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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWAL
Aforesaid appeals by the assessee are directed against a common order dated 27th May 2016, passed by the learned Commissioner (Appeals)–1, Thane, pertaining to assessment years 2010–11, 2011–12 and 2012–13.
Grounds raised by the assessee in all these appeals are common and identically worded, except the figures.
The first common issue in all the appeals relates to disallowance of exemption claimed under section 11(2) of the Act in respect of payments made to trustees towards interest free security deposit for 3 Children Welfare Education Trust construction of additional floors. Since, the facts are common for all the assessment years under appeal, for the sake of brevity; we will refer to the facts as involved in ITA no.4979/Mum./2016, for the assessment year 2010–11.
Brief facts are, the assessee is a charitable trust registered under section 12AA of the Income Tax Act, 1961 (for short “the Act”). The assessee is basically engaged in imparting education through a School in the name of St. Xavier’s High School. For the assessment year 2010–11 the assessee filed its return of income on 18th February 2011 declaring total income of ` 2,00,707, after claiming exemption under section 11 of the Act. The return of income filed by the assessee was processed under section 143(1) of the Act. Subsequently, the Assessing Officer alleging violation of section 13(1)(c) of the Act re– opened the assessment under section 147 of the Act. In response to the notice issued under section 148 of the Act, the assessee filed a revised return of income on 11th April 2014. During the assessment proceedings, the Assessing Officer noticing that the assessee has incurred expenses from the building fund for expansion of the building owned by a trustee called upon the assessee to explain why the exemption claimed under section 11 of the Act should not be disallowed in view of violation of section 13(1)(c) of the Act. Further, from the computation of income of the assessee, the Assessing Officer
4 Children Welfare Education Trust found that out of the total receipts of ` 1,10,55,776, an amount of ` 83,55,069, was claimed to have been spent for the objects of the trust which worked out to 75% of the total receipt. Out of the surplus of ` 27,00,707, assessee claimed exemption of ` 25 lakh under section 11 while offering the balance amount of ` 2,00,707. The Assessing Officer after perusing the leave and license agreement between the assessee and the trustees was of the view that the expenditure incurred for repair and renovation of the building amounting to ` 23,80,926, is in contravention of the provisions of section 13(1)(c) of the Act as a benefit has accrued to the trustee through such payment who happens to be the owner of the building. The Assessing Officer observed that by making such expenditure the assessee has given benefit to the trustee in the form of expansion of building without any cost and without inflationary effect. Thus, he disallowed the repairs and renovation expenses of ` 23,80,926. Further, out of the accumulated surplus, the Assessing Officer disallowed claim of exemption in respect of ` 25 lakh on the reasoning that the amount having been advanced to the trustee a benefit has been provided in violation of section 13(1)(c) read with section 13(3) of the Act. In this process, the total income was determined at ` 50,81,630. Being aggrieved of the additions made by the Assessing Officer after denial of exemption under section 11 of the Act, the assessee preferred appeal before the first appellate authority.
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The learned Commissioner (Appeals) after considering the submissions of the assessee in the context of facts and material on record accepted assessee’s claim with regard to expenditure incurred towards repairs and renovation and deleted the addition of ` 23,80,926. However, as regards utilisation of ` 25 lakh out of the surplus fund, the learned Commissioner (Appeals) upheld the addition made by the Assessing Officer by holding that by incurring such expenditure, the trust has provided a benefit to the trustee in violation of section 13(1)(c) of the Act. Thus, he upheld the addition of ` 25 lakh.
The learned Authorised Representative reiterating the contentions raised before the first appellate authority submitted that the assessee has taken on rent the building owned by the trustee for running its School. He submitted, the expenditure made by the assessee was for the benefit of the School and no benefit has accrued to the trustee. He submitted, the assessee has entered into a memorandum of understanding (MOU) with the trustee under which the trust has occupied the third and fourth floor of the building for running its School. He submitted, as per the terms of the MOU, the trust was allowed to extend the building upto fourth floor at its own cost subject to condition that the entire expenditure incurred by the trust for extension of the building will be payable by the trustee. It is 6 Children Welfare Education Trust further provided under the agreement that as soon as the fourth floor of the building is completed along with all the amenities including electricity, water connection, etc., the trustee will be responsible to pay the entire expenditure and cost as per the Balance Sheet to the trust. He submitted, in addition to the memorandum of understanding, a lease agreement was also entered between the trust and the trustees which specifically provided that the third and fourth floor of the building constructed by the assessee would be given on lease for a period of 25 years to the assessee free of rent. The lease deed specifically provided that only after expiry of 25 years, the assessee will pay rent to the trustee at the market rate. The lease agreement further provided that the trustee will have an option to buy the premises on payment of actual cost incurred by the assessee without deducting depreciation. Thus, it was submitted, in reality no benefit has accrued to the trustee as the assessee is in possession of the third and fourth floor of the building where it is running its School without paying rent to the trustee. Thus, it was submitted that the security deposit advanced to the trustee which forms part of the surplus is eligible for exemption under section 11(2) of the Act as there is no violation of section 13(1)(c) of the Act. The learned Authorised Representative submitted, though, all the documentary evidences such as memorandum of understanding as well as the lease agreement
7 Children Welfare Education Trust were submitted before the learned Commissioner (Appeals), however, the learned Commissioner (Appeals) has simply ignored the documentary evidences on the reasoning that they were not filed before the Assessing Officer during the course of assessment proceedings. The learned Authorised Representative submitted, in addition to the fact that the assessee was utilizing the third and fourth floor of the building rent free till date, it has also received back an amount of ` 19 lakh from the trustee who is the owner of the building. Thus, the learned Authorised Representative submitted, there is no violation of section 13(1)(c) of the Act to deny assessee’s claim of exemption under section 11(2) of the Act.
