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Exemption to Trust U/s. 11 of Income Tax Act can not be denied if Payment made to concerns covered U/s. 13(3) not excessive

DDIT(E)-II Vs. M/s. Rock Church Ministries (ITAT Hyderabad ) The purpose of section 13(1)(c) is to deprive a religious or charitable trust from exemption if it is found that its income is used or applied, directly or indirectly, for the benefit of the specified persons. Section 13(1)(c) carves out a general exception wherein the provisions of sections 11 and 12 will not operate on account of user or application of any income of the trust for any direct or indirect benefit of the any specified persons. It is an undisputed fact that the rent paid of Rs. 9,500 is not excessive even as per the old provisions of municipal. The assessee paid the rent as per the old municipal taxes. The present rental value would be much more than the rent paid by the assessee for the property having a building of 4000 sq. Ft. on a land admeasuring 15,000 sq. ft. that too in a prime locality in the city of Hyderabad. The market rent i.e., Rs. 80,000 per month as estimated by the Government Valuer is much more to the rent paid by the assessee. The Assessing Officer could not establish that the rent paid by the assessee is excessive and the rental value estimated by the Government valuer is incorrect. The contention of the Revenue that there is variation in the name in the municipal records and I.T. records is also baseless as the name in the municipal records is in abbreviated form.

DDIT(E)- II Vs. M/s. Rock Church Ministries (ITAT Hyderabad)

The purpose of section 13(1)(c) is to deprive a religious or charitable trust from exemption if it is found that its income is used or applied, directly or indirectly, for the benefit of the specified persons. Section 13(1)(c) carves out a general exception wherein the provisions of sections 11 and 12 will not operate on account of user or application of any income of the trust for any direct or indirect benefit of the any specified persons. It is an undisputed fact that the rent paid of Rs. 9,500 is not excessive even as per the old provisions of municipal. The assessee paid the rent as per the old municipal taxes. The present rental value would be much more than the rent paid by the assessee for the property having a building of 4000 sq. Ft. on a land admeasuring 15,000 sq. ft. that too in a prime locality in the city of Hyderabad. The market rent i.e., Rs. 80,000 per month as estimated by the Government Valuer is much more to the rent paid by the assessee. The Assessing Officer could not establish that the rent paid by the assessee is excessive and the rental value estimated by the Government valuer is incorrect. The contention of the Revenue that there is variation in the name in the municipal records and I.T. records is also baseless as the name in the municipal records is in abbreviated form.

 We have also gone through the order of this Tribunal in the case of Oasis Educational Society (supra) wherein a similar issue was decided in favour of the assessee. In this case the assessee was an educational institution entitled for exemption u/s. 10(23C)(iiiad) of the I.T. Act, 1961. The Assessing Officer denied exemption on the ground that the land of the school building was not owned by the assessee society and the principal paid was paid a salary of Rs. 10,000 per month and thus he was given pecuniary benefit contrary to the provisions of section 13 of the Act. The Tribunal held that charging of a small amount ranging from Rs. 1,000 to Rs. 2,500 could not be termed as capitation fee. The Tribunal distinguished the decision of this Tribunal in the case of Vasavi Academy of Education, in ITA No. 1794/Hyd/2008 dated 4.2.2010, Hyderabad which was relied on the learned DR, and allowed the case of the assessee.

 The CIT(A) has passed a detailed and speaking order on this issue. In the absence of any evidence in support of the contention of the Assessing Officer, We do not find any infirmity in the order the CIT(A) and the same is confirmed. In view of the detailed order of the CIT(A) and the Tribunal order in the case of Vasavi Academy (supra), the grounds raised by the Revenue do not find any merit. Accordingly the grounds raised by the Revenue are dismissed.

INCOME TAX APPELLATE TRIBUNAL, HYDERABAD

I.T.A. No. 463/Hyd/2010

C.O. No. 20/Hyd/2010

(Assessment year- 2006- 07)

DDIT(E)-II

Vs.

M/s. Rock Church Ministries, Hyderabad

O R D E R

PER CHANDRA POOJARI, AM:

This appeal filed by the Revenue and the Cross Objection (CO) are directed against the order of the CIT(A)-IV, Hyderabad dated 29.12.2009 for the assessment year 2006- 07. Since the appeal and the CO involve common issue, we heard the same together and disposing both of them by this common order, for the sake of convenience.

2. First we will take up the appeal filed by the Revenue. The Revenue raised the following grounds of appeal:

1. The learned CIT(A) ignored the crucial fact that the society adopted double standards by showing one value to the municipal authorities and another value to the I.T. Dept. Quite against the settled law that such sub-standard conduct should not be taken judicial notice of.

2. The learned CIT(A) failed to appreciate the fact that the assessee grossly acted against one of the certificates given by itself at the time of registration before the Registrar of the Societies that no payment should be made from the funds of the society to any office bearer regardless of the reasonableness of such payments in view of the blanket bar against such payments to office bearers from funds of society.

