Income Tax Appellate Tribunal - Chennai
M/S Avm Charities, Chennai vs Ito, Exemption Ward, Chennai on 27 March, 2024
आयकर अपीलीय अिधकरण, 'बी' यायपीठ, चे ई।
IN THE INCOME TAX APPELLATE TRIBUNAL 'B' BENCH: CHENNAI ी वी. दु गा राव, माननीय ाियक सद एवं ी मंजूनाथा.जी, माननीय लेखा सद के सम BEFORE SHRI V. DURGA RAO, HON'BLE JUDICIAL MEMBER AND SHRI MANJUNATHA. G, HON'BLE ACCOUNTANT MEMBER आयकर अपील सं./ITA Nos.1632 to 1638/Chny/2023 िनधा रण वष /Assessment Years: 2012-13 to 2018-19 M/s.A.V.M.Charities, v. The Income Tax Officer, No.101, Dr.Radhakrishnan Salai, Exemptions Ward-1, Mylapore, Chennai.
Chennai-600 004.
[PAN: AAATA 0512 F]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से/ Appellant by : Shri B. Ramakrishna, FCA &
Shri Shrenik Chordia, CA
यथ क ओर से /Respondent by : Shri V. Nandakumar, CIT
सुनवाईक तारीख/Date of Hearing : 26.02.2024
घोषणाक तारीख /Date of
Pronouncement : 27.03.2024
आदेश / O R D E R
PER BENCH:
This bunch of 'seven' appeals filed by the assessee are directed against separate, but identical orders of the Commissioner of Income Tax (Appeals)-20, Chennai, all dated 30.10.2023 and pertains to assessment years 2012-13 to 2018-19. Since, facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are being disposed off, by this consolidated order.
ITA Nos.1632 to 1638/Chny/2023 :: 2 ::
2. The assessee has, more or less, raised common grounds of appeal for both the assessment years. Therefore, for the sake of brevity, grounds of appeal filed for the AY 2012-13 in ITA No.1632/Chny/2023, are re-
produced as under:
1. For that the Order of the Learned Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case.
2. For that the reopening of an assessment u/s.147 of the Act is bad in law.
3. For that the Learned Commissioner of Income Tax (Appeals) erred in upholding the reopening of the completed assessment beyond a period of four years, where there is no failure on the part of the appellant to disclose fully and truly all material facts.
4. For that the Learned Commissioner of Income Tax (Appeals) erred in upholding the Assessment Order without appreciating the fact that it is a settled principle of law that 'change of opinion' is not permissible under the garb of reopening of a completed assessment.
Without prejudice to the above grounds, we raise the following grounds:
5. For that the Learned Commissioner of Income Tax (Appeals) erred in confirming the action of the Learned AO in denying the claim of exemption claimed u/s.11 of the Act, without appreciating the facts and circumstances of the case.
6. For that the Learned Commissioner of Income Tax (Appeals)by upholding the denial of claim of exemption u/s 11 of the Act erred in denying the treatment of income from Kalyanamandapam as business income, despite the decision of Hon'ble ITAT in appellant's own case rendered in the earlier Assessment Years treating such income as income from property held under trust.
7. For that the Learned Commissioner of Income Tax (Appeals) erred in concluding that the activity of renting of Kalyanamandapam is commercial in nature without appreciating the fact that the said activity is incidental to the attainment of the objects of the Trust as the income derived from such activity were purely utilized for the purposes of charity in the view of provisions of section 11(4) of the Act.
8. For that the Learned Commissioner of Income Tax (Appeals) erred in denying the entire, exemption claimed u/s.11 of the Act by merely stating that - 'since there is a violation of provisions of section 13(1)(c) of the Act, entire exemption claimed u/s.11 is not allowable including the income received from kalyanamandapams' without assigning proper reasons for denial of entire exemption.
ITA Nos.1632 to 1638/Chny/2023 :: 3 ::
9. For that the Learned Commissioner of Income Tax (Appeals) ought to have restricted the denial of claim of exemption u/s.11 of the Act to the extent of alleged violation of provisions of section 13(1)(c) of the Act.
10. For that the Learned Commissioner of Income Tax (Appeals) erred in treating the alleged difference in the rental income from M/s.Cine Film Distributors amounting to Rs.1,19,70,707/- as income of the appellant by invoking provisions of section 13(1)(c) r.w.s.13(2) of the Act and in consequently erred in levying tax at maximum marginal rate as per Proviso to Section 164(2) of the Act.
11. For that the Learned Commissioner of Income Tax (Appeals) erred in confirming the action of Assessing Officer for invoking the provisions of section 13(1)(c) of the Act with respect to the renting of immovable property to M/s.Cine Film Distributors without appreciating the fact that construction costs were incurred by M/s.Cine Film Distributors.
12. For that the Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of the depreciation as claimed by the appellant amounting to Rs.38,24,001/-.
13. For that the Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of the depreciation as claimed by the appellant amounting to Rs.38,24,001/- without appreciating the fact that the provisions of section 11(6) of the Act were amended vide Finance Act, 2014 which was prospectively applicable from AY 2015-16.
14. For that the Learned Commissioner of Income Tax (Appeals) erred in taxing the addition of the depreciation of Rs.38,24,001/- without appreciating the fact that, despite the addition of depreciation, more than 85% of the gross receipts had been spent towards the objects of the trust, thus satisfying the requirements of Section 11.
15. Assuming but not admitting the decision of Learned Commissioner of Income Tax (Appeals) having held that the appellant is not eligible for exemption u/s.11 of the Act, he ought to have allowed the claim of depreciation amounting to Rs.38,24,001/- in accordance with provisions of section 32 of the Act.
For these grounds and such other grounds that may be adduced before or during the hearing of the appeal, it is prayed that the Hon'ble Tribunal may be pleased to delete the additions made and/or pass such other orders as this Hon'ble Tribunal deems fit.
3. The brief facts of the case are that the assessee is a Public Charitable Trust registered u/s.12AA of the Income Tax Act, 1961 (in short "the Act"), vide proceedings of the CIT order dated 11.04.1975. The assessee had filed its return of income for AYs 2012-13 to 2018-19 u/s. 139(1) of the Act, declaring NIL total income after claiming exemption ITA Nos.1632 to 1638/Chny/2023 :: 4 ::
u/s.11 of the Act. The assessee Trust was having income from two Kalyanamandapams, namely M/s Rajeswari Thirumana Kalyanamandapam (in short "RTK"), located in Dr.Radhakrishnan Salai, Chennai, and Mena Kalyanamandapam (in short "Mena"), located at Kumaran Colony Main Road, Vadapalani, Chennai. The assessee was also running a Health Centre at AVM Charities Health Centre at Vadapalani. Apart from this, the assessee had given a property of 5 acres with building located at Valasarawakkam, Chennai, to a Trust called AVM Rajeswari Educational Trust, from which, the latter run a School called Avichi. The assessee had let out one other building at P.S. Sivaswamy Road, Chennai, to AVM Medical and ENT Research Foundation for running a Diabetic Centre. The assessee had also given a space for library at Virugambakkam, Chennai, run by the Government. The assessments for AYs 2012-13 to 2014-15 were completed u/s.143(3) of the Act, and the AO denied exemption u/s.11 of the Act, by invoking provisions of Sec.2(15) of the Act, by holding that the activities of the assessee Trust comes under advancement of any other object of General Public Utility (in short "GPU"). From the AY 2015-16, there was no scrutiny assessment. The assessee had challenged denial of exemption u/s.11 of the Act, by the AO before the ITAT. The ITAT Chennai Benches, vide their order dated 02.01.2019 in ITA Nos.277 to 286/Chny/2018 held that running of Kalyanamandapam by the assessee Trust/Society is incidental to the attainment of main objects and is covered by Sec.11(4) of the Act, but ITA Nos.1632 to 1638/Chny/2023 :: 5 ::
not hit by proviso to Sec.2(15) of the Act, and thus, directed the AO to allow exemption u/s.11 of the Act, as claimed by the assessee up to assessment years 2014-15.
