1. This is an appeal by the Department against the order of the CIT(A) dt. 8th Oct., 1998. The only ground raised in this appeal reads as under: "On the facts and in the circumstances of the case, the CIT(A) erred in deleting the capital gains of Rs. 51,39,366 taxed by the AO by treating the difference in the rate of interest as deemed consideration." 2. The facts, in brief, are that the assessee entered into licence agreement with the East India Hotels Ltd., Calcutta, on 2nd May, 1989, whereby the assessee-company agreed to grant a licence of 75 acres of land known as Haridasji-ki-Magri for a period of 75 years to enable the licensee to construct a hotel at its own expense and run the same.
However, on 17th Dec., 1992, the assessee executed a lease deed in favour of East India Hotels Ltd. and provided the abovementioned 75 acres of land bearing khasra No. 148 along with the rights, easements, amenities on lease for a period of 72 years from 17th Dec., 1992, as per the lease deed dt, 17th Dec., 1992 registered with the office of the Sub- Registrar, Udaipur. The terms regarding lease deposit were as under: "15.1 The lessee shall keep deposited with the lessor an advance lease deposit of Rs. 2.50 crores on the following terms and conditions : (iii) Interest--9 per cent per annum simple interest with effect from the date of receipt of payment.
(iv) Payment--10 yearly instalments of Rs. 25 lakhs each from 1st May, 2055." The terms and conditions regarding consideration of the above lease were as under: 1. In consideration of the lease hereby granted on the demised premises for a period of 72 years, EIH shall pay to the lessor herein the following amounts by way of lease rents : (a) From 1st May, 1992 for 7 years ending 30th April, 1999--Rs. 23 lakhs per year.
(b) From 1st May, 1999 for 10 years ending 30th April, 2009--Rs. 23.25 lakhs per annum.
(c) From 1st May, 2009 for 10 years ending 30th April, 2019--Rs. 24 lakhs per annum.
(d) From 1st May, 2019 for 10 years ending 30th April, 2029--Rs. 24.25 lakhs per annum (e) From 1st May, 2029 for 10 years ending 30th April, 2039--Rs. 24.50 lakhs per annum (f) From 1st May, 2039 for 10 years ending 30th April, 2049--Rs. 25 lakhs per annum (g) From 1st May, 2049 for 15 years ending 30th April, 2064--Rs. 25.50 lakhs per annum 2. The annual lease rent shall be payable by the 1st day of May for the previous year at the office of the lessor or at such other place as the lessor may from time to time direct." The AO stated that the long-term lease of the land was considered as covered by the definition of the term 'transfer' in the light of the provisions of Section 2(47) of the IT Act, in terms of the ratio laid down by various High Courts which had been mentioned in the assessment order dt. 31st March, 1998. The AO also stated that in consideration of such transfer, the assessee received Rs. 2.5 crores as deposit at a concessional rate of interest at 9 per cent per annum, whereas the normal market rate of interest on loan was in range of 18 to 24 per cent and the rate at which the loans were normally advanced by banks during that period was 18 per cent. He, therefore, considered the rate of 18 per cent as most reasonable and accordingly worked out the concessional interest on deposit of Rs. 2.5 crores at Rs. 14.62 lakhs for the first year and Rs. 22.50 lakhs for the remaining years. The AO worked out the value of lease on the concessional benefit in the form of interest by discount at the present value factor of 18 per cent and thus the consideration for lease was worked out at Rs. 1,18,32,120. The AO further stated that the value of land at Haridasji-ki-Magri as on 1st April, 1981, was Rs. 44,000, per bigha, i.e., Rs. 82,415 per acre.
By considering that value as the market value, the AO worked out the cost of land as on 1st April, 1981, at Rs. 61,81,125. The AO further pointed out that in the wealth-tax assessment of the assessee, the fair market value of land as on 31st March, 1992 as well as on 31st March, 1993, had been taken at Rs. 2,44,05,030. On that basis, the cost of acquisition of the lease hold rights had been determined by the AO at Rs. 29,96,751, as per the following calculation: The AO by taking the cost index as on 31st March, 1992, at 223 worked out the cost of acquisition at Rs. 66,82,754 (Rs. 29,96,751 x 223/100).
Accordingly, the capital gain was worked out by the AO at Rs. 51,39,366 (Rs. 1,18,32,120--Rs. 66,82,752). The AO completed the assessment by ignoring this contention of the assessee that there was no consideration except rent as per the lease agreement and, therefore, the provisions of Sections 45 and 48 were not applicable. The AO also stated that the lease agreement had been drafted and executed in such a manner that no consideration could be reflected apparently and that type of colourful device could not be permitted to evade tax. He relied on the decision in the case of Amora Chemicals (P) Ltd. v. Asstt. CIT (1996) 56 TTJ (Ahd) 273. In this manner, capital gain of Rs. 51,39,366 was computed in the hands of the assessee.
