TaxTMI 
TaxTMI 
2022 (5) TMI 880
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion 25 of the Companies Act, 1956. It conducts market surveys and compiles reports of readership and listenership of various media and provides them to its members and non-members on subscription basis. The reports enable subscribers to plan strategies for advertising in newspapers, periodicals, TV, radio, etc. The assessee is registered under section 12A of the Income-tax Act, 1961 ("the Act") vide certificate dated 7th June 1994 and claims benefit under section 11 of the Act. Ground 1: Denial of benefit of section 11 by invoking section 13 4. During the previous year ended 31st March 2007, the assessee entered into an agreement with Hansa Research Group Pvt. Ltd. ("HRG") (Page 45-58 of PB - IRS 2007) where under HRG agreed to conduct market survey and compile reports styled as Indian Readership Survey ("IRS") to be provided by the assessee to its subscribers. The subscription revenues were agreed to be shared between the assessee and HRG as per clause V of the agreement (page 48) as under: - (i). Upto Rs. 350 lakh of subscription revenues - HRG 90% and assessee 10% (ii). Next Rs. 50 lakh - Hansa 85% and assessee 15% (iii). Next Rs. 50 lakh - Hansa 75% and assessee 25% ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsive exercise covering various parts of the country and by involving a large number of people. It was a long-drawn and expensive exercise, which required funds to be disbursed in advance. It was pointed out that the total debit to Income and Expenditure account for payment to research agencies was Rs. 5.15 crore whereas the advance was only Rs. 68.07 lakh (page 11 of the assessment order). * Arrangement for remunerating the research agencies - it was explained that the payment to research agencies was made as a percentage of subscription receipts. It was explained that the apparently lower percentage of payment made to AC Neilson ORG MARG (unrelated entity - ORG MARG stands for Operations Research Group - Marketing and Research Group) as compared to Hansa was on account of the scope of work being different. It was pointed out that the more appropriate comparison would be between work done by Hansa and similar work done by other research agencies in past. The said data was provided. On comparison, it was seen that ORG MARG was paid 87.5% of subscription revenues from IRS 2001 upto Rs. 425 lacs and NFO MBL (National Family Opinion Market Behaviour Ltd) was paid 87.5% upto Rs. 300 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ubscription received for Reports Rs. 20 - Rs. 23 lakhs 80% Rs. 23.1- Rs. 30 lakhs 50% > Rs. 30 lakhs 25% (ii) Other Cities "Rs. 10-Rs.11.5 lakhs 80% Rs. 11.6 Rs. 15 lakhs 50% > Rs. 15 lakhs 25% The apparent lower percentage of payment to A C Nielsen -ORG - MARG is explained hereunder: The IRS Research Fees payable should be seen in the context of past arrangements and not in comparison with another project of a different type, albeit in the same time frame. Please see the following historical data on IRS Research fees with other research agencies as compared to the fees payable in the current year. IRS Year Research Slab Structure Revenue Sharing % IRS 2001 Operations Research India Ltd and Marg Marketing & Research Group Pvt. Ltd., (Referred to as ORG-MRG) Upto 425 Lacs 87.5 Rs.425 - 525 Lacs 75.0 IRS 2002 NFO MBL India Pvt. Ltd., Upto 300 Lacs 87.5 Rs.300-475L 85.0 IRS 2006 Hansa Research Group Pvt. Ltd., Upto 330 Lacs 90.0 Rs.330 - 365 Lacs 85.0 IRS 2007 Hansa Researc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lied, directly Or indirectly for the benefit of any person referred to in sub-section 3 : The benefit prohibited is both directly or indirectly given to person who is covered ( under section 13(3) of the Act. The -point to be taken note of in the - resent case is that Shri Shekar Swam - who is director of the assessee and also director of Hansa Research Group is also in the Board of Governor of the assessee. He is undoubtedly at the helm of affair. The benefit whether huge or minuscule is prohibited. The assessee itself had argued in earlier years that unless there is Violation of section 11 or 13, benefit of section 11 cannot be denied. Now, when it is established beyond doubt that there is violation of section 13, the assessee is Providing self serving contradicting arguments. It is seen from careful perusal of Different data/statistic that the average common Sale in different years on which payment of fees is based is Rs. 3 crore. Therefore, the data to be compared is upto sale of Rs. 3 crore. It is seen from the Copy of Agreements of Research Agencies that percentage of subscription received for Reports paid as fees in different years for sale upto 3 crore are as under:....