ADIT, Hyderabad v. Chirec Education Society, R.R.Dist

ITA 283/HYD/2006 | 1999-2000
Pronouncement Date: 30-07-2010 | Result: Partly Allowed

Appeal Details

RSA Number 28322514 RSA 2006
Bench Hyderabad
Appeal Number ITA 283/HYD/2006
Duration Of Justice 4 year(s) 4 month(s) 7 day(s)
Appellant ADIT, Hyderabad
Respondent Chirec Education Society, R.R.Dist
Appeal Type Income Tax Appeal
Pronouncement Date 30-07-2010
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 30-07-2010
Date Of Final Hearing 08-07-2010
Next Hearing Date 08-07-2010
Assessment Year 1999-2000
Appeal Filed On 23-03-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B HYDERABAD BEFORE SHRI G.C. GUPTA VICE PRESIDENT AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA NOS.282 TO 286/HYD/2006 ASSESSMENT YEARS: 1998-99 1999-2000 2000-01 200 1-02 & 2002-03 THE ADIT(E) 1 HYDERABAD VS M/S CHIREC EDUCATION SOCIETY 1-22 KONDAPUR RR DISTRICT. (APPELLANT) (RESPONDENT) APPELLANT BY: SMT. VASUNDHARA SINHA & SMT. NIVEDITA BISWAS RESPONDENT BY: SHRI Y. RATNAKAR O R D E R PER CHANDRA POOJARI ACCOUNTANT MEMBER THESE FIVE APPEALS PREFERRED BY THE REVENUE ARE DIRECT ED AGAINST THE COMMON ORDER PASSED BY THE CIT(A)-IV HYDERABAD DAT ED 30.11.2005 AND PERTAINS TO THE ASSESSMENT YEARS 1998-99 1999- 2000 2000-01 2001-02 & 2002-03. SINCE CERTAIN COMMON ISSUES ARE INVOLVED THESE APPEALS ARE CLUBBED TOGETHER HEAR D TOGETHER AND DISPOSED OF VIDE THIS COMMON ORDER FOR THE SAKE OF CONVEN IENCE. 2. THE COMMON GROUNDS IN ALL THE APPEALS ARE: 1. THE CIT(A) ERRED IN DELETING THE ADDITIONS MADE ON ACCOUNT OF ROYALTY ALTHOUGH THERE WAS CLEAR VIOLATION OF PROVI SIONS OF SEC.13(1) ( C) OF THE IT ACT. 2. THE CIT(A) ERRED IN ALLOWING EQUIPMENT HIRE CHARGES AS RENT THOUGH THERE WAS NO MENTION IN THE LEASE AGREEMENT ABOUT T HE EQUIPMENT CHARGES. ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 2 3. THE CIT(A) OUGHT TO HAVE CONFIRMED THE ADDITIONS MA DE IN THE ASSESSMENT YEAR ORDER UNDER THE HEAD ROYALTY & RENT AS THEY WERE MADE AFTER THOROUGH EXAMINATION. 3. SINCE FACTUAL BACKGROUND AND ISSUES INVOLVED ARE COM MON IN ALL THESE CASES FOR THE SAKE OF CONVENIENCE WE MAY NOTE BRIEF WITH BRIEF FACTS OF THE CASE FROM APPEAL OF THE ASSESSEE FOR ASSESSM ENT YEAR 1998-99 (ITA 282/HYD/2006). 4. THE ASSESSEE IS AN EDUCATIONAL SOCIETY REGISTERED UNDER THE PUBLIC SOCIETIES REGISTRATION ACT. FOR THE ASSESSMENT YEA R 1998-99 DENYING THE ASSESSEES CLAIM FOR EXEMPTION OF ITS INCOME U /S 11 OF THE IT ACT ON THE GROUND THAT THE ASSESSEE SOCIETY PAID ROYAL TY OF RS.12 38 395/- AND PAID EXCESS/UNREASONABLE RENT FOR TH E PREMISES ETC. TAKEN ON LEASE WHICH WAS DETERMINED AT 20% OF THE ACT UAL RENT PAID COMPLETED THE ASSESSMENT ON A TOTAL INCOME OF RS.19 34 400 VIDE ORDER OF ASSESSMENT DATED 18.3.2005 PASSED U/S 143(3) READ WITH 147 OF THE ACT. 5. THE ASSESSEE SOCIETY CHIREC EDUCATIONAL SOCIETY TOOK ON LEASE THE PREMISES BELONGING TO SHRI SHAKTHI SCHOOLS (P ) LTD.(SSSPL) SITUATED AT KONDAPUR VILLAGE SERLINGAMPALLY MANDAL RR DISTRICT. THE SAID SSSPL HAD THE SCHOOL BUILDINGS AND ALL OTHER INFRA STRUCTURE FOR RUNNING AN EDUCATIONAL INSTITUTION. AS THE SAID SSSPL WAS REJECTED THE AFFILIATION TO CBSE IT HAS LEASED OUT MOST OF THE PRE MISES WITH REQUIRED INFRASTRUCTURE TO THE ASSESSEE SOCIETY FOR RUNNING ITS SCHOOL . DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE SOCIETY PAID AN AMO UNT OF RS.15 60 000 WHICH COMPRISES RS.14 40 000 BY WAY OF REN T AND RS.1 20 000 TOWARDS EQUIPMENT