Facts of the Case

  • The assessee, a charitable foundation, received substantial donations including corpus donations from Hamdard Dawakhana (Wakf).
  • The Assessing Officer (AO) observed that properties owned by the assessee were rented to Hamdard Dawakhana at rates significantly lower than market rent.
  • Based on third-party reports and online property listings, the AO concluded that the rent was inadequate and invoked Section 13(2)(b).
  • Consequently, exemption under Sections 11 and 12 was denied.
  • The ITAT deleted the additions, holding that the AO failed to prove inadequacy of rent with cogent evidence.
  • The Revenue filed appeal before the Delhi High Court.

Issues Involved

  1. Whether concessional rent to a specified person constitutes violation of Section 13(2)(b).
  2. Whether exemption under Sections 11 and 12 can be denied in absence of conclusive evidence of inadequate rent.
  3. Whether reliance on external sources like websites and brokers is sufficient to determine market rent.

Petitioner’s Arguments (Revenue)

  • The assessee provided property to a related entity at substantially lower rent, violating Section 13(2)(b).
  • Market data from brokers and websites showed rent was significantly higher.
  • The assessee failed to justify reasonableness of rent or provide comparable evidence.
  • Each assessment year is separate; earlier acceptance does not bind subsequent years.
  • The ITAT erred in relying on prior orders and ignoring statutory violations.

Respondent’s Arguments (Assessee)

  • The lease arrangements were longstanding and consistently accepted by the department since earlier years.
  • The AO relied on unverified and unreliable sources without independent inquiry.
  • Rent received was higher than standard rent under applicable laws.
  • No material evidence was produced to prove inadequacy of rent.
  • Principle of consistency applies in absence of change in facts.

Court’s Findings / Order

  • The burden lies on the Revenue to prove that rent is not adequate.
  • Market rent alone is not the sole criterion; surrounding circumstances must be considered.
  • Information from websites and brokers without verification is not reliable evidence.
  • No independent inquiry was conducted by the AO regarding:
    • Property condition
    • Comparable properties
    • Actual market dynamics
  • The ITAT’s findings were factual and not perverse.
  • No substantial question of law arose.
  • Appeals of the Revenue were dismissed.

Important Clarifications by Court

  • “Adequate rent” is not synonymous with “market rent.”
  • Unless inadequacy is so gross as to shock the conscience, Section 13(2)(b) cannot be invoked.
  • Principle of consistency applies in tax matters where facts remain unchanged.
  • Burden of proof remains on the Revenue to establish violation.
  • Lack of security deposit alone does not prove inadequacy of rent.

Link to download the order –

https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:608-DB/NAC16022022ITA1152021_120447.pdf

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