AI TextQuick Glance (AI)Headnote
Issues Involved:
1. Whether the assessee society is an educational institution.
2. Whether the assessee is entitled to claim exemption under Section 10(23C)(iiiad) of the Income-tax Act, 1961.
Issue-wise Detailed Analysis:
1. Whether the assessee society is an educational institution:
The assessee, a society registered with the Registrar of Societies, Meerut, was formed with the aim of imparting education. The society filed nil income tax returns for the assessment years 2002-03 and 2003-04. The assessments were reopened, and notices under Section 148 were issued. The Assessing Officer observed that the assessee had shown donations received as corpus donations, claiming exemption from tax. However, the Assessing Officer noted that the assessee was not registered under Section 12AA of the Income-tax Act, 1961, and questioned the exemption claims. The assessee contended that it had not prepared an income and expenditure account as there was no functioning during the relevant periods and that the donations were corpus donations. The society had applied for a plot of land with the Greater Noida Authority for establishing an educational institution and had paid a substantial amount towards the plot. It claimed exemption under Section 10(23C)(iiiad), asserting that it existed solely for educational purposes and not for profit.
The Learned CIT(Appeals) upheld the Assessing Officer's decision, leading to the appeals before the Tribunal. The Tribunal noted that the assessee had been granted registration under Section 12AA on 29th September 2009, indicating the genuineness of its activities. The Tribunal acknowledged that the aims and objects of the society were educational and not for profit, as evidenced by the documents and the provisional sanction by the CBSE for school affiliation.
2. Whether the assessee is entitled to claim exemption under Section 10(23C)(iiiad) of the Income-tax Act, 1961:
The Tribunal considered whether the assessee's activities qualified it for exemption under Section 10(23C)(iiiad). The Assessing Officer had relied on the Madras High Court decision in CIT v. Devi Educational Institution, which held that the actual existence of an educational institution was a precondition for exemption. The Tribunal, however, referred to subsequent decisions, including MR. AR Educational Society v. CIT, where the Madras High Court suggested reconsideration of the earlier judgment, emphasizing that taking steps towards establishing an educational institution could qualify for exemption.
The Tribunal also referred to the Calcutta High Court decision in CIT v. Doon Foundation, which held that preliminary steps towards running a teaching course could qualify an institution for exemption. Similarly, the Kerala High Court in CIT v. Sree Narayana Chandrika Trust held that income derived during the establishment phase of a hospital was exempt.
The Tribunal concluded that the expression "existing" in Section 10(23C)(iiiad) should be interpreted to include institutions in the process of establishment. It noted that the society had taken substantial steps towards establishing an educational institution, including acquiring land and starting construction. The Tribunal held that the society's predominant object was educational and not for profit, and the incidental profit did not change its character.
The Tribunal distinguished the Supreme Court decision in American Hotel & Lodging Association, Educational Institute v. CBDT, noting that the context was different and did not directly address the issue of when an institution is considered to exist for educational purposes.
Conclusion:
The Tribunal allowed the appeals, directing the Assessing Officer to grant the benefit of Section 10(23C)(iiiad) to the assessee for the assessment years 2002-03 and 2003-04, recognizing the society as an educational institution existing for educational purposes, even during its establishment phase.
Tribunal grants Section 10(23C)(iiiad) benefit to educational institution during establishment phase
The Tribunal allowed the appeals, directing the Assessing Officer to grant the benefit of Section 10(23C)(iiiad) to the assessee for the assessment years 2002-03 and 2003-04, recognizing the society as an educational institution existing for educational purposes, even during its establishment phase.
Educational Institution – exemption denied u/s 10(23C)(iiiad) on ground that institution is not active in field of education, and it is in process of establishing - AY 2003-04 & 2004-05 Held that:- It is undisputed that Institution has been granted registration u/s 12A though on 29th September 2009 which infers aims and objects of the society was to run an educational institution and they are not for the purpose of profit. Apex court in case of ACIT v. Surat Art Silk Cloth Manufacturer Association(1979 - TMI - 5217 - Supreme Court - Income Tax) held that the test of pre-dominant object of the activity is to be seen whether it exists solely for education and not to earn profit.
In the present case, society is in existence but actual educational activity has not taken place. Therefore in view of decisions of Calcutta High Court, Kerala High Court, wherein it has been observed that from construction period it is to be stated that educational institution is existing, we direct the A.O. to grant benefit of section 10(23C)(iiiad) – Decided in favor of assessee.
