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.
3. 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.
4. 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.
5. We have heard the rival submissions. We first refer to the agreement entered into between the assessee and C.F. Angadi and Ors. which is available at pages 15 to 21 of the assessee's paper book. It is clear from the narration in the deed that the lease is a permanent one.
According to the terms of the deed, the assessee was to pay every month a sum of Rs. 5,000 to the lessor and also deposit a sum of Rs. 10 lakhs described as a security deposit. The relevant clauses are reproduced below : (2) The lessee shall pay to the lessors promptly without fail each calendar month, the rent hereinbefore referred to within the time specified. The lessors shall have the first charge for the rent and interest on arrears on the lessee's interest in the property demised and of the improvements affected therein by him ; the lessee shall be further liable to pay the lessors interest at 12 per cent per annum on any arrears of rent from the due date or dates up to the date of payment.
(3) In addition to the rents provided above the lessee has paid to the lessor a sum of Rs. 10 lakhs (Rupees ten lakhs only) as security deposit as follows :- (i) Rs. 3,30,000 (Rupees three lakhs and thirty thousand only) before the execution of this lease [contd. on page 5, C.F. Angadi, F.C. Angadi, Tukaram S. Pai, P. Dayananda Pai V. Sheet of document No. 291/1974-75 book I MNR SR 22/4 (Seal)] ; (ii) Rs. 1,70,000 (Rupees one lakh and seventy thousand only) as retained with the lessee to be paid over to Sri Y.S. Hiriyannayya in full settlement of the decree in O.S. No. 85/49-50 on the file of the II Add.
District Judge, Bangalore ; (iii) Rs. 5 lakhs (Rupees five lakhs) paid by the lessee to the lessor by Bank Demand draft in the presence of the Registering Officer at the time of registering this document and the lessors hereby acknowledge receipt of the said sum of Rs. 10 lakhs (Rupees ten lakhs only) This security deposit is to be retained by the lessors free of interest as a deposit for securing the due performance of the terms and conditions herein contained and on the part of the lessees to be observed and performed this sum shall be refundable by the lessors to the lessee in case the lease shall be terminated except by way of compulsory acquisition, by any enactment, State or Central, of the said property or vis. major in which event the provisions hereinafter specified shall have effect.
(5) The lessees shall be at liberty to sublet assign or alienate their lease- % hold rights either wholly or in part in the said property and the lessors shall not be entitled to object to the same provided that the lessees shall, notwith standing any such subletting, assignment or alienation, continue to be liable to pay the rents herein specified and to observe and perform [contd. on page 7, C.F. Angadi, F.C. Angadi, Tukaram S. Pai, P. Dayananda Pai VII sheet of document No. 291/1974-75 book I MNR SR 22/4 (Seal)] or to ensure observance and performance by the sub-lessee, assignee or alliance of all the terms and conditions herein contained and on the part of the lessees to be observed and performance subject to all the rights of the lessors and obligation of the lessee hereunder.
The lessee shall be entitled to raise monies or loans on the security of the lessee's interest in the property leased hereunder and on the improvements effected therein by the lessee without prejudice to the right of the lessors under Clause (2) above.
Clause 4 gives liberty to the lessees either to retain the existing structure or demolish them, rebuilding the structures and construct any additional or new building. Clause 5 gives valuable rights to the assessee. In our opinion, this clause lend support to the argument on behalf of the revenue that the transaction was in the nature of sale.
Clause 6 dealing with the retention of the security deposit by the lessor is as follows : (6) If the said property shall be compulsorily acquired by the Government, State or Central, or by any other authority, organisation or body, the lessors shall be entitled to retain absolutely the security deposit of Rs. 10 lakhs (rupees ten lakhs only) and in addition thereto receive out of the compensation or amount awarded therefor a sum of Rs. 9 lakhs (Rupees nine lakhs only) towards their share [contd. on pages of C.F. Angadi, F.C. Angadi, Tukaram S. Pai, P. Dayananda Pai VIII sheet of document No. 291/1974-75 book I MNR SR 22/4 (Seal)] in the acquisition compensation ; the balance of the compensation on the amount awarded therefor shall exclusively belong to the lessee and the lessors shall not have any right to or interest therein.
From the above clause it would appear that the assessee can under no circumstances get back the security deposit of Rs. 10 lakhs. But on the contrary, in the case of compulsory acquisition, the lessor would receive a share. There is also a clause that the lessee should not use the property for any unlawful purposes, etc.
6. Coming to the lease agreement with Naveen Mechanised Construction Co. (P.) Ltd. and T.N. Krishna Reddy, we find that they are also in similar terms. The following clauses in the agreement between the assessee and Naveen Mechanised Construction Co. (P.) Ltd., were made relevant of which some are reproduced below : (2) Rent.-The rent payable by the lessee is Rs. 3,000 (Rupees three thousand) per month. The rent for the portion of the month of April 1974 has been paid this day and the lessor hereby acknowledge receipt of the same. The rents payable for the period commencing from 1-5-1974 shall be paid on or before the fifth day of the month following that for which it is due.
