TaxTMI 
TaxTMI 
2010 (7) TMI 988
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.... the additions made 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 common 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 assessment year 1998-99 (ITA 282/Hyd/2006). 4. The assessee is an educational society registered under the Public Societies' Registration Act. For the assessment year 1998-99, denying the assessee's claim for exemption of its income u/s 11 of the IT Act on the ground that the assessee society paid Royalty of ₹ 12,38,395/- and paid excess/unreasonable rent for the premises, etc. taken on lease, which was determined at 20% of the actual rent paid, completed the assessment on a total income of ₹ 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 infrastructure for running an ....
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....three installments falling due on 15th of May, 15th of September and 15th 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 classes I to VI besides its teaching staff, to the assessee. The assessing officer taking note of the fact that the Directors of the SSSPL are also members of the assessee society, disallowed the payment of ₹ 12,38,395 made by the assessee society to SSSPL as royalty. Thus, the assessing officer has completed the assessment on a total income of ₹ 19,34.395, with the above three additions. 8. In the other years under appeal, only two disallowances, viz. on account of disallowance of 20% of the actual rent paid and disallowance of royalty are involved. As for those years 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....
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....er submissions of the appellant, I am more convinced with the appellant's contention that no one would transfer user rights of name and other benefits without charging adequate consideration. Further, since the Assessing Officer himself has not given any finding with regard to the reasonableness of the Royalty Payment, the 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 worked out at 20% of the rent paid by the assessee for each of these years, and also directed the Assessing Officer to allow the exemption under S.11 of the Act, claimed by the assessee, with the following observations- "9. The claim of the assessing officer is that the members of the society and the directions of private limited company are one and the same. It is true that certain members are common. 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 dis....
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....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 the profit sharing as Royalty for the service provided. Though the company, according to the Learned Departmental Representative, permitted the assessee society to use the name Chirec, part of the name was kept by the company SSSPL for its own pre-school, named as 'Chirec Pre- 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. Whatever profits arise to the educational society, the same have to be utilized for building up infrastructure to impart education with non-profit motive. Instead of becoming into self-sustaining, the assessee-society, the Learned Departmental Representative pleaded, is depending upon the company SSSPL, which has put various conditions, and taking out huge receipts of the society in the shape of Rent, Roy....
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.... at all correct and the provision of S.13(1)(c) stand violated only if the amount paid is not reasonable for the services rendered as provided under S.13(2) of the Act. According to the learned counsel, 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 submitted 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 amount 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 violation 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 and the findings of the assessing officer are against the provisions of the Act. He submitted that the amount of royalty and rent paid by 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 assessee society, which amounts to ....
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....te security and consideration, and certain transactions of purchase of lands was routed through the assessing officer in which all members were directors and employees of the assessee. The misutilisation was glaring. Hon'ble Andhra Pradesh High Court held that the assessee could not escape the clutches of law, nor any sympathy or equities could be extended, particularly for an organization, which received donations purely for the welfare of the under privileged and needy class of the society. In view of the fact that entire transaction was within personal knowledge of trustees, it could be said that the funds of assessee were diverted and mis-utilised. On fact, the assessee had violated provisions of section 13 (1) ( c ) (ii) read with Sec.13 (2) (b) and, thus, was not entitled for exemption. 18. The words 'any concern' are comprehensive and embrace every concern which satisfies the qualification of being one in which any person referred to in sub. Section 3 of Sec.13 has a substantial interest which includes a concern in which members of trust society is a director/member. In the present case, assessee made payment made to a company i.e. SSSPL in which the members of the trust ar....
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....her, there is no compulsion on pre-school students of SSSPL to join the assessee's 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 with the students. M/s SSSPL has no approval from CBSC carrying on the educational institution. Having no option, the Members of assessee's society indirectly intended to get profit out of the educational activity of the assessee society and in the name of royalty payment made to M/s SSSPL they got the benefit. In our opinion, this is a collusive transaction to transfer the profit of the assessee society to interested persons which cannot be allowed as business deduction. It is immaterial whether the company is paid tax on that amount or not, the funds of the assessee society are governed by the provisions of the IT Act, specifically provisions of Sec.11 & 13. Funds of the assessee society cannot be said that used for the purpose of pursuing the object of the assessee society, therefore the activities of the society are caught by the provisions of Sec.....