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TMI Blog2018 (6) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... or assessment year under appeal. It would support the explanation of assessee that assessee paid service tax for assessment year under appeal, out of rent received from the lessee because there were no mention of the service tax in the rent agreement. Since the service tax is a liability upon the assessee-company which have been discharged as per Service Tax Act, therefore, it is an allowable deduction in favour of assessee, because in the service tax, assessee has no right to claim it as a rent. The authorities below were, therefore, not justified in making addition - decided in favour of assessee Disallowance of interest on borrowed funds - Held that:- Assessee has given complete details before CIT(A) to show how much own funds are available to assessee and how much amounts have been borrowed from the Bank and other institutions. The assessee claimed that the borrowings as on 31.03.2010 were only ₹ 25,13,58,904/-, on which, above interest have been paid. The assessee has invested a sum of ₹ 43,46,57,917/- in the school land and building. This itself proves that assessee utilized the entire borrowed funds for construction of school building. Learned Counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty and in there with the income by ₹ 1,67,74,073/- and further in omitting to give relief as sought for in respect of Service Tax. 5. During the year under consideration, assesseecompany has derived rental income from the school building constructed at Village Shiltane, Lonvala from M/s. Cathedral Vidya School in which one of the Director is also trustee. During the course of assessment, it was observed that assesseecompany has received rental income of ₹ 1.80 crores, whereas, they have offered ₹ 1,63,19,130/- as rental income for the year. In reply to the specific query raised by the A.O, assessee has submitted that the balance amount of ₹ 16,80,870/- pertains to service tax which was included in rental income. However, as per the copy of Agreement filed by the assessee company, nothing was mentioned about the service tax and its liability. Moreover, assessee company is not registered with the Service Tax Department and without registration, question of charging of Service Tax and its liability does not arise. Accordingly, Net Rental Income is further increased by ₹ 11,76,609/- (being ₹ 16,80,870/- less 30%). The A.O. accordingly, made the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hallan, in respect of audit fee paid. The assessee requested for admission of the additional evidence, on which, report from the A.O. was called for. Ld. CIT(A) ultimately admitted these additional evidence under Rule 46A. 7. The Ld. CIT(A) noted the facts in the case of assessee that assessee purchased 39 acres of land in Lonavala in 2005. Shri Vineet Nayyar owns 99% of the assessee-company and balance 1% is held by his daughter Ms. Namrata Nayyar. 26% of the above land was sold to Cathedral School Welfare Trust. The assessee and co-owner leased the land and building constructed by them to CVT. Shri Vineet Nayyar is Settler of CVT along with his wife. The assessee filed copy of the lease deed between the assessee company and CVT which shows that the lease deed is actually between assessee and CVT which is signed by Shri Vineet Nayyar on behalf of the assessee company and for the lessee, lease rent fixed is ₹ 15 lakhs per month to be paid to assessee-company.. 7.1. The assessee reiterated the same facts before the Ld. CIT(A). The Ld. CIT(A), noted that as per the balance sheet the value of the school land is ₹ 1.11 crores and building is valued at ₹ 42.36 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax. Section 23(1) provides manner of computing the annual value of house property. He has submitted that there are two methods to be kept in mind for judging annual letting value i.e., the standard rent if property is subject to Rent Control Act or the Municipal Ratable Value for the purpose of house tax would be the annual letting value where there is no standard rent. Therefore, the method applied by the Ld. CIT(A) by applying 8% of the investment is highly improper and not applicable to the Income Tax Act. Merely because the family member of Shri Vineet Nayyar controlled both the institutions by himself is no ground to reject the fair rental value shown by assessee. The Charitable Trust can pay to the Trustee rent which is reasonable for such services. The property was let out to educational institution which may not be used for commercial purpose or residential purpose. Therefore, the rent was reasonable, which was also lesser in earlier year and accepted. The Ld. CIT(A) has not given any comparable case while fixing the annual letting value of the property. The Learned Counsel for the Assessee relied upon decision of the Full Bench of the Delhi High Court in the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to substantiate the reasonableness of the payment of rent. Assessee, however, explained that assesseelessee paid reasonable rent and there is no basis for the A.O. to arrive at different findings and relied upon assessment orders/ appellate order in the case of assessee-lessee for preceding assessment years. The Tribunal in paras 5 to 10 in the case of CVT held as under : 5. We have considered the rival submissions of ld. AR of the parties and have gone through the orders of authorities below. We have also perused the material and the two decision mainly relied by ld AR for the assessee before us. The assessee-Trust was registered on 21.02.2008. The settler of Trust is Vineet Nayyar. The other trustee in the trust is Reva Nayyar. The address of both the trustee in the trust-deed are of 5A, Friends Colony (W), Mathura Road, Delhi-65. The initial corpus fund of ₹ 1100/- was contributed by settler. The name of the Trust was given as The Cathedral Vidya Trust . The registered office of the Trust is mentioned as 6, Purushottamdas Thakurdas Marg, Fort Mumbai-400001. Further, the membership of the Trust was restricted to minimum one and not more than three. There is furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional activities by setting up and running school and allied charitable objects. The assessee has been promoting educational activities since inception, no other activities has been carried by the assessee till date. During the AY 2010-11, the AO has also observed that the object of trust is to promote educational activities by setting up and running school and granted exemption under section 11. For fees structure, the assessee contended that the school was established and started from 03.08.2008 and imparting education from Std. IV to Std. XI and Diploma courses. The assessee is