M/S. T vs. CHARITIES,,MADURAIVS.ITO, EXEMPTION WARD,, MADURAI

आदेश /O R D E R PER MAHAVIR SINGH, VP: This appeal by the assessee is arising out of the order of the Commissioner of Income Tax (Appeals)-2, Madurai in dated 20.08.2019. The assessment was framed by the Income Tax Officer, Exemptions Ward, Madurai for the assessment year 2016-17 u/s.143(3) of the Income Tax Act, 1961, (hereinafter ‘the Act’) vide order dated 14.12.2018.

Name of the Percentage of shares held Percentage of shares held Trustees/Interested by the trustee along with by the trustee along with concerns their relatives in the their relatives in the Company M/s TVS & Sons Company M/s Southern Pvt. Ltd., during the Roadways during the F.Y.2015-16 F.Y.2015-16 Sri R. Haresh, Director of 11.9 2.28 M/s. TVS & Sons Pvt. Ltd Sri Suresh Krishna, 16.27% 15.75% Director of M/s. TVS & Sons Pvt. Ltd. Ms. Shrimathi Mahesh 8.18% 2.59% Sri Venu Srinivasan, 22.95% 9.18% Director of M/s. TVS & Sons Pvt. Ltd. & M/s. Southern Roadways M/s. TVS & Sons Pvt. Ltd. - 54.98% Total 59.3% 84.78% According to AO, the assessee charitable trust owns land in Vijayawada and leased out the same to TVS Iyengar Pvt. Ltd., and Southern Roadways Ltd., and these two tenants are specified persons u/s.13(3) of the Act and hence, provisions of section 13(1)(c) of the Act are applicable to the case of the assessee and hence, as such assessee is not entitled to claim exemption u/s.11 of the Act.

3.2 The AO also noted that the above 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 and also obtained the copy of certificate of rent reasonableness issued by Superintending Engineer, CPWD, Vijayawada for the building taken on rent by Income-tax Department and accordingly, in term of the same he arrived at the prevailing market rate and assessed the rent leased to Southern Roadways at Rs.98,23,320/- and land leased to TVS & Sons Ltd., at Rs.81,44,316/- and thereby assessed the total income for leased properties at Rs.1,79,67,636/-. For this, he made calculations in para 7(x)(a) and (b) as under:- 7…. x) In view of the above, the assessee' s objections are rejected and the violation u/s 13(1)(c) r.w.s 13(2(b) of the I.T. Act is computed based on the monthly prevailing market rent for the site at Rs. 8.5/- per Sq. ft (25.5/3) and that of building at Rs. 17 per Sq. ft. as under, a) Based on the prevailing market rate the trust property-land measuring 6164 Sq. Mts. (66348 Sq. Ft) leased to the company M/s Southern Roadways is arrived at Rs. 5,63,958/- (66348*8.5) per month and yearly rent is arrived at Rs. 67,67,496/- (563958* 12). Also as per lease deed the property consists of land with building measuring 1487.66 Sq. Mts. (Plinth area taken from Vijayawada Municipal tax calculation old Assessment no. 26122F) and the monthly rent of the said building is arrived at Rs. 2,72,221/- (17*16013 Sq.ft) and thus the yearly rent of the building is arrived at Rs. 32,66,652/- (272221*12). The yearly marketable rent off the property land cum building is arrived at Rs. 100,34, 148/- (6767496+3266652). After reducing the rent actually received during the financial year 2015-16, the total income applied for the benefit of a person referred to in sub-section (3) of section 13 of the I.T. Act, by leasing out the trust land without charging adequate rent by violating the provisions of Sec 13(1)(c) r.w.s 13(2) (b) is arrived at Rs.98,23,320/- (10034148-210828) and is charged to tax at maximum marginal rate as per the proviso to section 164(2) of the I.T. Act. b) Based on the prevailing market rate the trust property-land measuring 7658 Sqm (82430 Sq. Ft) leased to the company M/s TVS & Sons Ltd., is arrived at Rs. 7,00,655/- (82430*8.5) per month. Yearly Rent on the same is Rs.84,07,860/- (700655* 12) after reducing the rent actually received during the year 2015-16, the total income applied for the benefit of a person referred to the sub-section (3) of section 13 of the Income Tax act by leasing out the trust land without charging adequate rent by violating the provisions of Sec 13(1) (c) r.w.s 13(2)(b) is arrived at Rs. 81,44,316/- (8407860-263544) and is charged to tax at maximum marginal rate as per the proviso to section 164(2) of the I.T. Act.

The AO also denied exemption by treating the assessee to be assessed as Association of Persons and denied exemption u/s.11 & 11 of the Act by observing in para ‘c’ as under:- c) Since, in the assessee’s case as per the Income & Expenditure statement for the A.Y.2016-17, the excess of income over expenditure was Rs.1,85,208/- was less than basic exemption limit for levying tax at the rates applicable for Association of Persons there is no tax liability on denying of exemption u/s 11 & 12 of the I.T. Act.

