IT: Where assessee-trust having taken land on lease from its trustees constructed a building thereon, in view of fact that in registered lease deed, there was no stipulation that construction made on leased land would become property of lessor after expiry of term of period of lease and it was always open to assessee to remove constructions, no benefit would directly enure to trustees and, therefore, on aforesaid ground exemption of income could not be denied to assessee-trust by invoking provisions of section 13(1)
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[2013] 38 taxmann.com 377 (Allahabad)
HIGH COURT OF ALLAHABAD
Commissioner of Income-tax
v.
Shri Nathji Education & Cultural Trust*
R.K. AGRAWAL AND RAM SURAT RAM (MAURYA), JJ.
IT APPEAL NO. 503 OF 2009†
JANUARY 15, 2013
Section 13 of the Income-tax Act, 1961 - Charitable or religious trust - Denial of exemption [Leasehold property] - Assessee-trust was running an educational institution - It took land on lease which belonged to two of its trustees - A registered lease deed was executed for a period of 29 years on monthly rent of Rs. 1000 - Assessing Officer noted that assessee had incurred huge expenditure on construction of a building on said leasehold property - According to Assessing Officer, after expiry of period of lease, assessee might choose not to remove constructions which would directly benefit lessors who were two trustees - He, thus, did not grant exemption to assessee-trust and brought to tax entire income - Tribunal opined that expenditure made on construction of building was to be treated as application of income of trust and, thus, section 13(1) did not apply - Whether since in registered lease deed, there was no stipulation that construction made on leased land would become property of lessor after expiry of term of period of lease and it was always open to assessee to remove constructions, no benefit would directly enure to trustees - Held, yes - Whether, therefore, impugned order of Tribunal was to be upheld - Held, yes [Para 5] [In favour of assessee]
A.N. Mahajan for the Petitioner. Niraj Tiwari for the Respondent.
ORDER
1. The present appeal has been filed under section 260A of the Income-tax Act, 1961 hereinafter referred to as the Act) against the order dated 08.05.2009 passed by the Income-tax Appellate Tribunal, Lucknow. The Commissioner of Income-tax (Appeals), Kanpur had proposed the following questions said to be substantial questions of law arising out of the order of the Income-tax Appellate Tribunal.
| "1. | Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that since no part of the income or property of the trust was applied directly or indirectly for the benefit of any persons referred to in section 13(3) of the Act, as spelt out in section 13(1) (c) (ii) during the year under consideration, therefore, the benefit of section 11 could not be denied to the trust without appreciating that the assessee trust has made huge investment in construction of the building on the lease hold land owned by the trustees in their individual capacities and after the expiry of lease period of 29 years, the rights of usage over the land were to be reverted back to the trustees in their individual capacities along with the building constructed thereupon to the trustees who were the beneficial owners of the trust property and view of this, the AO has rightly held that the funds of the trust have been applied directly or indirectly for the benefit of any persons referred to in section 13(3) of the Act in violation of provisions of section 13(1)(c)(ii) of the Act? | |
| 2. | Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in not appreciating that the amended deed dated 02-07-2008, which was entered into by the trustees in their individual names and on behalf of the trust as its trustee, is a collusive document because no power had been given to the trust to transfer its super structure by way of sale, mortgage or otherwise and therefore, no such deed could be registered simply because of the fact that the trust is not owner of the property consisting of land and building? | |
| 3. | Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in not appreciating that the trust created was not irrevocable in terms of clause 2 of the Registered Trust deed dated 04-02-2003 and also section 14 of the Indian Trust Act mandatorily require that the trustees would not set up title adverse to the beneficiary whereas in the case of the assessee, declared to be a public charitable trust, the public is the beneficiary as declared in clause 3(i) of the Registered Trust deed, therefore, entering into the registered lease deed dated 14-06-2005 by the assessee with their trustees in their individual capacities as land owners amounts to setting up off adverse title to the trust property, the texty of the relevant section read as under:— | |
| '14. Trustee not to set up title adverse to beneficiary:— the trustee must not for himself or another set up or aid any title to the trust property adverse to the interest of the beneficiary.' | ||
| 4. | Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in not appreciating that while entering into the registered lease deed dated 14-06-2005 with its trustees in their individual capacities as land owners u/s 17(d) of the Registration Act, 1908 set up an agreement enforceable u/s 23 of the India Contract Act, 1872, the declared purpose of which was to set up title to the trust property in favour of the trustees which is adverse to the interests of the beneficiary, general public, and since the assessee in violation of section 14 of the Indian Trust Act have set up adverse title in their favour, the action of the AO taxing entire excess of income over expenditure under the head income from business or profession denying the benefit of deduction u/s 11 of the Act, corresponding to the year of setting up of the adverse title is lawful and valid in the eye of law?" |
2. Briefly stated, the facts giving rise to the present appeal are as follows:
The respondent-assessee is a trust. It runs an educational institution from Class LKG to Class X affiliated with CBSE Board. It had taken on lease, land which belongs to two of its trustees. Initially, the lease deed was executed for a period of 11 months which under law was not required to be registered. This continued for three continuous term of 11 months. Subsequently, a registered lease deed was executed for a period of 29 years from 14-06-2005 to 13-06-2034, the monthly rent remaining the same i.e. Rs. 1000/- per month. The Assessing Officer relying upon the terms of the unregistered lease deed drew an inference that as the assessee herein had incurred huge investment on construction of building on the said leasehold property amounting to Rs. 4.08 crores, after expiry of the lease period, the trust would have to remove the constructions incurring huge expenses and loss or in the alternative may choose not to remove the constructions which may directly benefit the lessor who are two trustees and, therefore, did not grant exemption and brought to tax the entire income. Feeling aggrieved, the assessee preferred an appeal before the Income-tax Appellate Tribunal, Kanpur, who vide order dated 17-11-2008 had allowed the appeal and directed that the expenditure made on construction of building be treated as application of income of trust and section 13(1) of the Act does not apply.
3. We have heard learned counsel for the parties.
4. Learned counsel for the appellant submitted that the registered lease deed was only for a period of 29 years. After the term would have expired in the year 2034, the lessee i.e. the present assessee would not be in a position to remove the construction which would enure to the benefit of the trustees who are lessors. Therefore, the provision of section 13 has rightly been invoked. The submission is wholly misconceived.
5. In the registered lease deed, there is no stipulation that the construction made on the lease land would become the property of the lessor after the expiry of the term of the period of lease. After the expiry of the leased period, it is always open to the assessee to remove the constructions and, therefore, no benefit would directly enure to the benefit of the trustees.
6. We do not find any legal infirmity in the order passed by the Income-tax Appellate Tribunal, Kanpur. The appeal fails and is dismissed.
SUNILRegards
Prarthana Jalan
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