would confer on them ''the right of occupation'' of specified floor-space in the building, either by themselves or by their nominees. The form of agreement was incorporated as a schedule to the articles of association. Clauses 3,4 and 5 of the agreement, which are relevant, provide as under:

"Clause 3 - On or before the execution of these presents, the shareholder shall deposit with the company, a sum of Rs............The company shall pay to the shareholder interest on the said initial deposit of Rs.......at such rates as the directors of the company may from time to time reasonably fix. Such interest shall commence to run from the date the shareholder or his nominee goes into occupation of the licenced premises. On the shareholder ceasing to own and be the registered holder of the shares mentioned in clause above, the said deposit shall be transferred to the purchaser or the transferee as provided in the next succeeding clause, the intention of the party being that the said deposit shall be non-refundable.

Clause 4 - As and when the shareholder sells or transfers his shares to any other person, firm or body corporate, the shareholder shall make it a condition with the purchaser or the transferee that the said deposit shall be assigned to the purchaser and on receiving an intimation, jointly from the shareholder and the purchaser in this behalf, the company shall transfer the amount of deposit to the name of the purchaser after the purchaser has been approved and accepted as transferee of the said shares by the Board of Directors under the articles of association of the company. The shareholder shall not sell, transfer, pledge, mortgage or otherwise alienate the said shares Nos. to (both inclusive) except in one lot the intention being the said shares shall be kept and maintained as one integral block or unit to be always dealt with as such and not piecemeal.

Clause 5 - In case the said shares are forfeited, surrendered or hold the company either in enforcement of its lien thereon or for any other reason, the shareholder shall have no further or other right on the said shares, of the licensed premises or the said deposit, all of which become the absolute property of the company and on occurrence of any such events, the company shall have full right and authority to remove from the licensed premises the shareholder, his agents, servants, or other occupiers of the licensed premises."

In consideration of the agreements, the members who had purchased the shares and made the requisite deposits were allotted specified floor area in the building, on a proportionate basis. In addition to the deposits required from them, the members were also required to pay what was styled as ''compensation'' at such rates as the directors might from time to time determine. By a resolution dated 20-10-1967, the Board of Directors had initially decided to charge and collect from the shareholders compensation at the rate of 0.85 paise per square foot per month, with effect from 1-11-1967, provisionally, subject to finalisation of the municipal assessment. The resolution specifically stated that the compensation was ''to meet the outgoings of the company'' and that the said amount had been arrived at after due and careful consideration of and having due regard to various circumstances such as payment of municipal taxes, ground rent, maintenance of building, etc. This amount was subsequently revised to Rs. 1.20 per square foot per month, by a resolution dated 7-8-1969.

Most of the members of the company, who had been allotted floor space, with the consent of the Board of Directors, transferred the right of occupation to their nominees. While the rate of compensation charged by the assessee-company to its members was Rs. 0.85 per square foot, the members charged compensation which varied from Rs. 1.85 paise to Rs. 2.50 paise per square foot per month. The accounting year of the assessee-company ended on 30th of June each year and in the years ending 30-6-1966 and 30-6-1967 the total deposits collected by the assessee were Rs. 40,07,676 and Rs. 31,61,218, respectively. The construction of the building was completed in October 1967 and in the returns for the assessment years 1967-68 and 1968-69 the assessee submitted a ''Nil'' return and a loss of Rs. 1,63,180-in the return for the assessment year 1969-70.

During the assessment proceedings, taking into consideration the objects of the assessee-company, the ITO came to the conclusion that the company had been formed to trade in land, or to carry on business in lands, tenements or easements which activity being in the course of the business of the assessee, any gain therefrom would form part of trading profits. The ITO then examined the agreement between the assessee and the shareholders and he took note of the fact that the deposits were termed as ''non-refundable deposits'' and that the interest payable on such deposits was to be fixed by the company and not by the depositors. Taking into account the provisions of clause 15 of the agreement, the ITO came to the conclusion that the net result thereof was that, in substance, the deposit ceased to belong to the shareholder and really became the absolute property of the assessee-company and that the provision for payment of interest was only a device to keep up an appearance of deposit. The ITO concluded that these deposits were nothing but trading receipts and included the deposits of Rs. 40,07,676 in the assessment for 1967-68 and Rs. 31,61,218 in the assessment for 1968-69 in the computation of the assessee''s income under the head ''Business income''.

