1. The question raised in this appeal, filed by the assessee, relates to the correctness of the order of the learned Commissioner, Delhi, under Section 263 of the Income-tax Act, 1961 ('the Act'). For the assessment year 1982-83, in question, he took the view that exemption to the assessee under Section 11 of the Act should have been denied by the ITO since it had contravened to the provisions of Section 13(2)(6)of the Act.
2. The assessee Shree Ram Vaikuntha Trust is a public charitable trust which was constituted under a deed dated 1-4-1969. It stands registered under Section 12A(a) of the Act. The ITO granted to the assessee-trust, exemption for the assessment year 1982-83 in question under Section 11 on the basis that the facts were the same as mentioned in the earlier years. Assessment was completed accordingly. On 9-9-1970, the assessee-trust received by donation an old two storeyed bungalow (tiled sheds described as servants quarters, garrage and kitchen, etc.), at Race Course Road, Coimbatore from one Peerless & Co. Ltd. (the limited company) under a deed of donation/settlement. At that time, the assessee-trust got vacant possession of this gifted bungalow. Later on 1-7-1971, the said bungalow was let out by the assessee-trust to Peria Karamalai Tea & Produce Co. Ltd., Coimbatore (the Tea Co.) at Rs. 650 per month. The said Tea Co. made a contribution of Rs. 7,000 to the assessee-trust in 1972. Thus, the learned Commissioner noticed that insofar as this contribution exceeded Rs. 5,000, the Tea Co. became, for the purposes of Section 13(3)(b) (as it stood for the assessment year in question) a person who had made a substantial contribution to the assessee-trust. The learned Commissioner was of the view that the rent of Rs. 650 per month could not be considered as adequate rent. He, therefore, came to the conclusion that insofar as the said land and building of the assessee-trust continued to be made available to the Tea Co. [which was covered under Section 13(3)(6)] during the assessment year in question without charging adequate rent or other compensation, tile property of the trust was to be deemed to have been used or applied for the benefit of the Tea Co. and so the assessee-trust could not have been allowed exemption under Section 11 for the assessment year in question. Therefore, after issuing the notice under Section 263 and after giving to the assessee an opportunity of being heard, the learned Commissioner held that the assessment order was erroneous insofar as it was prejudicial to the interests of the revenue. Accordingly, he set aside the assessment order and directed the ITO to make a fresh assessment according to law, after denying exemption under Section 11.
3. Even though in the grounds of appeal, the assessee had challenged the Commissioner's order on the initiation of the proceedings under Section 263 as well as on merits, the arguments were pressed before us only on merits. We have, therefore, to proceed on the basis that there was a valid initiation of the proceedings under Section 263.
4. Dr. Devi Pal, the learned counsel for the assessee reiterated the submissions made on behalf of the assessee before the learned Commissioner. Firstly, he pointed out that the property in question was given on rent much before the receipt of donation from the Tea Co. He pointed out that in Section 13(3)(b), the limit of Rs. 5,000 came only with effect from 1-4-1977 by the Taxation Laws (Amendment) Act, 1975 and that prior to it the only expression used was 'any person who has made a substantial contribution to the trust or institution'.
5. Secondly, Dr. Devi Pal pointed out that the value taken for the property in the deed of settlement of gift was Rs. 6,63,867 as accepted by the learned Commissioner himself. Next he pointed out that the total area (excluding the built-in area) was 71,108 sq. ft. out of which in 1976, an area of 41,966 sq. ft. was sold to three companies for Rs. 3,11,500. Thus, an area of 29,142 sq. ft. was left in 1976. He pointed out that out of this area, the area used for common roads was 3,885 sq.
ft. The balance left was thus 25,257 sq. ft. He pointed out that the value of 25,257 sq. ft. would be Rs. 2,50,000 at the rate at which land was sold in 1976. Thus, according to him, the value of the bungalow with land appurtenant remained at Rs. 1,02,367 (Rs. 6,63,867-Rs. 3,11,500-Rs. 2,50,000). He also pointed out that in considering whether the rent was adequate or not regard had also to be had to repairs and municipal tax which were the responsibility of the Tea Co. as the tenant. He, therefore, pointed out that the rent charged was quite adequate.
6. Thirdly, he pointed out that the building was an old one built in 1919 with tiled sheds. He also pointed out that the municipal valuation of the building was only Rs. 2,664 per annum. In this connection, reference was also made by him to the following decisions for the proposition that the municipal valuation afforded an indication as to the reasonable annual letting value of a building which could be rebutted and either reduced or enhanced only on the basis of other materials on the record--Kashi Prasad Kataruka v. CIT [1975] 101 ITR 810 (Pat.), CIT v. H.P. Sharma [1980] 122 ITR 675 (Delhi), Dewan Daulat Rai Kapoor v. NDMC [1980] 122 ITR 700 (SC) and CIT v. Prabhabati Bansali [1983] 141 ITR 419 (Cal.).
