AI Drafter 
TaxTMI 
TaxTMI 
2025 (7) TMI 1281
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....nto between the assessee Society and M/s. Sri Kalyan Chakravorthy Memorial Educational Trust (SKCMET) and the companies M/s. Varsity Education Management Pvt. Ltd. And M/s. Junior Varsity Education Pvt. Ltd. are all sham transactions as M/s. SKCMET is controlled by the same group and that it was clearly a device to benefit the interested persons i.e. the daughters of the members of the assessee society. 4. In the facts and circumstances of the case, the Ld. CIT(Appeals) erred in not appreciating the fact that the loss/profit incurred by a charitable society enjoying the benefit of Sec. 12 has no relevancy to determine whether the income of the society was used for the benefit of the specified persons u/s. 13(3) of the IT Act, in violation of the provisions of Sec. 13(1)(c), 13(2)(c) and 13(2)(g) of the IT Act. 5. In the facts and circumstances of the case, the Ld. CIT(Appeals) erred in concluding that the assessee society has not violated the provisions of Sec. 13(1)(c), 13(2)(c) and 13(2)(g) of the IT Act in current assessment year i.e. AY 2012-13 since the said provisions were not invoked by the AO for AY 2013-14 to 2016-17 ignoring that the assessment proceedin....
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....non-teaching staff, provision of content curriculum and related services, management of all the administrative activities of the colleges/institutions etc. The services to be provided by the above Trust is part of Annexure-1 of agreement which was reproduced by the Assessing Officer in his assessment order. Further, in pursuance of the service agreement, M/s. SKCMET has sub-contracted the work of operation, management and administration of colleges to two companies viz., M/s. Varsity Education Management Pvt. Limited and M/s. Junior Varsity Education Management Pvt. Limited. These two companies are owned by Smt. B. Sushmasree and Smt. B. Suma daughters of Sri Dr. B. Satyanarayana and Smt. Dr. B. Jhansi Lakshmi Bai who are the Founders/Authors of the appellant-society. In pursuant to the above service agreement, an amount of Rs. 232,15,33,642/- was paid to M/s. Junior Varsity Education Management Pvt. Limited and Rs. 24,84,30,000/- was paid to M/s. Varsity Education Management Pvt. Limited. 3.2. During the course of assessment proceedings, the Assessing Officer observed that, the appellant-society had entered into service contract agreement with the above two companies owned by t....
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....he appellant society for the financial year 2010-2011 and 2011-2012. The Assessing Officer discussed the issue at length in light of agreements and composition of above two companies and observed that, appellant-society has entrusted the work of operation, management and administration of colleges/ institutions to the related parties and in turn, the related parties being above two companies have earned substantial profit out of payment received from the appellant society. Therefore, the Assessing Officer observed that, the appellant-society has violated the provisions of section 13(1)(c) r.w.s.13(2)(c) and 13(2)(g) of the Act and thus, rejected the exemption claimed by the appellant society under section 11 of the Act. 3.4. Further, the Assessing Officer had also discussed the issue of payment of service charges to above named two companies in light of expenditure incurred by the appellant- society for the purpose of it's objects for the previous financial year 2010- 2011 and observed that, the appellant- society has made excessive and unreasonable payment to the above two companies for rendering services, which attracts section 13(2)(c) of the Act, where if any amount is paid ....
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.... and on that expenditure made, addition @ 8% profit that normally any business person earned in this kind of works-contract to arrive at a final payment towards outsourced expenditure of Rs. 231.23 crores. In other words, as against the total payment made by the appellant society to the two companies for services rendered in pursuance to agreements at Rs. 256.91 crores, the Assessing Officer has arrived at a reasonable payment to be paid to the third party for rendering similar services at Rs. 231.23 crores and finally arrived at excess payment of Rs. 25,76,43,593/- and observed that, the said amount is the value of benefit given to the interested persons specified under section 13(3) of the Act in violation of section 13(1)(c) r.w.s.13(2)(c) of the Act. Further, the Assessing Officer after considering relevant provisions of the Act and also applying provisions of sec.40A(2)(a) observed that, appellant society has made excessive and unreasonable payment to the above two companies for rendering services which cannot be allowed as deduction. Thus, the Assessing Officer disallowed a sum of Rs. 25,76,43,593/- u/sec.40A(2)(a) of the Act. The relevant findings of the assessing officer ar....
