Per Shri A. R. Halder, Judicial Member - This appeal by the revenue is directed on the ground that the AAC erred in law in holding that the salami receipts of Rs. 74,868 arising from business are exempt under section 10(3) of the Income-tax Act, 1961 (the Act).
2. This is a restored appeal inasmuch as this was originally disposed of by the Tribunal by its order dated 26-3-1973. At the time of hearing, the appeal, originally a preliminary objection was raised on behalf of the assessee that the appeal was barred by limitation. The Tribunal, however, held that the appeal was in time and that finding of the Tribunal was upheld by the Honble High Court at Calcutta. The Honble High Court, however directed that the ITO be permitted to amend the date of verification of the memorandum of appeal filed before the Tribunal. It is important to mention in this connection that the Tribunal while disposing the appeal by its order dated 26-3-1973 did not deal with the merit of the case.
3. In pursuance of the direction of the Honble High Court, the Tribunal again heard the appeal and disposed of the same by its order dated 8-2-1979 directing the ITO to amend the date of verification of the memorandum of appeal filed before it and observed that the said appeal be fixed for hearing and final disposal after the necessary amendment was made by the ITO. since the necessary amendment has been made by the ITO, the present appeal has come up for hearing.
4. The only question for consideration in this appeal is whether or not the salami of Rs. 74,868 is assessable as a revenue receipt The assessee took on lease the partly constructed second and third floors of the building at 55, Canning Street, Calcutta, from Vishnu Properties (P.) Ltd. According to the terms and conditions of that lease, Vishnu Properties (P.) Ltd. retained the ground and first floors of the building and the assessee was to complete the construction of the second and third floors and to let them out. The assessee constructed the second floors during the previous year relevant to the assessment year under appeal and the third floor was in the process of construction. The second floors so constructed was let out to different tenants and the rental income was returned, accordingly. The ITO found that in the set of books seized there were some deposits aggregating to Rs. 74,868 and the entries regarding those deposits were mostly mentioned as salami. The assessee claimed that the amounts represented salami receipted from the tenants, which were not taxable. The assessee also had filed a revised return on 8-10-1967 showing an amount of Rs. 70,000 in section F of the return. By a letter dated 4-11-1967, the assessee submitted that the figure of Rs. 70,000 shown in section F of the revised return should be taken at Rs. 74,868. The ITO was of the opinion that since letting out of premises was one of the business activities of the assessee-firm, the amounts received by it as salami were assessable as business income in the light of the decision in the case of Karanapura Development Co. Ltd. v. CIT : 44ITR362(SC) . Accordingly, the ITO included the sum of Rs. 74,868 in the assessees total income stating Salami receipts being treated as trading profits.
5. The assessee preferred an appeal before the AAC and contended that in view of the decisions in Member for the Board of Agrl. Income-tax v. Sindhurani Chaudhurani : 32ITR169(SC) , CIT v. Rao Thakur Narayan Singh : 46ITR901(All) and CIT v. Port Canning & Land Improvement Co. Ltd. : 62ITR87(Bom) , the amount received by the assessee as salami was not assessable as revenue receipt and that the decision in the case of Karanpura Development Co. Ltd. (supra), on which the ITO relied, was distinguishable on facts. The AAC after considering the facts and circumstances of the case, as also discussing the case laws cited before him, held the ITO was not justified in treating the amount of Rs. 74,868 as income of the assessee. He further observed that this amount represented salami from tenants being casual income arising from business, hence, the same was exempt under section 10(3).
6. Against the said order of the AAC, the revenue has preferred the present appeal and the learned departmental representative contended that the AAC while deciding the issue misapplied the law inasmuch as the provisions of section 10(3) had no application in the instant case. He took us through the relevant portion of the assessment order to show that one of the business activities of the assessee was to take on lease or on hire any building, land, godown, etc., and to let them out in order to derive income. He, therefore, submitted that the amount so received by the assessee could not be said to be a salami and that the ITO was justified in applying the principle laid down in the case of karanpura Development Co. Ltd. (supra). The learned departmental representative invited out attention to the observations of the Supreme Court in the case of karanpura Development Co. Ltd. (supra) at page 377 to the effect that a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by the of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader. He urged that in the instant case the assessee, admittedly, was not the landowner and, therefore, the amount so received as salami was to be treated as trading receipts. He also relied on the decision of the Supreme Court in the case of Ukhara Estate Zamindaries (P.) Ltd. v. CIT : 120ITR549(SC) wherein the same view has been reiterated by the Supreme Court. The learned departmental representative, therefore, submitted that the AAC was wrong in excluding the amount of Rs. 74,686.
