2022 (9) TMI 401 - AT - Income Tax

Exemption u/s 11 - violation of sections 13 1 C and 13 3 - assessee trust passed on the benefits to the trustees or the relatives of the trustees in the form of excessive payment rent to school buildings and also computer hirings rents, which is violation of sections 13 1 C and 13 3 - HELD THAT - AO failed to note any payment to the persons specified under section 13 3 of the Act does not ipso facto attracts the provisions of section 13 1 C , but whereas such payment is unreasonable or excessive, it can be said that any benefit is derived by such specified person. The specified persons can be said to have derived the benefits mainly when something is passed on to them, over and above the reasonable and adequate consideration which is at arm s length. Thus there is no bar in transactions with the entity claiming exemption under section 11 on one side and persons specified u/s 13 3 on the other side and only when the consideration is found to be unreasonable or excessive, then the question of withdrawal of exemption under section 11 will arises. Whether the consideration is reasonable or excessive is to be judged from the fair market value of such consideration between two unrelated parties in arm s-length situation. Whether the consideration paid by the assessee Trust to the specified persons is reasonable or not? - AO had compared the rent with municipal valuation to content that the rent paid by the assessee trust was excessive. This findings of the ld AO is not legal, proper and has no logic for the reason that municipal valuation does not reflect the fair market value and this position is accepted under the Income Tax and as in the calculation of Income from house property, higher of municipal valuation or fair rent is taken into account - The rental agreements clearly mention that besides building other amenities like furniture, electrical fittings, parking and open ground was also used by the trust. AO is not correct in making comparison with the municipal valuation and the assessee has made excessive payment to the trustees. The assessee Trust also shown factual data as comparable to justify reasonable rates of building rent in the form of few comparable instances by obtaining the details from CPWD and PWD - Rents paid by the assessee trust to its trustees are very reasonable and not excessive rent. Respectfully following case of Shree Kamdar Education Trust 2016 (9) TMI 18 - GUJARAT HIGH COURT mere payment of lease rent, without there being any element of such payments being excessive or unreasonable compared to normal rates prevailing, would not fall within the mischief of section 13 1 c of the Act. Thus the assessing officer is not correct in denying the benefit of section 11 to the assessee trust. Computer rent paid by the assessee trust to Gyanganga Computers - CIT A has held perusal of the annual accounts of M/s. Gyanganga Computers, the major part of its income is by way of computer rent from the appellant Trust and other Trust under same management and still its net profit ratio is 2.93 % only, this indicates that a reasonable margin is here and on cost which cannot be termed as excessive. Further it is observed M/s. Gyanganga Computers charged Rs.60 per month to outsiders in case of one-time payment and Rs.70 per month in case of instalment payment, whereas the assessee trust was being charged at Rs. 37.3 per month per student which is reasonable and also concessional. Therefore it is not a case of undue benefits having been passed to the specified person in the form of computer rent. Therefore the denial of exemption under section 11 is not sustainable in law. Thus we uphold the order passed by the ld CIT Appeals and reject the grounds of appeals filed by the revenue.

Summary

Issues Involved:

1. Whether the rent paid by the assessee trust for school buildings to trustees or their relatives is excessive and violates sections 13(1)(c) and 13(3) of the Income Tax Act, 1961.
2. Whether the computer rent paid by the assessee trust to Gyanganga Computers, where partners are also trustees, is excessive and violates sections 13(1)(c) and 13(3) of the Income Tax Act, 1961.
3. Whether the denial of exemption under section 11 of the Income Tax Act, 1961 by the AO is justified.

Detailed Analysis:

1. Rent Paid for School Buildings:

The assessee trust, engaged in education, paid rent for three school complexes to trustees or their relatives. The AO compared the rent with municipal valuations, finding the payments excessive and against sections 13(1)(c)(ii) and 13(3) of the Act, thus denying the exemption under section 11. The assessee argued that fair market value, not municipal valuation, should be the benchmark. The CIT(A) accepted this, noting the rent was at arm's length and provided comparable instances from CPWD and PWD, showing higher rents paid by other entities. The CIT(A) concluded that the rent paid by the trust was reasonable and even concessional, benefiting the trust rather than the specified persons.

2. Computer Rent Paid to Gyanganga Computers:

The AO also found the computer rent excessive, comparing it to the cost of the computers. The assessee contended the rent included services of qualified supervisors, maintenance, and repairs, and provided a comparison with state government rates and other institutions. The CIT(A) observed that the rent was reasonable and concessional, noting that Gyanganga Computers charged higher rates to outsiders and had a low net profit ratio, indicating no undue benefit to specified persons.

3. Denial of Exemption under Section 11:

The CIT(A) restored the exemption under section 11, stating the AO failed to provide evidence of excessive or unreasonable payments. The Tribunal upheld this decision, noting the AO's reliance on improper benchmarks and failure to consider the fair market value and comparable instances provided by the assessee. The Tribunal emphasized that transactions with specified persons are permissible if the consideration is reasonable and at arm's length, which was the case here.

Conclusion:

The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s decision that the rent and computer payments were reasonable and concessional, and the denial of exemption under section 11 was not justified. The Tribunal highlighted the importance of fair market value and proper benchmarks in determining the reasonableness of transactions with specified persons.