BAL BHAVAN SCHOOL,BHOPAL vs. DCIT EXEMPTION, BHOPAL

आदेश / O R D E R

Per B.M. Biyani, A.M.:

Feeling aggrieved by appeal-order dated 26.06.2023 passed by learned Commissioner of Income-Tax (Appeals), NFAC, Delhi [“CIT(A)”] which in turn arises out of assessment-order dated 23.12.2016 passed by learned DCIT (Exemption), Bhopal [“AO”] u/s 143(3) of the Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2014-15, the assessee has filed this appeal.

Page 1 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

and registered by Income-tax Department u/s 12A of the Act. The assessee

states that it runs a school named “Bal Bhavan School” since 1976 which is

a very famous school for class I to class XII for CBSE Board and its students

have done their names in India and abroad. For AY 2014-15, the assessee

filed return declaring a total income of Rs. Nil after claiming exemption u/s

11/12 of the Act. The case of assessee was selected for scrutiny and the AO

completed assessment u/s 143(3) after making certain adjustments, namely

(i) addition of Rs. 12,04,820/- on account of excessive payment of lease-rent

to specified persons attracting section 13(1)(c)/13(2), (ii) another addition of

Rs. 41,72,105/- on account of bogus payment of computer charges to a

specified person attracting section 13(1)(c)/13(2) and (iii) addition of Rs.

98,55,734/- due to denial of exemption u/s 11/12 consequent upon

violation of section 13(1)(c)/13(2). Accordingly, the AO determined total

income at Rs. 1,52,32,659/-. Aggrieved, the assessee contested these

adjustments in first-appeal but did not get any relief. Now, the assessee has

come before us in next appeal.

Ld. DR for revenue/respondent pointed out that the AO has noted that

identical adjustments were also made in assessee’s case in an earlier AY

2012-13, therefore the status of AY 2012-13 has to be ascertained. In reply,

Ld. AR for assessee/appellant submitted that the assessee has opted for

‘Vivad Se Vishwas’ Scheme for that year and hence the issues stand closed.

Page 2 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

“(1) On the facts and circumstances of the case and applicable law, Ld. DCIT (Exemption), Bhopal erred in passing the assessment order u/s 143(3) which is contrary to the material on record and provisions of the Act, unjust and bad in law. (2) On the facts and circumstances of the case and applicable law, Ld. CIT(A) erred in sustaining the addition of Rs. 12,04,820/- as alleged excess lease rent payment to the specified persons within the meaning of section 13(1)(c) and 13(2). (3) On the facts and circumstances of the case and applicable law, Ld. CIT(A) erred in sustaining the addition of Rs. 41,72,105/- made towards computer expenses as diversion of income to the persons specified within the meaning of section 13(1)(c) and 13(2). (4) On the facts and circumstances of the case and applicable law, Ld. CIT(A) erred in denying the benefit of exemption claimed u/s 11 of Rs. 98,55,734/- by alleging that the assessee has applied the income towards the benefit of persons specified u/s 13(3). (5) On the facts and circumstances of the case and applicable law, Ld. CIT(A) erred in not considering the submissions and documentary evidences placed on record in response to the various notices issued in proper perspective. Ground No. 1 and 5:

Therefore, they do not require any separate adjudication by us. We proceed

to adjudicate other specific grounds in subsequent discussions.

Ground No. 2:

sustaining addition of Rs. 12,04,820/- made by AO on account of excessive

lease rent paid to specified persons attracting section 13(1)(c)/13(2).

The AO has noted that the assessee paid lease rent of Rs. 14,65,992/- (or

Page 3 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

Rs. 14.65 lacs) to specified persons. When the AO show-caused assessee for

justification of payment, the assessee tried to show the reasonable of rent by

filing property tax return showing ‘municipal rent value’ of Rs. 26,59,957/-.

The assessee claimed that the rent paid by two tenants was just Rs. 20.05

lacs viz. Rs. 14.65 lacs paid by assessee (+) Rs. 5.40 lacs paid by another

tenant named “M/s West Wind”, thus the total rent paid by two tenants was

much lesser than the ‘municipal rental value’. The AO, however, rejected

assessee’s submission for the reason that the property tax return showed

‘municipal rental value’ of entire property consisting of land (+) building and

the value of land was only Rs. 3,57,770/-. The AO further noted that as per

lease-agreement submitted by assessee, the assessee had taken only land

on rent; the building was constructed and owned by assessee. Then, the AO

noted that the rent of Rs. 14.65 lacs paid by assessee constituted 73% of the

total rent of Rs. 20.05 lacs paid by both tenants. Therefore, ‘municipal

rental value’ of land qua assessee shall be Rs. 2,61,172/- (73% of Rs.