HIRE CHARGES TO THE SSSPL . THE ASSESSING OFFICER NOTED THAT AS PER THE LEASE AGREEMENT RE NT PAYABLE WAS ONLY RS.1 20 000 ONLY PER MONTH OUT OF WHICH RS.80 000 WAS ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 3 TOWARDS BUILDING AREA AND RS.40 000 WAS TOWARDS PLAY GR OUND AREA AND THE SAID RENT DOES NOT INCLUDE ELECTRICITY CONSUMPTION CH ARGES. HE FURTHER NOTED THAT THE TOTAL RENT PAID DURING THE Y EAR AMOUNTS TO RS.15 60 000 AS PER INCOME AND EXPENDITURE STATEMENT. SINCE THE LEASE AGREEMENT WAS REGISTERED ON 26.6.1997 THE PERIO D OF FALLING UNDER THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1998-99 THE ASSESSING OFFICER NOTED WAS ONLY NINE MONTHS. AS SUCH ACCORD ING TO THE ASSESSING OFFICER RENT PAYABLE AMOUNTS TO RS10 80 000 WHEREAS THE ASSESSEE HAS DEBITED AN AMOUNT OF RS.15 60 000. ACCORDINGL Y HE DISALLOWED THE EXCESS AMOUNT OF RS.4 80 000 DEBITED AS RE NT. 6. THE ASSESSING OFFICER FURTHER TAKING NOTE OF THE RE NT PAID BY THE ASSESSEE YEAR AFTER YEAR FROM 1997-98 TO 2001-02 NO TED THAT THE LEASE RENT HAS BEEN INCREASING YEAR AFTER YEAR. HE FURT HER NOTED THAT BESIDES PAYING RENT AT A HIGHER RATE ASSESSEE HAS ALSO ADV ANCED FOR CONSTRUCTION OF THE PROPERTY IS TO BE TAKEN ON LEASE FRO M THE LESSOR AS ADVANCE RENT. THERE WAS NO ADJUSTMENT OF ADVANCE RENT T OWARDS RENT PAYABLE. IN THE CIRCUMSTANCES ASSESSING OFFICER WAS OF THE VIEW THAT WHENEVER RENTAL ADVANCE IS PAID BEFORE COMPLETION OF S UPERSTRUCTURE THE RENT IS NEGOTIABLE. CONSIDERING THE RENT PAID FOR THE ASSESSMENT YEAR 2002-03 AND ALSO LOCATION OF THE BUILDING REASON ABLE RENT FOR THE STRUCTURE PROVIDED SHOULD BE 80% OF THE ACTUAL RENT PAI D BY THE ASSESSEE TO THE LESSOR. ON THIS BASIS HE DETERMINED A FU RTHER EXCESS RENT OF 20% ON GROUNDS OF REASONABLENESS OF THE RENT PAID WHICH F OR THE ASSESSMENT YEAR 1998-99 WORKED OUT TO RS.2 16 000 ( 20% OF RS.10 80 000) 7. THE ASSESSEE ALSO PAID ROYALTY OF RS.12 38 395 TO S SSPL WHICH WAS WORKED OUT AT 20% OF THE FEES RECEIVED FROM THE STUDENTS ON ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 4 ROLLS AT THE BEGINNING OF THE YEAR IN THREE INSTALLME NTS FALLING DUE ON 15 TH OF MAY 15 TH OF SEPTEMBER AND 15 TH JANUARY. THIS ROYALTY IS CLAIMED TO BE PAYABLE FOR EXTENSIVE USAGE OF BRAND NAME OF CHIREC ; PART REIMBURSEMENT OF THE VARIOUS AMOUNTS SPENT BY SSSPL FOR HUGE INFRASTRUCTURE SERVICES AND FACILITIES RENDERED BY SSSPL . AT THE TIME OF AGREEMENT FOR THE PAYMENT OF ROYALTY THE SSSPL IS ALSO CLAIMED TO HAVE TRANSFERRED STUDENTS NUMBERING OVER 400 STUDYING IN CLASSE S I TO VI BESIDES ITS TEACHING STAFF TO THE ASSESSEE. THE ASSESSING OF FICER TAKING NOTE OF THE FACT THAT THE DIRECTORS OF THE SSSPL ARE A LSO MEMBERS OF THE ASSESSEE SOCIETY DISALLOWED THE PAYMENT OF RS.12 38 395 MA DE BY THE ASSESSEE SOCIETY TO SSSPL AS ROYALTY. THUS THE ASSESSING OFFICER HAS COMPLETED THE ASSESSMENT ON A TOTAL INCOME OF RS.19 34. 395 WITH THE ABOVE THREE ADDITIONS. 8. IN THE OTHER YEARS UNDER APPEAL ONLY TWO DISALLO WANCES VIZ. ON ACCOUNT OF DISALLOWANCE OF 20% OF THE ACTUAL RENT PA ID AND DISALLOWANCE OF ROYALTY ARE INVOLVED. AS FOR THOSE YEAR S THE PREMISES LEASED OUT TO THE ASSESSEE FOR THE ENTIRE YEAR THE FIRST DISALLOWANCE MADE FOR THE ASSESSMENT YEAR 1998-99 IS NOT INVOLVED. WHILE FACTS OF THE CASE IN RELATION TO THE UNREASONABLE/EXCESS AMOUNT OF RENT PAID AND ROYALTY PAID ARE COMMON THE DISALLOWANCES MADE AND THE INCOME ASSESSED BY THE ASSESSING OFFICER FOR THOSE YEARS ARE AS FOLLO WS- ASSESSMENT YEAR` DISALLOWANCE OUT OF RENT PAID (RS.) ROYALTY AMOUNT DISALLOWED (RS.) INCOME ASSESSED (RS.) 1999-2000 4 09 520 16 38 780 20 48 300 2000-2001 5 35.384 21 28 043 30 87 575 2001-02 6 09 836 21 18 790 31 36 660 2002-03 9 16 000 29 34 200 39 88 485 ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 5 9. DURING THE APPELLATE PROCEEDINGS FOR THE ASSESSMENT YEAR 1998-99 THE ASSESSEE FILED WRITTEN SUBMISSIONS DATED 30. 