AI Drafter 
TaxTMI 
TaxTMI 
2019 (11) TMI 1039
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....e A.Y.2009-10 declaring total income of Rs.(-)6,547/- on 06.10.2009. The case was selected for scrutiny and the Assessing Officer (AO) completed the assessment on total income of Rs. 8,33,70,977/- for the A.Y.2009-10. The AO made the following additions to the returned income for the A.Ys.2009- 10 and 2010-11 : Nature of addition A.Y 2009-10 A. Y. 2010-11 Disallowance of rent payable to M/s VEIL u/s 40(a)(ia) 6,00,00,000 - Disallowance of rent paid to M/s VEIL u/s 40A(2) 2,00,00,000 2,01,00,000 Disallowance of Mess expenses, Misc. Expenses, Credit card expenses, municipal taxes, donation, guest house expenses, board expenses, library etc. 33,77,524 Disallowance of Mess expenses, municipal taxes, donation, board expenses, recruitment expenses, capital nature expenses and transportation charges 74,71,547 3. Aggrieved by the order of the AO, the assessee filed appeal before the CIT(A) and the Ld.CIT(A) partly allowed the appeal of the assessee. 4. Against the order of the CIT(A), the assessee filed appeal before us and raised as many as 9 grounds for the A.Y.2009-10 which reads as under : 01. The Order passed by....
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....ure of library books, also, submitted that they were not bound books / text books, hence eligible to be debited to profit & loss a/c, the AO is not justified in making an addition of Rs. 6,53,533, also CIT(A) is not justified in confirming the addition, hence liable to be deleted in the hands of the assessee. 5. Ground No.1 is general in nature which does not require specific adjudication. 6. Ground No.2 for the A.Y.2009-10 is related to the addition of Rs. 600.00 lakhs made u/s 40a(ia) of the Act. Brief facts of the case are that the assessee is running educational institutions at Visakhapatnam, Tirupathi and Hyderabad. The society is having its office at Asilmetta, Visakhapatnam. The educational institutions run by the society at various places are as under : Visakhapatnam Nalanda Talent School Seethammadhara Airport Campus College Sheelanagar Mahila Kalasala NAD Kotha Road Hyderabad Oakridge International School Khajaguda, Nanakram Guda Road Tirupathi Junior College, K.C.Road 6.1. During the previous year relevant to the assessment year 2009-10, the assessee has debited the sum of Rs. 6,00,00,000/- to the Profit and Loss account (P&L account) and....
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....staff e. Confidence that will be created in the minds of both parents, students) authorities concerned from whom the institution is to get necessary approvals, permissions, that the group is having huge buildings, campuses, to cater to the needs of the students. f. That the entire facilities are at the disposal of the students of the Vikas Educational Society only. g. Construction of buildings/creation of floor space including arrangement of furniture, fixtures, providing computers including hardware, software, strictly to suit the requirements of students of the Vikas Educational Society. h. Confidence/assurance to meet the future needs of the society towards its requirements, in facilities with respect to increase in the strength of the students vis-a-vis additional courses to be offered. i. Flexibility in payment of user charges, at the end of the financial year also extending financial support by incurring expenditure on behalf of the VES/investment on behalf of the VES" 7. The AO examined the explanation of the assessee and facts of the case and observed that the assessee has made the payment towards the Land, Building and other ....
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....ot be characterised as rent. Not being convinced with the explanation of the assessee, the CIT(A) dismissed the appeal of the assessee and confirmed the addition made by the AO. 9. Against the order of the Ld.CIT(A), the assessee is in appeal before us. During the appeal hearing, the Ld.AR advanced the same submissions which were made before the AO as well as the Ld.CIT(A). The Ld.AR argued that the company is providing infrastructure facilities (reproduced in the assessment order) such as huge extent of building, floor area, play ground, swimming pools for conducting sports, games and other events, in house mess / canteen facilities both for the students and the staff all the time, books, periodicals and library for use of both the students and the staff. These facilities are offered by the VEIL to the assessee and the same cannot be equated with the letting out of the concrete building and structures hence, argued that there is no case for deduction of tax at source and the same cannot be treated as rent payment. Hence, argued that there is no case for application of 194I in the case of the assessee and the disallowance u/s 40(a)(ia) is not applicable in the assessee's case ac....
