TaxTMI 
TaxTMI 
2013 (7) TMI 574
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....red it under the Public Societies Registration Act, 1350, Fasli. The assessee took on lease premises (a building bearing Nos. 1-22 and an extent of ac. 5.52 cents in Serilingampally Mandal, Ranga Reddy District) belonging to SSSPL under a registered lease deed dated June 25, 1997. The directors of SSSPL are members of the assessee-society. The assessee was granted affiliation by the CBSE. SSSPL retained its identity and continued the educational activity in pre-primary-1 (PP1), pre-primary-2, L. K. G. and U. K. G. sections, in the name of Chirec pre-school, without recognition from the CBSE. The assessee paid rent for the building and playground belonging to SSSPL as per the lease agreement dated June 25, 1997, and royalty for using the name "Chirec", under an agreement dated April 1, 1997. The royalty amount is 20 per cent. of the total fee received from the students on rolls as at the beginning of the year and was paid in three instalments. As per a letter dated February 7, 2005, of the assessee given to the Assessing Officer, royalty is being paid to SSSPL for extensive use of its famous and established brand name "Chirec" and against part reimbursement of various amounts spen....
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....tructure, etc., cannot be ruled out ; it is in the character of business payment ; in the remand report, the Assessing Officer has only stated that "reasonableness (of royalty) cannot be determined" and, thus, failed to establish as to what should be the reasonable amount of royalty payment ; consequently the order of the Assessing Officer is unsustainable once reasonableness of the royalty payment cannot be determined ; that no reasonable man would transfer user rights of name and other benefits without charging adequate consideration ; that the royalty paid for the assessment year in question cannot be said to be unreasonable ; that the Assessing Officer also erred in disallowing 20 per cent. of the rent simply on ad hoc basis without conducting any enquiry for collecting information about comparable cases or asking the assessee for clarification ; and that the Assessing Officer was also not correct in ignoring the hire charges for equipment of Rs. 1.20 lakhs. The Revenue challenged the orders of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal, Hyderabad Bench-B, Hyderabad (for short "the Tribunal"). The appeals were numbered as I. T. A. Nos. 28....
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....he situation with the students ; as SSSPL did not get approval from the CBSE to run the school, the members of the assessee society entered into a collusive transaction to transfer the profit of the assessee society to interested persons and get business deduction for the royalty payment ; and the Assessing Officer rightly withdrew the exemption under section 11 invoking section 13(1)(c) and taxed the income of the assessee. It, however, upheld the finding of the Commissioner of Incometax (Appeals) on the issue of rent reduction and equipment hire charges. Challenging the common order of the Tribunal, the present appeals have been preferred by the assessee. Heard Sri S. Ravi, learned senior counsel for Sri Ch. Pushyam Kiran, learned counsel for the appellant-assessee and Sri J. V. Prasad, learned senior standing counsel for the respondents-Revenue. The learned counsel for the assessee contended that it paid royalty to SSSPL equivalent to 20 per cent. of the fees received from students towards usage of registered trade name "Chirec" and the logo for running the school which also belonged to SSSPL ; payments of royalty were made in terms of the agreement dated April 1, 1997 ; SSSP....
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....Trust [1997] 227 ITR 203 (Ker), Kanahya Lal Punj Charitable Trust v. Director of Income-tax (Exemption) [2008] 297 ITR 66 (Delhi) and Action for Welfare and Awakening in Rural Environment v. Deputy CIT [2003] 263 ITR 13 (AP). We have noted the respective contentions of the respective parties. Admittedly, the assessee was formed as a society registered under the Public Societies Registration Act, 1350, Fasli by the members of SSSPL after the application of SSSPL to the CBSE was rejected and the assessee had taken the premises belonging to SSSPL with infrastructure on lease under a lease agreement dated June 25, 1997, to run the school and is paying rent to SSSPL. Under and agreement dated April 1, 1997, SSSPL is also receiving as royalty from the assessee, 20 per cent. of the total fee received from the students on rolls as at the beginning of the year. It is the contention of the assessee that SSSPL is paying the royalty for usage of the brand name "Chirec" and also the infrastructure, tangible and intangible benefits created by SSSPL ; that it could secure a readymade school with all infrastructure including the students from SSSPL and that the payment of royalty by it to SSSPL....
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....) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3) in so far as such use or application relates to any period before the 1st day of June, 1970 ; (d) In the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year- (i) any funds of the trust or institution are invested or deposited after the 28th day of February, 1983, otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 ; or (ii) any funds of the trust or institution invested or deposited before the 1st day of March, 1983, otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 continue to remain so invested or deposited after the 30th day of November, 1983 ; or (iii) any shares in a company [not being a Government company as define....
