TaxTMI 
TaxTMI 
TaxTMI 
2025 (1) TMI 559
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....rounds 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 u/s 11, whereas as when assessee is hit by sec. 13, the exemption u/s 11 and ....
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....me 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 denied the exemption claimed by the assessee under Section 11 of the Act and computed the assessee's income in accordance with the normal provisions applicable to an as....
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....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 the trust / institution In modes or forms other than those specified. Section 13(1)(d) provides that exemption from tax to charitable or religious trust / institution will be forfeited if any funds of ....
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....reof - (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, are hold by the trust or institution after the 30th day of November. 1983" From the aforesaid provisions of section 13(1) d), it may be seen that if the conditions laid down there under are not fulfilled, then the trust will lose the benefit of exemption under section 11 of the Act, in respect of income referred to therein. 8.3 Statuto....
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....or 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: "164 Charge of tax where share of beneficiaries unknown. (2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, or which is of the nature referred to in sub-clause (ire) of clause (4 of section 2 or which is of the nature referred to in sub-section Rs. 4A) of section 11 tax shall be charged on so much of the relevant income as is not exempt under section 11 or secti....
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....1 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 property for the benefit of the settlor, etc., contained in section 13(1)(c) and (d) of that Act, the said rate will not apply: to the business profits of such trusts which are otherwise chargeable to fax. In other word, where such a trust contravenes the provisions of section 13(1) (c) or (d) of the Act, the maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provisions. As per the aforesaid paragraph 28.6 of the aforesaid Circular....
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....vider 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 task carried out Is highly technical and intellectual in nature cannot be justified. Further, the appellant is right is contending that the AO had erroneously taken a que from section 44AD 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 sect....
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....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 used as a comparison to benchmark the profits needs to be computed by analyzing the profit margins of similar/identical businesses having more or less matching turnovers and operating in the same geographical area. Such a computation of arm's length price is not done by the AO as he had adopted the profit rate mentioned in section 44AD of the IT Act as a bench mark. The AO had not gone into the services offered by is. Edufice Educational Services Pvt. Ltd nor any comparables operating in the same line of business are Identified by the AO to benchmark the profit marg....
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.... 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. Such a conclusion by the AO dis- regarding the intellectual capability of the service provider without going into the details of service provided vis-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 AG had ignored this aspect completely. Considering t....
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.... 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 conferred unreasonable and excessive benefit on the specified person M/s CMR Education and Consultancy services u/s. 13(3)." (iii) Jaista Developers and Construction Pvt Ltd. "It is a common practice in the market and also as per the said` procedure laid down for valuation of construction that, if the owner himself supervises the construction, a deduction of 10% is allowed towards the probable savings in construction cost consequent to self supervision. In the present case, the appellant is running various educational institutions and also a university. What was being constructed by M/s. Jaista Developers & Constructions(P....
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....e 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 Commissioner of Income Tat (Appeals) to kindly consider the submissions above and hold that, there is no excessive payment as alleged and hence no disallowance warranted. According to the AO, the profit margins of the company, whose gross receipts is predominantly from the related enterprises only, before payment of salaries to specified persons u's. 13(3) and after payment of the same are in the order of 1763% and 1257% respectively, and this as per AO is not at arm's length, in terms of Sec,13(2)(c) and sec.13(2)(g) Hence .AO computed arm's length price by allowing a profit margin of 5% apart from the actual cost incurred. This being so, the AO while taking a CUE ....
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....not 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 continuation, the appellant In the submission stated that: "Order u./s 143(3) of the act, has been concluded in the case of the appeU1ent for the A. Vs. 2014-15. 2015-16 and also 2016-17. The returned income has been accepted and there have been no adverse findings in respect of transaction with specified persons U/s 13(1)0 of the act. Copies of the orders attached. The facts remain the same for the AY 2017-18 also. Under the circumstances, in the absence of any fresh evidence an record and the facts remaining the same, the department could not have taken and adverse stand for the A. Y. 2017-18 ignoring the orders passed u/s 143(3, of the act, in the immediate preceding three assessment years. The order passed by the Assessing Officer....
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....d 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. The Revenue is now in appeal before us against the findings of the learned CIT(A). Before addressing the issue raised by the Revenue, i.e., whether the assessee is eligible for exemption under Section 11 of the Act, it is pertinent to note that in the assessee's own case for the earlier assessment years-AYs 2014-15, 2015-16, and 2016-17-the exemption under Section 11 was allowed by the Revenue in assessments framed under Section 143(3) of the Act. The first issue that arises is whether the Revenue can take a different stand in the assessee's own case for the current year as compared to the stance adopted in the earlier years or subsequent years. While the principle of res judicata does not apply to tax proceedings, the 'Principle of Consistency' mus....
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....hing 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 carried out under the provisions of Section 143(3) of the Act for the assessment years 2014-15 and 2016-17. The copies of the assessment orders are placed at pages 59 to 68 of the paper book. This fact was also acknowledged by the learned CIT(A) in his order, which was not disputed by the Revenue. In each of these assessment years, the assessee made payments to specified persons as defined under Section 13(1)(c) of the Act, on a similar basis, which were accepted by the Revenue without any adverse remarks. For clarity, we refer to the notice issued under Section 142(1) of the Act for the assessment year 2016-17, dated 22 June 2018, wherein the following questions were raised: "16) Whether under section 13(1)(c) of the Act, any income or property of the trust ensures/is used/is a....