DDIT, Hyderabad v. ROCK CHURCH MINISTRIES, Hyderabad

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A' HYDERABAD BEFORE SHRI G.C. GUPTA VICE PRESIDENT AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER I.T.A. NO. 463/HYD/2010 (ASSESSMENT YEAR 2006-07) DDIT(E)-II HYDERABAD VS. M/S. ROCK CHURCH MINISTRIES HYDERABAD PAN: AAATR3512Q APPELLANT RESPONDENT C.O. NO. 20/HYD/2010 ARISING OUT OF I.T.A. NO. 463/HYD/2010 (ASSESSMENT YEAR 2006-07) M/S. ROCK CHURCH MINISTRIES HYDERABAD PAN: AAATR3512Q VS. DDIT(E)-II HYDERABAD APPELLANT RESPONDENT ASSESSEE BY: SHRI A.V. RAGHURAM REVENUE BY: SHRI V. SRINIVAS O R D E R PER CHANDRA POOJARI AM: THIS APPEAL FILED BY THE REVENUE AND THE CROSS OBJ ECTION (CO) ARE DIRECTED AGAINST THE ORDER OF THE CIT(A)-I V HYDERABAD DATED 29.12.2009 FOR THE ASSESSMENT YEAR 2006-07. SINCE THE APPEAL AND THE CO INVOLVE COMMON ISSUE WE HEARD TH E SAME TOGETHER AND DISPOSING BOTH OF THEM BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST WE WILL TAKE UP THE APPEAL FILED BY THE RE VENUE. THE REVENUE RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED CIT(A) IGNORED THE CRUCIAL FACT THAT THE SOCIETY ADOPTED DOUBLE STANDARDS BY SHOWING ONE VALUE TO THE MUNICIPAL AUTHORITIES AND ANOTHER VALUE TO THE I.T. DEPT. QUITE I.T.A. NO. 463/HYD/2010 C.O. NO. 20/HYD/2010 M/S. ROCK CHURCH MINISTRIES ======================= 2 AGAINST THE SETTLED LAW THAT SUCH SUB-STANDARD CONDUCT SHOULD NOT BE TAKEN JUDICIAL NOTICE OF. 2. THE LEARNED CIT(A) FAILED TO APPRECIATE THE FACT THAT THE ASSESSEE GROSSLY ACTED AGAINST ONE OF THE CERTIFICATES GIVEN BY ITSELF AT THE TIME OF REGISTRATION BEFORE THE REGISTRAR OF THE SOCIETIES THAT NO PAYMENT SHOULD BE MADE FROM THE FUNDS OF THE SOCIETY TO ANY OFFICE BEARER REGARDLESS OF THE REASONABLENESS OF SUCH PAYMENTS IN VIEW OF THE BLANKET BAR AGAINST SUCH PAYMENTS TO OFFICE BEARERS FROM FUNDS OF SOCIETY. 3. THE FACTS OF THE CASE IN BRIEF ARE THAT THE AS SESSEE IS A RELIGIOUS AND CHARITABLE SOCIETY REGISTERED U/S. 12 A OF THE INCOME-TAX ACT 1961 VIDE REGISTRATION DATED 12.09. 1980 WITH GRANT OF EXEMPTION U/S. 11 OF THE ACT HAVING THE OB JECTIVES TO ESTABLISH RUN AND MAINTAIN CHURCHES SCHOOLS CHIL DREN HOMES RELIEF WORKS TECHNICAL AND EDUCATIONAL INSTITUTION S ETC. 4. IT WAS OBSERVED BY THE ASSESSING OFFICER THAT TH E PRESIDENT OF THE TRUST MRS. RACHEL J. KOMMANAPALLI WAS PAID RS. 1 14 000 TOWARDS RENT. IT WAS ALSO NOTICED BY THE ASSESSING OFFICER THAT AS PER FORM NO. FC3 FOR THE YEAR ENDE D 31.3.2006 HER HUSBAND SHRI EARNEST P. KOMMANAPALLI HAD DONATE D RS. 50 LAKHS TO THE APPELLANT TRUST IN HIS INDIVIDUAL CAPA CITY ON 17.02.2006. THE ASSESSING OFFICER OBSERVED THAT A S PER SECTION 13(1)(C) R.W.S. 13(3)(B) 13(3)(CC) AND 13( 3)(D) THE BENEFIT OF SECTION 11 IS NOT AVAILABLE IF ANY INCO ME OF THE TRUST / SOCIETY IS APPLIED DIRECTLY OR