Elaborating on his submission further, Dr. Devi Pal referred to the provisions of the Tamil Nadu Buildings (Lease and Rent Control) Act, 1960 and pointed out that under Section 4(2) of that Act, the fair rent for any residential building was to be fixed by the Controller at 9 per cent gross return per annum on the total cost of such building.
Referring to sub-section (iv) of Section 4 of the Tamil Nadu Buildings (Lease and Rent Control) Act, he pointed out that the total cost referred to earlier was to consist of the market value of the site in which building is constructed and the cost of construction of the building. He also referred to the proviso appended thereto to the effect that while calculating the market value of the site on which the building is constructed, the Controller shall take into account only that portion of the site on which the building is constructed and on a portion up to 50 per cent thereof of the vacant land, if any, appurtenant to such building, the excess portion of the vacant land being treated as amenity. He, therefore, submitted that the Rent Control Legislation referred to above, which was applicable to the building in question had also to be considered and the adequate rent examined in the light thereof. Reference was also made by him to the decision of the Supreme Court in the case of Dr. Balbir Singh v. M.C.D.[1985] 152 ITR 388 for the proposition that in respect of buildings located in an area where rent restriction law is in force, the annual value cannot exceed the measure of standard rent.
7. Fourthly, Dr. Devi Pal submitted that the report of the ITO, Coimba-tore to which reference had been made by the learned Commissioner was to the effect that the rental rate was 50 paise to Rs. 2 per sq. ft. He pointed out that no reliance could be placed on such a report because no copy thereof had been afforded to the assessee and because the assessee had not been afforded any opportunity of meeting the same. At the same time, he pointed out that adequacy of rent had to be seen with reference to 1-2-1971, when the building had been given on rent to the Tea Co. He also pointed out that the learned Commissioner had not referred to any comparable cases before coming to the conclusion that the land and building of the assessee-trust continued to be made available to the Tea Co. without charging adequate rent or other compensation.
8. Lastly, Dr. Devi Pal pointed out that if no rent had been charged from the Tea Co., the Tea Co. would have paid less tax as its income was Rs. 31 lakhs in the year ending 31-3-1972 and the trust income would not have been taxable in any case.
9. On the other hand, Shri S.D. Kapila, the learned departmental representative pointed out that since the assessment year 1982-83 in question fell after 1-4-1977, when Section 13(3)(6) had been amended, the amendment was attracted and, therefore, the fact that the property had been given on rent much before the receipt of donation from the Tea Co. was not material. He also supported the observation of the learned Commissioner that the amendment in question was clarificatory in nature and that even prior to 1-4-1977, Section 13(3)(&) could be attracted in cases where the contribution was substantial. According to him, the contribution of Rs. 7,000 by the Tea Co. was certainly substantial.
10. He submitted that having regard to the value of the building let out with land, the rent charged was certainly inadequate. He pointed out that in the calculation sheet relied upon on behalf of the assessee (page 8 of the assessee's paper book), the figures of repairs and municipal tax at Rs. 1,300 and Rs. 1,000 have not been taken correctly.
In this connection, he referred to the report dated 28-10-1972 of the assessee's valuer wherein the amount of tax had been taken at Rs. 586 and the cost of annual repairs at Rs. 300. In other respects, Shri Kapila, strongly relied upon the order of the learned Commissioner. He, therefore, argued that there was no warrant or justification for any interference with the order of the learned Commissioner.
11. We have considered the rival submissions as also the decisions refert red to above. In Section 13(3)(b), the words 'that is to say, any person whose total contribution up to the end of the relevant previous year exceeds five thousand rupees' were inserted by the Taxation Laws (Amendment) Act, 1975, with effect fiom 1-4-1977.
Therefore, for the assessment year 1982-83 in question, the Tea Co.
