2017 (10) TMI 1091 - AT - Income Tax

Exemption under section 11 denied - whether the payment of rent/ lease rent paid to the related party is reasonable or excessive? - Held that - Though, the assessee within four years from the execution of lease deed increased the rent from ₹ 5.00 lacks to ₹ 25.00 lacks per month. There is no dispute about the status of trustee in assessee trust and the Directors in the lesser company. The assessee has placed on record the copy of valuation report about the rental value of the leased asset dated 10.01.2014 and certified that this document was filed before lower authorities. In the valuation report the monthly rental value is assessed as ₹ 32,31,367/-. The area of leased land is in this report is referred only 10 acre, however in the reply before assessing officer the area of land was claimed as 16.93 acre (page 8 para II of AO order). The assessing officer has not given any finding on this document. Similarly, the assessing officer has not brought any evidence on record about any valuation of comparable property. Similarly, the ld. Commissioner (Appeals) has not made any comment on the valuation report furnished by the assessee. In our view this documentary evidence furnished by assessee is not controverted by assessing officer by bringing any incriminating evidence on record. Thus in our view in absence of any incriminating evidence the payment of rent to the related party during the year under consideration is reasonable one. The assessee during the course of his submission filed a copy of the order lf ld CIT(A)-9 New Delhi dated 18.02.206, showing that the rent paid by the assessee was duly shown by Vidya Education Investment Pvt Ltd.(VEIPL) and was assessed by the revenue. The perusal of this order reveals that VEIPL has shown to have let out the land with superstructure to the assessee. VEIPL has offered the rent received from the assessee to tax. In our opinion in absence of any material the rent paid by the assessee to the related party during the year is reasonable one. With these observation the grounds of appeal raised by the assessee is allowed.

Summary

Issues Involved:
1. Denial of exemption under Section 11 of the Income Tax Act.
2. Determination of whether the assessee's activities are charitable.
3. Consideration of comparative fee structure data.
4. Disallowance of rent paid under Section 13(2)(g) of the Act.
5. Consistency of exemption under Section 11 based on previous assessments.

Issue-wise Detailed Analysis:

1. Denial of exemption under Section 11 of the Income Tax Act:
The primary issue was whether the assessee, a Charitable Trust, was entitled to exemption under Section 11 of the Income Tax Act. The Assessing Officer (AO) denied this exemption, arguing that the trust was operating a lavish international school and charging high fees, indicating a profit motive. The AO assessed the total income of the assessee at ?1,41,16,320/- and denied the exemption for ?2,75,00,000/- paid to a company excluded under Section 13(3). The Income Tax Appellate Tribunal (ITAT) found that the trust was registered under Section 12AA and its primary objective was educational, thus it should not be denied exemption merely for charging fees.

2. Determination of whether the assessee's activities are charitable:
The AO contended that the activities of the trust were commercial in nature due to the high fees charged and lack of charitable benefits like scholarships for needy students. The ITAT, however, noted that the trust was imparting education and that charging fees for such services does not negate its charitable status. The Tribunal referenced several judicial precedents, including the Supreme Court’s decision in Queen’s Education Society vs. CIT, to support the view that charging fees does not automatically imply a profit motive.

3. Consideration of comparative fee structure data:
The assessee argued that their fee structure was comparable to other international schools and was necessary to cover operational costs, including high salaries for qualified teachers. The ITAT acknowledged that the assessee provided comparative data and found that the fees charged were reasonable and aligned with the trust’s objective of providing quality education. The Tribunal did not find any evidence of excessive fee charging intended to generate profit.

4. Disallowance of rent paid under Section 13(2)(g) of the Act:
A significant issue was the payment of ?2.75 crore as rent to Vidya Education Investment Pvt. Ltd., a company related to the trustees. The AO and CIT(A) disallowed this payment, deeming it unreasonable and a tool for fund diversion. The ITAT examined the lease agreement and a valuation report indicating that the rent paid was reasonable. The Tribunal concluded that the payment was justified and not excessive, thus not violating Section 13(2)(g).

5. Consistency of exemption under Section 11 based on previous assessments:
The assessee argued that the exemption under Section 11 was granted in the previous assessment year (AY 2010-11) under similar circumstances. The ITAT noted that the principles of res judicata do not apply to income tax proceedings, but consistency in decision-making is important. The Tribunal found no substantial change in the facts or circumstances that would warrant a different treatment in the current assessment year.

Conclusion:
The ITAT allowed the appeal, ruling in favor of the assessee on all grounds. The Tribunal held that the assessee’s activities were charitable in nature, the fees charged were reasonable, and the rent paid to the related party was justified. Consequently, the assessee was entitled to the exemption under Section 11 for the assessment year 2011-12. The order was pronounced in the open court on October 24, 2017.