Educational Institution – exemption denied u/s 10(23C)(iiiad) on ground that institution is not active in field of education, and it is in process of establishing - AY 2003-04 & 2004-05 Held that:- It is undisputed that Institution has been granted registration u/s 12A though on 29th September 2009 which infers aims and objects of the society was to run an educational institution and they are not for the purpose of profit. Apex court in case of ACIT v. Surat Art Silk Cloth Manufacturer Association(1979 - TMI - 5217 - Supreme Court - Income Tax) held that the test of pre-dominant object of the activity is to be seen whether it exists solely for education and not to earn profit.
In the present case, society is in existence but actual educational activity has not taken place. Therefore in view of decisions of Calcutta High Court, Kerala High Court, wherein it has been observed that from construction period it is to be stated that educational institution is existing, we direct the A.O. to grant benefit of section 10(23C)(iiiad) – Decided in favor of assessee.
AI TextQuick Glance (AI)Headnote
Issues Involved:
1. Withdrawal of exemption under Section 80G(5) of the Income-tax Act, 1961.
2. Classification of 'Bhagwat Katha' as a religious activity.
3. Applicability of Section 13(1)(b) and Section 80G(5B) of the Income-tax Act.
4. Validity of the trust's activities and the genuineness of the trust.
5. The impact of the decision in CIT v. Upper Ganges Sugar Mills Ltd. on the case.
6. The procedural correctness of the withdrawal of approval by the CIT.
Detailed Analysis:
1. Withdrawal of Exemption under Section 80G(5):
The assessee, a charitable trust, had its exemption under Section 80G(5) withdrawn by the Commissioner of Income-tax (CIT) on the grounds that it incurred 78% of its total receipts on organizing 'Bhagwat Katha', which was deemed a religious activity. The CIT's decision was based on Explanation 3 to Section 80G, which excludes purposes of a religious nature from being considered charitable. The tribunal partially upheld this withdrawal for the financial year 2007-08 but remanded the matter back to the CIT for reconsideration for subsequent years.
2. Classification of 'Bhagwat Katha' as a Religious Activity:
The assessee argued that 'Bhagwat Katha' was not a religious activity as it was open to all castes and religions and aimed at educating people about Indian culture. However, the tribunal, relying on the Supreme Court's decision in CIT v. Upper Ganges Sugar Mills Ltd., held that organizing 'Bhagwat Katha' is inherently a religious activity, irrespective of its public character. The tribunal emphasized that the common understanding of 'religion' or 'religious' should be applied in the absence of specific definitions under the Act.
3. Applicability of Section 13(1)(b) and Section 80G(5B):
The assessee contended that Section 13(1)(b), which excludes trusts benefiting a particular religious community from exemptions under Sections 11 and 12, did not apply. The tribunal clarified that the issue was not about Section 13(1)(b) but about Section 80G(5)(vi) read with Explanation 3, which excludes trusts with purposes substantially of a religious nature. The tribunal also noted that Section 80G(5B) allows for a limited expenditure on religious activities (up to 5% of income), which the assessee had exceeded.
4. Validity of the Trust's Activities and Genuineness:
The tribunal considered whether the trust's activities were genuine. It concluded that the trust's significant expenditure on religious activities in one year did not necessarily imply that the trust's overall activities were not genuine. The tribunal held that the withdrawal of approval should be limited to the year in which the expenditure exceeded the statutory limit, and the CIT should review subsequent years to ensure compliance with the 5% limit.
5. Impact of CIT v. Upper Ganges Sugar Mills Ltd.:
The tribunal heavily relied on the Supreme Court's decision in CIT v. Upper Ganges Sugar Mills Ltd., which held that establishing places of worship is a religious activity, even if open to all religions. This precedent was used to reject the assessee's argument that 'Bhagwat Katha' was not a religious activity. The tribunal noted that the decision was binding and directly applicable to the assessee's case.
6. Procedural Correctness of the Withdrawal of Approval:
The tribunal found that the CIT's withdrawal of approval for the financial year 2007-08 was procedurally correct but required a review for subsequent years. The CIT was directed to examine the assessee's expenditure on religious activities for the years following 2007-08 and ensure that it did not exceed the 5% limit. The CIT was also instructed to consider any amendments to the trust's constitution aimed at compliance and to grant approval for years where the limit was not breached.
Conclusion:
The tribunal's order confirmed the withdrawal of approval for the financial year 2007-08 and remanded the matter for subsequent years back to the CIT for further examination. The tribunal emphasized the need for the CIT to ensure compliance with the statutory limit on religious expenditure and to consider the genuineness of the trust's activities on a year-to-year basis. The decision in CIT v. Upper Ganges Sugar Mills Ltd. was pivotal in classifying 'Bhagwat Katha' as a religious activity, impacting the trust's eligibility for exemption under Section 80G.