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.... Filed along with the return of income. Rs. 575,40,66,365 Less: Amount paid to the two companies for the services Rendered by them interms of the agreement entered into Between the service provider trust and the companies. Rs. 256,99,63,642 Amount of expenditure incurred by the trust on behalf of the assessee. Rs. 318,41,02,723 Now the issue to be examined is that out of the amount of Rs. 256.99 Crores paid to the companies what the assessee would have paid had the contracts been awarded on the basis of competitive bidding. For calculating the said amount the amount of expenditure that was incurred by the assessee during the immediately preceding year on account of the services outsourced in the current financial year, has been taken as a base figure. In the immediately preceding year assessee incurred the entire expenditure on its own and no contracts were given. Such expenditure was accepted in the assessment completed u/s. 143(3). As such, the amount that would have been payable to a contractor other than the interested companies for rendering the same services is worked out as under. For this purpose the expenditure figures of the immediately preceding y....
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....egard to the rate of profit that contractor would expect to earn for the contract the rates accepted in the decision of various decisions of Courts/Tribunals ranging from 8% to 12% can be taken as reasonable rates. In the instant case, the rate of profit at 8% is adopted as a reasonable rate in the facts and circumstances of the case as the promoters of the company also got the benefit of investment from the investor who had invested by purchasing the shares at premium. Hence, adoption of the minimum rate of 8% is justified in the present case. Thus, the reasonable amount for which a contractor would have offered the services outsourced by the assessee to the interested persons works out to as under: Cost to the assessee after making allowance for inflation Rs.214,10,37,082 Add: Profit @ 8% which the unrelated party would have Expected. Rs. 17,12,82,967 Rs. 231,23,20,049 Thus, the amount of Rs. 231,23,20,049/- would have been a reasonable consideration for the services rendered by the two companies. As against the said amount the assessee paid an amount of Rs. 256,99,63,642/-. Thus, the excess amount of Rs. 25,76,43,593/- is taken as the value of b....
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....n the instant case it was found that the assessee had made transactions with related parties and awarded work contracts to them. In the aforementioned paragraphs it has been established that the amount paid on account of such contracts was excessive and unreasonable when compared to the amount that would have been payable had the contracts been awarded through competitive bids. In view of this the payments made to related parties are hit by the provisions of section 40A(2)(a) of the I.T. Act. As per the said section where the assessee incurs any expenditure in respect of which payment has been made to specified persons referred to in Clause-b of the Section and the Assessing Officer is of the openion that such expenditure is excessive or unreasonable having regard to the fair market value of the services rendered then so much of the expenditure as is considered by the A.O as excessive or unreasonable is not allowable as deduction. In the instant case the payments made to the two companies i.e. M/s. Varsity Education Management Pvt Ltd and M/s. Junior Varsity Education Management Pvt Ltd are covered by the circumstances mentioned in Sub-Clause (vi) of Clause-b of Section 40A(2). As ....
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....es and their relation to the appellant society to invoke the provisions of section 13(1)(c) and argued that, there is no dispute with regard to the fact that, the above two companies are owned by related parties of the appellant society. However, payment made to the above two companies for rendering services is commensurate with services rendered by above companies which is evident from the gross receipts and gross expenditure of the appellant society for the financial year 2010-2011 and 2011-2012. The Assessing Officer without understanding the provisions of section 40A(2)(a) of the Act, has made adhoc disallowance of Rs. 25,76,43,593/- by extrapolation of figures without pointing out how payment made by the appellant society for rendering services is excessive and unreasonable by bringing on record any comparable cases of similar nature or the industry average for this kind of activity carried-out by any third party. 4.1. The learned CIT(A) after considering the relevant submissions of the appellant-society and also taken note of various facts including the relevant agreement between the parties and the provisions of section 13(1)(c) r.w.s.13(2)(c) and sec.40A(2)(a) of the Act....