Aggrieved, assessee preferred appeal before CIT(A).

4. The CIT(A) after considering the arguments of assessee and submissions of assessee recomputed the lease rentals on land portion only and recomputed the fair market rent to be assessed on the basis of rates determined as under:- S.No. Particulars Amount A Southern Roadways (P) Limited Land Portion per month (5.48 * 66348) 3,63,587 Building (constructed by lessee) - Total 3,63,587 Rent assessed 43,63,044 Less: Actual Rent Offered 2,10,828 B T.V. Sundram Iyengar & Sons P. Ltd. Land Portion (5.48 * 82430) 4,51,716 Rent assessed 54,20,597 Less: Actual Rent Offerred 2,63,544 Amount of disallowance 51,57,053 Total under assessment of rent which is disallowed u/s.13(1)(c) r.w.s 13(2)(b) C Total Disallowance (A+B) 93,09,269 For this, the CIT(A) gave his finding in para 5(I) as under:- 5….. I) Admittedly, the assessee trust has let out 6,164 square meters of land located at door No.40-5-7 Venkateswarapuram, Tikkal Road, Vijayawada to Southern Roadways Pvt. Ltd. with a shed constructed thereon. The assessee trust has further let out land measuring 7,658 square meters to M/s. T.V. Sundaram Iyengar & Sons Ltd. which is located at door No.40-5-142 Mughalrajpuram, Bunder Road (MG Road), Labbipet, Vijayawada. There is a super structure standing on this land. In the Remand Report, the Assessing Officer has conceded that the lessee M/s. Southern Roadways Pvt. Ltd. has raised this super structure from its own resources. Under the facts, the assessee trust is entitled to receive rent for the vacant land only.

However, the CIT(A) confirmed the action of AO by holding that the lessee companies are part of the same group, where the trustees of the assessee’s trust and relatives hold more than 50% of the shares. He also observed that the assessee’s trust has not charged the fair market rent of these two group companies and cumulatively they have violated the provisions of section 13(1)(c) r.w.s. 13(2)(b) of the Act as they have violated the provisions of section 13(1)(c) of the Act as the assessee’s trust had sold out benefit to the interested parties who are the trustees or the relatives or the concerns in which the interested persons have substantial interest as noted by the AO in his assessment order. The CIT(A) also rejected the ground of assessee in regard to deduction for maintenance claimed at 30% as against 10% adopted by the AO. The CIT(A) also not disturbed the finding of AO in charging of maximum marginal rate of tax as per the provisions of section 164(2) of the Act. Aggrieved, assessee came in appeal before Tribunal.

or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1).

The ld.counsel for the assessee stated that even Hon’ble Madras High Court in the case of CIT vs. Rao Bahadur Calavala Cunnan Chetty Charities, 135 ITR 485 held that income from properties held under trust would have to be arrived at in the normal commercial manner without reference to the provisions which are attracted by section 14 of the Act. The ld.counsel for the assessee pointed out the relevant para of the judgment which reads as under:- “This is because the Act sometimes deals with income attributed by some statutory fiction. There can be no distribution or accumulation of what is taxed under some fiction. The Supreme Court in CIT v. Bipinchandra Maganlal & Co. Ltd. considered the question whether the expression "smallness of profits" has to be understood in the sense of smallness of assessable income. It was pointed out that a company normally distributes dividends out of its business profits and not out of its assessable income and that even though the assessable income of a company may be much, the commercial profits may be so small that compelling distribution of the difference between the balance of the assessable income reduced by the taxes payable and the amount distributed as dividend would require the company to fall back either upon its reserves or upon its capital which in law it could not do. Applying the same reasoning, the expression "income" has to be understood in the popular or general sense and not in the sense in which the income is arrived at for purpose of assessment to tax by the application of some artificial provisions either giving or denying deduction. That income cannot be understood in the sense of what is arrived at for the purpose of income-tax would be clear if we pay some attention to Section 10. For instance, Section 10(1) exempts agricultural income. It is not necessary to find out what the agricultural income is. It is enough if the agricultural income as a category is excluded. There is no need or scope to arrive at the income in the manner contemplated by the I.T. Act. Other instances can be multiplied. Taking into account, the purpose for which the conditions of Section 11(1)(a) arc imposed, it would be clear that we have to consider the income as arrived at in the context of what is available in the hands of the assessee, subject of course to any adjustment for expenses extraneous to the trust. If the expression "income" is so understood, then we have to take the accounts of the assessee with reference to the receipts and deduct therefrom the expenses necessary for earning or looking after that income. The net amount that remains would be available for distribution or application for charitable purpose. In applying the income for charitable purposes, even capital expenditure may be incurred. Therefore, the nature of the expenditure in the hands of the entity which receives the money is not the criterion. So long as the assessee disburses the amount for charitable purposes, whether the amounts are utilised for capital or revenue purposes by the charity concerned, the assessee would have complied with that part of the requirement of Section 11, namely, application of the income for charitable purposes. The authorities will have to find out as to whether they are really charitable purposes or not. Subject to such examination, the application of the income for charitable purposes will have to be excluded and it is only the balance that would require examination for finding out whether the assessee has complied with the rule of accumulation to the extent of Rs. 10,000 or 25 per cent. of the income, whichever is higher.”