11.2005 CONTESTING THE ADDITIONS MADE BY THE ASSESSING OFFICER BY W AY OF DISALLOWANCE OF ENTIRE AMOUNTS OF ROYALTY PAID BY THE ASSESSEE AND DISALLOWANCE OF PART OF THE RENT PAID BY THE ASSESSEE FOR EACH OF THESE YEARS ON VARIOUS COUNTS. THE CIT(A) CALLED FOR A REMAN D REPORT FROM THE ASSESSING OFFICER TO OFFER HIS COMMENTS IN THE LIGHT OF THE WRITTEN SUBMISSIONS FILED BY THE ASSESSEE IN RESPONSE TO WHICH THE ASSE SSING OFFICER SUBMITTED THE REMAND REPORT DATED 12.12.2005 . WHEN THE SAID REMAND REPORT WAS MADE AVAILABLE TO THE ASSESSEE TH E ASSESSEE HAS RAISED ITS OBJECTIONS TO THE CONTENTIONS OF THE ASSESSING OFFICER VIDE ITS LETTER DATED 20.12.2005. ON CONSIDERATION OF THE SUBMISSIONS OF THE ASSESSEE AND THE MATERIAL AVAILABLE ON RECORD WITH REGA RD TO ALLOWABILITY OF ROYALTY PAID BY THE ASSESSEE OBSERVED THAT THE ACTUAL ISSUE INVOLVED IS NOT WHETHER THE ROYALTY PAYMENT IS ALLOWABLE EXPENDITURE OR NOT BUT IS WHETHER THE QUANTUM OF RO YALTY PAYMENT IS REASONABLE OR NOT SINCE THE ASSESSING OFFICER HIMSELF HAS GI VEN A FINDING THAT THE ROYALTY PAYMENT IS IN LIEU OF THE NAME 'CHIREC' AND THE OTHER ASSOCIATED FACILITIES AND SERVICES WITH WHICH THE SS SPL HAS PARTED WITH WHILE TRANSFERRING THE INFRASTRUCTURE TO THE ASSESSEE. OBSERVING FURTHER THAT THE ASSESSING OFFICER HAS FAILED TO ESTABLISH AS TO WHAT SHOULD BE THE REASONABLE AMOUNT OF ROYALTY AND THE REMAND REPORT THE ASSESSING OFFICER HAS SIMPLY STATED THAT REASONA BLENESS CANNOT BE DETERMINED' CONCLUDED THAT IF THE REASONABLE NESS OF THE ROYALTY PAYMENT CANNOT BE DETERMINED ENTIRE FINDIN GS OF THE ASSESSING OFFICER IS WITHOUT ANY SUPPORT WHATSOEVER. HE ULTIMATE LY DIRECTED THE ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 6 ASSESSING OFFICER TO ACCEPT THE CLAIM OF THE ASSESSEE WITH REGA RD TO THE ROYALTY PAYMENT WITH THE FOLLOWING FURTHER OBSERVAT IONS- '6.1 ALONG WITH THE OTHER SUBMISSIONS OF THE APPELLANT I AM MORE CONVINCED WITH THE APPELLANT'S CONTENTION THAT NO ONE WOULD TRANSFER USER RIGHTS OF NAME AND OTHER BENE FITS WITHOUT CHARGING ADEQUATE CONSIDERATION. FURTHER SINCE THE ASSESSING OFFICER HIMSELF HAS NOT GIVEN ANY FINDING WITH REGARD TO THE REASONABLENESS OF THE ROYALTY PAYMENT T HE APPELLANT'S CLAIM OF ROYALTY PAYMENT CANNOT BE HELD AS UNREASONABLE. THE ASSESSING OFFICER IS THEREFORE DIRECTED TO ACCEPT THE CLAIM OF THE APPELLANT SOCIETY IN THIS RESPECT. THE APPELLANT SUCCEEDS ON THIS GROUND OF APPEAL.' 10. THE CIT(A) ALSO DELETED THE AD-HOC DISALLOWANCE W ORKED OUT AT 20% OF THE RENT PAID BY THE ASSESSEE FOR EACH OF THE SE YEARS AND ALSO DIRECTED THE ASSESSING OFFICER TO ALLOW THE EXEMPTIO N UNDER S.11 OF THE ACT CLAIMED BY THE ASSESSEE WITH THE FOLLOWING OBSE RVATIONS- '9. THE CLAIM OF THE ASSESSING OFFICER IS THAT THE MEMBER S OF THE SOCIETY AND THE DIRECTIONS OF PRIVATE LIMITED COMPAN Y ARE ONE AND THE SAME. IT IS TRUE THAT CERTAIN MEMBERS ARE COMM ON. THE ROYALTY AND RENT IS PAID BY THE SOCIETY TO THE PRIVATE LIMITED COMPANY. THE PRIVATE LIMITED COMPANY IS TAXED ON THESE PAYMENTS IN FULL. AGAIN THE SAME