2022 (12) TMI 1088 - AT - Income Tax

Exemption u/s 11 - Application of provisions of Accumulation of income for Notional Income (Rent) - annual value of any property is to be determined - two properties leased out by assessee are not the fair market value of rental income and it is only nominal value and he compared the prevailing market rent in the area - As per AO assessee charitable trust owns land leased out the same and the two tenants are specified persons u/s.13(3 hence, provisions of section 13(1)(c) of the Act are applicable to the case of the assessee - HELD THAT - As going through the CBDT Circular No.005P (LXX-6) dt. 19th June, 1968 cited above, which has been considered in the case of Rao Bahadur Calavala Cunnan Chetty Charities 1979 (8) TMI 17 - MADRAS HIGH COURT and Ganga Charity Trust Fund 1985 (10) TMI 67 - GUJARAT HIGH COURT we are of the view that the accumulation or application in section 11(1)(a) of the Act must be of real income and as per the CBDT circular No.005P(LXX-6) cited above, makes it clear that the word income in section 11(1)(a) must be understood in commercial sense. The entire income of the trust in the commercial sense has been spent for the purpose and not the notional income. But in the present case before us, the assessee has violated the provisions of section 13(1)(c) r.w.s. 13(1)(b) of the Act, as the assessee has received rent from two tenants who are specified persons u/s.13(3) of the Act and hence, clear violation of provisions of section 13(1)(c) r.w.s. 13(1)(b) of the Act. Therefore, the assessee is not entitled for claim of deduction. Accordingly assessee trust cannot be assessed on notional rental income in term of CBDT Circular No.005P(LXX-6) dt. 19th June 1968 AO will deny exemption u/s.11 of the Act, in regard to the income declared by assessee and will assess the same to tax in term of section 164(1) of the Act.

Issues Involved:
1. Assessment of notional lease rent.
2. Applicability of Section 13(1)(c) and 13(2)(b) of the Income Tax Act.
3. Denial of exemption under Section 11 of the Income Tax Act.
4. Computation of fair market rent for leased properties.
5. Application of CBDT Circular No.005P(LXX-6) dated 19th June 1968.
6. Taxation under Section 164(1) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Assessment of Notional Lease Rent:
The primary issue in this appeal was whether the Department could assess notional rent for a charitable trust under Section 11 of the Income Tax Act. The AO assessed the lease rent from the land leased out to specified persons on a notional basis by adopting the market value of the lease rent, comparing it with the rent paid by the Income-tax Department for a building in Vijayawada. The Tribunal held that the trust could not be assessed on notional rental income, referencing CBDT Circular No.005P(LXX-6) and the decision of the Hon'ble Madras High Court in the case of Rao Bahadur Calavala Cunnan Chetty Charities.

2. Applicability of Section 13(1)(c) and 13(2)(b) of the Income Tax Act:
The AO noted that the trustees and their relatives held substantial interests in the companies leasing the land, making them specified persons under Section 13(3). Consequently, the provisions of Section 13(1)(c) were applicable, leading to the denial of exemption under Section 11. The Tribunal confirmed that the assessee violated these provisions as the trust received rent from specified persons, thus breaching Section 13(1)(c) read with Section 13(2)(b).

3. Denial of Exemption under Section 11 of the Income Tax Act:
Due to the violation of Section 13(1)(c), the AO denied the exemption under Section 11, treating the trust as an Association of Persons (AOP). The Tribunal upheld this denial, stating that the assessee was not entitled to claim exemption under Section 11 due to the violation of the specified provisions.

4. Computation of Fair Market Rent for Leased Properties:
The AO compared the market rent in the area and assessed the rent for the properties leased to Southern Roadways and TVS & Sons Ltd. based on the prevailing market rates. The CIT(A) recomputed the lease rentals, considering only the land portion and excluding the superstructure constructed by the lessee. The Tribunal did not disturb the CIT(A)'s findings on the fair market rent computation.

5. Application of CBDT Circular No.005P(LXX-6):
The Tribunal referred to CBDT Circular No.005P(LXX-6), which states that the word "income" in Section 11(1)(a) should be understood in its commercial sense, i.e., book income. The Tribunal emphasized that the trust's income should be assessed based on actual income recognized and realized, not on notional income. This interpretation was supported by the decisions of the Hon'ble Madras High Court and the Hon'ble Gujarat High Court.

6. Taxation under Section 164(1) of the Income Tax Act:
The Tribunal directed that the AO should deny exemption under Section 11 and assess the income declared by the assessee at Rs. 8,25,510/- under Section 164(1) of the Act. This section mandates that income in violation of Section 13(1)(c) should be taxed at the maximum marginal rate.

Conclusion:
The appeal was partly allowed, with the Tribunal holding that the assessee trust could not be assessed on notional rental income but confirming the denial of exemption under Section 11 due to the violation of Section 13(1)(c). The Tribunal directed that the income should be assessed under Section 164(1) at the maximum marginal rate.

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