Information From Property Dealers Or Websites Not Cogent Evidence On Adequacy Of Rent For Invoking Section 13(2)(B) Of Income Tax Act: Delhi High Court

The Assessee Foundation received voluntary and corpus donations from Hamdard Dawakhana (Wakf) in a particular assessment year. Also, the Assessee had let out its property to the Wakf under a Lease Agreement. The Assessing Officer (AO), relying upon enquiry made from estate agents and information gathered from websites, held that the property was let out by the Assessee to the Wakf at a much lower rate than the market rate and therefore invoked the provisions of section 13(2)(b) of the Act, adding the donations to the taxable income of the Assessee. The appeal preferred by the Assessee against the order was rejected by the Commissioner of Income Tax (Appeals) (CIT (A)). The ITAT allowed the appeal in favour of the Assessee, directing deletion of additions made by the AO. The revenue authorities filed an appeal before the High Court against the impugned order.

The counsel for the Revenue Department submitted that in terms of Section 13(1)(c)(ii) of the Act, the AO was required to examine whether any part of the income or any property of the charitable trust is used for the benefit of a specified person referred to in Section 13(3)(b) of the Act. He contended that having found so, the AO was entitled to make the additions in the Return of Income of the Assessee. The Assessee submitted that it had been letting out its property to the Wakf under a Lease Agreement since 1981, which had been accepted by the Revenue in the previous assessment years without invoking section 13(2)(b) of the Act. The Assessee contended that the ITAT had rightly recorded that the rent received by the Assessee from the Wakf is more than the standard rent under the Delhi Rent Control Act, 1958 and therefore the AO's determination of rent as inadequate was wrong.

Section 11 of the Act provides that income from property held under a trust for charitable or religious purposes shall not be included in the total income, to the extent to which it is applied or set apart for application to such purposes in India. Section 12 provides that any voluntary contributions received by a charitable or religious trust or institution shall be deemed to be income derived from property held under the trust. However, section 13(1) provides that if any part of such income or property is used for the benefit of any person referred to section 13(3), the exemption under section 11 will not apply. "Person" referred to in section 13(3) includes any person who has made a substantial contribution to the trust or institution, exceeding fifty thousand rupees in the relevant previous year. Additionally, section 13(2)(b) provides that the income or property shall be deemed to be used for the benefit of the person if it is made available for any period during the previous year without charging adequate rent or other compensation.

The court observed that the ITAT, while allowing the appeal in favour Assessee, had found that the material collected by the AO from the Internet as well as the estate agents cannot be termed as a collaborative piece of evidence and that the law requires the revenue authorities to bring on record cogent evidence to justify the invocation of section 13 of the Act. Holding that the AO has made no independent inquiry, the court upheld the findings of ITAT that there is no justification for the addition made by the AO by invoking section 13(2)(b) and section 13(3) of the Act.

"In the present case, the Assessing Officer, apart from relying upon some opinion of rent from property broker firms and websites, does not appear to have made any independent inquiry on the adequacy of the rent being charged by the respondent/assessee from Hamdard Dawakhana (Wakf). It is not shown that the Assessing Officer made any independent inquiry on the age and condition of the building of the assessee situated at Asaf Ali Road, New Delhi."

The court, ruling that the market rate was not the sole criteria for determining adequacy of rent, held the burden of showing that the rent charged by the Assesse was not adequate is on the revenue authorities.

"Under Section 13(2)(b), the burden of showing that the rent charged by the respondent/assessee was not "adequate" is on the revenue. Unless the price/rent was such as to shock the conscience of the Court and to hold that it cannot be the reasonable consideration at all, it would not be possible to hold that the transaction is otherwise bereft of adequate consideration. It is necessary for the Assessing Officer to show that the property has been made available for the use of any person referred to in Sub-section (3) of Section 13 otherwise than for adequate consideration. In order to determine the same, the context of the facts of the particular case needs to be appreciated. For determining "Adequate" consideration/rent, however, market rent or rate is not the sole yardstick; other circumstances of the case also need to be considered."

Upholding the order of ITAT, the court dismissed the appeal of revenue authorities, holding that in the absence of any independent inquiry by the AO, the invocation of section 13(2)(b) of the Act was clearly flawed.

Case Title: Commissioner Of Income Tax (Exemptions) Versus Hamdard National Foundation (India)

Dated: 16.02.2022 (Delhi High Court)

Citation: 2022 LiveLaw (Del) 149

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