Charitable Trust's Exemption Withdrawn for Excessive Religious Spending
The tribunal upheld the withdrawal of exemption under Section 80G(5) for the charitable trust due to significant expenditure on 'Bhagwat Katha', classified as a religious activity. The tribunal emphasized adherence to the 5% limit on religious activities under Section 80G(5B) and directed the CIT to review subsequent years for compliance. The decision was influenced by the precedent set in CIT v. Upper Ganges Sugar Mills Ltd., affirming 'Bhagwat Katha' as inherently religious. The tribunal deemed the procedural correctness of the withdrawal for 2007-08 but required further assessment for subsequent years to ensure trust genuineness and compliance.
Withdrawal of exemption u/s. 80G(5) – Charitable Trust - CIT(A) withdrew approval u/s 80G(5) on finding that Trust has spend about 78% of its total receipt for organizing 'Bhagwat Katha' i.e. activities of religious nature, which is in violation of Section 80G(5B) in FY 07-08 – AY 08-08, 09-10 - Held that:- Expenditure of religious nature exceeds the qualifying limit of 5%, in AY 2008-09. The withdrawal of the approval once for all on the basis of an activity restricted to a particular year would be unjust, amount as it would to castigating a person acting bona fide, particularly considering that its objects are purely charitable in nature. The charge of un-genuineness in our view would imply that the institution is not undertaking any charitable work or engaged in impermissible activity/s in the guise of charitable objects, which would be, a very un-charitable and unwarranted view to take.
Therefore, withdrawal of approval u/s. 80G would be sustainable in law only in respect of the first year, i.e., AY 2008-09, while the matter would require a review for the subsequent years. In other words, the section would continue to apply, and the approval valid, for the years for which the said limit is not exceeded – Decided partly in favor of assessee for statistical purposes.
Withdrawal of exemption u/s. 80G(5) – Charitable Trust - CIT(A) withdrew approval u/s 80G(5) on finding that Trust has spend about 78% of its total receipt for organizing 'Bhagwat Katha' i.e. activities of religious nature, which is in violation of Section 80G(5B) in FY 07-08 – AY 08-08, 09-10 - Held that:- Expenditure of religious nature exceeds the qualifying limit of 5%, in AY 2008-09. The withdrawal of the approval once for all on the basis of an activity restricted to a particular year would be unjust, amount as it would to castigating a person acting bona fide, particularly considering that its objects are purely charitable in nature. The charge of un-genuineness in our view would imply that the institution is not undertaking any charitable work or engaged in impermissible activity/s in the guise of charitable objects, which would be, a very un-charitable and unwarranted view to take.
Therefore, withdrawal of approval u/s. 80G would be sustainable in law only in respect of the first year, i.e., AY 2008-09, while the matter would require a review for the subsequent years. In other words, the section would continue to apply, and the approval valid, for the years for which the said limit is not exceeded – Decided partly in favor of assessee for statistical purposes.
AI TextQuick Glance (AI)Headnote
Issues Involved:
1. Addition on account of unaccounted donations.
2. Applicability of provisions of section 13(1)(c) of the Income Tax Act.
3. Benefit of deduction/exemption under section 11 of the Income Tax Act.
4. Time barring of assessments.
5. Influence of the order of CIT(C) on the assessment orders.
6. Disallowance of expenditure on account of payment of GPF interest.
7. Assessment of income from voluntary contributions.
8. Disallowance of depreciation.
9. Relief allowed by CIT(A) in relation to unaccounted donations.
10. Disallowance of deduction on account of payment to Director of Technical Education.
Detailed Analysis:
1. Addition on Account of Unaccounted Donations:
The main dispute was regarding the addition of unaccounted donations based on incriminating diaries found during a survey at the business premises of Shri A.K. Patil. The AO noted that the donations were collected on the instructions of trustees and not recorded in the trust's books. Despite Shri Patil's later denial, the AO and CIT(A) held that the donations were collected on behalf of the trust. The Tribunal upheld the CIT(A)'s order, confirming the addition of unaccounted donations as income of the trust.
2. Applicability of Provisions of Section 13(1)(c):
The AO did not initially apply section 13(1)(c), but CIT(A) examined its applicability. CIT(A) concluded that the trust violated section 13(1)(c) as donations were used by trustees and the secretary, disqualifying the trust from exemptions under section 11 for assessment years 2001-02 to 2003-04. The Tribunal upheld this decision, confirming that the trust was not entitled to any benefit of sections 11 or 12 for these years.