In the assessee''s appeal, the AAC found that the building had not been constructed by way of investment and that the construction of the building and its letting out constituted a business and that under the cover of taking the deposits, the assessee-company had in fact sold the occupancy right of the floor-space in the building constructed by it. He agreed with the view of the ITO that notwithstanding the nomenclature of the ''deposit'', and the apparent grant of interest thereon, the so-called deposits partook of the character of trading receipts. The assessee had raised two further alternative contentions before the AAC. Firstly, it contended that though the deposits were received in the assessment years 1967-68 and 1968-69, they could not be taken into account till the assessment year 1969-70 because it was only in that year that the transactions were completed by the allotment of the floor space to the members. Secondly, that if the deposits were to be treated as sale proceeds of the floor space and, hence, as trading receipts, then the entire cost of construction of the building, or at least a considerable portion of it, should be allowed as an admissible deduction as there could have been no floor space but the outlay of such a consideration. Both these contentions were negatived by the AAC. He rejected the first contention by taking the view that though the amounts were initially recorded in the books as "shareholders'' contributions" and were transferred to the head ''Non-refundable deposits'' only in the accounting year relevant to the assessment year 1969-70, the revenue was not bound to depend on the entries in the books of account of the company so long as the nature of a particular receipt was clear. In rejecting the second contention of the assessee, the AAC held that the assessee had several types of rights in the building and these rights in their entirety had not been parted with on allotment of the floor space, as, by allotment of floor space, there was no ''exhaustion of the asset''. The AAC upheld the inclusions made by the ITO without allowing any deduction for the cost of construction of the building.

Though the floor space was allotted to the members on 1-11-1967, two of the members who were probably connected with the assessee, had actually licensed out their floor space to their nominee from 1-6-1967, even prior to the date of the allotment. The compensation charged by the members was higher than what they were themselves required to pay in the relevant years. Having regard to the disparity ur the rates of compensation charged by the assessee to its members and by the members in turn to their nominees, the ITO had recorded a conclusion that the shareholder, though termed as a shareholder, could not be called the tenant in the strict sense, but merely a collector or rent. He also took the view that because the building was situated in a posh locality where the rental value was as high as Rs. 2.50 per square foot per month, the bona fide letting value should be determined on that basis. He also fixed the rental value of the car parking space at Rs. 200 per car and not at Rs. 50 per car that was actually charged by the assessee to its members. He accordingly computed the income from the property from the date of allotment of the floor space, i.e., from 1-11-1967 to the end of the accounting year at Rs. 16,89,881 and included it in the assessment for 1969-70. As regards the compensation received prior to the date of actual allotment ( i.e., from 1-6-1967 to 31-10-1967), the ITO, without giving any reason for the change in the head of income, calculated the income on hypothetical rate of Rs. 2.50 per square foot per month, under the head ''Income from other sources'' and made additions of Rs. 18,970 in the assessment year 1968-69 and Rs. 75,800 in the assessment year 1969-70.

In the appeal before the AAC, it was contended by the department that the income derived by the assessee from the letting out of the floor space of the building was rightly assessable as income from ''business'' and not as income from ''property'' as was held by the ITO. The AAC accepted this contention of the department and held that although the income from the compensation had been assessed by the ITO under the head ''Income from house property'', the same should have been assessed under the head ''Business''. He, however, did not accept the reasoning of the ITO that the hypothetical value of what was the going rent in the locality should be adopted as the basis for computation and that there were contractual constraints which could not be ignored in determining the annual letting value. The net effect of the AAC''s order was that apart from the deletion of certain cash credits, the major additions of Rs. 40,07,676 and Rs. 31,61,218 as ''Income from business'' were upheld for the assessment years 1967-68 and 1968-69. The AAC also directed the ITO to re-compute the income from compensation receipts on the footing that it was also ''Income from business''. He deleted the sums of Rs. 18,970 and Rs. 75,000 which were added by the ITO under the head ''Income from other sources'' in the assessment years 1968-69 and 1969-70 on the ground that no compensation had actually been charged by the assessee to any of its members during the period 1-6-1967 to 31-10-1967.