PAYMENTS ARE DISALLO WED AND ARE ALSO TAXED IN THE HANDS OF THE SOCIETY. THIS WOULD MEAN THAT THE VERY SAME AMOUNT IS TAXED ONCE IN THE HANDS OF THE SOCIETY AND AGAIN IN THE HANDS OF PRIVATE LIMITED COMPANY. T HEREFORE THE REASONING FOR MAKING DISALLOWANCE IS NOT APPROPRIATE. SECTION 13(2) OF THE IT ACT ITSELF REFERS TO WHEN AN INCOME OR PROPERTY CAN BE SAID TO BE USED OR APPLIED FOR PERSONS SPECIFIED IN SUB SECTION ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 7 (3). HENCE THE ASSESSING OFFICERS REASONING FOR MAKING TH E DISALLOWANCE BY LOOKING INTO ONLY SECTION 13(1) ( C ) I GNORING SUB SECTION (2) IS NOT SUPPORTED BOTH ON FACTS AND ALSO ON TH E BASIS OF LEGAL POSITION APPLICABLE. 11. WHILE UPHOLDING THE DISALLOWANCE OF EXCESS RENT PA ID OF RS.4 80 000 FOR THE ASSESSMENT YEAR 1998-99 THE CIT(A) OBSERVING THAT IN SO FAR AS THE RENT FOR EQUIPMENT OF RS.1 20 00 0 IS CONCERNED THERE APPEARS TO BE OVERLOOKING OF THE FACT OF EQUIP MENT HIRE ON THE PART OF THE ASSESSING OFFICER AS CONTENDED BY THE ASSESSEE AL LOWED THE GROUND OF THE ASSESSEE ON THAT ISSUE. 12. THOUGH THE CIT(A) PASSED SEPARATE ORDERS FOR EACH O F THESE YEARS HIS CONCLUSIONS ON THE ISSUES INVOLVED ARE IDENTICAL T O THOSE GIVEN FOR THE ASSESSMENT YEAR 1998-99 DISCUSSED AT LENGTH ABOVE. 13. AGGRIEVED BY THE ORDERS OF THE CIT(A) REVENUE PREFERRED THESE APPEALS BEFORE THIS TRIBUNAL WITH THE GROUNDS A LREADY EXTRACTED IN PARA-2 ABOVE. 14. THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONG LY SUPPORTING THE ACTION OF THE ASSESSING OFFICER SUBMITTED TH AT THE MEMBERS OF THE ASSESSEE-SOCIETY AND THE DIRECTORS/SHAREHOL DERS OF THE COMPANY SSSPL ARE ONE AND THE SAME AND AS SUCH AS PER S.13(3)(E) OF THE ACT THE FOUNDER MEMBERS OF CHIREC EDUCATIONAL S OCIETY ARE HAVING SUBSTANTIAL INTEREST IN SSSPL AND HENCE THE EXE MPTION UNDER S.11 OF THE ACT WAS RIGHTLY DENIED DEALING WITH THE CONTENTION OF THE ASSESSEE THAT BECAUSE OF NAME THAT THE ASSESSEE WOULD BE ABL E TO RUN THE SCHOOL AND THE CONTENTION THAT SSSPL HAVE MADE HUG E INVESTMENTS ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 8 ESTABLISHED INFRASTRUCTURE AND TRAINED TEACHERS AND ALSO GAVE A TOTAL STRENGTH OF 400 STUDENTS TO THE SOCIETY SHE SUBMITTED THA T EVEN WITH ALL THE FACILITIES IF AN INSTITUTION IS NOT HAVING RECOGNIT ION OF CBSE NO CHILD WOULD JOIN THE SCHOOL AND FOREGO HIS/HER CAREER. SHE SUBMITTED THAT THE INTENTION OF SSSPL IN SHAPING THE SCHOOL IS TO EARN PR OFIT AND NOT IMPART EDUCATION ON NON-PROFIT BASIS AND IT WAS FOR THAT REA SON THAT THE CBSE HAS PUT THE CONDITION THAT THE SOCIETY SHOULD BE FORMED AND IT SHOULD BE NON-PROFIT ORGANIZATION. IT WAS IN THOSE CIRCUMSTANCES TO MAKE PROFIT OUT OF THE ESTABLISHMENTS FORMED BY THE COMPANY THAT AN UNDERSTANDING WAS MADE WITH THE SOCIETY TO PART WITH IT RECEIPTS FOR THE BENEFIT OF THE COMPANY AND A NAME WAS GIVEN TO TH E PROFIT SHARING AS ROYALTY FOR THE SERVICE PROVIDED. THOUGH THE COMPA NY ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE PERMITTED T HE ASSESSEE SOCIETY TO USE THE NAME CHIREC PART OF THE NAME WAS KEP T BY THE COMPANY SSSPL FOR ITS OWN PRE-SCHOOL NAMED AS 'CHIREC PR E- SCHOOL'. SHE SUBMITTED THAT IT IS PRE-REQUISITE FOR AN EDUCATIONAL INSTITUTION TO IMPART EDUCATION ON NON-PROFIT MOTIVE AND PROFIT ARISING WAS NOT TO BE DISTRIBUTED AMONG THE MEMBERS. WHATEVE R PROFITS ARISE TO THE EDUCATIONAL SOCIETY THE SAME HAVE TO BE UTILIZ ED FOR BUILDING UP INFRASTRUCTURE TO IMPART EDUCATION WITH NON-PROFIT