TaxTMI 
TaxTMI 
TaxTMI 
2019 (11) TMI 1039
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....(-)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 the A 0 is arbitrary and unjustifiable 02. The AO is not justified in making addi....
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.... 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 paid to M/s People Combine Avenues Ltd. [formerly M/s Vikas Educational Institutions (P) Ltd.(in short VEIL)]. On 31.03.2009 and the provision for TDS wa....
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....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 items specified in the definition of 194I of the Act and viewed that it is squarely covered by the definition of rent. The AO found from the balance sheet and depreciation statement that the block of assets held by V....
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...., 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 accordingly requested to set aside the orders of the lower authorities and allow the appeal of the assessee. 10. On the other hand, the Ld.DR relied on the orders of the Ld.CIT(A) and supported the orders of the lower authorities. 11. We have considered the rival submissions and pe....
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....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 facilities owned by the company VEIL for which payment has been made, and therefore, apparently the Impugned payments would fall within the purview of rent under section 1941. It was, however, contended that a lessor would not provide these many facilities and therefore the transaction cannot be characterized as one of rent. I....
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.... 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 etc., which squarely fit into the definition of rent as defined in the Income Tax Act u/s 194I of the Act. For the sake of clarity and convenience, we extract section 194 I which reads as under : Rent. 93194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to 94[a re....
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....pany 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 deducted the TDS and remitted to Government account before the due date for filing the Return of Income. In the subsequent assessment year also, the assessee has deducted the TDS and made the payment. For a query from the Bench, the Ld.AR submitted that in the subsequent years, the assessee has entered into an agreement with the company and making the payment as rent and deducting the TDS. In the financial statement of the VEIL, the....
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....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 recognitions in the hands of VES, the loans are extended to VEIL, entire receipts are taken into consideration, before arriving credit decisions by the banks. (f) Both State & Central Government Authorities, public at large who are concerned, It is VES carrying educational activity, it is the responsibility of VES to provide necessary facilities as committed to students, to impart education / diffusion of knowledge. (g) From the Public/students point of view it is the re....
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....here 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 increasing the additional floor area. There was no agreement between the assessee society and the company with regard to the additional space made available to the assessee. The assessee has furnished the copies of the board resolutions of the company dated 28.02.2008 for increase of rent from Rs. 350 lakhs to Rs. 600 lakhs. The AO did not convince with the explanation offered by the assessee and as per the observations made by him from the information furnished by the assessee, the AO held that the payment of Rs. 4.00 c....
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....t 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 passed at these both society and company were accepted and there was no issue on this score. c. Both the society and company are controlled by the same Management, hence, there was no insistence for agreement. d. Unless a Govt. agency insist for the agreement, there was no need for internal agreement by incurring huge stamp duty and registration fees, the same would reduce the profits of the organization in turn reduce the tax payment. e. In both society & company, there is no stake of the public and, hence, every rupee saving in expenditure is the ultimate motto of the management. f. The charges that is to be incur....
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.... 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/nominal cost in the hands of the assessee society. In view of the above, it is again submitted / undertaken that is, a. Just because the assessee society and the company come under the common management the fair market value of the services were not over valued / over charged. b. In fact, keeping in view of the size, extent, quality of infrastructure available under one common roof also for exclusive use would yield better revenue if given to outsiders other than the assessee society. c. The company was having huge indebtedness to various nationalized banks / financial institutions / NSFCs, in addition to this all the assets including movable, immovable, were under mortgage when compared to the risk, interest burden,....
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....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 stated to be reasonable. The Ld.CIT(A) has extracted the submission of the assessee in para No.7.9 of the order and the same was reiterated by the Ld.AR during the appeal hearing which is extracted for the sake of convenience as under: "7.9 Further to the above, the AR of the appellant also made written submission vide letter dated 17.06.2013 which is as follows :- "With reference to the above, the following are the detailed workings on the cost of infrastructure, size of infrastructure and other facilities offered to the assessee society, viz., That the detailed explanations and the nature and size of infrastructure, offered by the company to the assessee society. Gachibouli campus :- Size of the land 5.50 acres (Approx) Extent of construction 2,2....
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....ging 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 for recruitment of excellent faculty from the intellectuals, though the value of this cannot be measured in terms of monetary value, this is valued as Rs. 200 lakhs per annum. Continuous guidance / drive for future programs / plans as an inbuilt system. The assessee society is being provided with guidance of top educationalists, children psychologists, personality development, the costs were not estimated. Whenever the assessee society finds it difficult, due to non receipt of its fees, to pay the establishment costs, the same shall be assured by the company, as part of the infrastructure facility, hence, there was no debt burden to the assessee. The infrastructure charges of Rs. 600 lakhs paid at the end of the financial year. Therefore, there was no pressure on the assessee society. Total costs estimated (per annum) A.Y.2009-10 (Rs. in lakhs) Gachibouli ....
