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Facts
The Revenue appealed against the CIT(A)'s order, which allowed the assessee's claim for exemption under Section 11 of the Income Tax Act. The core issue was whether the lease rent paid by the assessee trust to Eduspark International Pvt. Ltd. (EIPL), a company in which the trustee had an interest, constituted a diversion of funds for personal benefit, thereby attracting provisions of Section 13(3) of the Act. The Assessing Officer (AO) had denied the exemption, alleging that the lease payments and remuneration to the trustee were designed to divert trust funds. The CIT(A) disagreed, finding no evidence of unreasonable rent or undue benefit.
Held
The Tribunal held that the AO was incorrect in denying the exemption under Section 11 of the Act. The lease rent paid was found to be at market price, supported by a valuer's report, and comparable to previous years. There was no evidence to suggest that the lease was an arrangement to divert funds for personal benefit or that the rent was excessive or not at arm's length. The remuneration received by the trustee from EIPL as a director was also not doubted by the assessing officer of EIPL. Therefore, the denial of exemption was not justified.
Key Issues
Whether the lease rent paid by the assessee trust to a related party company constituted a diversion of funds under Section 13(3) of the Income Tax Act, justifying the denial of exemption under Section 11, and whether the valuation report for the lease rent was correctly assessed.
Sections Cited
Section 250, Section 13(3), Section 13(2)(c), Section 13(2)(g), Section 11, Section 143(3)
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Income Tax Appellate Tribunal, BENGALURU “B” BENCH, BENGALURU
IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU “B” BENCH, BENGALURU Before Shri Waseem Ahmed, Accountant Member and Shri Soundararajan K., Judicial Member ITA No. 1105/Bang/2023 (Assessment Year:2017-18)
Assistant Commissionerof K.J. Foundation Income Tax 58/1 Thubarahalli Room No. 606, 6th Floor Behind Sriram, Samruthi vs. Unity Bldg. Annex Apartments, Whitefield Road P. Kalinga Rao Road Karnataka 500067 Karnataka 560027 PAN – AABTK1178N (Appellant) (Respondent) Assessee by: Shri Satish R. Mody, Advocate Revenue by: Shri Vilas V. Shinde, CIT-DR Date of hearing: 28.05.2024 Date of pronouncement: 19.06.2024 O R D E R Per: Soundararajan K., J.M. This is an appeal filed by the Revenue against the order passed by the National Faceless Appeal Centre, Delhi (‘CIT(A)’) under Section 250 of the Income Tax Act, 1961 (the Act) in respect of the Assessment Year (AY) 2017-18.
The Revenue has raised the following grounds of appeal: - “1 The order of learned CIT(A) is opposed to facts and circumstances of the case 2 The CIT(A) has erred in observing that during the F.Y 2016- 17, the assessee had paid lease rent of Rs.9,58,28,710/-only to Eduspark International Pvt. Ltd. which was a specified person u/s.13(3) of the Income Tax Act, 1961 and that such payment
2 ITA No. 1105/Bang/2023 K.J. Foundation was only 16.78% of the gross receipts of the assessee and not 30.75% as stated by the AO while in Form No.10B filed for the A.Y.2017-18, the assessee has declared that during the F.Y.2016-17, it had paid lease rent of Rs.9,58,28,710/- and Deposit of Rs.7,87,92,000/- to Eduspark International Pvt. Ltd. under the category 'application or use of income or property for the benefit of persons referred to in section 13(3) of the Income Tax Act, 1961, which constitutes 30.75% of the gross receipts of the assessee as pointed out by the AO. 3 The CIT(A) has erred in observing that there was no diversion of funds by the assessee trust to the trustee, Mr Rustom Kerawala. The AO has clearly brought out in the assessment order that in Eduspark International Pvt. Ltd the specified person to whom 30.57% of the receipts of the assessee were paid during the relevant financial year, the trustee Mr Rustom Kerawala was holding 99.99% of the shares and acting as a Director of the Company, had drawn huge sum of money as remuneration, which was 40% more than the salary drawn during the F.Y.2015-16. Therefore, the AO had rightly held that the trust was diverting trust money to the company Eduspark International Pvt. Ltd and from company, it was diverted in the form of remuneration to the trustee, Mr Rustom Kerawala for his benefit in terms of Sections 13(2) and 13(2)(g) of the Income Tax Act, 1961. 