Bombay High Court Deliberates on Tax Exemption and Classification of Lease Transactions in Income Tax Reference concerning Scientific Research Centre. Assessee's claim for exemption under Section 11 of Income Tax Act, 1961 hinges on whether activities constitute general public utility, whether construction and letting out of World Trade Centre amounts to business, and whether receipts are revenue in nature.

Income tax reference under Section 256(1) of the Income Tax Act, 1961 arising from the Income Tax Appellate Tribunal's order regarding denial of exemption under Section 11 for assessment years 1989-90 and 1990-91.

Assessee sought exemption under Section 11 of the Income Tax Act, 1961 and challenged the Tribunal's findings on the nature of transactions, income from lease/sale, sinking fund, and standard rent for computation of annual value.

The Assessing Officer denied exemption under Section 11, treated lease transactions as sale, taxed advance rent as business income and sinking fund as revenue receipt; the assessee appealed.

The Income Tax Appellate Tribunal by its common order dated 29th March, 1996 upheld certain findings against the assessee, leading to the reference. Earlier, the Bombay High Court by judgment dated 15th March, 2001 (251 ITR 852) remanded the matter to the Tribunal on two points, and a remand report was submitted on 29th November, 2001.

Whether the assessee complied with the provisions of Section 11 (Application of income, Accumulation), 11(4A), 12 and 13 and is therefore exempt from tax for assessment years 1989-90 and 1990-91. Whether only 1/60th of the advance can be assessed as income for the year as the Tribunal had rightly held the transaction as lease and not sale. Whether the primary basic rent and the parking rent were assessable as income from profits and gains of business or profession. Whether the amount appropriated towards a sinking fund was part of the rent received and in the nature of revenue receipt. Whether the Tribunal was right in directing to adopt the standard rent fixed by the Municipal Authorities as the annual value instead of the actual rent realised.

The Tribunal on the assessee's application drew up a statement of case and referred the following eight questions and an additional question for the year 1990–91 for the opinion of this Court. By an order and judgment dated 15th March, 2001 (251 ITR 852), this Court remanded the matter to the Tribunal for its decision on two points. The assessee entered into agreements with various parties (referred to herein as lease agreements) on the terms and conditions contained therein. The Government of Maharashtra by a resolution dated 18th November, 1974 superseded the earlier resolution dated 16th October, 1970. By this resolution sanction was accorded to the grant of a lease to the assessee of the said land.

The assessee was incorporated as a Section 25 company on 26th June, 1970. It was recognized as a scientific research institution under Section 35(1)(ii) in 1970, but recognition was withdrawn from 31st March, 1981. A certificate under Section 12A was issued on 8th February, 1984. For assessment years 1989-90 and 1990-91, the Assessing Officer denied exemption under Section 11 and taxed various receipts as business income. The CIT(Appeals) upheld the denial and alternatively treated the advance rent as short-term capital gain. The Income Tax Appellate Tribunal in a common order dated 29th March, 1996 gave findings adverse to the assessee. The assessee sought reference under Section 256(1), and eight questions plus an additional question were referred to the High Court. On 15th March, 2001, the High Court remanded two points to the Tribunal, and the Tribunal submitted a remand report on 29th November, 2001. The reference was heard finally and reserved on 18th September, 2012, with pronouncement on 25th October, 2012.

• Income Tax Act, 1961: 256(1), 11, 11(4A), 12, 13, 35(1)(ii), 43(4)(i), 143(3), 12A
• Companies Act, 1956: 25