TMI Blog2013 (7) TMI 574X X X X Extracts X X X X X X X X Extracts X X X X ..... c) and clause (d) of sub-section (1)" occurring in sub-section (2) of section 13 suggest that the provisions of sub-section (2) should not be understood as cutting down the provisions of clause (c) and clause (d) of sub-section (1) of section 13 but this does not mean that in a situation like the present where sub-section (2) can apply, it should be ignored. Royalty u/s 13(2) - whether the act of the assessee in paying royalty amounts to diversion of the funds of the assessee attracting section 13(2) (g) - Held that:- merely because such facility was provided by SSSPL and royalty was being paid to it by the assessee in that behalf, the Revenue cannot contend that it is impermissible – Held that:-The observations of the Tribunal that income of the assessee is given to SSSPL, a company whose activity is commercial and not charitable - that payment of royalty by the assessee is not incurred for purpose of the assessee's business - that the students or staff of SSSPL were not bound to join the assessee once it was formed by SSSPL - and the payment was intended to benefit the members of assessee society - that it is a collusive transaction to transfer the profit of the assessee socie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y-2, L. K. G. and U. K. G. sections, in the name of Chirec pre-school, without recognition from the CBSE. The assessee paid rent for the building and playground belonging to SSSPL as per the lease agreement dated June 25, 1997, and royalty for using the name "Chirec", under an agreement dated April 1, 1997. The royalty amount is 20 per cent. of the total fee received from the students on rolls as at the beginning of the year and was paid in three instalments. As per a letter dated February 7, 2005, of the assessee given to the Assessing Officer, royalty is being paid to SSSPL for extensive use of its famous and established brand name "Chirec" and against part reimbursement of various amounts spent by SSSPL for the huge infrastructure and for services and facilities rendered by SSSPL as at the time of the agreement, SSSPL had transferred to the assessee students numbering over 400 from classes I to VI apart from teaching staff. For the above assessment years, when the assessee sought exemption under section 11 of the Act, the Assessing Officer by separate orders all dated March 18, 2005, denied it on the ground that the pre-condition for an educational institution is to impart e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r benefits without charging adequate consideration ; that the royalty paid for the assessment year in question cannot be said to be unreasonable ; that the Assessing Officer also erred in disallowing 20 per cent. of the rent simply on ad hoc basis without conducting any enquiry for collecting information about comparable cases or asking the assessee for clarification ; and that the Assessing Officer was also not correct in ignoring the hire charges for equipment of Rs. 1.20 lakhs. The Revenue challenged the orders of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal, Hyderabad Bench-B, Hyderabad (for short "the Tribunal"). The appeals were numbered as I. T. A. Nos. 282 to 286/Hyd/2006. By a common order dated July 30, 2010, the appeals of the Revenue were partly allowed by the Tribunal. The Tribunal held that in case of charitable institutions, income derived from property held under trust wholly for charitable or religious purposes shall be applied for the object for which the institution was created ; in the present case, royalty is being paid to a private limited company engaged in commercial activities ; SSSPL is not a company incorporated un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etax (Appeals) on the issue of rent reduction and equipment hire charges. Challenging the common order of the Tribunal, the present appeals have been preferred by the assessee. Heard Sri S. Ravi, learned senior counsel for Sri Ch. Pushyam Kiran, learned counsel for the appellant-assessee and Sri J. V. Prasad, learned senior standing counsel for the respondents-Revenue. The learned counsel for the assessee contended that it paid royalty to SSSPL equivalent to 20 per cent. of the fees received from students towards usage of registered trade name "Chirec" and the logo for running the school which also belonged to SSSPL ; payments of royalty were made in terms of the agreement dated April 1, 1997 ; SSSPL paid income-tax on the rent as also the royalty received from the appellant ; the Commissioner of Income-tax (Appeals) rightly called for a remand report from the Assessing Officer specific to the question of reasonableness of the royalty paid ; as the Assessing Officer did not give any finding with regard to the reasonableness of the royalty payment, the Commissioner of Income-tax (Appeals) rightly held that the claim of royalty payment cannot be held to be unreasonable and dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected and the assessee had taken the premises belonging to SSSPL with infrastructure on lease under a lease agreement dated June 25, 1997, to run the school and is paying rent to SSSPL. Under and agreement dated April 1, 1997, SSSPL is also receiving as royalty from the assessee, 20 per cent. of the total fee received from the students on rolls as at the beginning of the year. It is the contention of the assessee that SSSPL is paying the royalty for usage of the brand name "Chirec" and also the infrastructure, tangible and intangible benefits created by SSSPL ; that it could secure a readymade school with all infrastructure including the students from SSSPL and that the payment of royalty by it to SSSPL is reasonable and allowable and therefore it is entitled to