(3) Deposit.-As and by way of security for the due performance of the lessee's obligations under this lease, the lessee has paid to the lessor a sum of Rs. 10,00,000 (Rupees ten lakhs only).
(9) General provisions.-9.1. Notwithstanding anything herein contained or in the Transfer of Property Act or any other law governing lessees, the lessor shall not be entitled to determine this lease or re-enter upon the leased property except for non-payment of rent as herein provided. In case rents are not paid on the due date by the lessee, the lessor shall be entitled to determine this lease or re-enter upon the leased property except for non-payment of rent as herein provided. In case rents are not paid on the due date by the lessee, the lessor shall be entitled to recover it with interest at 12 (twelve) per cent per annum on the amount in arrear and claim a charge therefor on the buildings erected by the lessee on the leased property. 9.2. The lessor shall not be entitled to determine the lease and re-enter for contravention of any other terms of the lease except non-payment of rent for a continuous period of three years ; in such an event the lessor shall give one year's notice in writing to the lessee to pay up the rent in arrear ; and only if it is not so paid within the said period the lessor shall be entitled to exercise its right of determination of the lease and on such determination the lessor shall be liable to refund to the lessee the deposit of Rs. 10,00,000 (Rupees ten lakhs) without interest before re-entry and also pay in full the value of the buildings in improvements and fixtures in the leased property as per Clause 8(c) above 9.3. In the event of the leased property or any part thereof being compulsory acquired by Government, corporation or any other local authorities, then (a) the compensation awarded for the buildings, fittings and fixtures and improvements in the leased property shall be taken by the lessee in entirety for itself ; (b) if the whole or substantially the whole of the land in the leased property is acquired up to an extent of rupees six lakhs shall be taken by the lessor and the excess over it by the lessee. In that event the lessor shall also be discharged of its liability to refund the deposit of Rs. 10 lakhs (Rupees ten lakhs) and the said sum shall become the property of the lessor.
After such acquisition the lessee shall stand discharged of all its obligations under this lease including liability to pay rent ; (c) if part only of the land in the lease property is acquired, then out of the compensation payable for the land the lessor shall be entitled to payment at the rate of Rs. 16 per sq. foot of the land acquired and the excess over it shall be taken by the lessee. In that event the lessor shall refund a proportionate sum out of the deposit of Rs. 10 lakhs (Rupees ten lakhs) and the rent payable by the lessee shall also get reduced proportionately from the date of acquisition. If the compensation received is at rate less than Rs. 16 per sq. foot, then the whole of the compensation shall be taken by the lessor. The rent shall however get reduced proportionate to the area acquired in relation to the area leased from the date of acquisition.
It is obvious from the above terms that the lessee would never allow the lease of such valuable property to be terminated and enough time has been given to the lessee to pay the arrears of rent, if any. Clause 13 in the agreement with T.N. Krishna Reddy is to the effect that the lessee should not use the property for purposes which are prohibited by law, does not suggest that'the lease is of such precarious nature as to make the so-called deposit refundable to the lessees. We accordingly agree with the authorities below that the deposits received by the assessee are actually sale proceeds, particularly since the lease is permanent and the lessees have been given proprietary rights over the property. We do not, however, consider the arguments advanced by the revenue that the sum received by the assessee could also be held as rent receipts as such, was never the case of the ITO.7. Having disposed of the contention of the assessee that the deposits, being refundable to the lessees, could never have the character of an income against the assessee, we address ourselves to the question whether the transactions entered into by the assessee are in the nature of trade. At the outset we refer to the clauses in the memorandum of association. The main objects are reproduced below : 1. To establish, conduct, manage and carry on business as proprietors of hotels, restaurants, taverns, refreshment and tea rooms, cafes, milk and snack bars and apartment houses.
2. To carry on the business of hotel, restaurant, cafe, tavern, beer-bouse, motel, refreshment room, boarding and lodging house, bar, night club, cabaret floor shows, fashion shows, licenced victuallers and wine, beer and spirit merchants.
3. To carry on business as caterers and contractors and manufacturers in all kinds of foods, drinks, provisions and products, refreshment contractors, sugar and sweetmeat merchants and carry on business as bakers, confectioners and ice-cream manufacturers.
4. To establish and/or conduct canteens, refreshment rooms, shops, departmental stores, sale rooms, depots and to arrange for and to act as contractors and caterers to conferences, exhibitions, seminars and shows of all kinds, board or other meetings of companies, corporations, or any other AOPs.