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....ons 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 shows that activity was not commenced in Oakridge International School-2, Hyderabad. It appeared that the Ld.AR is trying to include all other facilities and all other premises to substantiate the increase in the rent. It is to be noted that the assessee is making separate payment for various other campuses which is accounted by the VEIL under the head income from revenue. There is no written agreement between the assessee and the company. In the absence of written agreement, the purpose of payment of various revenues and the expenses could not be linked to the rent. Though the assessee has claimed to have made the payment for Oakridge Hyderabad campus, there was no such mention in the P&L account of the company, VEIL which is also stated to be closely related institution to the assessee. The assessee claimed that both the VEIL and the assessee are travelling together for a common goal by imparting education to....
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....es 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 the reasonableness for increase in payment of rent to the company with proper documentation. The assessee could not substantiate the increase in rent with proper documentation. We find from the records that the assessee filed the return of income for the A.Y.2009-10 declaring loss of Rs. 6457/- and admitting income of Rs. 4,65,336/- for the A.Y.2010-11. At the same time, VEIL earned the profit of Rs. 9,44,94,871/- for the A.Y.2009-10 and Rs. 7,70,55,982/- for the A.Y.2010-11 from the payments made by VES. It is worthy to note that the assessee has made the payment of Rs. 28.53 crore for the A.Y.2009-10 and Rs. 33.30 crores for the A.Y.2010-11 to VEIL, which shows that the assessee is either incurring losses or declaring meager income, whereas the VEIL which is a company is earning huge profits. Coming to Visakhapatnam campus, VEIL has received a sum of Rs. 9.23 crores under the Revenue apart from the rent o....
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.... 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 / college. However, the assessee failed to submit the details of number of students, temporary staff, parents or guests taken lunch etc., therefore, the AO disallowed 20% of expenses and added back to the returned income. 19. On appeal, the Ld.CIT(A) restricted the disallowance to the 10% of the expenses claimed. The Ld.CIT(A) restricted the disallowance to 10% as discussed in para No.9.3. of the order which reads as under : "9.3. The authorized representative represented that some expenses in the nature of mess expenses are incurred by the society, when it provides snacks/food to parents/guests/counselors in the school / college premises. It was also argued that the amount of such expenses claimed is very reasonable taking into account the number of students and staff of the institution. I have considered the submissions. It is an admitted position that the company VEIL maintains the hostels and bears all mess e....
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....diture 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 wing of the assessee. I have considered the submissions made. The TA & DA particulars could have explained with reference to tickets purchased and other supporting evidence. Taking into account, the nature of expenses, and the explanation offered, I consider it reasonable to restrict the disallowance to 10% of the amount debited. Accordingly, addition to the tune of Rs. 1,92,598/- is confirmed. This ground is partly allowed." 24. We have considered the rival submissions and it is a fact that the expenses were made with self made vouchers and the same was not disputed. Though the assessee claimed that the expenses were related to TA/DA public relations persons, the assessee did not furnish the details of names of the persons to whom the TA/DA was paid. Since the assessee is a society and claimed to be non profitable organization, it is not expected to incur public relations expenses which are not verifiable with the documentary eviden....
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....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 utilisation etc. was also not substantiated by the Ld.AR. Therefore, we hold that disallowance of 20% of expenditure would meet the ends of justice. Accordingly, we restrict the disallowance to 20% of the expenditure. The ground of the assessee was partly allowed. 29. Ground No.7 for the A.Y.2009-10 is related to payment of municipal tax. The assessee made the payment of municipal tax to GVMC in respect of airport campus building in Visakhapatnam owned by VEIL. In the absence of agreement and payment of huge rent of Rs. 6.00 crores to VEIL, the AO viewed that the payment of municipal taxes are not allowable deduction in the absence of any specific agreement to that effect, hence, disallowed the expenditure and added to the returned income. 30. Against the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) confirmed the addition made by the AO observing that in the absence of any agreement, the owner required to make the payment ....
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....n 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 the same as business expenditure. However, the AO found that the assessee has not maintained the proper bills, vouchers and the details for the expenses, hence, disallowed 20% of the expenses amounting to Rs. 88,473/-. 34. On appeal, the Ld.CIT(A) restricted the disallowance to the extent of 10%. 35. Against the order of the Ld.CIT(A), the assessee filed appeal before this Tribunal. We have considered the rival submissions and perused the material placed before us. It is a fact that the assessee could not submit the details such as name of the guest, date of visit, relation of the guests with the company, purpose of visit, date wise and relevant bills and vouchers for incurring the expenditure. Therefore, the Ld.CIT(A) restricted the disallowance to 10% of the expenses claimed. Taking into consideration of the explanation of the Ld.AR during the appeal hearing, we find that the disallowance is justified and do not find any reason to interfere with the order of th....