INDIRECTLY FOR THE B ENEFIT OF ANY PERSON MENTIONED IN SECTION 13(3) OF THE ACT AS THE PRESIDENT IS A RELATIVE OF THE DONOR I.E. MR. EARNEST P. KOMMAN APALLI AS HE I.T.A. NO. 463/HYD/2010 C.O. NO. 20/HYD/2010 M/S. ROCK CHURCH MINISTRIES ======================= 3 HAD DONATED IN EXCESS OF THE LIMIT OF RS. 50 000 ST IPULATED IN SECTION 13(3)(B) AND THEREFORE THE INCOME OF THE TRUST DIVERTED DIRECTLY FOR THE BENEFIT OF THE PRESIDENT WAS COVER ED BY SECTION 13(3)(CC) BEING RS. 1 14 000 WHICH IS MORE THAN THE TOLERANCE LIMIT OF RS. 1 000 STIPULATED IN SECTION 13(2)(G). ACCORDINGLY THE ASSESSING OFFICER ISSUED A NOTICE DATED 24.12.2008 TO THE ASSESSEE TO SHOW CAUSE AS TO WHY THE CLAIM U/S. 11 SHOULD NOT BE REJECTED. 5. IN RESPONSE A DETAILED REPLY DATED 29.12.2008 WA S FILED BEFORE THE ASSESSING OFFICER. IT WAS CONTENDED BY THE ASSESSEE THAT THE PAYMENT OF RENT BY THE SOCIETY IS VERY NOM INAL AMOUNTING TO ONLY 12% OF THE MARKET VALUE SAVING 88 % TO THE SOCIETY AND THE PROPERTY WAS LET OUT ON NOMINAL REN T BASIS AND NOT ON COMMERCIAL BASIS. IT WAS CONTENDED THAT THE PAYMENT OF RENT WAS CONSIDERED REASONABLE BY THE SOCIETY AND I T DOES NOT AMOUNT TO DIVERSION OF INCOME IN FAVOUR OF ANY INTE RESTED PERSON. IT WAS FURTHER ARGUED THAT PAYMENT OF RS. 9 500 PER MONTH TOWARDS RENT AGAINST THE MARKET RATE OF RS. 8 0 000 PER MONTH IS VERY REASONABLE. THE ASSESSEE RELIED ON T HE DECISION IN THE CASE OF CIT VS. 21 ST CENTURY IMMACULATE CONCEPTION (241 ITR 193)(MAD) BESIDES THE CBDT CIRCULAR NO. 387 DT . 6.7.1984. 6. HOWEVER THE ASSESSING OFFICER OBSERVED THAT REASONABLENESS OF THE PAYMENT IS REQUIRED TO BE SEE N ONLY IN RESPECT OF THE EIGHT SPECIFIC DEEMED SITUATIONS OR CIRCUMSTANCES I.T.A. NO. 463/HYD/2010 C.O. NO. 20/HYD/2010 M/S. ROCK CHURCH MINISTRIES ======================= 4 MENTIONED IN SECTION 13(2)(A) TO (H). THE ASSESSIN G OFFICER OBSERVED THAT SECTION 13(2) DOES NOT LEAVE OUT THE GENERALITY OF THE PROVISIONS AND IF THE INCOME OF THE TRUST IS DI VERTED TO THE TRUSTEES TO THE USE OR BENEFIT OF ANY OF THE INTERE STED PERSONS THE CLAIM OF THE TRUST FOR EXEMPTION U/S. 11 SHALL BE FORFEITED AS PER THE PROVISIONS OF SECTION 13(1)(C) OF THE ACT. THE ASSESSING OFFICER FURTHER OBSERVED THAT PAYING RENT TO THE HO USE OF PRESIDENT WAS NOT AT ALL COVERED BY ANY OF THE EIGH T DEEMED SITUATIONS U/S. 13(2) OF THE ACT. THE ASSESSING OF FICER FURTHER OBSERVED THAT THE CONCEPT OF BENEFIT REFERRED IN SE CTION 13(1)(C) NEED NOT HAVE ANY MONETARY IMPLICATIONS ONCE THE D IRECT OR INDIRECT BENEFIT TO THE SPECIFIED PERSONS IS ESTABL ISHED. HE ALSO RELIED ON THE DECISION OF KERALA HIGH COURT IN AGAP PA CHILD CENTRE VS. CIT (226 ITR 211) WHERE EXEMPTION WAS DE NIED FOR PURCHASE OF A REFRIGERATOR THAT WAS KEPT IN THE HOU SE OF MANAGING TRUSTEE AND WAS HELD AS USED BY AN INTERES TED PERSON. THE ASSESSING OFFICER