In the appeal before the Tribunal, the assessee took up a stand that the building ''Nirmal'' was constructed by way of investment and that the income derived by it therefrom was assessable under the head ''Income from property''. Irrespective of what the objects clause declared to be the objects of the company, the assessee contended that ''the reality of the situation'' must govern the decision on the issue. Alternatively, it contended that even if the construction and letting out of the building was to be considered to be a business venture, there could be no question of taxing the non-refundable deposits received from the members. The expression ''non-refundable deposits'' was explained by the assessee to mean that the deposit was non-refundable only so long as the arrangement lasted, the emphasis being more on the word ''deposit'' than on ''non-refundable''. It also contended that the deposits had been shown in the balance-sheet of the company as liabilities and that many of the members had included such deposits in their wealth-tax returns as net wealth. It was also contended that, at the highest, the amount could be treated as premium charged for the occupation of the premises and, in that view of the matter, they would partake of the nature of capital receipts not exigible to tax.

Alternatively, the assessee contended before the Tribunal that even if the construction of the building and the letting out of the floor space was to be treated as a business transaction, there could be no income assessable to tax in the assessment years 1967-68 and 1968-69 for two reasons. First, that the profits could be said to arise only when the transaction was fully complete and the transaction was completed only upon allotment of the floor space in November, 1967 which month fell within the accounting period relevant to the assessment year 1969-70; no profit could be said to have accrued in the assessment years 1967-68 and 1968-69. Second, that even if the deposits were treated as trading receipts, they could not, in their entirety, be treated as income, as the cost incurred in bringing into existence the floor area, or the cost of construction of the building, must necessarily be deducted in order to determine the profit, if any, resulting from the transaction. The assessee pointed out that the deposits which were received in the accounting periods relevant to two assessment years 1967-68 and 1968-69 aggregated to Rs. 71,68,894 and, inclusive of further deposits received in the subsequent years, the total amount of deposits, as on 30-6-1971, stood at Rs. 80,50,455, as against which the total cost of construction was much higher and, hence, the assessee had not derived any profit in the transaction as the venture had resulted in a loss. The department contended that the deposits accepted from the members of the assessee-company had been rightly held to be trading receipts which were income from the relevant assessment years; that the AAC was right in holding that the assessee, who, as owner, had several rights in the building, had not parted with all its rights and thus there was no exhaustion of the asset. The department also supported the finding of the ITO that the amounts had been rightly assessed in the years in which they were received and that there was no warrant for the suggestion that their taxability, if at all, could arise only in the assessment year 1969-70, being the year in which the floor space was actually allotted.

The Tribunal, considering the matter in its totality and the manner in which the assessee had gone about the whole affair, agreed with the finding of the AAC that the building ''Nirmal'' was not constructed by the assessee by way of investment and that it was business venture. It also upheld the finding of the AAC that, under cover of taking the deposits, the appellant-company had in fact sold the occupancy right of the floor area and, that, notwithstanding the nomenclature ''deposit'' and the apparent grant of interest thereon, the deposits in question partook of the character of trading receipts. The Tribunal accepted the contention of the assessee that since the deposit amount had been received before the allotment of floor space in the building, the transaction could not be said to be complete until such time as the floor space was actually allotted. Since it was an admitted position that the allotment of the floor space was only in the month of November, 1967, which fell within the previous year relevant to the assessment year 1969-70, the profit, if any, accrued or arose only in that assessment year and not in the assessment years 1967-68 and 1968-69 as held by the authorities below.

