2013 (7) TMI 574 - HC - Income Tax

High Court restores exemption under section 11, emphasizes reasonableness of payments

Chirec Education Society Versus Assistant Director of Income-tax

Chirec Education Society Versus Assistant Director of Income-tax - [2013] 354 ITR 605 Issues Involved:1. Denial of exemption under section 11 of the Income-tax Act, 1961.2. Reasonableness of royalty payments to SSSPL.3. Application of section 13(1)(c) and section 13(2) of the Income-tax Act, 1961.4. Alleged diversion of funds to SSSPL.5. Interpretation of relevant case laws and statutory provisions.Detailed Analysis:1. Denial of Exemption Under Section 11:The assessee, a society formed by directors of SSSPL, sought exemption under section 11 for the assessment years 1998-99 to 2002-03. The Assessing Officer denied the exemption, citing that the assessee was not operating on a non-profit basis, with profits being diverted to SSSPL through rent and royalty payments. The Commissioner of Income-tax (Appeals) reversed this decision, stating that the royalty payments were reasonable and linked to the use of the 'Chirec' brand and infrastructure. The Tribunal partially allowed the Revenue's appeal, maintaining the denial of exemption under section 11, asserting that the payments to SSSPL constituted a diversion of funds for the benefit of members of the assessee society.2. Reasonableness of Royalty Payments to SSSPL:The Commissioner of Income-tax (Appeals) found that the royalty payments were reasonable, noting that the Assessing Officer failed to establish what would be a reasonable amount. The Tribunal, however, disagreed, suggesting that the payments were not for the business purpose of the assessee and were intended to benefit SSSPL. The High Court emphasized that the reasonableness of the payments should be considered under section 13(2) and not dismissed outright. The court noted that the payments were for the use of the 'Chirec' brand and infrastructure, which were necessary for the assessee's operations.3. Application of Section 13(1)(c) and Section 13(2):Section 13(1)(c) disallows exemption if any part of the income is used for the benefit of specified persons. Section 13(2) provides specific instances where income is deemed to be used for the benefit of such persons, including payments that are excessive or unreasonable. The High Court held that these provisions must be read harmoniously. The court found that the royalty payments were not excessive or unreasonable and were necessary for the assessee's operations, thus not attracting the provisions of section 13(1)(c).4. Alleged Diversion of Funds to SSSPL:The Tribunal concluded that the payments to SSSPL represented a diversion of funds for the benefit of members of the assessee society. The High Court disagreed, stating that the payments were for legitimate business purposes, including the use of the 'Chirec' brand and infrastructure. The court emphasized that the Revenue failed to prove that the payments were unreasonable, and therefore, the payments did not constitute a diversion of funds.5. Interpretation of Relevant Case Laws and Statutory Provisions:The High Court referenced several cases, including New Noble Educational Society, Polisetty Somasundaram Charities, and Span Foundation, to support its interpretation that the reasonableness of payments must be considered under section 13(2). The court distinguished the present case from others cited by the Revenue, such as Rattan Trust and Muthoottu Charitable Trust, noting that those cases involved clear violations of section 13. The court concluded that the Tribunal misdirected itself by focusing on irrelevant issues and failing to consider the provisions of section 13(2).Conclusion:The High Court allowed the appeals, set aside the Tribunal's order, and restored the Commissioner of Income-tax (Appeals)'s decision, granting the assessee exemption under section 11 for the relevant assessment years. The court emphasized the need to consider the reasonableness of payments under section 13(2) and found that the payments to SSSPL were legitimate and necessary for the assessee's operations.