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.... purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3), (a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub-section (3), for any period during the previous year without either adequate security or adequate interest or both ; (b) if any land, building or other property of the trust or institution is, or continues to be, made available for the use of any person referred to in sub-section (3) for any period during the previous year without charging adequate rent or other compensation ; (c) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services ; (d) if the services of the trust or institution are made available to any person referred to in sub-section (3) during the previous year without adequate remuneration or other compensation ; (e) if any share, secu....
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....tution from such investment, by reason only that the funds of the trust or the institution have been invested in a concern in which such person has a substantial interest. (5) Notwithstanding anything contained in clause (d) of sub-section (1), where any assets (being debentures issued by, or on behalf of, any company or corporation) are acquired by the trust or institution after the 28th day of February, 1983, but before the 25th day of July, 1991, the exemption under section 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such assets, by reason only that the funds of the trust or the institution have been invested in such assets if such funds do not continue to remain so invested in such assets after the 31st day of March, 1992. Explanation 1.-For the purposes of sections 11, 12, 12A and this section, 'trust' includes any other legal obligation and for the purposes of this section 'relative', in relation to an individual, means- (i) spouse of the individual ; (ii) brother or sister of the individual ; (iii) brother or sister of the spouse of the individual ; (iv) any lineal ascendant or descen....
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....ed adequate or reasonable which would warrant denial of exemption under section 11. It is a settled principle of interpretation of statutes that the court should avoid a construction which would render a part of the statute devoid of any meaning or application (Rao Shiv Bahadur Singh v. State of Vindya Pradesh, AIR 1953 SC 394). Therefore, it is not possible to ignore the provisions of sub-section (2) of section 13 (as contended by the Revenue) while deciding the question whether the assessee is entitled to the exemption under section 11 of the Act. It is true that the words "Without prejudice to the generality of the provisions of clause (c) and clause (d) of sub-section (1)" occurring in sub-section (2) of section 13 suggest that the provisions of sub-section (2) should not be understood as cutting down the provisions of clause (c) and clause (d) of sub-section (1) of section 13 but this does not mean that in a situation like the present where sub-section (2) can apply, it should be ignored. The next question to be considered is whether the act of the assessee in paying royalty amounts to diversion of the funds of the assessee attracting clause (g) of sub-section (2) of section ....
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....view of the Commissioner of Income-tax (Appeals) that the assessee is entitled to the benefit of section 11 is valid and was liable to be interfered with. We, therefore, hold that the observations of the Tribunal that income of the assessee is given to SSSPL, a company whose activity is commercial and not charitable ; that payment of royalty by the assessee is not incurred for purpose of the assessee's business ; that the students or staff of SSSPL were not bound to join the assessee once it was formed by SSSPL ; and the payment was intended to benefit the members of assessee society ; that it is a collusive transaction to transfer the profit of the assessee society to interested persons ; are wholly irrelevant and perverse. The Tribunal appears to have misdirected itself and considered totally irrelevant issues. We are of the view that the Assessing Officer and the Tribunal have failed to consider sub-section (2) of section 13 and have simply concentrated on clause (c) of sub-section (1) of section 13. In New Noble Educational Society (supra), this court held that the provisions of section 13(1)(c) would be attracted only in cases where any part of the income, or property of a ....
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....that if the assessee let out its premises to persons mentioned in section 13(3) and derived rents therefrom and such rents were more than the standard rent as computed under the Delhi Rent Control Act, 1958, they have to be treated as adequate and the assessee cannot be denied exemption under sections 11 and 12 of the Act. In J. K. Charitable Trust [1992] 196 ITR 31 (All), it was held that where adequate interest/rent is charged by the assessee trust on loans advanced and buildings leased out to certain concerns, they are not hit by section 13(2)(a) and the assessee is entitled to exemption under section 11. The above decisions also support our view that reasonableness or adequacy of payments by an assessee to the interested person have to be necessarily gone into (under section 13(2)) to determine whether the assessee would be entitled to exemption of income under section 11. In Rattan Trust [1997] 227 ITR 356 (SC) cited by the Revenue, the Supreme Court considered the effect of amendments to section 13 of the Act and section 21A of the Wealth-tax Act, 1957, by the Finance Act, 1970, with effect from April 1, 1971. The provisos thereto laid down that exemption under section 11 ....