3. Benefit of Deduction/Exemption under Section 11:
For assessment years 2001-02 to 2003-04, the Tribunal upheld the denial of exemption under section 11 due to violations of section 13(1)(c). For assessment years 2004-05 to 2006-07, the Tribunal allowed exemption under section 11 as the trust's registration under section 12AA was restored, and no violations of section 13(1)(c) were found.
4. Time Barring of Assessments:
The assessee's ground regarding the time-barring of assessments due to special audit under section 142(2A) was not pressed during the hearing and was dismissed as not pressed.
5. Influence of the Order of CIT(C) on the Assessment Orders:
The assessee argued that the assessments were influenced by the CIT(C)'s order under section 12AA. The Tribunal found that the AO passed reasoned and speaking orders, dismissing this ground as infructuous.
6. Disallowance of Expenditure on Account of Payment of GPF Interest:
This ground, relevant only for assessment year 2000-01, was not pressed during the hearing and was dismissed as not pressed.
7. Assessment of Income from Voluntary Contributions:
The AO treated voluntary contributions as revenue receipts. CIT(A) held that these were corpus donations based on confirmations and receipts. For assessment years 2001-02 to 2006-07, the Tribunal upheld CIT(A)'s decision, treating these as capital receipts and not taxable. For assessment year 2000-01, the Tribunal held that voluntary contributions, including corpus donations, were income under section 2(24)(iia) as the trust was not registered under section 12AA.
8. Disallowance of Depreciation:
The AO disallowed depreciation on assets, treating the opening WDV as nil. CIT(A) allowed depreciation based on the actual WDV in the books, following the Supreme Court's ruling in Madeva Upendra Sinai. The Tribunal upheld CIT(A)'s order, allowing depreciation as claimed by the assessee.
9. Relief Allowed by CIT(A) in Relation to Unaccounted Donations:
CIT(A) provided relief by accepting that certain amounts were school fees and not donations. The Tribunal upheld CIT(A)'s decision, confirming the relief granted for assessment years 2000-01 and 2001-02.
10. Disallowance of Deduction on Account of Payment to Director of Technical Education:
The AO disallowed the deduction, treating it as a penalty. CIT(A) allowed the deduction, stating it was for violation of administrative guidelines, not statutory provisions. The Tribunal upheld CIT(A)'s decision, allowing the deduction for assessment year 2000-01.
Conclusion:
1. Appeals of Vidyavardhini for assessment years 2000-01 to 2003-04 are dismissed; for assessment years 2004-05 to 2006-07, they are partly allowed.
2. Appeals of the revenue in case of Vidyavardhini for assessment years 2000-01 to 2003-04 are partly allowed; for assessment years 2004-05 to 2006-07, they are dismissed.
3. Appeals of the revenue in case of Shri A.K. Patil for assessment years 2000-01 to 2003-04 are dismissed.
Trust's Income Inclusion Upheld, Exemptions Denied for Violations
The Tribunal upheld the addition of unaccounted donations as income of the trust based on incriminating diaries found during a survey. The trust was disqualified from exemptions under section 11 due to violations of section 13(1)(c) for certain assessment years. Depreciation was allowed based on the actual written down value, and deductions for payments to the Director of Technical Education were permitted. The Tribunal confirmed relief granted for certain unaccounted donations and treated voluntary contributions as capital receipts. Overall, the appeals were partly allowed for some assessment years and dismissed for others.
Additions made for unaccounted donations entered in the four diaries recovered from the business premises of Shri A.K. Patil who was the Hon. Secretary of the trust - Shri Patil in one statement at the time of survey mentioned donations had been collected on the instructions of the trustees and later in statement that donations were collected in his personal capacity - Held that:- confirming addition of unaccounted donations in case of the assessee - CIT(A) has given a clear finding that the assessee could not show any co-relation between entries and the summary and therefore claim was rejected.
Assessee raised ground of applicability of provisions of section 13(1)(c) - applicability of provisions of section 13(1)(c) in assessment years 2000-01 to 2003-04 on ground of unaccounted donations having been used by Hon. Secretary and trustees of the trust. The ld. AR for the assessee has argued that provisions of section 13(1)(c) were not applied by AO and therefore the same cannot be applied by CIT(A), for the first time – Held that:- settled legal position that powers of CIT(A) are co-terminus with that of the AO and he can do what the AO can do and can also consider aspects which have been omitted to be considered by the AO.
Allowability of deduction/exemption under section 11 of the IT Act for assessment years 2001-02 to 2006-07 – Held that:- assessee was not registered under section 12AA for the assessment year 2000-01 and, therefore, not entitled to exemption under section 11 - As regards assessment years 2004-05 to 2006-07, the registration of the assessee under section 12AA has been restored by the Tribunal and no violations of provisions of section 13(1)(c) have been found in these years and therefore, exemption under section 11 has to be allowed to the assessee.