4. In this case, survey u/s.133A of the Act, was conducted at the premise of M/s.AVM Charities on 16.17.2018. During the course of survey, it was found that the assessee Trust let out its property at Dr.No.101, Dr.Radhakrishnan Salai, Mylapore, Chennai, to a partnership firm by name M/s.Cine Film Distributors (in short "M/s.CFD"). The partnership firm, M/s.CFD in turn sub-let the same property to three entities namely, M/s Hotel Saravana Bhavan, M/s. B & M Hot Breads Pvt. Ltd., & M/s. Hatsun Agro Products Ltd., and received rental income. The AO has tabulated year wise rent received by the assessee Trust from M/s.CFD and rent received by M/s.CFD from three tenants, as follows:
5. Consequent to survey u/s.133A of the Act, the assessment for AYs 2012-13 to 2016-17, have been re-opened u/s.147 of the Act, for reasons ITA Nos.1632 to 1638/Chny/2023 :: 6 ::
recorded, as per which, any income chargeable to tax had been escaped assessment on account of under assessment of rental income from letting out of property to M/s.CFD, and accordingly, notice u/s.148 of the Act, dated 29.03.2019 was issued and served on the assessee. In response to notice u/s.148 of the Act, the assessee Trust filed a letter on 03.09.2019 and stated that return of income originally filed u/s.139(1) of the Act, may be treated as return filed in response to notice u/s.148 of the Act. The cases were selected for scrutiny and during the course of assessment proceedings, the AO noticed that the assessee Trust has allowed benefit to the interested persons referred to u/s.13(2) of the Act, by letting out land & building for the use of persons during the previous year without charging adequate rent or other compensation and thereby, violates provisions of Sec.13(1)(c) of the Act. Therefore, called upon the assessee to explain 'as to why' the benefit of exemption u/s.11 of the Act, cannot be denied for AYs 2012-13 to 2018-19. The AO had also called upon the assessee Trust to explain 'as to why' difference between the rental income offered by the assessee Trust towards letting out properties to M/s.CFD and rental income received by M/s.CFD from three tenants as income of the assessee Trust. The AO had also called upon the assessee to explain 'as to why' depreciation on fixed assets claimed as application of income u/s.11(1)(a) of the Act, cannot be disallowed, because, the assessee Trust has claimed cost of asset purchased as application of income in the year of purchase.
ITA Nos.1632 to 1638/Chny/2023 :: 7 ::
6. In response, the assessee submitted that denial of exemption u/s.11 of the Act, is incorrect, because, the ITAT has already held in earlier round of litigation that the activities carried out by the assessee Trust are charitable in nature like medical relief and education, and further, income derived from running Kalyanamandapam is incidental to the attainment of main objects of the Trust, which is covered u/s.11(4) of the Act. Therefore, on very same facts, exemption u/s.11 of the Act, cannot be denied. The assessee Trust also explained income derived from letting out properties to M/s.CFD in light of rental income derived from the Firm and argued that the Trust had let out a simple structure on "as is where is basis" for rent which commensurate with fair market value of rent at that point of time. Further, the partnership firm has spent huge amount for further construction and improvement of the property to make it let out to various persons and derived income and also offered said income for the purpose of taxation. Therefore, rental income derived by the partnership firm from sub-letting properties to three tenants cannot be considered as rent receivable by the assessee on let out of property as per agreement between the parties. The assessee further submitted that depreciation on fixed assets, the cost of which has been treated as application of income for charitable purpose u/s.11(1)(a) of the Act, is covered by the decision of the Hon'ble Supreme Court in the case of CIT v. Rajasthan & Gujarati Charitable Foundation, Poona, reported in [2018] 89 taxmann.com 127 (SC) up to AY 2014-15, and thus, even if cost of ITA Nos.1632 to 1638/Chny/2023 :: 8 ::
asset has been claimed as application of income, depreciation should be allowed for computing income from property held under Trust.
7. The Assessing Officer, after considering relevant submissions of the assessee and also taken note of factual findings noticed during the course of survey conducted u/s.133A of the Act, opined that the assessee Trust has violated provisions of Sec.13(1)(c) of the Act, by allowing direct or indirect benefit to the persons referred to u/s.13(2) of the Act, by letting out properties for nominal rent which is far lesser than prevailing market rate of property at that point of time. Therefore, the AO opined that the assessee is not entitled for exemption u/s.11 of the Act, and thus, rejected exemption claimed u/s.11 of the Act, and assessed excess of income over expenditure as per financial statements for AYs 2012-13 to 2018-19 as income of the assessee. The AO had also disallowed depreciation on fixed assets claimed as application of income u/s.11(1)(a) of the Act, on the ground that expenditure incurred for acquisition of capital assets was treated as application of income for charitable purpose u/s.11(1)(a) of the Act, and thus, further allowing depreciation on said asset amounts to double deduction. The AO had also made additions towards difference between the rental income offered by the assessee Trust and rental income received by the partnership firm, M/s.CFD, as income of the assessee Trust for AYs 2012-13 to 2018-19.
ITA Nos.1632 to 1638/Chny/2023 :: 9 ::
8. Being aggrieved by the assessment orders, the assessee preferred appeals before the Ld.CIT(A). The assessee has challenged re-opening of assessment for AYs 2012-13 to 2016-17 on the ground that re-opening of assessment has been carried out on the basis of 'change of opinion' without there being any fresh tangible material which suggest escapement of income. The assessee had also challenged re-assessment on the ground that the assessment has been re-opened after a period of four years from the end of relevant assessment years, and further, the original assessments have been completed u/s.143(3) of the Act, and thus, unless there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessments, the assessment cannot be re-opened. The assessee had also challenged denial of exemption u/s.11 of the Act, in light of decision of the ITAT in the assessee own case for AYs 1997-98 to 2014-15 and argued that the assessee is carried out activities in accordance with the objects of imparting education and medical relief and thus, income derived from running of Kalyanamandapam is incidental to the attainment of main objects and covered by Sec.11(4) of the Act. The assessee had also challenged additions made by the AO towards difference between the rental income received by the assessee Trust from the partnership firm, M/s.CFD and rental income received by the partnership firm from three tenants. The assessee had also challenged the additions made by the AO towards disallowance of depreciation on Fixed Assets.
ITA Nos.1632 to 1638/Chny/2023 :: 10 ::
9. The Ld.CIT(A) after considering relevant submissions of the assessee and also taken note of certain judicial precedents, rejected the ground taken by the assessee challenging re-opening of assessment for AYs 2012-13 to 2016-17 on the ground that there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for completion of assessment in respect of rental income received from M/s.CFD on let out of premise which is clearly evident from Form No.10B filed by the assessee for all assessment years, where, the assessee has not disclosed the details with regard to income or properties of the Trust was made or continued to be made available for the use of any such persons during the previous year referred to u/s.13(3) of the Act. The Ld.CIT(A) further held that during the course of survey u/s.133A of the Act, the Department has gathered information, which clearly shows that the assessee has let out its property to a partnership firm, where, the trustees are partners of a firm for nominal rent, which is far less than the prevailing market rate of the property which amounts to allowing the benefit of Trust directly or indirectly to the persons referred to u/s.13(3) of the Act, and thus, rejected the ground taken by the assessee and upheld re-opening of assessment.
