ORDER
Vimal Gandhi, JM
1. This appeal by the assessee for the assessment year 1987-88 is directed against order of CIT(A) and in the first ground, assessee has challenged addition of Rs. 1,10,923 on account of ground rent and Rs. 19,662 on account of property tax collected from constituents as a trading receipt.
2. The facts of the case are that assessee is a builder and promoter of buildings. The assessee acquired a plot of land No. 26 at Rajendra Place, New Delhi from D.D.A. on lease through public auction held on 28-10-1977 and as per the terms mentioned in letter No. F. 23 (3)/78-IMPL dated 20-1-1978 of D.D.A. After getting the plan approved, the assessee started constructing multi-storeyed building named Pragati Tower on the plot. Subsequently and from assessment year 1978-79 onward the flats in the aforesaid building were sold to different buyers.
3. Under the terms of lease, the assessee was liable to pay ground rent to the D.D.A. On the construction made and completed by the assessee, there was further liability to pay property tax. As per agreement with the flat owners, in the Pragati Tower, the assessee is entitled to recover ground rent and property tax. For the past several years, the assessee had been recovering ground rent and property tax from the flat owners. These two receipts were neither shown nor treated as income of the assessee. However, in the period under consideration, the Assessing Officer found that assessee collected ground rent aggregating to a sum of Rs. 1,10,923. No amount was paid to the D.D.A. Likewise assessee collected Rs. 10,622 from the flat owners towards property tax. The Assessing Officer was of the view that above receipts were of trading nature in the light of decision of Supreme Court in the cases of Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542 and Sinclair Murray & Co. P. Ltd. [1974] 97 ITR 615. He asked the assessee to show cause why above receipts should not be taxes as such.
4. The assessee in its written reply contended that amounts of rent were collected under clause 6(a) of the agreement with flat owners and were not trading receipts as there was an overriding title with the D.D.A. It was further contended that ground rent is neither tax nor duty as it was collected by the D.D.A. for services intended to be rendered in the area. The Assessing Officer did not find any force in the submission of the assessee. He held that it was statutory liability of the assessee which under the agreement was passed on to the flat owners. In this connection, reliance was placed to property tax paid by the assessee in earlier years and debited to the profit and loss account. The Assessing Officer also referred to surrender of Rs. 1,50,929 made by the assessee under the Amnesty Scheme out of the amount collected from the flat owners towards property tax. The ground rent was also held to be of similar nature. The Assessing Officer treated these receipts as trading receipts.
5. The assessee impugned the addition in appeal before the CIT(A) and contended that amount of ground rent and property tax was collected by the assessee as agent and in fiduciary capacity for payment to the Government agencies. These amounts could not be considered as trading receipts in the hands of the assessee. The assessee placed reliance on decisions reported in case of Gulab Singh & Sons. P. Ltd. v. CIT [1974] 94 ITR 537 (Delhi) and in the case of P.N. Sikand v. CIT [1981] 131 ITR 9 (Delhi). The ground rent was further claimed to be a deduction under provision of section 37 of the Act and was to be allowed on accrual basis. The assessee further drew attention of learned CIT(A) to the contractual obligations of flat owners to pay proportionate amounts of ground rent and property tax. The amount collected was claimed as a liability payable to Government agencies. It was claimed that principles laid down by Hon’ble Supreme Court in the cases of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367, CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60 and Tollygunge Club Ltd. [1977] 107 ITR 776 were applicable. The learned CIT(A) did not find any force in the submissions advanced on behalf of the assessee. In her view, the amount in question was liability of the assessee which by means of a contract passed on to the buyers. Since the receipts from the flat owners are trading receipts, the ground rent collected from them even though shown separately has the same character of trading receipt. The addition on account of ground rent and property tax was accordingly justified.
6. The assessee has brought the issue in appeal before the Appellate Tribunal.
7. We have heard rival submissions of parties at great length. The learned counsel for the assessee Sh. Talwar drew our attention to agreement of assessee with the D.D.A. granting lease of plot to the assessee. He further drew our attention to agreement of assessee with flat owners under which the amounts in dispute were collected. It was claimed that amounts were held by assessee in fiduciary capacity for discharge of a specified statutory liability. It was held as an agent for passing the same to statutory bodies. The amount could not be pocketed by the assessee and, therefore, it was not a trading receipt. Shri Talwar greatly relied upon decision of ITAT, Pune Bench in the case of Sharma Associates v. Asstt. CIT [1996] 217 ITR 1 (AT). The learned representative vehemently opposed above submissions and claimed that amount in question were collected by the assessee in the course of carrying on of its business and was trading receipts. The assessee has never paid any ground rent. Both the amounts were collected to discharge assessee’s liability. In these circumstances, these amounts cannot be said to be held by the assessee in any fiduciary capacity. The learned D.R. placed reliance on the decisions of Chowringhee Sales Bureau P. Ltd (supra) and Sinclair Murray & Co. (supra). The decision of learned CIT(A) was accordingly supported.
