AO Can’t Deny Sec. 11 Exemption if Diff. Between Rent Received From Specified Persons & Rental Value is Less Than 10%

Case Details: DCIT vs. Indian Grameen Services - [2024] 163 taxmann.com 409 (Delhi - Trib.)

Judiciary and Counsel Details

• Madhumita Roy, Judicial Member & Naveen Chandra, Accountant Member
• Sandeep Kumar Mishra, Sr. DR for the Appellant.
• Arvind Kumar, Adv. for the Respondent.

Facts of the Case

Assessee, a company registered under Section 25 of the Companies Act, 1956, filed its return of income for the relevant assessment year. During the assessment proceedings, the Assessing Officer (AO) found that the assessee rented out its premises to a related person, i.e., a specified person, under section 13(3) of the Income Tax Act. It was noticed that the rent charged by the assessee was substantially lower than the prevailing rental market rates.

AO contended that the assessee violated the provisions of Section 13(2)(b) and denied the exemption under Sections 11 and 12 to the assessee.

On appeal, CIT(A) upheld the order of AO. Aggrieved by the order, the assessee preferred an appeal to the Delhi Tribunal.

ITAT Held

The Tribunal, relying on the judgment of the Hon’ble Delhi High Court in the case of Hamdard National Foundation [India] [2022] 135 taxmann.com 348 (Delhi), held that the AO failed to bring on record any cogent evidence to show that the rent received by the assessee was inadequate. It was held that the material collected from the internet and the estate agents could not be termed a corroborative piece of evidence. It was further held that the rent received by the assessee exceeds the valuation adopted by the Municipal Corporation of Delhi to levy house tax.

The AO must show that the property has been made available for the use of any person referred to in Section 13 other than for adequate consideration. In order to determine the same, the context of the facts of the particular case needs to be appreciated. For determining “Adequate” consideration/rent, however, market rent or rate is not the sole yardstick; other circumstances of the case also need to be considered.

In the instant case, the AO had assumed that the fair market value is the sole yardstick for the determination of ‘adequate rent’. However, the difference between the rental value adopted by the assessee and the rental value adopted by the AO was less than 10%. Therefore, the same cannot be termed as inadequate. Accordingly, the assessee’s appeal was allowed.

List of Cases Reviewed

• Hamdard National Foundation [India] in ITA 142/2021, dated 16-2-2022 followed.

List of Cases Referred to

• SHREE RAM VAIKUNTHA TRUST v. ITO [1986] 15 ITD 1 (Bombay) (para 10).