imparting world class education with strong Indian Tradition and values with advance school of modern technology. In order to get the Teachers and Faculties for imparting good education, the assessee is require to pay high amount of remuneration to Teachers of that calibre. There were 300 students and 65 teaching staff and administrative support staff. The school is not added by the Government support and entire expenditure is incurred from the fees that are charged from the students. The fee structure as compared to the other International School, the fee of the assessee is on lower side. The assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied on behalf of assessee nor the order of CIT(A) for AY 2010-11 is helpful to the assessee. The decision in Queen's Educational Society relates to section 10(23C), however the case of the assessee is hit by section 13 of the Act. Further, the issue in AY 2010-11 may be relevant for the conditions of section 13(2) (c), however the provision of section 13(2)(g) are applicable in the year under consideration. Moreover, the principles of resjudicata are not applicable in the income tax proceedings. 7. In our view, the only question for our consideration is whether the payment of rent/ lease rent paid to the related party is reasonable or excessive. The exemption under section 11 can only be denied when the income of the trust is diverted during the previous year in favour of any person referred in section13(3). Section 13(2) (g) specifically provides that when the income of the trust is diverted during the previous year in favour of any concern as provided under section 13(3)(e) the assessee would not be entitled for exemption if the rent paid is unreasonable one. 8. The perusal of the lease deed reveals that initially the rent was payable at the rate of ₹ 5,00, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the rent have been accepted in the case of lessee and the Tribunal deleted the addition, therefore, enhancement made by the Ld. CIT(A) is wholly unjustified. 9. On the other hand, Ld. D.R. relied upon the orders of the authorities below and submitted that no material is produced in support of annual letting value claimed by the assessee. He has submitted that the decision relied upon by the assessee are distinguishable on facts. 10. We have considered the rival submissions and perused the material on record. The operative words in Section 23(1)(a) are the sum, for which, the property might reasonably be expected to let from year to year . These words provide a specific direction to the Revenue for determining the fair rent. The A.O. having regard to the aforesaid provisions is expected to make an enquiry as to what would be the reasonable rent that the property under reference might fetch. If the A.O. finds that actual rent received is less than the fair rent/market rent because of certain reasons, the A.O. can take necessary exercise in that behalf. Hon ble Delhi High Court in the case of CIT vs. Moni Kumar Subba (supra), in para-20 has given its conclusion, reproduced a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Thus, there were no basis for Ld. CIT(A) to enhance the annual letting value of the property in question. We may also note that identical issue was considered in the case of lessee i.e., CVT by ITAT, Mumbai Bench and the entire addition made by the A.O. have been deleted by the Tribunal. Though this case pertains to subsequent A.Y. 2011-2012, but the fact remains that the Tribunal accepted the claim of lessee of fair rent paid by them to assessee. The demised property was let-out though agreement which follow in year under appeal. So, facts are identical. The claim of assessee has been supported by opinion/report of M/s. Atharva Land Developers who have determined fair rent against which Ld. CIT(A) has not brought any report of expert. So, it could not be disputed. In the case of assessee and lessee, the rent paid in earlier year have not been disputed by the Revenue Authorities. Considering the totality of the facts and circumstances and in the light of decisions relied upon by the Learned Counsel for the Assessee, we are of the view that the lessee has paid fair reasonable rent to the assessee. Therefore, there were no basis to enhance the fair rent paid by lessee to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... August, 2008, was charged to the P L A/c i.e., ₹ 95,17,940/- as ended on 31.03.2009 and ₹ 2,20,46,017/- ended on 31.03.2010. The assessee in the return of income claimed interest paid and claimed deduction under the Head House Property . The assessee further submitted that deduction is allowable as the borrowings have nexus with the construction of the property. Since the interest is charged on borrowed capital utilized for acquiring and constructing of the property, therefore, it is an allowable deduction under section 24(b) of the I.T. Act. The proportion of the value of the land and building as against the other assets is 93.15% and not 50% as computed by the A.O. All the borrowings were used for construction of assets of the school. The share capital, loans and reserve and surplus of the assessee ending 31.03.2010 are ₹ 17,31,22,801/-. The balance sheet of the assessee shows total investment on assets as on 31.03.2010 at ₹ 43,46,75,917/- whereas, the borrowings as on 31.03.2010 were ₹ 25.13 crores only. This clearly shows that assessee has substantially utilized its own funds amounting approximately to ₹ 18 crore and the funds of the co-o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs as on 31.03.2010 were only ₹ 25,13,58,904/-, on which, above interest have been paid. The assessee has invested a sum of ₹ 43,46,57,917/- in the school land and building. This itself proves that assessee utilized the entire borrowed funds for construction of school building. Learned Counsel for the Assessee also referred to page-10 of the synopsis to show bifurcation of the land and building of the demise property and other assets and submitted that the other net addition on other assets in assessment year under appeal is only ₹ 60,35,902/- which is not disputed by the Ld. CIT(A), because, such Schedule-5 of the fixed assets was also filed before authorities below. He has, therefore, rightly contended that the entire borrowed funds have been used for the purpose of acquisition and construction of the school building. Similar deduction of interest claimed in earlier year not disputed by authorities below. Therefore, interest is allowable. We, accordingly, set aside the orders of the authorities below and delete the addition. This ground of appeal of assessee is allowed. 18. On ground No.2(b), assessee challenged the addition of ₹ 2,75,750/- on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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