1. These are two departmental appeals filed against the consolidated order of the CIT(Appeals)-XII, Bombay, dated 14-3-1990. The two common grounds which were raised in each of these appeals are the following :- "1. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in directing the Assessing Officer to treat the rental income earned by appellant-trust from letting out premises to MTNL, Bombay as 'Income from other sources' and not as 'Business income' at the hands of appellant-trust in both the years.
2. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in directing the Assessing Officer to hold that shares of the beneficiaries of trust are definite and determinate as per the terms of Trust Deed and directing the Assessing Officer to take further action accordingly ?" 2. The assessee is a private family trust formed under Trust Deed dated 9-1-1984. Copy of the Trust Deed is filed before the Tribunal in paper compilation. Shri Haji Yunus, Abdul Sattar and Shri Haji Sikandar Abdul Sattar are the settlors of the Trust. Shri Haji Razak A. Sattar, Smt.
Momina H. Razzak, Shri Haji Ahmed Haji Razak and Smt. Bilkishbai Haji Ahmed of Bombay are the Trustees. There are 24 beneficiaries, out of whom Trustees 1 and 2 above also figure. Different ratios at which they are entitled to share the profit arising out of the trust property were defined against each of their names as can be seen from page 12 of the paper compilation. Copy of the Trust Deed itself is provided at pages 6 to 35 of the paper compilation. Clause 8(f) of the Deed gives power to the Trustees to do business either on their own or in partnership with any firm or firms. We are concerned with the sub-letting of Flat No. 4 (admeasuring 1472.47 sq. ft.), 2nd Floor, Rabro House, 57-59, Shahid Bhagatsingh Road, Colaba, Bombay-5. Originally, this flat belonged to Shri Maganlal Jadavji and Shri Mansukhlal Jadavji. From the original landlords, the four tenants, i.e., (1) Haji Amin, (2) Haji Siddick, (3) Haji Yunus, and (4) Haji Sikander, took over the flat on a monthly rent of Rs. 129.12 ps. p.m. The four sub-tenants, in their turn, executed a lease deed dated 9-1-1984 in favour of the assessee-trust sub-letting the premises on a rent of Rs. 3,000 p.m. The assessee-trust, in its turn, sublet the same premises on 1-3-1984 to the Bombay Telephone, Bombay, on a monthly rent of Rs. 41,229.6 paise and on a deposit of Rs. 7,42,124.05 p., which was equivalent to 18 months' rent. The deposit was recoverable by the Bombay Telephones in 36 monthly instalments together with interest at 10% p.a. or Bank rate of interest, whichever was higher by way of adjustment against the rent payable.
3. For the assessment year 1985-86, the assessee-trust filed its return on 20-5-1985 disclosing an income of Rs. 3,45,636. The assessment was completed on 146-1985 determining the total income at Rs. 3,45,636. The said assessment was set aside by the CIT, Bombay City-V, Bombay, by his order dated 23-2-1988 passed under section 263 of the Income-tax Act.
Under the said orders, the assessment was re-opened with a direction to the Assessing Officer to see the applicability of section 161(1A) and charge tax at maximum marginal rate. Further, the Assessing Officer was also directed to take into consideration while computing the income of the assessee-trust the interest that is derived on the deposit of Rs. 7,42,125. In pursuance of the CIT's revisionary order, the assessment was re-opened. By its letter dated 14-12-1988, the assessee contended that it was not carrying on any business activity and so section 161(1A) was not applicable. It was also further contended that as the assessee-trust was specific and was not carrying on any business, tax at maximum marginal rate could not by imposed. The Assessing Officer, while completing the assessment, did dot accept the contentions thus put forward by the assessee. He held the following. The assessee itself filed its return for assessment year 1985-86 showing income of Rs. 3,45,636 as income from profits and gains of business or profession. In the capital account of the partners, the share of profit arising from income has also been shown. Further, the contention raised in its letters dated 24-5-1985 and 14-12-1988 also clearly points out the business activities of the assessee trust. Further, the assessee came forth with the contention that the interest earned by the trust is not accounted for on the ground that 9 beneficiaries belonging to Kudia family are not interested in the said interest income as per the resolution dated 'nil passed by the Mg. Trustee and the trustee decided to utilise the interest of the above deposit solely in the interests of the family members of Gajiani Family only. This action was not in consonance with the recitals of the Trust Deed. It throws to winds the directions contained in the original Trust Deed with regard to the names and shares of the beneficiaries. It would show that the Trustees and beneficiaries are following their own rules and regulations disregarding the clauses of the Trust Deed. The names of the beneficiaries and the determined ratios of each of the beneficiaries' interest appear to have been followed more in breach rather than in compliance. In the circumstances, the Assessing Officer held that the names of the beneficiaries and their shares in the income of the trust are not ascertainable with reference to the trust deed and hence not taxing the income of the trust does not arise. Under the circumstances, the Assessing Officer applied the provisions of section 161(1A) of the Income-tax Act and he charged the maximum marginal rate also.