7. The learned counsel for the assessee, on the other hand, contended that the AAC was justified in deleting the addition of Rs. 74,686 which was made by the ITO without considering the correct factual and legal aspects of the matter. He pointed out that the ITO treated this receipt as a separate source of income. The learned counsel for the assessee contended that the amount so received as salami was spent by the assessee for the construction of the building and that even assuring that this was a trading receipt, it was not assessable inasmuch as the business had not commenced. He urged that the amount so received was from the prospective tenants prior to the tenancy and, therefore, the character of the receipt was a salami, which was not taxable as income of the assessee. He relied on the decision of the following cases for the proposition that the amount so received by the assessee was a capital receipt :
Sindhurani Chandhuranis case (supra), Promode Ch. Roy Chowdhury v. CIT : 46ITR1064(Cal) , Port Canning & Land Improvement Co. Ltd.s case (supra), Durga Das Khanna v. CIT : 72ITR796(SC) , CIT v. Ratilal Tarachand Mehta : 110ITR71(Bom) and CIT v. Purnendu Mullick : 116ITR591(Cal)
The learned counsel for the assessee vehemently urged that the facts in the case of Karanpura Development Co. Ltd. (supra) were different inasmuch as in the case the assessee-company was formed with the objects, inter alia, of acquiring and disposing of underground coal-mining rights in certain coalfields. The company never worked the coalfields with a view of raising coal nor did it acquire or sell coal raised by the sub-lessees. But in the present case the assessee took on lease certain space of the building in order to construct a building thereon and to let it out to the prospective tenants to derive income therefrom. Such income of the assessee, therefore, cannot be strictly brought within the term business income and the amount so received as salami from tenants cannot be assessed as trading profit. The learned counsel for the assessee, however, did not make any submission as to the applicability of section 10(3).
8. We have heard the rival submissions and considered the facts on record. There is no dispute about the fact that the assessee received lump sum amount from various prospective tenants before letting the premises to them. Therefore, it has to be held that the amount in question was received by the assessee prior to creation of tenancy and the payment made by the tenants as consideration for being let into possession of the premises that were not even constructed by the assessee.
9. In the case of Port Canning & Land Improvement Co. Ltd. (supra) the objects of the assessee-company as per its memorandum and articles of association, among other things, included acquisition of houses, lands, forests, farms, etc., to cultivate or to give and take on lease land for cultivation or otherwise and to accept payment of rent in cash or in produce. The lands acquired by the company were leased out to various tenants receiving a salami or premium at the time of settlement or resettlement in addition to the annual lease rent. On these facts, the Bombay High Court held that the assessee was not a dealer in tenancy rights, holding the tenancy rights as its stock-in-trade, and the salami receipts received by it was not its income from business chargeable as such under the Act.
10. In the case of Ukhara Estate Zamindaries (P.) Ltd. (supra), the assessee-company was formed primarily for the purpose of taking over the zamindari properties of a family, took on lease for a period of 999 years extensive zamindari properties belonging to the family comprising coal bearing lands and mines, and also took an assignment of movable of the family, including Government promissory notes, jewellery belonging to the members of the family and arrears of rent, etc. During the relevant previous years, the assessee granted several sub-leases for periods of 999 years to various companies and received salami and premia therefor and also received compensation for portions of the estate which were compulsorily acquired. Since inception, the assessee had not taken any other property on lease. On a reference, the Supreme Court, reversing the decision of the High Court, on the facts, held that the assessee had dealt with its leasehold interest in the zamindari property as a landowner and not as a trader and the receipts on account of salami premia and compensation were receipts of a capital nature.
11. We are unable to concede to the submission of the learned departmental representative that the assessee was not the owner of the property which was proposed to be tenanted and for that purpose salami was received from the prospective tenants. The rule in India is that a person who builds a superstructure upon the land of lessor remains the owner of the superstructure and can, at the end of the term of the lease, remove that superstructure from the land unless the terms of the lease otherwise provide. This is so because there as no absolute rule of law in India that whatever is affixed or built on the land becomes a part of it and is subjected to the same rights of property as the land itself. In fact, section 108(b) of the Transfer of Property Act, 1882, provides that in the absence of a contract or local usage to the contrary, the lease may even after the determination of the lease remove, at any time whilst he is in possession of the property leased but not afterwards, all things which he had attached to the earth; provided he leaves that property in the state in which he received it. It is, thus, apparent that in the absence of a contrary condition the lessee is the owner of the superstructure during the tenure of the lease.
12. In the instant case, the amount of salami was received from the tenants on condition of letting out the structure of which the assessee was to be the owner; but in the case of Karanpura Development Co. Ltd. (supra) the assessee was company formed with the object of acquiring and disposing of underground coal mines right in certain coalfields. The memorandum of association of the company enumerated other objects, such as coal raising but the assessee restricted its activities to acquiring coal mining leases over large areas, developing them as coalfields and then sub-leasing them to collieries and other companies. The lease were acquired for a term of 999 years and were sublet for the balance of the term of the respective leases minus two days. The company never worked in the coalfields with a view to raising coal nor did it acquire or sell coal raised by the sub-lessees. As against a salami of Rs. 40 per bighas which the assessee had paid, it realised from the sub-lessees Rs. 400 per bighas as salami. In addition, the assessee charged certain royalties at rates higher than those it had agreed to pay under the head leases. The company admitted that the income form the royalties was taxable. The question was whether the amounts received by the assessee as salami for granting the sub-lease constituted trading receipts in its hands and the profit therefrom was assessable to tax under the Act. Having regard to the objects for which the company was formed as well as the nature of the operations which the company indulged in, this Court held that the transactions of acquiring leases and turning them to account by way of sub-lease were in the nature of trading activity within the objects of the company and not enjoyment of property as landowner and the amounts received by way of salami were trading receipts and the profit therefrom were liable to income-tax. Therefore, this case does not apply to the facts of the case before us.
13. In view of what we have discussed above, we would hold that the disputed amount was a receipt of salami and not a train and/or revenue receipt. In view of our above findings, we consider inn unnecessary to deal with the issue regarding the application of the provisions of section 10(3). So also, the various decisions cited by both the parties before us.
14. In the result, the departmental appeal is dismissed.