4 The CIT(A) has erred in holding that the provisions of section 13(3) are not attracted in the instant case because during the F.Y.2016-17, no salary/allowance was paid by the trust to the person referred to in section 13(3). Though the assessee had not paid any salary to the specified person, the funds were diverted to Eduspark International Pvt. Ltd which ultimately was for the undue benefit of the trustee who was a director of the specified person i.e. Eduspark International Pvt Ltd. 5 The CIT(A) has erred in observing that it cannot be said that there is a diversion of income by the assessee in paying lease rent to Eduspark International Pvt. Ltd. on the ground that Eduspark International Pvt Ltd. had duly accounted the transaction in its books of accounts and taxed at maximum marginal rate. It is not stipulated in the Act that an undue benefit conferred by the assessee trust to a specified person
3 ITA No. 1105/Bang/2023 K.J. Foundation would be out of the purview of section 13 provided the recipient of such benefit had offered the same for taxation 6 The CIT(A) has erred in holding that the lease rent paid by the assessee to Eduspark International Pvt Ltd. was at market price as determined by the approved valuer relying on the valuation report submitted by the assessee during appellate proceedings. The Appellate Commissioner ought to have called for a remand report from the AO in respect of the valuation report filed by the assessee 7 The CIT(A) has erred in not following the judgment delivered by the Hon'ble Supreme Court in the case of Sole Trustee of Lok Shikshana Trust 1976 SCR (1) 461 wherein it was held that "the action which flows from charitable thinking is not directed towards benefitting one's self. It is always directed at benefitting others". In the instant case, the assessee trust was only interested in benefitting the director of Eduspark International Pvt. Ltd who is its own trustee 8 The appellant craves leave to add, alter or amend all or any of the Grounds of Appeal before or at the time of the hearing of the appeal. 9 The order of the learned CIT(A), NFAC may be set- aside and the order of the A.O. may be confirmed.” 3. The brief facts of the case are that the assessee is a public charitable trust registered under the provisions of the Act and carrying on the activities of providing education to primary and secondary courses in the name of VIBGYOR in Bengaluru. During the assessment year the assessee trust paid lease rent of Rs.9,58,28,710/- to a company M/s. Eduspark International Pvt. Ltd. The lease amount paid to the said company is for the land, building with swimming pool, tennis and badminton courts and other facilities and immovable assets required for providing primary and secondary education. The assessee paid the rent based on the valuation report of the approved valuer to justify the rent paid to the said company. The ld. Assessing Officer (AO) disputed the rent paid to the company for the reason that the trustee of the
4 ITA No. 1105/Bang/2023 K.J. Foundation assessee trust is having interest in the said company and therefore the lease arrangement is only for diverting the funds of the trust to the company and from the company to the Director by way of paying huge remuneration and therefore the provision of Sec 13(2)(c) and 13(2)(g) of the Act would be attracted. Therefore, the AO denied the deduction u/s 11 of the Act on the allegation that diversion of the funds of the trust is only for the benefit of the person referred to in Sec13(3) of the Act. The ld AO further come to the conclusion that the assessee trust had shown undue benefit to the company in terms of Sec13(2) and therefore the assessee trust is not entitled to claim deduction u/s 11 of the Act. The ld AO disallowed the entire amount spent towards charitable purposes and subjected the entire income to tax. The said order was challenged before the CIT(A) on the ground that the application of provisions 13(2)(c) and 13(2)(g)) of the Act to deny the deduction is not correct since there is no payment of any remuneration to the trustee and further in respect of the very same property, for the earlier years, the lease rent has been accepted as reasonable. The assessee further disputed the denial of depreciation. The learned CIT(A) considered the same in detail and also the various records produced by the assessee including the fact that the lease rent paid to the company by the assessee trust for assessment years 2012-13 to 2016-17 was never a subject matter of dispute and in fact the same was accepted and order under Section 143(3) of the Act was passed and granted the exemption claimed under Section 11 of the Act. Not satisfied with the above order of the CIT(A) the Revenue is in appeal before us with the abovementioned grounds of appeal.