3,57,770/-). Thus, the AO computed excess rent of Rs. 12,04,820/- paid by

assessee [Rs. 14,65,992 (-) Rs. 2,61,172] to specified person in terms of

section 13(1)(c) r.w.s. 13(2). Accordingly, the AO made an addition of

excessive payment of Rs. 12,04,820/- and also applied maximum marginal

rate.

show that the ‘market value’ of the land taken by assessee on rent was Rs.

68.31 crore and the assessee has paid rent of Rs. 14.65 lacs only which

Page 4 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

constitutes approx. 0.21% of ‘market value’. The assessee submitted that

the ITAT, Mumbai in The Sardar Pratap Singh Education Society Vs.

CIT, ITA No. 487/Mum/2021 order dated 11.06.2021 accepted 1.86% of

‘market value’ of property as a reasonable rent. The assessee also submitted

that the land taken by assessee was located in posh area of city forming a

major attraction. Accordingly, the assessee claimed that the payment made

by it was lesser as compared to prevailing market rate and the same should

be accepted. However, the CIT(A), in Para 4.3.2 of his order, made following

observation, rejected assessee’s submission and upheld AO’s order.

“When the municipal rental value for the land was arrived at Rs. 2,61,772/- only, why such payment of Rs. 14.65 lakhs had been made, could not be explained by the appellant either before the AO during the assessment proceedings or before the undersigned during the appellate proceedings. Whether the same payment was 0.21% of the market value as how such market value had been arrived at on the land owned by the interested persons vis-à-vis the construction of the building made by the appellant, had also not been explained by the appellant in the submission so made.” 9. Before us, Ld. AR for assessee raised following contentions to assail the action of lower-authorities:

(i) The assessee has taken a vast area of 2.25 acres (or 0.910 hectare or 98,010 square feet area) of land on rent from joint owners Shri Omar Ali and Shri Raashid Ali and paid rent of Rs. 8,62,992/- and Rs. 6,03,000/- respectively to them aggregating to Rs. 14,65,992/- in terms of written lease-deeds duly stamped, copies filed at Page 82 to 91 of Paper-Book.

(ii) The assessee has filed ‘valuation-certificate’ in support of ‘market value’ of land, the same is submitted at Page 94 of Paper-Book and re- produced below:

Page 5 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

Page 6 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

In this certificate, the valuer has adopted collector guideline rate of

land @ Rs. 6,970.26 per square feet and accordingly computed the

market value of 98,010 square feet area of land at Rs. 68.31 Crore.

The certificate is clearly mentioning all these facts/figures/working.

Therefore, the CIT(A) has wrongly stated that how the ‘market value’

was found, is not explained by assessee. Having said thus, Ld. AR

went on submitting that the rent paid by assessee was Rs.

14,65,992/- whereas the market value of land was Rs. 68.31 crore;

thus the rent-payment was just 0.21% of the ‘market value’. In The

Sardar Pratap Singh Education Society (supra), the market value

of land was Rs.13,03,76,400/- crore and the assessee paid rent of Rs.

24 lakhs which worked out 1.86%. The ITAT, Mumbai accepted 1.86%

as reasonable. Then, the rent of 0.21% paid by assessee is very

reasonable, in fact much lower.

(iii) That the same issue of reasonability of rent has been examined by AO

in scrutiny-assessment for subsequent AY 2020-21. The AO has

passed assessment-order u/s 143(3) dated 19.09.2022, copy at Page

115-119 of Paper-Book. Drawing our attention to Para 3.2.2 and 3.2.4

of order, Ld. AR showed that in subsequent AY 2020-21, the assessee

paid much higher rent of Rs. 53.77 lacs constituting about 0.82% of

the market value and the AO has accepted the same as reasonable in

the light of very same decision of The Sardar Pratap Singh

Education Society (supra) and not taken any adverse inference

Page 7 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

regarding section 13(1)(c)/13(2). Therefore, the payment of Rs.

14,65,992/- made in current year constituting just 0.21% of market

value, is very much reasonable and must be accepted.

(iv) The assessee has made month-to-month payment to the payees

through banking channel after deduction of appropriate TDS u/s 194-

I. Copies of Ledger A/c of Lease-Rent and TDS certificates (Form No.

16A) issued by assessee are filed at Page 53-77 of Paper-Book.