10. The Ld.CIT(A) had also upheld the findings of the AO in denial of exemption u/s.11 of the Act, on the ground that once the Trust violates provisions of Sec.13(1)(c) of the Act, then, the benefit of exemption ITA Nos.1632 to 1638/Chny/2023 :: 11 ::
u/s.11 of the Act, cannot be allowed. The Ld.CIT(A) discussed the issue at length in light of discussion of the ITAT in the assessee own case along with certain judicial precedents and held that although, the ITAT has held that the objects of the Trust are charitable in nature and further, running of Kalyanamandapam is incidental to the attainment of main objects and is covered by u/s.11(4) of the Act, but facts are that the Trust violates provisions of Sec.13(1)(c) of the Act, and thus, the benefit of exemption u/s.11 of the Act, cannot be allowed. Therefore, the CIT(A) upheld the findings of the Assessing Officer for denial of exemption u/s.11 of the Act. The Ld.CIT(A) had also upheld the additions made by the AO towards difference in rental income received by the assessee Trust from the partnership firm, M/s.CFD, and rental income received by M/s.CFD, from three tenants on the ground that the facts gathered during the course of survey clearly shows that the assessee has under stated rental income towards letting out of properties and thus, the AO has rightly made additions towards difference between rental income in the hands of the assessee as its income. The Ld.CIT(A) has also upheld additions made by the AO towards disallowance of depreciation on fixed assets on the ground that the income of AOP which is not eligible for exemption u/s.11 of the Act, should be computed under normal commercial accounting principles, and thus, once the cost of asset has been allowed as deduction in the year in which such asset was purchased, depreciation on said assets, cannot be allowed as deduction and thus, rejected arguments of ITA Nos.1632 to 1638/Chny/2023 :: 12 ::
the assessee and sustained additions made by the AO towards disallowance of depreciation. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeals before us.
11. The first issue that came up for our consideration from Ground Nos.2 to 4 of the assessee appeal for AYs 2012-13 to 2016-17 is upholding the re-opening of assessment u/s.147 of the Act. The Ld.Counsel for the assessee referring to reasons recorded for re-opening of assessment by the AO submitted that assessments for AYs 2012-13 to 2014-15 were completed u/s.143(3) of the Act. The AO has re-opened the assessments on the basis of reasons recorded as per which, escapement of income on account of under assessment of rental income received from let out of property, but fact remains that rental income from let out of properties was disclosed in the return of income for relevant assessment year and the AO has considered in original assessment passed u/s.143(3) of the Act. Further, the AO has re-opened the assessment u/s.147 of the Act, to deny exemption claimed u/s.11 of the Act, on the ground that objects of the assessee Trust are in the nature of advancement of any other object of general public utility and activities carried out by the assessee of running Kalyanamandapam is in the nature of trade and commerce which is hit by provisions of Sec.2(15) of the Act. But, fact remains that the ITAT Chennai Benches in the assessee own case has decided the issue and held that activity of running of Kalyanamandapam is incidental to the attainment of main objects of ITA Nos.1632 to 1638/Chny/2023 :: 13 ::
the Trust and income derived from such activities were purely utilized for the purpose of charity and thus is covered under provisions of Sec.11(4) of the Act. The Ld.Counsel for the assessee referring to reasons recorded by the AO for re-opening of assessment submitted that the reasons given by the AO is verbatim reproduction for all assessment years and the AO has computed under assessment or escapement of income from the return of income filed by the assessee towards rental income received by the assessee Trust from M/s.CFD and rental income received by the partnership firm. From the above, it is undisputedly clear that the re- opening of assessment is contrary to provisions of Sec.147 of the Act, because, the assessments have been re-opened after four years from the end of relevant assessment years without any allegation of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Therefore, he submitted that the re-opening of assessments for AYs 2012-13 to 2016-17 should be quashed.
12. The Ld.DR, Shri V. Nandakumar, CIT, on the other hand, supporting the order of the Ld.CIT(A) submitted that the assessee has not made full and true disclosure of income derived from property let out to partnership firm, M/s.CFD, where the trustees of the Trust are partners. This fact has been noticed during the course of survey conducted u/s.133A of the Act, where the Department has gathered information and as per said information, the assessee has let out these properties for nominal rent to partnership firm, in which, the trustees are interested and the firm has ITA Nos.1632 to 1638/Chny/2023 :: 14 ::
derived huge rental income. This fact has not been disclosed by the assessee in the return of income in the relevant assessment year. Although, the assessments for AYs 2012-13 to 2014-15 were concluded u/s.143(3) of the Act, but there is no full and true disclosure from the assessee with regard to let out of properties and rental income derived from partnership firm in Form No.10B filed for all these assessment years. Further, assessments for AYs 2015-16 & 2016-17 are completed u/s.143(1) of the Act, and the AO has not considered the issue. Therefore, provisions of Sec.147(1) of the Act, does not apply for AYs 2015-16 & 2016-17. The Ld.CIT(A) after considering relevant facts has rightly upheld the re-opening of assessment and their orders should be upheld.
13. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The sole basis for the AO to re-open the assessments for AYs 2012-13 to 2016-17 is survey conducted u/s.133A of the Act. During the course of survey, it was noticed that the assessee Trust has let out a property to a partnership firm called M/s.CFD and offered rental income in the return of income filed for these assessment years. It was further noticed that the partnership firm has sub-let the subject property to three tenants for a monthly rent and offered rental income as its income and also paid taxes.
The AO was of the opinion that there was under assessment of rental ITA Nos.1632 to 1638/Chny/2023 :: 15 ::
income towards let out of property to partnership firm. According to the AO, the assessee has let out property to a partnership firm, in which, the trustees of the assessee Trust are partners for a nominal rent which is far more less than the prevailing market rate of the property. Therefore, the AO opined that the assessee Trust has directly or indirectly allowed property or income of the Trust to the persons referred to u/s.13(3) of the Act, and thereby, violates provisions of Sec.13(1)(c) of the Act. Therefore, re-opened the assessments u/s147 of the Act, for the reasons stated as per which income chargeable to tax had been escaped assessment u/s.147 of the Act.