The learned Departmental Representative relied upon the observations of the learned Commissioner (Appeals) and Assessing Officer.
We have considered rival submissions and perused materials on record. It is evident that the Assessing Officer has disallowed assessee’s claim of exemption under section 11(2) of the Act out of the surplus income / receipt on the ground that such amount was advanced to the trustee who is the owner of the building on which the assessee has constructed the third and fourth floor by incurring expenditure. It is the case of the Assessing Officer that by incurring
8 Children Welfare Education Trust such expenditure the assessee has provided benefit to the trustee which is in contravention of section 13(1)(c) of the Act. Though, before the Assessing Officer, the assessee has furnished the memorandum of understanding between the assessee and the trustee to emphasize that the assessee has incurred the expenditure in constructing the third and fourth floor of the building for running the School and the Trustee is required to repay the expenditure incurred by the assessee, however, the Assessing Officer has rejected the agreement as an after–thought. Notably, before the learned Commissioner (Appeals), the assessee has furnished a lease agreement with the trustee under which the assessee is authorised to occupy third and fourth floor of the building for a period of 25 years without paying any rent. However, the learned Commissioner (Appeals) has refused to take cognizance of the lease agreement by stating that it was neither submitted before the Assessing Officer nor the assessee brought to the notice of the Assessing Officer the fact that it was occupying the third and fourth floor of the building without paying any rent. On a perusal of the lease agreement, a copy of which is submitted in the paper book, we find that there is a specific term in the lease deed providing that the assessee is to be given lease of the 3rd and 4th floor of the building for a period of 25 years without paying any rent. It further provides that only after expiry of 25 years the assessee will pay rent at the market
9 Children Welfare Education Trust rate. The said lease agreements also provides an option to the trustee to buy back the third and fourth floor by paying the actual cost to the assessee. Thus, as could be seen from the aforesaid facts, the assessee has not incurred the expenditure in constructing the third and fourth floor of the building owned by the trustee for free. As per the terms of the lease agreement, the assessee has a right to occupy the third and fourth floor without paying any rent. The learned Authorised Representative has made a submission at the bar that though the assessee is occupying the third and fourth floor of the building, till date it has not paid any rent to the trustee. The aforesaid claim of the assessee could have been factually verified either by the learned Commissioner (Appeals) himself or through the Assessing Officer. Without verifying or ascertaining the claim of the assessee through proper enquiry, the documentary evidences submitted by the assessee cannot be discarded by terming it as an after–thought. In case, the claim of the assessee that it is occupying the third and fourth floor of the building owned by the trustee without paying any rent is found to be correct then the allegation made by the Departmental Authorities with regard to violation of section 13(1)(c) of the Act may not be valid. However, the claim of the assessee that it is occupying third and fourth floor of the building without paying any rent requires to be verified factually. Since, neither of the Departmental Authorities
10 Children Welfare Education Trust have factually examined this claim of the assessee, we are inclined to restore the issue to the Assessing Officer for verifying assessee’s claim. With the aforesaid observations, the issue raised in this ground is restored to the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee. Grounds raised on this issue are allowed for statistical purposes.
Our decision on the aforesaid will apply mutatis mutandis to the other two appeals as well.
The assessee has raised one more issue by way of additional ground for Assessment Years 2010–11 and 2012–13 and it relates to allowance of capital expenditure in respect of purchase of furniture, computers and books.
The learned Authorised Representative submitted that in assessment year 2010–11, the assessee has purchased furniture of ` 6,99,950 and in assessment year 2012–13, it has purchased computers and books of ` 2,40,500 which should be treated as application of fund over and above the 15% blanket deduction under section 11(2) of the Act.
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The learned Departmental Representative submitted that this issue was never raised by the assessee before the Departmental Authorities, hence, cannot be raised at this stage.
Having considered the rival submissions, we are of the view that the aforesaid claim of the assessee requires to be examined by the Assessing Officer keeping in view the relevant statutory provisions and in accordance with law. Therefore, we restore the issue to the file of the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee.
In the result, all the appeals are allowed for statistical purposes. Order pronounced in the open Court on 31.08.2018