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....sts estimated (per annum) A.Y.2009-10 Rs. In Lakhs Gachibouli Campus 472.50 Airport campus, Vizag 144.00 Sports facilities 52.80 Buses 360.00 Technical know-how 200.00 Total 1229.30 6.7. Thus, it could be seen that the claim for infrastructure charges is said to be paid for space (building with facilities) and certain technical or managerial services As already discussed, it is not verifiable what are technical services provided by VEIL The assessee has also not demonstrated provision of such technical knowhow with reference to specific details or evidence No information was furnished as to what were the collaborations tied up during the relevant year, or what were the new courses introduced, what are the faculty recruitment made during the year for which the impugned payment was to be made. The facts apparent from the various details filed is ,that- the VEIL has provided building floor space along with requisite furniture and fitting to run educational institution to the assessee society. The service component embedded in such payment has not been demonstrated. It is evident that the assessee has used the land, building and facilitie....
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....ee. There was no written agreement between the assessee and the VEIL. VEIL is company and closely associated with the assessee. Since the assessee is using the land and building as well as the other furniture and fixtures available to the company, the Ld.AR contended that it is using infrastructure facilities. However, fact remains that the company, VEIL has given its premises along with the furniture and machinery, fittings etc as available in the Balance Sheet to the assessee for it's use and receiving rent monthly/or yearly from the assessee. In the books of accounts of payee, the receipt was accounted for under the head ' rent account'. Apart from the rent, the company is also receiving various other revenues from the educational institutions located at Visakhapatnam, Hyderabad, Tirupathi etc. It is undisputed fact that the VEIL is the owner of the land and building and the other items of assets mentioned in the balance sheet and given it on lease to the assessee. In the instant case, as observed from the order of the AO and the Ld.CIT(A), block of assets shown by the VEIL consists of buildings, computers, air conditioners, electrical fittings and other furniture and fittings e....
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....name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.] 11.2. In the instant case, there was no agreement between the assessee and the company. The fact remains that the assessee is using the buildings and other furniture and fittings available to the company and the company is earning the income which was admitted in the financial statements as rents. As per the depreciation statement, the written down value of the buildings as on 31.03.2009 was Rs. 32.00 crores and other assets mentioned in the depreciation statement was around Rs. 8.00 crores approximately. Thus, the major part of the payment was related to the use of the Land and building. Since the assessee is making the payment of composite rent for the purpose of use of the land and buildings and other equipment, the payment made to the company is squarely covered by the definition of 194I for the purpose of rent. It is observed from the assessment order that in the immediately preceding year, the assessee has made the payment of Rs. 350 lakhs to the company and....
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....ssment proceedings, the AO found that the Vikas Educational Society and VEIL are closely related concerns and the relation of the society and the VIEL is explained by the AO in page No. 5 of the assessment order as under : "(a) VEIL (Vikas Educational Institutions Ltd.) is part of the VES (Vikas Educational Society) came into existence, to create, own, operate and manage the necessary infrastructure for the purpose of VES. (b) Both VEIL and VES are housed in the same accommodation in all these centres. (c) To facilitate flexibility in borrowing/raising of the funds through term loan and working capital loan from nationalized banks and financial institutions for the purpose of creating infrastructure, VES is achieving all these objects through its branch/division by name VEIL (d) The managing Committee of VES controls affairs of the VEIL having presence in the Board of directors of VEIL. (e) For mobilizing/ raising funds through term loan / working capital arrangements from banks, both VES & VEIL are parties to the banks, executing common documents, undertaking the debt and repayment of the debt jointly, based on the strength of recogniti....
