TaxTMI 
TaxTMI 
2025 (1) TMI 559
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....Revenue. 3. The Revenue raised the following grounds of appeal: "1. The CIT(A), Order is opposed to facts and circumstances of the case. 2. Whether on the facts and in the circumstances of the case, the CIT(A) was correct in law in holding that assessee was not hit by the provisions of section 13, whereas the AO had brought on record cogent evidence that the payment made to specified persons viz., M/s EESPL, M/s CMRECS and M/s JDCPL was unreasonable and unduly excessive, since they did not possess the extra ordinary qualification, the huge payments made by the assessee to them was not commensurate to the services rendered by them. 3. Whether on the facts and in the circumstances of the case, the CIT(A) was correct in law in ignoring the fact that the assessee was hit by provisions of section 1.3(2)(c) and 13(2)(g) as the assessee siphoned off the funds of the trust for the benefit of persons referred to in section 13(3), thereby enriching the trustees /relatives of trustees and depriving the benefit to the beneficiaries of the trust. 4. Whether on the facts and in the circumstances of the case, the CIT(A) was correct in allowing the exemption ....
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....ed by the group companies under the guise of the assessee trust, which functioned merely as a name lender. Consequently, the educational scheme was operated with a profit-oriented motive. Furthermore, the specified entities were generating significant profit margins prior to disbursing salaries to directors/partners, who are specified persons as per the provisions of the assessee trust. 5) The specified entities were effectively overseeing and managing the administrative and commercial affairs of the trust. 6) The primary purpose behind the formation of the specified entities was to divert the income of the assessee trust. 7) The costs incurred by the assessee for services received from the specified entities were unreasonable. This is because the directors, who were employed by the specified entities, should have been drawing their salaries directly from the assessee trust, rather than diverting funds to the specified entities. 7. Given the above, the Assessing Officer (AO) was of the opinion that the provisions of Section 13(1)(c) of the Act had been violated, as the assessee trust had extended benefits to specified persons. Consequently, the AO deni....
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....emption in respect of the income of a charitable or religious trust. As regards the exemption available under section 11 of the Act, the provisions of section 13 are quite relevant. The heading of section 13 is "Section 11 not to apply in certain cases", In other words, section 13 provides that exemption under section 11 will not be available in cases of Violation of the provisions of section 13 of the Act. Besides, section 13(2) lists conditions which are deemed to be violation under sections 13(1)(c) or 13(1)(d). (i) Section 13(1)(c) - Benefit to interested persons Section 13 (1)(c) of the Act has carved out an exception from exemption in cases where a part. of income of a charitable or religious trust institution enures or is used or applied directly or indirectly for the benefit of the settler, founder or certain other specified persons under section 13(3) of the Act. This is obviously intended to ensure that the Income of such a trust! institution is not diverted towards the benefit of persons who are closely connected with the creation, establishment and conduct of the affairs of the trust/institution. (II) Section 13(1)(d) - Investment of funds of ....
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.... income. 8.2 Statutory Provision :section 13(1)(c) of the Act is reproduced as follows : "13. Section 11 not to apply in certain cases. (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof - (d) in the case of a trust for chartable or religious purposes or a charitable or religious institution, any income thereof 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 specked in sub-section (5 of section ii continue to remain so invested or deposited after the 30th day of November, 1983: or (iii) any shares in a company, other than- (A) shares in a public sector company ; (BB shares prescribed as a form or rode of investment under clause (xii) of sub-section (5) of section 11....
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.... trust or institution is diverted during the previous year in favour of any person referred to in sub-section 33, Provided That this clause shall not apply where the income, or the value of the property or, as the case may be, the aggregate of the income and the value of the property, so diverted does not exceed one thousand rupees; (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year not being a period before the1st day of January, 1971), in any concern in which any person referred to in subsection (3) has a substantial interest." From the aforesaid provisions of section 13(2), it may be seen that in respect of various circumstances referred o in clauses (a) to (h) thereof, the income or property of the trust or institution or any part of such income or property shall, for the purposes of section 13(1)(c) and 13(1)(d), be deemed to have been used or applied for the benefit of the trustee, etc. It clearly implies that section 13(2) is nothing: but an extension of section 13(1)(c) 113(1)(d). (iii) Statutory Provision :section 164(2) are also relevant, which are reproduced as follows: ....