At the time of hearing the learned D.R. made a submission that the trustee of the assessee trust is having interest in the company to whom the huge rent has been paid by the trust and in turn the trustee has also received
5 ITA No. 1105/Bang/2023 K.J. Foundation huge remuneration from the said company and therefore the AO had correctly denied deduction under Section 11 of the Act. Further, the learned D.R. submitted that the learned CIT(A) ought to have called for a remand report from the AO instead of relying on the valuation report submitted by the assessee to arrive the fair rental value.
The learned A.R. of the assessee had submitted that the order of the learned CIT(A) is a well considered one and submitted that the AO had allowed the deduction claimed by the assessee trust in respect of earlier years, based on the very same valuation report and therefore without pointing any other deficiency the AO was not correct in denying the exemption under Section 11 of the Act. The learned A.R. further submitted that the facts and circumstances of the earlier years and the disputed year are one and the same and therefore the AO was not correct in denying the exemption only in respect of the current assessment year. The learned A.R. filed a paper book and also enclosed the copy of the assessment order for AY 2016-17 in support of his case.
We have heard the rival contentions and perused the materials on record. The only issue to be decided in this appeal is whether the disallowance of the claim of exemption under Section 11 of the Act is in order when the trust had complied with all the conditions prescribed under the statute. Before going into the issue, first we will take a look on the findings given by the CIT(A). The learned CIT(A) had given the following findings: - “5.1 In this case while finalising the assessment the Assessing Officer has denied the exemption u/s.11 claimed by the appellant by invoking the provision of Section 13(3) r.w.s 13(2)(c) and 13(2)(g) of the Act for the rent paid to M/s. Eduspark International Pvt. Ltd., hereinafter referred as EIPL, a company in which the trustees have interest within the meaning of Section 13(3) of the Act. A.O has observed that the lease agreement made between appellant Trust and M/s. EIPL is
6 ITA No. 1105/Bang/2023 K.J. Foundation nothing but an arrangement made to divert the funds of appellant Trust to M/s. EIPL. He further noticed that quantum of payment to EIPL during the year is Rs. 17,46,18,710/-. (rent of Rs.9,58,26,710/- + security deposit of rs.7,87,92,000/- ) which is more than 30% of gross receipt of the trust. Assessing Officer has also pointed out in his order that during the year the EIPL has given 30% of total employee benefit to the director Mr. Rustam P Kerawalla who holds 99.99% shares in EIPL and also a trustee in K.J. Foundation i.e. appellant trust. Accordingly, he concluded that the Trustee is diverting the funds of the trust to a company from there it is diverted in the form of remuneration of the benefit in terms of Section 13(2)(c) and Section 13(2)(g) of the Act. 5.2 Further, the A.O has observed that the transactions between EIPL and that appellant trust are tailor made with a motive to divert the funds of trust for the benefit of person referred in Section 13(3) of the Act. Accordingly, after discussing several case laws the A.O has denied the exemption u/s.11 and determined taxable income or Rs. 6,02,10,941/- at maximum marginal rate u/s 13(1)(c) of the Act. Penalty proceedings u/s. 270A has also been initiated. 5.3 The appellant has filed appeal against the said order. During the appellate proceedings notices were issued and in response to that the appellant has filed submissions from time to time which has been made part of the order in para 4. On going through the same following things are noticed / observed. 1. The trust has paid lease rent of Rs.9,58,28,710/- inclusive of service tax of Rs. 1,24,38,740/- during the year for the land, building, ground, swimming pool, tennis court, badminton court, other facilities etc and other movable assets. No payment of Security deposit of Rs.7,87,92,000/- was made during the year as claimed in the assessment order but paid in prior years for FY 2008-09 to F.Y.2014-15 and genuineness of the same was not doubted in respective years. 2. Nothing has been brought on record by the A.O to prove that the rent paid to EIPL is unreasonable or excessive and not at arm's length price. 3. No effort was made by the AO to ascertain the fair market value of properties leased to the appellant trust by M/s EIPL. AO has not referred or obtained any valuation report from the DVO to ascertain the fair price of the properties taken on lease by the trust
