2017 (4) TMI 167 - AT - Income Tax

Denial of exemption u/s.11 - Held that - Assessee is a charitable trust engaged in promotion of education and allied activities. Assessee was running school, college of Engineering, Pharmacy, Management etc., With respect to each and every query of the AO, the CIT(A) has dealt in great detail and after giving detailed finding, reached to the conclusion that deposit of ₹ 6,68,00,000 was in pursuance of valid lease agreement for the user of the premises and various other facilities and fixed asset in nature of building, ground etc., In the process of carrying out educational activities / charity, the assessee has used the premises and other leased assets for its purpose after recording detailed finding at para 4.32 -5.6, the CIT(A) reached to the conclusion that there is no case of any benefit being diverted by the assessee trust to the interested persons. Accordingly, denial of exemption u/s.11 by the AO was not correct. Accordingly there is no application of Section 13 of IT Act. - Decided in favour of assessee

Summary

Issues Involved:
1. Reliance on the lease agreement and whether the transaction was at arm's length.
2. Excessive provision of the lease agreement and potential diversion of funds.
3. Admission of additional evidence without giving the Assessing Officer (AO) an opportunity to examine the same.
4. Denial of exemption under Section 11 of the Income Tax Act due to alleged diversion of funds.

Detailed Analysis:

1. Reliance on the Lease Agreement and Arm's Length Transaction:
The Revenue argued that the Commissioner of Income Tax (Appeals) [CIT(A)] erred by relying on the lease agreement between the assessee and the lessor, ignoring the fact that the transaction was not at arm's length and was between interested parties. The CIT(A) found that the lease agreement was valid and that the premises and other leased assets were used by the assessee for its educational activities. The CIT(A) concluded that there was no benefit being diverted to the interested persons, thus rejecting the AO's claim.

2. Excessive Provision of the Lease Agreement and Potential Diversion of Funds:
The Revenue contended that the CIT(A) failed to account for the excessive provision in the lease agreement, which included a deposit of ?9 crores and monthly lease rentals of ?5 lakhs against a property valued at ?31 crores. The AO had added ?6 crores as unexplained income under Section 68, suspecting that the lease deed was a means to divert funds. The CIT(A) observed that the assessee had provided sufficient documentary evidence, including a donation letter, bank statements, and the donor's statement, to prove the identity, source, and genuineness of the donations. The CIT(A) accepted the assessee's explanation and deleted the addition.

3. Admission of Additional Evidence Without AO's Examination:
The Revenue argued that the CIT(A) admitted additional evidence, such as telephone bills, building tax receipts, and electricity bills, without giving the AO an opportunity to examine them, thus violating Rule 46A of the IT Rules. The CIT(A) considered these documents to establish that schools and colleges were operating in the leased premises since 2007-08, supporting the assessee's claim that the lease agreement was genuine and that the premises were used for educational purposes.

4. Denial of Exemption under Section 11 Due to Alleged Diversion of Funds:
The AO had denied exemption under Section 11, alleging that the funds amounting to ?6.68 crores were diverted to M/s Kalyani Education Pvt. Ltd., an excluded person, under a colorable device. The CIT(A) found that the deposit was made in pursuance of a valid lease agreement for the use of premises and facilities necessary for the assessee's educational activities. The CIT(A) noted that the premises and leased assets were indeed used by the assessee, and there was no undue benefit to the excluded person. The CIT(A) concluded that Section 13 of the IT Act did not apply and directed the AO to delete the additions and allow the exemption under Section 11.

Conclusion:
The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s order, dismissing the Revenue's appeal. The ITAT found that the CIT(A) had addressed each query of the AO in detail and provided a comprehensive analysis, concluding that the lease agreement was valid and the premises were used for the assessee's educational purposes. The ITAT agreed that there was no diversion of funds to interested persons and that the exemption under Section 11 was rightly allowed. The Revenue's appeal was dismissed, and the CIT(A)'s findings were affirmed.