MO TIVE. INSTEAD OF BECOMING INTO SELF-SUSTAINING THE ASSESSEE-SOCIETY THE LEAR NED DEPARTMENTAL REPRESENTATIVE PLEADED IS DEPENDING UPO N THE COMPANY SSSPL WHICH HAS PUT VARIOUS CONDITIONS AND TAKING OU T HUGE RECEIPTS OF THE SOCIETY IN THE SHAPE OF RENT ROYALTY AND ALSO AS AD VANCE RENT. SHE SUBMITTED THAT WHENEVER EDUCATIONAL SOCIETY DEVELOP S ITS OWN INFRASTRUCTURE AND CONDITION STIPULATED FOR THE SOCIETY AT THE TIME OF WINDING UP OF THE SOCIETY IS TO TRANSFER THE ENTIRE I NFRASTRUCTURE TO THE ANY OTHER SOCIETY WITH THE SAME OBJECTS. AS AGAINST THIS IN THE CASE OF THE ASSESSEE INSTEAD OF DEVELOPING ITS OWN INFRASTRUCTURE WHENEVER ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 9 AMOUNTS ARE RECEIVED IN EXCESS OF THE EXPENDITURE THE SA ME ARE DISTRIBUTED TO THE MEMBERS OF THE COMPANY WHO ARE ALSO THE MEMBERS OF THE SOCIETY FOR THEIR BENEFIT AS RENT ROYALTY AND ADVANCE RENT. SHE ALSO SUBMITTED THAT THE EXPENDITURE IN THE FORM OF RE NT ROYALTY ETC. INCURRED BY THE ASSESSEE IS NOTHING BUT PARTING OF INCOME OF THE ASSESSEE SOCIETY FOR THE BENEFITS OF THE DIRECTORS OF THE COM PANY SSSPL. SINCE THE ASSESSEE HAS NOT MADE ANY BUSINESS WITH THE COMPANY THE EXPENDITURE UNDER ROYALTY CANNOT BE TREA TED AS BUSINESS EXPENDITURE AND AS SUCH REASONABLENESS OF THE SAME CANNOT BE DETERMINED. 15. LEARNED DEPARTMENTAL REPRESENTATIVE ALSO SUBMITTE D THAT DISALLOWANCE OF 20% OF RENT IS ON THE BASIS OF RENT PAID BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2002-03 AND ALSO THE VARIOUS REASO NS DISCUSSED IN THE ASSESSMENT ORDER. SHE SUBMITTED THAT AS PER THE LE ASE AGREEMENT RS.80 000 WAS FOR THE BUILDING AND RS.40 00 0 WAS FOR THE PLAYGROUND UTILIZED BY THE SOCIETY AND THERE WAS NO ME NTION ABOUT THE INFRASTRUCTURE AND HIRE FOR EQUIPMENT TAKEN ON LEASE AND ALSO SEPARATE RENT PAID FOR THE INFRASTRUCTURE. SHE SUBMITTED THAT T HE ROYALTY HAS BEEN PAID BY THE ASSESSEE WITH THE SOLE INTENTION TO REDUCE TH E PROFIT AND IT IS NOTHING BUT PARTING OF PROFIT WITH OTHERS BY THE ASSE SSEE TRUST AND IT IS A SHAM TRANSACTIONS. IT CANNOT BE TREATED AS BUSINESS EXPEN DITURE AND THERE IS NO QUESTION OF DISALLOWING ONLY THAT PORTION OF UNREASONABLE AMOUNT AND REASONABLENESS CANNOT BE DETERMINED. IN THE CIRCUMSTANCES THE CIT(A) ACCORDING TO THE LEARNED DEPAR TMENTAL REPRESENTATIVE IT WAS NOT JUSTIFIED IN GRANTING ANY RELIEF TO THE ASSESSEE ON THESE COUNTS. ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 10 16. LEARNED COUNSEL FOR THE ASSESSEE REITERATING THE CO NTENTIONS ARGUED BEFORE THE LOWER AUTHORITIES AND SUBMITTED THA T THE ONLY CLAIM OF THE ASSESSING OFFICER IS THAT THE PAYMENT OF ROYALTY E TC. BY THE ASSESSEE TO THE COMPANY SSSPL IS IN VIOLATION OF S.13(1) (C) OF THE ACT. HE SUBMITTED THAT THIS OBSERVATION OF THE ASSESSING OFFICER IS NOT AT ALL CORRECT AND THE PROVISION OF S.13(1)(C) STAND VIOLATED O NLY IF THE AMOUNT PAID IS NOT REASONABLE FOR THE SERVICES RENDERED AS PROVIDED UNDER S.13(2) OF THE ACT. ACCORDING TO THE LEARNED COU NSEL THE ASSESSING OFFICER HAS MERELY REFERRED TO THE PROVISION OF S.13(1)(C) OVERLOOKING THE PROVISION OF S.13(2) OF THE ACT. HE S UBMITTED THAT PAYMENT OF ROYALTY IS REASONABLE AND IS NOT HIT BY THE PROVISION OF S.13(2) OF THE ACT. HE SUBMITTED THAT EVEN IF THERE IS VIOLATION OF SEC.13(1) ( C) OF THE IT ACT THE ENTIRE ROYALTY AMOUN T CANNOT BE DISALLOWED OR EXEMPTION U/S 12 CAN NOT BE WITHDRAWN. HE SUBMITTED THAT ACCORDING TO THE ASSESSING OFFICER THE ASSESSEE CANNOT PAY EVEN