Therefore, he included a sum of Rs. 74,213 which represents 1096 of the interest on the deposit of Rs. 7,42,124.88 and he determined the total income at Rs. 4,19,849 and applied the maximum marginal rate under section 161(1A) and completed the assessment on 6-1-1989 under section 143(3).
4. For assessment year 1986-87, as per the return filed on 20-8-1986, a sum of Rs. 4,54,460 was returned. However, by another return filed on 26-2-1987, the total income was revised to Rs. 4,54,600. In the original return, the income was shown to have been derived from business or profession. However, in the revised return, the income was shown to have been derived from 'other sources". The assessee contended that it was by oversight or by mistake that the rental income it derived was shown under the head 'Profits and gains of business or profession' rather than under the head 'Income from other sources'.
According to the assessee, the rental income should be assessed either as "income from property" or as "income from other sources". Since the assessee is not the real owner of the property let out, the rental income derived by sub-lease is more properly to be assessed as income under the head "Other sources". The sub-lease under which the impugned rent is being derived was the same as was already discussed for assessment year 1985-86. Haji Amin, Haji Siddick, Haji Yunus and Haji Sikander were the original tenants of the tenanted premises mentioned above who took it on a monthly rent of Rs. 129.12 ps. p.m. These four tenants have sub-leased the tenanted premises to the present trust on a monthly rent of Rs. 3,000 on 9-1-1984 and the assessee-trust, in turn, further sub-leased the same to Bombay Telephones Bombay, on a monthly rent of Rs. 41,229.16. ps. on 1-3-1984 and also on taking a deposit of Rs. 7,42,124.88 which is equivalent to 18 months' rent. This deposit is recoverable by Bombay Telephones in 36 monthly instalments together with interest @ 1096 p.a. or bank rate whichever is higher by way of adjustment rent payable. For assessment year 1986-87, the facts being all identical with those in 1985-86, the assessment was completed on a total taxable income of Rs. 5,22,488 and the maximum marginal rate was applied to it. Thus, the assessment for 1986-87 was completed by the Assessing Officer on 25-1-1989 under section 143(3).
5. Against the assessments dated 6-1-1989 for assessment year 1985-86 and 25-1-1989 for assessment year 1986-87, the assessee went in appeal before the CIT(Appeals). The CIT(Appeals) consolidated both the appeals and disposed them of by his common order dated 14-3-1990 whereby he partly allowed the appeals. Firstly, the ld. CIT(Appeals), accepting the contention of the assessee, held that though the assessee was taking up diverse positions with regard to the head of income under which the rental income is assessable in its hands, the assessee was not precluded from claiming that income from letting out of the premises constituted its income from "other sources" even though it had shown the same as "business income" in the return of income during the course of assessment proceedings. He relied upon the following decisions : (3) Baijnath Brijmohan & Sons (P.) Ltd. v. CIT [1986] 161 ITR 234 (Bom.) Based on the ratio of the above decisions, he directed the Assessing Officer to treat the rental income earned by the assessee-trust from letting out of the premises to MTNL and/or Bombay Telephones as "income from other sources" and not as "business income" in the hands of the assessee-trust for the two years under appeal.