(v) That both of the payees have filed their respective returns, declared

rental incomes, paid due taxes and claimed credit of TDS deducted by

assessee out of rent payments, copies of ITR documents of payees are

filed at Page 92-93 and 121-122. From these documents, it can be

clearly ascertained that both payees have declared very high amount

of taxable rent and paid heavy amounts of taxes thereon @ 30%+Cess

in highest slab. The department has duly assessed rental incomes in

the hands of payees, charged tax thereon and also allowed credit of

TDS deducted by assessee.

(vi) It is submitted that by making a payment of Rs. 14,65,992/- on

account of rent, there is a hefty tax burden of more than 30% in the

hands of payees whereas the assessee’s income was anyways exempt

u/s 11. In such a situation, why would the assessee and the specified

persons make an arrangement which results in increasing overall tax

Page 8 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

burden and clearly against them? This vital point, without speaking

further, shows that there is a genuine payment made by assessee.

assessee is very genuine as well as reasonable and no adverse inference

should be taken against assessee.

the observations made by lower authorities and prayed to uphold the same.

orders of lower-authorities as well as the material held on record to which

our attention has been drawn. There is no doubt or dispute regarding taking

of land on rent, the only controversy is whether the rent paid by assessee

was excessive or reasonable? In this regard, firstly we find that the assessee

has submitted a valuation-certificate showing market value of land at Rs.

68.31 crore and the rent paid by assessee is Rs. 14.65 lacs which

constitutes about 0.21% of market value. In The Sardar Pratap Singh

Education Society (supra), the Mumbai, ITAT has accepted rent of 1.86%

of market value of property as reasonable. Therefore, the rent payment by

assessee is very reasonable, in fact much lower. The CIT(A) has rejected this

plea of assessee with the observation that the assessee has not explained as

to how the market value of land had been arrived? But a careful reading of

the valuation-certificate filed by assessee, re-produced above, clearly states

that the market value has been arrived at by multiplying area of land taken

Page 9 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

by assessee by ‘Collector Guidelines Rate’ per square feet. Thus, the basis as

well as working of market value is mentioned in the certificate of valuer

itself. It seems that the CIT(A) has, due to oversight, missed to read the

certificate carefully. Notably, the revenue is not raising any question on the

admissibility of the certificate submitted by assessee as evidence to show the

fair/reasonable rent of property. Secondly, we find that the AO has himself

allowed rent as high as Rs. 53.77 lacs constituting about 0.82% of the

market value in scrutiny-assessment of subsequent AY 2020-21 as is

evident from copy of assessment-order filed in Paper-Book, of the same land

on same set of facts and having regard to the same decision of ITAT,

Mumbai in The Sardar Pratap Singh Education Society (supra). Thirdly,

we also find much weightage in the contention raised by Ld. AR that the

assessee’s income is fully exempt u/s 11 and does not attract a single penny

of tax. On the other hand, the payees have paid tax in the highest bracket of

30%+Cess on income arising from impugned rental payments. When it is so,

why would the assessee and the payees (who are closely-connected persons

of assessee) make a tax-inefficient arrangement unless there is a strong

genuineness in payments? Thus, considering all these aspects, we are

inclined to hold that the rent payment made by assessee cannot be said to

be excessive. In that view of matter, we are inclined to delete the addition

made by AO and we do so. This ground is accordingly accepted.

Ground No. 3:

Page 10 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

sustaining addition of Rs. 41,72,105/- made by AO on account of computer

expenses paid to specified persons attracting section 13(1)(c)/13(2).

noted that the assessee made a payment of Rs. 41,72,105/- to ‘M/s West

Wind’ which is a specified person being a partnership firm of Shri Omar Ali

and Shri Raashid Ali. When the AO show-caused assessee for justification of

payment, the assessee submitted that it has paid computer charges which

comes to approx. Rs. 170/- per student as it is very difficult to maintain

computer lab at such a low cost by itself and it was a better option to

outsource. The AO, however, rejected assessee’s submission citing following

reasons:

(i) The assessee failed to submit any evidence, even bill/voucher, except

the Ledger A/c of charges paid.

(ii) The assessee has not made any effort to obtain market rates of similar

services before taking from specified persons.

(iii) The assessee has also claimed payment of Rs. 6,58,260/- as computer

expenses to NIIT and Rs. 4,00,000/- as NIIT Smart Classes expenses,

which shows that the actual computer training was provided only by

NIIT.

Page 11 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

(iv) The Balance-Sheet of M/s West Wind shows value of the ‘computer

systems’ owned by it as on 31.03.2013 at Rs. 1,14,810/- and as on

31.03.2014 at Rs. 45,924/-. The assessee itself has computers

valuing at Rs. 48,023/- as on 31.03.2014 which is more than the

value of computers shown by M/s West Wind. Therefore, it is not

understandable as to how M/s West Wind is charging huge amount

from assessee?

