TMI Blog2001 (4) TMI 177X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the assessee-society has also been registered under a similar enactment in the State of Tamil Nadu, but we are not concerned with this aspect of the matter in the present appeals. The assessee-society was granted registration under section 12A of the Income-tax Act by the Commissioner of Income-tax's Order dated 22-9-1978. The objects of the assessee-society included establishing and conducting educational institutions in the State of Kerala and elsewhere in India, to establish hospitals and Nursing Homes in Kerala and elsewhere in India, to establish and maintain industrial establishments for helping the poor, guest houses for Indian and international tourists for international understandings, to help the economically weaker sections by distribution of cloth and providing low cost houses, to run hostels for the benefits of deserving students, working men and women, etc. There is no dispute that the objects of the assessee society are charitable within the definition of section 2(15) of the Income-tax Act. In the printed booklet of the assessee-society filed with us, the Chairman's appeal reads as under: "You are perhaps aware that 220 million of our population live in cit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in Tamil Nadu, mentioned at No. 3 above. He held that the income in respect of the activity carried on by the assessee in Tamil Nadu is not eligible for exemption under section 11 mainly on the ground that the assessee has violated the provisions of section 13(1)(c) while carrying on this activity in Tamil Nadu. He noticed that the assessee-society has taken on lease a building at No. 4, D'Silva Road, Mylapore, Chennai, which belonged to the Chairman Shri C. George, and his wife Smt. Omana George as co-owners, and used it as a guest house of the society. Further', he observed that the assessee-society incurred an expenditure of Rs.4,36,785 on the renovation of the said guest house. He also mentioned that the assessee had purchased the following items of furniture and equipments and installed them in the said guest house: --------------------------------------------------------------------------- 1 . Furniture fittings Rs. 1,15,000 2. Air conditioners Rs. 1,05,050 3. BPL Washing machine Rs. 13,000 4. BPL Micro oven Rs. 11,540 5. Fridge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome applied for charitable purposes as per Assessing Officer. Rs. 26,190 ---------------- Rs. 18,74,443 Less: Allowable depreciation worked out by the Assessing Officer Rs. 5,93,011 ----------------- Rs. 12,81,432 ----------------- --------------------------------------------------------------------------- The Assessing Officer held that the above income of Rs.12,81,432 is to be taxed at the maximum marginal rate, presumably under the provisions of section 164(2) of the Income-tax Act. On this basis, he levied income tax of Rs.5,12,572 and interest under section 234B of Rs.2,25,500, and thus raised an aggregate demand of Rs.7,38,072. 6. When the matter reached the CIT (Appeals), the Assessing Officer sought an enhancement of the total income of the assessee to Rs.17,75,003 on the ground that certain expenditure of a capital nature incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n free of rent to the trust cannot be considered "other compensation" for this property. The letting out of the building was not on condition of such free accommodation. Moreover, the compensation has not come from the persons who enjoyed the stay. In this connection the strict view taken by the Kerala High Court in the case referred to in para 4(c) is to be kept in view. I, therefore, hold that the trust has been lightly denied the benefit of exemption under sections 11 and 12 in view of section 13(1)(c)(ii) read with section 13(2). (4)(g). This brings me to the question of what will be assessed. Section 13(1)(c) denies exemption to trusts of their 'income' and not their total income. The Kerala High Court in the case of Programme for Country Organisation (228 ITR 620) had held that even the Central Board of Revenue understood the term 'income' in the commercial sense in this context as distinguished from "total income" as defined in section 2(45) of the Act. Therefore, tax will be levied on the income as arrived at in commercial principles. This means that income will be decided after allowing all legitimate expenses for earning the income including depreciation on assets used. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnitaries who stayed in the said guest house during 1995 to 1998, and it is explained that the said list was furnished to the Assessing Officer vide the assessee's letter dated 30-3-1999. A copy of the list of the guests can be seen in the paper book filed before us as Annexure-I to the letter dated 30-3-1999 addressed to the Assessing Officer. In the light of the above list of guests, it is claimed that the said guest house was never used exclusively for the residence of the Chairman or the Trustees. It was only used as a guest house for the benefit of the Chairman and Trustees and other visitors. It was explained that it was entirely because of the difficulty of accommodating the visitors who came to supervise or assist in the activities of the assessee-society, the society hit upon the idea of taking on lease the said property at D'Silva Road, as per the letter of the assessee-society addressed to Mrs. Omana George, referred to hereinabove. It is also explained that before the property was taken on lease by the assessee-society it was let out to outsiders on a rent of about Rs.25,000 per month, and the family of the Chairman had foregone the said rent and the substantial securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e letter is the house is given for the use of the trust. So the entire reasoning of the Assessing Officer and CIT(A) for withdrawal of the full exemption fails. Further, this guest house is not used for any period. The trustee has his own house as a separate residence." The Id. counsel for the assessee also claimed that the income of the assessee has to be computed on commercial principles in the light of the decision of the Hon'ble Kerala High Court in the case of CIT v. Programme for Community Organisation [1997] 228 ITR 620, and so the various disallowances made by the Assessing Officer are unwarranted. Regarding the equipment installed in the guest house, it is claimed that they continued to be the property of the Trust, despite their installation in the guest house and so the assessee derived no benefit from such installation, and so the provisions of section 13(1)(c) are not attracted. 