ALSO RELIED ON THE D ECISION OF ITAT IN SOCIETY FOR INTEGRATED DEVELOPMENT IN URBAN AND RURAL AREAS (SIDDUR) VS. DCIT (90 ITD 493) AND THE DECISI ON OF JURISDICTIONAL HIGH COURT IN AWARE (263 ITR 43). T HE ASSESSING OFFICER FELT THAT THE PAYMENT OF RENT OF RS. 1.14 LAKHS CONSTITUTED BENEFIT TO THE INTERESTED PERSON. HE O BSERVED THAT THE BOARD CIRCULAR AS REFERRED BY THE ASSESSEE IS N OT RELEVANT WHILE CONSIDERING THE STRICT APPLICATIONS OF FISCAL PROVISIONS I.T.A. NO. 463/HYD/2010 C.O. NO. 20/HYD/2010 M/S. ROCK CHURCH MINISTRIES ======================= 5 CONTAINED IN THE TAX STATUTES. ACCORDINGLY THE CL AIM OF THE ASSESSEE FOR EXEMPTION U/S. 11 OF THE ACT WAS DENIE D. 7. BEFORE THE CIT(A) THE ASSESSEE REITERATED THE SA ME ARGUMENTS AS ARGUED BEFORE THE ASSESSING OFFICER. THE CIT(A) AFTER CONSIDERING THE ARGUMENTS OF THE ASSESSEE HE FORWARDED THE SUBMISSIONS OF THE ASSESSEE TO THE ASSESSING OF FICER VIDE LETTER DATED 20.11.2009 ALONG WITH THE CERTIFICATE REGARDING FAIR RENT VALUE (FRV) OF THE PROPERTY. THE ASSESSING O FFICER VIDE HIS REPORT DATED 10.12.2009 SUBMITTED THAT AS PER T HE MUNICIPAL RECORDS THE OWNER OF THE PROPERTY WAS JYOTHY K.P.R. AND IN THE CERTIFICATE ISSUED BY THE VALUER IT WAS MENTIONED A S MRS. RACHEL J. KOMMANAPALLY. THE MUNICIPAL RECORDS STATED THAT THE FRV OF THE PROPERTY IS RS. 9 500 PER MONTH. THE ASSESSING OFFICER ALSO ENCLOSED A COPY OF THE COMMUNICATION RECEIVED FROM DY. COMMISSIONER OF GHMC CIRCLE 7 HYDERABAD DATED 10. 12.2009 IN THIS REGARD AND OBSERVED THAT THE PLEA OF THE AS SESSEE THAT THE RENT OF THE PROPERTY IS NOMINAL AS CONTENDED B Y THE ASSESSEE IS BASELESS. THE CIT(A) PROVIDED THE RE MAND REPORT SUBMITTED BY THE ASSESSING OFFICER TO THE AS SESSEE. THE ASSESSEE SUBMITTED THAT THE NAME JYOTHI KPR IS TH E ABBREVIATED FORM OF RACHEL J. KOMMANPALLY AND TH EREFORE BOTH THE NAMES REFER TO THE SAME PERSON. IT WAS AL SO SUBMITTED BY THE ASSESSEE THAT THE MUNICIPAL RECORD IS BASED ON AN OLD SELF ASSESSMENT MADE FOR PAYMENT OF MUNICIPAL TAXES WHICH SCHEME CAME INTO EFFECT A DECADE AGO AND THE TRUST IS NOT I.T.A. NO. 463/HYD/2010 C.O. NO. 20/HYD/2010 M/S. ROCK CHURCH MINISTRIES ======================= 6 PAYING ANYTHING MORE THAN THE REDUCED AMOUNT WHICH IS FAR LESS THAN THE MARKET RENT AS EVIDENCED BY THE CERTIFICAT E OF THE VALUER. 8. THE CIT(A) OBSERVED THAT THE ASSESSING OFFICER H AS NOT BROUGHT ANY EVIDENCE TO SHOW THE CORRECT RENTAL VAL UE AS ON DATE OR TO REFUTE THE VALUE AS SHOWN BY THE GOVERNM ENT VALUER. THE ARGUMENT OF THE ASSESSEE THAT THE RENT COLLECTE D IS VERY NOMINAL CANNOT BE DISPUTED EVEN AS PER THE INFORMAT ION OBTAINED FROM THE MUNICIPAL AUTHORITIES AND ANYTHIN G OVER AND ABOVE THE ADEQUATE CONSIDERATION/MARKET RENT/STANDA RD RENT WAS PASSED TO THE SPECIFIED PERSON IN THE GARB OF A COMMERCIAL TRANSACTION OF TAKING PROPERTY ON RENT