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....de an addition that the appellant has violated provisions of Section 13(1)(c) and applied provisions of section 164(2) and made the same addition u/s 40(a)(2b) and calculated the demand for both the additions and made the appellant liable for both the demands in the notice u/s 156. This was a case of double addition. It is seen that the Assessing Officer initiated rectification proceedings u/s. 154 of the Act and issued a notice u/s. 154 dated 02.02.2016 and in response to the same, the appellant filed a reply on 09.02.2016 and a consequent order U/s. 154 of the Act was passed on 12.02.2016 by reducing the same income taxed twice and the income was determined at Rs. 25,76,43,593/- by removing the double entry u/s 40(A)(2)(b) taxing twice. Besides, the Assessing Officer made an addition of Rs. 34,77,166/- in the order u/s 154, thus arriving at a total income of Rs. 26,11,20,759/-. It is however seen that the appellant has not filed any appeal against the said rectification order nor furnished any submissions with regard to the said addition in the present appellate proceedings. Brief facts of the case are that the appellant society was constituted on 31.01.1987 and....
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....diture of Rs. 575,40,66,365/-. The AO further noted that there is no reason to give the North India Operations to M/s. JV when it could have given the same to other entity. However, the AO has neither given a reason nor has given any other entity to do such humongous activity with regard to the services rendered by the JV. The AO noted that as per rule 17, the appellant is required to handover operations to another charitable entity to do the operations but they have given the operations to the persons specified u/s. 13(3) of the Income Tax Act, 1961. It is important to note that this observation is not correct as the payment by the appellant, SCEC has been made to another trust M/s. Sri Kalyan Chakravarthy Memorial Educational Trust (SKCMET) and the said Trust in turn has paid to JV and VEMPL. The AO, however, held that the society has forfeited exemption tax on account of the violations and, therefore, the income is chargeable u/s 164(2) of the Income Tax Act, 1961 and also cited the CBDT Circular No. 387 dated 06.07.1984 in this regard. The AO's observation regarding the excess payment is on the following basis as mentioned in the page 91 ....
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....ncrease of revenue of 11.36% and an increase of expenses by 10.18%. This is a healthy situation as compared to past year and it is in the favour of the appellant and cannot be used against the appellant. Rather it makes out a case that the appellant, by appointing related party, has better managed the operations and the loss returned is much lesser and thus it has been financially a benefit for the appellant as a whole. There is no major change brought out by the Ad as compared to the earlier financial year which leads to a situation of examination otherwise or giving a different perspective to these figures and break-up of these figures. The acceptance of the earlier year data by the AO rather fortifies the case of the appellant of having a better performance than the earlier year. The AO has further cited that the related party have made sizeable profits and their profits should only be restricted to 8%. The first issue is that the magic figure of 8% has no legal sanctity and further the fact that the efficiency of the organizational finances improved as compared to last year when making payments to different unrelated entity implies that even the third party we....
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....ound becomes inconsequential. The other grounds become inconsequential for separate adjudication in view of the discussion above. In view of the same, the appeal is allowed accordingly." 5. MS. M. Narmada, learned CIT-DR submitted that, the learned CIT(A) erred in law and on facts in holding that, there is no violation of provisions of section 13(1)(c) r.w.s.13(2)(c), 13(2)(g) and 13(2)(h) of the Act by the appellant society. Learned DR further submitted that, the service agreement entered into between the appellant society and M/s. SKCMET and the companies viz., M/s. Varsity Education Management Pvt. Ltd., and M/s. Junior Varsity Education Management Pvt. Ltd., are all sham transactions as M/s. SKCMET controlled by the same group and that, it was clearly advised to benefit the interested persons i.e., daughters of the Founders of the appellant-society. The learned CIT-DR referring to the composition of appellant-society, M/s. SKCMET and Board of Directors of above two companies submitted that, the above two companies are owned by the daughter's of Founders of the appellant-society. Further, the service agreement was entered into for the first time from 01.04.2011 and p....
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....n the purview of section 13(1)(c) r.w.s.13(2)(c) of the Act. But the fact remains that, whether payment made by the appellant society is a benefit given to the Trustees/Members of the Society or compensation given for rendering services which is commensurate with the services rendered by above two companies or any excessive or unreasonable payment is made, has to be seen. The appellant society has filed all evidences to prove that, the payment made to the above two companies is reasonable and commensurate with services rendered by the above two companies, which is evident from the fact that, the gross receipts of the appellant society and expenditure incurred against such receipt is increased of about 10% when compared to previous financial year and, therefore, the method followed by the Assessing Officer to arrive at a reasonable amount of payment for services in pursuant to the said agreement and considering the payment made by the appellant society as excessive and reasonable is only a jugglery of figures without there being any substance. Further, the Assessing Officer has also invoked provisions of section 40A(2)(a) of the Act without understanding the relevance of said provis....