3. The facts of the case, in brief, are that the assessee is a religious and charitable society registered u/s. 12A of the Income-tax Act, 1961 vide registration dated 12.09.1980 with grant of exemption u/s. 11 of the Act having the objectives to establish, run and maintain churches, schools, children homes, relief works, technical and educational institutions, etc.

4. It was observed by the Assessing Officer that the President of the Trust, Mrs. Rachel J. Kommanapalli was paid Rs. 1,14,000 towards rent. It was also noticed by the Assessing Officer that as per Form No. FC3, for the year ended 31.3.2006, her husband Shri Earnest P. Kommanapalli had donated Rs. 50 lakhs to the appellant trust in his individual capacity on 17.02.2006. The Assessing Officer observed that as per section 13(1)(c) r.w.s. 13(3)(b), 13(3)(cc) and 13(3)(d) the benefit of section 11 is not available, if any income of the trust /society is applied directly or indirectly for the benefit of any person mentioned in section 13(3) of the Act as the president is a relative of the donor i.e., Mr. Earnest P. Kommanapalli, as he had donated in excess of the limit of Rs. 50,000 stipulated in section 13(3)(b) and, therefore, the income of the trust, diverted directly for the benefit of the president was covered by section 13(3)(cc) being Rs. 1,14,000 which is more than the tolerance limit of Rs. 1,000 stipulated in section 13(2)(g). Accordingly the Assessing Officer issued a notice dated 24.12.2008 to the assessee to show cause as to why the claim u/s. 11 should not be rejected.

5. In response a detailed reply dated 29.12.2008 was filed before the Assessing Officer. It was contended by the assessee that the payment of rent by the society is very nominal amounting to only 12% of the market value saving 88% to the society and the property was let out on nominal rent basis and not on commercial basis. It was contended that the payment of rent was considered reasonable by the society and it does not amount to diversion of income in favor of any interested person. It was further argued that payment of Rs. 9,500 per month towards rent against the market rate of Rs. 80,000 per month is very reasonable. The assessee relied on the decision in the case of CIT vs. 21st Century Immaculate Conception (241 ITR 193)(Mad), besides the CBDT circular No. 387 dt. 6.7.1984.

6. However, the Assessing Officer observed that reasonableness of the payment is required to be seen only in respect of the eight specific deemed situations or circumstances mentioned in section 13(2)(a) to (h). The Assessing Officer observed that section 13(2) does not leave out the generality of the provisions and if the income of the trust is diverted to the trustees to the use or benefit of any of the interested persons, the claim of the trust for exemption u/s. 11 shall be forfeited as per the provisions of section 13(1)(c) of the Act. The Assessing Officer further observed that paying rent to the house of president was not at all covered by any of the eight deemed situations u/s. 13(2) of the Act. The Assessing Officer further observed that the concept of benefit referred in section 13(1)(c) need not have any monetary implications, once the direct or indirect benefit to the specified persons is established. He also relied on the decision of Kerala High Court in Agappa Child Center vs. CIT (226 ITR 211) where exemption was denied for purchase of a refrigerator that was kept in the house of managing trustee and was held as used by an interested person. The Assessing Officer also relied on the decision of ITAT in Society for Integrated Development in Urban and Rural Areas (SIDDUR) Vs. DCIT (90 ITD 493) and the decision of jurisdictional High Court in AWARE (263 ITR 43). The Assessing Officer felt that the payment of rent of Rs. 1.14 lakhs constituted benefit to the interested person. He observed that the Board circular as referred by the assessee is not relevant while considering the strict applications of fiscal provisions contained in the tax statutes. Accordingly, the claim of the assessee for exemption u/s. 11 of the Act was denied.

7. Before the CIT(A) the assessee reiterated the same arguments as argued before the Assessing Officer. The CIT(A) after considering the arguments of the assessee he forwarded the submissions of the assessee to the Assessing Officer vide letter dated 20.11.2009 along with the certificate regarding fair rent value (FRV) of the property. The Assessing Officer vide his report dated 10.12.2009 submitted that as per the municipal records the owner of the property was Jyothy K.P.R. and in the certificate issued by the valuer it was mentioned as Mrs. Rachel J. Kommanapally. The municipal records stated that the FRV of the property is Rs. 9,500 per month. The Assessing Officer also enclosed a copy of the communication received from Dy. Commissioner of GHMC, Circle 7, Hyderabad dated 10.12.2009 in this regard and observed that the plea of the assessee that the rent of the property is nominal, as contended by the assessee, is baseless. The CIT(A) provided the Remand Report submitted by the Assessing Officer to the assessee. The assessee submitted that the name “Jyothi KPR” is the abbreviated form of “Rachel J. Kommanpally” and, therefore, both the names refer to the same person. It was also submitted by the assessee that the municipal record is based on an old self assessment made for payment of municipal taxes which scheme came into effect a decade ago and the trust is not paying anything more than the reduced amount which is far less than the market rent as evidenced by the certificate of the valuer.

