TaxTMI 
TaxTMI 
TaxTMI 
2025 (7) TMI 1281
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 proceedings were separate and distinct for each year. 6. The appellant craves leave to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 the related parties as defined u/sec.13(3) of the Act and observed that, since the service con....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ussed 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 by way of salary, allowances or otherwise during the previous year to any person referred to in s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his 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 are as under. "23. In the instant case the society has forfeited exemption in respect of the valu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 year have been adopted as a starting point as the operations / activities of the assessee remained same during preceding year as well as the current year and t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 benefit conferred on the promoters of the two companies who are the daughters of the author / founder of the assessee. Accordingly, the said amount has to be taxed at maximum marginal rate. In addition to this the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ontracts 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 per the said sub-clause payment made by an AOP to any person who carries on business or profession and in which any relative of the member /members of the AOP has a substantial interest then such payment is recognized as a rela....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., 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 and also by taking into account the relevant financial statements of appellant society for the two financial years and also financial statement of the above two companies who rendered services to the appellant society, observed that, the Assessin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....otice 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 has been operating a number of colleges and institution and is imparting education at the level of Intermediate. The Assessing Officer noted that the appellant has been managing/operating 186 colleges and 2,21,891 students were studying in the said colleges. The addition contest....
X X X X Extracts X X X X
X X X X Extracts X X X X
....V. 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 of the assessment order, which is as under For THIS purpose the expenditure figures of the immediately preceding pear have been adapted as a starting point as the operations/activities of the assessee remained same during preceding year as well as the current your and there is no significant expansion or reduction in operations in terms of the numb....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llant 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 were being paid equivalent sum rather more, if one looks at the operational loss of the past year. The arm's length price is not determined on the basis of the profit of that entity which is rendering the service but on the basis of the market condition. The efficiency of an entity which is a related party cannot be held against it for receiving a payment from a related entity. The related entity this year has bene....
X X X X Extracts X X X X
X X X X Extracts X X X X
....her 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 prior to this agreement, the appellant society which was managing, operation maintenance and management of the colleges/institutions. The Assessing Officer had also brought-out the purpose of creation of above two companies and also agreement between the Trust and further agreement with the above two companies and brought-out the facts with regard to super profit earned by two companies from the services and also purpose of earning above profit to raise ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 provisions and also how the said provision can be invoked in the given facts and circumstances of the case. The learned CIT(A) after considering the relevant facts, has rightly deleted the addition made by the Assessing Officer and, therefore, the order of the learned CIT(A) should be upheld. 7. We have heard both the parties, perused the material on record and the orders of the authorities below. There is no dispute with regard to the fact that, the appellant....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 year under consideration. Therefore, it is necessary for us to examine the reasons given by the Assessing Officer to make adhoc disallowance of excessive and unreasonable payment in terms of section 40A(2)(a) of the Act. 9. The Assessing Officer has taken total expenditure of financial year 2010-2011 as base expenditure which was at Rs. 522.31 crores. From the above expenditure, the Assessing Officer has detected total expenditure incurred by the appellant ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at 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 agreement between the appellant society and M/s. SKCMET and further sub-contract agreement between the two companies for rendering services to the appellant society for operation, maintenance and administration of colleges/institutions run by the appellant society and consequent payment made to the above two companies as excessive and unreasonable and also computed excessive amount of Rs. 25,76,43,593/- in terms of 40A(2)(a) of the Income Tax Act, 1961. There is no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red 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 certain evidences to prove that, payment made by the appellant society to the above two companies is excessive and unreasonable going by the evidences which suggest that, for similar services, third party would have rendered services for such an amount referred to by the Assessing Officer, in our considered view, merely on suspicion and surmises, adhoc disallowance cannot be made. 12. In the present case, the Assessing Officer by making a jugglery of figures, has ar....