14. The provisions of Sec.147 of the Act deals with the income escaping assessment. As per said provisions, if any income chargeable to tax in the case of the assessee has escaped assessment for any assessment year, the AO may subject to the provisions of Secs.148 to 153, assess or re-assess such income or re-compute the loss or the depreciation allowance for such assessment year. Proviso provided to sec.147 of the Act deals with re-opening of assessment, in a case, where the assessment has been completed u/s.143(3) of the Act, and as per said proviso, where the assessment under sub-sec.(3) of sec.143 of this section has been made for relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped ITA Nos.1632 to 1638/Chny/2023 :: 16 ::
assessment for such assessment year by the reason of failure on the part of the assessee to make a return u/s.139 of the Act or to disclose fully and truly all material facts necessary for his assessment for that assessment years. From the combined reading of provisions of Sec.147 of the Act and proviso provided therein, it is undoubtedly clear that in case of original assessment was made u/s 143(3) of the Act, the assessments cannot be reopened after four years from the end of the relevant assessment year, unless there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for that assessment year. In other words, if the AO wants to re-open the assessment after four years from the end of the relevant assessment year, then, there should be clear finding with respect to failure of the assessee to fully and truly disclose necessary information for that assessment year. Unless, there is a finding from the AO with regard to failure on the part of the assessee to fully and truly disclose all material facts necessary for these assessment years, the assessments cannot be re-opened u/s.147 of the Act. In this case, the AO has re-opened the assessments, on the ground that there is no full and true disclosure from the assessee in respect of rental income derived from let out of property to a partnership firm and according to the AO, said non-disclosure amounts to failure on the part of the assessee to disclose fully and truly all material facts necessary for that assessment year. In our considered view, the AO is completely erred in coming to the conclusion that there is ITA Nos.1632 to 1638/Chny/2023 :: 17 ::
a failure on the part of the assessee to disclose fully and truly all material facts necessary for that assessment year, because, the assessee has very much disclosed rental income derived from let out of property to the partnership firm, M/s.CFD, in the return of income filed for AYs 2012-13 to 2014-15. The assessment for the above three years were completed u/s.143(3) of the Act. The assessee has filed all details including relevant financial statements for the above assessment years before the AO and the AO has completed assessment without there being any observation with regard to rental income derived by the assessee from the partnership firm. From the above, it is undisputedly clear that the assessee has made full and true disclosure of all facts necessary for completion of assessment in respect of rental income derived from the partnership firm, and thus, in our considered view, the re-opening of assessment after four years from the end of the relevant assessment years is bad in law and liable to be quashed. This legal preposition is supported by the decision of the Hon'ble Supreme Court in the case of CIT v. Foramer France reported in [2003] 264 ITR 566 (SC), wherein the Hon'ble Supreme Court has held as under:
Section 148, read with sections 147 and 153, of the Income-tax Act, 1961 - Income escaping assessment - Issue of notice for - Assessment years 1988-89 to 1990-91 - Petitioner-foreign company was engaged in business of oil exploration and providing expertise and assistance in said field - Proceeds from manning and management contracts received by petitioner were originally assessed in February, 1991 under section 143(3) treating same as business income in terms of section 44BB - However, following Tribunal's decision rendered in case of petitioner's expatriate employee, Assessing Officer issued a notice under section 148 in November, 1998 seeking to reassess same income as fees for technical services - Whether law prevailing on date of issue of impugned notice would apply to instant case, and since new section 147 had come into force with effect from 1-4-1989, provisions of that section were applicable
- Held, yes - Whether since admittedly there was no failure on part of ITA Nos.1632 to 1638/Chny/2023 :: 18 ::
petitioner to make return or to disclose fully and truly all material facts necessary for assessment, proviso to new section, which bars issue of notice under section 148 after expiry of four years from end of relevant assessment year, squarely applied to facts of instant case and, therefore, impugned notice was barred by limitation - Held, yes - Whether since notice under section 148 was without jurisdiction, there was no merit in plea that petitioner was to be relegated to alternative remedy - Held, yes.
15. The Hon'ble Supreme Court has also affirmed the decision of the Hon'ble Allahabad High Court in the case of Foramer v. CIT reported in [2001] 247 ITR 436 (Allahabad). The Hon'ble Allahabad High Court held that when there is no failure on the part of the assessee to make a full and true disclosure of facts necessary for the assessment year, the provisions of Sec.147 of the Act, is squarely applied and the impugned notices issued u/s.148 of the Act were bad in law. The Hon'ble Allahabad High Court in the case of Foramer v. CIT (supra) held as under:
A new section substituted section 147 with effect from 1-4-1989. The new section 147 has made a radical departure from the original section 147 inasmuch as clauses (a) and (b) of the original section 147 have been deleted and a new proviso added to section 147.
In Rakesh Aggarwal v. Asstt. CIT [1997] 225 ITR 496/[1996] 87 Taxman 306, the Delhi High Court held that in view of the proviso to section 147 notice for reassessment under section 147/148 should only be issued in accordance with the new section 147 and where the original assessment had been made under section 143(3), then in view of the proviso to section 147 the notice under section 148 would be illegal if issued more than four years after the end of the relevant assessment year. In the instant case, the law prevailing on the date of issue of the notice under section 148, i.e., 20-11-1998, had to be seen. Admittedly, by that date, the new section 147 had come into force and, hence, it was the new section 147 which would apply to the facts of the present case. In the instant case, there was admittedly no failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for the assessment. Hence, the proviso to the new section 147 squarely applied, and the impugned notices were barred by limitation mentioned in the proviso.
The revenue relied on section 153(3)(ii ) and submitted that there was no bar of limitation in view of the said provision. There was no merit in such ITA Nos.1632 to 1638/Chny/2023 :: 19 ::
a plea. Section 153 relates to passing of an order of assessment and it does not relate to issuing of notice under section 147/148. Moreover, this was not a case where reassessment was sought to be made in consequence of, or to give effect to, any finding or direction contained in the order of the Tribunal in Boudier Christian's case. As already stated above, Boudier Christian's case related to the employees of the company, whereas the impugned notice had been issued to the company. Hence, it could not be said that the proposed reassessment in consequence of the impugned notice would be in consequence of, or to give effect to, any findings of the Tribunal in Boudier Christian's case. A direction or finding as contemplated by section 153(3)(ii) must be a finding necessary for the disposal of a particular case, that is to say, in respect of the particular assessee and in relevance to a particular assessment year. To be a necessary finding, it must be directly involved in the disposal of the case. To be a direction as contemplated by section 153(3)(ii), it must be an express direction necessary for the disposal of the case before the authority or court.
The case of an expatriate employee was to be decided on the basis of the provisions of article XIV of the treaty with France, whereas corporate income was to be decided on the basis of either article III or article XVI of the treaty or section 44BB. Hence, the observation of the Tribunal in Boudier Christian's case was not a direction necessary for the disposal of the appeal relating to the petitioner. The eligibility of income of the petitioner from manning and management contracts was never an issue directly or indirectly involved in the case of Boudier Christian. Moreover, the Tribunal in the appeal relating to the assessment of the petitioner's own case, vide Dy. CIT v. O.N.G.C. As agent of Foramer France[1999] 70 ITD 468 (Delhi), had considered the decision of the Tribunal in Boudier Christian's case. It is settled law that an appeal is a continuation of the original proceedings and, hence, when the Tribunal in the appeal relating to the petitioner had considered the decision of the Tribunal in Boudier Christian's case, the impugned notice under section 147/148 would obviously be on the basis of a mere change of opinion by the income-tax authorities, which would not be valid. In the decision of the Tribunal in the assessee's own case, - O.N.G.C.'s case (supra), it had been held that the income from the contract between the parties was business income and not fee for technical services.
As regards alternative remedy, since the notice under section 148 was without jurisdiction, the petitioner should not be relegated to his alternative remedy. The writ petition was, accordingly, allowed and the impugned notices were to be quashed.
16. In this view of the matter and considering the facts and circumstances of the case, we are of the considered view that re-opening ITA Nos.1632 to 1638/Chny/2023 :: 20 ::
of assessments for AYs 2012-13 to 2014-15 is bad in law and are liable to be quashed, because, the assessments have been re-opened without there being any allegation as to failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment year and for that assessment years. The Ld.CIT(A) without appreciating relevant facts simply upheld re-opening of assessment. Thus, we quashed re-opening of assessments and orders passed by the AO u/s.143(3) r.w.s.147 of the Act for AYs 2012-13 to 2014-15.
17. Coming back to AYs 2015-16 & 2016-17. Admittedly, assessments for AYs 2015-16 & 2016-17 were completed u/s.143(1) of the Act. The proviso to Sec.147 of the Act, does not apply in so far as the assessments have been completed u/s.143(1) of the Act. Therefore, the arguments of the assessee that provisions of Sec.147 of the Act applies and unless there is an allegation on the part of the assessee to disclose fully and truly all material facts necessary for assessment, the assessments cannot be re-opened, is illogical and devoid of merits. Further, the assessments have been re-opened for these two assessment years on the basis of fresh tangible material which suggest escapement of income on account of under assessment rental income and said escapement of income was noticed during the course of survey conducted u/s.133 of the Act. In our considered view, new tangible materials found during the course of survey constitute a fresh material and as per said material, there is ITA Nos.1632 to 1638/Chny/2023 :: 21 ::
escapement of income. The AO has formed reasonable belief of escapement of income and thus, in our considered view, re-opening of assessments for AYs 2015-16 & 2016-17 are valid in accordance with law and thus, we reject the arguments of the assessee and also reject grounds taken by the assessee challenging validity of assessment for AYs 2015-16 & 2016-17. Thus, reopening of assessment for Asst. Years 2015- 16 & 2016-17 are upheld.
