Akil Kureshi, J. - This appeal is filed by the assessee, which is a trust registered under the Bombay Public Trusts Act. At the time of admission, the following substantial question of law was framed:
"Whether on the facts and in the circumstances of the case Income Tax Appellate Tribunal was right in law in denying benefit under Section 11 of the Income Tax Act, 1961 to the appellant-assessee?"
2. Brief facts are as under;
2.1 The assessee is an educational trust and is engaged in running a school in the name of Delhi Public School at Rajkot. The assessee had filed a return of income for the assessment year 2003-04, declaring total loss of Rs. 8,47,901/-. The Assessing Officer took return in scrutiny. During such assessment, the Assessing Officer issued a notice dated 24.2.2006 requiring various details from the assessee. The main thrust of the Assessing Officer in such notice, however, was in respect to the assessee's claim of exemption under section 11 of the Income Tax Act, 1961. He pointed out that substantial payments were made by the trust to the settler of the trust as well as the trustees and their near relatives, which according to him, were in violation of section 13(1)(c) of the Act. These payments were made in the nature of interest on deposits from the trustees and lease rent paid for the land taken on lease from them. The Assessing Officer also referred to the fee structure of the school and compared it with another school in the vicinity, namely, St. Marry School to contend that such fee was many times higher than that of the other school. He, therefore, tentatively came to the conclusion that the trust is not engaged in any charitable activity and had also committed breach of section 13(1)(c) of the Act. He, therefore, proposed to deny the exemption under section 11 of the Act as claimed by the assessee.
2.2 In reply to such notice, the assessee pointed out that the trustees and their relatives have substantial landed properties. The trust had taken such property on lease under a deed dated 1.11.2000 under which lease rent was fixed at Rs. 1/- per sq.ft. The assessee contended that the prevailing market rate in the area was Rs. 5/- per sq.ft. In support of such contention, the assessee produced a lease deed executed between the trustees/relatives of the trustees and one M/s. Max New York Life Insurance Co. Ltd. The lease rent fixed was Rs. 5/- per sq.ft. It was pointed out that on the leased premises, the trust had made substantial investment for construction of the school building. The trust has, therefore, not breached the provisions of section 13(1)(c) of the Act.
2.3 With respect to payment of interest to the trustees on borrowed funds, the trust pointed out that it needed to raise loan of Rs. 2 crores, for which, the Joint Commissioner had also given permission. However, it was found that the Central Bank of India, to whom approach was made for such purpose, would charge prevailing market rate of interest, which would be very high. The trustees of the trust, therefore, instead agreed to lend the amount at the interest rate of 9% per annum, which would be without offering any security.
2.4 The Assessing Officer discarded such defence, and in the order of assessment dated 27.3.2006, came to the conclusion that the assessee was running the educational institution on commercial basis with profit motive. In order to come to such conclusion, he discarded the assessee's plea of better facilities being provided to the students as no evidence in this regard was furnished. The contention of the assessee that St. Mary School and New Era School were grant-in-aid schools and, therefore, could afford to charge lesser fees was discarded on the ground that the schools did not receive government grant. Regarding the loans from the trustees and their relatives, he held that the same would amount to diversion of the trust income for the benefit of the interested persons, which would be violative of section 13(1)(c) of the Act.
2.5 The assessee carried the matter in appeal. The CIT(Appeals), dismissed the assessee's appeal on the ground that the author of the trust had settled a sum of Rs. 5,000/- for the trust. The trustees were near relatives of the author who had absolute power to appoint trustees. In his absence, his brother would do the same. The management and control over the trust fund was in the hand of the author and his family members. The school fees and development charges were exorbitant and beyond the reach of the poor and needy students. The trust did not have any voluntary contribution, but took loans from the trustees. The property was taken on lease from the trustees. According to him, these factors would show that the trust was imparting education with sole motive of profit making. He discarded the comparison of lease rent which the trustees had charged from the Max New York Life Insurance Co. Ltd on the ground that the assessee trust was occupying a larger area, whereas Max New York Life Insurance Co. Ltd. was occupying a very small piece of land and, therefore, comparison of rent was not possible. With respect to borrowing from the trustees, he discarded the assessee's contention that borrowing from the Bank would entail higher interest and lengthy procedure by suggesting that the investment of idle funds by the trustees in the Bank would fetch lower interest than what was offered by the trust. He concluded that such monetary transactions were nothing but planning of tax evasion in camouflage.
