1. ' FAKHRUDDIN H. SHAIKH, J.-- This reference has been made by the Income-tax Tribunal under section 66(1) of the Income-tax Act 1922, on the application of the Commissioner Income-tax, whereby following two questions have been referred to this Court for opinion:- "(1) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the sum of Rs,40,000 represents premium or Salami for the purpose of granting the leases in question which was paid over and above the rent and was, therefore, receipt of a capital nature and not taxable under the provisions of the Income-tax Act.
(2) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that in its order relating to assessm ent years 1964-65, 1965-66 and 1968-69 that property income from 16 shops in question should be computed on the basis of the actual rent received by the assessee from the immediate lessees as per the agreement for lease."
2. ' The facts relevant for the purpose of this reference are that the respondent (assessee), a co- operative Society (hereinafter referred to as the Society) is registered under the Co-operative Societies Act, 1925. The aims and the objects of the society are:- "to carry on the trade of building, and of buying, selling, hiring, letting and developing land in accordance with co-operative principles and to establish and carry on social, recreative and educational work in connection with its tenants and the Society shall have full power to do all things it deems necessary expedient for the accomplishment of all objects specified in its by-laws, including the powers to purchase hold, sell, exchange, mortgages sell, exchange, mortgage, rent, lease, sub-lease, surrender accept surrenders of and deal with lands of any tenure and to sell by instalments and subject to any terms or conditions and to make and guarantee advances to members for purchasing property and to erect, pull down repairs, alter or otherwise deal with and building thereon."
3. ' In the assessm ent year 1963-64 the society received an amount of Rs,57,500 from certain persons as premium for granting tenancy rights of shops built by the Society in the premises of a Mosque.
4. Out of the sum of Rs,57,500 the sum of Rs,17,500 was received from members of the Society while the remaining amount of Rs,40,000 was received from non-members. Before the Income-tax Officer it was claimed by the Society that the sum of Rs,40,000 was exempted from income-tax as it was donation for the purpose of construction of the Mosque and that it was a receipt of casual non-recurring nature and was received in pursuance of the objects of the Society for carrying on its charitable purposes. The Income-tax Officer disallowed the plea of the Society and held that the amount of Rs,40,000 was liable to be taxed. This disallowance was confirmed by the Appellate Assistant Commissioner in appeal.
5. ' The respondent Society then preferred appeal before the Income-tax Tribunal. It was urged before the Tribunal that the sum of Rs,40,000 was receipt of a casual non-recurring nature paid by way of donation for construction of a Mosque and as such was exempted under the provisions of section 4(3) (vii) of the Income-tax Act. The Tribunal agreed with the contention of the Society and held that the receipt of Rs,40,000 by the Society was a premium or Salami for the purpose of granting the leases in question and was paid over and above the rent. According to the Tribunal the payment was receipt of a capital nature and not taxable under the provisions of the Income-tax Act. In taking this view the Tribunal placed reliance on the case of Raja Bahadur v. Commissioner of Income-tax (1943) 11 I T R 513. In the above case the Privy Council had held that single payment made by way of Salami for execution of right of lease, shall be treated as capital receipt. In view of the above decision of the learned Tribunal upheld the plea of the Society and ordered allowance of Rs,40,000.
6. ' The next question before the Tribunal was in respect of assessment of rent of 16 shops of the Society. The Income-tax Officer had determined the rent of 16 shops for the purpose of income-tax on the basis of annual rental value of the shop and not on the basis of actual rent which was said to be recovered by the Society from the tenants of the shops by virtue of rent agreements. The plea of the Society was that the rent on which the shops were actually let out to the shop-keepers, should be the basis of determining bona fide annual rental value and not the annual value on which the shops could have been let out. Income-tax Officer had fixed the annual letting value of each shop at Rs per 1,200 where as the society had claimed that it was recovering only Rs,50 per month, that is, Rs,600 per annum from each shop-keeper. The learned Tribunal accepted the plea of the Society and held that the income of the Society from the shop could be computed on the basis of the actual rent received by the society from the shopkeepers as per lease agreements executed by them in favour of the Society. In this view of the matter the appeal of the Society was allowed. Hence this reference.
7. ' So far as the first question is concerned reliance has been placed by the learned counsel for the Society on section 4(3) (vii) of the Inco me-tax Act for claiming exemption in respect of the amount of Rs,40,000. It may be stated that the original plea of the Society was that this amount was received from non-members by the way of donation for the mosque. But during the inquiry conducted by the Income-tax Officer, it transpired that this amount was exacted from the lessees over and above the rent as Nazrana or Salami for granting leases shops to them. In any case it has been argued on behalf of Society that this amount shall be covered by section 4 (3) (vii) of the Act, which is reproduced hereunder:- "4(3) Subject to the provisions of this Act, any income profits or gains falling within the following classes shall not (to such extent as may by specified in this subsection or prescribed in this behalf), be included in the total income of the person receiving them:-
(vii) Any receipt (not being capital gains chargeable according to the provisions of section 12-B and) not being receipts arising from business or the exercise of a profession, vocation or occupation which are of a casual and non-recurring nature or are not by way of addition to the remuneration of an employee."
8. ' The learned Tribunal has relied on the case of Raja Bahadur referred to hereinabove in which it has been held by the Privy Council as under:- "The Salami has been, rightly in their Lordship's opinion, treated as a capital receipt. It is a single payment made for the acquisition of the rights of the lessees .To enjoy the benefits granted to them by the lease. That general right may properly be regarded as a capital assets, and the money paid to purchase it may properly be held to be a payment on capital account."