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....ion would remain exempt under the provisions of section 11 of the Act. Board Circular: In the present context it is apposite to peruse paragraph 28 of Circular No.387 dt.&.7. 9, issued by the CBOT, under the heading "Levy of income-tax at maximum marginal rate in the case of charitable and religious trusts which forfeit tax exemption'. Paragraph 28.6 of the aforesaid circular is reproduced as follows: "28.6 It may be noted that new sub-section I) inserted in section 161 of the IT Act, which provides for taxation of the entire income received by trusts at the maximum marginal rates is applicable only in the case of private trusts having profits and gains of business. So far as public charitable and religious trusts are concerned, their busyness profits are not exempt from tax, except in the cases failing under clause (a) or clause (b) of section 11(4AA of the IT Act. As the maximum marginal rate of tax under the new proviso to section 164(2) applies to the whole or a part of the relevant income of a charitable or religious trust which forfeits exemption by virtue of the provisions of the IT Act in regard to investment pattern or use of the trust proper....
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....part of education and it is only the administrative party of which the appellant is responsible and so, the intellectual input should in ' command a higher price than what has been paid. Though the contentions are raised even before the AO, the same have not been discussed by the AO while arriving at the conclusion that M/s. Edufice Educational Services Pvt. Ltd does not possess any extra-ordinary qualification or an intangible asset so as to demand such huge payment. Such a conclusion regarding the Intellectual capability of the service provider without going into the details of service provided iris-a-vis the intellectual scholastic content, cannot hold ground especially when the said conclusion is merely drawn on the basis of analysis of profit margins of the service provider, more so when the such analysis of the said profit margin is just based on tangible costs without ever considering the intellectual inputs. The appellant is right is contending that intellectual input should command a higher price and the AO had ignored this aspect completely. Considering the activities of the service provider, the process of arriving at a net margin ignoring the fact that, the....
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....rried out is highly technical and intellectual in nature cannot be justified. Further, the appellant is right is contending that the AC had erroneously taken a que from section 44A0 in applying the profit margin to arrive at the so called arm's length price. In fact. the presumptive taxation scheme of section 44AD is designed to give relief to small taxpayers (having small turnover upto the ceiling specified in the said provision) engaged in any business (except the business of plying, hiring or leasing of goods carriages referred to in section 44AE) and this is applicable to the assessees mentioned therein the section whose income is computed on presumptive basis at the rate of 8% of the turnover or gross receipts of the eligible business for the year. At the same time, a person may voluntarily disclose his business income at more than 8% of turnover or gross receipt and the said provision does not preclude an assessee from disclosing higher income. This is to say that the profit rate mentioned in the said provision is not a maximum permissible rate nor it can be used to bench mark profit rate for any business of any turnover. The arm's length price that can be us....
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....tal fees collected. Further, the appellants case is that, it is In the interest of the appellant that, the services rendered by MIs CMR Education and Consultancy services are exclusive to the benefit of the appellant for the reason that, if the company provides the same services to different schools, it would be detrimental to the interest of the appellant, The appellant submitted that, the techniques evolved by the service provider are in house and that they have also intellectually contributed to evolving the techniques. Further it is submitted that this intangible asset has not been valued at all, since the same is developed in house. Stating so, the appellant submitted that had this intangible asset been valued and as allowable .antler the provisions of the act, has been allowed, the margins would have been far lesser. It is the contention of the appellant that the Assessing Officer has not considered this aspect at all. These contentions have not been discussed by the AO while arriving at the conclusion lat M/s CM JR Education and Consultancy services does not possess any extra-ordinary qualification or an intangible asset so as to demand such a huge payment.....