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion was glaring and it 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 misutilised. On fact, the assessee had violated provisions of section 13(1)(c)(ii) read with section 13(2)(b) and, thus, was not entitled for exemption - Action for Welfare & Awakening in Rural Environment (AWARE) v. Dy. CIT[2003] 130 Taxman 82/263 ITR 13 (AP)." In the case of [2003] 126 Taxman 365 Supreme Court of India Director of Income-tax v. Bharat Diamond Bourse It was held that "In the result, we disagree with the view taken by the High Court and the Tribunal and affirm the view taken by the Assessing Officer and the Appellate Commissioner of Income-tax (Appeals). We hold that Bharat Shah was a founder of the assessee on institution; that during the previous years relevant to the assessment years 1989-90 and 1990-91, a substantial amount of money to the extent of Rs. 70 lakhs was le....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llowed. This judgment has been relied upon in the case of the assessee by the Hon'ble Tribunal. Further, in the case of Mafatlal Industries Ltd. v. Wealth-tax Officer, 95 ITD 66 (Mum.) it was held that "General presumption is that a taxpayer should not take inconsistent view and expected to be consistent with the view already taken. It is also expected that taxpayer should not change its stand as Suits to its requirement and advantageous in different proceedings. Therefore, respectfully following the above referred judicial decisions, the claim of the assessee to be alternatively held as Mutual association is hereby rejected." 10. The Assessing Officer at page 13, para 6.13 concluded that the assessee had agreed that the amount paid to HRG was more than the amount paid to unrelated entities. On a common base of Rs. 3 crores, he noted that 87.5% was paid to unrelated entities whereas 90% was paid to HRG. He also noted that the payments made to ORG MARG (unrelated entity) during the year at 80% was much lower than 90% paid to HRG. Thus, he concluded that the assessee was making excess payment to HRG. He also alleged that a huge sum was given by way of advance to HRG (page ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssing Officer, the assessee further pointed out that HRG was not dependent on the assessee and that it worked with over 100 companies for research and did over 500 research reports in a year and that it had a 100% subsidiary in the US which did over 50 projects a year for US companies [page 10, para (e)]. 14. Ld.CIT(A) rejected the above submissions and observed as under: - "6.16 I have carefully considered the arguments of the Assessing officer and have also gone through the written submissions, oral submissions as also letter dated 18th December 2009. The authorized representative by giving lengthy statements and calculations has tried to establish that the payments to HRG are not excessive. However, from the facts it is clear that the initial slabs of payment of fees to HRG has been 90% as compared to 87.5% to the earlier agencies for IRS 2001 and 85% to the earlier agencies for IRS 2002. The rate of 90% is certainly more than the rates of 87.5% and 85% to the earlier agencies. Further in the same accounting year Research is also handled by another agency viz., A C Nielsen - ORG Marg in respect to whom the initial slab is only 80%. I am not impressed by the lengthy explanatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to the above Grounds, the appellant submits that if, in the opinion of the CIT (A), the appellant was not entitled to exemption u/s 11, he erred in not granting exemption on grounds of mutuality to the entire Income other than income attributable to non members. 2. He failed to appreciate and ought to have held that if exemption is to be denied under section 11, the appellant is fully entitled to claim and be allowed exemption on grounds of mutuality in respect of income attributable to members. VI. The learned CIT (A) has erred in confirming the disallowance / add backs of the following items in computing the taxable income: Provisions for Gratuity Rs. 11,702 Provisions for Leave encashment 1,14,097 Loss on sale of Fixed Assets 4,598 VII. The CIT (A) has erred in treating the sum of % 12 lac as income chargeable to tax for the assessment year 2008-09 VIII. The CIT (A) erred in not considering the Accumulation under clause (2) of Explanation. to section 11 (1) for, the current year amounting to Rs.25,50,000 as application towards objects of the institution." 16. Ld. Counsel for the assessee submitted that HRG is not a person covered under section 13(3)(e) as Mr. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....voting pow. In other words, Explanation (a) when broken down, requires two conditions that need to be fulfilled. The first condition is that, that the person should be the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits); and second that these shares (of which the person is the beneficial owner) are carrying not less than 20% of the voting power. In the facts of the present case, admittedly HDFC Ltd., on its own, is not the beneficial owner of shares carrying at least 20% of the voting power as required under explanation (a) to section 40A (2) (b) of the I. I. Act. The shareholding that HDFC Ltd. has in the Petitioner is only 16.39%. 