FROM THE PRE SIDENT IS NOT ESTABLISHED. THE CIT(A) OBSERVED THAT IN VIEW OF T HE DECISION OF THE MADRAS HIGH COURT IN THE CASE OF CIT VS. 21 ST SOCIETY OF IMMACULATE CONCEPTION (241 ITR 193) SUCH SACRIFICE CANNOT BE HELD AGAINST THE PRESIDENT WHO IN ADDITION TO THE SUBSTANTIAL DONATION MADE BY HER HUSBAND THE PRESIDENT HAD CHA RGED ONLY REASONABLE RENT AND EVEN LESSER THAN THE MARKET REN T FOR LETTING OUT HER PROPERTY. HE OBSERVED THAT UNDER THE GIVEN CIRCUMSTANCES THE PAYMENT OF RS. 1 14 000 AS RENT TO THE PRESIDENT OF SOCIETY WHICH WAS NOT FOUND TO BE EXCE SS OF THE STANDARD/MARKET RENT FOR AN IDENTICAL PROPERTY CAN NOT BE CONSIDERED AS A BENEFIT TO THE INTERESTED PERSON TH AT WOULD MAKE THE ASSESSEE INELIGIBLE FOR CLAIMING EXEMPTION U/S. 11 OF THE ACT. ACCORDINGLY THE CIT(A) DIRECTED THE ASSE SSING OFFICER I.T.A. NO. 463/HYD/2010 C.O. NO. 20/HYD/2010 M/S. ROCK CHURCH MINISTRIES ======================= 7 TO GRANT EXEMPTION U/S. 11 OF THE ACT AND RECOMPUTE D THE TOTAL INCOME OF THE ASSESSEE ACCORDINGLY. 9. THE LEARNED DR RELIED ON THE FOLLOWING DECISIONS : I. RAM BHAWAN DHARAMSHALA VS. STATE OF RAJASTHAN 258 ITR 725 II. CIT VS. NAGARATHU VAISIYARGAL SANGAL 246 ITR 165 III. AGAPPA CHILD CENTRE VS. CIT 226 ITR 211 10. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE FOLLOWING DECISIONS: I. CONSOLIDATED ORDER OF ITAT HYDERABAD BENCHES IN THE CASE OF OASIS EDUCATIONAL SOCIETY IN I.T.A. NOS. 258 TO 261/HYD/2006 ITA NO. 284/HYD/07 AND ITA NO. 1261/HYD/2008 FOR DIFFERENT ASSESSMENT YEARS ORDER DATED 5 TH MARCH 2010. II. THE ORDER OF ANDHRA PRADESH HIGH COURT IN THE CASE OF M/S. NEW NOBLE EDUCATIONAL SOCIETY HYDERABAD IN W.P. NOS. 21248 21252 21257 ETC. ORDER DATED 11.11.2010 (COPY ENCLOSED). 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND ALSO PERUSED THE MATERIAL ON RECORD. THE PURPO SE OF SECTION 13(1)(C) IS TO DEPRIVE A RELIGIOUS OR CHARI TABLE TRUST FROM EXEMPTION IF IT IS FOUND THAT ITS INCOME IS USED OR APPLIED DIRECTLY OR INDIRECTLY FOR THE BENEFIT OF THE SPECIFIED PER SONS. SECTION 13(1)(C) CARVES OUT A GENERAL EXCEPTION WHEREIN THE PROVISIONS OF SECTIONS 11 AND 12 WILL NOT OPERATE ON ACCOUNT O F USER OR APPLICATION OF ANY INCOME OF THE TRUST FOR ANY DIRE CT OR INDIRECT BENEFIT OF THE ANY SPECIFIED PERSONS. IT IS AN UND ISPUTED FACT THAT THE RENT PAID OF RS. 9 500 IS NOT EXCESSIVE EVEN AS PER THE OLD I.T.A. NO. 463/HYD/2010 C.O. NO. 20/HYD/2010 M/S. ROCK CHURCH MINISTRIES ======================= 8 PROVISIONS OF MUNICIPAL. THE ASSESSEE PAID THE REN T AS PER THE OLD MUNICIPAL TAXES. THE PRESENT RENTAL VALUE WOUL D BE MUCH MORE THAN THE RENT PAID BY THE ASSESSEE FOR THE PRO PERTY HAVING A BUILDING OF 4000 SQ. FT. ON A LAND ADMEASURING 15 000 SQ. FT. THAT TOO IN A PRIME LOCALITY IN THE CITY OF HYDERAB AD. THE MARKET RENT I.E. RS. 80 000 PER MONTH AS ESTIMATED BY