2025 (5) TMI 2131 - AT - Income Tax

Withdrawal of benefit u/s 11 - Addition on account of benefit provided to persons specified in section 13(3) of the Act - payment for management fees and other expenses - corpus donation receipts - HELD THAT - Assessee had brought evidence to show that the expenses were on account of availing actual facilities including services like bus usage infrastructure charges admission charges including enrolment advisory manpower supply of various categories of employees like security catering housekeeping peon etc. AO has conducted no exercise to point out any discrepancy in the evidences to show that these services were not required for running the schools and conducting other activities. As a matter of fact these are not new expenses but in assessment proceedings for AY 2011-12 2012-13 and 2015-16 also such payments have been examined by the Department and no additions were made. Thus on the principle of consistency alone the said charges deserved to be allowed and in any case if they were to be disputed the same could have been on the basis of substantive evidence establishing that these expenses were not bona fide which is not done. The findings arrived by the CIT(A) are on the basis of appreciation of facts which have been left out of consideration of the AO and we find no reason to interfere in the same. Addition for corpus donation which the AO has disallowed consequent to withdrawal of benefit u/s 11 and 12 for the alleged violation of section 13 - There is no dispute with regard to the genuineness or identity of the donors and in the aforesaid discussion with regard to the addition amounting to Rs. 3, 30, 82, 692/- we have examined the issue including that the AO was unable to make out a case of benefit being provided to persons specified in section 13(1)(c) of the Act. Thus this ground is rightly determined by the CIT(A) in favour of the assessee and we sustain the same. Addition on account of payment of royalty to specified persons u/s 13(3) - On the basis of transfer of trade mark Calorx by the assessee to ALPL a presumption cannot be drawn that the same was done for giving any benefit to ALPL. The CIT(A) has observed that ALPL has the trade mark Yali registered since 03.10.2008 and the trade mark Calorx does not comprise of the words but only a logo which stands in the name of ALPL exclusively and the payments for royalty are being made for both. There is also substance that since this royalty payment is also included in the aggregate payment made to ALPL which has been examined earlier then there was no reason to make a disallowance again. We are thus not inclined to interfere in the findings of the ld.CIT(A). Addition as notional income on account of corporate guarantee charges - As established that the corporate guarantee was given in January 2012 when there was no relationship of holding and subsidiary company between the ALPL and the assessee. Furthermore the assessee has not incurred any expense or received anything on this account thus making an addition on the notional income is not sustainable under law. CIT(A) has given reasoned findings which require no interference. Disallowance of depreciation - A suo moto addition was made on account of disallowance by the assessee and the same have been deleted by the CIT(A) holding that no cogent reason has been given by AO for disallowance. The assessee has not claimed depreciation of asset as application of fund but instead claimed cost of asset as application of fund for AY 2017-18. That being the case as in the computation of income depreciation on asset has not been claimed as the application of fund for the AY 2017-18 no addition could have been made and the same has been rightly deleted by the CIT(A) and require no interference. Decided against revenue.

Summary

The core legal questions considered by the Tribunal in this appeal include:

1. Whether the payments made by the assessee company to its holding company and related parties, particularly management fees and other expenses, can be treated as reasonable and at fair market value, or whether they attract disallowance under section 13(1)(c) of the Income Tax Act, 1961 due to benefit being provided to specified persons.

2. Whether the corpus donation of Rs. 21,79,000/- should be included in income due to alleged violation of section 13, despite the assessee claiming exemption under sections 11 and 12.

3. Whether the payment of royalty of Rs. 40,80,000/- by the assessee to its holding company for use of trademark and trade name is a genuine transaction or a device to divert application income to related parties, thereby attracting disallowance under section 13(3).

4. Whether the addition of Rs. 25,28,757/- on account of corporate guarantee charges, which was not charged by the subsidiary company, is justified.

5. Whether the claim of depreciation amounting to Rs. 1,51,13,775/- by the assessee is allowable, considering the cost of asset was claimed as application of fund and depreciation was not separately claimed as application of fund.

Issue-wise Detailed Analysis

1. Reasonableness of Payments to Holding Company and Related Parties (Section 13(1)(c))

Legal Framework and Precedents: Section 13(1)(c) prohibits application of income or assets for the benefit of specified persons, including related parties. The reasonableness of payments to related parties is a key test for exemption under sections 11 and 12. The Hon'ble Madras High Court in CIT vs Nagarathu Vaisiyargal Sangam held that unreasonable payments to interested persons disqualify the trust from exemption.

Court's Interpretation and Reasoning: The AO disallowed 25% of payments aggregating Rs. 3,30,82,692/- made to the holding company (Altus Learning Pvt. Ltd.) and Yali Education Company Pvt. Ltd., on the ground that no qualitative screening process was followed to select the vendor and the payments were excessive and unreasonable. The AO noted that the holding company's financial condition was not strong enough to support the services, and the assessee appeared to be a special purpose vehicle for the holding company's business profits.

The CIT(A) reversed this addition after detailed examination of agreements, ledger accounts, and supporting documents. It was found that payments were made for bona fide services such as human resources, accounting, marketing, fund management, IT, legal matters, administration, transport, admission services, infrastructure usage, and other operational support. Third-party quotations for bus services and rental agreements for infrastructure were provided to demonstrate market comparability. The CIT(A) also noted that the AO did not produce any evidence of inflated expenses or discrepancies in the books of accounts. The principle of consistency was invoked, as similar payments were allowed in prior assessment years.