8. The CIT(A) observed that the Assessing Officer has not brought any evidence to show the correct rental value as on date or to refute the value as shown by the Government valuer. The argument of the assessee that the rent collected is very nominal cannot be disputed even as per the information obtained from the municipal authorities and anything over and above the adequate consideration/ market rent/ standard rent was passed to the specified person in the garb of a commercial transaction of taking property on rent from the president is not established. The CIT(A) observed that in view of the decision of the Madras High Court in the case of CIT vs. 21st Society of Immaculate Conception (241 ITR 193) such sacrifice cannot be held against the president who, in addition to the substantial donation made by her husband, the president had charged only reasonable rent and even lesser than the market rent for letting out her property. He observed that under the given circumstances, the payment of Rs. 1,14,000 as rent to the president of society which was not found to be excess of the standard/ market rent for an identical property, cannot be considered as a benefit to the interested person that would make the assessee ineligible for claiming exemption u/s. 11 of the Act. Accordingly, the CIT(A) directed the Assessing Officer to grant exemption u/s. 11 of the Act and recomputed the total income of the assessee accordingly.

9. The learned DR relied on the following decisions:

i. Ram Bhawan Dharamshala vs. State of Rajasthan, 258 ITR 725

ii. CIT vs. Nagarathu Vaisiyargal Sangal, 246 ITR 165

iii. Agappa Child Centre vs. CIT, 226 ITR 211

10. The learned counsel for the assessee relied on the following decisions:

i. Consolidated order of ITAT, Hyderabad Benches in the case of Oasis Educational Society in I.T.A. Nos. 258 to 261/Hyd/2006, ITA No. 284/Hyd/07 and ITA No. 1261/Hyd/2008 for different assessment years order dated 5th March, 2010.

ii. The order of Andhra Pradesh High Court in the case of M/s. New Noble Educational Society, Hyderabad in W.P. Nos. 21248, 21252, 21257, etc. order dated 11.11.2010 (copy enclosed).

11. We have considered the rival submissions on either side and also perused the material on record. The purpose of section 13(1)(c) is to deprive a religious or charitable trust from exemption if it is found that its income is used or applied, directly or indirectly, for the benefit of the specified persons. Section 13(1)(c) carves out a general exception wherein the provisions of sections 11 and 12 will not operate on account of user or application of any income of the trust for any direct or indirect benefit of the any specified persons. It is an undisputed fact that the rent paid of Rs. 9,500 is not excessive even as per the old provisions of municipal. The assessee paid the rent as per the old municipal taxes. The present rental value would be much more than the rent paid by the assessee for the property having a building of 4000 sq. Ft. on a land ad measuring 15,000 sq. ft. that too in a prime locality in the city of Hyderabad. The market rent i.e., Rs. 80,000 per month as estimated by the Government Valuer is much more to the rent paid by the assessee. The Assessing Officer could not establish that the rent paid by the assessee is excessive and the rental value estimated by the Government valuer is incorrect. The contention of the Revenue that there is variation in the name in the municipal records and I.T. records is also baseless as the name in the municipal records is in abbreviated form.

12. We have also gone through the order of this Tribunal in the case of Oasis Educational Society (supra) wherein a similar issue was decided in favour of the assessee. In this case the assessee was an educational institution entitled for exemption u/s. 10(23C)(iiiad) of the I.T. Act, 1961. The Assessing Officer denied exemption on the ground that the land of the school building was not owned by the assessee society and the principal paid was paid a salary of Rs. 10,000 per month and thus he was given pecuniary benefit contrary to the provisions of section 13 of the Act. The Tribunal held that charging of a small amount ranging from Rs. 1,000 to Rs. 2,500 could not be termed as capitation fee. The Tribunal distinguished the decision of this Tribunal in the case of Vasavi Academy of Education, in ITA No. 1794/Hyd/2008 dated 4.2.2010, Hyderabad which was relied on the learned DR, and allowed the case of the assessee.

13. The CIT(A) has passed a detailed and speaking order on this issue. In the absence of any evidence in support of the contention of the Assessing Officer, We do not find any infirmity in the order the CIT(A) and the same is confirmed. In view of the detailed order of the CIT(A) and the Tribunal order in the case of Vasavi Academy (supra), the grounds raised by the Revenue do not find any merit. Accordingly the grounds raised by the Revenue are dismissed.

14. Now coming to the CO filed by the assessee. The assessee raised the grounds of CO against the appeal filed by the Revenue on the same issue. Since we uphold the order of the CIT(A) that favors assessee’s plea, the grounds raised by the assessee become infructuous.

15. In the result, the appeal of the Revenue and the CO of the assessee are dismissed.

Order pronounced in the open court on 25th February, 2011.

Categories: Income Tax
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