6. As regards the additions representing interest, it was contended before the CIT(Appeals) that Rs. 74,213 for assessment year 1985-86 and Rs. 68,082 for assessment year 1986-87 were assessed as interest earned by the assessee on the interest bearing deposit received by the assessee from MTNL. It was submitted that while on the one hand, the assessee had received interest on deposit received from MTNL, on the other hand, the assessee also had to pay interest to MTNL. The interest received and the interest payable on the Deposit to MTNL was exactly the same amount and, therefore, the net addition at the hands of the assessee would have been 'nil and for that reason, the assessee had not disclosed any interest income. For the above reasons, it was submitted before him that the Assessing Officer may be directed not to make any addition on account of interest received or, in the alternative, he may be directed to allow deduction on account of interest paid to MTNL by way of reduction in rent receivable. The ld. CIT(Appeals) held that on this point also the assessee was liable to succeed. He further held that no serious dispute could be raised in regard to action taken by the Assessing Officer by making addition on account of interest received on the deposit amount by the assessee; at the same time, the Assessing Officer ought to have allowed deduction for interest paid by the assessee on deposit amount to Bombay Telephones or MTNL.
Ultimately, he directed the Assessing Officer to verify the assessee's liability on account of interest payable to MTNL on the deposit amount for the two years under appeal and, after such verification, he directed the Assessing Officer to allow deduction on account of interest payable by the assessee to MTNL on the deposit amount.
7. Next, the ld. CIT(Appeals) took up the contention that the shares of the beneficiaries of the trust were not determinate and that the shares of beneficiaries of the trust as shown in the Trust Deed could not be accepted. He found that the deposit amount of Rs. 7,42,124 was distributed amongst 15 beneficiaries and not amongst 24 beneficiaries and depending upon that fact the Assessing Officer held the view that the shares of the beneficiaries were not determinate and their shares as shown in the Trust Deed could not also be accepted. It was contended before the ld. CIT(Appeals) on behalf of the assessee trust that the deposit that the deposit was made as an advance from the tenant and it could not be the income of the assessee-trust and, therefore, the amount of deposit was not required to be distributed amongst the beneficiaries and, in fact, the deposit was not distributed amongst the beneficiaries. Since the assessee-trust was required to pay interest on the deposit to MTNL or Bombay Telephones, as a measure or recouping the interest, the assessee offered the amount as loan to the beneficiaries at the same rate of interest which was payable by the assessee-trust to the tenant. However, only 15 beneficiaries out of 24 were willing to take the amount as loan from the assessee-trust and, therefore, it was advanced to them at the same rate of interest which was payable by the assessee-trust to Bombay Telephones. It was submitted before the ld.CIT(Appeals) that there was no necessity to distribute the deposit amount amongst all the beneficiaries; simply because the deposit was not distributed amongst all the beneficiaries, it could not be said that the shares of the beneficiaries were indeterminate. In fact, the interest of the beneficiaries was determinate and all the income of the trust was distributed amongst the beneficiaries as per their shares in the Trust Deed and there was no violation of the said stipulation in the said Trust Deed. The ld. CIT(Appeals) held that the Assessing Officer was not correct and justified in holding that the shares of the beneficiaries were indeterminate. He directed the Assessing Officer to hold that the shares of the beneficiaries were defined and determinate as per the terms of the Trust Deed.
8. Thus, having been aggrieved against the impugned orders of the CIT(Appeals) dated 14-3-1990, the present second appeals are preferred by the revenue and thus the matters stand for our consideration.