Assessee has challenged the assessment orders passed by the AO on the ground that the same were barred by limitation – Held that:- provisions of section 142(2A) were not applicable and the AO was not entitled to avail extended period and the assessments were thus barred by limitation. The ld. AR for the assessee, however, at the time of hearing of these appeals did not press this ground. This ground is therefore, dismissed as not pressed in all the assessment years.
Assessee had treated these donations as capital receipts on the ground that the same were corpus donations - CIT(A) was convinced by the explanation given by the assessee – Held that:- There is no dispute that the assessee had issued receipts in each and every case on which it was specifically mentioned and that donations were received towards corpus - Assessee also filed confirmations from all donors giving name, address, PAN, mode of payment, etc. in which it was clearly mentioned that donations were towards corpus – against revenue.
Whether the voluntary contribution even if made with specific direction to form corpus of the trust could be assessed as income ? - Held that :- For assessment year 2000-01 it was not registered, the voluntary contributions with direction to form corpus have to be treated as income - In assessment years 2001-02 to 2003-04 also provisions of sections 11 and 12 were not applicable due to violation of provisions of section 13(1)(c) and voluntary contributions towards corpus have to be treated as income - in assessment year 2004-05 to 2006-07 in which the assessee was registered under section 12AA, and in which no violation of section 13(1)(c) were found, voluntary contributions have to be treated as capital receipt, not taxable.
Disallowance of depreciation - assessee had filed returns of income as trust and claimed capital expenditure as full deduction in the computation of income -– Held that:- allowing full deduction in respect of capital expenditure in relation to the provisions of section 11 only meant that expenditure incurred on acquisition of capital asset to be used for charitable /religious purposes has to be treated as application of income. The depreciation has to be allowed in respect of capital assets so acquired and used for charitable activity – decided in case of CIT v. Institute of Banking Personnel Selection (2003 - TMI - 11526 - BOMBAY High Court)
Disallowance of deduction claimed by the assessee on account of payment to Director of Technical Education – Held that:- The case of the assessee is that extra students had been admitted inadvertently in violation of administrative guidelines thus there was no infraction of law. The ld. DR, could not explain before us as to how there was any violation of statutory provisions in admitting students. Therefore, in our view the deduction claimed cannot be disallowed under the provisions of Explanation to section 37(1) – against revenue
Additions made for unaccounted donations entered in the four diaries recovered from the business premises of Shri A.K. Patil who was the Hon. Secretary of the trust - Shri Patil in one statement at the time of survey mentioned donations had been collected on the instructions of the trustees and later in statement that donations were collected in his personal capacity - Held that:- confirming addition of unaccounted donations in case of the assessee - CIT(A) has given a clear finding that the assessee could not show any co-relation between entries and the summary and therefore claim was rejected.
Assessee raised ground of applicability of provisions of section 13(1)(c) - applicability of provisions of section 13(1)(c) in assessment years 2000-01 to 2003-04 on ground of unaccounted donations having been used by Hon. Secretary and trustees of the trust. The ld. AR for the assessee has argued that provisions of section 13(1)(c) were not applied by AO and therefore the same cannot be applied by CIT(A), for the first time – Held that:- settled legal position that powers of CIT(A) are co-terminus with that of the AO and he can do what the AO can do and can also consider aspects which have been omitted to be considered by the AO.
Allowability of deduction/exemption under section 11 of the IT Act for assessment years 2001-02 to 2006-07 – Held that:- assessee was not registered under section 12AA for the assessment year 2000-01 and, therefore, not entitled to exemption under section 11 - As regards assessment years 2004-05 to 2006-07, the registration of the assessee under section 12AA has been restored by the Tribunal and no violations of provisions of section 13(1)(c) have been found in these years and therefore, exemption under section 11 has to be allowed to the assessee.
Assessee has challenged the assessment orders passed by the AO on the ground that the same were barred by limitation – Held that:- provisions of section 142(2A) were not applicable and the AO was not entitled to avail extended period and the assessments were thus barred by limitation. The ld. AR for the assessee, however, at the time of hearing of these appeals did not press this ground. This ground is therefore, dismissed as not pressed in all the assessment years.
Assessee had treated these donations as capital receipts on the ground that the same were corpus donations - CIT(A) was convinced by the explanation given by the assessee – Held that:- There is no dispute that the assessee had issued receipts in each and every case on which it was specifically mentioned and that donations were received towards corpus - Assessee also filed confirmations from all donors giving name, address, PAN, mode of payment, etc. in which it was clearly mentioned that donations were towards corpus – against revenue.