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.... society had incurred total expenditure of Rs. 522.31 crores for the financial year 2010-2011 on its own. For the financial year 2011-2012, the total expenditure incurred by the appellant society is at Rs. 575.40 crores, out of which Rs. 256.99 crores has been paid to the above two companies for the services rendered in terms of service agreement. Therefore, the net expenditure incurred by the appellant society on its own for the financial year 2011-2012 was at Rs. 318.41 crores. If we consider the total receipts and the total expenditure of financial years 2010-2011 and 2011- 2012, there is an increase of 11.39% in total receipts and increase of 10.16% in expenditure in the financial year 2011-2012, when compared to the earlier financial year 2010- 2011 and this fact has been noted by the Assessing Officer in page-11 of the assessment order. In other words, there is no substantial or material changes in the activities carried out by the appellant society during the year under consideration, except to the extent of outsourcing part of services to the above two companies in pursuant to service agreement. Further, there is almost 10% increase in revenue and 10% in expenditure for the....
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.... of the Trust or Institution directly and directly used for the benefit of any person referred to in section 13(3) of the Act. Section 13(2) deals with deemed benefit given to the interested persons referred to under section 13(3) of the Act and as per said provisions, if any part of the income or property of the Trust or Institution is given to the specified persons referred to under section 13(3) for rendering any services and the amount so paid in-excess of what may be reasonably paid for such services, then, same is considered as benefit to persons specified u/sec.13(3) of the Act. In other words, as per section 13(2)(c), if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub- section-(3), out of the resources of the Trust/Institution for such services rendered by that person to such Trust/ Institution and the amount so paid in excess what may be reasonably paid for such services, then, the excess payment may be deemed to be used or applied for the benefit of a person referred to in sub-section (3) of section 13 of the Income Tax Act, 1961. 11. In the present case, the Assessing Officer has considered service ....
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....ng Officer examined the payments under the provisions of section 13(1)(c) because, the appellant-society has made payment to the related parties specified under sub-section 13(3) of the Act. But, the Assessing Officer erred in computing excessive and unreasonable amount of Rs. 25,76,43,593/- by invoking the provisions of section 13(2)(c) without bringing on record any comparable cases of similar nature. The Assessing Officer has simply taken total expenditure incurred by the appellant society for the financial year 2010-2011 as base expenditure, but, arrived at a reasonable amount to be payable for the above services and then compared with payment made by the appellant society for the year under consideration to allege that, the payment made by the appellant society is excessive and unreasonable. In our considered view, the action of the Assessing Officer in making adhoc disallowance of expenditure is purely on suspicion and surmises manner without there being any evidence to suggest that, expenditure incurred by the appellant society is excessive and unreasonable which fall under section 40A(2)(a) of the Act. In our considered view, unless the Assessing Officer brings on record ce....
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....morial 1,18,22,69,794 2,54,94,595 5,09,892 2,54,946 Educational Trust 1,20,85,29,228 SKCT Ä°CEC 1,68,62,84,318 1,68,62,84,318 Junior Varsity Total 2,87,01,47,4782,55,36,561 5,10,731 2,55,3662,89,64,50,136 K-12 Nexgen Educational Trust 66,67,21,420 6,17,265 12,345 6.17 66,73,57,203 K-12 Sri Chaitanya Educational Trust 26,78,63,842 2,54,970 5.099 2.550 26,81,26,461 K-12 Total 93,45,85,261 8,72,235 17,445 8,722 93,54,83,664 Varsity Nexgen Educational Trust 4,49,40,000 4,49,40,000 Varsity Sri Chaitanya Educational Trust 2,59,35,000 2,59,35,000 Varsity Sri Kalyana Chakravarti Memorial Educational Trust 11,14,05,000 11,14,05,000 Varsity Total 18,22,80,000 18,22,80,000 Sri Chaitanya Educational Trust Sri Chaitanya Educational Trust Sri Kalyana Chakravarti Memorial Educational Trust Grand Total 3,98,70,12,7402,64,08,797 _5,28,176 _2,64,0884,01,42,13,800 Document 2 Service Income Details for FY 2013-14 Billing Entity From Customer Name Gross Amount Service Tax Education Cess Secondary Higher Education Cess Inovice Amount K-12 Mootha Gopal Krishna Educational Society 70,38,423 . 70,38,423 K-12 Mothers Care E....