TMI Blog2022 (12) TMI 1088X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial sense. The entire income of the trust in the commercial sense has been spent for the purpose and not the notional income. But in the present case before us, the assessee has violated the provisions of section 13(1)(c) r.w.s. 13(1)(b) of the Act, as the assessee has received rent from two tenants who are specified persons u/s.13(3) of the Act and hence, clear violation of provisions of section 13(1)(c) r.w.s. 13(1)(b) of the Act. Therefore, the assessee is not entitled for claim of deduction. Accordingly assessee trust cannot be assessed on notional rental income in term of CBDT Circular No.005P(LXX-6) dt. 19th June 1968 AO will deny exemption u/s.11 of the Act, in regard to the income declared by assessee and will assess the same to tax in term of section 164(1) of the Act. - ITA No.: 2850/CHNY/2019 - - - Dated:- 21-12-2022 - Shri Mahavir Singh, Vice President And Shri Manoj Kumar Aggarwal, Accountant Member For the Appellant : Shri R. Vijayaraghavan, Advocate For the Respondent : Shri P. Sajit Kumar, JCIT ORDER PER MAHAVIR SINGH, VP: This appeal by the assessee is arising out of the order of the Commissioner of Income Tax (Appeals)-2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent proceedings noted that the proceeds of the assessee s trust, the above noted are relatives of the trustees and other relatives of the trustees are jointly holding substantial interest in companies namely TVS Sons Pvt. Ltd., and Southern Roadways Ltd., as under:- Name of the Trustees/Interested concerns Percentage of shares held by the trustee along with their relatives in the Company M/s TVS Sons Pvt. Ltd., during the F.Y.2015-16 Percentage of shares held by the trustee along with their relatives in the Company M/s Southern Roadways during the F.Y.2015-16 Sri R. Haresh, Director of M/s. TVS Sons Pvt. Ltd 11.9 2.28 Sri Suresh Krishna, Director of M/s. TVS Sons Pvt. Ltd. 16.27% 15.75% Ms. Shrimathi Mahesh 8.18% 2.59% Sri Venu Srinivasan, Director of M/s. TVS Sons Pvt. Ltd. M/s. Southern Roadways 22.95% 9.18% M/s. TVS Sons Pvt. Ltd. - 54.98% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T. Act, by leasing out the trust land without charging adequate rent by violating the provisions of Sec 13(1)(c) r.w.s 13(2) (b) is arrived at Rs.98,23,320/- (10034148-210828) and is charged to tax at maximum marginal rate as per the proviso to section 164(2) of the I.T. Act. b) Based on the prevailing market rate the trust property-land measuring 7658 Sqm (82430 Sq. Ft) leased to the company M/s TVS Sons Ltd., is arrived at Rs. 7,00,655/- (82430*8.5) per month. Yearly Rent on the same is Rs.84,07,860/- (700655* 12) after reducing the rent actually received during the year 2015-16, the total income applied for the benefit of a person referred to the sub-section (3) of section 13 of the Income Tax act by leasing out the trust land without charging adequate rent by violating the provisions of Sec 13(1) (c) r.w.s 13(2)(b) is arrived at Rs. 81,44,316/- (8407860-263544) and is charged to tax at maximum marginal rate as per the proviso to section 164(2) of the I.T. Act. The AO also denied exemption by treating the assessee to be assessed as Association of Persons and denied exemption u/s.11 11 of the Act by observing in para c as under:- c) Since, in the assessee s case as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the assessee s trust has not charged the fair market rent of these two group companies and cumulatively they have violated the provisions of section 13(1)(c) r.w.s. 13(2)(b) of the Act as they have violated the provisions of section 13(1)(c) of the Act as the assessee s trust had sold out benefit to the interested parties who are the trustees or the relatives or the concerns in which the interested persons have substantial interest as noted by the AO in his assessment order. The CIT(A) also rejected the ground of assessee in regard to deduction for maintenance claimed at 30% as against 10% adopted by the AO. The CIT(A) also not disturbed the finding of AO in charging of maximum marginal rate of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use 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 even though the assessable income of a company may be much, the commercial profits may be so small that compelling distribution of the difference between the balance of the assessable income reduced by the taxes payable and the amount distributed as dividend would require the company to fall back either upon its reserves or upon its capital which in law it could not do. Applying the same reasoning, the expression income has to be understood in the popular or general sense and not in the sense in which the income is arrived at for purpose of assessment to tax by the application of some artificial provisions either giving or denying deduction. That income cannot be understood in the sense of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 purpose of Section 11 which excludes that income from the computation of total income. The view that we have taken above is also consistent with the circular of the Central Board of Direct Taxes dated 19th June, 1968, reproduced in V.S. Sundaram's Law of Income Tax In India, 11th Edn., p. 798. The ld.counsel for the assessee also relied on the decision of Hon ble Gujarat High Court in the case of CIT vs. Ganga Charity Trust Fund, (1986) 162 ITR 612 and stated that notional income, if calculated on the basis of mercantile method of accounting is conceived as income for the purpose of section 11(1)(a) of the Act, it must be considered that such notional income can never be actually applied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Act, the view taken by the Tribunal commends itself to us. The ld.counsel also drew our attention to para 7 where the view taken by various courts is discussed and the same reads as under:- 9. The view taken by the courts in the above referred cases is that before determining the income which could be actually applied or accumulated for the purposes of the trust under section 11(1)(a) of the Act, all outgoings, including the outgoing in the nature of payment of income-tax, must be deducted. It is only from the surplus income that remains in the hands of the trustees that actual application or accumulation for the purposes of the trust can be expected. If there is no income which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted 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 applicable to the assessee and as such, assessee is not entitled for claim of exemption u/s.11 of the Act. 7. After hearing the arguments of ld.counsel for the assessee as well as ld. Senior DR and going through the CBDT Circular No.005P (LXX-6) dt. 19th June, 1968 cited above, which has been considered by Hon ble Madras High Court in the case of Rao Bahadur Calavala Cunnan Chetty Charities., supra and also by Hon ble Gujarat High Court in the case of Ganga Charity Trust Fund, supra, we are of the view that the accumulation or application in section 11(1)(a) of the Act must be of real income and as per the CBDT circular No.005P(LXX-6) cited above, makes it clear that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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