Whether the voluntary contribution even if made with specific direction to form corpus of the trust could be assessed as income ? - Held that :- For assessment year 2000-01 it was not registered, the voluntary contributions with direction to form corpus have to be treated as income - In assessment years 2001-02 to 2003-04 also provisions of sections 11 and 12 were not applicable due to violation of provisions of section 13(1)(c) and voluntary contributions towards corpus have to be treated as income - in assessment year 2004-05 to 2006-07 in which the assessee was registered under section 12AA, and in which no violation of section 13(1)(c) were found, voluntary contributions have to be treated as capital receipt, not taxable.
Disallowance of depreciation - assessee had filed returns of income as trust and claimed capital expenditure as full deduction in the computation of income -– Held that:- allowing full deduction in respect of capital expenditure in relation to the provisions of section 11 only meant that expenditure incurred on acquisition of capital asset to be used for charitable /religious purposes has to be treated as application of income. The depreciation has to be allowed in respect of capital assets so acquired and used for charitable activity – decided in case of CIT v. Institute of Banking Personnel Selection (2003 - TMI - 11526 - BOMBAY High Court)
Disallowance of deduction claimed by the assessee on account of payment to Director of Technical Education – Held that:- The case of the assessee is that extra students had been admitted inadvertently in violation of administrative guidelines thus there was no infraction of law. The ld. DR, could not explain before us as to how there was any violation of statutory provisions in admitting students. Therefore, in our view the deduction claimed cannot be disallowed under the provisions of Explanation to section 37(1) – against revenue
AI TextQuick Glance (AI)Headnote
Issues Involved:
1. Adjustment under Section 92CA(3) of the Income Tax Act.
2. Addition under Section 14A of the Income Tax Act.
3. Depreciation claim on goodwill and other intangible assets.
Issue-wise Detailed Analysis:
1. Adjustment under Section 92CA(3) of the Income Tax Act:
The assessee challenged the adjustment of Rs. 460,391 made by the Assessing Officer (A.O.) under Section 92CA(3) of the Act. The assessee, engaged in catering services, supplied processed food to Singapore Airlines and Virgin Atlantic, benchmarking the transaction using the Comparable Uncontrolled Price (CUP) method. The Transfer Pricing Officer (TPO) adjusted the arm's length price based on the average prices charged to other airlines. The A.O. added Rs. 460,391 to the assessee's income, which was confirmed by the Dispute Resolution Panel (DRP). The assessee argued that the transaction should be viewed as a single bundled transaction, citing Rule 10(l)(d) of the I.T. Rules and OECD guidelines. The assessee presented a comparison table showing that the rates charged to Singapore Airlines were the highest, indicating arm's length pricing. The Tribunal agreed with the assessee, holding that the transactions were at arm's length price and directed the A.O. to delete the adjustment, allowing the ground raised by the assessee.
2. Addition under Section 14A of the Income Tax Act:
The assessee contested the addition of Rs. 205,950 made by the A.O. under Section 14A of the Act. The assessee earned dividend income of Rs. 0.49 crores from Tata Mutual Funds, claimed as exempt under Section 10(35). The A.O. disallowed 10% of the CFO's remuneration, amounting to Rs. 205,950, based on DRP's directions. The assessee argued that the investments were made from own funds, and no specific expenditure was incurred to earn the exempt income. The Tribunal considered both sides' arguments and concluded that the disallowance made by the A.O. on an ad hoc basis was on the higher side. It directed a reasonable disallowance of Rs. 150,000, partly allowing the ground raised by the assessee.
3. Depreciation Claim on Goodwill and Other Intangible Assets:
The assessee challenged the A.O.'s disallowance of Rs. 7,77,77,860 claimed as depreciation on various intangible assets grouped under 'Goodwill.' The assessee argued that the business of Indian Hotels Company Limited (IHCL) was acquired as a going concern, including various business/commercial rights. The A.O. rejected the claim, noting that the tax auditors did not consider depreciation on goodwill as allowable. The A.O. also highlighted that the issue was previously disallowed in Assessment Year 2003-04, upheld by the CIT(A), and the matter was pending before the Tribunal. The Tribunal, referencing its earlier decision, held that no depreciation is allowable on goodwill. It also rejected the assessee's bifurcation of goodwill into intangible assets as an afterthought, prepared eight years after the business transfer agreement. The Tribunal upheld the A.O.'s order, disallowing depreciation on goodwill and other intangible assets, dismissing the grounds on this issue.
Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal directing the deletion of the adjustment under Section 92CA(3) and a reduced disallowance under Section 14A. However, the claim for depreciation on goodwill and other intangible assets was dismissed. Grounds 4 to 6 were not pressed by the assessee and were dismissed as academic in nature.
Tribunal partially allows appeal, adjusts Income Tax Act sections, dismisses depreciation claim. Grounds 4-6 dismissed.
The Tribunal partly allowed the appeal filed by the assessee. It directed the deletion of the adjustment under Section 92CA(3) of the Income Tax Act, and reduced the disallowance under Section 14A. However, the claim for depreciation on goodwill and other intangible assets was dismissed. Grounds 4 to 6 were not pressed by the assessee and were dismissed as academic in nature.
Adjustment u/s 92CA(3) - providing catering services to different airlines - joint venture between IHCL at 51% stake and SATS at 49% stake – Taj Sats supplied processed food to AE's using CUP method - TPO made the adjustment to the arm's length price charged by Taj Sats to its AE after comparing the average of prices per item of meal charged to other Airlines - Held that:- the food supplied is a basket containing individual items rather than supply of the items individually. Therefore the entire transaction has to be viewed as a single transaction - A.O. was not justified in making the adjustment of ₹ 460391/-u/s 92CA(3) of the Act – in favour of assessee.
Addition u/s 14A - assessee company has earned dividend income from Tata Mutual Funds claimed as exempt u/s 10(35) - A.O disallowed 10% of CFO's remuneration amounting u/s 14A of the I.T. Act relying on fact that the CFO definitely spent some time for investment decision – Held that:- since the assessee has not allocated any expenditure for earning tax free dividend income and since the disallowance made by the A.O. on adhoc basis appears to be on higher side, a reasonable disallowance of ₹ 1,50,000/-.
Dis-allowance of claim of depreciation on various intangible assets grouped under the head 'Goodwill' – that the business of IHCL was acquired by the assessee as a going concern – The consideration is not paid independently for each asset or liability – Held that:- when depreciation has neither been claimed nor allowed on intangible assets in the preceding years the assessee, in our opinion, cannot be allowed to claim depreciation on intangible assets in the impugned assessment year – against assessee.
Adjustment u/s 92CA(3) - providing catering services to different airlines - joint venture between IHCL at 51% stake and SATS at 49% stake – Taj Sats supplied processed food to AE's using CUP method - TPO made the adjustment to the arm's length price charged by Taj Sats to its AE after comparing the average of prices per item of meal charged to other Airlines - Held that:- the food supplied is a basket containing individual items rather than supply of the items individually. Therefore the entire transaction has to be viewed as a single transaction - A.O. was not justified in making the adjustment of ₹ 460391/-u/s 92CA(3) of the Act – in favour of assessee.
Addition u/s 14A - assessee company has earned dividend income from Tata Mutual Funds claimed as exempt u/s 10(35) - A.O disallowed 10% of CFO's remuneration amounting u/s 14A of the I.T. Act relying on fact that the CFO definitely spent some time for investment decision – Held that:- since the assessee has not allocated any expenditure for earning tax free dividend income and since the disallowance made by the A.O. on adhoc basis appears to be on higher side, a reasonable disallowance of ₹ 1,50,000/-.
Dis-allowance of claim of depreciation on various intangible assets grouped under the head 'Goodwill' – that the business of IHCL was acquired by the assessee as a going concern – The consideration is not paid independently for each asset or liability – Held that:- when depreciation has neither been claimed nor allowed on intangible assets in the preceding years the assessee, in our opinion, cannot be allowed to claim depreciation on intangible assets in the impugned assessment year – against assessee.
AI TextQuick Glance (AI)Headnote
Issues:
1. Interpretation of sale agreement and undisclosed income.
2. Disallowance under Section 40A(3).
3. Treatment of addition of Rs. 90,101 as undisclosed income.
4. Surcharge under Section 113.
5. Consideration of additions based on statement under Section 132(4).
Issue 1: Interpretation of sale agreement and undisclosed income:
The case involved a partnership firm engaged in trading milk products. After a search, documents suggested an undisclosed sale of the firm for Rs. 2 crores. The assessee contended the actual sale was for a lower amount due to reduced milk processing. The Assessing Officer relied on seized documents to confirm the sale at Rs. 2 crores. The Tribunal, however, found the seized agreement unreliable, stating it contained inflated figures. The High Court disagreed, noting lack of evidence to discredit the agreement. Stamp paper purchases and related documents supported the Rs. 2 crores sale consideration. The Tribunal's deletion of the addition was deemed unreasonable and perverse.