having made a contribution of Rs. 7,000 (even though that contribution was made in 1972) was a person referred to in Section 13(3)(6). We have, therefore, to see whether the rent of the building in question during the previous year relevant to the assessment year 1982-83, could be said to be inadequate. It is not under dispute that the building in question is located in an area where rent restriction law was in force, namely, the Tamil Nadu Buildings (Lease and Rent Control) Act, The rent could not be increased. Therefore, we have to see whether the rent as at the beginning of the tenancy, i.e., on 1-7-1971 could be said to be adequate rent. In this connection, firstly it requires to be noticed that the assessee is right in pointing out that the municipal valuation affords an indication as to the reasonable annual letting value of a building and that it was for the department to rebut this presumption, on the basis of proper materials. The annual value cannot exceed the measure of fair rent or standard rent as held by the Supreme Court in the case of Dewan Daulat Rai Kapoor(supra) and as reiterated by the Supreme Court again in the case of Dr. Balbir Singh (supra). The learned Commissioner was, therefore, not justified in observing that the concept of standard rent and municipal valuation was not relevant and that it could be relevant only if one was considering the taxability of rental income. It may also be pointed out here that the report of the ITO, Coimbatore regarding the rental rate being 50 paise to Rs. 2 per sq. ft. having not been afforded to the assessee and the assessee not having been afforded any opportunity of meeting the same, it could not be taken into consideration. Moreover the rental rate depends upon the location, the type and standard of accommodation which may be under consideration. Therefore, on the basis of the said report, the learned Commissioner was not justified in deducing that on the basis of the built in area of 9,152 sq. ft. the rent should have been Rs. 4,500 per month and that any rent lower than that was to be treated as inadequate. It may be that the figures of the expenses for repairs and municipal tax as given at page 8 of the assessee's paper book, did not accord with the figures as appearing in the report of the assessee's valuer, but even apart from them, the question of 'adequate rent' can be examined. The learned Commissioner, has at pages 5 and 6 of his order considered the concept of adequate rent. The said concept is not a matter of controversy before us. 'Adequate' means legally sufficient or such as is lawfully and reasonably sufficient. In the case of CGT v. Indo Traders & Agencies (Madras) (P.) Ltd. [1981] 131 ITR 313, reference to which was made on behalf of the assessee before us, it was held by the Hon'ble Madras High Court that if the consideration which passed between the parties can be considered to be reasonable or fair, it cannot be considered to be inadequate. It was held that adequate consideration was not necessarily what is ultimately determined by someone else as the market value and that unless the price was such as to shock the conscience of the Court, it was not possible to hold that the transaction was otherwise than for adequate consideration. This is a test which the rent under consideration has to inact. In this connection, it is also relevant to notice that though the provisions of Section 13(3)(b) are applicable for the assessment year 1982-83 in question, the fact remains that the property in question was given on rent on 1-7-1971, i.e., at a time when the Tea Co. had not made any contribution. This fact cannot be brushed aside while weighing the material on the record on this point. Both the parties accept the basis, namely, that the value taken for the property in the deed of settlement of gift was Rs. 6,63,867. The land area excluding the bungalow was 71,108 sq. ft. out of which in 1976, 41,966 sq. ft. had been sold to three companies for Rs. 3,11,500. Thus, 29,142 sq. ft. of land worth Rs. 3,52,367 was left in 1976 (Rs. 6,63,867 -Rs. 3,11,500). It is also not under dispute that out of this an area of 3,885 sq. ft. was the area used for common roads. Thus, the area left was 25,257 sq. ft. If the value of this area was to be taken at the same rate at which land had been sold by the assessee-trust in 1976 (taken in respect of which premise there was no dispute) it comes to about Rs. 2,50,000 as given in page 8 of the" assessee's paper book.
Thus, the value of the bungalow with vacant land comes to Rs. 1,02,367.
A perusal of the report of the assessee's valuer also shows that the above figures are correct. That report shows that the plinth area and cost of construction was as follows : (The depreciated cost taken in the report of the assessee's valuer at Rs. 64,818).
The learned Commissioner had proceeded on the basis as if the entire land (after excluding the land sold in 1976) was part of the tenancy.
That is why he took its value at Rs. 3,52,367 and he expected 10 per cent return on it at Rs. 35,000. He was not justified in doing so. In terms of the Tamil Nadu Buildings (Lease and Rent Control) Act, as referred to on behalf of the assessee, we could only take fair rent at 9 per cent of the total cost of such building, i.e., the value of the site in which the building is constructed plus the cost of construction of the building plus the value up to 50 per cent of the site on which the building is constructed. As we have already seen above, the plinth area of the main building was 7,194 sq. ft. Therefore, the area of the building site plus 50 per cent thereof would be 10,791 sq. ft. (Rs. 7,194 + 3,597). At the rate of Rs. 7.4 per sq. ft. (the rough rate at which land was sold in 1976 by the assessee-trust to the three companies), the value would come to Rs. 80,900. The value of the constructions as given in the assessee's valuer's report, was Rs. 64,818, i.e., the total value comes to Rs. 1,45,718. In our view, the value at Rs. 1,02,367 derived on the basis of the valuation as given in the deed of settlement is the reasonably acceptable value. Before the learned Commissioner as well as before us, it was stated on behalf of the assessee that it is the tenant (Tea Co.) who was to effect repairs and pay house tax. This has not been controverted before us on behalf of the revenue except raising a strange suspicion. Taking the same into consideration, the rent of Rs. 650 per month could not be said to be inadequate. Further, under Section 7 of the Tamil Nadu Buildings (Lease and Rent Control) Act, a landlord cannot claim or receive anything in excess of fair rent or agreed rent. In the present case, it has not been shown that the rent agreed on 1-7-1971 was sham or that the Tea Co. was in any way connected with the assessee-trust so as to charge less than 'adequate rent'. Again, having regard to the municipal valuation which is a relevant factor, it cannot be said that the rent of Rs. 650" agreed between the assessee-trust and the Tea Co. was such as to shock the conscience of the Court or to be such as did not represent adequate rent. We are, therefore, of the considered view that the learned Commissioner was not justified in taking the view that the rent charged from the Tea Co. was not adequate and that the ITO should make a fresh assessment after denying to the assessee-trust exemption under Section 11. The order of the learned Commissioner under Section 263 is, accordingly, quashed.