The ld.counsel also drew our attention to para 20 of the judgment which reads as under:- 21. There is one further error in the order of the Tribunal. The Tribunal has proceeded on the basis that the receipts from rents amounting to Rs. 1,31,412 during the year ending with 31st of March, 1965, would have to be considered under the head "Income from house property" and the net income arrived at under that head. In the view that we have explained above, the determination of the income as if the sum of Rs. 1,31,412 relates to house property and would, therefore, have to be considered in the context of the provisions of Sections 22 to 27, would not be correct. Those provisions enact certain technical rules for the purpose of the ascertainment of income for the particular head for purposes of charge and as seen already that cannot be imported into the determination of the income of the property held in trust for the purpose of Section 11 which excludes that income from the computation of total income. The view that we have taken above is also consistent with the circular of the Central Board of Direct Taxes dated 19th June, 1968, reproduced in V.S. Sundaram's Law of Income Tax In India, 11th Edn., p. 798.

The ld.counsel for the assessee also relied on the decision of Hon’ble Gujarat High Court in the case of CIT vs. Ganga Charity Trust Fund, (1986) 162 ITR 612 and stated that notional income, if calculated on the basis of mercantile method of accounting is conceived as income for the purpose of section 11(1)(a) of the Act, it must be considered that such notional income can never be actually applied or accumulated or set apart for the purpose of the trust and the assessee’s trust, will be able to pay income-tax on accrual basis, not be able to derive the benefit confined by the above said provision. The ld.counsel for the assessee drew our attention to para 5 of the judgment where the provisions of section 11(a) of the Act is discussed as regards to accumulation of income and the relevant para 5 reads as under:- 5. Section 11(1)(a) of the Act with which we are concerned reads as under :

"11.(1) Subject to the previous of sections 60 to 63, following income shall not be included in the total income of the previous year of the person in receipt of the income -

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five percent of the income from such property;"

On a plain reading of this sub-section, it becomes clear that the income referred to in clause(a) is not liable to be added to thejtotal income of the previous year of the assessee in receipt of the income to the extent to which such income applied for the purposes of the trust in India and, where such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 25% of the income from such property. It is, therefore, clear that the income derived from property must be such as can be applied for the purposes of the trust or accumulated or set apart for such application at a future date not exceeding 25% of the income from such property. The word "applied" was construed by the Supreme Court in H. E. H. Nizam's Religious Endowment Trust v. CIT [1966] 59 ITR 582 and the Supreme Court stated that it envisaged actual application of the income for the purposes of the trust. Similarly, the word "accumulated" meant the income so set apart during the year for future spending on such purposes. There can be no actual application or setting apart or accumulation of income derived from the trust property unless it is actually available for application or accumulation in the hands of the trustees. Where an assessee is following the mercantile system of accounting, income on accrual basis may be reflected in the account books, but such notional income is incapable of actual application or accumulation under section 11(1)(a) of the Act and if the assessee-trust is called upon to pay income-tax for want of such application or accumulation, it would result in rendering the benevolent provision found in clause(a) of section 11(1) of the Act nugatory. Therefore, on a plain reading of section 11(1)(a) of the Act, the view taken by the Tribunal commends itself to us.

The ld.counsel also drew our attention to para 7 where the view taken by various courts is discussed and the same reads as under:-

He also relied on another decision of Hon’ble High Court of Calcutta in the case of CIT vs. Jayashree Charity Trust, (1986) 159 ITR 280.

7.1 Accordingly, we held as under:- (i) The assessee trust cannot be assessed on notional rental income in term of CBDT Circular No.005P(LXX-6) dt. 19th June 1968 and in term of decision of Hon’ble Madras High Court in the case of Rao Bahadur Calavala Cunnan Chetty Charities., supra.

(ii) The AO will deny exemption u/s.11 of the Act, in regard to the income declared by assessee at Rs.8,25,510/- and will assess the same to tax in term of section 164(1) of the Act.

In term of the above, the appeal of the assessee is partly allowed.

Order pronounced in the open court on 21st December, 2022 at Chennai.