18. The next issue that came up for our consideration from Ground Nos.5-9 of the assessee appeal is denial of exemption u/s.11 of the Act.
The facts with regard to the impugned dispute are that the assessee is a registered society under Society Registration Act, 1860 and having registration u/s.12AA of the Act. The assessee has claimed exemption u/s.11 of the Act, in respect of income derived from property held under trust, which includes income from two Kalyanamandapams namely Rajeswari Thirumana Kalyanamandapam and Mena Kalyanamandapam. The assessee had also derived income from letting out of properties to various Trusts and persons. The AO denied exemption u/s.11 of the Act, on the ground that the activity of running Kalyanamandapam is in the nature of trade and commerce which is hit by proviso to Sec.2(15) of the Act, and as per said proviso, if gross receipts exceeds threshold limit, then, the assessee looses the benefit of exemption u/s.11 of the Act.
ITA Nos.1632 to 1638/Chny/2023 :: 22 ::
19. The Ld.Counsel for the assessee submitted that the main object of the assessee as contained in its Memorandum of Association indicating carrying out activity of promote any object which was only charitable in nature apart from doing medical relief. The Ld.Counsel for the assessee referring to the objects of the Trust argued that the main objects of the Trust are to provide relief to the poor and medical relief. As per its objects, the assessee Trust is carrying out charitable activities and in the process running Kalyanamandapam which is incidental to the attainment of main objects and is covered by Sec.11(4) of the Act. The Ld.Counsel for the assessee further submitted that this issue is squarely covered in favour of the assessee by the decision of ITAT in assessee own case for AYs 1997-98 to 2014-15, where, the Tribunal after considering the main objects of the Trust, the activities carried out for relevant assessment years and also income derived from running Kalyanamandapam held that the activity of running Kalyanamandapam is only incidental to the attainment of main objects and thus, the assessee could take advantage of sub-section (4) of sec.11 of the Act. The facts for the impugned assessment year are identical and there is no change in facts, except the AO making allegation that there is a violation of provisions of Sec.13(1)(c) of the Act, in so far as let out of properties to a partnership firm, in which, the trustees are partners. Therefore, he submitted that the AO and the Ld.CIT(A) are erred in denying exemption u/s.11 of the ITA Nos.1632 to 1638/Chny/2023 :: 23 ::
Act, and thus, argued that the benefit of exemption u/s.11 of the Act, should be allowed as claimed by the assessee.
20. The Ld.DR, Shri V.Nandakumar, CIT, submitted that although, the Tribunal has considered the issue of exemption u/s.11 of the Act, and held that income derived by the Trust from running Kalyanamandapam is incidental to attainment of main objects, but as per facts and circumstances of the case, the AO has given clear finding that the assessee Trust is not eligible for exemption u/s.11 of the Act. Further, after the decision of the Hon'ble Supreme Court in the case of ACIT v.
Ahmadabad Urban Development Authority reported in [2022] 449 ITR 1 (SC), the law has been changed in so far as the GPU trusts are concerned. The Ld.DR further submitted that as per the decision of the Hon'ble Supreme Court, there is a difference between running of a business as a property held under Trust and running of a business as a property held for the Trust. If running of a business as property held under Trust, then, the Trust can took advantage of provisions of Sec.11(4) of the Act, and claim the benefit of exemption. In case, the business has been run on behalf of Trust and such business is in the nature of GPU activities and covered by provisions of Sec.2(15) of the Act, then, said Trust cannot claim the benefit of exemption u/s.11 of the Act. In the present case, the assessee Trust main activities are running of Kalyanamandapam as a commercial activity and spending meager amount ITA Nos.1632 to 1638/Chny/2023 :: 24 ::
for Charitable Trust. Therefore, the AO and the Ld.CIT(A) rightly held that the assessee Trust is not entitled for exemption u/s.11 of the Act. The Ld.DR further submitted that the AO has also brought out violation of provisions of Sec.13(1)(c) of the Act, and in case, there is a violation of Sec.13(1)(c) of the Act, then, said Trust cannot claim the benefit of exemption u/s.11 of the Act. Therefore, he submitted that the order of the Ld.CIT(A) should be upheld.
21. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The assessee Trust is established with the main objects of providing medical relief in its most comprehensive sense and other relief whatsoever, but only charitable in nature to the public irrespective of nationality, caste, creed, color, select or any other distinction whatsoever. The assessee is running a Kalyanamandapam and derived income and applied said income for the objects of the Trust. From the activities carried out by the assessee for these assessment years, it is noticed that apart from running two Kalyanamandapams, the assessee was having properties from which a school, a Health Centre and a Library was run. Although, the School was run by another Trust, but rental income received by the assessee for running School was nominal. The assessee Trust was also running a Medical Centre and provided space for running a Library by charging very nominal rent. All these activities are either in the field of education or in the field of medical care. If you go by the objects of the Trust and ITA Nos.1632 to 1638/Chny/2023 :: 25 ::
activities carried for these assessment years, there is no dispute that the assessee Trust has carried out its activities in accordance with the objects and the objects of the Trust are charitable in nature and more particularly in the field of medical relief. Further, this issue has already been settled by the Coordinate bench in assessee own case in the earlier round of litigation in ITA No.277 to 286/Chny/2018 order dated 02-01-2019. The ITAT after considering the main objects of the Trust, the activities carried out for relevant assessment year and also the income derived from running of Kalyanamandapam has held that the activity of running Kalyanamandapam is property held under Trust and rental income received by the assessee from Kalyanamandapam that which was in the nature of income from business, but such income was derived from property held under Trust. The Tribunal further held that such business of running a Kalyanamandapam is incidental to attainment of main objects and the assessee Trust can take advantage of sub-section (4) to sec.11 of the Act. The Tribunal further held that the audited accounts filed along with its return clearly shows separate income and expenditure for each of the activities including Kalyanamandapam and thus, sub-sec 4A is not applicable to the assessee once its business is considered as incidental to the attainment of its main objects. The relevant findings of the Tribunal are as under:
9. We have considered the rival contentions and perused the orders of the authorities below. Assessee has not disputed the findings of the ld.
Commissioner of Income Tax (Appeals) that rentals received from its Kalyanamandapam had to be considered under the head income from ITA Nos.1632 to 1638/Chny/2023 :: 26 ::
business. In fact Hon'ble Jurisdictional High Court while remitting the question back to the ld. Commissioner of Income Tax (Appeals) for assessment years 1997-98, 98-99 etc, had indicated that income of the assessee from the Kalyanamandapam was more in the nature of business income, by virtue of the judgment of their Lordships in the case of CIT vs.Halai Nemon Association, (2000) 243 ITR 439. This view was taken by their Lordships overruling the opinion of this Tribunal in the earlier round, wherein Co-ordinate Bench held the income from Kalyanamandapam as income from house property. For taking this view, in the earlier round, this Tribunal had relied on a judgment of Jurisdictional High Court in the case of CIT vs. Samyuktha Gowda Saraswatha Sabha, (2000) 245 ITR 242, which was also duly considered by their Lordships when the question was remitted back to the ld. Commissioner of Income Tax (Appeals). Obviously, assessee cannot now raise a plea against the finding of the ld. Commissioner of Income Tax (Appeals) that income of the assessee from renting out Kalyanamandapams were business income, and it has wisely done so. However, it is peeved on the view taken by the ld. Commissioner of Income Tax (Appeals) that such business income could not be considered as income earned from a property held under the Trust, thereby disentitling the assessee from taking advantage of Sub section (4) of Section 11 of the Act. Section 11(4) and 11(4A) of the Act, as it was stood in the period covered by the appeals before us and which are apposite are reproduced hereunder:-
Section 11(4) of the Act:-
''For the purposes of this section "property held under trust" includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the Assessing Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment ; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes.
