2010 (7) TMI 988 - AT - Income Tax

Partial Success for Revenue in Tax Appeals

The Assistant Director of Income Tax (E), 1, Hyderabad Versus M/s Chirec Education Society

The Assistant Director of Income Tax (E), 1, Hyderabad Versus M/s Chirec Education Society - TMI Issues Involved:1. Deletion of additions made on account of Royalty.2. Allowance of equipment hire charges as 'rent'.3. Confirmation of additions made in the assessment order under the head Royalty & Rent.Summary:Issue 1: Deletion of Additions Made on Account of RoyaltyThe CIT(A) deleted the additions made on account of Royalty, observing that the actual issue was not the allowability of the royalty payment but its reasonableness. The CIT(A) noted that the Assessing Officer failed to establish what should be the reasonable amount of royalty and concluded that the findings of the Assessing Officer were without support. The CIT(A) directed the Assessing Officer to accept the claim of the assessee regarding the Royalty payment, stating, 'no one would transfer user rights of name and other benefits without charging adequate consideration.' However, the Tribunal found that the payment of royalty to SSSPL, a company in which members of the assessee society had substantial interest, violated the provisions of Sec.13(1)(c) of the IT Act. The Tribunal held that the funds of the assessee society were diverted for the benefit of SSSPL, which amounted to personal benefits for the members. Consequently, the Tribunal allowed the ground of the Revenue, stating, 'When there is violation of provisions u/s 13(1)(c), then the assessing officer has to withdraw the exemption u/s 11.'Issue 2: Allowance of Equipment Hire Charges as 'Rent'The CIT(A) allowed the equipment hire charges as 'rent', noting that the Assessing Officer had overlooked the fact of equipment hire. The Tribunal upheld the CIT(A)'s decision, stating, 'we do not find any infirmity in the order of the CIT(A) on this issue.'Issue 3: Confirmation of Additions Made in the Assessment Order under the Head Royalty & RentThe CIT(A) deleted the ad-hoc disallowance of 20% of the rent paid by the assessee and directed the Assessing Officer to allow the exemption u/s 11 of the Act. The Tribunal, however, upheld the disallowance of excess rent paid of Rs. 4,80,000 for the assessment year 1998-99 but allowed the payment of rent for other years, noting that the reduction in rent for the assessment year 2002-03 was due to reduced utilization area. The Tribunal stated, 'CIT(A) justified in allowing the payment of rent.'Conclusion:The Tribunal partly allowed the Revenue's appeal for the assessment year 1998-99 and allowed the Revenue's appeals for the assessment years 1999-2000 to 2002-03, thereby disallowing the royalty payments and upholding the disallowance of excess rent for the assessment year 1998-99 while allowing the rent payments for other years.