Issue 2: Disallowance under Section 40A(3):
The Assessing Officer disallowed Rs. 8,31,036 under Section 40A(3). The Tribunal, considering the nature of the business, deleted the disallowance. The High Court found no reason to interfere with the Tribunal's decision, as it did not raise any legal question.
Issue 3: Treatment of addition of Rs. 90,101 as undisclosed income:
The addition of Rs. 90,101, shown in Form 2B for 2000-01, was treated as undisclosed income by the Assessing Officer and confirmed by the 1st appellate authority. The Tribunal allowed the set-off, assuming a parallel regular assessment. The High Court disagreed, stating no such regular assessment existed, and restored the addition as undisclosed income.
Issue 4: Surcharge under Section 113:
The Tribunal ruled in favor of the Revenue on the surcharge issue, which was not appealed by the assessee. The individual assessments were to be addressed separately.
Issue 5: Consideration of additions based on statement under Section 132(4):
The Tribunal deleted certain additions based on statements under Section 132(4), citing lack of seized materials and retractions. The High Court disagreed, emphasizing the evidentiary value of such statements and directed the Tribunal to reconsider based on established legal principles.
In conclusion, the High Court partly allowed ITA 18 of 2010, sustaining additions based on the sale agreement. The undisclosed income of Rs. 90,101 for 2000-01 was upheld. Appeals regarding individual partners were remanded to the Tribunal for fresh consideration, aligning with the High Court's findings and legal principles.
High Court decision on undisclosed income and additions in ITA case, remanding appeals for reconsideration
The High Court partly allowed ITA 18 of 2010, upholding additions based on the sale agreement and confirming undisclosed income of Rs. 90,101 for 2000-01. Appeals concerning individual partners were remanded to the Tribunal for reconsideration in line with the High Court's decision and applicable legal principles. The Tribunal's deletion of certain additions was deemed unreasonable, and the High Court directed a reassessment based on established legal standards.
Search and seizure - Undisclosed income - assessee's claim was that the actual sale as against the later agreement was for an amount of Rs. 1,32,40,000/- and not for Rs.2 crores as is revealed from the earlier agreement - Assessing Officer has noticed that the Stamp paper used for the agreement dated 23.5.2000 and 1.6.2000 has both been purchased on 23.5.2000 from the very same vendor - It is not clear as to how the Tribunal came to the finding that the agreement dated 23.5.2000 was one which was not enforceable and we are afraid that no reasonable person could reach the conclusions arrived at by the Tribunal - Held that: The documents seized on search as also the statement recorded under section 132(4) provides ample evidence to support the actual consideration of Rs.2 crores and we answer the question of law raised by the revenue in favour of the revenue since the deletion made by the Tribunal was without adverting to the material seized and conclusion of the Tribunal with respect to the actual sale consideration is unreasonable and perverse.
Regarding set off of carried forward loss from the assessment year 1999-2000 - Assessing Officer as well as the 1st appellate authority treated the same as undisclosed income for the assessment year 2000-01 - assessee failed to file a return in the assessment year 2000-01 and only after the search on 4.10.2001 and notice under Section 158BC dated 9.10.2002 filed a return of income in Form No.2B for the block period 1.4.1995 to 4.10.2001 that too on 19.2.2003 - Decided against the assessee
Search and seizure - Undisclosed income - assessee's claim was that the actual sale as against the later agreement was for an amount of Rs. 1,32,40,000/- and not for Rs.2 crores as is revealed from the earlier agreement - Assessing Officer has noticed that the Stamp paper used for the agreement dated 23.5.2000 and 1.6.2000 has both been purchased on 23.5.2000 from the very same vendor - It is not clear as to how the Tribunal came to the finding that the agreement dated 23.5.2000 was one which was not enforceable and we are afraid that no reasonable person could reach the conclusions arrived at by the Tribunal - Held that: The documents seized on search as also the statement recorded under section 132(4) provides ample evidence to support the actual consideration of Rs.2 crores and we answer the question of law raised by the revenue in favour of the revenue since the deletion made by the Tribunal was without adverting to the material seized and conclusion of the Tribunal with respect to the actual sale consideration is unreasonable and perverse.
Regarding set off of carried forward loss from the assessment year 1999-2000 - Assessing Officer as well as the 1st appellate authority treated the same as undisclosed income for the assessment year 2000-01 - assessee failed to file a return in the assessment year 2000-01 and only after the search on 4.10.2001 and notice under Section 158BC dated 9.10.2002 filed a return of income in Form No.2B for the block period 1.4.1995 to 4.10.2001 that too on 19.2.2003 - Decided against the assessee
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