3. The assessee carried the matter to the CIT(A) and on the basis of various clauses in the lease agreement contended as under: "(i) The consideration for grant of lease is the lease rental as contained under Clause (3) of the lease agreement; (ii) The sum of Rs. 2.50 crores is amount of advance lease deposit bearing interest at 9 per cent per annum and payable by 10 yearly instalments of Rs. 25 lakhs from 1st May, 2055; (iii) There is no clause conferring any right on the lessee to have renewal on the terms and conditions contained in the lease agreement (Clause 8). Clause 8 provides for renewal or extension by mutual agreement and on such terms and conditions as may be mutually agreed upon before the expiry of the lease. The case of R.K. Palshikar v. CIT (1988) 172 ITR 311 (SC) is completely distinguishable to the facts of the case of the assessee-company. There the transfer by way of lease was for 99 years and it was agreed under the lease deed that on expiration of the said period of lease, the lessor or his legal heir will execute a new lease deed in favour of the lessee or his legal heirs on the terms and conditions as would be settled later. The transfer was on payment of the salami or premium apart from annual lease rent of the plot. Thus, it was patent that it was a perpetual lease on payment of premium or salami, whereas the assessee-company has not given perpetual lease and has also not charged any premium; (iv) There lay provision for termination of the lease prior to full term (Clauses 6 and 7); 2.7 It is patent on records that no premium or salami or any other consideration except annual lease rent was received by the assessee-company consequent to the lease. The lease rent is for use and occupation of the demised land, is income and is being assessed to income-tax from year to year. The lease rent as recorded in the lease deed has been found to be genuine and such lease rent stands assessed during the year under appeal (in the original assessment as well as reassessment order) and in all succeeding assessment years.
The lease rent is the only consideration for the lease. Such rent having been assessed as income and rightly assessed, there is no other consideration which could be taxed by way of capital gain.
Distinction between rent and salami/premium is well recognised under Section 105 of the Transfer of Property Act. There lay many decisions and in such decisions amounts received by way of salami/premium alone have been taxed by way of capital gain and rent or royalty received annually have been taxed under Section 28/56." It was further stated that the lessee company was an existing assessee and interest charged from the assessee-company had been duly shown as income and the lease rentals as deductible expenditure. Therefore, the advance deposit of Rs. 2.5 crores which was refundable was only to safeguard the interests of the assessee to compel the lessee company to comply with the terms and conditions of the agreement strictly. It was stated that the transactions where the consideration had been correctly declared/disclosed could not be treated to be covered by the ratio of the decisions relied upon by the AO. The reliance was placed on the decision in the case of Asstt. CIT v. K.B. Investment & Finance Company Ltd. (1995) 53 ITD 410 (Del), wherein it had been held that for the purpose of invoking Section 45 the consideration received within the meaning of Section 48 must be available in order to compute the gain, Accordingly, it was submitted that when such consideration was not available, no profit or gain could be taxed under Section 45. As regards to the finding of the AO in respect of treating the lease agreement as device to evade tax, it was stated that the lessee as well as the assessee were companies of repute and no relationship between the two existed or brought on record by the AO in support of the adverse finding. It was emphasised that the transaction by lease agreement was completed with the approval of the Company Law Judge and the stamp duty had been paid on the recorded lease rent. Therefore, the allegation of concessional lease rent was not tenable because the Sub-Registrar, who was an independent and competent authority, had accepted the correct value of lease rent for the purpose of stamp duty and registration fee. It was stated that the transaction as such had been accepted by the AO of the lessee company and the AO had not gathered any evidence or material to prove that the transaction was subterfuge or device to evade tax. It was contended that the ratio of the decision relied upon by the AO was not applicable in the case of the assessee. Rather, the ratio of the decisions of the Rajasthan High Court in the cases in Rajmal Chordia v. CIT (1995) 215 ITR 52 (Raj) and Vimal Chand Hirawat v. CIT (1994) 208 ITR 839 (Raj) supported the case of the assessee and not of the Revenue.