ONE RUPEE AS ROYALTY AND IF IT PAYS IT AMOUNTS TO VIOLATI ON OF SEC.13 (1) (C ) OF THE IT ACT AND HE DOES NOT TOOK INTO THE CONDITION SPECIFIED U/S 13 (2) OF THE IT ACT WHICH REFERS TO REASONABLENESS OF PAYMENT A ND THE FINDINGS OF THE ASSESSING OFFICER ARE AGAINST THE PROVISIONS OF TH E ACT. HE SUBMITTED THAT THE AMOUNT OF ROYALTY AND RENT PAID B Y THE ASSESSEE SOCIETY HAS BEEN TAXED IN THE HANDS OF THE RECIPIENT AND AGAIN THE SAME PAYMENTS DISALLOWED AND ALSO TAXED IN THE HANDS OF ASSESSE E SOCIETY WHICH AMOUNTS TO DOUBLE TAXATION AND THAT SHALL BE AV OIDED. HE RELIED ON THE FOLLOWING JUDGEMENTS: 1. CIT VS. MUTHOOTTU CHARITABLE TRUST (227 ITR 203 ) (KER. HC) 2. KANAHYALAL PUNJ CHARITABLE TRUST VS. DIT (E) ( 297 ITR 66) (DEL.) HC 17. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN THE CASE OF CHARITABLE INSTITU TIONS THE INCOME ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 11 DERIVED FROM THE PROPERTY HELD UNDER TRUST WHOLLY FO R CHARITABLE OR RELIGIOUS PURPOSES SHALL BE APPLIED FOR THE OBJECT FOR W HICH THE INSTITUTION WAS CREATED. IT IS A SETTLED LAW THAT INCOME CAN BE APPL IED BY WAY OF DONATIONS TO OTHER CHARITABLE INSTITUTIONS HAVING SIMIL AR OBJECTS. IN THE INSTANT CASE THE AMOUNT OF ROYALTY WAS PAID TO A PRIVA TE LIMITED COMPANY ENGAGED IN COMMERCIAL LINE OF ACTIVITIES. THE COMPANY IS NOT A COMPANY INCORPORATED UNDER SEC.25 OF COMPANY ACT HAV ING CHARITABLE OBJECTS. A COMPANY REGISTERED FOR COMMERCIAL PURPOSES CANNO T BE CALLED AS COMPANY ENGAGED IN CHARITABLE ACTIVITY. IF AN Y FUNDS ARE DIVERTED BY A TRUST REGISTERED U/S 12A OR CLAIMING EXEM PTION U/S 11 FOR THE BENEFIT OF ANY MEMBERS OF THE ASSESSEE TRUST OR ANY COMPANY IN WHICH MEMBERS OF THE ASSESSEE TRUST ARE SUBSTANTIALLY INTERE STED THEN PROVISIONS OF SEC. 13(1) ARE ATTRACTED. SEC.13(1) STARTS W ITH NON OBSTANTE CLAUSE THAT IF THE ACTIVITY OF THE CHARITABLE INSTITUTION ARE CAUGHT BY THE SECTION 13 THE PROVISIONS OF SEC. 11 OR 12 SHALL NOT APPLY. IN THE CASE OF KANAHYA LAL PUNJ CHARITABLE TRUST CITED SUPRA IT WAS HELD THAT THE ACT REQUIRES VERY STRICTLY THAT THE TRUST SHOULD USE ITS FUNDS ONLY FOR THE CHARITABLE OBJECTS FOR WHICH IT HAS BEEN SET UP AND CANNOT BE PERMITTED TO DIVERT THE FUNDS FOR THE BENEFIT OF ANY PERSON REFERRED TO IN SEC.13(3) AND IF THERE WAS ANY VIOLATION OF SEC.13(1 ) ( C ) AND 2(A) OF THE ACT THE BENEFIT OF EXEMPTION U/S 11 & 12 COULD BE DENIED. FURTHER IN THE CASE OF MUTHOOTTU CHARITABLE TRUST CITED SUPRA IT WAS HELD THAT WHEN ANY AMOUNT OF THE TRUST USED FOR NON CHARITABLE P URPOSE OR FOR THE BENEFIT OF OTHER PERSON IN WHICH MEMBERS OF ASSESSEE TRUST ARE INTERESTED THEN ASSESSEE IS DISENTITLED FOR EXEMPTION U/ S 11. IN THE CASE OF ACTION FOR WELFARE & AWAKENING IN RURAL ENVIRO NMENT (AWARE) VS. DY.CIT (2003) 263 ITR 13 (AP) THE FIXED DEPOSITS IN THE NAME OF THE ASSESSEE TRUST WORTH RS.16 LAKHS WERE PLEADED AS SECURITY WITH THE BANK ENABLING ONE OF MEMBERS OF THE ASSESSEE TO AVAIL L OAN WITHOUT ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 12 ADEQUATE SECURITY AND CONSIDERATION AND CERTAIN TRANSACTI ONS OF PURCHASE OF LANDS WAS ROUTED THROUGH THE ASSESSING OFFICER IN WHICH ALL MEMBERS WERE DIRECTORS AND EMPLOYEES OF THE ASSESSEE. THE MIS- UTILISATION WAS GLARING. HONBLE ANDHRA PRADESH HIGH CO URT HELD THAT THE ASSESSEE COULD NOT ESCAPE THE CLUTCHES OF LAW NOR ANY SYMPATH Y OR EQUITIES COULD BE EXTENDED PARTICULARLY FOR AN ORGANI ZATION WHICH RECEIVED DONATIONS PURELY FOR THE WELFARE OF THE UNDE R PRIVILEGED AND NEEDY CLASS OF THE SOCIETY. IN VIEW OF THE FACT THAT ENT IRE TRANSACTION WAS WITHIN PERSONAL KNOWLEDGE OF TRUSTEES IT COULD BE SA ID THAT THE FUNDS OF ASSESSEE WERE DIVERTED AND MIS-UTILISED. ON FACT THE ASSESSEE HAD VIOLATED PROVISIONS OF SECTION 13 (1) ( C ) (II) REA D WITH SEC.13 (2) (B) AND THUS WAS NOT ENTITLED FOR EXEMPTION. 