Income Tax Appellate Tribunal - Delhi
Confrere Educational Society, Noida vs Department Of Income Tax on 19 November, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `B': NEW DELHI
BEFORE SHRI C.L.SETHI, JUDICIAL MEMBER AND
SHRI B.K. HALDAR, ACCOUNTANT MEMBER
I.T. A. No. 27/Del/2011
Assessment Year : 2006-07
Confrere Educational Society, Addl. Commissioner of Income-tax,
C-56A/28, Sector-62, Vs. Noida Range, Noida.
Noida.
PAN: AAATC4508K
I.T. A. No. 833/Del/2011
Assessment Year : 2006-07
Addl. Commissioner of Income-tax, Confrere Educational Society,
Noida Range, Noida. Vs. C-56A/28, Sector-62,
Noida.
(Appellants) (Respondents)
Assessee by: Shri Ranjan Chopra, CA.
Department by: Shri Rohit Garg.
ORDER
PER C.L. SETHI, JUDICIAL MEMBER:
These are cross appeals, filed by the assessee as well by the revenue, directed against the order dated 19.11.2010 passed by the learned Commissioner of Income-tax (Appeals) in the matter of an assessment made by the Assessing Officer under sec. 143(3) of the Income-tax Act, 1961 (the Act), for the Assessment Year 2006-07.
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2. In the course of hearing of the assessee's appeal, the learned counsel for the assessee has submitted that the issue regarding assessee's claim of exemption under sec. 10(23)(iiiad)/(vi) of the Income-tax Act, 1961, may kindly be treated to be withdrawn and as such, the ground Nos.1 to 3 raised by the assessee may be dismissed as not pressed for.
3. In the light of the categorical submission made by the learned counsel for the assessee, grounds No.1 to 3 raised by the assessee are dismissed as not pressed for.
4. Ground Nos. 4 & 5 are directed against the learned CIT(A)'s order in only partially allowing the payment out of Rs.28,46,950/- made to M/s. I.T. Break.Com Pvt. Ltd. and Silicon Argo Research Pvt. Ltd. by the assessee for developing course study material for its various students enrolled with the society.
5. In the department appeal, the revenue has taken a ground that the learned CIT(A) has erred in law and on facts in allowing proportionate amount of expenses paid to M/s. I.T. Break.Com Pvt. Ltd. and Silicon Argo Research Pvt. Ltd.
6. Thus, ground Nos.4 & 5 raised by the assessee and ground Nos.1 & 2 raised by the revenue are inter-connected. Hence, they are taken together for our decision.
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7. The assessee society is registered under sec. 12A vide order dated 15.03.2004 of the learned CIT. The assessee filed its return of income for Assessment Year under consideration on 30.10.2006 declaring total income at Rs. Nil. The assessee as an educational society claimed exemption u/s 10(23C(vi)on its total income of Rs.7,90,815/- and filed return declaring total income at Rs. Nil. The assessee filed audit report under sec. 12A(b) along with the return of income. In the income and expenditure account, the assessee had shown gross receipts of Rs.2,46,77,668/-. Since the gross receipts exceed Rs.1,00,00,000/- and the assessee society was not notified under sec. 10(23C)(vi), the assessee's claim of exemption under sec. 10(23C)(vi) was disallowed by the AO. The AO further stated that the assessee's identical claim under sec. 10(23C) was also disallowed in the Assessment Year 2004-05. The AO further stated that in the Assessment Year 2004-05, expenditure under the head "Course Material Collection and Development" amounting to Rs.18,13,780/- was also disallowed being the payment made to the company in which members of the society were directors. The AO further stated that appeal by the assessee against the aforesaid disallowance was pending at the time when this return of income for Assessment Year 2006-07 was selected for scrutiny. The AO then issued notice u/s 143(2) of the Act, which was duly served upon the assessee. In 4 reply thereto, the assessee's authorized representative appeared before the AO and furnished details and replies as called for. Books of account were also produced and test checked. The AO then discussed the matter with the assessee's Authorized Representative and completed the assessment under sec. 143(3) of the Act vide order dated 30.12.2008.