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....lows : Nature of Asset Additions during the F.Y.2008-09 Buildings 67,14,792 (upto 30.09.2008) 5,71,83,793 (upto 31.03.2009) Computers & Equipment 14,88,758 Duplicating Machine 0 EPABX 58,000 Fax Machine 0 Generators 0 Refrigerators 0 Televisions 0 Water Coolers 0 Air Conditioners 19,04,289 Audio Equipment 0 Electrical Fittings 14,84,000 Furniture 1,57,99,392 Other Equipment 10,276 12.2. The AO further observed that there were no additions to the NSTL and Oakridge International School Campus at Visakhapatnam as claimed by the assessee. The AO further observed that there was increase in buildings of Oakridge International School, Hyderabad after 30.09.2008. The AO further observed that the additional floor area relating to dining hall, hostel mess are utilised by the company itself and only the floor area relating to the class rooms and library are used by the assessee. Though there was substantial increase in the additions to buildings after 30.09.2008 i.e. in the middle of financial year, by the time the classes were already started and there was no advantage to the society on ....
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....Lawsons Bay colony, Visakhapatnam where Nursery to P.P-2 are in operation. b. Increase in students Since there was floor space available/accommodation with all features available the same was contributed towards increasing strength of the students, which in turn led to increase in all costs related to infrastructure facilities provided by the company to the assessee. Need for agreement between the Assessee and the Company and reasons for not having agreement. a. At every stage of approvals before the Government agencies in the hands of the assessee, when asked/called for having support of the infrastructure available, the company would also submitting necessary consent letters/ documentary evidence, affidavits or undertakings that the entire infrastructure created in the hands of the company would be at the exclusive disposal of the society, therefore, there was no insistence for the agreement between these two concerns from any govt. departments. b. Necessary resolutions passed at assessee society and the company would be submitted whenever called for the same, out of the past more than one and half decade experience, the resolutions pa....
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....accruing to the assessee on receipt of such goods, services or facilities: a. The assessee society was having confirmed / agreed source of mobilizing infrastructure. b. The infrastructure facilities available were at the exclusive disposal of the assessee society. c. The provider of the infrastructure facilities is a reputed corporate body with organized set up which in-turn boost the image of the assessee society to get the necessary approvals, permission / affiliations. d. With a confidence that every increase in number of students or addition of further courses or additional approvals or additional courses the needs for the infrastructure would be met on time without scouting for the same. e. It will enhance the confidence in the minds of the assessee society With regard to its future business / prospects of the business. f. To create own infrastructure instead of availing from the company, the assessee society was required to mobilize term loans and working capita's from banks / financial institutions, however, without having pain of these responsibilities / burden hiring infrastructure would work out very cheap cost/nom....
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.... of rent of Rs. 4.00 crores is reasonable and accordingly confirmed the addition made by the AO. 14. Against the order of the Ld.CIT(A), the assessee filed appeal before this Tribunal. During the appeal hearing, the Ld.AR reiterated the submissions made before the AO/CIT(A) and argued that the AO committed a mistake by making the disallowance u/s 40A(2) of the Act. Referring to page No.56 of the paper book, he submitted that there was increase in the infrastructure facilities offered by the company for which the assessee is making the payment of rent. He argued that in the case of Gachibowli campus, the assessee has been offered 5.50 acres of land with a constructed area of 2,25,000 sq.ft providing facilities at international standards and argued that the area would fetch around Rs. 50/- per sq.ft per month and the rental value of the Gachibouli campus alone works out to Rs. 675 lakhs. The Ld.AR further submitted that sports facilities offered, fleet of buses offered by the company to the assessee and technical knowhow given to the assessee and worked out the rental value at Rs. 12.29 Lakhs and submitted that against which the assessee paid the rent of Rs. 600 lakhs which is sta....
