2018 (10) TMI 1919 - AT - Income Tax

Tribunal clarifies assessment order validity, emphasizes taxation on excess income in contravention cases.

The Tribunal dismissed the assessee's contentions regarding the validity of the assessment order under section 143(3) versus section 153C. It remitted ... Excess/unreasonable rent and arm's length test - application of Section 13(1)(c) - disqualification of charitable status for benefit to specified persons - disallowance under Section 40A(2)(b) for non arm's length payments - remedial quantification and judicial remand for determination of fair rent - investment v. application of income - Section 13(1)(d) (shares in public companies and co operative banks) - limited denial of exemption - denial restricted to relatable income/dividend, no wholesale withdrawal of exemption - prior period expenditure - allowability where liability crystallises and remand for verification - corpus donations and taxability where exemption under Section 11 is disallowed - related party advances and Section 13(1)(c) - tribunal intervention upheld where factual parity with prior coordinate bench decisionsExcess/unreasonable rent and arm's length test - application of Section 13(1)(c) - disqualification of charitable status for benefit to specified persons - disallowance under Section 40A(2)(b) for non arm's length payments - remedial quantification and judicial remand for determination of fair rent - Whether rent paid to properties owned by Shri M.N. Navale (individual or Bigger HUF) gave rise to excess/non arm's length payment attracting section 13(1)(c) and section 40A(2)(b), and if so, the extent of tax consequence. - HELD THAT: - The Tribunal held that (a) where properties were established to belong to M.N. Navale (Bigger HUF) following prior ITAT/Civil Court records, the Bigger HUF is not a person under section 13(3) and rent paid for those specified properties (Flats Nos.7,8 & 9, Geeta Building and Warje farm house) cannot attract section 13(1)(c); those additions were therefore deleted. (b) For other properties (not covered by the Bigger HUF finding), the Tribunal accepted that where owner and tenant are closely related and transactions are not at arm's length, the Assessing Officer may estimate fair rent (relying on precedents applying a reasonable return on property value). However, the Tribunal found the CIT(A)'s adoption of a fixed percentage for the Karve Road property required fresh adjudication in light of tenant centric considerations and additional evidence filed by the assessee. Accordingly the Tribunal remitted the question of fair rent for the Karve Road property to the CIT(A) to decide afresh on facts and evidence; only the excess fair rent, if any, is to be taxed (at marginal rate) and there cannot be wholesale denial of exemption merely because some part of income benefited a specified person. [Paras 10, 11, 87]Issue partly decided: additions in respect of Flats Nos.7,8 & 9 and Warje farm house deleted; applicability of section 13(1)(c) upheld for other properties but the determination of fair rent for the Karve Road property is remitted to CIT(A) for fresh decision; only excess fair rent, if any, to be taxed.Investment v. application of income - Section 13(1)(d) (shares in public companies) - limited denial of exemption - denial restricted to relatable income/dividend, no wholesale withdrawal of exemption - Whether acquisition of small number of shares in public limited companies and co operative banks by the trust attracts section 13(1)(d) and whether denial of exemption must be wholesale. - HELD THAT: - The Tribunal accepted the coordinate bench approach followed in the assessee's earlier years: (a) minimal shareholdings (small number of shares, nominal outlay) used for institutional objects (e.g., access to audited accounts, or as precondition to obtain loans) cannot be treated as an investment invoking section 13(1)(d) in the circumstances; shares taken to obtain bank facilities (co operative bank shares) have been held not to attract section 13(1)(d). (b) Even where a contravention is found, denial of exemption must be confined to relatable income; there cannot be wholesale denial of exemption for the entire income of the trust. The Tribunal directed that the matter be referred back for computation/identification of dividend income or relatable income (including value of bonus shares) and such income alone be brought to tax. [Paras 14, 15]Partly allowed: section 13(1)(d) not attracted to co operative bank shares; for public limited companies, dividend/relatable income to be taxed after verification - wholesale denial of exemption rejected.Prior period expenditure - allowability where liability crystallises and remand for verification - Whether the expenditure treated as prior period expense is allowable in the year under appeal where the liability crystallised during the year. - HELD THAT: - Relying on the coordinate bench precedent and relevant High Court/Tribunal authorities, the Tribunal found the issue required fresh examination by the Assessing Officer. The Tribunal observed that where liabilities are incurred as per the method of accounting such amounts may be allowable and, in prior parallel proceedings, the matter had been remitted for verification. Given identical facts, the Tribunal remitted the claim to the Assessing Officer with directions to decide the allowability after giving the assessee an opportunity of being heard. [Paras 19]Issue remitted to the Assessing Officer for fresh adjudication and verification; appeal allowed for statistical purposes.Related party advances and Section 13(1)(c) - corpus donations and taxability where exemption under Section 11 is disallowed - Whether advances/donations made to other trusts (where trustees overlap) are disallowable under section 13(1)(c) and whether corpus donations so earmarked are taxable if section 11 exemption is denied. - HELD THAT: - The Tribunal upheld the CIT(A)'s finding that advances made to certain trusts where trustees