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Issues:
1. Deductibility of rent paid by the assessee to the trust for computing income. 2. Applicability of section 40A(2) regarding the rent payment. Analysis: Issue 1: Deductibility of Rent Paid The case involved the deduction of rent paid by the assessee to a trust for computing income. The trust, Ayyappa Family Trust, was created by the assessee's father-in-law for the benefit of his grandchildren, with the assessee and his wife as trustees. The trust was permitted to construct a building on the assessee's land, and a lease agreement was executed between the trust and the assessee. The Income-tax Officer initially disallowed the deduction, treating the property as the assessee's own. However, the Tribunal ruled in favor of the assessee, considering the trust as the owner of the building. The Tribunal rejected the Revenue's argument based on sections 164 and 40A(2), stating that there was no transfer of assets to minor children and no payment to relatives of the assessee. The Tribunal accepted the deduction claim, emphasizing the lack of an objective standard to deem the rent as exorbitant or for extra-commercial consideration. Issue 2: Applicability of Section 40A(2) The second issue raised was the applicability of section 40A(2) concerning the rent payment. The Tribunal held that section 40A(2) did not apply in this case, as there was no transfer of assets to minor children or payments to relatives of the assessee. The Tribunal emphasized the lack of an objective standard to assess the rent paid as exorbitant or for extra-commercial consideration, leading to the acceptance of the deduction claim. Recognition of Trust by Tax Authorities The judgment highlighted that the tax authorities had previously recognized the trust and assessed the beneficiaries individually for wealth-tax and income tax. The Wealth-tax Officer assessed the beneficiaries, S. Venkatakrishnan and S. Rukmani, for wealth-tax, acknowledging the trust as valid and the properties as trust assets. The Department's recognition of the trust and taxation of beneficiaries under both wealth-tax and income tax laws supported the legitimacy of the trust and the rent paid by the assessee being treated as the trust's income. Conclusion The court ruled in favor of the assessee, emphasizing that the trust was the rightful owner of the building, entitled to receive rent. The ownership of the land by the assessee did not negate the trust's ownership of the building, as the trust had used its funds for construction with the assessee's consent. The court affirmed the genuineness of the trust and the separate assessment of beneficiaries, concluding that the rent paid to the trust was allowable as a deduction. Consequently, both questions referred by the Revenue were answered in favor of the assessee, upholding the Tribunal's decision and recognizing the trust's legitimacy in the income computation process.
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