2.6 The assessee carried the matter further in appeal before the Tribunal. The Tribunal, by the impugned judgment, rejected such appeal. The Tribunal held that the assessee was carrying on the activities for profit motive which was being diverted to the trustees and their relatives.
2.7 The assessee, thereupon, filed the present tax appeal.
3. Learned counsel for the assessee submitted that the Tribunal and the Revenue Authorities committed a serious error in denying the exemption to the income of the trust. Mere creation of surplus in the process of running an educational institution would not deprive the trust of its status of being a charitable institution. For this purpose, he relied on the decision of the Supreme Court in the case of Queen's Educational Society v. CIT [2015] 372 ITR 699/231 Taxman 286/55 taxmann.com 255 and a later case in the case of Visvesvaraya Technological Universityv. Asstt. CIT [2016] 384 ITR 37/239 Taxman 395/68 taxmann.com 287 (SC).
4. Counsel further submitted that even otherwise the accounts of the trust would show that there was no surplus created. Merely because the trust charged fees, which in the opinion of the Assessing Officer was high, would not mean that the trust was running with the motive of making profit. Counsel further submitted that merely because the land of the trustees or the relatives was taken on lease or the trust had borrowed money from such persons, by itself, would not establish breach of section 13(1)(c) of the Act. In the present case, the Assessing Officer had not established that the rent paid was excessive as compared to the market rate or that the interest charged was excessive. In fact, the trust had produced sufficient evidence to establish that the rent paid to the trustees was extremely low and the interest paid for the borrowed fund was also lower than the Bank rate for lending.
5. On the other hand, the learned advocate Mr. P.G. Desai for the Revenue opposed the appeal contending that the trust was being run for profit motive. The profit was diverted to the trustees and their near relatives in the guise of rent for the land leased to the trust and by way of interest on the borrowed funds.
6. Having thus heard the counsel for the parties and having perused the documents on record, we may recall that the revenue had two principal contentions for denying the exemption to the assessee. First was that the trust was running the educational institution for profit making. The second was that the trust had diverted its income in favour of the trustees and their near relatives, thereby breaching section 13(1)(c) of the Act. So far as the first issue is concerned, the revenue authorities seem to be relying on the fact that the assessee was charging, what they considered, was high rate of fees compared to the other schools in the region. That, by itself, would not establish that the school was running for profit making. Through series of decisions, it is by now well settled that the trust, in the course of running an educational institution, is entitled to make a reasonable surplus and setting apart a surplus after expenditure from the receipts, by itself, would not mean that the purpose is profit making. This aspect was highlighted by the Supreme Court in detail in case of Queen's Educational Society (supra) in which reliance was placed on the decisions in the case of Aditanar Educational Institution v. Addl. CIT [1997] 227 ITR 310/90 Taxman 528 (SC) and in the case of American Hotel & Lodging Association, Educational Institution v. CBDT [2008] 301 ITR 86/170 Taxman 306 (SC).
7. In the present case, in fact, as reproduced by the Tribunal in its impugned order, if we consider the last seven years accounts of the assessee trust, there was not even a surplus after the assessee adjusted its expenditure for the respective years. The assessee had shown a total deficit of Rs. 11.78 lakhs for the said period. The first ground of objection of the revenue, therefore, must fail.