overlapped violated section 13(1)(c). It explained that corpus donations are capital receipts but, if the trust is found not entitled to exemption under section 11 (by reason of section 13), those corpus receipts do not qualify for exemption under section 11(1)(d) and therefore are includible in income. The Tribunal followed its coordinate bench precedent that where there is violation the income relatable to the violation is taxable; in the facts before it the advances/donations which breached section 13(1)(c) were brought to tax. [Paras 13, 48]Advances/donations in question held to fall foul of section 13(1)(c); corpus donations do not enjoy exemption where section 11 is disapplied and are includible in income; assessee's ground is dismissed.Write off of petty balances and Generally Accepted Accounting Policies - Whether amounts written off as petty/fictitious receivables (detected on special audit) should be added back to income or the deletion by CIT(A) upheld. - HELD THAT: - The CIT(A) deleted the addition because the Assessing Officer had not discussed the nature of the amounts in the assessment order; the assessee explained the write offs were adjustments of petty debit balances written off in accordance with accounting practice. Revenue did not persuade the Tribunal of any error in the CIT(A)'s reasoning. On that basis the Tribunal declined to interfere with the deletion. [Paras 31]Deletion of the addition in respect of amounts written off upheld; Revenue's ground dismissed.Final Conclusion: The Tribunal disposed appeals for A.Y. 2007 08, 2008 09 and 2009 10 by applying coordinate bench precedents: (i) deletions were ordered for rent paid in respect of properties shown to belong to the Bigger HUF; determination of fair rent for remaining property (Karve Road) remitted to CIT(A) for fresh decision and only any excess fair rent to be taxed; (ii) investments in co operative bank shares not hit by section 13(1)(d), and for nominal shareholdings in public companies dividend/relatable income alone to be brought to tax (remand for quantification); (iii) prior period expenditure remitted to Assessing Officer for verification; (iv) advances/donations to related trusts held in breach of section 13(1)(c) and corpus receipts are includible in income where section 11 exemption is disallowed; and (v) write off of petty balances was upheld. Overall, the assessee's appeals were partly allowed and the revenue's appeals were partly allowed in the manner indicated. Issues Involved:1. Validity of the assessment order under section 143(3) versus section 153C.2. Disallowance of rent paid and applicability of section 13(1)(c).3. Acquisition of shares and contravention of section 13(1)(d).4. Disallowance of prior period expenditure.5. Taxability of corpus donations.6. Advances to other trusts and contravention of section 13(1)(c).7. Write-off of amounts and their disallowance.Detailed Analysis:1. Validity of the Assessment Order:The assessee contended that the assessment should have been made under section 153C instead of section 143(3). The Tribunal dismissed this ground as not pressed by the assessee.2. Disallowance of Rent Paid and Applicability of Section 13(1)(c):The Assessing Officer (AO) found that rent paid by the assessee to Shri M.N. Navale was excessive and attracted the provisions of section 13(1)(c) as the benefits were derived by persons referred to in section 13(3). The CIT(A) granted partial relief by deleting the additions for certain properties but upheld the applicability of section 13(1)(c). The Tribunal remitted the issue back to the CIT(A) for verification, following the decision in the assessee's case for AY 2006-07, where it was held that only the excess rent should be taxed, not the entire income.3. Acquisition of Shares and Contravention of Section 13(1)(d):The AO held that the acquisition of shares contravened section 13(1)(d), disallowing the benefits under sections 11 and 12. The CIT(A) granted partial relief, holding that the denial of exemption should be restricted to the relatable income. The Tribunal, following its decision in AY 2006-07, remitted the issue back to the AO to determine the dividend income from these shares and bring it to tax.4. Disallowance of Prior Period Expenditure:The AO disallowed prior period expenses, which the assessee claimed had crystallized during the year. The CIT(A) upheld the AO's decision. The Tribunal, following its decision in AY 2006-07, remitted the issue back to the AO for verification, emphasizing that the expenses should be allowed if they crystallized during the year.5. Taxability of Corpus Donations:The AO added corpus donations to the income, stating that the assessee was not entitled to exemption under sections 11 and 12 due to the contravention of section 13. The CIT(A) upheld this addition. The Tribunal held that corpus donations should be taxed if there is a violation of section 13(1)(c).6. Advances to Other Trusts and Contravention of Section 13(1)(c):The AO disallowed advances made to other trusts, stating that it violated section 13(1)(c). The CIT(A) upheld this disallowance. The Tribunal, following its decision in AY 2006-07, held that such advances violate section 13(1)(c) and should be taxed.7. Write-off of Amounts and Their Disallowance:The AO disallowed the write-off of amounts based on the Special Auditor's report. The CIT(A) deleted this addition, stating that the AO did not discuss the issue on merits. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere.Conclusion:The Tribunal's detailed analysis and decisions were based on precedents set in the assessee's earlier assessment years, particularly AY 2006-07. The Tribunal remitted several issues back to the CIT(A) or AO for verification and proper adjudication, ensuring that only the excess or relatable income should be taxed in cases of contravention of sections 13(1)(c) and 13(1)(d). The appeals of the assessee and the Revenue were partly allowed or dismissed based on the specific grounds and issues raised.