5. To construct or give for contract, fit up, equip, decorate and furnish any buildings, houses, cottages, structures, or constructions and any property for the purpose of letting the same to visitors or guests or to customers or persons doing business with the company whether in single rooms, suites, chalets, cottages or otherwise and to establish and provide all kinds of curios and attraction for customers or persons dealing with the company and/or for other requirements.
6. To establish offices, showrooms, balls, conference rooms, art galleries, swimming pools, exhibitions and such like as may be necessary for the business of the company.
1. To purchase, take over or otherwise acquire and to take on lease or for the purpose of management of hotels, restaurants, boarding and lodging houses or hotels or any other places where lodging and/or food and/or drinks are supplied, sold or provided for and to manage and conduct the same, on such terms and conditions as may be agreed upon between the company and the respective owners or conductors thereof.
3. To purchase, or by any other means acquire, any freehold, leasehold or other property for any estate or interest whatsoever and any buildings, offices, machinery, engines, rolling stocks, vehicles, plant, live and dead stock or any real or personal property or rights whatsoever which may be conveniently used with or may enhance the value of any other property of the company.** ** ** 15. To improve, manage, cultivate, exchange, let or lease or otherwise mortgage, charge, sell, dispose of, turn to account, grant rights and privileges in respect of, or otherwise deal with all or any part of the property and rights of the company.
In our opinion the question whether the company was authorised to deal in property and the profit earned was from authorised objects is wholly irrelevant. If the company trades outside the objects stated in its memorandum of association, the business may be illegal. But the revenue is not concerned with that question. It has right to tax profits from illegal businesses also. What we have to see is whether the activities carried on by the assessee amounted to trade or not.
8. It is seen that the lease agreement with C.F. Angadi was executed on 22-4-1974 and registered on 29-4-1974. Before the ink had dried on this agreement it entered into a lease with Naveen Mechanised Construction Co. (P.) Ltd. This agreement was also entered into on 22-4-1974 and registered on 30-4-1974. Close on the heels of this agreement, came the second agreement with T.N. Krishna Reddy executed on 8-5-1974 and registered on 9-5-1974. These transactions suggest that the assessee never wanted to carry on the business of hoteliers. The so-called notice given by the Corporation of Bangalore is dated 8-2-1974 in pursuance of the gazette notification dated 8-1-1974. There is nothing on record to suggest that the assessee came to know of these facts after he entered into the lease agreement with C.F. Angadi The gazette notification was issued in January 1974. Further, the acquisition notice was for a portion of the property for widening the road. It is not suggested that the entire property or substantial portion was being acquired by the Corporation for widening the road. That the lease agreement entered into by the assessee with Naveen Mechanised Construction Co. (P.) Ltd. and T.N. Krishna Reddy was out of sheer panic is falsified by the fact that the assessee entered into agreement with C.F. Angadi on 22-4-1974 and on the very same day passed on the property to Naveen Mechanised Construction Co. (P.) Ltd. This shows careful planning and not panic. As the learned departmental representative has rightly pointed out that the fees paid to Ravi Engineering Services was for developing the plot into a commercial complex and not for construction of a hotel building. We do not also see the relevance of this payment, date of which has not been furnished to us, while on 22-4-1974 itself the assessee entered into an agreement with Naveen Mechanised Construction Co. (P.) Ltd. and oral agreement with T.N. Krishna Reddy. The transactions have all the characteristics of trade and we agree with the learned departmental representative that the burden imposed on the revenue in this behalf has been amply discharged by it.
9. The other arguments on behalf of the assessee that this was a solitary transaction and profit motive alone will not justify treating the excess of deposit received by it as income, are equally unacceptable. In Rajputana Textiles (Agencies) Ltd. v. CIT  42 ITR 743, it was held by the Supreme Court that where the promoters had commenced negotiations for sale of shares before they entered into an agreement for purchase of the shares, the profits were taxable as an adventure in the nature of trade. The situation here is similar.
10. We have also adverted to another fact. The capital of the company was only Rs. 10,000. We do not think that with such a meagre capital the assessee could have embarked on the business of running the hotel in a very big way. It appears that it raised finances from Manipal Finance Corporation for paying Rs. 10 lakhs to C.F. Angadi. This is an admission of the fact that the assessee itself had no funds of its own and had to borrow substantially for the purpose of acquiring the land.
But on the very same day it has entered into another agreement to recoup the entire borrowing. The case is also similar to the decision of the Andhra Pradesh High Court in Raja Dhanraj Girji v. CIT  79 ITR 563 where the assessee purchased gold with borrowed money by pledging jewellery, sold gold, purchased shares and then sold them after a short interval. These transactions were held to be an adventure in the nature of trade. We agree with the authorities below that the assessee was taxable on a sum of Rs. 8 lakhs as profit arising from an adventure in the nature of trade.
11. From the facts stated above, the assessee's claim for deduction of fees paid to Ravi Engineering Services and claim under Section 35D are also not acceptable.