2018 (10) TMI 62 - HC - Income Tax

Lase rent / land premium received by the assessee Nigam - business receipt or capital receipt - Nature of income - assessee company is in the business of Industrial and Infrastructure development - Held that - The assessee has been acting independent / equivalent to the owner of the land which is clear from the Clause 22 of the Memorandum where it is clearly brought out that the object of the MPAKVN and SEZ shall be to sell, improve, manage, develop, exchange, lease, mortgage, dispose off, deal with all or any part of property and rights of the company. Moreover, there is no denial on the part of any transaction, the same has to be taxed under the Income Tax Act, 1961 unless the same is exempted by a particular provision of the Act. Assessee company is involved in the business of Industrial and Infrastructure development and thus the land premium and other lease charges so received are part and parcel of its business receipt and hence the land premium and lease rent received is not a liability in the hands of the assessee company but a taxable revenue receipt. The company debits all the expenses incurred on development of plots in Profit and Loss account and hence the land premium being the consideration of leasing out of plot needs to be given the same treatment ie., treated as revenue receipt. The submission of the appellant assessee that the land premium is in the nature of liability onwed by the appellant to the State Government is not acceptable. The assessee company is doing the business of Contractor and therefore, cannot take the shelter under Article 289(1) or 289(3) of the Constitution of India. There has to be a clear distinction between sovereign function and a function carried out as trader or a businessman. If the function carried out falls under the ambit of sovereign function, certainly any receipt arising there from cannot be subject to tax but where the function is being carried out as a contractor, in that event, such receipt is taxable and as per the directives of the State of M.P., the entire receipt remains with the assessee company. A careful perusal of the Memorandum and Article of Association makes it crystal clear that the assessee s main object is to develop, promote, encourage, assist in growth and establishment of industries etc. with ancillary/incidental objects of carrying out of business. A reference to objects as specified under B9 to B12 makes it clear that the assessee is in the business with a motive to earning the profit. The perusal of above Clauses of Memorandum reveals that the assessee is in the business of leasing out of the land and getting rental income as well as the premium. Therefore, a land premium is nothing but a revenue receipt in the form of advance rent which has loosely been named as land premium. Since the assessee is showing annual rent on account of such leasing of the plots, there is no reason why the advance rent received should be taxed accordingly.

Issues Involved:
1. Taxability of Lease Rent/Land Premium as Revenue Receipt.
2. Applicability of Article 289 of the Constitution of India.
3. Classification of Land Premium as Capital Receipt.
4. Understatement of Profit and Disallowance of Expenses.

Detailed Analysis:

1. Taxability of Lease Rent/Land Premium as Revenue Receipt:
The primary issue was whether the lease rent/land premium received by the assessee should be treated as a revenue receipt and thus taxable. The Income Tax Authorities had treated the land premium as a revenue receipt, which was contested by the assessee on the grounds that it was a capital receipt and not taxable. The assessee argued that they acted merely as a nodal agency for the State Government and the land premium collected was credited to the State Government's account as a capital receipt. However, the tribunal found that the assessee was empowered to acquire land and deal with it in a manner similar to a business entity, and thus the land premium was considered revenue in nature and taxable.

2. Applicability of Article 289 of the Constitution of India:
The assessee claimed exemption from tax under Article 289(1) of the Constitution, which states that the property and income of a State shall be exempt from Union taxation. The tribunal rejected this plea, stating that there is a distinction between sovereign functions and functions carried out as a trader or businessman. Since the assessee was engaged in the business of industrial and infrastructure development, the income generated from these activities was taxable.

3. Classification of Land Premium as Capital Receipt:
The assessee argued that the land premium was a capital receipt and thus not taxable. The tribunal referred to various judgments and found that the nature of the receipt depends on the intention of the assessee. In this case, the tribunal observed that the assessee itself had treated the land premium as taxable in earlier years, indicating that it was considered a business activity. Therefore, the tribunal held that the land premium was revenue in nature and taxable.

4. Understatement of Profit and Disallowance of Expenses:
The assessee was found to have understated its profit by not capitalizing certain expenses related to employee remuneration and administrative overheads. The assessing officer disallowed expenses amounting to ?2,18,75,469 and added this to the total income of the assessee. The tribunal found that the assessee had changed its accounting policy without proper justification and had not provided sufficient evidence to support its claim that these expenses were revenue in nature. Therefore, the tribunal upheld the disallowance of expenses and the addition to the total income.

Conclusion:
The tribunal dismissed the appeals filed by the assessee, holding that the lease rent/land premium was revenue in nature and taxable. The tribunal also upheld the disallowance of expenses and the addition to the total income, finding that the assessee had not provided sufficient evidence to support its claims. The tribunal found no substantial question of law for determination and dismissed the appeals without any order as to costs.

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