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IN THE HIGH COURT OF BOMBAY
B.N. Srikrishna, T.D. Sugla, JJ.
SHREE NIRMAL COMMERCIAL LTD., BOMBAY
Versus
THE COMMISSIONER OF INCOME TAX (CENTRAL), BOMBAY. AND VICE VERSA.
I.T.R. No. 108 of 1977 with I.T.R. No. 216 of 1977,
Decided On: Decided On : 10-04-1991
INCOME TAX - Non-refundable deposits received by assessee company from shareholders for allotment of floor space in building constructed by company - Whether trading receipts - Whether cost of construction deductible from trading receipts - Whether compensation received from shareholders for occupation of floor space assessable as income from property or business - Whether residuary rights of ownership of assessee in building after allotment of floor space to shareholders were inherently capable of being let out.
Fact of the Case:
The assessee company constructed a building and allotted floor space to its shareholders in consideration of non-refundable deposits. The shareholders were entitled to occupy the floor space themselves or assign it to others on payment of compensation. The assessee charged compensation from the shareholders for the occupation of the floor space. The Income Tax Officer treated the non-refundable deposits as trading receipts and added them to the assessee's income. The Appellate Assistant Commissioner and the Tribunal upheld the addition. The assessee contended that the non-refundable deposits were not trading receipts but were in the nature of capital receipts and that the cost of construction of the building should be deducted from the trading receipts to ascertain the profits of the transaction. The assessee also contended that the compensation received from the shareholders was assessable as income from property and not as business income.
Finding of the Court:
The Court held that the non-refundable deposits were trading receipts and that the cost of construction of the building should be deducted from the trading receipts to ascertain the profits of the transaction. The Court also held that the compensation received from the shareholders was assessable as business income and not as income from property. The Court further held that the residuary rights of ownership of the assessee in the building after allotment of floor space to the shareholders were not inherently capable of being let out and, therefore, the charge under section 22 of the Income Tax Act, 1961, did not arise.
Issues: 1. Whether non-refundable deposits received by assessee company from shareholders for allotment of floor space in building constructed by company were trading receipts? 2. Whether cost of construction deductible from trading receipts? 3. Whether compensation received from shareholders for occupation of floor space assessable as income from property or business? 4. Whether residuary rights of ownership of assessee in building after allotment of floor space to shareholders were inherently capable of being let out?
Ratio Decidendi: 1. The non-refundable deposits were in the nature of consideration paid by the shareholders for allotment of the floor space and were, therefore, trading receipts. 2. The cost of construction of the building was deductible from the trading receipts to ascertain the profits of the transaction. 3. The compensation received from the shareholders was assessable as business income and not as income from property. 4. The residuary rights of ownership of the assessee in the building after allotment of floor space to the shareholders were not inherently capable of being let out and, therefore, the charge under section 22 of the Income Tax Act, 1961, did not arise.
Final Decision: The Court answered the questions referred to it as follows: 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.
(Per 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, 1968-69 and 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 ?
2. 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 shareholder ?
3. 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 ?
4. 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 year 1967-68 and 1968-69 ?
5. Whether on the facts and in the circumstances of the case the Tribunal was justified in deleting the addition of Rs. 50,000/- for assessment year 1967-68 made by 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 there in 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 the extent of the compensation received by the shareholders in their own right ?
2. 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 trade 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 Limited, was originally registered as a private limited company on the 14th July, 1964, which was later converted into a public limited company on the 13th August, 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 off and deal with movable and immovable property and rights, and privileges of all 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 respec
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