8. In the assessment order, the AO stated that during the course of assessment proceedings, it was noted by him that the assessee society had made payment of Rs.28,46,950/- as course material collection and development charges to the following parties:-
1. M/s. I.T. Break.Com Pvt. Ltd. Rs.15,08,750/-
2. M/s. Silicon Agro Research Pvt. Ltd. Rs.13,38,200/-
Total Rs.28,46,950/-
9. The AO then asked the assessee to file the copies of the Income-tax return along with balance-sheet and Profit & Loss account of the above said companies which were furnished vide reply dated 25.11.2008. On perusal of the returns of income, it was found that Shri Punit Malhotra and Shri Prashan Kansal were directors of the company in M/s. I.T. Break.Com Pvt.
Ltd. and Mrs. Sharwani Shukla, Smt. Bharti Gupta and Mrs. Archana Malhotra who are wives and relatives, are directors in M/s. Silicon Agro Research Pvt. Ltd. The AO further found that Shri Punit Malhotra, Shri 5 Vijay Shankar Shukla and Shri Prashan Kansal are the Chairman, Vice- Chairman & Secretary, and Secretary & Treasurer respectively. From these details, it was noted by the AO that either the Executive Members of the Society or their relatives or wives are the directors in the aforesaid two companies. The AO then referred to sec. 13(1)(c)(ii) along with sec.13(2)(c) and 13(3)(cc) of the Act . The AO therefore has taken a view that payment made for the purpose of course material and development charges to the aforesaid two companies was in violation of sec. 13 of the Act by giving following reasons:-
"(a) The payment for Course Material Collection & Development Charges has not been made to independent entities, since executive members/members of the Trust are either the Directors of the above Company or their relatives are Directors of the Companies.
(b) Perusal of Profit & Loss account of M/s. I.T. Break.Com Pvt. Ltd. i.e. the concern to which the payment of Rs.15,08,750/- has been made shows that payment of Rs.12,28,800 (out of gross receipts of Rs.15,12,740/-) has been made to its Directors. Similarly in the case of M/s. Silicon Agro Research Pvt. Ltd. (to whom payment of Rs.13,38,200/-
has been made for Course Material Collection & Development Charges) has made payment of salary of Rs.10,80,000/- (out of gross expenses of Rs.16,23,914) to its Directors. This transaction clearly shows that these Companies have been used only as a conduit to siphon off the funds of the Society to the account of executive members/members of the Trust or their relatives under guise of payment for Course Material Collection & Development Charges."
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10. The AO further stated that it was true that some expenditure might have been required to prepare course material by the society, but the nature of expenses shown in the Profit & Loss account of the aforesaid two companies was mostly in the nature of salary, travelling, conveyance, business promotion and staff welfare and salary to the directors. The AO then asked the assessee to explain the matter vide order sheet entry dated 23.10.2008. The assessee then submitted its reply vide letter dated 10.11.2008 as under:-
"The society provides specialized course material to its every student for enhancement of their knowledge and carrier. These course materials are an integral part of their course curriculum. These course materials are on specialized topics in the area like Bio Informatics, Clinical trials, drug design and discovery etc. These course materials are in shape of bound printed books and electronics CD's. More than 40 course books material and several CD's material has been developed by these companies for Confrere Education Society. Society has made payment for course material and development charges for content preparation. Most of these books/course material are not easily available and if available then on very high cost. The Society has take help of two companies for development of such course material, so that quality can be maintained and cost can be reduced so that student can afford it.
This work is carried out by two companies namely silicon Agro Research Pvt. Limited & I.T. Break.Com Pvt. Ltd., in which relatives of trustee are interested. This work has been entrusted to these two companies due to peculiar nature of the work. The course content development work is highly intellectual and confidential work. This work is a intellectual property right work. Course material content development is a 7 intellectual and capital intensive exercise, which can be taken up by the qualified individuals. Because the material under development can easily be copies, replicated or published else where. Therefore it becomes necessary to outsource this work to parties of confidence. Further the directors of these two companies are highly qualified and experienced individuals and well equipped to complete this task. That is the only reason to give this work to related parties."
