Registration under Section 80G(5)(vi) was refused because the arrangement was likely to benefit the trustees

Fact and issue of the case

This appeal by the assessee against the order dated 30-03-2021 passed by the Commissioner of Income Tax (Exemption), Pune [‘CIT(Exemption)’].

We find that this appeal was filed with a delay of 03 days. Upon hearing both the parties, we find that the delay of 03 days is saved by the decision of Hon’ble Supreme Court passed during National Lockdown imposed on account of pandemic Covid-19. Therefore, the delay of 03 days is condoned.

The assessee raised two grounds of appeal amongst which the only issue emanates for our consideration is as to whether the CIT(Exemption) justified in rejecting the application seeking registration u/s. 80G of the Act.

It is noted that the assessee sought registration u/s. 80G(5)(vi) of the Act vide application dated 24-09-2020 in Form No. 10G. The CIT(Exemption) issued a letter on 12-10-2020 through ITBA portal requesting to upload certain other information/clarification for the purpose of verifying the genuineness of the activities carried out during the process of above said application. According to the CIT(Exemption), the assessee has shown value of building of Rs.14.62 lacs as on 31-03-2017 and no corresponding land is reflected in the Balance sheet for construction of building. The CIT(Exemption) sought explanation from the assessee to furnish the proof of ownership of immovable properties on which the building was constructed. It is noted that the CIT(Exemption) opined that the assessee constructed the said building deriving funds from the trust on the land owned by the four trustees i.e. Shri balkrushna Dnyanoba Khandve, Shri Ashok Dnyanoba Khandve, Shri Bhausaheb Dnyanoba Khandve and Shri Tanaji Dnyoba Khandve. Therefore, according to the CIT(Exemption) that whatever educational activities are carried out, building constructed, funds invested in construction of building by the assessee are not protected and denied the registration u/s. 80G(5)(vi) of the Act.

The ld. AR submitted that admittedly, the said land belongs to the four trustees and the assessee’s trust entered into lease agreement with the said trustees for 30 years. He vehemently argued that the finding of CIT(Exemption) has no basis for rejecting the application filed seeking for registration u/s. 80G(5)(vi) of the Act. He undertaken that the assessee is ready to modify the lease deed that, by inserting any clause benefiting the assessee’s trust and prayed to allow the grounds raised by the assessee.

The ld. DR filed written submissions on 10-02-2023 which is on record and supported the order of CIT(Exemption).

Heard both the parties and perused the material available on record. As noted above the facts remains admitted that there was no land belonging the assessee’s trust in the Balance sheet, but however, the assessee utilized its funds in constructing a building on land belonging to the trustees. The CIT(Exemption) discussed certain clauses at page No. 2 of the impugned order. On perusal of the same, we note that the lease period is for 30 years which clearly establishes that the assessee is not the owner and the ownership with the trustees. According to the CIT(Exemption) that the deed is not irrevocable which means that can be terminated at any time. It is pertinent to note the respondent-revenue filed written submissions vehemently opposing the registration u/s. 80G(5)(vi) of the Act. The relevant portion of the said written submissions is reproduced hereunder:

Since the overall activity of construction of building as per the terms of the lease agreement having-direct benefit of the persons covered u/s1313) of the-income-tax Act, the same violates the conditions mentioned u/s 80G(5)(vi) of the Income-tax Act. For better understanding of the case, relevant provisions of the lease agreement dated 20.11.2015 (as translated by the appellant) is reproduced below:

The agreed property is the ancestral property of the lessors and the said property’s 7/12, bears the name of the lessee since today.

The agreed property is leased out by the lessors to the lessee for a span of past 30 years, the monthly rent of the same being Rs 1,00,000. As such each lessor is receivable Rs. 25,000/- monthly. In this agreement, there is no deposit receivable or payable by any of the parties to the agreement. Accordingly, irrespective of this agreement, the ownership of the agreed property vests in the lessors of the property. There will be no change in the ownership, that is, the ownership rights will still vest in the original owners of the property. But, the lessors cannot refrain the enjoyment and possession rights of the lessee.

The ‘agreed property, being the property of the lessors is registered in lessors’ name in government records. The ‘agreed property’ is in possession of the lessors.

Observation of the court

The L’d AR has relied upon the judgement of High Court of Bombay in the case of CIT-II, Pune Vs National Education Foundation. The facts of the referred citation do not match vis-a-vis facts of the present case. In the referred case law, the 80G approval was already existent and subsequent denial of 80G by the CIT-II, Pune has been on the issue of non-compliance of financial statements of the preceding years and the denial of 80G has been primarily on procedural non-compliance. Contrary to the facts of the referred case law, the application of 80G in the present case has been already rejected twice before on 27.08.2019 and 08.08.2020. Further, there is nothing on record in the paper book submitted by L’d AR as to post amendment of section 12A w.e.f. 01.04.2021, whether re-registration of 12A has been obtained by the assessee trust or not. Thus in view of the above submission, the order passed by the CIT(Exemption), Pune rejecting the application for grant of recognition under section 80G(5)(vi) of the Income-tax Act dated 30.03.2021 may kindly be upheld. (Keyur Patel) Commissioner of Income Tax (DR) A-Bench, ITAT-I, Pune Email id: pune.cit.itat1@incometax.gov.in

On perusal of the above, we note that the respondent-revenue vehemently contended that overall activity of construction of building as per the terms of the lease agreement direct benefit of the persons covered u/s. 13(3) of the Act which clearly violates the conditions mentioned u/s. 80G(5)(vi) of the Act. Further, the said lease agreement is not containing automatic renewal clause and the trustees can dispossess the assessee from the building constructed by the assessee from its funds. The ld. DR argued that the assessee’s trust after deriving the benefit of donations and constructing buildings on the land belonging to the trustees is a tax free asset, will hand over the said tax free asset to the trustees at the end of lease period of 30 years. We find force in the arguments of the ld. DR the assessee will have no right whatsoever over the construction of building and its development, utilizing from the assessee’s trust fund. The assessee is also bound to vacate the said premises after the lease period. Further, it is brought to our notice that the CIT(Exemption) rejected the assessee’s application on two earlier occasions and this is the third application wherein the assessee has not made any efforts in modifying the lease deed as the case may be. As noted above as rightly pointed by the ld. DR if the registration u/s. 80G(5)(vi) of the Act is granted, the assessee is entitled to receive certain donations which are tax free being utilized for construction, development and the achievement of its objects etc. which goes to the hands of the lessors after the expiry of lease period of 30 years. We find there is no guarantee or protection given to the said tax free asset in the lease deed and will benefit the persons i.e. trustees covered u/s. 13(3) of the Act. Thus, we find no infirmity in the order of CIT(Exemption) and it is justified. Thus, the grounds raised by the assessee are dismissed.

In the result, the appeal of assessee is dismissed.

Order pronounced in the open court on 17th May, 2023.