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....and Consultancy services nor any comparable assessees operating in the same line of business are identified by the AO to benchmark the profit margin in order to hold that appellant's profit margin is abnormal. Even after taking a cue from section 44AD of the IT Act, the AO had further scaled it down stating that in the case under consideration the turnover is substantial and therefore, a reasonable profit percentage would be 5%, since, higher the turnover, the lower would be the profit margin. The AO's stand suffers on two counts. One, section 44AD which applies to a specified class of assesses cannot be taken as a bench mark and two, scaling it down even further does not have any basis either technical or arithmetic. The AO had not made out a case to justify his arm's length price, least of it, he had not brought on record any comparable cases to substantiate the profit rate arrived at by him. Hence, it can be said that the arm's length price computed by the AO stands unsubstantiated and uncorroborated. In such a circumstance. the bench mark of adopted by the AO on estimated basis cannot be taken into consideration for holding that the appellant-assesses had confer....
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....t, the payments made are excessive and therefore require disallowance in the hands of the appellant. The appellant is being put to hardship only for the reason that, the company M/s. Jaista Developers & Construction (P) Ltd declared the actual profits earned without window dressing in the books. We submit that, under the circumstances, the margin of 17% is reasonable and justified and therefore cannot be considered excessive. In the light of the above facts, we submit that, the analysis made by the Assessing Officer is prima-facie incorrect and not based on facts. The Assessing Officer has not analysed the issues In the right perspective. The conclusions of the Assessing Officer are on mere presumptions and surmises The action of the Assessing Officer in holding teat., the expenditure to the extent of Rs. 1,05,58,895/- is excessive is unjustifiable. The Assessing Officer has also ignored the fact, that there is no tax planning involved in as much as the company M/s Jaista Developers & Constructions (P)) Ltd has, declared substantial Income and has paid taxes at 35% of such income being the rate applicable to private limited companies. We request the Hon'ble Co....
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....3 of the Act. It is also relevant to state here that a person who makes a positive statement is required to establish the same. It is not for the person against whom the averment is made to establish negatively that the state of affairs averred by the other person does not exist. The onus lies on the AO to bring on record cogent material / evidence to establish that the trust I charitable institution is hit by the provisions of section 13. The AO will have to prove to the hilt, on the basis of positive evidence brought on record, that the trust has committed a violation of the provisions of section 13 of the Act. If the AO is not able to discharge the burden of proof, which lies on him, then he cannot deny the benefit of exemption under section 11 to the trust, on the basis of alleged violation of section 1. of the Act Therefore, the exception has to be stated and established by the AD. In other words, burden of proof lies on the AO. In support of the aforesaid view, reliance is placed on the following legal precedents- 1. Surat City Gymkhana Vs Dy.CIT [2002] 254 ITR 733 (Guj)) 2. CIT Vs Kamala Town Trust [20051279 IIR 89 (All) 10. In continuatio....
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....6 to 205, and written submissions from pages 1 to 7, all of which are on record. Among other contentions, the learned AR submitted that the revenue has framed scrutiny assessments under section 143(3) of the Act for the assessment years 2014-15 to 2016-17 wherein all the transactions with the specified persons were accepted without invoking the provisions of section 13(1)(c) of the act. Accordingly, the ld. AR contended that the principles of consistency should be applied. 12. Both the ld. DR and AR before us vehemently supported the orders of the respective authorities below as favourable to them. 13. We have heard the rival contentions of both parties and carefully perused the materials available on record. In the present case, the exemption claimed by the assessee under Section 11 of the Act was denied by the Assessing Officer (AO) in the assessment framed under Section 143(3) of the Act, on account of certain payments made by the assessee to the specified persons, invoking the provisions of section 13(1)(c) of the Act. However, the learned CIT(A), after considering all relevant facts and details, allowed the exemption claimed by the assessee under Section 11 of the Act. T....
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....uestions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the learned counsel for the Revenue. 13.3 However, in genuine cases, the Revenue Department may identify a different fact pattern or circumstances that justify a divergent view from that taken in earlier years. In other words, a departure from the decisions made in earlier assessment years is justified when the facts or circumstances in the relevant assessment year differ from those in the earlier years. Nevertheless, the onus of establishing such a change in the factual pattern lies with the Revenue. The Hon'ble Supreme Court, in the case of M/s Godrej & Boyce Manufacturing Co. Ltd. [81 taxmann.com 111], held that the principles of res judicata will not apply unless the Revenue establishes compelling reasons for departing from a settled issue. 13.4 Turning to the facts of the present case. It is undisputed that scrutiny assessments were car....