THE GOVERNMENT VALUER IS MUCH MORE TO THE RENT PAID BY THE ASSESSE E. THE ASSESSING OFFICER COULD NOT ESTABLISH THAT THE RENT PAID BY THE ASSESSEE IS EXCESSIVE AND THE RENTAL VALUE ESTIMATE D BY THE GOVERNMENT VALUER IS INCORRECT. THE CONTENTION OF THE REVENUE THAT THERE IS VARIATION IN THE NAME IN THE MUNICIPA L RECORDS AND I.T. RECORDS IS ALSO BASELESS AS THE NAME IN THE MU NICIPAL RECORDS IS IN ABBREVIATED FORM. 12. WE HAVE ALSO GONE THROUGH THE ORDER OF THIS TRI BUNAL IN THE CASE OF OASIS EDUCATIONAL SOCIETY (SUPRA) WHERE IN A SIMILAR ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE. IN TH IS CASE THE ASSESSEE WAS AN EDUCATIONAL INSTITUTION ENTITLED FO R EXEMPTION U/S. 10(23C)(IIIAD) OF THE I.T. ACT 1961. THE ASS ESSING OFFICER DENIED EXEMPTION ON THE GROUND THAT THE LAND OF THE SCHOOL BUILDING WAS NOT OWNED BY THE ASSESSEE SOCIETY AND THE PRINCIPAL PAID WAS PAID A SALARY OF RS. 10 000 PER MONTH AND THUS HE WAS GIVEN PECUNIARY BENEFIT CONTRARY TO THE PROVISIONS OF SECTION 13 OF THE ACT. THE TRIBUNAL HELD THAT CHARG ING OF A SMALL AMOUNT RANGING FROM RS. 1 000 TO RS. 2 500 COULD NO T BE TERMED AS CAPITATION FEE. THE TRIBUNAL DISTINGUISHED THE DECISION OF THIS I.T.A. NO. 463/HYD/2010 C.O. NO. 20/HYD/2010 M/S. ROCK CHURCH MINISTRIES ======================= 9 TRIBUNAL IN THE CASE OF VASAVI ACADEMY OF EDUCATION IN ITA NO. 1794/HYD/2008 DATED 4.2.2010 HYDERABAD WHICH WAS R ELIED ON THE LEARNED DR AND ALLOWED THE CASE OF THE ASSESSE E. 13. THE CIT(A) HAS PASSED A DETAILED AND SPEAKING O RDER ON THIS ISSUE. IN THE ABSENCE OF ANY EVIDENCE IN SUPP ORT OF THE CONTENTION OF THE ASSESSING OFFICER WE DO NOT FI ND ANY INFIRMITY IN THE ORDER THE CIT(A) AND THE SAME IS C ONFIRMED. IN VIEW OF THE DETAILED ORDER OF THE CIT(A) AND THE TR IBUNAL ORDER IN THE CASE OF VASAVI ACADEMY (SUPRA) THE GROUNDS RAI SED BY THE REVENUE DO NOT FIND ANY MERIT. ACCORDINGLY THE GRO UNDS RAISED BY THE REVENUE ARE DISMISSED. 14. NOW COMING TO THE CO FILED BY THE ASSESSEE. TH E ASSESSEE RAISED THE GROUNDS OF CO AGAINST THE APPEA L FILED BY THE REVENUE ON THE SAME ISSUE. SINCE WE UPHOLD THE ORDER OF THE CIT(A) THAT FAVOURS ASSESSEES PLEA THE GROUN DS RAISED BY THE ASSESSEE BECOME INFRUCTUOUS. 15. IN THE RESULT THE APPEAL OF THE REVENUE AND TH E CO OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH FEBRUARY 2011. SD/ - (G.C. GUPTA) VICE PRESIDENT SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD DATED 25 TH FEBRUARY 2011 TPRAO I.T.A. NO. 463/HYD/2010 C.O. NO. 20/HYD/2010 M/S. ROCK CHURCH MINISTRIES ======================= 10 COPY FORWARDED TO: 1. DY. DIRECTOR OF INCOME-TAX (EXEMPTIONS)-2 3 RD FLOOR ROOM NO. 307A BASHEERBAGH HYDERABAD. 2. M/S. ROCK CHURCH MINISTRIES 10-5-7/16 1 ST LANCER ROAD MASAB TANK HYDERABAD. 3. THE CIT(A)-IV HYDERABAD. 4 THE DIT(E) HYDERABAD 5. THE DR A BENCH ITAT HYDERABAD