18. THE WORDS ANY CONCERN ARE COMPREHENSIVE AND EMBR ACE EVERY CONCERN WHICH SATISFIES THE QUALIFICATION OF BEING O NE IN WHICH ANY PERSON REFERRED TO IN SUB. SECTION 3 OF SEC.13 HAS A SUB STANTIAL INTEREST WHICH INCLUDES A CONCERN IN WHICH MEMBERS OF TRUST SOCIETY I S A DIRECTOR/MEMBER. IN THE PRESENT CASE ASSESSEE MADE PAYMENT MADE TO A COMPANY I.E. SSSPL IN WHICH THE MEMBERS OF THE TRUST ARE SUBSTANTIALLY INTERESTED. IN FACT ENTIRE SHARE CAPITA L OF M/S SSSPL IS OWNED BY THE MEMBERS OF THE ASSESSEE SOCIETY. THEREFORE FUNDS OF THE ASSESSEE HAD BEEN UTILIZED FOR THE BENEFIT OF PERSONS SPEC IFIED U/S 13(1) (C ) OF THE IT ACT. THERE IS NO DISPUTE THAT MEMBERS O F THE SOCIETY ARE INTERESTED PERSON IN THE COMPANY M/S SSSPL. THE FUNDS OF THE ASSESSEE SOCIETY WERE DIVERTED FOR THE BENEFIT OF THE M/S SSSPL WHICH AMOUNTS BE SPENT FOR THE PERSONAL BENEFITS OF THE MEMBERS. THE CLAI M OF THE ASSESSEE IS THAT THE ROYALTY HAS BEEN PAID FOR THE PURPO SE OF THE BUSINESS OF THE ASSESSEE. IN OTHER WORDS IT WAS INCURRED TO ENABLE THE ASSESSEE TO CARRY ON AND EARN PROFIT IN THAT ACTIVITIES. IT IS NOT ENOUGH ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 13 THAT THE DISBURSEMENT ARE MADE IN THE COURSE OF OR ARISE OUT OF OR ARE CONCERNED WITH OR MADE OUT OF PROFIT OF THE BUSINESS BU T THAT MUST ALSO BE FOR THE PURPOSE OF THE BUSINESS. IN THE PRESENT CASE A SSESSEE MADE PAYMENT TOWARDS ROYALTY TO M/S SSSPL. ROYALTY IS NOT HING BUT CONSIDERATION FOR THE USE OR RIGHT TO USE ANY INDUSTRIAL COMMERCIAL SCIENTIFIC EQUIPMENT PATENT INVENTIONS MODEL DESIGN SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY. THE CLAI M OF THE ASSESSEE IS THAT ROYALTY INCURRED WHOLLY AND EXCLUSIVELY FOR T HE PURPOSE OF BUSINESS. THE WORDS WHOLLY AND EXCLUSIVELY BOTH REFE R TO THE EXPENSES INCURRED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUSINESS. WH ILE DETERMINING AS TO WHETHER THE DEDUCTION CLAIMED HAS BEE N WHOLLY AND EXCLUSIVELY SPENT ON SUCH BUSINESS IT IS PERMISSIBLE TO FIND OUT WHETHER THE AMOUNT HAS REALLY GONE FOR THE PURPOSE OF BUSINESS OR NOT. THE WORD BUSINESS USED IN SEC.37 CONNOTES SOME REAL SUBSTANTIA L AND SYSTEMATIC AND ORGANIZED COURSE OF ACTIVITY OR CONDUCT WITH THE SET PURPOSE WHICH IS CARRIED ON WITH THE END VIEW OF MAKIN G OR EARNING PROFIT. THUS IN ORDER TO DEDUCT THE EXPENDITURE MUST BE INCURRED FOR THE PURPOSE OF BUSINESS. THE PAYMENT OF ROYALTY TO M/S S SSPL CANNOT BE SAID THAT IT WAS INCURRED FOR THE PURPOSE OF BUSINESS. THE CONTENTION OF THE ASSESSEE IS THAT THE PAYMENT O F ROYALTY RESULTED IN GETTING READY MADE SCHOOL WITH ALL THE INFRASTRUCTURE INCLUDING STUDEN TS AND STAFF. THIS ARGUMENT OF THE ASSESSEE COUNSEL HAS NO MERIT. M/S SSSPL I S NOT ENTITLED TO CARRY ON SCHOOL AS IT IS NOT APPROVED BY CBS E. FURTHER M/S SSSPL ITSELF CARRIED ON THE PRE-SCHOOL CLASSES FOR WHICH CBS E APPROVAL IS NOT REQUIRED. FURTHER THERE IS NO COMPULSION ON PRE -SCHOOL STUDENTS OF SSSPL TO JOIN THE ASSESSEES INSTITUTION ONLY. THEY ARE AT LIBERTY TO JOIN EDUCATIONAL INSTITUTION AS THEY LIKE. REGARDING STAFF ALSO THEY ARE NOT THE BONDED EMPLOYEES OF THE SSSPL. MOREOVER