11. The AO then considered the assessee's explanation and stated that the reply of the assessee was not acceptable. The AO observed that the assessee society had made payment of Rs.28,46,950/- towards course material and development charges out of gross receipt of Rs.2,46,77,668/- to the aforesaid companies, which comes to 11.50% of total receipts. The AO then stated that these bogus companies were created and the entire transaction was in the nature of colourable transactions created for the purpose of disbursement/diversion of income to the members. The AO then opined that entire transaction was not in the spirit of sec. 12A and was in violation of sec. 13 of the Act. The AO then held that the assessee had applied Rs.28,46,950/- indirectly for the purpose of salary and other benefits of the members and their relatives and exemption under sections 11 & 12 will not be operative in that regard. The AO further stated that identical disallowance of expenses were made in Assessment Year 2004-05 and on an appeal filed before the learned CIT(A), the learned CIT(A) partially allowed relief to the assessee but the order of the learned CIT(A) has not been 8 accepted by the department and second appeal has been filed before the Tribunal. The AO, therefore, disallowed the payment of Rs.28,46,950/- and benefit under sec. 11 was denied.
12. Being aggrieved, the assessee preferred an appeal before the learned CIT(A).
13. After considering the AO's order and the assessee's submission and in the light of the CIT(A)'s order passed in the Assessment Year 2004-05, the learned CIT(A) allowed a relief of Rs.23,70,715/- out of the total addition of Rs.28,46,950/- made by the Assessing Officer. The revenue is in appeal against the CIT(A)'s order in granting a relief of Rs.23,70,715/- and the assessee is in appeal against sustaining the addition only by granting of Rs.23,70,715/- against total addition of Rs.28,46,950/-.
14. The learned counsel for the assessee has submitted that identical issue had come for consideration before ITAT, Delhi Bench `B', Delhi in the assessee's case pertaining to the Assessment Year 2004-05, where relief granted by the learned CIT(A) in that year was upheld and the part of the addition sustained by the learned CIT(A) has been deleted vide order dated 28th January, 2011 in ITA Nos.95(Del)/2009 and 118(Del)/2009. The learned counsel for the assessee further submitted that the AO has not been able to establish and prove that the aforesaid two companies are bogus and 9 the payment made to them towards course material and development charges was not made at arm's length or any excessive payment has been made having regard to the market value of the item. He placed reliance upon the aforesaid Tribunal's order passed in the assessee's case for the Assessment Year 2004-05.
15. The learned DR on the other hand, reiterated the various points and reasons given by the AO in his order while disallowing the deduction of expenses amounting to Rs.28,46,950/-. He further submitted that the AO has categorically stated in his order that these are bogus companies and entire transaction was made for the purpose of diversion of income to its members. He therefore, submitted that entire transaction was in violation to sec. 13 of the Act.
16. We have heard both the parties and have carefully gone through the orders of the authorities below.
17. On perusal of the AO's order, we find no material or basis to hold that the aforesaid two companies namely M/s. I.T. Break.Com Pvt. Ltd. and M/s. Silicon Agro Research Pvt. Ltd. are bogus companies. In the course of assessment proceedings, the assessee produced the income-tax return along with balance-sheet and profit and loss account of the above said companies. It is not in dispute that the members of the assessee society are directors in M/s. I.T. Break.Com Pvt. Ltd. But the AO has not brought any material on record or any comparable cases to show that the payment has not been made 10 at arm's length or any excessive payment has been made to these parties. The AO has also not been able to dispute the assessee's claim that the assessee has purchased course materials in the shape of bound printed books and electronic CDs from the said two companies. The identical disallowance has been made by the AO in the Assessment Year 2004-05 as so stated by the AO in the assessment order itself. The AO further stated in the assessment order that in Assessment Year 2004-05, the learned CIT(A) has allowed partial relief to the assessee but the order of the learned CIT(A) has not been accepted by the department and a second appeal has been filed before the Tribunal. In the Assessment Year 2004-05 both the assessee and revenue were in appeal and after hearing both the parties, the Tribunal dismissed the revenue's appeal and allowed the appeal filed by the assessee. The Tribunal in Assessment Year 2004-05 has held and observed as under:-
