2011 (9) TMI 803 - HC - Income Tax

Principle of mutuality - income derived from deposits from the shareholders towards the value of the floor area allotted to them proportionately and other deposits - assessee contesting it to be exempt from tax on ground of principle of mutuality - Held that - In order to constitute mutuality what is required to be proved is identity between contributor and the beneficiary absence of private motive and principle that when a property is held by the members they cannot be said to earn profit on their own property and whatever the income that is received by the Society or the Company would be shared by the members of the shareholders and that there is no other beneficiary other than the contributors. In present case occupants are given specific commercial apartment together with a perpetual uninterrupted absolute and exclusive right which makes clear that the profit motive is involved in the scheme prepared by the assessee for conferring title under the agreement as referred to above and the income that is derived by the company is not shared among the shareholders. Therefore ITAT first Appellate Authority and the AO were justified in holding that principle of mutuality cannot be invoked. Amount received towards transfer of units at terrace with lawn rights - business income or capital gain - Revenue contended that said units at terrace were not in the construction approved under the original scheme and which was also without the permission of the competent authority and in view of the above said facts constituted short term capital income - Held that - Material on record would clearly show that rights of T1 and T2 and lawn area do not stand on the same footing as other shareholders in whose favour premises were allotted as construction T1 and T2 and lawn area was not included in the original scheme and it was in favour of the Directors initially as a lease deed and thereafter it has been treated as perpetual lease deed. Therefore same has to be treated as capital gains - Decided in favor of Revenue. Maintenance deposit - Held that - AO and the appellate authority have referred to the submission made by the assesses before them to the effect that the surplus income from the said deposit shall also be shown as income from business and accordingly on the basis of the said submission order passed by Tribunal was not at all justified in deleting the income shown as income from business in respect of maintenance deposit - Decided in favor of Revenue.

Summary

Issues Involved:
1. Applicability of the principle of mutuality.
2. Treatment of maintenance deposit as income.
3. Nature of share capital received.
4. Treatment of amounts received for T1 and T2 units with lawn rights.
5. Classification of stock in trade.
6. Short term capital gains on T1 and T2 units.
7. Depreciation on the building.

Issue-wise Analysis:

1. Applicability of the Principle of Mutuality:
The Tribunal, first appellate authority, and the Assessing Officer concluded that the principle of mutuality does not apply to the assessee company. The company was incorporated for real estate business, and the income derived from deposits for floor area allotment to shareholders was treated as business income. The authorities relied on the decision in Shree Nirmal Commercial Ltd. vs. Commissioner of Income Tax, which stated that mutuality does not apply where there is a private motive and the possibility of commercial exploitation. The Supreme Court's decisions in Commissioner of Income Tax vs. Bankipur Club Ltd. and Chelmsford Club vs. Commissioner of Income Tax were deemed inapplicable due to the nature of the agreements transferring ownership to shareholders.

2. Treatment of Maintenance Deposit as Income:
The Tribunal held that the maintenance deposit could not be treated as income of the assessee as it was received for future maintenance and upkeep of buildings. However, the High Court found this conclusion erroneous. The material on record indicated that the maintenance costs collected were admitted as business income, and the assessee had conceded that any surplus from the deposit could be treated as business income. Therefore, the Tribunal's deletion of Rs.22,92,000/- as business income was set aside.

3. Nature of Share Capital Received:
The Tribunal determined that the share capital received by the assessee was a capital receipt and could not be treated as business income. This was upheld by the High Court, which agreed that the share capital was received towards the allotment of flats/units and was not income from business activities.

4. Treatment of Amounts Received for T1 and T2 Units with Lawn Rights:
The Tribunal initially treated the income from T1 and T2 units as business income, stating that these units stood on the same footing as other shareholders. However, the High Court found that the agreements for T1 and T2 units were different from those with other shareholders. The units were leased to directors under different terms, and the income from these transactions was rightly treated as short-term capital gains by the Assessing Officer and the first appellate authority.

5. Classification of Stock in Trade:
The Tribunal's finding that the stock of T1 and T2 units plus lawn area could not be treated as stock in trade was overturned. The High Court held that these units were not included in the original scheme and were leased under different conditions, justifying their classification as stock in trade.

6. Short Term Capital Gains on T1 and T2 Units:
The High Court upheld the Assessing Officer's treatment of income from T1 and T2 units as short-term capital gains. The units were leased to directors and later sold, and the income from these transactions was correctly classified as short-term capital gains. The Tribunal's decision to treat this income as business income was set aside.

7. Depreciation on the Building:
The Tribunal's decision to disallow depreciation on the building was upheld. The High Court agreed that the building's depreciation could not be allowed as the income derived from the building was treated as business income.

Conclusion:
The High Court set aside the Tribunal's order and restored the first appellate authority's order, confirming the Assessing Officer's findings with a minor adjustment to the short-term capital gains. The cross-objection filed by the assessee was dismissed.