Section 11(4A) of the Act:-
Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business''.
Ld.CIT(Appeals) was of the opinion that Kalyanamandapam having being built by the assessee subsequent to its formation in the year 1959, could not be considered as property under trust. Ld. Authorised Representative, during the course of his arguments has stated that the land in which Kalyanamandapam were built was part of the original settlement and the building were built therein by the assessee from its income. Be that as it may, there is no dispute that the land and building was owned by the assessee society, whether it was part of original ITA Nos.1632 to 1638/Chny/2023 :: 27 ::
settlement or not. In our opinion, once income of a trust is used by it to acquire a property, the property so acquired will be property held under trust. Income from such property will be income from property under the trust. Thus, in our opinion, rental income received by the assessee from Kalyanamandapam though it was in the nature of income from business, such income was nothing but income from property held under trust.
10. Now the question is whether assessee can be denied the exemption claimed by it u/s.11(1) of the Act by virtue of Sub Section (4A) thereof. For answering this question is we have to see whether renting out the Kalyanamandapams could be considered as incidental to the attainment of the objects of the assessee. Objects of the assessee as it appear in its Memorandum of Association is reproduced hereunder:-
3. The objects for which the Society is established are :-
a) to provide for, carry out, and - do all such acts and things as will or are likely or calculated to, promote the objects and purposes of a wholly and society charitable nature.
b) To provide medial relief in its most comprehensive sense and other relief whatsoever, but of a wholly charitable nature to the public irrespective of nationality caste, creed, colour, sect or any other distinction whatsoever.
c) without prejudice to the above comprehensive objects expressed in general terms and, without limiting, in any way, the scope or extent thereof, to establish, promote, provide for and maintain maternity homes nursing homes, hospitals, general and for the treatment of children's diseases, provide facilities for surgical operations. out-patient.
Dispensariessupply of medicines and after-treatment care and to take care of and provide for orphans, the aged, the infirm and the destitute
d) for any of the purposes of the Society i. to acquire, by accepting as gift, purchase, lease, exchange or otherwise, lands, buildings and structures of any tenure or description, to sell, mortgage, exchange, lease, let out, hire or otherwise deal with such property; and to build constructions on lands and extend, improve and repair buildings and structures and otherwise deal with the property; and to receive rent and other income from property ii. to make donations to such persons or bodies and in such cases, and either of cash or other. Assets as the Society may think directly or indirectly conclusive to any of its objects.
iii. To do all such acts as may be necessary for the benefit of the Society or in Its Interest to derive benefits from Its ITA Nos.1632 to 1638/Chny/2023 :: 28 ::
assets consistently always with the charitable nature of the Society's objects.
iv to open current. demand deposit, fixed deposit and other accounts with any Scheduled Bank and operate same;
v. to receive gifts, donations, contributions, subscriptions, whether In cash or in kind.
vi. To do, subject always to the provisions of the Societies Registration Act, 1860 and to the Rules and Regulations of this Society, all such other or further acts and things as shall or may be conducive or incidental to the attainment of charitable objects for which this society is formed''.
By virtue of clause (d) above, assessee can purchase, build and let out properties for its other purposes. The purpose mentioned in clause (a) clearly indicate promotion of any object which was wholly and solely charitable in nature. No doubt ld. Commissioner of Income Tax (Appeals) had mentioned this to be a very wide expressions, disentitling it from claiming exemption u/s.11 of the Act. It is true that clause (a) is of a wide amplitude. However what we need to remember is that the assessee was having registration u/s.12A of the Act since 11.04.1975, and such registration still continued. If the main object of the assessee was too wide, as mentioned by ld. Commissioner of Income Tax (Appeals), it would not have been given such registration. Having given such registration, which was alive since 1975, Revenue cannot now turn back and say that the main object was very wide and assessee could not be given benefit of Section 11(1) of the Act. Activity of renting out Kalyanamandapam in our opinion could be construed as only incidental to the attainment of its main object. Assessee therefore could take advantage of Sub Section (4) of Section 11 of the Act. There is no dispute that assessee had maintained separate books for its Kalyanamandapam. The audited accounts filed along with its return clearly show separate income and expenditure for each of the activities, including Kalyanamandapam. Sub Section 4A would not apply to the assessee once its business is considered as incidental to the attainment of its main objects.
11. Now coming to the question whether the predominant activity of the assessee was charity and if so what was the nature of charity. It is not disputed that apart from the two Kalyanamandapams, assessee was having properties from which a school, a health centre and a library were run. It might be true that the school was run by another trust.
However, rental received by the assessee for running the school called Avichi school was nominal. We find great strength in the argument of the ld. Authorised Representative, that property from which the School was run, if given out on market rates, would fetch tens of crores in income, and forgoing such income for educational purpose, was nothing but charity in the nature of education. Especially so, since the school was run by a trust which was undisputedly having registration u/s.12A of the Act. Apart from this assessee had earned little revenue from its diabetic centre. It had also given out a premises to the Government for a library.
ITA Nos.1632 to 1638/Chny/2023 :: 29 ::
All the activities of the assessee were either in the field of education or in field of medical care. Net revenue earned by the assessee and its expenditure in the field of medical aid, health care and donations as compiled from its income and expenditure account and Balance sheet reads as under:-
Net revenue includes what the assessee received as rentals from its Kalyanamandapams also. Submission of the assessee that donations given were all to organization engaged in either education or medical relief, which were having registration under Section 80G of the Act was not rebutted by the Revenue. No doubt, ld. Departmental Representative has raised an argument that such donations can at best be treated as donation given by an individual for which benefit to the extent given under Section 80G alone could be claimed. However, a reading of Section 11(1) of the Act clearly show that, types of income mentioned in clauses
(a) to (d) therein have to be excluded while computing the total income of a person in receipt of such income. Exclusion is available to any person irrespective of status. Viz whether an individual, HUF, AOP, firm or company. Vide clause (a), income which is applied for charitable purpose or religious purpose is necessarily to be excluded Donations given to a trust having 12A registration which is pursuing an object of ITA Nos.1632 to 1638/Chny/2023 :: 30 ::
medical relief, education or relief to poor, is in our opinion equivalent to using the money for such purpose. Intention remains the same. No doubt, ld. Commissioner of Income Tax (Appeals) has observed that assessee could not produce evidence for the charity done by it. However, it is not disputed that assessee had maintained books of accounts and produced the books and records before ld. Assessing Officer. Such books were subject to audits and assessee had filed Audit reports in form 10A of the Act. In such circumstances, we find no reason to uphold the finding of the lower authorities that predominant activity of the assessee was not charity.
12. Coming to the application of proviso to Section 2(15) of the Act, said Section is reproduced hereunder:-
2(15) "charitable purpose" includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility ; [Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless-
(i) Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility;
and
(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of the previous year] First proviso applies to an assessee engaged in advancement of general public utility other than relief to the poor, education, medical relief, preservation of environment and preservation of monuments. As already mentioned by us, assessee's charitable activities were directly or indirectly in the nature of relief to the poor or education or medical relief. It was not an organization which was pursuing an activity of general public utility, different from education, medical relief or relief to the poor. First proviso to Section 2(15) of the Act is attracted only where an assessee carries on activities which was of general public utility other than those mentioned specifically in the definition of charitable purpose given in Section 2(15) of the Act. In the circumstances, we are of the opinion that assessee was eligible for the exemption claimed by it u/s.11(1) of the Act for the impugned assessment years. Orders of the lower authorities are set aside and the ld. Assessing Officer is directed to give assessee the exemption claimed by it u/s.11(1) of the Act for the impugned assessment years.
