IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY WEDNESDAY, THE 10TH NOVEMBER 2010 / 19TH KARTHIKA 1932 ITA.No. 770 of 2009() --------------------- AGAINST THE ORDER IN ITA.200/COCH/2003 DATED 11/09/2006 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT / APPELLANT: -------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): / RESPONDENT --------------- M/S INTERNATIONAL HOUSING COMPLEX, MALIAKKAL HOUSE, JUDGE MUKKU, TRIKKAKARA. ADV. SRI.K.GOPALAKRISHNA KURUP FOR R1 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 10/11/2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & BHABANI PRASAD RAY, JJ. ---------------------------------- ITA No.770 of 2009 --------------------------------- Dated, this the 10th day of November, 2010 J U D G M E N T Ramachandran Nair, J. This is an appeal filed by the Revenue challenging the order of the Income Tax Appellate Tribunal, which confirmed the order of the CIT (Appeals) cancelling the assessment of short term capital gain on the respondent assessee for the assessment year 1993-94. 2. We have heard Shri.P.K.R.Menon, learned senior counsel appearing for the Revenue, and Shri.K.Gopalakrishna Kurup, learned senior counsel appearing for the respondent assessee. 3. The facts leading to the controversy are as follows:- The respondent assessee, which is a partnership firm consisting of close relatives, executed several lease deeds on various dates in August, 1992 and amended some of the lease deeds in December, 1994, whereunder 11.46 acres of land and building thereon belonging to the assessee-firm were given on long term lease for a period of 99 years to a Private Limited Company, the shares of which are held by the partners of the assessee firm for a total ITA NO.770/2009 -2- consideration of Rs.3,76,43,000/-. In fact, the consideration was paid by the lessee Company by allotment and issue of fully paid up shares of the Company for the entire value of the lease to the partners of the assessee firm. The respondent assessee relied on the terms of the lease deeds and contended that the consideration received for assignment of the lease is rent receivable @ Rs.3,80,232/- each year for the entire period of the lease i.e. 99 years but received fully and in bulk in advance. However, the Assessing Officer treated the consideration received in the form of allotment of fully paid up shares of the lessee Company to the partners of the assessee firm as sales consideration received, and assessed the same as short term capital gains. The assessee challenged the assessment in appeal before the CIT (Appeals), who allowed the appeal by holding that the entire consideration received is assessable as regular income for all the 99 years, in terms of the claim made by the assessee. On second appeal filed by the Revenue, the Tribunal confirmed the order of the CIT (Appeals), against which, this appeal is filed. 4. Before us, learned senior counsel for the Revenue contended that the transaction of lease for 99 years granted for the ITA NO.770/2009 -3- land and building by the assessee firm, is nothing but a transfer within the meaning of Section 2(47)(vi) of the Income Tax Act and so much so, it is assessable for capital gains. Learned senior counsel for the assessee, on the other hand, submitted that the consideration received in the form of allotment of fully paid up shares is the advance rent received for 99 years and in terms of the lease agreement the assessee is returning the income on year to year basis for all the succeeding years, which is being accepted by the Department. In the first place, learned senior counsel for the Revenue contended that when the assessment for the year 1993-94 is pending in appeal, subsequent proceedings such as filing of return for the subsequent years and acceptance of the same by the Revenue do not affect the decision of this Court on merits for 1993- 94. 5. Learned senior counsel appearing for the assessee relied on the decisions of the Supreme Court in Commissioner of Income Tax, Assam, Tripura and Manipur v. Panbari Tea Company Ltd. reported in 1965 (LVII) ITR 422, Maharaja Chintamani Saran Nath Sah Deo v. Commissioner of Income Tax, Bihar & Orissa reported in 1966 (LXII) ITR 167, Durga Das Khanna v. Commissioner of Income ITA NO.770/2009 -4- Tax, Calcutta reported in 1969(72) ITR 796, A.R.Krishnamurthy and Another v. Commissioner of Income Tax, Madras reported in 1989 (176) ITR 417 and the decision of the Andhra Pradesh High Court in Mrs.G.Seetha Kumarajj v. Commissioner of Income Tax reported in 2006 (284) ITR 54 (AP), and contended that the amount received by the partners of the assessee firm by way of fully paid up shares cannot be assessed as short term capital gains, and it is only rent received in advance as held by the first appellate authority as well as the Tribunal. 