2012 (11) TMI 235 - HC - Income Tax

Entitlement to exemption under section 11 - construction activity of World Trade Center, Centre 1 and IDBI Centre - denial of claim as the transaction was one of sale of lease-hold rights of use of space and not of leasing - Held that - The Department sought and received from the assessee particulars of the expenditure incurred by the assessee towards scientific research & the details furnished in the table speak for themselves - hardly any expenditure worth mentioning was incurred on research and development. The assessee s reliance upon section 2(15) is of no assistance to it. The only object of general public utility that can be claimed by the assessee is on account of its main object in the Memorandum of Association. The assessee never engaged itself in any activity connected to the main object viz. to organize, sponsor, promote, establish, conduct or undertake the scientific research in any way or by any means whatsoever and in any area or field. Mr. Andhyarujina fairly stated that the lease transactions were the only business of the assessee. The income therefore, was entirely from the assessee s business unrelated to any charitable purposes whatsoever. An assessee that engages itself only or predominantly in activities relating to its ancillary or incidental objects which do not relate to any charitable purpose and does not carry on any activity relating to its main object which pertains to a charitable purpose is not entitled to an exemption under Section 11. The assessee s claim for exemption fails the first test viz. in establishing that its income was derived from the property held under trust wholly for the alleged charitable purposes. The assessee s claim for exemption under section 11 also fails the second test under section 11(1)(a). It has not been able to establish that such income was applied to such purposes viz. charitable or religious purposes. The assessee s claim is also not maintainable as it has not been established that the work in connection with the assessee s business is mainly carried on by the beneficiaries of the institution - against assessee. Whether only 1/60th of the advance can be assessed as its income for the year as the tribunal had rightly held it as transaction of lease and not of sale ? - Held that - In the agreements, where the rent was divided into three components, the basis rent and parking space rent were to be paid in advance before execution of the lease in installments similar to those under the first set of agreements. Thus under both the agreements, substantial rent was payable in advance - the doctrine of diversion of income by over-riding title does not operate in the assessee s favour. The mere use of the term sinking fund and the manner in which the assessee treats the same in its accounts is not decisive of the matter. The assessee is not a co-operative society in which case the question may well be answered entirely differently depending upon the facts of the case. The fact that depreciation has been claimed by the assessee in respect of the plant and machinery and other equipment required for extending the facilities indicates that the sinking fund was utilized for acquiring and maintaining the same for the benefit of the assessee. The income was, therefore, used by the assessee and for the assessee and the assessee retained the benefit arising therefrom - against assessee. Standard rent fixed by the Municipal Authorities as the annual value v/s - actual rent realized by the assessee - Held that - The additional question for the assessment year 1990-91 is, accordingly, answered in favour of the assessee viz. that the Tribunal has itself held that the said income is to be taxed as income from Profits and gains of business or profession . The issue of consideration received in respect of the transactions for the assessment year 1990-91 under the head income from property does not survive in view of the remand report made by the Tribunal in which it is expressly held that the same has to be assessed under the head Profits and gains of business or profession - in favour of assessee.

Issues Involved:
1. Entitlement to exemption under section 11 of the Income Tax Act, 1961.
2. Nature of certain clauses in the Memorandum of Association.
3. Classification of construction activities as business.
4. Establishing of World Trade Center as an object of public utility.
5. Applicability of section 11(4A) of the Income Tax Act, 1961.
6. Classification of transactions as sale or lease.
7. Assessment of primary basic rent and parking rent as business income.
8. Nature of the sinking fund as revenue receipt.
9. Adoption of standard rent fixed by Municipal Authorities for annual value.

Issue-wise Detailed Analysis:

1. Entitlement to Exemption under Section 11:
The court held that compliance with section 12A is not the only requirement for the applicability of section 11. The property must be held under trust wholly for charitable or religious purposes, and the income must be applied to such purposes. The assessee failed to prove that its activities were for charitable purposes, as it did not engage in any scientific research or apply its income towards such purposes. The court concluded that the assessee's claim for exemption under section 11(1)(a) failed as it did not hold the property under trust wholly for charitable purposes and did not apply the income to such purposes.

2. Nature of Certain Clauses in the Memorandum of Association:
The court examined the clauses in the Memorandum of Association and found that the assessee's activities did not align with its main object of organizing, sponsoring, promoting, establishing, conducting, or undertaking scientific research. The court noted that the incidental or ancillary objects cannot be the main or dominant purposes unconnected with or unrelated to the charitable purpose.

3. Classification of Construction Activities as Business:
The court held that the construction activities of the World Trade Center, Centre 1, and IDBI Centre were activities of business. The income derived from these activities was not related to any charitable purposes.

4. Establishing of World Trade Center as an Object of Public Utility:
The court rejected the claim that the establishment of the World Trade Center was an object of public utility covered by the provisions of section 11. The assessee did not engage in any activities connected to its main object of scientific research, and its income was derived from business activities unrelated to charitable purposes.

5. Applicability of Section 11(4A):
The court held that the assessee's business was not carried on wholly for charitable purposes, and therefore, the claim was barred by section 11(4A). The assessee also failed to establish that the work in connection with its business was mainly carried on by the beneficiaries of the institution.

6. Classification of Transactions as Sale or Lease:
The court analyzed the lease agreements and concluded that the "advance rent" was in fact a premium or salami, and not rent paid in advance. The court held that the transactions were leases and not sales, and the entire "advance rent" was taxable in the year of receipt.

7. Assessment of Primary Basic Rent and Parking Rent as Business Income:
The court affirmed that the primary basic rent and the parking rent were assessable as income from profits and gains of business or profession. The court noted that the nature of income was not in dispute, only the quantum that was liable to be brought to tax.

8. Nature of the Sinking Fund as Revenue Receipt:
The court held that the amount appropriated towards a sinking fund was part of the rent received by the assessee and was in the nature of revenue receipt. The court rejected the claim that the contributions to the sinking fund constituted a diversion of income by overriding title.

9. Adoption of Standard Rent Fixed by Municipal Authorities for Annual Value:
The court found this question to be academic in light of the Tribunal's remand report, which held that the income from the transactions was to be assessed under the head "Profits and gains of business or profession." Therefore, the issue of adopting the standard rent fixed by Municipal Authorities did not survive.

Final Judgment:
1. Question 1 is answered in the negative, in favor of the Revenue and against the assessee.
2. Questions 2 to 5 were not pressed by the assessee and are returned unanswered.
3. Question 6 is answered in the negative, in favor of the Revenue and against the assessee.
4. Question 7 is answered in the affirmative, in favor of the Revenue and against the assessee.
5. Question 8 is answered in the affirmative, in favor of the Revenue and against the assessee.
6. The additional question for the assessment year 1990-91 is answered in the negative, against the Revenue and in favor of the assessee.

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