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....4 lakhs Sports facilities Other than play grounds, swimming pool the cost of sports / games articles meant for use of the students at these locations (based on past experience) 2200 students x Rs. 300 X 8 comes to Rs. 52.80 lakhs Buses: A fleet of 45 buses are part of the infrastructure provided to the assessee society, the minimum rental value comes to i.e, Diesel shall be the expenditure of the user Driver salary shall also be the expenditure of the user With the above conditions, the bus in the market would fetch a rent of Rs. 4000 per day (irrespective of age of the vehicle) as it can be easily ascertained from the motor field. The cost of infrastructure under this head comes to Rs. 4000 X 45 X 200 days comes to Rs. 360 lakhs Technical know-how: The assessee society is incorporate under the statute, the managing committee, are not paid with any remuneration / honorarium for the services rendered by them, scouting for continuous development in the field, updation of the infrastructure, addition of new courses, affiliation from various universities, located in other part of the world, research and development, inventing ....
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....ound Rs. 1229.30 lakhs against which the payment of Rs. 600 lakhs argued to be reasonable. The Ld.CIT(A) found the rent was paid for the campuses at Visakhapatnam i.e. NSTL campus, VMK campus, Rednam gardens, the Nalanda Talent School, NAD campus, VES campus at CBM Compound and other premises taken for the purpose of guest house etc.. and there was no increase in floor space etc. Out of the above campuses, floor space was hired from VEIL only for two campuses i.e. Gachibouli campus at Hyderabad and airport campus at Visakhapatnam. In respect of other campuses, lease was taken from third parties but not from VEIL. The Ld.CIT(A) found that there was addition to the fixed assets to the extent of Rs. 6.21 crores in respect of Oakridge Hyderabad campus and there is no other additional space hired by the company. On verification of the P&L account placed before us in respect of Vikas Educational Society Institutions Ltd, the rent was received only for Visakhapatnam campuses. There was no mention of rent payment for Hyderabad Oakridge International campus, Hyderabad or Gachibouli campus. In fact the revenue from Oakridge International School-2, Hyderabad was only Rs. 1,78,619/- which show....
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.... of Hyderabad Oakridge School during the year under consideration. The issue of payment of rent required to be verified in the light of payment of other revenue of Rs. 11.17 crores by Hyderabad and Rs. 9.23 crores by Visakhapatnam campuses also. Payment of other revenue and the rents to be examined jointly. Though the assessee claimed to have paid the increase in value of rent for other facilities such as sports, buses, higher salary, cost of infrastructure etc., there is no evidence in the form of written agreement to support the same. It is also necessary to furnish the details of collection of separate charges for bus services, sports facilities from the students or not etc. It is undisputed fact that VES is a society to whom the Societies Act applies, whereas VEIL is a company to whom the Companies Act applies. The procedure for drawal, usage of money etc. are governed by the different Acts i.e. Societies Act and the Companies Act. The government places certain restrictions on the societies, especially educational societies for use of funds. Since both the institutions are inter linked and usage of funds are restricted by both the Acts differently, it is necessary to establish ....
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....ical facts of the earlier year. On appeal the Ld.CIT(A) confirmed the addition and the assessee is in appeal before us. Since the issue is on identical facts, we remit the matter back to the file of the AO for deciding the issue afresh on merits as per the directions given in the A.Y.2009-10. Accordingly both the appeals for the A.Y.2009-10 and 2010-11 are set aside on the disallowance u/s 40A(2) for denovo consideration of the AO. 17.1. The assessee relied on the various decisions to support it's argument, not to make disallowance u/s 40A(2) of the Act. Since the issue is remitted back to the file of the AO, the assessee is free to raise all the issues before the AO. Accordingly the appeal of the assessee on the issue of disallowance u/s 40A(2) is allowed for statistical purposes. 18. Ground No.4 for the A.Y.2009-10 is related to the disallowance confirmed by the Ld.CIT(A) in respect of mess charges of Rs. 1,17,935/- . During the assessment proceedings, the AO found that the assessee has debited the sum of Rs. 11,79,349/- towards mess expenses for which the assessee claimed to have incurred the expenses towards snacks / food to parents / guests / counselors in the school / c....