7 ITA No. 1105/Bang/2023 K.J. Foundation from EIPL. On the contrary, the appellant has submitted detailed valuation report by approved valuer as per which the rent paid to the company i.e. EIPL is comparable to market price and at arm's length. Further, the appellant has claimed that based on such approved valuer's report the order u/s.143(3) for the A.Y. 2016-17 and earlier years were passed accepting the claim of exemption under section 11 of the Act. 4. No salary/allowance on remuneration has been paid by the trust to any trustee during the year. 5. No evidence was brought on record by the AO to establish that the transactions between EIPL and the appellant trust are tailor made with a conscious view to divert fund of the trust. 6. No show cause notice was issued to deny the claim of exemption u/s.11 before the completion of assessment u/s. 143(3) of the Act. 7. Lease rent paid quarterly and not monthly as observed by the A.O. 5.4 Ground Nos. 1 to 6 pertain to the denial of exemption u/s.11 of the Act and hence, are adjudicated simultaneously. 5.5 In its submission the appellant trust has claimed that the AO was not right in drawing conclusion that during the year appellant trust has paid Rs.17,46,18,710/- (rent of Rs. 9,58,26,710/- + security deposit of Rs.7,87,92,000/-) because no security deposit was made during the year. On perusal of the case records and audited balance sheet, the said claim was found to be correct. After considering correct amount paid to M/s EIPL by the trust Hence, it comes to 16.78% of gross receipts of the trust and not 30.75% as stated by the AO. Any inference drawn on the basis of wrong fact cannot be right. 5.6 Further, the AO has alleged that more than 40% of total remuneration paid by EIPL is given to Mr. Rustom P. Kerawala, the director & Trustee of the Appellant Trust. According to the AO, this clearly shows that the diversion of fund to EIPL and from EIPL to the Trustee in terms of section 13(2) (c) of the Act. As Section 13(2)(c) of the Act says that:- "Without prejudice to the generality of the provisions of clause (c) of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3),-
8 ITA No. 1105/Bang/2023 K.J. Foundation (a).. (b)....; (c) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reason-ably paid for such, services; It is noticed from the case records that no salary / allowance was paid to the trust to the person referred to in Sub-section (3) of Section 13 of the I.T. Act for the services rendered by the person. However, in the case of M/s EIPL the Department has never ever doubted the reasonableness of remuneration paid to Mr. Rustom P Kerawala, the Director of the company and a trustee in appellant trust. Therefore the provisions of Section 13(2)(c) are not attracted in the case of appellant trust and accordingly the exemption u/s.11 can't be denied on this ground. 5.7 The AO has also denied the exemption under section 11 of the Act by invoking the provision of section 13(2)(g) of the Act on account of treating the rent paid by the appellant trust to EIPL as unreasonable and excessive. Section 13(2)(g) of the I.T. Act says "Without prejudice to the generality of the provisions of clause (c) of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit t of a person referred to in Sub-section (3), - (a) ... (b)...; (c)... (d)..; (e)....; (f)..... (g) if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub- section (3): Provided that this clause shall not apply where the income, or the value of the property or, as the case may be, the aggregate of the
9 ITA No. 1105/Bang/2023 K.J. Foundation income and the value of the property, so diverted does not exceed one thousand rupees; 5.8 Question of diversion of income in property arises only if the amount is paid by the trust to the person referred in Sec. 13(3) of the Act at unreasonable rate and with a motive to divert the income and evade taxes. However, in the case of the appellant Lease rent of Rs.9,58,28,710/- was paid by the appellant trust to company M/s. Eduspark International Pvt. Ltd., a company in which the trustees have interest within the meaning of Section 13(3) of the Act, at market price as determined by the approved valuer prepared by the GCA Consultants. During the appellate proceedings the appellant has submitted the valuation report in respect of properties at Thubarahalli having area of 99,324 sq.ft and at Haraluru having area of 93,238 sq.ft. as per which rate per sq.ft for Thubarahalli & Haraluru are Rs.28 per sq.ft plus Rs.8 per sq.ft. of play ground area and Rs.43 per sq.ft. respectively. Whereas, the rate at which lease rent was paid by the assessee trust is @Rs.25.70 sq.ft & Rs.42.55 sq.ft respectively