3.1 The CIT(A), after considering the submissions of the assessee observed that the object of the deposit, nature of the transaction and the relationship between the parties were the relevant factors for consideration to determine the reasonableness of the rate of interest in the context of a particular transaction but the AO had not analysed those things before arriving at the conclusion that 9 per cent rate was concessional. He opined that the amount/quantum of deposits, period of deposits, amount of annual rent, vis-a-vis, the total value of capital assets transferred were the other pertinent factors and relevant aspects to judge the reasonableness of the interest rate and not the market rate in respect of the commercial/banking transactions for ordinary loans/deposits. The CIT(A) mentioned that the deposits were in the nature of security deposits and the interest was on the refundable advance which was taken by the assessee for the purpose of the performance of agreement besides real consideration shown in the form of lease rent. He also pointed out that the lease agreement was entered into on 17th Dec., 1992, in supersession of existing licence agreement dt. 2nd May, 1989, against which deposit to the extent of Rs. 1 crore was already available with the assessee. The CIT(A) also pointed out that the total value of the land taken by the AO as per the wealth-tax record as on 31st March, 1993, was Rs. 2,44,05,030 and the value of consideration by transfer of leasehold rights worked out at Rs. 1,18,32,120 against the cost of acquisition of leasehold rights computed at Rs. 66,82,754. According to him, the total lease rent for the entire lease period worked out to Rs. 16.90 crore at the stipulated rate. Therefore, the adequacy of consideration or full value of consideration and/or genuineness of transaction had to be examined and judged in the light of these facts and aspects because no other material/evidence or basis had been brought on record to support the findings that the interest rate of 9 per cent was concessional being disguised consideration for transfer. The CIT(A) stated that nowhere the AO mentioned that the security deposit was not necessary for the purpose of lease agreement nor it was his case that the deposit was purely of commercial/banking nature of deposit or loan to the lessor so as to compare the interest rates thereon with the market value of such deposits because normal rule that was comparable should only be compared. According to the CIT(A), the long-term lease agreement provided for refundable advance/security deposit for due compliance of the terms of the agreement and that being the normal practice in such transactions, the AO ought to have given specific finding in this respect. The CIT(A) was of the view that there was neither such evidence/material to prove that the deposit and interest thereon as consideration nor there was any justification to treat 9 per cent interest rate as concession on such deposit. The CIT(A) further stated that the value of land as assessed under the wealth-tax was Rs. 2,44,05,030. Therefore, the refundable advance deposit of Rs. 2.5 crore was almost equal to the value of land, which suggested that this amount of deposit was not unreasonable as security deposit because possession of land had been parted with but the land had not been transferred. The CIT(A) also stated that the annual rent ranged between Rs. 23 to 25 lakhs per annum was not low. He also stated that the transaction of lease had not been held as ingenuine. He also stated that there was no specific finding about the inadequacy or otherwise of lease rent. If it was not held insufficient consideration, the concept of full value of consideration does not come into picture because no prudent man would pay full lease rent in addition to deposit at a lower rate of interest.
The CIT(A) opined that the low rate of interest, if any, agreed upon between the parties could not by itself cause as well as effect for resorting to the provisions of Section 45/48. He, therefore, held that the amount of consideration worked on the basis of presumed difference in the rate of interest could not be equated to the consideration in the form of salami or premium normally paid and held taxable for the purpose of capital gains. In the present case, no premium or salami had been paid and the advance deposit was refundable. The CIT(A) categorically stated that the ratio of the decision relied upon by the AO had been distinguished by the assessee and also, in his view, the ratio could not be said to be squarely applicable to the facts of the assessee's case, in the absence of any amount received as salami or premium, whereas in those cases amount of salami or premium was ascertainable and specifically mentioned. The CIT(A) further stated that the provisions of Section 45/48 were specific and both these provisions could not be invoked on assumptions and presumptions.
According to him, the deeming provisions for computing the capital gains had been specifically provided for under different sections, such as Sections 45(2), 45(3), 45(4), etc., and the charging Section 45(1) could not be construed to be the deeming provision but strictly interpreted to charge the capital gain tax because it was based on statutory legal fiction. The CIT(A) further pointed out that Section 48 deals with the mode of computation of income chargeable under the head 'capital gains' and unless and otherwise provided, consideration shown in the document of transfer should be adopted being binding as per the standing provisions of law. He, therefore, observed that the full value of consideration which had not been shown to have actually received or accrued to the assessee could not be computed. He relied on the decision in the case of Smt. K. Narasama v. ITO reported in (1990) 32 ITD 494 (Ahd), wherein it has been held that where the purchaser states that he had paid higher amount than stated in the agreement, the capital gains could not be computed on the figures so stated unless and until some other evidence was brought on record to support such statement of the purchaser. As regards to the observations of the AO that the lease deed was a device or subterfuge to evade tax, the CIT(A) stated that the AO was duty bound to unveil the device and to determine the true character of the transaction from the documents relied upon or from the conduct of the parties. The AO impliedly admitted his inability to lay hands on any such material/evidence in support of his findings in this respect. According to the CIT(A), no tenable evidence had been brought on record in support of the adverse finding except presuming the concessional rate of interest as disguised consideration for the purpose of adopting the full value of consideration for levying capital gains tax, However, as per the settled position of law, the basic principle of levying the capital gains tax was that there must be profit or gain arising from the transfer of capital assets and the relevant provisions must be read in conjunction and co-relationship of the charge and mode of consumption as provided under Section 45/48. The reliance was placed on the decision in the case of CIT v. S. Ramal Amai (1982) 135 ITR 292 (Mad), wherein it has been held as under: "....that taxing statute must be applied in accordance with the legal rights of the parties to the transaction. When the transaction is embodied in a document, the liability to tax depends upon the meaning and content of the language used therein and this seems to be determined in accordance with the ordinary rules of construction.