5. The second question is whether the assessee is entitled to fully deduct the amount of Rs. 18,13,780/- paid to IT BVreak.com Pvt. Ltd. for developing its course study material, which is used for the purpose of imparting education. The AO has disallowed this amount by invoking the provision contained in section 13(1)(c)(ii) by holding that a part of income or property of the institution has been used or applied in this year directly or indirectly for the benefit of the persons referred to in section 13(3). In the case of Lucknow Diocesan Trust Association (supra), the question before the Hon'ble Allahabad High Court was-whether, on the facts and in the circumstances of the case, the Tribunal was correct in allowing the payment of Rs.10,000/- made by the trust to its trustees as an admissible deduction? The 11 Tribunal had given a finding of fact that the trust was governed by Charitable and Religious Trusts Act, 1922 and not by the Indian Trusts Act, 1882. It could not be shown that there is any restriction placed in the Charitable and Religious Trusts Act, 1922, in the matter of payment of remuneration by the trust to the trustees. It was held that on these facts the Tribunal was right in holding that the amount of Rs.10,000/- was an admissible deduction. Having considered this case, we are of the view that issue involved in our case is somewhat different, namely, as to whether any benefit has been passed to the members of the society indirectly so as to attract the provision contained in section 13(1)(c)(ii) read with section 13(2) of the Income-tax Act, 1961. However, this decision does lead to the inference that remuneration paid to directors may be admissible. The relevant portion of the judgment is reproduced below:-
"As noted above, the facts, found by the Tribunal were that the assessee is a charitable and religious trust and is governed by the Charitable and Religious Trust Act, 1922, and not by the Indian Trusts Act, 1882. It could not be shown to us that there is any restriction placed in the Charitable and Religious Trusts Act, 1922, in the matter of payment of remuneration by the trust to the trustees. It was further found and it is not disputed that the Lucknow Diocesan Trust Association manages the affairs of the assessee and this payment was made to them for the services rendered and that it was clearly for the purpose of the trust. On these facts, the Tribunal was right in holding that this amount of Rs. 10,000/- was an admissible deduction."
5.1 In the case of Pariwar Sewa Sansthan (supra), the question before the Hon'ble Delhi High Court was-whether, on the facts and in the circumstances of the case and in law, the Tribunal was correct in allowing the benefit u/s 11 of the Income-tax Act, 1961, without appreciating that the assessee had violated the provisions of sections 13(1)(c) and 13(1)(d) 12 of the Act? The Hon'ble Court mentioned that Tyagi Foundation was a separate registered society engaged in similar charitable activities and the allegation of the AO about this society being controlled by Mrs. Sudha Tewari was wrong and irrelevant. No material was brought to show that Tyagi Foundation was not a genuine registered society engaged in similar charitable activities. The loan was given by the assessee to Tyagi Foundation in pursuance of its objects to promote charitable activities. It was not the case that Tyagi Foundation has misused the amount of loan and utilized it for non-charitable purposes. The loan was fully secured by mortgage deed and in subsequent year on non- payment of the loan, the property reverted to the assessee- society. Therefore, it was held that the ld. CIT(A) was justified in rejecting the case of the AO. We find that the facts of this case are somewhat different. The case dealt with a loan of Tyagi Foundation secured by mortgage. On non-payment of the loan, the property reverted to the assessee-Sansthan. In the case at hand, the assessee had paid certain amounts to IT Break.com Pvt. Ltd. It is not a loan. Further, there is nothing on record to show that IT Break.com Pvt. Ltd. is an educational institution. Therefore, the ratio of this case is not applicable to the facts of the case of the assessee. However, for ready reference, the relevant paragraph from the judgment is reproduced below:-
"Again, we have carefully gone through the orders of the Assessing Officer and the ld. Commissioner of Income-tax (Appeals) for the assessment years 1995-96 and 1996-97 on the issue of loan to Tyagi Foundation and considered the submissions and contentions made by the learned Authorised Representatives of both the sides. We are of the view that the ld.
