THE CATHEDRAL VIDYA TRUST,MUMBAI vs. ITO (E) 1(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH “C”,MUMBAI BEFORE SHRI P.K. BANSAL, VICE-PRESIDENT AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA No.4958/Mum/2015 (Assessment Year- 2011-12) The Cathedral Vidya Trust ITO (Exemption)-1(1), 6, Purushottamdas Thakurdas Piramal Chamber, Lalbaug, Vs. Marg, Fort, Mumbai-400001 Mumbai. PAN: AABTT5706B (Appellant) (Respondent)

Assessee by Shri Madhur Agarwal/Ronak : G. Doshi (AR) Revenue by : Sh. H. N. Singh Sr. DR Date of hearing : 10.08.2017 Date of Pronouncement : 24.10.2017

Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by assessee under section 253 of Income Tax Act (the Act) is

directed against the order of Ld. Commissioner of Income-Tax (Appeals)-

1, Mumbai [hereinafter referred as ld. CIT(A)] dated 18.08.2015 for

Assessment Years (AY) 2011-12. The assessee has raised the following

grounds of appeal:

“Being aggrieved by the order passed under section 250 of the Income tax Act, 1961 ('the Act') by the learned Commissioner of Income tax (Appeals)-1, Mumbai ['CIT(A)'], your appellant submits the following grounds of appeal for your sympathetic consideration: 1. The learned CIT(A) erred in upholding the action of the Assessing Officer in denying the exemption claimed by the Appellant under Section 11 of the Act. 2. The learned CIT(A) erred in confirming that the activity carried out by the Appellant is non charitable.

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under Bombay Public Trust Act and granted registration under section

12AA. The assessee trust is registered under the provisions of Trust Act on

21.02.2008 and with Charity Commissioner Mumbai vide registration

dated 30.07.2008 and further got registration under section 12A of

Income- tax Act on 31.03.2009. For Assessment Year 2011-12, the

assessee filed its return of income declaring Nil income. The return of

income was selected for scrutiny. After serving statutory notice under

section 142(1) and 143(1) and considering the contention of assessee, the

assessment was completed on 09.03.2014 under section 143(3) of the Act.

The Assessing Officer (AO) while passing the assessment order denied the

exemption under section 11 for Rs. 2,75,00,000/-, which was paid to a

Company which is excluded under section 13(3). The AO also concluded

that the fee structure is designed in a way to fund huge establishment

expenses and the assessee is not entitled for exemption as the assessee are

not doing any charity. The AO assessed total income of the assessee at

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Rs.1,41,16,320/-. On appeal before the ld. CIT(A), the action of AO was confirmed. Thus, further aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before us. 3. We have heard the ld. Authorized Representative (AR) and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. The ld. AR of the assessee argued that assessee Trust has set up its International Residential School in the name of Cathedral Vidya School at Lonawala. The assessee is imparting education from Std. IV to Std. XII and Certain Diploma Courses. The assessee-Trust is duly registered under section 12AA vide Registration dated 31.03.2009. The assessee is registered with Charity Commissioner under Bombay Public Trust Act vide Registration dated 30.07.2008. One of the objects of assessee is to promote educational activity by setting up and running School and allied charitable objects, the copy of registration of Trust and certificate under section 12AA is filed on record. During the assessment proceeding, the AO issued show-cause notice as to why the exemption claimed under section 11 be not denied to the assessee. The AO objected on the ground that (i) the object of the Trust are solely for education purpose, however, the Trust is running Lavish International School and charging heavy fees on commercial line and therefore, the Trust is setup for the purpose of profit, (ii) No charitable benefit is

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available to poor and needy students as a fee waiver, or scholarship etc. The activities of institution are not charitable and commercial in nature. (iii) The assessee-Trust is making payment of lease rent to a company in which the Trustee of the assessee are Director and majority shareholder, which violates section 13 of the Act. It was argued that assessee has filed its reply and given satisfactory explanation and substantiated its contention that the assessee is not working in violation of its object. The ld. counsel for the assessee submits that he has three alternative submissions to substantiate his contention and furnished a chart of his synopsis and the reliance of various decisions of Superior Courts. Firstly, the registration of the assessee/institution under section 12A is still valid and AO cannot deny the exemption under section 11 of the Act. In support of his submission, the ld. AR of the assessee relied upon the decision; (i) ACIT vs. Surat City Gymkhana (300 ITR 214) (SC), (ii) Hiralal Bhagwati vs. CIT (246 ITR 188) (Guj. HC), Stock Exchange Ahmedabad vs. ACIT (74 ITD 1) (Ahm. Trib.) & (iii) Gagan Education Society vs. ACIT (10 taxmann.com 156) (Agra Trib.). Secondly, merely charging fees, it should not impugn upon the eligibility for exemption under section 11 of the Act. The fee is charging for fulfilment of its object and in support of his contention, the ld. AR of the assessee relied upon the following decision: i. Queen’s Education Society vs. CIT (372 ITR 699) (SC). ii. Vanita Vishram Trust vs. CCIT (327 ITR 121) (Bom.HC).