for those properties. Further the company M/s. Eduspark International Pvt. Ltd., has duly accounted for the transaction in its books of accounts and taxed at maximum marginal rate. Therefore, it can't be said that there is diversion of income by the appellant trust in paying lease rent to M/s. Eduspark International Pvt. Ltd. 5.9Further, the AO has not given any reason to treat the rent paid to EIPL as unreasonable and not at arm's length price. In contrary to that the appellant has submitted detailed valuation report prepared by approved valuer M/s GCA Consultants as per which the rent paid to the company i.e. EIPL is comparable to market price and at arm's length. The market value of rent determined for the above properties in the report is based on the ready reckoner issued by the Government of Karnataka. In the case of state of Maharashtra and others Vs Supermax International Pvt Ltd (2009) 9 SCC 772, Hon'ble Supreme Court has held that the amount fixed with the stamp duty reckoned cannot be doubted. Similarly in the case of Sanjeev alias Sanjay Subhas Grover Vs Vertex Trading Company, the Hon'ble Bombay Hight Court has taken the similar view. Therefore, it can be said that the fair market value determined by the approved valuer is correct and genuineness of the same cannot be doubted. 5.10In the case of Shri Ramdoot Prasad Seva Samiti Trust (2022) 450 ITR 288, Hon'ble Rajasthan has held while dismissing the appeal filed by the Revenue that
10 ITA No. 1105/Bang/2023 K.J. Foundation “Clause (g) would be applicable in a case where any income or property of a trust or institution is diverted during the previous year in favour of any person referred to in sub-section (3). Sub-section (3) in turn relates to persons or institutions which are closely related such as the author of the trust or the founder of the institution, any trustee of the trust or manager of the institution etc. Clause (g) would apply where any income or property of the trust or institution is "diverted" during the previous year in favour of any person referred to in subsection 3. The crux of this provision is diversion of income. Mere transaction of sale and purchase between two related persons would not be covered under the expression "diversion of income. Diversion of income would arise when the transaction is not a arm's length and sale or purchase price is artificially inflated so as to cause undue advantage to other person and divert the income." In the instant case, the AO has not given any reason to prove that the rent paid to EIPL was excessive or not at arm's length and accordingly, it cannot be said that appellant trust has diverted funds during the year in question in favour of the person referred in section 13(3) of the Act. In view of the above facts and legal position, it is held that the AO was not correct in denying exemption under section 11 of the Act to the appellant. 5.11 Further, lease rent paid for AY 2012-13 to 2016-17 was never a subject matter of any dispute. Not only that the assessment for the AY 2012-13, 2014-15 and 2016-17, assessment order was passed u/s 143(3) of the Act by accepting the exemption u/s 11 of the Act where facts are identical to the facts of the year in question. In the case of Radha Soami Satsang (1992) 193 ITR 321, the Hon'ble Supreme Court has held that- "We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or other and parties have allowed that position to be sustained by not challenging the order it would not be at all appropriate to allow the position to be changed in a subsequent year." In view of the above discussion made, the addition made on account of denial of exemption under section 11 of the Act by invoking the
11 ITA No. 1105/Bang/2023 K.J. Foundation provision of section 13(2)(c)and 13(2)(g) of the Act by the AO, is hereby deleted. Therefore, ground no. 1 to 6 of the appeal are allowed accordingly. 5.12 With regard to the Ground No. 7, the Asst. Commissioner of Income- tax has erred in denying depreciation of Rs. 1,50,36,372/- since the Computation of Income is done according to the Provisions of Sec. 28 to 45 of the I.T. Act. In this regard it is held that the exemption under section 11 of the Act has already been allowed, this issue need not to be adjudicated. 5.13 With regard to the Ground No. 8, the Asst. Commissioner of Income- tax should have carried forward the losses/ brought forward deficits and set off against the income of the Trust as per the judgements of the Supreme Court, High courts and Appellant Tribunal. In this regard, the AO is directed to allow the claim of the appellant as per law after due verification. Therefore, ground of appeal is allowed accordingly for the statistical purpose.”