6. We proceed to consider the issues raised one after another as below:- The first issue raised is whether the transaction is a transfer of asset that attracts liability for capital gains. “Transfer” under Section 2 (47)(vi) of the Act, takes in “any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation :- For the purposes of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA.” ITA NO.770/2009 -5- Admittedly, the transaction herein is a long term lease leaving complete freedom to the lessee Company to enjoy the immovable property leased out for 99 years. So much so, in our view, the transaction is a transfer of capital asset within the meaning of Section 2(47)(vi) of the Act. 7. The next question to be considered is whether the consideration received by way of fully paid up shares of the lessee company issued to the partners of the assessee firm amounts to receipt of consideration by the assessee, assessable at it's hands. While the learned senior counsel for the assessee relied on the findings of the first appellate authority and the Tribunal, learned senior counsel appearing for the Revenue relied on the decision of the Supreme Court in N.Khader Vali Sahed and Another v. N.Gudu Sahid (Decd.) and Others reported in 261 ITR 1 and contended that partnership is not an independent entity and partners are real owners of the firm. 8. We do not think the contention of the assessee or the findings of the lower authorites on this issue can be sustained because the consideration for the lease of the land and building executed by the firm was advance allotment and later issue of fully ITA NO.770/2009 -6- paid up shares by the Company to the partners of the respondent assessee in proportion to their shares in the firm. Admittedly, the members of the assessee firm, which executed the lease deeds, are the shareholders of the lessee Company. Therefore, consideration by way of fully paid up shares issued by the lessee Company to the partners of the lessor firm constitutes consideration for the lease executed by the firm. In fact, the assessee itself has no case that the long term lease of the land and building for 99 years executed by the assessee firm is without consideration. On the other hand, the assessee concedes that the consideration accepted by the assessee is rent received in advance for 99 years which is in the form of fully paid up shares issued by the lessee company to the partners of the assessee firm, which executed lease deeds. We therefore hold that the consideration received, by way of fully paid up shares of the lessee Company, by the partners of the firm is the consideration received for the lease of the land and building of the firm. So long as fully paid shares are issued by the lessee Company to the partners of the assessee firm only on execution of lease deeds by the assessee firm, it is nothing but receipt of consideration by the assessee firm, and simultaneously sharing of the same by the ITA NO.770/2009 -7- partners in proportion to their entitlement of share in the Firm. We, therefore, reverse the findings of the lower authorities, including the ITAT, by holding that the consideration received by the partners together constitutes consideration received by the assessee firm for executing lease deeds in favour of the lessee Company. 9. The next question to be considered is whether the consideration received by way of issue of fully paid up shares to the partners of the assessee firm is the rent received for the whole period of the lease i.e. 99 years, in advance. In this context, we doubt whether the assessee's contention even if accepted, will entitle them to defer payment of tax on the income received in advance in the form of rent. Admittedly, rental income on land and building is assessable either as income from other sources or as income from house-property. Since income is assessable on receipt basis, advance rent received in the previous year for the lease, could be assessed in the assessment year following. So much so, we are afraid whether the assessee's contention even if accepted, helps them to get out of tax liability. However, going by the view we propose to take, we do not think there is any necessity to consider whether the entire income is assessable in the assessment year as ITA NO.770/2009 -8- income of the assessee as advance rent received, particularly when the Department itself does not have such a case. The Supreme Court has in the decision in Commissioner of Income Tax, Assam, Tripura and Manipur v. Panbari Tea Company Ltd. reported in 1965 (LVII) ITR 422 held as follows:- “Under section 105 of the Transfer of Property Act, a lease of immovable property is a transfer of a right to enjoy the property made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent. The Section, therefore, brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in other rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the ITA NO.770/2009 -9- other circumstances, to ascertain the intention of the parties. ” 