THERE IS NO CONTRACT BETWEEN THE STAFF OF SSSPL TO WORK WITH THE ASSESSEE AND SAME THING ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 14 WITH THE STUDENTS. M/S SSSPL HAS NO APPROVAL FROM CBSC CARRYING ON THE EDUCATIONAL INSTITUTION. HAVING NO OPTION THE ME MBERS OF ASSESSEES SOCIETY INDIRECTLY INTENDED TO GET PROFIT OUT OF THE EDUCATIONAL ACTIVITY OF THE ASSESSEE SOCIETY AND IN THE NAME OF ROYALT Y PAYMENT MADE TO M/S SSSPL THEY GOT THE BENEFIT. IN OUR OPIN ION THIS IS A COLLUSIVE TRANSACTION TO TRANSFER THE PROFIT OF THE ASSE SSEE SOCIETY TO INTERESTED PERSONS WHICH CANNOT BE ALLOWED AS BUSINESS DEDUCT ION. IT IS IMMATERIAL WHETHER THE COMPANY IS PAID TAX ON THAT AMOUNT OR NOT THE FUNDS OF THE ASSESSEE SOCIETY ARE GOVERNED BY THE PRO VISIONS OF THE IT ACT SPECIFICALLY PROVISIONS OF SEC.11 & 13. FUNDS OF T HE ASSESSEE SOCIETY CANNOT BE SAID THAT USED FOR THE PURPOSE OF PURSUI NG THE OBJECT OF THE ASSESSEE SOCIETY THEREFORE THE ACTIVITIES OF THE SO CIETY ARE CAUGHT BY THE PROVISIONS OF SEC.13 (1) ( C) OF THE ACT AND THE ASSESSING OFFICER IS JUSTIFIED IN INVOKING PROVISIONS OF SEC.13(1) ( C). WHEN THERE IS VIOLATION OF PROVISIONS U/S 13(1) (C) THEN THE ASSESSING OFFICER HAS TO WITHDRAW THE EXEMPTION U/S 11. ACCORDINGLY ASSESSING OFF ICER HAS WITHDRAWN THE EXEMPTIONS U/S 11 AND TAXED THE INCOME O F THE ASSESSEE. WE FIND NO INFIRMITY IN THE ORDER OF THE ASSESSING OFFI CER ON THIS ISSUE. THIS GROUND OF THE REVENUE IS ALLOWED. 19. WITH REGARD TO PAYMENT OF RENT IT WAS DISALLOW ED BY THE ASSESSING OFFICER ON THE REASON THAT COMPARATIVELY THE PAY MENT OF RENT FOR THE ASSESSMENT YEAR 2002-03 IS LOWER THAN EARLIER ASSE SSMENT YEARS. THE ASSESSEE GIVE AN EXPLANATION THAT FOR THE ASSESSMENT YE AR 2002-03 THERE WAS A CONSTRUCTION ACTIVITY AS SUCH AVAILABLE AREA O F UTILIZATION REDUCED BY 23 383 SQ. FT. CONSEQUENTLY RENT WAS REDUCED. THIS FACT WAS NOT CONTROVERTED BY THE DEPARTMENT. AS SUCH IN OUR OPI NION CIT(A) JUSTIFIED IN ALLOWING THE PAYMENT OF RENT. THIS GRO UND OF THE REVENUE IS DISMISSED. ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 15 20. FURTHER IN THE ASSESSMENT YEAR 1998-99 THERE WAS A DISPUTE REGARDING ALLOWABILITY OF RS.1 20 000 TOWARDS EQUIPME NT HIRE CHARGES IT WAS STATED THAT RENT INCLUDES HIRE FOR EQUIPMENT AND TH IS FACT WAS OVER LOOKED BY ASSESSING OFFICER AND THE CIT(A) AFTER CONSIDERI NG THIS FACT ALLOW THE CLAIM OF THE ASSESSEE. BEING SO WE DO NOT FIN D ANY INFIRMITY IN THE ORDER OF THE CIT(A) ON THIS ISSUE. 21. AS THE FACTS IN OTHER ASSESSMENT YEARS ARE ALSO SIMILAR TO THE FACTS THAT WE HAVE CONSIDERED FOR THE ASSESSMENT YEAR 1998-99 APPLYING THE SAME RATIO LAID DOWN BY US IN THE EARLI ER PARAS OF THIS ORDER FOR THE ASSESSMENT YEAR 1998-99 THE ISSUE RELATING TO TH E PAYMENT OF ROYALTY IS DECIDED AGAINST THE ASSESSEE FOR THESE ASSESSMENT Y EARS AND THUS WE ALLOW THE GROUND TAKEN BY THE REVENUE. 22. IN THE RESULT REVENUE APPEAL IN ITA NO.282/HYD /2006 IS PARTLY ALLOWED AND REVENUE APPEALS IN ITA NOS.283 TO 286/HYD/2006 ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT 30 .7.201 0 SD/- SD/- G.C. GUPTA CHANDRA POOJARI VICE PRESIDENT ACCOUNTANT MEMBER DATED THE 30 TH JULY 2010 ITA NOS.282 TO 286/HYD/2006 CHIREC EDUCATIONAL SOCIETY HYDERABAD 16 COPY FORWARDED TO: 1. M/S CHIREC EDUCATION SOCIETY 1-22 KONDAPUR NEAR HI -TECH CITY SERILINGAMPALLY MANDAL RANGA REDDY DISTRICT 2. ADIT (EEMPTIONS)-I HYDERABAD 3. CIT(A)-IV HYDERABAD. 4. CIT HYDERABAD 5. THE D.R. ITAT HYDERABAD. NP