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TMI Blog2022 (12) TMI 1088X X X X Extracts X X X X X X X X Extracts X X X X ..... lding in the center of the city of Vijayawada. The assessee raised the following question during the course of hearing, "Whether in the given facts and circumstances of the case, can the Department assess notional rent in the case of charitable trust, the assessee, assessed u/s.11 of the Act". For this, assessee has raised various grounds, which are argumentative and exhaustive and hence, need not be reproduced. 3. Brief facts are that the assessee M/s. TVS Charities Trust, is registered as society with the Registrar of Societies on 05.06.2003 vide Sl.No.63 of 2003. The assessee is also registered as public charitable trust u/s.12AA of the Act with the CIT-Madras vide No.C.No.212(263)/73 dt.18.03.1973. The assessee trust has filed it return of income for the relevant assessment year 2016-17 on 28.09.2016 admitting 'nil' total income. The assessee's case was selected for limited scrutiny in order to verify, "whether transaction with specified persons are correctly shown in the return of income". The AO during the course of scrutiny assessment proceedings noted that during the year main receipts of the assessee's trust was by way of rent and income from investments and the applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.81,44,316/- and thereby assessed the total income for leased properties at Rs.1,79,67,636/-. For this, he made calculations in para 7(x)(a) and (b) as under:- 7.... x) In view of the above, the assessee' s objections are rejected and the violation u/s 13(1)(c) r.w.s 13(2(b) of the I.T. Act is computed based on the monthly prevailing market rent for the site at Rs. 8.5/- per Sq. ft (25.5/3) and that of building at Rs. 17 per Sq. ft. as under, a) Based on the prevailing market rate the trust property-land measuring 6164 Sq. Mts. (66348 Sq. Ft) leased to the company M/s Southern Roadways is arrived at Rs. 5,63,958/- (66348*8.5) per month and yearly rent is arrived at Rs. 67,67,496/- (563958* 12). Also as per lease deed the property consists of land with building measuring 1487.66 Sq. Mts. (Plinth area taken from Vijayawada Municipal tax calculation old Assessment no. 26122F) and the monthly rent of the said building is arrived at Rs. 2,72,221/- (17*16013 Sq.ft) and thus the yearly rent of the building is arrived at Rs. 32,66,652/- (272221*12). The yearly marketable rent off the property land cum building is arrived at Rs. 100,34, 148/- (6767496+3266652). After reducing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; Amount of disallowance 51,57,053 Total under assessment of rent which is disallowed u/s.13(1)(c) r.w.s 13(2)(b) C Total Disallowance (A+B) 93,09,269 For this, the CIT(A) gave his finding in para 5(I) as under:- 5..... I) Admittedly, the assessee trust has let out 6,164 square meters of land located at door No.40-5-7 Venkateswarapuram, Tikkal Road, Vijayawada to Southern Roadways Pvt. Ltd. with a shed constructed thereon. The assessee trust has further let out land measuring 7,658 square meters to M/s. T.V. Sundaram Iyengar & Sons Ltd. which is located at door No.40-5-142 Mughalrajpuram, Bunder Road (MG Road), Labbipet, Vijayawada. There is a super structure standing on this land. In the Remand Report, the Assessing Officer has conceded that the lessee M/s. Southern Roadways Pvt. Ltd. has raised this super structure from its own resources. Under the facts, the assessee trust is entitled to receive rent for the vacant land only. However, the CIT(A) confirmed the action of AO by holding that the lessee companies are part of the same group, where the trustees of the assessee's trust and relatives hold more than 50% of the shares. He also observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1). The ld.counsel for the assessee stated that even Hon'ble Madras High Court in the case of CIT vs. Rao Bahadur Calavala Cunnan Chetty Charities, 135 ITR 485 held that income from properties held under trust would have to be arrived at in the normal commercial manner without reference to the provisions which are attracted by section 14 of the Act. The ld.counsel for the assessee pointed out the relevant para of the judgment which reads as under:- "This is because the Act sometimes deals with income attributed by some statutory fiction. There can be no distribution or accumulation of what is taxed under some fiction. The Supreme Court in CIT v. Bipinchandra Maganlal & Co. Ltd. considered the question whether the expression "smallness of profits" has to be understood in the sense of smallness of assessable income. It was pointed out that a company normally distributes dividends out of its business profits and not out of its assessable income and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or charitable purposes will have to be excluded and it is only the balance that would require examination for finding out whether the assessee has complied with the rule of accumulation to the extent of Rs. 10,000 or 25 per cent. of the income, whichever is higher." The ld.counsel also drew our attention to para 20 of the judgment which reads as under:- 21. There is one further error in the order of the Tribunal. The Tribunal has proceeded on the basis that the receipts from rents amounting to Rs. 1,31,412 during the year ending with 31st of March, 1965, would have to be considered under the head "Income from house property" and the net income arrived at under that head. In the view that we have explained above, the determination of the income as if the sum of Rs. 1,31,412 relates to house property and would, therefore, have to be considered in the context of the provisions of Sections 22 to 27, would not be correct. Those provisions enact certain technical rules for the purpose of the ascertainment of income for the particular head for purposes of charge and as seen already that cannot be imported into the determination of the income of the property held in trust for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust or accumulated or set apart for such application at a future date not exceeding 25% of the income from such property. The word "applied" was construed by the Supreme Court in H. E. H. Nizam's Religious Endowment Trust v. CIT [1966] 59 ITR 582 and the Supreme Court stated that it envisaged actual application of the income for the purposes of the trust. Similarly, the word "accumulated" meant the income so set apart during the year for future spending on such purposes. There can be no actual application or setting apart or accumulation of income derived from the trust property unless it is actually available for application or accumulation in the hands of the trustees. Where an assessee is following the mercantile system of accounting, income on accrual basis may be reflected in the account books, but such notional income is incapable of actual application or accumulation under section 11(1)(a) of the Act and if the assessee-trust is called upon to pay income-tax for want of such application or accumulation, it would result in rendering the benevolent provision found in clause(a) of section 11(1) of the Act nugatory. Therefore, on a plain reading of section 11(1)(a) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be said to be actual application of income for the charitable purposes of the trust in India. He also relied on another decision of Hon'ble High Court of Calcutta in the case of CIT vs. Jayashree Charity Trust, (1986) 159 ITR 280. 6. When we pointed out that these facts to ld.Senior DR, he stated that there is no bar in computing notional income of rent in term of provisions of section 23 of the Act, where a formula is given as to how the annual value of any property is to be determined. The ld.Senior DR stated that even in the provisions of section 11 to 13 of the Act, there is no bar in computing annual value of the trust property and AO as well as CIT(A) has rightly computed the annual value in term of the provisions of section 23 of the Act. As regards to violation of provisions of section 13(1)(c) r.w.s. 13(1)(b) of the Act, the ld.Senior DR stated that now assessee's counsel before us conceded that the income of the trust has to be assessed on maximum marginal rate u/s.164(1) of the Act and moreover, no deduction or exemption can be allowed u/s.11 of the Act, because the two tenants are specified persons u/s.13(3) of the Act and hence, provisions of section 13(1)(c) is ap ..... 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