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.... we consider the disallowance of 5% is reasonable. Accordingly, appeal of the assessee is partly allowed. 22. Ground No.5 for the A.Y.2009-10 is related to the disallowance of miscellaneous expenditure of Rs. 3,85,197/-, out of the total expenditure debited to the Profit and Loss account of Rs. 19,25,985/- on estimation basis, since the expenses were mostly made out of self made vouchers. The AO disallowed 20% of the total miscellaneous expenses. 23. The Ld.CIT(A) restricted the disallowance to 10% which worked out to Rs. 1,92,598/- as per detailed discussion made in para No.10.3 of the order of the Ld.CIT(A) which reads as under : "10.3. It could be seen that the assessee has debited expenditure to the tune of Rs. 19,25,935/- towards miscellaneous expenses It was explained that these expenses are incurred towards staff who mobilize business for the institute and are in public relations It was also claimed that the expenditure incurred was towards TA & DA. However, the assessing officer had noted that most of the vouchers were self-made which was not disputed in appeal. The authorized representative contended that all these expenses are scrutinized by internal audit ....
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....urred with regard to affiliation, permission / recognition and was claimed to be public relation expenditure. It is not in dispute that the expenses were towards hotel bills and show room bills. It is possible that there is business purpose in respect of hotel bills; but such a view cannot be taken in respect of showroom bills which definitely involve an element of personal nature. Therefore, the disallowance at 50% appears to be on the higher side. Hence the Assessing officer is directed to restrict the disallowance to 30% of the amount 'aimed. Accordingly, addition of Rs. 3,93,264/- is confirmed. This ground is partly allowed." 27. During the appeal hearing, the Ld.AR argued that the expenditure was wholly laid out for the purpose of business and the Ld.DR supported the order of the Ld.CIT(A). 28. We have heard rival contentions and observed that the expenses were mostly for hotel bills and payment for cloth show room bills. The assessee failed to submit the details of names of the persons for whom the hotel bills were incurred and the relation between the assessee and the persons to whom the hotel bills were paid. Similarly, the purpose of cloth purchase and utilisatio....
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.... to the file of the AO and direct the AO to decide the issue afresh on merits. Accordingly, appeal of the assessee on the issue of payment of municipal taxes is allowed for statistical purpose. 32. Ground No.4 for the A.Y. 2010-11 is related to municipal taxes paid to GVMC for a sum of Rs. 6,55,696/-. For the same reasons discussed in 2009- 10, we remit the matter back to the file of the AO for fresh consideration. 33. Ground No.8 for the A.Y.2009-10 is related to the addition of Rs. 88,473/- under the head guest house entertainment expenditure. In the assessment proceedings, the AO found that the assessee claimed the guest house entertainment expenditure of Rs. 4,42,355/- under the head 'office maintenance expenses' for Visakhapatnam branch. The assessee explained that the guest house accommodations are being maintained at every campus and the expenses towards the officials / authorities visiting campus both within India and from outside India, public relation officers, counsels etc. were debited to the guest house expenditure. Ld.AR submitted before the AO that the expenditure was wholly and exclusively laid out for the purpose of business and accordingly requested to allow....
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....f lending libraries. Since the assessee is not engaged in the business of lending library, the Ld.CIT(A) held that as per Rules, the assessee is entitled for depreciation of 60%, accordingly confirmed the order of the AO. Against which the assessee filed the appeal. 38. We have considered the rival submissions. As per Income Tax Rules and the depreciation schedule, the depreciation is allowable @100% in the business of running lending libraries. In the instant case, there is no dispute that the assessee is not running the business of lending library. The allowable depreciation is only 60% in the business other than lending libraries. Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld. Identical issue is involved for the assessment year 2010-11 also. Since facts are identical we, uphold the order of the Ld.CIT(A) and dismiss the appeal of the assessee on depreciation of library books for the A.Y.2009-10 and 2010-11. A.Y.2010-11. 39. Ground No.5 for the A.Y. 2010-11 is related to Chief Minister's Relief Fund. Since the issue is remitted back to the file of the AO, the Ld.AR has not pressed this ground, hence this ground is dismissed ....