9. The learned Departmental Representative for the department argued that the assessee was, no doubt, a sub-tenant and the assessee-trust had let out the tenanted premises in its turn to a sub-tenant. However, the rental amount agreed to be paid by MTNL or Bombay Telephones should only be assessed as "business income" of the assessee-trust and in support of this part of the case he relied upon the following. Firstly, the ld. Departmental Representative brought to our notice the important clauses in the Trust Deed dated 9-1-1984. While submitting that the assessee-trust was a private trust, our attention was drawn to clause 8(f) of the Trust Deed authorising the Trustees to carry on business in general either independently or as partner of the firm in association with others. For the assessment year 1985-86, the assessee-trust filed its return of income declaring its total income at Rs. 3,45,636 under the head "Business". For assessment year 1986-87, the original return was filed on 20-8-1986 and in the said return also the rental income was described as "business income". It was only on 26-2-1987 when a revised return was filed, the assessee claimed to income as "income from other sources". The assessee filed profit and loss account as well as balance-sheet along with the return for assessment year 1985-86. The assessee also appended capital account of the partners to the balance-sheet. The share of profit arising from the income has also been shown. In the assessee's letter dated 24-5-1985 as well as its letter dated 14-12-1988 addressed to the Assessing Officer, the assessee clearly admitted that the assessee-trust was doing business.
It was argued by the learned Departmental Representative that the sole motive in taking lease of the tenanted premises and subletting the same to MTNL or Bombay Telephones was to earn profits and, therefore, the rental income should be correctly taxed as 'income from business". When once the nature of the income was determined as business, the provisions of section 161(1A) automatically would apply and the said income as a whole should be liable for tax at maximum marginal rate.
10. On the other hand, the learned counsel for the assessee contended that the order of the CIT(Appeals) to treat the income as one from "other sources" was perfectly justified and did not warrant any interference. He submitted the following in support of his contention.
10.1 Madanlal Jadavji and Mansukhlal Jadavji are the two owners of the tenanted premises and the tenanted premises were first let out to 4 persons, i.e., Haji Amin, Haji Siddick, Haji Yunus and Haji Sikander.
There was a Court litigation between the original owners and the 4 original tenants and it appears that a compromise was effected between them even when the litigation was pending in the High Court. In the compromise, it was agreed by the original owners that the 4 original tenants were to be considered as contractual tenants. However, none of the 4 tenants are the trustees or beneficiaries of the assessee-trust.
The assessee-trust had also obtained lease deed from the original tenants on 9-1-1984 under which the monthly rent agreed upon was Rs. 3,000 p.m. The assessee-trust, in its turn, had sublet the tenanted premises under the Tenancy Agreement dated 1-3-1984 on condition that the lessee (Bombay Telephones) should pay monthly rent of Rs. 41,229.18 p.m. as rent and also make a deposit of Rs. 7,22,124 representing 18 months' rent. The deposit should carry interest at 10% per annum or the bank interest, whichever is higher. The deposit together with interest should be repaid in 36 monthly instalments. It is contended that simply because the rental income was shown as "business income" in the income-tax return for assessment year 1985-86, it does not operate as res judicata nor does it preclude the assessee to contend that it is correctly assessable as income from other sources". In support of this contention, the assessee relied upon the Supreme Court decision in Bihar State Co-operative Bank Ltd.'s case (supra). It is also contended that none of the trustees were carrying on any business. When we questioned about the business of each of these trustees, the learned counsel for the assessee submitted that only Trustee No. 1, Haji Amin, owns a business since he is running a factory. Trustee No. 2 Haji Siddick, is only a lady and she is not doing any business. Trustee No.3, Haji Yunus, earlier carried on shoe business (7 or 8 years back) but presently he is a partner in a small hotel and Trustee No. 4, Haji Sikander, is only a lady who passed away 4 or 4 1/2 years back. In total, there are 24 beneficiaries. There are 15 beneficiaries belonging to Gajiani Family and 9 beneficiaries belonging to Kudia Family. We have ascertained the inter se relationship between the settlors of the trustees as well as the beneficiaries. The settlors are stated to be the sons of Abdul Sattar. The first of the Trustees also appears to be one of the sons of Abdul Sattar. The second of the Trustees is the wife of the first Trustee. The 4th Trustee is the wife of the 3rd Trustee.