The Tribunal also recorded a finding that the assessee''s second alternative contention was better founded and that out of the several types of rights which the assessee had as owner of the building, it had transferred the occupancy rights of the entire floor area to the shareholders and the residuary rights which remained with the assessee-company were of negligible or dubious value. The Tribunal took the view that in a situation like this, what was left with the owner was more in the nature of obligations than of rights. Having endorsed the view of the AAC that the deposit amounts in fact represented the consideration received for the sale of occupancy rights of the floor area of the building, the Tribunal accepted the contention of the assessee that the assessee was entitled to deduct the cost of construction for the purpose of determining the profit, if any, resulting from the transaction. Since the total cost of construction was Rs. 84,92,425 as against the total deposits of Rs. 80,50,455, the Tribunal found that the business venture had clearly not resulted in profits to the assessee. On this reasoning, the Tribunal deleted the additions of Rs. 40,07,676 and Rs. 31,61,218 made in the assessment years 1967-68 and 1968-69 and allowed the assessee''s appeals.

As a follow through of its reasoning, the Tribunal dismissed the departmental appeal for the assessment year 1967-68 against the deletion of a sum of Rs. 50,000 added by the ITO as income from undisclosed sources. In the appeal for the assessment year 1968-69, pertaining to the deletion of the sum of Rs. 18,970 relating to the compensation received for the period 1-6-1967 to 31-10-1967, the Tribunal held that there was nothing in the agreement containing any prohibition against the occupation from an earlier date by mutual consent, nor did it contain any provision to the effect that, in the event of such earlier occupation, the income derived by the occupants during such period was to be passed on to the assessee. In this view of the matter, the Tribunal rejected the contention of the department and upheld the deletion of Rs. 18,970 made for the assessment year 1968-69.

Turning next to the department''s appeal for the assessment year 1969-70 against the direction made by the AAC for recomputation of the income derived by the assessee from the letting out of the floor space on the footing that it was the income from business and not income from property, the Tribunal found that the Department itself had contended before the AAC that the income was properly assessable under the head Income from business'' and not under the head ''Income from house property'' as had been done by the ITO. Since the AAC had accepted the contention of the department, the Tribunal held that it was not open to the department to take a stand contrary to what it had urged earlier before the AAC. Though, the Tribunal took the view that the appeal was for the assessment year 1969-70 was incompetent, the Tribunal went on to record its finding on the merits of the case for the sake of completeness. After considering the entire activity of the assessee-company in constructing the building ''Nirmal'', the letting out of its floor area to its depositors and the fact that the department had in the first two assessment years 1967-68 and 1968-69 held that this activity constituted a ''business'', which finding had been upheld in appeal concurrently by the AAC and the Tribunal, the Tribunal felt that there was no other circumstance in the accounting year relevant to the assessment year 1969-70, which would warrant a reconsideration. The Tribunal accordingly held that the income from this source would continue to be assessable as income from business and rejected the contention of the department that even if the income was to be computed under the head ''business'', it was not the actual compensation receivable by the assessee-company from its members which should be taken into account, but the compensation which the members, in their turn, had charged to their nominees, as the department had not produced any material to show that the agreements between the assessee and its members were collusive arrangements. The Tribunal held that the AAC was fully justified in directing the income from business should be computed on the basis of the actual income receivable by the assessee. The Tribunal upheld the order of the AAC insofar as the deletion of Rs. 75,800 for the assessment year 1969-70, arising out of the assessees having allotted their floor space to their nominees even before the date on which they had been allotted the floor space.

On the aforesaid facts, the Tribunal has referred five questions, as stated hereinabove, for the opinion of this Court vide income tax Reference No. 108 of 1977 and two questions vide income tax Reference No. 216 of 1977.

income tax Reference No. 108 of 1977

We have been taken through the entire record, including the lengthy orders of the two departmental authorities and that of the Tribunal in appeal. Though the parties shifted their stand from ''business'' to ''property'' and vice versa, in our opinion, the transaction must necessarily take its legal colour from its essence:

The assessee was a company out to do business in construction and sale of property. Since it had a paucity of funds, it chose to raise the funds by seeking non-refundable deposits from its members. These deposits, proportionate to the floor area required by each member were to be permanently held by the assessee-company as long as the member/ shareholder was in occupation of the floor area allotted to him. Though it was said that these deposits would fetch an interest as may be determined by the Board of Directors of the assessee-company, the said fact is not determinative of the character of the deposits. The deposits were to be held by the assessee-company as long as the member continued to occupy floor area allotted to him and, in the event of the member transferring or alienating his occupancy rights to another, with the approval of the Board of Directors, the amount standing to the credit of the member would be transferred in the books to the credit of the new transferee. There was no event or contingency contemplated in which the shareholder could demand repayment of the deposit. Though the said amount might have been shown as liability in the balance sheet of the assessee-company, it did really partake of the character of a loan or an amount which had to be returned.

Having regard to the manner in which the non-refundable deposits were taken from the shareholders, the shareholders were allotted floor space area which they were not only entitled to occupy but were also entitled to assign to others on payment of compensation and to transfer their occupancy rights by sale of shares and the purpose for which the compensation was charged, the whole transaction, it appears to us, is in reality of sale of floor space by the assessee-company to its shareholders. The assessee-company had kept with itself only the right of the management of property as a whole, the compensation being charged by way of reimbursement of the expenses which were likely to be incurred. That is why there was a provision in the agreement for increase of compensation from time to time.

Notwithstanding the description of these amounts in the books of the assessee and its records as ''deposits'', we are of the view that the Tribunal was right in holding that these deposits were in essence the consideration paid by the shareholder for allotment of the floor space. The AAC and the Tribunal were, therefore, right in taking the view that this was in the nature of sale proceeds for sale of floor space area and legitimately ought to be treated as trading receipts. We are also in agreement with the Tribunal''s finding that after parting with the right of occupancy of the floor area to every member, what remained with the assessee was merely ownership in the technical sense of the word. Though the assessee technically continued to be the owner of the property, even after the entire floor area had been allotted to different members in consideration of the deposits received, the vestigial or residuary rights of ownership which remained with the assessee-company were negligible and of dubious value.

Considering the transaction in its entirety, we agree with the Tribunal''s assessment of the situation, namely, that it was a business transaction and, therefore, the deposits ought to be treated as the revenue receipts in the hands of the assessee. The necessary corollary, therefore, is that what was outlaid by the assessee towards the construction of the floor space area, or the building, must be treated as the revenue expenditure and the profits ascertained only after the cost of construction is entirely deducted from the trading receipts, namely, the so-called non-refundable deposits. Both Mr. Jetly and Dr. Balasubramanian, the learned counsels appearing for the revenue, vehemently contended that even if it be assumed that the cost of construction was legitimately to be deducted from the trading receipts to ascertain the profits of the transaction, since the assessee had retained at least some of the residuary rights, the entire cost of construction could not be deducted from the trading receipts. Though there is some force in this contention, we have to reject it as no material to support such a contention was placed by the department before the two authorities and the Tribunal. No attempt was made to find what the nature of the residuary rights was, nor was any attempt made to evaluate or quantify the monetary value thereof. In these circumstances, we are not impressed by the contention advanced by the revenue and, considering the facts and circumstances of the present case, we are inclined to hold that the assessee would be entitled to deduct the entire cost of construction from the trading receipts for the purpose of determining the profits, if any, resulting from the transaction. In the result Question No. 1 is required to be answered in the affirmative ,question No. 2 in the affirmative and question No. 3 in the negative.

Since we have held that the non-refundable deposits were trading receipts and that the cost of construction had to be deducted therefrom for ascertaining the trading profits and transaction, it follows logically that the whole exercise could be carried on only upon the completion of the transaction and the allotment of floor space area. Since this event occurred only in the accounting year relevant to the assessment year 1969-70, the Tribunal was justified in holding that the profits with reference to the trading receipts accrued in the said accounting year and deleting the addition of Rs. 40,07,676 and Rs. 31,61,218 for the assessment years 1967-68 and 1968-69. Question No. 4 would have to be answered in the affirmative.

