B.V. Venkataramaiah, Accountant Member -
(1.) THIS is an appeal by the assessee for the assessment year 1975-76. The assessee-company, Century Hotels (P.) Ltd., was incorporated on 4-8-1973. The main object of the company was carrying on business of hoteliers and restauranteurs. The incidental objects were acquisition of properties on lease, mortgage, etc. and manage, cultivate, lease out, sale, etc., such properties. On 22-4-1974 the company entered into an agreement with Shri C.F. Angadi and Shri F.C. Angadi to acquire on permanent lease a property, at present bearing municipal No. 14, situated on Mahatma Gandhi Road, Bangalore, on payment of a lease rent of Rs. 5,000 per month and a sum of Rs. 10 lakhs. The said sum of Rs. 10 lakhs is described as a deposit. THIS deposit was to be retained by the lessor free of interest and to be refunded to the lessee in case the lease was determined except by way of compulsory acquisition or by an enactment of the Government or viz., major (sic). The property consisted of old buildings and open land. According to a copy of the lease deed furnished by the assessee, the area of the plot was 22,143 sq. yards. On the very same day, i.e., on 22-4-1974, the assessee-company executed lease agreement with Naveen Mechanised Construction Co. (P.) Ltd. leasing out in perpetuity 1,00,000 sq. feet of the premises on a monthly rent of Rs. 3,000 and payment of a sum of Rs. 10 lakhs also described as deposit returnable to the lessee on the determination of the lease for any reason. On 8-5-1974, the assessee executed another lease agreement with T.N. Krishna Reddy leasing out the remaining portion of the property on monthly rent of Rs. 2,000 and payment of a sum of Rs. 8 lakhs described as a deposit returnable on the determination of the lease. The ITO referred to the lease agreement. He observed that the lease in favour of Naveen Mechanised Construction Co. (P.) Ltd. could be terminated only if the rent was not paid for a continuous period of three years and that too, after the assessee gave one year's notice, a contingency which would never arise. On these grounds he held that in this venture, the assessee straightway made a profit of Rs. 8 lakhs, i.e., Rs. 18 lakhs received from the sub-lessees minus Rs. 10 lakhs paid to the original lessors and brought it to tax as revenue receipt. The claim of the assessee to deduct consultancy fees of Rs. 2,000 paid to Ravi Engineering Services was disallowed, on the ground that the assessee had no idea of developing the plot as it had already leased it away.
(2.) The matter went in appeal to the Commissioner (Appeals). He observed that even before the agreement with C.F. Angadi was registered on 29-4-1974, the assessee had already entered into an agreement with Naveen Mechanised Construction Co. (P.) Ltd. on 22-4-1974 which, however, was registered on 30-4-1974. The lease deed with T.N. Krishna Reddy was also registered on 9-5-1974. All these facts went to show that the object of the assessee was to dispose of the land for profit. It had all the characteristics of an adventure in the nature of trade. He, accordingly, held that the profit arising from these transactions can be taxed under business. He agreed with the ITO that the deposits would never become refundable to the lessees. He also agreed with the ITO regarding the disallowance of consultation fees paid to Ravi Engineering Services. He, accordingly, confirmed the order of the ITO. The assessee is in appeal.
Before us the learned counsel for the assessee submitted that the Corporation of Bangalore had issued a notice for acquisition of a portion of the property No. 14 Mahatma Gandhi Road for widening the road. As the assessee's object of running the hotel was likely to be frustrated, it panicked and gave away the land in perpetual lease to two parties. This was a solitary transaction and there was no profit motive in the same. The assessee by these transactions wanted to avoid future losses. As the deposits were refundable there was actually no profit. Great stress was laid on Clause 9 in the lease agreement entered into with T.N. Krishna Reddy. There it is stated that the lease could be terminated if any of the terms and conditions were not fulfilled by the lessors. The learned counsel tried to emphasise that the lease could be terminated for several reasons. For example, use of the land by the lessee for any purpose prohibited by law.
It was submitted that the assessee's business was not that of real estate. The benefit motive alone does not convert the transaction into a trading transaction. The burden lay heavily on the revenue to prove that the transaction was in the nature of trade as held by the Supreme Court in Saroj Kumar Mazumdar v. CIT  37 ITR 242. The ancillary objects relied upon by the authorities below to hold that the transaction was in the nature of trade could not be confused as the main object of the company which was to carry on the business of hoteliers and restauranteurs and the acquisition and disposal of properties by way of lease, mortgage, etc., was only in furtherance of the main objects and they do not supplant or obliterate the main objects. The assessee-company had not given up the main object and in pursuance of that object had also paid consultation fees to Ravi Engineering Services. On these grounds, it was submitted that the order of the Commissioner (Appeals) should be set aside.
(3.) THE learned departmental representative, on the other hand, submitted that what the assessee had done was in pursuance of the objects mentioned in paragraphs 3 and 15 of the memorandum of association. THE transactions could not really be considered as leases. THEy were perpetual leases amounting to sales. THE assessee's transaction with Naveen Mechanised Construction Co. (P.) Ltd. and T.M. Krishna Reddy came close upon the heels of the assessee's transaction with C.F. Angadi. THE payment of fees to Naveen Mechanised Construction Co. (P.) Ltd. was for developing the plot as a commercial complex and not as a hotel. At present a hotel and the building for Vijaya Bank have come up on the plot and the assessee has nothing to do with these new constructions. He further submitted that even if it is to be assumed but not admitted, that the transaction was one of lease, the lease rent paid and receivable by the assessee were so insignificant that the deposits themselves have to be regarded as advance rent and as such taxable.;