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iii. Tolani Education Society vs. DDIT (351 ITR 184) (Bom.HC). iv. Green Acres Educational Trust vs. DCIT (70 taxmann.com 347) (Mum. Trib.) v. Gagan Education Society vs. ACIT (10 taxmann.com 156) (Agra Trib.) vi. ACIT vs. Mahima Shiksha Samiti (79 taxmann.com 38) (Jaipur Trib.). Thirdly, that the rent paid by assessee to the Company wherein the Trustee of the assessee are Director, is reasonable one. The assessee has duly substantiated their contention before the AO about reasonableness of the payment of rent. It was argued that the AO has not brought any material on the onus upon him to show that the rent paid by assessee is unreasonable. The assessee has placed on record the copy of Rental Valuation Report dated 10.01.2014. In support of his submission, the ld. AR of the assessee further relied upon the order of ld. CIT (A) in assessee’s own case for AY 2010-11, copy of assessment order for AY 2010-11 passed under section 143(3) on 21.03.2013 and order of ld. CIT (A) in Vidya Education Investment Pvt. Ltd. for AY 2011-12 dated 18.02.2016. In support of his submission, the ld. AR of the assessee relied upon the following decision: i. Chirec Education Society vs. ADIT (354 ITR 605) (Andhra HC). ii. ITO vs. Virendra Singh Memorial Shiksha Samiti (35 SOT 1) (Lucknow Trib.) The ld. AR for the assessee mainly relied on the decision of Hon’ble Supreme Court in Queen’s Education Society vs. CIT (supra) and decision

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of Andhra Pradesh High Court in Chirec Education Society vs. ADIT (supra). 4. On the other hand, the ld. DR for the Revenue supported the order of authorities below. It was argued that the assessee-Trust is running an International School. The assessee is charging heavy fees on commercial lines and earning exorbitant profit. The assessee is making payment of lease rent to a Company in which Trustees of assessee are Directors, the rent paid by assessee is not reasonable. The assessee-Trust and the lesser company are managed by the same person. The lease agreement on behalf of lesser as well as lessee is signed by the same person. 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 Rs. 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

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three. There is further provision in the trust-deed that the trustee shall be entitled to appoint the additional trustee as and when they deem fit as per Clause-6 of Trust-Deed. It is mentioned in the trust-deed that trustee shall immediately form a Private Limited Company under the provisions of Companies Act and will appoint the Trust-company as sole trustee of the Trust. The assessee Trust got registration under section 12A of the Act on 31.03.2009. The assessee has placed on record a copy of lease agreement with Vidya Education Investment Pvt. Ltd. having its registered office at 5C, Old Friends Colony (W), Mathura Road, New Delhi-65 dated 14.06.2008. The lease deed was executed initially for nine years commenced from 01.06.2008. The lease-deed is signed by Vineet Nayyar on behalf of lesser as well as lessee. During the AY, the assessee has paid rent of Rs. 2.75 Crore to lesser i.e. M/s Vidya Education Investment Pvt. Ltd. on account of Annual rent which is one of the subject matter of impugned assessment. 6. During the assessment proceeding, the AO issued show cause notice under section 142(1) seeking explanation from assessee with regard to (i) that assessee is running a Lavish International School, charging heavy fees from the students on commercial lines. The assessee is charging fee of Rs.4,65,000/- p.a. from Class-IV to Class-VIII, Rs. 4,65,000/- for IGCSE* students and Rs. 5,65,000/- from I.B* ( * no details of abbreviations is

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available in record). (ii) No charitable benefit is available to poor and needy students as a fee waiver, or scholarship etc. The activities of institution are not charitable and commercial in nature. (iii) the assessee- Trust has made the payment of Rs. 2.75 Crore to M/s Vidya Education Pvt. Ltd. which is an excluded person under section 13(3) of the Act. The assessee was asked to justify the reasonableness of the said payment in term of provision of section 13(2) failing which it can be presumed that this just a tool for diversion of fund in the hand of excluded person and therefore, exemption under section 11 shall be denied and income shall be assessed disallowing the payment of Rs. 2.75 Crore. The assessee filed its reply vide reply dated 13.03.2014. In the reply, the assessee contended that the assessee-trust is duly registered under section 12A. As per the trust- deed, the object of trust is to promote educational 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