The ITO, during the assessment for the year 1967-68, found that in the books of the assessee there was an account in the name of Kanhayalal Dhanpatrai in which there was a credit of Rs. 50,000. According to the assessee, this amount represented a loan from the said party. On a reference made by the ITO, the said party accepted the fact of having given a sum of Rs. 50,000 to the assessee but maintained that the said payment was made for occupancy rights in the assessee''s building. In view of this apparent contradiction, the ITO decided to treat the said amount as a fictitious credit and taxed it accordingly as the assessee''s income from an undisclosed sources. On appeal, the AAC deleted it on the ground that the creditor having accepted the fact of the payment and the purpose for which it was made, there was no question of adding it as income from undisclosed sources. Before the Tribunal, the parties agreed that the Tribunal''s decision in regard to the addition of Rs. 40,07,676 would equally govern the dispute regarding this sum of Rs. 50,000. The Tribunal having deleted the addition of Rs. 40,07,676, upheld the deletion of the sum of Rs. 50,000 also. In our view, the answer to this question is obvious. This amount of Rs. 50,000 must also be treated as non- refundable deposit and payment towards acquisition of occupancy rights. Since this payment had the same character as the sum of Rs. 40,07,676, it could not have been treated differently, as income from undisclosed sources, and the Tribunal was right in deleting the addition of Rs. 50,000 during the said assessment year 1967-68. Hence, question No. 5 is to be answered in the affirmative.

income tax Reference No. 216 of 1977

Though the factual matrix in which the questions arise is the same, the questions appear to have been referred on account of the apparent insistence of the revenue, that the Tribunal''s decision for the earlier assessment years was erroneous and was not accepted by the department.

The assessment year concerned is 1970-71. In this year the assessee received non-refundable deposits totalling to Rs. 5,99,861. The ITO, following his earlier reasoning given in the assessee''s own case for the assessment year 1967-68, brought the entire amount to tax as income. The AAC following his predecessor''s order for the preceding years, held that the non-refundable deposits were in the nature of business receipts and upheld the addition of Rs. 5,99,861. The Appellate Tribunal agreeing with the AAC, held that the non-refundable deposits were in the nature of business receipts and could be considered as income of the assessment year.

In this assessment year, the assessee had also received from its shareholders, to whom specific floor areas were allotted, compensation amount of Rs. 16,18,300. There was no dispute that the licencees in turn had let out the floor area under their occupation to others at much higher rate of compensation, as undoubtedly entitled under the agreement. The ITO felt that the assessee was assessable, not with reference to the compensation of Rs. 16,18,300 actually received, but with reference to the higher compensation received by the shareholders which was determined at Rs. 51,03,050. The AAC, following his reasoning for the earlier years, accepted the assessee''s contention that the compensation received was not of the nature of income from property but was business income. He also held that what was taxable in the assessee''s hands was the actual amount of compensation received by the assessee and not the higher compensation received directly by the shareholders inasmuch as there was no material to show that the assessee-company was entitled to the higher compensation in its own right. Following its common order for earlier years, the Tribunal found that the compensation had to be taxed, not as income from property, but as business income. It also held that what was required to be taxed from this source was only the actual amount of compensation receivable by the assessee and not the amount of compensation received by the shareholders as there was no material to indicate any fraud or collusion.

Though, in view of our conclusion arrived at while answering the question referred in income tax Reference No. 108 of 1977, pertaining to the assessment years 1967-68 and 1968-69, we should have no difficulty in answering the question referred to in the present reference, we have to deal with an additional contention raised by Dr. Balasubramanian, the learned counsel for the revenue.

To recapitulate, the whole transaction was a business venture of the assessee. The assessee raised monies by floating its scheme, constructed the building ''Nirmal'' and allotted all the floor space areas to its shareholders in consideration of different specified amounts of non-refundable deposits received by it. While dealing with the reference for the previous years, we have already held that, considering the transaction as a whole, the non-refundable deposits must be treated as trading receipts in the hands of the assessee. When it came to taxing the non-refundable deposits, the revenue took the stand that they were trading receipts since the venture of the assessee was a business venture. Strangely, however, when taxing the amount of compensation received by the assessee from its shareholders, the revenue shifted its stand and took up the contention that these receipts must be taxed as income from property.