Key Evidence and Findings: Agreements for management services and trademark charges, detailed breakup of payments, third-party quotations, rental agreements, and ledger accounts substantiated the genuineness and reasonableness of expenses. The AO failed to demonstrate any factual or documentary basis for disallowance.

Application of Law to Facts: The Tribunal upheld the CIT(A)'s findings that the payments were reasonable and made in the ordinary course of business, rejecting the AO's mechanical disallowance based on percentage benchmarks without evidentiary support.

Treatment of Competing Arguments: The Revenue's argument rested on the absence of a vendor selection process and the holding company's financial weakness. The Tribunal found these insufficient to disallow expenses, emphasizing the need for concrete evidence of unreasonableness or benefit to specified persons.

Conclusion: The addition of Rs. 3,30,82,692/- was rightly deleted, and the payments were held to be bona fide and at arm's length.

2. Corpus Donation of Rs. 21,79,000/- and Applicability of Sections 11, 12, and 13

Legal Framework: Sections 11 and 12 provide exemption for income applied for charitable purposes, subject to restrictions under section 13, which prohibits benefit to specified persons.

Court's Reasoning: The AO disallowed the benefit of exemption on the corpus donation due to alleged violation of section 13. However, the Tribunal found no dispute regarding the genuineness or identity of donors and no evidence that the donation was used to benefit specified persons. Since the earlier issue of payments to related parties was resolved in favor of the assessee, the disallowance on corpus donation was also unsustainable.

Conclusion: The CIT(A) rightly deleted the addition, and the exemption under sections 11 and 12 was upheld.

3. Royalty Payments of Rs. 40,80,000/- for Trademark Usage

Legal Framework and Precedents: Section 13(3) prohibits diversion of income for benefit of specified persons. The substance-over-form principle, as reiterated by the Apex Court in State of Andhra Pradesh vs Kone Elevators India Ltd, requires examining the true nature and intention behind transactions.

Court's Interpretation: The AO disallowed the royalty payments on the ground that the assessee company was incorporated before the holding company, and the brand name 'Calorx' was developed by the assessee, making payment to the holding company for trademark usage questionable. The AO viewed the registration of trademarks in the holding company's name as a device to divert income.

The CIT(A) held that the trademark 'Yali' was registered in the holding company's name since 2008 and that the logo was also registered in the holding company's name. The payments were made as per agreements and consistently since FY 2009-10. The CIT(A) further noted that the royalty payments were part of the aggregate payments to the holding company already examined under management fees, making the AO's separate disallowance a double addition.

Key Evidence: Trademark registration documents, agreements, ledger accounts, and the history of payments demonstrated the genuineness of the royalty payments.

Application of Law to Facts: The Tribunal agreed with the CIT(A) that the payments were for legally registered trademarks and were made consistently, negating the AO's presumption of diversion.

Conclusion: The addition of Rs. 40,80,000/- was deleted.

4. Addition of Rs. 25,28,757/- on Account of Corporate Guarantee Charges

Legal Framework: Corporate guarantee charges are generally payable when a guarantee is extended. If no charges are levied or expenses incurred, notional income addition is questionable.

Court's Reasoning: The AO added notional income for corporate guarantee charges, although the subsidiary company did not charge any amount. The guarantee was given in 2012 before the holding-subsidiary relationship existed. The CIT(A) found no expenditure or receipt of income on this account and held that notional addition was not sustainable.

Conclusion: The addition was rightly deleted.

5. Disallowance of Depreciation of Rs. 1,51,13,775/-

Legal Framework: Under the Income Tax Act, depreciation is allowable on assets used for charitable purposes unless the cost of asset has already been allowed as application of income in earlier years, which would result in double benefit.

Court's Interpretation: The AO disallowed depreciation on the ground that cost of asset was claimed as application of fund but no documents were furnished to clarify whether depreciation pertained to current or earlier years. The CIT(A) observed that the assessee had claimed cost of asset as application of fund for AY 2017-18 and had not claimed depreciation as application of fund. Since depreciation was not claimed in the computation, no addition was warranted. The CIT(A) found no cogent reason for disallowance.

Conclusion: The disallowance was deleted.

Significant Holdings

"The payments have been duly paid to ALPL for providing all the kind of services as mentioned above. The Ld. AO has not given any basis for disallowance of the expenses of the appellant merely because they are from holding company while explaining the unreasonableness of the same."

"The rule of consistency must have been followed by the AO. Quantum of payments to a particular party is no reason to treat a part of payment as unreasonable since the test is the value and importance of the services rendered."

"The substance of a contract is determinative and not its form. Thus the essence of the contract is crucial and is to be seen, keeping in mind the intention of the parties."

"No discrepancy in the books of account of the appellant have been brought on record by the Ld. AO which could have warranted the rejection of books of accounts."

"The corporate guarantee was given in January, 2012 when there was no relationship of holding and subsidiary company between the ALPL and the assessee. Furthermore, the assessee has not incurred any expense or received anything on this account, thus, making an addition on the notional income is not sustainable under law."

"The assessee has not claimed depreciation of asset as application of fund, but, instead, claimed cost of asset as application of fund for AY 2017-18. That being the case, as in the computation of income depreciation on asset has not been claimed as the application of fund for the AY 2017-18 no addition could have been made."

The Tribunal concluded that the Revenue's appeal lacked merit on all grounds and dismissed the appeal, affirming the CIT(A)'s order deleting all additions made by the AO.