Related-party lease test: trustees' de minimis shareholding precludes denial of exemption and notional rent substitution.

The note clarifies that where trustees' collective shareholding in a lessee falls below the statutory threshold for related-party attribution, the related-party prohibitions do not apply and an assessing officer cannot replace agreed rent with a notional rent based on a valuation report; this outcome follows binding precedent and absence of distinguishing material. It further prescribes that on a transition to accrual accounting, interest income that accrued in an earlier year but was taxed on receipt in the current year must be excluded from accrual in the assessment year to avoid double taxation, with verification of computations directed.

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Issues: (i) Whether the trust is liable to denial of exemption under section 11 of the Income-tax Act, 1961 by reason of alleged breach of section 13(1)(c) read with section 13(2)(a) & (b) on account of leasing its hospital property to a concern claimed to be related under section 13(3), and whether the Assessing Officer was justified in substituting actual rent by notional rent based on a District Valuation Officer report; (ii) Whether interest income of Rs. 29,33,333/- received in the relevant year but accrued in an earlier year is liable to be taxed again in the assessment year and, if so, whether adjustment is required to avoid double taxation.

Issue (i): Whether section 13(1)(c) and section 13(2)(a) & (b) are attracted in view of the shareholding and relationship facts and whether notional rent substitution by the Assessing Officer was permissible.

Analysis: The tribunal examined the factual record on shareholding and trustee interests and found, on the material before it, that the trustees collectively held an insignificant number of shares relative to the total share capital, falling below the statutory threshold for attracting section 13(3). The tribunal also noted that a Coordinate Bench in earlier assessment years on identical facts had concluded that the concern was not a related party within section 13(3) and that, as a consequence, substitution of actual rent by a notional rent based on a valuation report did not arise. No fresh material was produced by the Revenue to distinguish the present years from the binding earlier decisions.

Conclusion: Section 13(1)(c) and section 13(2)(a) & (b) are not attracted; the Assessing Officer was not justified in substituting actual rent by notional rent. Conclusion in favour of the assessee on Issue (i).

Issue (ii): Whether interest income already accrued in an earlier year and received/declared on receipt basis in the current year should be excluded to avoid double taxation when the method of accounting is adjusted to accrual basis.

Analysis: A Coordinate Bench had held that interest is taxable on accrual basis but directed that, in the year of transition, interest of the earlier year which is received and taxed on receipt basis in the current year must be excluded from the accrual for the current year to avoid double taxation. The assessee demonstrated that the specified interest of Rs. 29,33,333/- accrued in the earlier year and was offered to tax on receipt basis in the current year; the Revenue produced no material to rebut this. The tribunal applied the earlier binding direction and required the Assessing Officer to verify computation and grant appropriate relief.

Conclusion: The interest income of Rs. 29,33,333/- pertaining to the earlier year must be excluded from taxable income of the assessment year to avoid double taxation. Conclusion in favour of the assessee on Issue (ii).

Final Conclusion: The tribunal upholds the appellate authority's findings and, following binding Coordinate Bench precedent and on the facts before it, holds that the provisions of section 13 are not attracted, notional rent substitution is unsustainable, and the specified interest income must be adjusted to prevent double taxation; the Revenue's appeals are dismissed.

Ratio Decidendi: Where trustees' collective interest in a lessee falls below the statutory threshold in section 13(3) of the Income-tax Act, 1961, the provisions of section 13 are not attracted and the Assessing Officer cannot substitute actual rent by a notional rent based on a valuation report; where accounting method changes to accrual basis pursuant to binding precedent, interest previously taxed on receipt basis must be excluded from accrual to avoid double taxation.

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