1985 (7) TMI 152 - AT - Income Tax

Summary

Issues Involved:
1. Correctness of the order under section 263 of the Income-tax Act, 1961.
2. Applicability of section 13(2)(b) and section 13(3)(b) of the Income-tax Act, 1961.
3. Adequacy of rent charged by the assessee-trust.

Issue-wise Detailed Analysis:

1. Correctness of the order under section 263 of the Income-tax Act, 1961:
The primary issue in the appeal was whether the order of the Commissioner under section 263 of the Income-tax Act, 1961, was correct. The Commissioner had held that the assessment order was erroneous and prejudicial to the interests of the revenue because the assessee-trust had allegedly contravened the provisions of section 13(2)(b) by not charging adequate rent for a property let out to a substantial contributor. The Tribunal noted that the arguments were pressed only on the merits, and it was assumed that there was a valid initiation of proceedings under section 263.

2. Applicability of section 13(2)(b) and section 13(3)(b) of the Income-tax Act, 1961:
The assessee-trust received a donation of Rs. 7,000 from the Tea Company in 1972, which exceeded the Rs. 5,000 limit specified in section 13(3)(b) for the assessment year 1982-83. Consequently, the Tea Company was considered a substantial contributor. The Commissioner argued that the rent of Rs. 650 per month was inadequate and, therefore, the property was deemed to have been used for the benefit of the Tea Company, violating section 13(2)(b). However, the Tribunal found that the rent charged in 1971, when the property was let out, had to be evaluated for adequacy. The Tribunal noted that the rent restriction laws, specifically the Tamil Nadu Buildings (Lease and Rent Control) Act, were applicable, and the rent could not be increased arbitrarily.

3. Adequacy of rent charged by the assessee-trust:
The Tribunal examined the adequacy of the rent charged by the assessee-trust. The Tribunal considered several factors:
- The municipal valuation of the property, which indicated a reasonable annual letting value.
- The Tamil Nadu Buildings (Lease and Rent Control) Act, which restricted the rent to fair rent or agreed rent.
- The value of the property as per the deed of settlement and subsequent sales of portions of the land.
- The responsibilities of the tenant (Tea Company) for repairs and municipal taxes.

The Tribunal concluded that the rent of Rs. 650 per month was not inadequate. The Tribunal emphasized that the rent agreed upon in 1971 was not sham and was in line with the municipal valuation and rent control laws. The Tribunal also noted that the Commissioner had incorrectly relied on a report from the ITO, Coimbatore, without providing the assessee an opportunity to respond.

Conclusion:
The Tribunal quashed the order of the Commissioner under section 263, holding that the rent charged from the Tea Company was adequate and that the ITO's original assessment allowing exemption under section 11 was correct. The appeal filed by the assessee was allowed.