We have gone through the above findings of the learned CIT(A) and found that the ld. CIT(A) had elaborately discussed each and every facts of the case and gave findings. The ld CIT(A) in paragraph 5.11 of his order had observed that the lease rent paid to the company was never disputed by the AO in respect of the assessment years 2012-13 to 2016-17. We have also considered the argument of the ld AR, that the very same valuation report given by the approved valuer was accepted by the ld AO for other years whereas the ld AO not accepted the same for the year in question, without any reasons. This approach of the ld AO has been find fault by the CIT(A) which in our considered view is absolutely correct. Further the ld. AO has no other materials to find fault with the fair market value of the leased out property and also no records were produced before us to prove that the rent paid is excessive and not at arm’s length price. In fact the ld AO has not taken any steps to find out the Arm’s length price. We have also gone through the assessment order issued u/s 143(3) for the A/Y 2016-17 dated 27.12.2018 in
12 ITA No. 1105/Bang/2023 K.J. Foundation which the ld AO had accepted the income returned by the trust. These facts were considered by the ld CIT(A)and correctly arrived the conclusion that the denial of exemption u/s 11 is not correct.
In so for as the ground raised by the Revenue that the ld CIT(A) ought to have obtained a remand report from the AO to ascertain the fair rental value, we are of the view that the valuation report of the approved valuer has been accepted by the ld AO in respect of the A/Y 2016-17 and further there is no compulsion under the provisions of the Act to get the same when there is a valuation report available with the authorities. The ld DR has also not placed any specific reasons for raising this ground at this point of time. We therefore not accepted the ground now raised before us.
Further we have also gone through the various documents filed by the assessee and found that no documentary evidence available with the ld AO in support of his allegation that there is a diversion of funds warranting to invoke sec 13(2)(c) and 13(2)(g) of the Act. We find that the allegation of the ld AO that the rent paid to the company is excessive or not at arm’s length price has no supportive materials and therefore we affirm the findings of the ld CIT(A),that the assessee trust has not diverted its funds during the year in question, in favour of the persons referred in sec 13(3) of the Act and therefore the exemption u/s 11 of the Act could not be denied. Further we found that the receipt of the remuneration by the assessee’s trustee from the company as Director was also not doubted by the assessing officer of the company and hence in these circumstances the denial of the claim of exemption u/s 11 of the Act is not correct. Eventhough each assessment year is a separate one, we are convinced that in respect of the current year there is no change in circumstance and also the authorities have not placed any material evidences before us, to take a different view. We, therefore, affirmed the order
13 ITA No. 1105/Bang/2023 K.J. Foundation of the learned CIT(A) for the disputed year by dismissing the appeal filed by the Department.
In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the open Court on 19th June, 2024.
Sd/- Sd/- (Waseem Ahmed) (Soundararajan K.) Accountant Member Judicial Member Bengaluru, Dated: 19th June, 2024 n.p. Copy to: 1. The Appellant 2. The Respondent 3. The CIT, concerned 4. The DR, ITAT, Bengaluru 5. Guard File By Order //True Copy// Assistant Registrar ITAT, Bengaluru