1982 (5) TMI 50 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of deposits received by the assessee as revenue receipts.
2. Nature of the transactions (whether they constitute an adventure in the nature of trade).
3. Deductibility of consultancy fees paid to Ravi Engineering Services.
4. Applicability of Section 35D deductions.

Issue-wise Detailed Analysis:

1. Taxability of Deposits Received by the Assessee as Revenue Receipts:
The Income Tax Officer (ITO) observed that the lease agreements with Naveen Mechanised Construction Co. (P.) Ltd. and T.N. Krishna Reddy were structured in such a way that the deposits received by the assessee would never become refundable. The ITO concluded that the assessee made a straight profit of Rs. 8 lakhs (Rs. 18 lakhs received from sub-lessees minus Rs. 10 lakhs paid to the original lessors) and brought it to tax as revenue receipt. This was confirmed by the Commissioner (Appeals), who agreed that the deposits were essentially non-refundable and represented a profit from business activities.

2. Nature of the Transactions (Whether They Constitute an Adventure in the Nature of Trade):
The Commissioner (Appeals) and the Tribunal agreed that the transactions had all the characteristics of an adventure in the nature of trade. The sequence of transactions-entering into a lease agreement with C.F. Angadi and immediately sub-leasing to Naveen Mechanised Construction Co. (P.) Ltd. and T.N. Krishna Reddy-indicated a profit motive rather than an intention to run a hotel. The Tribunal noted that the leases were perpetual and provided the lessees with proprietary rights, effectively amounting to a sale. This was further supported by the terms of the lease agreements, which made it unlikely that the deposits would ever be refunded.

3. Deductibility of Consultancy Fees Paid to Ravi Engineering Services:
The ITO disallowed the deduction of consultancy fees paid to Ravi Engineering Services, arguing that the assessee had no intention of developing the plot as it had already leased it away. The Commissioner (Appeals) upheld this disallowance, and the Tribunal agreed, noting that the fees were paid for developing the plot into a commercial complex rather than for constructing a hotel building. The Tribunal found no relevance in this payment, especially since the agreements with the sub-lessees were executed on the same day as the agreement with C.F. Angadi.

4. Applicability of Section 35D Deductions:
The assessee's claim under Section 35D was also rejected. The Tribunal did not find any merit in this claim, given the nature of the transactions and the fact that the assessee's main object was not to carry on the business of hoteliers but to dispose of the land for profit.

Conclusion:
The Tribunal dismissed the appeal, agreeing with the authorities below that the deposits received by the assessee were taxable as revenue receipts arising from an adventure in the nature of trade. The consultancy fees paid to Ravi Engineering Services and the claim under Section 35D were not deductible. The Tribunal's decision was based on the detailed examination of the lease agreements, the sequence of transactions, and the objects of the assessee company as stated in its memorandum of association.