2024 (10) TMI 342 - AT - Income Tax

Denial of exemption u/s 11 12 - assessee had charged inadequate rent from the specified person with in the meaning of section 13(3) of the Act which is a violation of section 13(2)(b) - CIT(A) deleted addition - HELD THAT -

Summary

Issues Involved:

1. Whether the CIT(A) erred in allowing the benefit of exemption under sections 11 and 12 of the Income-tax Act by overlooking the alleged inadequate rent charged from specified persons, violating section 13(2)(b) read with section 13(3) of the Act.

Issue-wise Detailed Analysis:

1. Adequacy of Rent Charged to Specified Persons:

The central issue in this appeal was whether the rent charged by the assessee from specified persons was adequate, as required under section 13(2)(b) of the Income-tax Act. The Revenue contended that the assessee charged inadequate rent from specified persons, thereby violating the provisions of section 13(2)(b), which led to the denial of exemption under sections 11 and 12.

The Assessing Officer (AO) had determined that the rent charged was substantially lower than the prevailing market rates. The AO calculated the rent at Rs. 26.2 per sq. ft, totaling Rs. 42,73,284/-, whereas the rent received by the assessee was Rs. 17,68,000/-, equating to Rs. 15.66 per sq. ft. The AO concluded that the property was made available to specified persons without charging adequate rent, thus infringing section 13(2)(b).

2. CIT(A)'s Findings:

Upon appeal, the CIT(A) re-evaluated the matter and found that the rent charged was adequate. The CIT(A) relied on the judgment in Shree Ram Vaikuntha Trust vs. ITO, which defined "adequate" as legally sufficient and reasonably sufficient. The CIT(A) noted that the difference between the rent charged and the market value was less than 10%, which was not significant enough to be considered inadequate. The CIT(A) concluded that the rent did not violate section 13(2)(b) as it did not "shock the conscience of the court."

3. ITAT's Consideration:

The ITAT examined the submissions from both parties. The Department's representative argued that the fair market value determined by the AO should be considered adequate rent. Conversely, the assessee's counsel argued that the rent was adequate and did not breach section 13(2)(b), citing the Delhi High Court's judgment in Hamdard National Foundation [India] which emphasized that the burden of proving inadequacy lies with the Revenue.

The ITAT noted that the Revenue failed to provide conclusive evidence that the rent was inadequate. The ITAT referred to the Delhi High Court's interpretation that market rent is not the sole criterion for determining adequacy; other circumstances must also be considered. The ITAT agreed with the CIT(A) that the difference in rent was not substantial enough to warrant a finding of inadequacy.

Conclusion:

The ITAT upheld the CIT(A)'s decision, concluding that the rent charged was adequate and did not violate section 13(2)(b). The appeal by the Revenue was dismissed, affirming the assessee's entitlement to exemptions under sections 11 and 12. The judgment emphasized that the determination of adequate rent should consider all relevant circumstances, not just market rates, and that the Revenue bears the burden of proving inadequacy. The order was pronounced in the open court on 15.05.2024.