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SHREE KAMDAR EDUCATION TRUST Versus INCOME TAX OFFICER

2016 (9) TMI 18 - GUJARAT HIGH COURT

Benefit of exemption u/s 11 denied - education institution - profit motive - commercial activity - transaction with the specified persons - Held that:- Insofar as the lease rent is concerned, the revenue had not brought on record any evidence to suggest that such lease rent was either excessive or even higher than the normal market rate prevailing in the region at the relevant time. In fact, the assessee produced material to show that a part of the land belonging to the trustees was leased to on .....

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rate between two cases was nearly five times. Without there being any further material on record, the Commissioner could not have come to the conclusion that the rent paid by the assessee to the trustees for the leased land, was excessive. - Similarly, the assessee pointed out to the authorities that it needed to raise a fund of ₹ 2 crores by taking loan from the financial institutions for which permission was also granted by the Charity Commissioner. The Bank had offered loan at the .....

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st at the rate higher than the market rate. What the trustees could have got from the Bank was not correct comparison. Secondly, the trustees were offering unsecured loan, which with inherent risks, invites higher interest than the bank loans. Last but not the least, if the trustees had parked their money in the Bank fixed deposits, the liquidities and security of such investment would be much higher than lending substantial amount to the trust without a collateral security. - Section 13(1)( .....

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in the mischief of section 13(1)(c). - Decided in favour of the assessee - TAX APPEAL NO. 1334 of 2008 - Dated:- 23-8-2016 - MR. AKIL KURESHI AND MR. A.J. SHASTRI, JJ. FOR THE APPELLANT : MRS SWATI SOPARKAR, ADVOCATE FOR THE OPPONENT : MR PRANAV G DESAI, ADVOCATE ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. This appeal is filed by the assessee, which is a trust registered under the Bombay Public Trusts Act. At the time of admission, the following substantial question of law was frame .....

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rn in scrutiny. During such assessment, the Assessing Officer issued a notice dated 24.2.2006 requiring various details from the assessee. The main thrust of the Assessing Officer in such notice, however, was in respect to the assessee s claim of exemption under section 11 of the Income Tax Act, 1961. He pointed out that substantial payments were made by the trust to the settler of the trust as well as the trustees and their near relatives, which according to him, were in violation of section 13 .....

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also committed breach of section 13(1)(c) of the Act. He, therefore, proposed to deny the exemption under section 11 of the Act as claimed by the assessee. 2.2 In reply to such notice, the assessee pointed out that the trustees and their relatives have substantial landed properties. The trust had taken such property on lease under a deed dated 1.11.2000 under which lease rent was fixed at ₹ 1/- per sq.ft. The assessee contended that the prevailing market rate in the area was ₹ 5/- p .....

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es on borrowed funds, the trust pointed out that it needed to raise loan of ₹ 2 crores, for which, the Joint Commissioner had also given permission. However, it was found that the Central Bank of India, to whom approach was made for such purpose, would charge prevailing market rate of interest, which would be very high. The trustees of the trust, therefore, instead agreed to lend the amount at the interest rate of 9% per annum, which would be without offering any security. 2.4 The Assessin .....

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harge lesser fees was discarded on the ground that the schools did not receive government grant. Regarding the loans from the trustees and their relatives, he held that the same would amount to diversion of the trust income for the benefit of the interested persons, which would be violative of section 13(1)(c) of the Act. 2.5 The assessee carried the matter in appeal. The CIT(Appeals), dismissed the assessee s appeal on the ground that the author of the trust had settled a sum of ₹ 5,000/- .....

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According to him, these factors would show that the trust was imparting education with sole motive of profit making. He discarded the comparison of lease rent which the trustees had charged from the Max New York Life Insurance Co. Ltd on the ground that the assessee trust was occupying a larger area, whereas Max New York Life Insurance Co. Ltd. was occupying a very small piece of land and, therefore, comparison of rent was not possible. With respect to borrowing from the trustees, he discarded t .....

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that the assessee was carrying on the activities for profit motive which was being diverted to the trustees and their relatives. 2.7 The assessee, thereupon, filed the present tax appeal. 3. Learned counsel for the assessee submitted that the Tribunal and the Revenue Authorities committed a serious error in denying the exemption to the income of the trust. Mere creation of surplus in the process of running an educational institution would not deprive the trust of its status of being a charitable .....

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Assessing Officer was high, would not mean that the trust was running with the motive of making profit. Counsel further submitted that merely because the land of the trustees or the relatives was taken on lease or the trust had borrowed money from such persons, by itself, would not establish breach of section 13(1)(c) of the Act. In the present case, the Assessing Officer had not established that the rent paid was excessive as compared to the market rate or that the interest charged was excessi .....

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terest on the borrowed funds. 6. Having thus heard the counsel for the parties and having perused the documents on record, we may recall that the revenue had two principal contentions for denying the exemption to the assessee. First was that the trust was running the educational institution for profit making. The second was that the trust had diverted its income in favour of the trustees and their near relatives, thereby breaching section 13(1)(c) of the Act. So far as the first issue is concern .....

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elf, would not mean that the purpose is profit making. This aspect was highlighted by the Supreme Court in detail in case of Queen s Educational Society vs. Commissioner of Income-tax (supra) in which reliance was placed on the decisions in the case of Aditanat Educational Institituion v. Addl. CIT, 224 ITR 310 and in the case of Americal Hotel & Lodging Association Educational Institution vs. CBDT, 301 ITR 86. 7. In the present case, in fact, as reproduced by the Tribunal in its impugned or .....

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ritable or religious purpose subject to fulfillment of condition contained therein. Section 13 of the Act, on the other hand, pertains to cases where section 11 would not apply. As per clause(c) of sub-section (1) of section 13, nothing contained in section 11 shall operate so as to exclude from the total income of the assessee bseing a trust for charitable or religious purpose or a charitable or religious institution, if any part of such income or any property of the trust or the institution is .....

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year, used or applied directly or indirectly for the benefits of any such person, in relation to such income, section 11 exemption would not apply. 9. In the present case, we may recall that the revenue relies on two factors to press in service breach of section 13(1)(c) of the Act. One is that the trust had taken a large part of land belonging to the trustees or relatives on lease, for which, the trust would pay lease rent at the rate of ₹ 1/- per sq.ft. per annum. This lease rent, accor .....

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as either excessive or even higher than the normal market rate prevailing in the region at the relevant time. In fact, the assessee produced material to show that a part of the land belonging to the trustees was leased to one Max New York Life Insurance Co. Ltd. at the rate of ₹ 5/- per sq. ft. as against the rate of ₹ 1/- per sq. ft. being paid by the assessee. The CIT (Appeals) discarded such comparison on the ground that the area occupied by the Max New York Life Insurance Co. Ltd .....

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out to the authorities that it needed to raise a fund of ₹ 2 crores by taking loan from the financial institutions for which permission was also granted by the Charity Commissioner. The Bank had offered loan at the interest rate of ₹ 12.50% per annum which would also require giving securities and executing documents. As against this the trustees offered unsecured loan at the interest rate of ₹ 9% per annum. Here again, the CIT (Appeals) discarded such comparison by contending .....

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