ITA Nos.1632 to 1638/Chny/2023 :: 31 ::
22. In this view of the matter and by respectfully following the decision of the co-ordinate bench in assessee own case for AYs 1997-98 to 2014-
15, we are of the considered view that the assessee objects and activity of running Kalyanamandapam is incidental to the attainment of main objects, and is covered by provisions of Sec.11(4) of the Act. Since, the assessee Trust is maintaining separate books of accounts for the activity of running of Kalyanamandapam and said activity is in the nature of attainment of main objects, in our considered view, provisions of Sec.11(4A) of the Act, is not applicable to the assessee, and thus, the AO and the Ld.CIT(A) erred in rejecting exemption u/s.11 of the Act. Thus, we reversed the findings of the Ld.CIT(A) on this issue and direct the AO to allow the benefit of exemption u/s.11 of the Act, to the assessee for the AY 2012-13 to 2018-19.
23. The next issue that came up for our consideration from Ground Nos.10-11 of the assessee appeal for all assessment years is addition towards difference between the rental income received by the assessee from M/s.CFD, a partnership firm and rental income received by the partnership firm, M/s.CFD from three tenants. The facts with regard to the impugned dispute are that a survey u/s.133A of the Act, was conducted at the premise of the AVM Charities on 16.03.2018. During the course of search, it was seen that the assessee has let out a property at Dr.No.101 Dr.Radhakrishnan Salai, Chennai, to a partnership firm by ITA Nos.1632 to 1638/Chny/2023 :: 32 ::
name M/s.CFD on monthly rent. It was further noted that the firm M/s.CFD has sub-let said property to three entities namely Hotel Saravana Bhavan, M/s.B &M Hot Breads Pvt. Ltd., & M/s.Hatsun Agro Products Ltd. The AO tabulated year wise rent received by the assessee from M/s.CFD and rent received by M/s CFD from three tenants which is available in CIT(A) order. According to the AO, the assessee has let out a property to a partnership firm, in which, the Trustees are partners for a nominal rent which is far more less than the prevailing market rate and thus, worked out the difference between the rental income received by the assessee from partnership firm and rental income received by the partnership firm from three tenants and treated said difference as income of the assessee and added to total income for AYs 2012-13 to 2018-19.
24. The Ld.Counsel for the assessee submitted that the Ld.CIT(A) erred in treating the alleged difference in the rental income from M/s.CFD as income of the assessee by invoking provisions of Sec.13(1)(c) of the Act and consequently, erred in levying tax on maximum marginal rate as per provisions of Sec.164(2) of the Act. The Ld.Counsel for the assessee referring to agreement between the assessee and the partnership firm submitted that the property has been let out way back in the year 1975. The assessee has let out the property which consists of land and building with asbestos sheets. The assessee has fixed rent to the property on the basis of prevailing market rate as on the date. The said agreement has ITA Nos.1632 to 1638/Chny/2023 :: 33 ::
been renewed for a further period from time to time and enhanced the rent. The partnership firm, M/s.CFD has put up construction and also spent huge amount right from 1975. The Ld.Counsel for the assessee further submitted that initially the property has been converted into a Preview Theatre by re-building the property and also installing necessary plant & machinery and said property has been used as Preview Theatre up to August, 1994. Thereafter, the property has been, once again, renovated with structural changes and let out to three tenants on monthly rent. Further, what was let-out by the assessee to the firm is a different property and what was let-out by the partnership firm is a different property. Therefore, the AO cannot compare rental income derived by the partnership firm from subletting of property and rental income received by the assessee from letting out of the property, because, the partnership firm has re-build the property to make it suitable for letting out for commercial purpose. The Ld.Counsel for the assessee referring to agreement between the parties and agreement between the partnership firm and three tenants submitted that the assessee has spent huge amount for re-building and renovating the building and for this purpose, filed relevant financial statements of partnership firm. Therefore, he submitted that the AO and the Ld.CIT(A) are erred in making addition towards difference between rental income in the hands of the assessee.
ITA Nos.1632 to 1638/Chny/2023 :: 34 ::
25. The Ld.DR, Shri V.Nandakumar, CIT, on the other hand, submitted that the AO and the Ld.CIT(A) brought out clear facts to the effect that the assessee has let out the property to a partnership firm, in which, trustees are partners for a nominal rent which is far more less than the prevailing market rate. Further, the AO and the Ld.CIT(A) brought out clear facts to the effect that the claim of the assessee with regard to re- modeling, renovating premise by the partnership firm, is incorrect, because, as per the financial statement of partnership firm, the firm has spent very nominal amount for improvement. He further submitted that the rent received by the assessee and rent received by the firm is different. The firm has received rental income which is far more than the amount of rent received by the assessee. Therefore, the AO and the Ld.CIT(A) has rightly considered the difference between rental income as income of the assessee and their orders should be upheld.
26. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The assessee is having a property at Dr. No.101, Radhakrishan Salai, Chennai, which has been used for running Kalyanamandapam. The assessee has owned adjoining land and building and the same has been let out to M/s.CFD, a partnership firm way back 1975. As per agreement between the assessee and M/s.CFD, the said property was consisting of land & building with asbestos sheet hall. The agreement further states that the lessee should ITA Nos.1632 to 1638/Chny/2023 :: 35 ::
repair the building and put up additional construction as per their requirement. The said agreement has been renewed from time to time up to 01.04.2015. The rent of the premise was initially fixed at Rs.4,500/- per month for five years in 1975 and the same has been enhanced to Rs.40,000/- per month from 01.04.2015. The partnership firm, M/s.CFD has used said premises as a Preview Theatre right from 1975 and up to 1994. From 1994 onwards, said property has been rebuild/refurbished into a smaller properties and let out to three tenants viz., M/s. Hotel Saravana Bhavan, M/s.B & M Hot Breads Pvt. Ltd., & M/s. Hatsun Agro Products Ltd. The assessee claims that M/s CFD has spent huge amount for further construction and renovation of building from time to time to make the building more suitable for sub-letting. According to the assessee, the property let out by the assessee to the partnership firm and rental income is different and the property let-out and rent received by the partnership firm from three tenants is a different property and same cannot be compared. The assessee further contended that rent received by the Trust from the partnership firm is in consonance with prevailing market rate and further, it is comparable with Fair Market rent fixed by municipal authorities for fixation of municipal taxes.
27. In this factual back ground, if you consider the reasons given by the AO to assess difference between rental income received by the assessee Trust from M/s CFD, partnership firm and the rental income received by the firm from three tenants, we do not subscribe with the reasons given ITA Nos.1632 to 1638/Chny/2023 :: 36 ::
by the AO for the simple reason that, what was let-out by the assessee to the partnership firm is a different property and what was let-out by the partnership firm to three different tenants is a different property. No doubt, there is a huge difference between rent received by the assessee from the partnership firm and rent received by the partnership firm from the three tenants, but that alone is not a reason for the AO to disbelieve the arrangement between the parties and agreement for letting out the premise. In our considered view, the AO has made additions towards difference in rental income purely on suspicion and surmise basis without there being any factual findings as to why rent received by the assessee is not commensurate with prevailing market rate. Further, the AO is not disputing the fact that the assessee has let out said property to the partnership firm in the year 1975 and as per Letter of Arrangement dated 01.01.1980, said property is a land and building with asbestos sheet hall.