9. ' Mr. Wahid Farooqui, learned counsel for the department has argued that the principle laid down in the above case by the Privy Council is not attracted because the donations or the amounts Salami exacted in the present case by the Society from the various lessees were not valuntary but were in violation of the provisions of the Sind Rented Premises Ordinance, 1979. Recoveries being illegal, it was argued by Mr. Wahid Farooqui, were not covered by section 4(3) (vii) of the Act and were liable to be taxed.
10. ' The learned Tribunal has also relied on the case of Commissioner Income-tax v. Rao Thakur Narayan Singh (1962) 46 I T R 901. In this case the assessee had granted leases of certain land belonging to him and in consideration of the leases, he received lump sum payment called 'nazrana' as also annual payments of rent. The lump sum payments were realized first and then the leases were granted or executed. On the question whether these lump sum receipts could be assessed as being in the nature of revenue, the Allahabad High Court held as under:- "That the payments were nothing but premia exacted as consideration for the granting of the leases; and even though some only of the assessee's rights in the lands were parted with, the consideration for parting with those rights partook of the nature of sale consideration. The payments were not advance or consolidated payments of rent for the whole period of the lease but were in addition to rent, as the payments of premia were made first and the relationship of landlord and tenant came into existence later. The lump sum receipts were, therefore, of a capital nature and could not be assessed."
11. ' Mr.Mazhar Jaffri learned counsel for the Society has relied on the case of Maharaja Chintamani Saran Nath Sah Deo v. Commissioner of Income-tax (1971) 82 I T R 464. The facts of the case were that on January 22, 1944, the assessee, the holder of an impartible estate, had granted a lease of certain mining rights to a company in respect of 171.03 acres of land for a period of 30 years. The lessee-company had to pay a Salami of Rs,2,25,000 a rent of 8 as. Per acre and a royalty of 6 as per ton. Earlier in March, 1941, the assessee had granted to the same company a prospecting lease of 311 acres of land (which included substantially the area comprised in the lease of 1944), for a period of one year, the Salami being Rs,100 per acre and royalty 8 as. Per ton. On a comparison with the 1941 lease the Tribunal held that the assessee had chosen to take under the 1944 lease a larger amount by way of premium but a lesser amount by way of royalty and that out of the Salami the sum of Rs,2,000 was in substance advance payment of royalty and was income in the hands of the assessee. It was held by the Supreme Court of India that:- "the lease of 1941 which was only for one year and was for a different purpose, viz., prospecting, could not afford a reasonable basis for determining whether the terms of the 1944 lease for 30 years and for mining were fixed in such manner that part of the proceeds of the royalty were included in figure of Salami. The mere fact that' the amount taken on account of Salami was substantial and on the fact of it looked considerably large did not justify the view that the amount represented capitalised royalty. The onus was on the revenue to show that what was stipulated in the lease as a payment by way of Salami was some other kind of pcyment, namely, royalty camouflaged as Salami, and that onus was not discharged by the revenue. The Tribunal was not, therefore, right in holding that the sum of Rs,2,20,000 was income of the assessee."
12. From the above decisions it would appear that any amount which is non-recurring, and received only once by the lessor from the lessee over and above the lease money as consideration for grant of lease, shall be treated as receipt of capital nature and shall fall within the exception prescribed in section 4(3) (vii) of the Act.
13. ' Mr. Wahid Farooqui, has been unable to distinguish the above decisions, from the facts of the present case. His plea is that the amounts recovered by the Society from the lessees over and above the lease money, were illegal according to the Sind Urban Rent Restriction Ordinance, 1959 and, therefore, the same shall be liable to be taxed. This plea was not advanced before the Tribunal. Nor amounts were held taxable by the Income-tax Officer on the ground that the same were forbidden by law. We have, therefore, no reason to take exception to the view which has found favour with the learned Tribunal on this question.
14. ' So far as the question No,2 is concerned rent recovered from the lessor is chargeable under section 9 of the Income-tax Act as income from the property. According to this session the taxable income is the bona fide annual value of the property. The term of 'annual value' has been explained in subsection (2) of section 9 of the Act which is to the following effect:- "(2) For the purposes of this section, the expression 'annual value' shall be deemed to mean the sum for which the property might reasonable be expected to let from year to year."
15. ' It has been arguecl on behalf of the Society that the annual value for the purpose of assessment shall be the actual rent which is being recovered by the Society from the tenants and not the annual value which the properties might fetch. This plea was not accepted by the Income-tax Officer and the Income-tax Appellate Commissioner, while the Tribunal held the annual value shall be the rent actually recovered by the Society. This view of the Tribunal runs counter to the definition of the 'annual value' given in subsection 9(2) of the Act. Had the intention of Legislature been to charge tax on the actual annual rental value according to the lease agreement executed by the lessor, then the language of subsection (2) of section 9 would have been different. From plain reading of subsection (2) it would appear that the actual rent received by the landlord is not the basis for determining that taxable amount, but the amount which the leased property is likely to fatch by way of rent or which the property might reasonably be expected to fetch from year to year shall be basis of calculating the taxable amount. In view of the plain language of subsection (1) read with subsection (2) of section 9 of the Income-tax Act. We are unable to agree with the view taken by the Tribunal.
16. ' Consequently, our answers to the above question are as under:- Question No,1: In the affirmative.
17. Question No,2 : In the negative. Reference disposed of accordingly.