Related-party tenancy and inadequate rent: exemption under section 11 could not be denied absent proof that the agreed rent was unrealistically low.

A trust's exemption under section 11 was examined in the context of section 13(3)(b) where the tenant company fell within the related-party threshold. The decisive question was whether the rent for property let long before the relevant contribution was inadequate. Rent control restrictions, municipal valuation, fair-rent principles, agreed rental value, and the tenant's responsibility for repairs and municipal tax supported adequacy. Material suggesting a higher rent was not confronted to the assessee and could not be relied on against it. On the facts, the rent was not shown to be sham, collusive, or so low as to amount to use of trust property for the contributor's benefit, so revision under section 263 and denial of exemption were not justified.

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Issues: Whether the Commissioner was justified in revising the assessment under section 263 by holding that the assessee-trust was not entitled to exemption under section 11 on the ground that the property let to the tea company had been made available for inadequate rent to a person covered by section 13(3)(b).

Analysis: The tea company fell within section 13(3)(b) because its contribution exceeded the statutory threshold, but the decisive question was whether the rent charged for the property was inadequate. The property had been let long before the contribution was made, the tenancy was subject to rent control legislation, and the rent could not be enhanced thereafter. Municipal valuation, fair-rent principles under the rent control law, the agreed rental value, and the responsibility of the tenant for repairs and municipal tax were relevant indicators of adequacy. The material relied upon by the revenue to suggest a higher rental rate was not shown to the assessee and could not be used against it. On the facts, the agreed rent was not shown to be sham, collusive, or so low as to justify treating the trust property as having been used for the benefit of the contributor.

Conclusion: The Commissioner was not justified in invoking section 263 or in directing denial of exemption under section 11, because the rent charged could not be held to be inadequate for the purposes of section 13(3)(b).

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