All the 4 Trustees are also beneficiaries under the Trust Deed. Out of them, Trustees 1, 3 and 4 hold 2% interest, whereas 2nd Trustee holds 3% interest. The inter se relationship was better explained in the letter dated 4-12-1986 addressed to the ITO. The 4th Trustee, i.e., Smt. Bilkishbai, is the sister of settlors 1 and 2 and the 3rd Trustee is the brother-in-law of settlors 1 and 2. The relationship amongst the beneficiaries also is clearly given and we are satisfied that they are related to one another and, therefore, it is quite unnecessary to describe the particulars of their relationship since nothing material turns upon it in these appeals. It is strongly contended that the Trustees were not at all carrying on any business and subletting the premises is definitely not a business undertaken by the Trustees. It is contended that a single transaction of taking a premises on sub-tenancy does not amount to business since business should comprise of a series of transactions and in support of this contention, the learned counsel for the assessee cited before us the following decision : In the said decision, the following ratio was held as part of the head-note at page 863 :- "But, merely because it is a speculative transaction, it will not, by itself, render it a speculative business for which there should be more than one speculative transaction carried on by the assessee, as per Explanation 2 to section 28 of the Act. In the instant case, as there was only one isolated transaction, the finding of the Tribunal that it is loss in business and not in speculative business, is correct." Therefore, the above authority would clearly show that in order to call it a business, there must be more than one transaction. But, if it is a single isolated transaction, it cannot be called a business. The assessee also cited before us the Supreme Court decision in Barendra Prasad Ray v. ITO [1981] 129 ITR 295/61 Taxman 19(SC). The word 'business' is defined in part of the head-note given under this case at page 296 of the reported decision as follows : "The expression "business" does not necessarily mean trade or manufacture only : it is being used as including within its scope professions, vocations and callings for a fairly long time. The word 'business' is one of wide import and it means an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earning an income." Having regard to the ratio of the above two decisions, it is not possible to hold that the sub-tenancy entered into by the assessee-trust with MTNL or Bombay Telephones does not establish any business connection nor was it entered into as a measure of business, it only signifies an isolated transaction, since it is not an activity carried on continuously or systematically with a view to earn income.
When once it is not business, the income derived does not become business income. There is another way of looking at the problem. The assessee, in any view of the matter, is not the owner of the property sublet to MTNL or Bombay Telephones. It is only the owner who can let out the property and who can derive the property income thereon but not others. Now, the question would be : what would be the nature of the rental income derived by a sub-tenant In this connection, the Madras High Court decision in Lakshmi Co.'s case (supra) would be instructive.
In the head-note of the decision, the following is what is held at page 905 of the report : "Held, (1) that the assessee's activity of taking premises on lease, putting up constructions as annexe thereto and letting them out to various tenants was in the nature of a business activity and not what an ordinary property owner would do. Consequently, the firm was entitled to registration.
(2) That sub-letting a property could not be considered to be a trade in its popular or commercial sense. The assessee's activity was not also like that of a property owner as the assessee was not the owner of the property. Mere sub-letting could not be taken to be a business and, hence, the income was assessable under the head 'Other sources'." The following Bombay High Court decision also supports the case of the assessee : The following is what is held in the head-note at page 235 of the report :- "Held, (i) that as a general rule, the principle of res judicata was not applicable to decisions of income-tax authorities and, hence, the fact that the income from letting out of office premises and godown was assessed in prior years as income from business was not conclusive. In order to preclude the income-tax authorities from changing their stand, the prejudice likely to be caused thereby should be such that an advantage which the assessee could have got, if the income-tax authorities had taken the stand taken in the relevant assessment year right from the beginning, should be lost to the assessee. In the present case, it is clear that there is no such prejudice caused to the assessee; (ii) that the facts found clearly showed that the only business which the assessee had been carrying on was dealing in mill-made cloth on commission basis. There was nothing to show that warehousing business was carried on by the assessee and the letting out of office premises and godown was merely a way of exploiting the property of the assessee. The income derived therefrom was not, therefore, assessable as income from business." The following is what is held in the head-note of the decision of the Bombay High Court in CIT v. Jolly Bros. (P.) Ltd. [1988] 169 ITR 72 : "Held, that though the assessee incurred considerable expenditure in laying adjoining roads and in filling and levelling land, keeping in view the facts that the assessee was not a dealer in lands and the nature of the rights it acquired and also the fact that only portions of the land were given on sub-lease to its sister concerns, the transaction did not amount to an adventure in the nature of trade. Therefore, the excess amounts realised by the assessee from the transaction were not assessable as business income." From all the above, it is argued that the ld. CIT(Appeals) was perfectly justified in concluding that the income derived by the assessee-trust was only "income from other sources" and not "business income", we agree with the findings of CIT(Appeals) on this point.