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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 specifically contended that no profit motive embedded in the charging of fees. For payment of lease rent at the rate of Rs. 25,00,000/- per month, the assessee contended that trust is paying lease rent to Vidya Education Investment Pvt. Ltd. for the plot of land measuring 16.93 acre. The lease deed was executed on 01.06.2008 for a period of nine years. Initially the rent was fixed at Rs. 5,00,000/- per month which was gradually increased from time to time and at present the assessee making payment of rent of Rs. 25,00,000/- per month. The assessee also filed a report of Valuer dated 10.01.2014. The assessee contended that as per the Valuation Report the lease rent of the leased land is around Rs.32.31 Lakhs per month. The assessee also contended that for preceding AY 2008-09, assessee-trust has not paid the lease rent which was waived by the lesser company because of financial difficulties faced by the assessee. The total cost of the land and

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school is Rs. 43,46,75917/- which is funded by Vidya Education Investment Pvt. Ltd. (VEIPL). The VEIPL has also provided furniture and fixture, computer, books, office equipment etc. required for school and further incurred a cost of Rs. 300 lakhs. Thus, in sum and substances the assessee claimed that the payment of lease rent is reasonable. The contention raised by assessee in its reply was not accepted by AO. The AO concluded that the assessee is charging huge fee for educational activity which cannot be considered and treated as charitable. There is no co- relation of fee charged and the expenses incurred. The excessive fee is charged to generate huge surplus to fund the liability of rent of Rs.2.75 Crore to a Private limited company owned and managed by excluded person. The assessee urged the similar contention before ld. Commissioner (Appeals). The ld CIT(A)confirmed the order of assessing officer holding that during the course of submission it was disclosed by the representative of the assessee that they are giving free education to One student, however the details of the student was not furnished. For charging of the high amount of fee the ld Commissioner (Appeals) concluded that no authentic data is provided. For payment of lease rent to the excluded person the ld. CIT(A) concluded that neither the decision of Supreme Court in case of Queen’s Educational Society (319 ITR 160) relied on behalf of assessee nor the order of CIT(A) for AY 2010-11 is helpful to the assessee. The

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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 Rs. 5,00,000/- p.m. The lease deed was executed on 01.06.2008. The assessee has debited the rent of Rs.2,75,00,000/- in its P/L account. Thus, the assessee claimed the payment of rent at the rate of Rs.25,00,000/0 per month to the Company owned and managed by the Trustees. Though, the assessee within four years from the execution of lease deed increased the rent from Rs. 5.00 lacks to Rs.25.00 lacks per

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month. There is no dispute about the status of trustee in assessee trust and the Directors in the lesser company. The assessee has placed on record the copy of valuation report about the rental value of the leased asset dated 10.01.2014 and certified that this document was filed before lower authorities. In the valuation report the monthly rental value is assessed as Rs. 32,31,367/-. The area of leased land is in this report is referred only 10 acre, however in the reply before assessing officer the area of land was claimed as 16.93 acre (page 8 para II of AO order). The assessing officer has not given any finding on this document. Similarly, the assessing officer has not brought any evidence on record about any valuation of comparable property. Similarly, the ld. Commissioner (Appeals) has not made any comment on the valuation report furnished by the assessee. In our view this documentary evidence furnished by assessee is not controverted by assessing officer by bringing any incriminating evidence on record. Thus in our view in absence of any incriminating evidence the payment of rent to the related party during the year under consideration is reasonable one. 9. The ld AR for the assessee during the course of his submission filed a copy of the order lf ld CIT(A)-9 New Delhi dated 18.02.206, showing that the rent paid by the assessee was duly shown by Vidya Education Investment Pvt Ltd.(VEIPL) and was assessed by the revenue. The perusal of this order reveals that VEIPL has shown to have let out the land with

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superstructure to the assessee. VEIPL has offered the rent received from

the assessee to tax. In our opinion in absence of any material the rent paid

by the assessee to the related party during the year is reasonable one. With

these observation the grounds of appeal raised by the assessee is allowed.

Sd/- Sd/- (P.K. BANSAL) (PAWAN SINGH) VICE-PRESIDENT JUDICIAL MEMBER Mumbai; Dated 24/10/2017 S.K.PS Copy of the Order forwarded to :