2023 (2) TMI 257 - AT - Income Tax

Income from House property - grant of deduction u/s 24(a) of the Act on rental income earned by the assessee trust - HELD THAT - The assessee during the year earned a rental income of Rs.79,15,551. While filing its return of income, the assessee reduced 30% as standard deduction from its rental income and declared as income from house property. Vide intimation issued u/s 143(1) of the Act, the standard deduction of 30% claimed by the assessee was disallowed, which was overturned by the learned CIT(A) granting relief to the assessee. Thus, the issue arises whether the assessee, being a trust, is entitled to claim a deduction of a sum equal to 30% of the annual value u/s 24(a) - We find that in CIT vs Rao Bahadur Calavala Cunnan Chetty Charities, 1979 (8) TMI 17 - MADRAS HIGH COURT held that the income from property held under trust would have to be arrived at in a normal commercial manner without reference to the provisions which are attracted by section 14. We direct the AO to disallow the deduction of 30% claimed by the assessee on rental income. As a result, grounds no. 1 and 2 raised in Revenue's appeal are allowed. Computation of exemption u/s 11 of the Act - CIT(A) directed the AO to allow 15% exemption under section 11(1)(a) and also directed that expenses be allowed to be set off to the extent of the income - HELD THAT - As per section 11 of the Act, the income derived from property held under trust wholly for charitable or religious purposes, to the extent applied to such purposes in India shall be excluded while determining the total taxable income of the trust for the year under consideration. The said exemption shall not be in excess of 15% of such income accumulated, as per the provisions of section 11 - Since vide intimation u/s 143(1) the claim for accumulation under section 11(1)(a) was taken as Nil, therefore, we find no infirmity in the order passed by the CIT(A) directing the AO to allow 15% exemption u/s 11(1)(a) as claimed by the assessee as per the law. Since the expenditure actually incurred by the assessee is much higher than the 85% of income which is required to be spent under section 11, therefore, we find no infirmity in the direction of the CIT(A) to allow the set off of expenses to the extent of the income. As a result, grounds raised in Revenue's appeal are dismissed.

Summary

Issues Involved:
1. Grant of deduction under section 24(a) of the Income Tax Act on rental income earned by a trust.
2. Computation of exemption under section 11 of the Income Tax Act.

Issue 1: Grant of Deduction under Section 24(a) of the Act on Rental Income:

The Revenue challenged the order passed by the Commissioner of Income Tax (Appeals) regarding the grant of deduction under section 24(a) of the Income Tax Act to a trust for the assessment year 2014-15. The appeal raised concerns about allowing the standard deduction of 30% from rental income earned by the trust. The Revenue contended that the deduction should not be permitted based on previous judgments. However, the learned CIT(A) directed the Assessing Officer to compute the income from house property after allowing the standard deduction. The tribunal analyzed the case, noting that the trust claimed a 30% standard deduction from its rental income, which was disallowed initially by the AO but later allowed by the CIT(A). The tribunal referred to a judgment by the Madras High Court, which emphasized that income from property held under trust should be computed in a commercial sense without considering provisions related to total income computation. Consequently, the tribunal directed the AO to disallow the 30% deduction claimed by the trust on rental income, thereby allowing the Revenue's appeal on this issue.

Issue 2: Computation of Exemption under Section 11 of the Act:

The second issue involved the computation of exemption under section 11 of the Income Tax Act. The trust earned total revenue during the year, incurring expenses that exceeded the required amount to be spent as per section 11. The AO, in the intimation under section 143(1) of the Act, considered the income and expenditure differently from what was claimed by the trust. The CIT(A) allowed the appeal filed by the trust, directing the AO to grant a 15% exemption under section 11(1)(a) and to allow expenses to be set off to the extent of the income. The tribunal examined the provisions of section 11, which exclude income applied for charitable or religious purposes from taxable income, subject to certain conditions. It found that the CIT(A)'s direction to allow the 15% exemption under section 11(1)(a) as claimed by the trust was in accordance with the law. Additionally, the tribunal upheld the direction to set off expenses to the extent of income, considering the higher actual expenses incurred by the trust compared to the required spending under section 11. Consequently, the tribunal dismissed the Revenue's appeal on this issue.

In conclusion, the tribunal partly allowed the Revenue's appeal concerning the grant of deduction under section 24(a) of the Act on rental income while dismissing the appeal regarding the computation of exemption under section 11 of the Act. The judgment provided detailed analysis and legal interpretations to address the issues raised by the Revenue, ensuring compliance with the relevant provisions of the Income Tax Act.