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TMI Blog2022 (9) TMI 401X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration is reasonable or excessive is to be judged from the fair market value of such consideration between two unrelated parties in arm s-length situation. Whether the consideration paid by the assessee Trust to the specified persons is reasonable or not? - AO had compared the rent with municipal valuation to content that the rent paid by the assessee trust was excessive. This findings of the ld AO is not legal, proper and has no logic for the reason that municipal valuation does not reflect the fair market value and this position is accepted under the Income Tax and as in the calculation of Income from house property, higher of municipal valuation or fair rent is taken into account - The rental agreements clearly mention that besides building other amenities like furniture, electrical fittings, parking and open ground was also used by the trust. AO is not correct in making comparison with the municipal valuation and the assessee has made excessive payment to the trustees. The assessee Trust also shown factual data as comparable to justify reasonable rates of building rent in the form of few comparable instances by obtaining the details from CPWD and PWD - Rents paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under section 11 of the Act. The returns were selected for scrutiny assessment and notice under section 142(1) were issued to the assessee. During the assessment proceedings, it was noticed that the assessee has made rent payment of Rs.41,50,000/- and computer rent of Rs.16,55,500/-. The assessee was asked to explain the details. The assessee explained that there are three school complexes of G.K. Dholakia School which are run by the assesseetrust. For School Complex-1 wherein rent of Rs.2,00,000/- was paid by the assessee; for School Complex-2 Rs.1,25,000/- and School Complex-3, rent of Rs.50,000/- were paid. All these payments were made by the assessee-trust to its trustees or relatives of the trustees. The AO called for details of Municipal valuation of these premises which were Rs.43,562/- for School Complex-1, Rs.9,942/- for School Complex-2 and Rs.19,202/- for School Complex-3. As the assessee has made excessive payment for the above school complexes to its Trustees or relatives of the Trust, which was against the provisions of section 13(3) and section 13(1)(c)(ii) of the Act. Therefore, the benefits of claim under section 11 were being withdrawn by the AO. Similarly, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles to justify reasonableness of building rent in the form of few comparable instances by obtaining the details from CPWD and PWD as under: Sr. No. Name of tenant Address of the property Rate of rent (per Sq. Ft.) Remarks 1 Income Tax Department 2nd 3rd Floor, Amrita Estate, Near Girnar Cinema, Rajkot. Rs. 12.98 This is an old buildpg constructed in 1964. 2 Joint director of industry, safety and health Annexy building, near Girnar Cinema, Rajkot. Rs. 10.03 This is an old building constructed in 1983. 3 Bank of Baroda Near Panchayat Nagar, Rajkot. Rs. 75/- This is situated in nearby area. The monthly rent of Rs.158250/- for 2110 Sq. feet. 4 Muthoot Finance Near Panchayat Nagar, Rajkot. Rs. 116/- This i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dholakiya Bhavnaben Dholakiya 2007-08 2.02 crore 2.50 crore 15 Lakhs 6% 3. G. K. Dholakiya School - 3 Balkrishnabhai Dholakiya Bhavnaben Dholakiya 2009-10 1 .67 crore 1 .67 crore 6 Lakhs 3.59% 8.8.1 The rate of return appears to be quite reasonable. Even if return is measured on original cost based on balance sheet of individuals, in no case it exceeds 7.5%. This rate of return is lower than the rate of return on fixed deposits and therefore it cannot be termed as excessive or unreasonable. Here also, it is found that the A.O. has ignored this aspect in the assessment order though the appellant placed the above data before her. 8.9 The yardstick of comparable cases and reasonable rate of return on investment are well accepted methods in measurement of fair consideration. Under the transfer pricing regime also, these two yardsticks are applied to determine arm's length price. In my view, the A.O. has erroneously ignored these two yardsticks and went ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form of building rent and fees for computer education are not acceptable as they defy economic rationale. It would be worthwhile to refer to the Gujarat High Court judgment in case of Surat City Gymkhana (254 ITR 733) relied upon by the appellant wherein the Jurisdictional High Court held that where the A.O. avers the applicability of provisions of section 13(l)(c), the onus lies on the A.O. to establish the same. In my view, the A.O. has failed on this test as neither in case of building rent nor in case of computer rent, she has referred to even a single case of fair consideration between two unrelated parties which is a pre-requisite to describe the consideration as excessive and establish the factum of benefit having been passed to the specified persons so as to validly invoke section 13(l)(c). The entire stand of the A.O. is based on improper yardsticks, irrelevant considerations and undue arithmetical exercise based on ad hoc and imaginative figures. It is also observed that though the appellant cited few comparable instances, the A.O. completely ignored and brushed aside them in the operative part of the assessment order. 11. In view of the legal and factual position d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: 10. . Insofar as the lease rent is concerned, the revenue had not brought on record any evidence to suggest that such lease rent was either excessive or even higher than the normal market rate prevailing in the region at the relevant time. In fact, the assessee produced material to show that a part of the land belonging to the trustees was leased to one Max New York Life Insurance Co. Ltd. at the rate of Rs. 5/- per sq. ft. as against the rate of Rs. 1/- per sq. ft. being paid by the assessee. The CIT (Appeals) discarded such comparison on the ground that the area occupied by the Max New York Life Insurance Co. Ltd. was much smaller, as compared to the area leased to the assessee. The size of the land under occupation may have some bearing on the lease rent which the land may fetch, nevertheless, in the present case, the difference of rate between two cases was nearly five times. Without there being any further material on record, the Commissioner could not have come to the conclusion that the rent paid by the assessee to the trustees for the leased land, was excessive. 13. Section 13(1)(c) of the Act does not prohibit normal transactions between the trust and the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er words, the specified persons can be said to have derived the benefits mainly when something is passed on to them, over and above the reasonable and adequate consideration which is at arm s length. Thus there is no bar in transactions with the entity claiming exemption under section 11 on one side and persons specified under section 13[3] on the other side and only when the consideration is found to be unreasonable or excessive, then the question of withdrawal of exemption under section 11 will arises. Whether the consideration is reasonable or excessive is to be judged from the fair market value of such consideration between two unrelated parties in arm s-length situation. 9. Now the next question is whether the consideration paid by the assessee Trust to the specified persons is reasonable or not. The assessee Trust paid monthly rent for school complex 1 of Rs.5.22 sqft; for school complex 2 of Rs. 7.61 and school complex 3 of Rs. 5.85. However the ld AO had compared the rent with municipal valuation to content that the rent paid by the assessee trust was excessive. This findings of the ld AO is not legal, proper and has no logic for the reason that municipal valuation does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supporting evidences contended that the State government had approved rate of Rs. 50 per student per month for computer education and other similarly placed education institutions charge and Rs. 40 per student per month. Thus the consideration paid by the assessee trust deemed to be reasonable and not excessive as held by the assessing officer. 12. Further the ld CIT[A] has held perusal of the annual accounts of M/s. Gyanganga Computers, the major part of its income is by way of computer rent from the appellant Trust and other Trust under same management and still its net profit ratio is 2.93 % only, this indicates that a reasonable margin is here and on cost which cannot be termed as excessive. Further it is observed M/s. Gyanganga Computers charged Rs.60 per month to outsiders in case of one-time payment and Rs.70 per month in case of instalment payment, whereas the assessee trust was being charged at Rs. 37.3 per month per student which is reasonable and also concessional. Therefore it is not a case of undue benefits having been passed to the specified person in the form of computer rent. Therefore the denial of exemption under section 11 is not sustainable in law. Thus we up ..... X X X X Extracts X X X X X X X X Extracts X X X X
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