The fact that a particular result can be achieved by treating the transaction as of a different kind from that when the parties have put through, would not give jurisdiction to the Tribunal to ignore the form of transaction which had commended itself to the parties and which the parties have adopted for incorporating the transaction. The Tribunal cannot tax on the basis of substance, neither can it let off an assessee from tax on the same basis." In view of the aforesaid discussion, the CIT(A) held that the concept of adopting the full value of consideration was not applicable to bona fide transaction unless it was shown that the consideration mentioned in the deed had been understated and the assessee had actually received more than what was stated in the document. He, therefore, deleted the addition made by the AO on account of capital gains on the basis of concessional rate of interest as deemed consideration. Now the Department is in appeal.
4. The learned Departmental Representative strongly supported the order of the AO and stated that the assessee had shown interest of 9 per cent. However, the prevailing market rate was 18 to 24 per cent.
Therefore, the assessee received the deposit/loan on concession rate and the AO was fully justified in determining the value by taking into consideration the rate of interest at 18 per cent and accordingly in computing the capital gain.
4.1 In his rival submissions, the learned counsel for the assessee, at the very outset, stated that the observations of the AO that it was a colourable device was without any basis and evidence on record. He emphasised that the assessee as well as the lessor company both were limited companies and the deposits were taken by the assessee to secure the rights. It was stated that the security deposit was refundable and interest was paid on that deposit, which was allowed year after year by the Department in the hands of the assessee as payment and in the hands of the lessee as income. So, it was not a colourable device. It was stated that the assessee neither received any premium nor salami.
Therefore, the facts of the cases relied upon by the AO were not applicable to the facts of the assessee's case. It was stated that both the parties were not related to each other and the transaction was in the normal course of business. It was contended that the interest had been allowed in the hands of the assessee as expenditure and had been charged to tax in the hands of the lessor. Similarly, lease rents had been allowed to the lessor and had been charged in the hands, of the assessee. It was stated that the AO took only notional rate of interest inspite of the fact that the interest income had been accepted.
Therefore, the action of the AO was without any basis, which was merely his presumption/assumption. As such, the CIT(A) was fully justified in deleting the addition made by the AO on account of capital gains. The reliance was placed on the decision in the case of Union of India and Anr. v. Azadi Bachao Andolan and Anr.
5. We have heard both the parties at length and carefully gone through the material as available on record. In the instant case, it is not in dispute that the assessee had given its land to East India Hotels Ltd. on lease for a period of 72 years. In lieu of that, the assessee received a deposit of Rs. 2.5 crores bearing an yearly interest rate of 9 per cent. However, the AO was of the view that the rate of interest was low in comparison to the market rate and on that basis he worked out the capital gains under Section 45 r/w Section 48. It may be pointed out that to charge capital gains under Section 45 r/w Section 48, the following four conditions are required to be fulfilled that: All the four are conditions precedent and in case any requirement remains unfulfilled, there is no question of charging the capital gains. In the instant case, the assessee had not received any consideration in lieu of the transfer of capital asset because the land in question had been given on lease and the assessee received lease rent year after year and on that lease rent, tax had been paid in accordance with law. The AO considered the security deposit as the value of consideration. However, the deposit in question was refundable. The AO also worked out the value of consideration by taking the present value factor of 18 per cent, i.e., the deemed rate of interest. On the contrary, the rate of interest shown by the assessee at 9 per cent was actual rate of interest. Therefore, the AO was not justified in assuming that the rate of interest was 18 per cent. In our opinion, the differential interest, if any, cannot be considered as value of consideration for transfer of the capital asset. Considering the totality of facts, we are of the considered opinion that the order passed by the CIT(A) is well reasoned and just on the basis of facts.
We, therefore, do not see any valid ground to interfere with the finding of the CIT(A) because the working of the AO is based only on assumption and presumption and not on factual position.