Ultimately, the AO treated the payment made by assessee as a bogus

payment/diversion of income to specified person in terms of section

13(1)(c)/13(2) and made an addition of entire payment of Rs. 41,72,105/-

and also applied maximum marginal rate.

upheld AO’s order.

(i) That when the AO raised a query in notice u/s 142(1) dated 05.08.2016, the assessee made following submission in Point No. 7 & 8 of its letter, copy at page 44-45 of Paper-Book:

“7. During the year the society has paid Rs. 41.40 lacs as computer hire charges to west wind firm. West wind provides training to around 2000 students of the Bal Bhavan School per month per year. Charges paid per month are Rs. 3,45,000/- for around 2000 students. Hence per student per month charge is around Rs. 170/-. Bal Bhavan finds it difficult to maintain computer lab at such low cost by itself and it is better option to outsource this service. Further, West Wind is taxable entity and pays income tax on the computer hire charges received by it. Hence there would have been substantial revenue loss to the income tax department if the Bal Bhavan has itself running the computer lab. This is for regular computer courses.

Page 12 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

NIIT offers computer courses which was taken during the year, Bill of 219420*3 is enclosed. Remember that computer were used of west wind. NIIT did not provide the computer. NIIT provides specialized courses of Smart class, which was also hired during the year. Smart class covers all subject and a graphic content of courses. Copy of ledgers are enclosed. 8. Copy of final account of M/s. West Wind enclosed. As the computer expenses were paid a concessional rate, no tenders were floated.” (ii) The copy of sample invoice dated 04.05.2013 issued by M/s West Wind to assessee for the month of April, 2013 filed at Page 97 of Paper-Book, contains following description of supply made by payee to assessee:

“Computer charges for Computer Lab, Computer Staff and Maintenance of Computer Lab for April …………….….…. Rs. 3,45,000.00” Ld. AR submitted that the Bills of other months are identical. The assessee has paid a total sum of Rs. 3,45,000 X 12 = 41,40,000/- to M/s West Wind and balance sum of Rs. 32,105/- to others (Page 51 of Paper-Book).

(iii) That the school run by assessee received “1st Computer Literacy Excellence Awards for Schools-2002” from then Hon’ble President of India, Shri Dr APJ Abdul Kalam (Page 51 of Paper-Book) for the state of Madhya Pradesh in recognition of distinguished performance in imparting Computer Education. Photograph of the event and copy of certificate given by Govt. of India are filed at Page 113-114 of Paper- Book.

(iv) That the payments made to NIIT / NIIT Smart classes were made for providing computer courses/specialized courses and not for computer lab, the computer lab was provided by M/s West Wind only. This fact was very much explained to AO in assessee’s letter but still the AO has missed or overlooked and made adverse observation.

Page 13 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

(v) Ld. AR drew us to “Schedule-2-Fixed Assets” forming part of audited

Balance-Sheet of M/s West Wind, copy at Page 103 of Paper-Book to

show that the value of Rs. 45,924/- picked by AO is actually W.D.V.

as on 31.03.2014 shown under the heading “Net Block”. The AO has

missed to see that the heading “Gross Block” shows cost of Rs.

55,61,557/- and the heading “Depreciation” shows accumulated

depreciation of Rs. 55,15,632/-, leaving the WDV at Rs. 45,924/-.

Thus, the entire observation made by AO is incorrect because the cost

of computers deployed by the payee is Rs. 55,61,557/- and not Rs.

45,924/-. Ld. AR pointed that the accumulated depreciation is so high

because the depreciation rate on computers is 60% and a big portion

of value depreciates in just three years. That apart, the AO is very

much wrong in basing his decision solely upon the value of computers

ignoring several other factors i.e. (i) the payee has incurred a very high

maintenance cost for keeping the working condition of computers and

(ii) the payee has also incurred a very high cost on providing 10 staff

members in computer lab and all necessary expenses for maintaining

computer lab (Page 51 of Paper-Book). Ld. AR invited our attention to

the audited P&L A/c of payee filed at Page 101 of Paper-Book showing

a very high cost being incurred by payee against gross-receipts.

(vi) The assessee has made month-to-month payments to the payee

through banking channel after deduction of appropriate TDS u/s

194C. Copies of Ledger A/c of Computer Expenses and TDS

Page 14 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

certificates (Form No. 16A) issued by assessee are filed at Page 95-96

and 105-112 of Paper-Book.