The learned counsel for the revenue strenuously urged that irrespective of the factual background of the case, we must hold that the compensation amount received from the shareholders must be taxed in the hands of the assessee-company as income from the property exigible to tax u/s 22. He contends that once there is any property consisting of buildings and/or land appurtenant thereto, of which the assessee is the owner, irrespective of whether he uses it himself, keeps it locked or lets it out, he is chargeable to tax u/s 22 of the Act, with regard to the annual value of the property as determined u/s 23. In the present case the assessee had not fully parted with the ownership rights and, therefore, continued to be the owner of the property, i.e., the building known as ''Nirmal''. Hence, he contends, the assessee is liable for tax u/s 22 on the annual value of the property as determined in accordance with section 23, irrespective of what the assessee collects from its shareholders (who, according to the learned counsel, are nothing but tenants) and irrespective of the label attached to such receipts.

The contention raised by Dr. Balasubramanian appears attractive at first blush, but on closer examination falls to ground. Even assuming that after the shareholders were allotted the floor space area and the right of occupancy thereof was completely transferred to the shareholders, the assessee still retained some residuary or vestigial rights of ownership, there are two difficulties in the way of the contention being accepted. First, the revenue had made no attempt to identify, quantify or evaluate such residuary rights of ownership. The second, and more formidable, difficulty is that the revenue is not able to show that the residuary or vestigial rights of ownership were of such nature as could be let out. In our view, unless the property owned by the assessee is of such nature as could be let out, the charge u/s 22 of the Act cannot be attracted. In our view, if the property is of such nature that it is inherently incapable of being let out and the assessee owner thereof, then the charge u/s 22 cannot arise. What is necessary for the charge u/s 22 to arise is that the property be inherently capable of being let out.

In this connection we may refer to the judgment of the Supreme Court in Commissioner of Income Tax, Ernakulam, Kerala Vs. Official Liquidator, Palai Central Bank Ltd., (In Liquidation), , to which our attention was invited by Mr. Dastur, the learned counsel for the assessee. The Supreme Court in Palai Central Bank Ltd''s case ( supra ) cited with approval its earlier judgment in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, and held that under the scheme of the Act, charge of tax will not get attracted unless the case or transaction falls under the governance of the relevant computation provisions. The Supreme Court observed:

"... character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section...."

Placing reliance on this judgment of the Supreme Court, Mr. Dastur submitted, in our view rightly, that since the residuary ownership rights of the assessee were inherently incapable of being let out, no computation of the tax could be made u/s 23 and, therefore, the charge u/s 22 fails. We agree with this submission and hold that the compensation received by the assessee from its shareholders has to be taxed as business income and not as income from property u/s 22. Mr. Dastur also placed reliance upon the judgment of our High Court in CIT v. Shah Construction Co. Ltd. [1983] 142 ITR 696, and contended that, in a situation like the present, the shareholder ought to be treated as the owner of the property. In the view that we are taking, it is unnecessary to decide this contention.

The learned counsel for the revenue placed reliance upon the decisions in Sultan Brothers (P) Ltd. Vs. Commissioner of Income Tax, , Karnani Properties Ltd. Vs. The Commissioner of Income Tax, West Bengal, and East India Housing and Land Development Trust Ltd. Vs. Commissioner of Income Tax, West Bengal, . Having been taken through these authorities, we are of the view that the decision in each of these cases turned upon the peculiar facts and no general proposition of law as canvassed for the revenue has been laid down therein. We, therefore, consider it unnecessary to make detailed reference to these authorities.

In the result, we answer the questions referred for opinion as under: income tax Reference No. 108 of 1977:

Question No. 1: In the affirmative and against the revenue. Question No. 2: In the affirmative and against the revenue. Question No. 3: In the negative and against the assessee. Question No. 4: In the affirmative and against the revenue. Question No. 5 : In the affirmative and against the revenue. income tax Reference No. 216 of 1977: Question No. 1: In the affirmative and against the revenue. Question No. 2: In the affirmative and against the assessee. No order as to costs.