10. Therefore, the question to be considered is whether the consideration received by the partners of the assessee firm by way of fully paid up shares of the lessee company is capital receipt or revenue receipt. The Supreme Court has cautioned that the assessee's statement in the lease deeds should not be taken on the face value about the nature of the transaction or the nature of receipt. This is a case where neither the assessee nor its partners received consideration for the lease in cash. On the other hand, the entire consideration for the lease was paid by the lessee company by way of issue of fully paid up shares to the partners of the assessee firm, which executed lease deeds. The total value of the shares issued is Rs.3,76,43,000/-, whereas the annual lease rent payable by the lessee company, according to the assessee, is only Rs.3,80,232/-. A notional interest income @ 10% of the bulk payment of advance lease rentals paid for the 99 years amounts to Rs.37.64 lakhs. In other words, if instead of paying the lease rentals fully in advance for 99 years the lessee company retained the consideration paid with them, which is Rs.3,76,43,000/-, it could have paid the annual lease rent of Rs.3,80,232/- on a year to year ITA NO.770/2009 -10- basis with 1% interest on the bulk lease rental paid in advance. The true nature of the transaction in our view has to be considered with reference to the benefit to the lessor from the bulk lease rental received. In our view, if 10% is taken as the reasonable return that could be derived on the bulk lease rent received, the assessee would be able to make Rs.37,64,300/- annually towards the interest for the advance rent received, whereas the assessee's entitlement under the terms of the lease is only annual rent of Rs.3,80,232/-. So much so, in our view, in substance and reality the consideration received is not rent received in advance as claimed by the assessee but consideration for the lease of land and building for 99 years. The net result of the transfer is non-availability of the land and building to the assessee or to it's partners for enjoyment for the next 99 years, during which period the lessee company will hold and enjoy the property. So much so, the consideration received is for the transfer of leasehold rights, which is assessable to capital gain. None of the decisions referred above relied on by the learned senior counsel for the assessee would go to support their contention that the consideration received for the transfer of leasehold rights is the rent receivable for 99 years by the lessee, but ITA NO.770/2009 -11- received in advance. So much so, we hold that the transaction attracts tax on capital gains on the transfer of capital asset. 11. The next question to be considered is whether the Department's stand that the transaction is assessable to short term capital gains is correct. We do not find any justification for assessment of the transaction as short term capital gains. There is nothing to indicate that the land and building was held by the assessee for a short period of less than 3 years to treat it as short term capital assets. If the assets are held by the Firm for more than 3 years, then the assessment on capital gains also has to be as long term capital gains. 12. We therefore, allow the appeal by setting aside the orders of the first appellate authority and also that of the Tribunal on this issue and remand the case back to the Assessing Officer for assessment of the consideration received by the partners of the assessee Firm in the form of fully paid up shares as long term capital gains received by the assessee Firm. Learned counsel for the assessee submitted before us that after the original lease deeds, revised lease deeds were executed for the buildings and the same was done in the year 1994, and ITA NO.770/2009 -12- therefore according to him, even if the lease deeds amount to transfer attracting capital gains as found by us, the same is not assessable for the assessment year 1993-94. However, this contention was objected by the learned Standing Counsel for the Revenue by contending that the possession was given based on the original lease deeds and consideration by way of allotment of shares to partners also made in the year 1992-93, and therefore assessment has to be made for the assessment year 1993-94. Since we have not seen copies of the original lease deeds or revised lease deeds, it is for the Assessing Officer to examine as to whether leases have taken effect based on the original lease deeds and if so, he should make assessment for 1993-94, and on the other hand, if subsequent lease deeds were the real transactions, which could be treated as transfer of the immovable property, then to assess the same for the assessment year relevant for the previous year during which revised lease deeds were executed. (C.N.RAMACHANDRAN NAIR, JUDGE) (BHABANI PRASAD RAY, JUDGE) jg