Director Of Income Tax ... vs Span Foundation
2008 Latest Caselaw 1950 Del

     *            THE HIGH COURT OF DELHI AT NEW DELHI


                                       Judgment delivered on: 04.11.2008

+            ITA Nos. 767/2008 & 789/2008

%            04.11.2008

DIRECTOR OF INCOME
TAX (EXEMPTION)                                      ...   Appellant

                                 - versus -


SPAN FOUNDATION                                        ... Respondent

Advocates who appeared in this case:

For the Appellant     : Ms Prem Lata Bansal
For the Respondent    : Mr Navneet Negi

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER

1. Whether Reporters of local papers may be allowed to see the judgment ?

2. To be referred to the Reporter or not ?

3. Whether the judgment should be reported in Digest ?

BADAR DURREZ AHMED, J (ORAL)

1. These appeals are directed against the common order dated

30.11.2007 passed by the Income Tax Appellate Tribunal in respect of

assessment years 2002-2003 and 2003-2004. Common issues have

been raised in respect of both the years. The assessee is a charitable

trust. It purchased certain land. Thereafter, it constructed a building

out of borrowed funds as well as out of the corpus. The building was

rented out. According to the revenue since the building was rented out

to concerns in which some of the trustees were directors, it implied that

the income derived out of the renting out of the building was not

applied towards charitable purposes but that the renting out of the

property was for such interested persons. On behalf of the assessee it

has throughout been contended that the income derived from the

renting out of the building was used in re-paying the loans with the

ultimate object of applying the income, after the loans had been fully

repaid, towards charitable objects. It was, therefore, contended that the

application of the money received as rentals by the trust for the

purposes of repayment of the loans was also for charitable purpose.

The Assessing Officer and the Commissioner of Income Tax (Appeals)

held in favour of the revenue and denied the exemption under Section

11 and 12 of the Income Tax Act, 1961 (hereinafter referred to as the

'said Act'). Both the authorities also held that the provisions of

Section 13 (1)(c) read with Section 13 (3) of the said Act had been

violated and, therefore, the exemption could not be given to the

assessee trust.

2. The Tribunal, after considering the submissions made by the

parties, came to the conclusion that the assessee trust was entitled to the

exemption under Section 11 and 12 of the said Act. The Tribunal also

came to the conclusion that the provisions of Section 13 were not

attracted.

3. The Tribunal noted that the case of the assessee was that it

wanted to let out the building and derive rent therefrom and use the

rents for the charitable purposes set out in the trust deed. As noted

above, the assessee had borrowed funds for the purposes of

constructing the building. The rent that was derived from the said

building was utilized by the assessee trust to re-pay the borrowed

funds. It was contended on behalf of the assessee that the re-payment

of the loan, in these circumstances, has to be regarded as application of

income for charitable purposes. The Tribunal accepted this plea of the

assessee. The Tribunal noted that if the argument of the revenue was to

be accepted, then it would amount to concluding that the assessee could

not utilize the rental incomes received by it from the lease of the

property for charitable purposes. The Tribunal noted that as and when

the loans are discharged and the assessee becomes free to utilize the

rental income, it would apply the same for charitable purposes set out

in the trust deed and that it is at that juncture that the Assessing Officer

could insist that the application of the income be for the purposes

mentioned in the trust deed. The Tribunal concluded that the

repayment of the funds borrowed for construction of the building was

to be treated as application of income for charitable purposes and held

that the assessee was entitled to the benefits under Section 11 and 12 of

the said Act.

4. As regards the benefit being derived by interested persons,

the only question that was of relevance was whether the rents paid by

the so-called interested persons were adequate or not? In this regard,

the Tribunal remanded the matter to the Assessing Officer to decide the

question of adequacy in accordance with law, after affording the

assessee an opportunity of being heard. However, while doing so, the

Tribunal noted its earlier decision in the case of Rabhubir Saran

Charitable Trust v. Income Tax Officer where the view was taken that

if the rent charged by an assessee was higher than the standard rent, as

computed under the rent control legislation, then the rent charged by

the assessee should be considered as adequate. We note that the

Tribunal's decision in Rabhubir Saran Charitable Trust was the

subject matter of a reference being IT case No. 81/1989 which was

disposed of by an order dated 15.01.1990 which has been reported as

183 ITR 297 (DEL). In that decision this Court applied the principles

set out in Dewan Daulat Rai Kapoor v. NDMC: 122 ITR 700 and

concluded that the market rent could not be more than the standard

rent.

5. We are informed that the Assessing Officer has since

examined the issue of adequacy as directed by the Tribunal by virtue of

the impugned order. After examining the lease deeds of adjacent

properties immediately to the right and left of the assessee's property as

also considering the fact that the rent received by the assessee in

respect of the said building was more than the standard rent as

computed in accordance with the Delhi Rent Control Act, 1958, the

Assessing Officer came to the conclusion that the rent received by the

assessee trust was adequate. Consequently, the question of any benefit

being derived by an interested person does not arise on facts.

6. It is, therefore, clear that the Tribunal's decision in both the

appeals cannot be faulted. No substantial question of law arises for our

consideration. The appeals are dismissed.

BADAR DURREZ AHMED, J

RAJIV SHAKDHER, J November 04, 2008 SR