8. We have given careful thought to rival submissions of the parties. The addition of Rs. 19,662 on account of recovery of property tax stands on a different footing as amount paid in the year is much greater than amount collected. As against total collection of Rs. 19,662, the assessee has paid Rs. 1,50,929. Thus even if property tax collected is held to be trading receipt the amount actually paid has to be allowed as a deduction and thus there is no taxable income. The addition of Rs. 19,662 is liable to be deleted on this short ground. However, collections both on account of ground rent and property tax are not trading receipt liable to be taxed in the hands of the assessee, for the reasons stated hereinafter.
9. The business of the assessee is acquiring land, building flats for disposal. With above end in view the plot at Rajendra Place was acquired. This is not in dispute. The assessee was allotted this plot through auction on terms and conditions provided in D.D.A’s letter dated 20-1-1978. Para 3 of the letter relating to payment of ground rent is as under :
“3. Besides the above an amount of Rs. _______________ on a/c of the annual ground rent payable in advance up to _____________ will be required to be paid by you separately at the time of execution of the lease deed. The cost of stamping and registration of the lease deed and also of the Corporation duty on purchase of immovable property, etc., will also be borne by you.”
At page 2 of terms and conditions, it is further provided as follows :
“Ground rent :
(i) In addition to the premium, the intending purchaser of the lease-hold rights in the plot shall have to pay an yearly ground rent. The ground rent will be at the rate of Re. 1 per plot per annum for the first two years allowed for construction purpose and thereafter will be at the annual rate of 2 1/2% of the amount of premium.
(ii) The ground rent will be enhanced after every 30 years provided that the increase in the rent at each such time shall not exceed 100% of that immediately before the enhancement is due.”
10. The assessee constructed flats in multi-storeyed building called ‘Pragati Tower’. These were sold to different flat owners under written contracts which clearly provided that these flat owners were to pay ground rent and property tax on proportionate basis depending upon the area sold to them. Paras 6(a) and 6(c) relating to payment of ground rent and property tax are as follows :
“6(a). The ground rent is payable to D.D.A. @ 2 1/2% of premium of the plot, i.e., Rs. 55,80,000 per annum w.e.f. 13th April, 1980. This will be borne by the flat owners in proportion to the area of their respective flats and the share payable by each owner will be determined by the promoters on the basis of the total saleable area in the building.
6(c). The property tax will be payable by each flat owner to the Municipal Corpn. of Delhi w.e.f. the date on which the building becomes ready for occupation irrespective of the date of taking possession of flat. However, if assessment of property tax is not made separately for each flat and a consolidated demand is made by the Municipal Corpn. on the promoters then in that case each flat owner will pay his proportionate share to the Promoters/ Corporation Body/Flat owners’ Association on the basis of the area of flat or the annual letting value, as the case may be. If, however, the flat remained vacant it is the responsibility of the buyer to inform the Assistant Assessor & Collector, M.C.D. Special Cell, S.P. Mukerjee Marg, Delhi, to claim vacancy remission.”
It is clear from the above that ground rent was original liability of the assessee but the same was taken over by flat owner “in proportion to the area of their respective flats.” Likewise property tax was agreed to be payable by each flat owner “w.e.f. date on which the building becomes ready for occupation”. The flat owner took over liability proportionate to share in building allotted to them. The revenue authorities added two receipts in question in the hands of the assessee as according to them these were liabilities of the assessee which assessee tried to pass on to the flat owners. In above approach revenue authorities has failed to consider legal effect of transfer made in favour of flat owners. The ground rent and property tax is a levy fasten to the ground and constructed property. It is nobody’s case that liabilities were transferred to flat owners without transferring flat to them. The agreements clearly provided that part of land under the flat has been transferred and possession of superstructure of the flat has also been delivered. Thus with the land and superstructure share of ground rent and property tax payable has also been transferred and became the liabilities of the flat owners. We do not see any difference between this case and a case of an ordinary transfer. It can hardly be contended that liability to pay ground rent or property tax or other liabilities required to be discharged by owner of a building would not pass to the purchaser when said building is sold. Appropriate legal effect of a valid transfer has to be taken into account, namely, the transfer of liability attached to a building. There is material on record to show that assessee while collecting share of ground rent and property tax from land owners gave them an undertaking that it is being collected for payment to DDA and Municipal Corpn. of Delhi respectively. The amounts are not collected to be pocketed by the assessee. Any collection in excess of the liability of the flat owners has to be refunded and cannot be retained by the assessee. Therefore, the amounts have been given to the assessee on a clear understanding that it is to be passed on to DDA and to Delhi Municipal Corpn. These are held by the assessee as an agent and in fiduciary capacity. If above position is accepted, there is no difficulty in holding that receipts so held by the assessee cannot be treated as trading receipts. This proposition is well-settled as per decision of Hon’ble Supreme Court in the cases of Sitaldas Tirathdas (supra), Tollygunge Club Ltd. (supra) and Bijli Cotton Mills (P.) Ltd. (supra). In the case of Sharma Associates (supra), the Pune Bench of ITAT has also taken the same view.