28. We cannot, and the law does not permit us, to hold that HDFC Ltd. is the beneficial owner of 22.64% of the shares in the Petitioner by clubbing the shareholding of HDFC Investments Ltd. with the shareholding of HDFC Ltd. If we were to do this, we would be effectively holding that HDFC Ltd., being a shareholder of HDFC Investments Ltd., is the beneficial owner of the shares which HDFC Investments Ltd. holds in the Petitioner. This, in law, is clearly imperm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpany have the, sole determining voice in administering the affairs of the company and are entitled, as provided by the Articles of Association to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company. The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders. The dividend is a share of the profits declared by the company as liable to be distributed among the shareholders. Reliance is placed on behalf of the appellant on a passage in Buckley's Companies Act (12th Edn.), p. 894 where the etymological meaning of dividend is given as dividendum, the total divisible sum but in its ordinary sense it means the sum paid and received as the quotient forming the share of the divisible sum payable to the recipient. This statement does not justify the contention that shareholders are owners of a divisible sum or that they are owners of the property of the company. The proper approach to the solution of the Questio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the company declares it, to participate in the liquidation proceeds and to vote at the shareholders' meeting. Refer also to Carew and Co. Ltd. v. Union of India [(1975)2 SCC 791] and Carrasco Investments Ltd. v. Directorate of Enforcement [(1994) 79 Comp Cas 631 (Del)]. 258. Holding company, of course, if the subsidiary is a WOS, may appoint or remove any Director if it so desires by a resolution in the general body meeting of the subsidiary. Holding companies and subsidiaries can be considered as single economic entity and consolidated balance sheet is the accounting relationship between the holding company and subsidiary company, which shows the status of the entire business enterprises. Shares of stock in the subsidiary company are held as assets on the books of the parent company and can be issued as collateral for additional debt financing. Holding company and subsidiary company are, however, considered as separate legal entities, and subsidiary is allowed decentralized management. Each subsidiary can reform its own management personnel and holding company may also provide expert, efficient and competent services for the benefit of the subsidiaries."(emphasis supplied) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....DT as set out in section 92BA (i) of the I. T. Act. 31. There is another reason for coming to this conclusion. If we were to interpret this provision as is sought to be contended by the Revenue, it would lead to an absurd situation, as correctly contended by Mr. Mistri. It is undisputed that there cannot be more than one beneficial owner of the same shares. If we were to take the example that was given by Mr. Mistri during arguments. it would effectively lead to a completely absurd result. Take for example Company 'A' has a wholly owned subsidiary Company W. In turn, the shares of Company 'C are held 90% by Company 'B' and 10% by Company W. If one was to give the interpretation as sought for by the Revenue, then it would, mean that Company 'A' beneficially owns 100% of Company 'C which would, lead to an absurd situation that Company 'B'; though owning 90% of the shareholding in Company 'C, would not be regarded as having a substantial interest in Company 'C as Company 'B' cannot be said to be the beneficial owner of its 90% shareholding in Company 'C'. Further, if the interpretation of the Revenue was to be held as c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....issues which are reproduced below:- "General - Applicability of Section 13(1)(c) Since section 13(2)(a) and 13(2)(c) deal more specifically with payments for services and monies lent, section 13(1)(c) ought not to be invoked for such payments. In any event, the amounts are not used or applied. Payment made for services cannot be regarded as use or application of money as contemplated in section 13(1)(c). Making payment for availing services cannot be regarded as providing a benefit. Otherwise, every payment made to a person referred in section 13(3) will be tantamount to use or application for the benefit of such person. Further, to be regarded as use or application, the income which has been so used or applied must be identifiable. As regards the advance of Rs. 68,07,442 - applicability of Section 13(2)(a) The advances of Rs.68,07,442 were given by the assessee to Hansa from time to time for carrying out research and market survey. The amounts were shown as advances because the reports were not yet dispatched to the subscribers. The advances were given to provide funds for extensive and expensive exercise involved in market research and survey by the research agencies. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1 and the work done by Hansa under IRS 2007 must be kept in mind while determining the reasonableness of the payments made to Hansa. Mutuality The Assessing Officer rejected the assessee's plea that the assessee was a mutual concern. He noted that the assessee received Rs.21,00,749 from non-members and therefore it was not a mutual concern. At para 8.4, the Ld.CIT(A) dismissed the argument based on mutuality. Submissions It is submitted that the assessee has received Rs.5,65,0 1,607/- from members compared to which receipts from non-members are insignificant and, therefore, the assessee must be regarded as a mutual concern. In any event, income to the extent of transaction with members must be regarded as mutual. Whether assessee can be considered as non-charitable Assessing Officer relied on his findings in AY 2006-07 to hold that even without considering the disqualifying provisions of section 13, the exemption under section 11 would not be allowable as the activities of the assessee were not charitable. At para 7.3, the CIT(A) distinguished the Tribunal's orders for earlier years which had reversed the orders of the AO and the CIT(A) on the ground that in tho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ar 2007-08 as that would result in taxing the same amount twice. II If exemption under section 11 is allowed (as requested by the assessee) If exemption under section 11 is allowed, the option of Rs. 12 Lakh would have been allowed as an application of income in Assessment year 2006-07. In the Assessment year 2007-08, the amount of Rs. 12 Lakh is deducted by the assessee itself to arrive at amount applied for charitable purposes and the taxable income. Since the assessee, having claimed the option of Rs. 12 Lakh as application in Assessment year 2006-07, has itself reduced the above amount from the expenditure applied on objects of the institution in Assessment year 2007-08, the question of adding Rs. 12 Lakh to taxable income in Assessment year 2007-08 does not arise. Ground No. VIII - Deduction of Rs.25,50,000 The assessee has claimed an amount of Rs.25,50,000 as option under clause (2) of Explanation to section 11(1). The position under two alternatives is as follows: (a) If exemption under section 11 is allowed. The amount of Rs. 25,50,000 is an option under clause (2) of Explanation to section 11(1) and, hence, is clearly allowable if exemption under section 11 is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....very specific that the assessee cannot share the revenue or benefits with any of the persons specified in the section 13(3) of the ACT directly or indirectly. We observed that Shri Shekar Swamy is the key director who controlled the affairs of the assessee company as well as HRG and also held the controlling capacity in the Board of Governor, in such situation it is no doubt that he played very crucial role in controlling the whole operations. It is fact on record that Shri Shekar has not directly held substantial shares in the HRG but held substantial interest in TIPL. The restrictions specified in the section 13 has to be evaluated holistically, not just based on shareholding. The controlling of the other unit plays important role, the controlling interest concept includes the controlling thru shareholding, it does include the controlling the other institution by indirect influence. In the given case, Shri Shekar controls the whole affairs in the assessee company, HRG and also plays a role in the Board of Governors. This shows that Shri Shekar has a say in the decision making process of all the units under his control or in the control of the family. Shri Shekar controls the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ere exists the transaction between the assessee and HRG, the advances given during the year can be considered as the advance paid for the purpose of business. It cannot be considered for the purpose of section 13 in order to deny the benefit u/s 11. We direct the Assessing Officer accordingly. 25. When we consider the whole submissions of both parties, we observe that the assessee consistently prayed for applicability of Mutuality concept in its case but it was rejected by the tax authorities with the observation that significant dealing with the nonmembers. We observe that the assessee has dealt with the 140 nonmembers and receipt of the total subscription from them is Rs.21,00,749/-, which equal to 3.60% of gross subscription. We do not agree with the revenue authorities that it falls under "significant dealing" with the nonmembers. Therefore, whenever a mutual concern deals with the members they have to allow the facilities to nonmembers also due to various reasons for survival. When compared to their gross revenue, if it is within range, say less than 5% of their operation, still it will be regarded as mutual concern/entity. It is the responsibility of such mutual entity to ma....