2020 (11) TMI 559 - AT - Income Tax

Exemption u/s 11 - denial of exemption to extent of rent paid by the assessee to one of its trustees holding the same to be on higher side as compared to market rate by invoking the provisions of section 13 (1)(c) - undue benefit had been given to the trustee by way of rent paid - as per CIT-A assessee society purchased further tracts of land - HELD THAT - The assessee had duly demonstrated the reasonableness of the rent paid comparing the per sq. ft. rent paid per month in the present case which came to ₹ 10. 53, with other comparable cases which varied from ₹ 28. 84 on premises leased to Punjab National Bank to ₹ 62 on premises leased to ING Vysya Bank in the same vicinity. No infirmity in the aforesaid facts has been pointed out by the Revenue before us, nor has, we find the AO done so during assessment proceedings when the same was brought to his notice, or the Ld. CIT(A) who did not consider it necessary to comment on the same. Rent paid to Trustee, was found reasonable by the ITAT in A. Y 2003 - 04 2004 - 05, when identically exemption was denied by the AO - DR has not brought to our notice any distinguishing facts vis a vis those years. Further in subsequent assessment years, i. e from A. Y 2010 - 11 TO A. Y 2014 - 15, the Revenue made no such addition to the income of the assessee society in scrutiny assessment u/ s 143 (3) of the Act. No reason for holding the rent paid by the assessee society to Sh Amar Jyot Singh in the impugned year as unreasonable. CIT(A) has gone on a totally different tangent for holding so stating that the fact that the assessee society purchased further tracts of land when it should have purchased the land taken on lease so as to do away with the rent payment, shows that undue benefit was being given by the assessee society to the lessor Shri Amarjyot Singh - No merit in this reasoning of the Ld. CIT(A) particularly when the assessee had demonstrated that the land purchased was not lying surplus with it but had been put to use for furthering the objective of the assessee society of imparting education. The assessee we have noted had filed a complete detail of usage of land both owned and leased by it - when the entire land was required by the assessee society for its objective of imparting education, there cannot be said that any benefit had been given to the lessor by retaining its land on lease instead of buying it off, as per the reasoning of the Ld. CIT(A) also. Denial of exemption u/ s 11 rejected - Decided in favour of assessee.

Summary

Issues Involved:
1. Denial of exemption under Section 11 of the Income Tax Act, 1961.
2. Reasonableness of the rent paid to the trustee.
3. Consistency in judicial decisions regarding the rent paid.
4. Taxation at the maximum marginal rate.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 11:
The primary issue in the appeal was the denial of exemption under Section 11 of the Income Tax Act, 1961, due to the rent paid by the assessee to one of its trustees. The Assessing Officer (AO) held that the rent of ?69 lacs paid to the trustee was on the higher side compared to the market rate, invoking the provisions of Section 13(1)(c) read with Section 13(3) of the Act. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's findings, leading to the present appeal.

2. Reasonableness of the Rent Paid to the Trustee:
The assessee argued that the rent paid was reasonable compared to the market rate. The property in question was utilized for various purposes related to the trust's educational activities. The rent paid amounted to ?10.53 per sq. ft. per month, which was significantly lower than the market rates for similar properties in the vicinity, ranging from ?28.84 to ?62 per sq. ft. per month. The Tribunal found no infirmity in the facts presented by the assessee and noted that the AO and CIT(A) did not provide any substantial evidence to contradict the reasonableness of the rent.

3. Consistency in Judicial Decisions:
The assessee highlighted that in previous assessment years (2003-04 and 2004-05), similar additions made by the AO were decided in favor of the assessee by the CIT(A) and upheld by the ITAT. Additionally, for the assessment years 2010-11 to 2014-15, no such additions were made during scrutiny assessments under Section 143(3). The Tribunal noted the consistency in judicial decisions and found no distinguishing facts for the impugned year.

4. Taxation at the Maximum Marginal Rate:
The assessee contended that the AO taxed the income at the maximum marginal rate, whereas the income of societies should be taxed as Individuals and Association of Persons (AOP). However, this issue was not elaborately discussed in the judgment, as the primary focus was on the reasonableness of the rent and the denial of exemption under Section 11.

Conclusion:
The Tribunal concluded that the denial of exemption under Section 11 was not justified. The rent paid was reasonable and comparable to market rates, and the AO's findings were based on mere conjectures without substantial evidence. The CIT(A)'s reasoning that the trust should have purchased the leased land instead of paying rent was also found to be without merit, as the entire land was utilized for the trust's educational purposes. Consequently, the denial of exemption under Section 11 was directed to be deleted, and the appeal of the assessee was allowed.

Order:
The appeal of the assessee was allowed, and the denial of exemption under Section 11 was directed to be deleted. The order was pronounced in the Open Court.