8. This brings to the element of diverting the income of the trust to the trustees and near relatives. Section 11 of the Act grants exemption to income from property held for charitable or religious purpose subject to fulfillment of condition contained therein. Section 13 of the Act, on the other hand, pertains to cases where section 11 would not apply. As per clause(c) of sub-section (1) of section 13, nothing contained in section 11 shall operate so as to exclude from the total income of the assessee being a trust for charitable or religious purpose or a charitable or religious institution, if any part of such income or any property of the trust or the institution is, during the previous year, used or applied directly or indirectly for the benefit of any person referred to in sub-section (3). Sub-section (3) of section 13, in turn, specifies the persons referred to in clause (c) of sub-section (1) which includes the author of the trust or the founder of the institution, any trustee of the trust or manager of the institution and any relative of such author, founder, trustee or manager etc. Thus, if any part of the income of the trust was, during the previous year, used or applied directly or indirectly for the benefits of any such person, in relation to such income, section 11 exemption would not apply.
9. In the present case, we may recall that the revenue relies on two factors to press in service breach of section 13(1)(c) of the Act. One is that the trust had taken a large part of land belonging to the trustees or relatives on lease, for which, the trust would pay lease rent at the rate of Rs. 1/- per sq.ft. per annum. This lease rent, according to the revenue, amounted to applying the trust income in favour of the trustees. The second factor pressed in service by the revenue was the interest on borrowed funds paid by the trust to these persons, Here again, the revenue contended that the income of the trust was being applied for the benefit of such persons.
10. We may deal with these issues one after another. Insofar as the lease rent is concerned, the revenue had not brought on record any evidence to suggest that such lease rent was either excessive or even higher than the normal market rate prevailing in the region at the relevant time. In fact, the assessee produced material to show that a part of the land belonging to the trustees was leased to one Max New York Life Insurance Co. Ltd. at the rate of Rs. 5/- per sq. ft. as against the rate of Rs. 1/- per sq. ft. being paid by the assessee. The CIT (Appeals) discarded such comparison on the ground that the area occupied by the Max New York Life Insurance Co. Ltd. was much smaller, as compared to the area leased to the assessee. The size of the land under occupation may have some bearing on the lease rent which the land may fetch, nevertheless, in the present case, the difference of rate between two cases was nearly five times. Without there being any further material on record, the Commissioner could not have come to the conclusion that the rent paid by the assessee to the trustees for the leased land, was excessive.
11. Similarly, the assessee pointed out to the authorities that it needed to raise a fund of Rs. 2 crores by taking loan from the financial institutions for which permission was also granted by the Charity Commissioner. The Bank had offered loan at the interest rate of Rs. 12.50% per annum which would also require giving securities and executing documents. As against this the trustees offered unsecured loan at the interest rate of Rs. 9% per annum. Here again, the CIT (Appeals) discarded such comparison by contending that the trustees themselves would have fetched lower fixed deposit rate from the Bank.
12. For multiple reasons, this was not a correct approach. First, we are trying to ascertain whether the trust was paying the interest at the rate higher than the market rate. What the trustees could have got from the Bank was not correct comparison. Secondly, the trustees were offering unsecured loan, which with inherent risks, invites higher interest than the bank loans. Last but not the least, if the trustees had parked their money in the Bank fixed deposits, the liquidities and security of such investment would be much higher than lending substantial amount to the trust without a collateral security.
13. Section 13(1)(c) of the Act does not prohibit normal transactions between the trust and the persons referred to in sub-section (3) of the Act. What is relevant is the use or application of any part of the income of the trust directly or indirectly for the benefits of any such person referred to in sub- section (3). Mere payment of lease rent or interest on borrowed funds, without there being any element of such payments being excessive or unreasonable compared to the normal rates prevailing, would not fall within the mischief of section 13(1)(c).
14. The Tribunal has, more or less, adopted the reasoning elaborated by the Commissioner. For the reasons recorded above, we do not find that the Tribunal correctly analyzed the situation.
15. For such reasons, tax appeal is allowed. The judgments of the Tribunal and the Revenue Authorities are reversed. The question is answered in favour of the assessee and the appeal is disposed of accordingly.