11. Next, it was contended by the learned Departmental Representative that the assessee is an invalid trust and in order to know the real nature of the trust the veil on the face of the trust should be removed and the real nature of the trust should be gone into and known.
Strongly opposing the contention, the ld. counsel for the assessee contended that it is impermissible to lift the veil to ascertain whether a business in reality and substance is the business of the trust or not and, in support of this contention, the Gujarat High Court's decision in K.T. Doctor v. CIT [1980] 124 ITR 501 was cited, wherein it was clearly held as follows as per a portion of the head-note : "Lifting the veil to ascertain whether a business in reality and substance is the business of the trust is not permissible in law so far as trusts are concerned." Therefore, the very argument advanced by the ld. Departmental Representative cannot be entertained.
12. It was next by the ld. Departmental Representative that the deposit must be distributed amongst all the 24 beneficiaries but, even according to the assessee-trust, it was not so distributed but was utilised only by the 15 members of Gajiani Family and Kudia Family members never enjoyed at all the said deposit. This would only show that the directions in the original Trust Deed were clearly disregarded adversely affecting the condition relating to ascertainment of the beneficiaries and also the determined ratio of beneficiaries' interest in each and every part of trust income. Therefore, the Assessing Officer was justified to deduce from the state of facts that the names of the beneficiaries and their shares in the income of the trust are not ascertainable. It was contended for the assessee that the trust under Trust Deed dated 9-1-1984 is a valid trust. It is registered according to law. The Assessing Officer nowhere said in his assessment orders that the trust itself is invalid. Further, it was contended for the assessee that the deposit was an advance received by the assessee-trust from the tenant and not an income of the assessee-trust.
It was not required to be distributed amongst the beneficiaries.
Further, the assessee-trust was required to pay interest on the deposit and the assessee-trust, in order to recoup the interest amount, offer the amount as a loan to the beneficiaries at the same rate of interest which was payable by the assessee-trust to the tenant. It is only the 15 beneficiaries of Kudia Family who came forward and utilised the deposit. Gajiani Family did not evince any interest whatsoever and did not take any amount on interest. At pages 46 to 48 of the paper book, how the amount was repaid was clearly explained to the ITO. At page 48, realisation of the amount of Rs. 24,222.15 from the members of Kudia Family was vividly stated. Therefore, there was no question of the beneficiaries under the trust not being ascertainable or their exact interest also not ascertainable or known. We agree with this contention advanced on behalf of the assessee.
13. A feeble attempt was made by the ld. Departmental Representative that the Trustees cannot at the same time be beneficiaries under the Trust Deed and if they figure as trustees as well as beneficiaries it would invalidate the trust. This contention is stated to be rejected in view of the decision of the Madras High Court in A.N. Kutti v. A.N.Ussan AIR 1927 Mad. 1134, a copy of which is provided by the assessee.
The very definition of the word 'trust' would negate the plea of the Departmental Representative because "trust" is defined in section 3 of the Indian Trusts Act, as an obligation annexed to the ownership of property and arising out of a confidence reposed in, and accepted by, the owner or declared and accepted by him for the benefit of another or of another and the owner. In view of the categorical definition, the Hon'ble Madras High Court in the aforesaid decision held as follows : "The fact that the trustees are enjoying the beneficial interest in the trust property together with the beneficiaries does not make it anytheless trust property.
14. In the result, the appeals of the department for both the years are found to be without merit and are dismissed.