11. In the alternative and without prejudice to the above finding, it is held that so long there is liability of the assessee to pay to the D.D.A. as also to the Delhi Municipal Corpn., the ground rent and property tax, the receipts in the hands of assessee cannot be charged to tax unless it is held that amount collected by the assessee is over and above the statutory and contractual liabilities. There is no finding recorded by the revenue authorities that assessee had no liability to pay ground rent or the property tax on the amount collected by the assessee was in excess of above liabilities. Therefore, on this account also, we hold that amounts collected under two heads are not chargeable to tax, in the hands of the assessee.
12. The assessee has placed great reliance on case of Sharma Associates (supra). In that case, the assessee was carrying on business as promoter and builder. Certain deposits were received by the assessee such as deposit for installation of transformer, stamp duty, water development, electricity board and formation of Society from the flat owners. The Assessing Officer treated these deposits as trading receipts in the light of decision of Supreme Court in the case of Chawringhee Sales Bureau (P.) Ltd. (supra). He taxed receipts in the year of account on accrual basis but held that deductions would be allowed as and when liabilities are incurred. The Appellate Tribunal after considering terms and conditions of agreement with the purchasers and other circumstances including relevant case law, i.e., the following decisions of Supreme Court :
1. Tollygunge Club Ltd.’s case (supra),
2. Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC),
3. CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 (SC), and
4. Bijli Cotton Mills (P.) Ltd.’s case (supra),
held that notwithstanding the fact that these amounts were collected during the course of business, nonetheless there was a liability to be incurred by the assessee as agent for and on behalf of various flat owners. We have to agree with the contention of the assessee because it is a universal fact that every independent house builder has to incur various expenditures in order to obtain water, sanitary, electric connection and also to perfect his title. In other words, the destination of such payments is towards various authorities to whom payments are to be made. It is immaterial whether the amounts have been incurred immediately or after some time and the assessee had the benefit of user of these funds. The Tribunal further held that there was an overriding charge on the amounts collected and, therefore, these could not be regarded as trading receipts. The Tribunal accordingly deleted addition of different amounts. It further held that these amounts were nothing but liabilities and were collected for specific purposes. Accordingly, addition of above amounts was deleted.
13. The above case is on all form with the case in hand. Here also the assessee has maintained separate account in respect of collection made towards ground rent and property tax. Thus in the light of decisions noted above, it is held that amounts collected by the assessee under the two heads are not part of trading receipts.
14. For the aforesaid reasons, we hold that addition of collection on account of ground rent and property tax is unjustified. The same is directed to be deleted.
15. In the next ground of appeal, assessee has challenged assessment of rent as business income from flat No. 1309. The facts of the case are that above flat was agreed to be sold to Sh. H.S. Mangat. Shri Mangat is stated to be non-resident and was to make payment to the assessee after obtaining permission from the Reserve Bank of India. It is stated that Reserve Bank of India did not allow permission to Sh. Mangat to make investment in properties. In the above circumstances, the assessee let out the flat and collected rent of Rs. 1,67,905. The above receipt was shown as income under the head ‘Head property’. The Assessing Officer assessed above amount as business receipt. The assessee challenged this decision in appeal but remained unsuccessful. Hence this appeal.
16. We have heard rival submissions of parties. It is not in dispute that only an agreement of sale was entered into with Mr. Mangat and that ownership in flat was never transferred. Thus the assessee continued to be owner of the flat and had let out the same in above capacity. When rent is realised in respect of house property as owner, the same is to be assessed under the head ‘House property’. The Assessing Officer has not made out any case for treating this rental income as business income. It is not shown that letting out of flat is being carried on by the assessee as a regular and systematic activity. Thus on above clear facts, the rental income has to be assessed under the head ‘House property’. We direct accordingly.
17. In the result, the assessee’s appeal is allowed.