7(a). The Id. counsel has also mentioned that the main income of the assessee is only by way of rent of a building which was acquired by funds to the tune of a crore of rupees provided by the Chairman. The other receipts of the society are only from patients treated in the hospital and so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... good work done by the assessee-society at page 12 of his order as under: "A perusal of the materials submitted shows that the society has done good work in the two re-settlement colonies at Adampakkam. However, the question regarding exemption is required to be considered in accordance with the provisions of the Income-tax Act." The CIT(Appeals) also acknowledges the good work done by the assessee-society in the following terms in para 4(a) at page 4 of his order as under: "It is pointed out that the various activities of the society in the previous year included running a free clinic which attends to about 1500 new cases free of charge every week, a creche of 50 children who are provided with free meals, running of a primary school with 260 students, arranging for sanitation in the adopted colony by appointment of 10 scavengers, various awareness programmes for women and children, adult literacy camps conducted, eye camps, TB detection camps, running of Anganvadies, tree planting works, embroidery training, etc. are being effectively done. The fact of such activity is not denied by the Assessing Officer. Evidence in this connection has also been produced." Actually the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the governing council, under the provisions of section 13(2) of the I.T. Act the said property shall be deemed to have been used or applied for the benefit of a person referred to in sub-section (3) of section 13, and so the assessee-society must be held to be hit by the provisions of section 13(1)(c). So, the Revenue authorities have held that the building at No. 4, D'Silva Road, which has been taken on lease by the assessee-society has been made available for the use of the Chairman and the members of the governing council of the society, and therefore, it is hit by the provisions of section 13(1)(c). It is the correctness of this conclusion that has to be examined by us. 11. It appears that the Assessing Officer proceeded on the assumption that the building at D'Silva Road, has been used as the residence of the Chairman. It is not clear how the Assessing Officer arrived at this assumption. Vide his letter dated 31-10-1997, a copy of which has been filed before us by the Departmental Representative, the Assessing Officer enquired of the assessee-society as follows: "Building repairing and maintenance Rs.5,11,343. A perusal of the bills in connection with these expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, but that does not mean that it was used as the exclusive residence of the Chairman. The mention of "D'Silva residence (Chairman's)" while giving details of the expenditure seems to be only a clerical error, and in popular usage the building could have been known as Chairman's residence, because before it was taken on leave, it happened to be the residence of the Chairman. Further, even before the Assessing Officer, the assessee had furnished the list of guests who were accommodated in the said building during the years 1995 to 1998. They are 17 in number and they were all visitors and some of them from abroad, like Kuwait, Canada and Singapore. The assessee also furnished the purpose of their visit, though the duration of their stay is not mentioned. 13. In its letter dated 24-5-1999 the assessee submitted before the Assessing Officer as under: "Points raised in your letter dated 7-5-1999. 1. With reference to the List of Guests and Foreign Dignitaries who have stayed at the House at No. 4 D'Silva Road, Mylapore, Chennai, which was being used as a guest house by the Society, furnished by us in our letter dated 30-3-1999 referred by your goodself, we wish to inform your goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verning council of the society and mentioned that this argument would be considered later. He, however, abruptly concluded towards the end of his order at page 12 as under: "The argument made by Shri George that his residential house was converted as a guest house is devoid of any merit as all the governing council members are his family members. As per the provisions of section 13(1)(c)(ii) if any part of such income or property of the trust is used or applied directly or indirectly to any persons referred to in sub section 3, such trust/institution does not qualify for exemption. The society, in the circumstances, is not eligible for exemption as per the provisions of sections 11 to 13 of the Income-tax Act, 196l." From the above, we have to infer that even the Assessing Officer did not dispute the fact that the building at No. 4, D'Silva Road was actually used as a guest house of the assessee-society and not as the residence of the Chairman. However, the Assessing Officer was of the view that even its user as a guest house for the governing council members attracted the provisions of section 13(1)(c), because the governing council members were all the family members of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with other outside guests for their temporary stay when they visited India from abroad. To give an extreme example, it is like the Chairman using the furniture of the society. Can it be said, in that case, that the property of the society is made available for the use of the specified person so as to attract the provisions of section 13(1)(c)? Such an extreme interpretation would, to our mind, render the functioning of any charitable trust impossible. In the light of the facts established in this case, i.e. that the building at 4, D'Silva Road has been utilised only as the guest house and not as the residence of any category of persons specified in section 13(3), we are of the view that the property of the assessee is not made available for the use of any person referred to in sub-section (3) of section 13, within the meaning of section 13(2) of the I.T. Act, even if no rent or compensation is charged. It is not the case of the Revenue that the governing council members have been extended any extra concession over and above the other guests who were accommodated in the guest house. It is not the case of the Assessing Officer that while the assessee-society charged rent from the ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities that the Chairman would have received a substantial security deposit, plus a monthly rent of Rs.25,000 if the said building at 4, D'Silva Road had been let out to outside parties, instead of being leased out to the assessee-society. In other words, the plea made out was that the Chairman did not actually receive any benefit from the said transaction of letting out the building on lease to the assessee-society. Of course, an amount of Rs.4,36,785 was spent on the renovation of the house for a period of two years. As per the terms of the lease, as is evident from the letter dated 15-3-1995 addressed by the assessee to Mrs. Omana George, which we have extracted above, a maximum of Rs.12 lakhs could have been spent over a period of 2 years. Actually, what was spent was only Rs.4,36,785 only. This amount is much less than the rent that the Chairman and his wife would have received, had it been let out to outsiders. We may also mention that the installation of various equipments in the guest house has also not benefited the Chairman or the governing council members, directly or indirectly. As we have already mentioned, they remained the property of the assessee-society. Simply ..... X X X X Extracts X X X X X X X X Extracts X X X X
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