(vii) The payee is a partnership firm and it has filed income-tax return,

declared the income, paid due taxes and claimed credit of TDS

deducted by assessee out of payments, copies of ITR documents of

payee are filed at Page 98-104 of Paper-Book. From these documents,

it can be clearly ascertained that the payee has declared very high

amount of taxable income and paid tax @ 30%+Cess. The department

has duly assessed income in the hands of payee, charged tax thereon

and also allowed credit of TDS deducted by assessee.

(viii) It is submitted that by making a payment of Rs. 41,40,000/-, there is

a hefty tax burden of more than 30% in the hands of payee whereas

the assessee’s income was anyways exempt u/s 11. In such a

situation, why would the assessee and the specified person make an

arrangement which results in increasing overall tax burden and

clearly against them? This vital point, without speaking further, shows

that there is a genuine payment made by assessee.

defended the orders passed by lower-authorities. He submitted that the

invoice issued by payee does not show the details of computers, manpower,

manhours, etc. He contended that in absence of such details, the

justification of payment cannot be established.

Page 15 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

orders of lower-authorities as well as the material held on record to which

our attention has been drawn. On a careful consideration, we find that the

assessee has made a payment of Rs. 41,40,000/- to M/s West Wind

(specified person) and rest of payment of Rs. 32,105/- has been made to

others. The payment of Rs. 41,40,000/- made to M/s West Wind is made up

of Rs. 3,45,000/- per month for 12 months. The assessee has filed a sample

invoice for the month of April, 2013 issued by the payee from which it is

discernible that the assessee has taken a computer lab inclusive of staff and

maintenance from the payee at a fixed charge of Rs. 3,75,000/-. The

assessee is running a school and it was submission of assessee to AO that

the sum of Rs. 3,75,000/- was paid for about 2,000 students which shows

cost of approx. Rs. 170/- per month per student. The assessee also

submitted that it has found difficult to maintain computer lab at such a low

cost. The assessee also submitted that the payments to NIIT / NIIT smart

classes were made for computer courses/specialized courses but NIIT did

not provide computer lab, the lab was provided by M/s West Wind only. The

assessee also submitted that since the computer lab was taken at a

concessional rate from M/s West Wind, no tenders were floated. Thus, the

assessee has made a sufficient explanation to AO but the AO seems to have

not considered assessee’s explanation properly while making assessment-

order. Then, the AO has made an observation that the value of computers

held by M/s West Wind as on 31.03.2014 was only Rs. 45,924/- but the Ld.

Page 16 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

AR has successfully shown, by referring to audited documents of M/s West

Wind, that the actual cost of computers was Rs. 55,61,557/- and the value

picked by AO at Rs. 45,924/- was only a depreciated WDV. Ld. AR has also

explained that the payee has also incurred substantial cost on staff and

maintenance of computer lab. These vital aspects pointed out by Ld. AR

clearly show that the AO has drawn adverse conclusions without any valid

basis or rather incorrectly. Lastly, we also find much weightage in the

contention raised by Ld. AR that the assessee’s income is fully exempt u/s

11 and does not attract a single penny of tax. On the other hand, the payee

is a partnership firm which has paid tax @ 30%+Cess on income arising

from impugned payments. When it is so, why would the assessee and the

payee (who is a closely-connected person of assessee) make a tax-inefficient

arrangement unless there is a strong genuineness in payments? Thus,

considering all aspects, we are inclined to hold that the payments made by

assessee are not bogus. Being so, we direct the AO to delete the addition

made. This ground is also accepted.

Ground No. 4:

thereby making an addition of Rs. 98,55,734/-. The AO has taken this

action as a consequence of finding excessive/bogus payments of Rs.

12,04,820/- and Rs. 41,72,105/- to specified persons in terms of section

13(1)(c) r.w.s. 13(2). Since we have already held, while adjudicating earlier

grounds, that there was no excessive/bogus payment, the issue involved in

Page 17 of 18

Bal Bhavan School, Bhopal ITA No. 321/Ind/2023 – AY 2014-15

ground No. 4 automatically abates. Therefore, we direct the AO to allow

exemption u/s 11 to assessee after necessary verification. This ground can be said to be allowed for statistical purpose.

Order pronounced in open court on 10.06.2024.

Sd/- sd/- (VIJAY PAL RAO) (B.M. BIYANI) JUDICIAL MEMBER ACCOUNTANT MEMBER Indore िदनांक /Dated : 10.06.2024 CPU/Sr. PS Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Assistant Registrar Income Tax Appellate Tribunal Indore Bench, Indore

Page 18 of 18