Commissioner of Income-tax (Appeals) was justified in holding that there was no violation of the provisions of section 13(5) in giving the loan to Tyagi Foundation. The ld. Commissioner of Income-tax (Appeals) found that Tyagi Foundation was a separate registered society 13 engaged in similar charitable activities and the allegation of the Assessing Officer of this society being controlled by Mrs. Sudha Tewari and others was wrong and irrelevant. No material was brought to show that Tyagi Foundation was not a genuine registered society engaged in similar charitable activities. The loan given by the assessee to Tyagi Foundation was out of the object of the assessee-society to promote its charitable activities. It was not a case that Tyagi Foundation had misused the amount of loan and utilized it for non-charitable purposes. No material was placed to show that the purchase of the property and utilization of the property by Tyagi Foundation was for purposes other than its charitable purposes. Moreover, the loan given was fully secured by mortgage deed and in fact in the subsequent year on non-payment of the loan the property was reverted to the assessee-society. No material was placed to show that there was any non-
charitable activities connected with the property in question. On the facts and in the circumstances of the case, therefore, we hold that the learned Commissioner of Income-tax (Appeals) was justified in rejecting this ground as well as for the rejection of the claim of exemption under section 11 of the Act by the Assessing Officer."
5.2 In the case of Surat City Gymkhana (supra), the question before Hon'ble Gujarat High Court was regarding the onus for invoking the provision contained in section 13(1)(c). It is mentioned that the revenue makes averment about the applicability of this provision and hence the onus is on it to establish the failure, if any. The relevant portion of the judgment at page no. 743 of the report reads as under:-
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"Even otherwise, the provisions of section 13 open with a non obstante clause and hence by virtue of the said provisions exception to the exemption provided by section 11 is carved out and an assessee is denied the exemption under section 11 of the Act in a case where the income or property of the trust is used or applied or enures for the benefit off any person referred to in section 13(3) of the Act. In the present case, it is the respondent who avers applicability of provision of section 13(1)(c) and hence the onus is on him to establish the failure, if any. From the reasons recorded it is apparent that he is of the opinion that the Tribunal has specifically directed the respondent to initiate action as there is failure of the prescribed condition or that some portion of the property or income of the petitioner-trust enures for the benefit of the prohibited category of persons or some portion of the property or income is applied or used for the benefit of the prohibited category of persons specified in section 13(3) of the Act. The law is well settled, a person who makes a positive averment 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. Furthermore, the Tribunal nowhere states that the provisions of section 13 of the Act are applicable. All that is stated is to grant exemption under section 11 of the Act subject to the other conditions being fulfilled."
5.3 It is seen that the payment has been made in respect of development of study material, which is used by the assessee- society for imparting education. Therefore, there is a quid pro quo in the payment and it is not a gratis payment. In other words, the payment has been made for the work done by that company for the assessee-society. No comparable instance has been brought on record to show that the payment 15 has not been made at arm's length or any excessive payment has been made. While the AO has added the whole amount, the ld. CIT(Appeals) has done some hypothetical calculation for making disallowance. The decision in the case of Surat City Gymkhana (supra) is to the effect that the provision contained in section 13(1)(c) can be applied when the income or property of the trust is used or applied or enures for the benefit of any person referred to in section 13(3). A payment made for the work done cannot be equated with use or application of funds for the benefit of the payee. Further, there is no objective evidence on record by way of comparable cases that the payment is more than arm's length payment. Therefore, we are of the view that the ld. CIT(Appeals) erred in partly disallowing a sum of Rs. 4,76,583/- from the overall payment of Rs. 18,13,780/- to IT Break.com Pvt. Ltd. for development of course study material. In this view of the matter, there could have also been no question regarding disallowance of the whole of the amount of Rs. 18,13,780/-."
18. Respectfully following the Tribunal's order in the Assessment Year 2004-05, we hold that there could have also been no question regarding part disallowance out of the whole amount of Rs.28,46,950/-. Therefore, the whole disallowance made by the Assessing Officer to the extent of Rs.28,46,950/- stands deleted.
19. In the result, the appeal of the assessee is allowed and that of the revenue is dismissed.
20. This decision is pronounced in the Open Court on 29th July, 2011.
Sd/- Sd/-
(B.K. HALDAR) (C.L. SETHI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 29th July, 2011.
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ITA Nos.27 & 833/Del/2011
Copy of the order forwarded to:-
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
By Order
*mg Deputy Registrar, ITAT.