Further, as per said Letter of Arrangement, the lesser has allowed the lessee to repair/renovate the property to make it suitable for their business. Further, as per Letter of Arrangement dated 01.02.1985 and 01.10.1994 and subsequent Letter of Arrangements, there was a clear understanding that sub-letting the property after making it suitable for said purpose. We further noted that the assessee has filed relevant evidences to prove that the partnership firm has spent huge amount for re-construction and renovating the property right from 1975 to make it a Preview Theatre up to 1994, from 1994 onwards said property has been ITA Nos.1632 to 1638/Chny/2023 :: 37 ::
once again re-constructed/re-modeled by spending huge amount to make it suitable for commercial let out. From the above, it is undoubtedly clear that what was let-out by the assessee to the partnership firm is a different property and rent received by the assessee from the partnership firm is comparable with prevailing market rate. Further, what was let-out by partnership firm to three tenants is a different property which is re- modeled/re-build by the firm to make it suitable for commercial purpose, and thus, rent received by the partnership firm cannot be considered as prevailing market rent of the property let out by the assessee Trust to the firm. Therefore, we are of the considered view that the AO and the Ld.CIT(A) are completely erred in coming to the conclusion that the assessee Trust has allowed income or property of the Trust to the benefit of interested persons referred to u/s.13(2) of the Act and thereby, violates provisions of Sec.13(1)(c) of the Act, in so far as rental income is concerned.
28. Having said so, let us come back what are the evidences filed by the assessee. The assessee has filed copies of agreement between the partnership firm and three tenants and as per agreement between the parties the description of the property as shown in the agreement is altogether different when compared to schedule of the property as per agreement between the assessee and the partnership firm. Further, the assessee has also filed financial statement of partnership firm to prove that the firm has spent huge amount for re-construction/renovating the ITA Nos.1632 to 1638/Chny/2023 :: 38 ::
building from time to time since 1975 onwards and if you consider the amount of money spent by the partnership firm to make the schedule of property for let out, in our considered view, the rent received by the partnership firm from three tenants is commensurate with what was let- out by the partnership firm. Further, the assessee has also filed relevant evidences to prove that the prevailing market rate of rent for all these assessment years is comparable with Fair Market Value of the property as per municipal authorities, where the municipal authorities have determined the Fair Market Value of the property for the purpose of municipal taxes which is lesser than the amount of rent received by the assessee from the partnership firm. Further, it was not the case of the AO that the prevailing market rate of rent for similar kind of property for these assessment years is higher than the rent received by the assessee from the partnership firm. In fact, the AO has not made any attempt to find out the fair market rent of the property in the adjoining areas during relevant period. But, the AO simply took rent received by the partnership firm and compared with rent received by the assessee from the partnership firm and held that rent received by the assessee from partnership firm is lesser than the fair market rent only on the ground that partnership firm is related to the assessee as per the provisions of Sec.13(3) of the Act. In our considered view, provisions of Sec.13(1)(c) r.w.s.13(2) of the Act will come into operation only in a case where any Trust or Institution allows the income or property of a Trust to the benefit ITA Nos.1632 to 1638/Chny/2023 :: 39 ::
of persons referred to u/s.13(3) of the Act, without any adequate consideration or compensation. In case, said property has been allowed to use by any person by paying consideration or compensation which is commensurate with prevailing market rent, then provisions of Sec.13(1)(c) r.w.s13(2) of the Act, cannot be applied. Therefore, we are of the considered view that the AO and the Ld.CIT(A) are completely erred in invoking provisions of Sec.13(1)(c) r.w.s.13(2) of the Act, and made additions towards difference between rental income. Thus, we reverse the findings of the Ld.CIT(A) on this issue and direct the AO to delete the additions made towards difference between rental income received by the assessee from partnership firm and rental income received by the partnership firm from three tenants as income of the assessee.
29. The next issue that came up for our consideration from Ground Nos.12 to 15 of the assessee appeal is disallowance of depreciation on fixed assets the cost of which has been claimed as application of income.
The fact with regard to the impugned dispute are that the assessee being a Trust registered u/s.12AA of the Act, has claimed expenditure incurred towards purchase of capital assets as application of income for relevant assessment year. The assessee had also claimed depreciation on said fixed assets for every year on WDV as per rate applicable for those assets and claimed as application of income. The AO has disallowed depreciation on fixed assets on the ground that once expenditure incurred for ITA Nos.1632 to 1638/Chny/2023 :: 40 ::
acquisition/purchase of fixed assets has been allowed as application of income, then, allowing depreciation on said fixed assets amounts to double deduction, which is not permissible under law. It was the arguments of the Ld.Counsel for the assessee that this issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of CIT v. Rajasthan & Gujarati Charitable Foundation, Poona, reported in [2018] 89 taxmann.com 127 (SC), where it has been held that depreciation on fixed assets has to be allowed as application of income, even though, the cost of acquisition/purchase of fixed assets has been allowed as application of income for earlier assessment years. It was further submitted that up to AY 2014-15, this issue is covered in favour of the assessee by the above decision, but from the AY 2015-16, the law has been amended to provisions of Sec.11(6) vide Finance Act, 2014 and as per said provisions, depreciation on fixed assets, cannot be claimed as application of income, once, the cost of said fixed assets has been allowed as application of income in the year of purchase.
30. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The issue of allowing deduction towards depreciation on fixed assets as application of income u/s.11(1)(a) of the Act, when cost of purchase/acquisition of said fixed assets was allowed as application of income in the year of purchase is no longer res-integra. The Courts and Tribunals have taken a consistent view and held that even though, the cost of ITA Nos.1632 to 1638/Chny/2023 :: 41 ::
acquisition/purchase of fixed assets has been allowed as application of income u/s.11(1)(a) of the Act, when such fixed assets were purchased, but still depreciation on said fixed assets should be allowed as application of income, because, income of a charitable institution claiming exemption u/s.11 of the Act, should be computed like any other entity in normal commercial accounting principles. This legal position has been upheld by the Hon'ble Supreme Court in the case of CIT v. Rajasthan & Gujarati Charitable Foundation, Poona, (supra), and said position is applicable up to AY 2014-15. Since, the assessee Trust is a registered u/s.12AA of the Act, and also claiming exemption u/s.11 of the Act, in our considered view, depreciation on fixed assets should be allowed as application of income up to AY 2014-15. Thus, we direct the AO to delete additions made towards disallowance of depreciation on fixed assets for AYs 2012- 13 to 2014-15. In so far as AYs 2015-16 to 2018-19, the law has been amended by the Finance Act, 2014 to provisions of Sec.11(6) of the Act and as per said provisions, where any income required to applied or accumulated or set part for application, then, for such purpose, the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as application of income under this section in the same or in any other previous year. From the amendment provisions of sec.11(6) of the Act, by the Finance Act, 2014, which is applicable from AY 2015-16 onwards, depreciation on fixed assets cannot be allowed as application of ITA Nos.1632 to 1638/Chny/2023 :: 42 ::
income, in case, the cost of acquisition of said fixed assets has been allowed as application of income in the same year or in any earlier year. Thus, we are inclined to uphold the findings of the Ld.CIT(A) for AYs 2015-16 to 2018-19 and reject ground taken by the assessee.
31. In the result, appeals filed by the assessee for AYs 2012-13 to 2014-15 are allowed and appeals filed by the assessee for AYs 2015-16 to 2018-19 are partly allowed.
Order pronounced on the 27th day of March, 2024, in Chennai.
Sd/- Sd/-
(वी. दु गा राव) (मं जूनाथा.जी)
(V. DURGA RAO) (MANJUNATHA.G)
याियक सद य/JUDICIAL MEMBER लेखा सद य/ACCOUNTANT MEMBER
चे ई/Chennai,
!दनांक/Dated: 27th March, 2024.
TLN
आदेश क ितिलिप अ$ेिषत/Copy to:
1. अपीलाथ /Appellant
2. थ /Respondent
3. आयकरआयु /CIT
4.िवभागीय ितिनिध/DR
5. गाडफाईल/GF