exemption under section 11 of the Act. It is not disputed by the Revenue that the Commissioner of Income-tax (Appeals) called for a remand report from the Assessing Officer on the issue whether the quantum of royalty payment is reasonable or not, and in the remand report dated December 12, 2005, submitted by the Assessing Officer to the Commissioner of Income-tax (Appeals), he had specifically stated that the reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year- (i) any funds of the trust or institution are invested or deposited after the 28th day of February, 1983, otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 ; or (ii) any funds of the trust or institution invested or deposited before the 1st day of March, 1983, otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 continue to remain so invested or deposited after the 30th day of November, 1983 ; or (iii) any shares in a company [not being a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956)], or a corporation established by or under a Central,. State or Provincial Act are held by the trust or institution after the 30th day of November, 1983 : Provided that nothing in this clause shall apply in relation to- (i) any assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1st day of June, 1973 ; (ia) any accretion to the shares, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinues to be, made available for the use of any person referred to in sub-section (3) for any period during the previous year without charging adequate rent or other compensation ; (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 or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services ; (d) if the services of the trust or institution are made available to any person referred to in sub-section (3) during the previous year without adequate remuneration or other compensation ; (e) if any share, security or other property is purchased by or on behalf of the trust or institution from any person referred to in subsection (3) during the previous year for consideration which is more than adequate ; (f) if any share, security or other property is sold by or on behalf of the trust or institution to any person referred to in sub-section (3) during the previous year for consideration which is less than adequate ; (g) if any income or property of the trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the exemption under section 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such assets, by reason only that the funds of the trust or the institution have been invested in such assets if such funds do not continue to remain so invested in such assets after the 31st day of March, 1992. Explanation 1.-For the purposes of sections 11, 12, 12A and this section, 'trust' includes any other legal obligation and for the purposes of this section 'relative', in relation to an individual, means- (i) spouse of the individual ; (ii) brother or sister of the individual ; (iii) brother or sister of the spouse of the individual ; (iv) any lineal ascendant or descendant of the individual ; (v) any lineal ascendant or descendant of the spouse of the individual ; (vi) spouse of a person referred to in sub-clause (ii), sub-clause (iii), sub-clause (iv) or sub-clause (v) ; (vii) any lineal descendant of a brother or sister of either the individual or of the spouse of the individual. Explanation 2.-A trust or institution created or established for the benefit of Scheduled Castes, backward classes, Sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue) while deciding the question whether the assessee is entitled to the exemption under section 11 of the Act. It is true that the words "Without prejudice to the generality of the provisions of clause (c) and clause (d) of sub-section (1)" occurring in sub-section (2) of section 13 suggest that the provisions of sub-section (2) should not be understood as cutting down the provisions of clause (c) and clause (d) of sub-section (1) of section 13 but this does not mean that in a situation like the present where sub-section (2) can apply, it should be ignored. The next question to be considered is whether the act of the assessee in paying royalty amounts to diversion of the funds of the assessee attracting clause (g) of sub-section (2) of section 13. In our considered view, this contention of the Revenue is also not tenable since royalty is being paid by the assessee to SSSPL for using the name "Chirec" which belongs to SSSPL and towards part reimbursement of various amounts spent by SSSPL for huge infrastructure and for services and facilities rendered by SSSPL. At the time of agreement for payment of royalty, the SSSPL has transferred students from classes I to VI numbering ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r staff of SSSPL were not bound to join the assessee once it was formed by SSSPL ; and the payment was intended to benefit the members of assessee society ; that it is a collusive transaction to transfer the profit of the assessee society to interested persons ; are wholly irrelevant and perverse. The Tribunal appears to have misdirected itself and considered totally irrelevant issues. We are of the view that the Assessing Officer and the Tribunal have failed to consider sub-section (2) of section 13 and have simply concentrated on clause (c) of sub-section (1) of section 13. In New Noble Educational Society (supra), this court held that the provisions of section 13(1)(c) would be attracted only in cases where any part of the income, or property of a charitable institution, is used, directly or indirectly, for the benefit of a person referred to in section 13(3) of the Act ; that under section 13(2), income or property of the institution shall, for the purposes of section 13(1)(a), be deemed to have been used or applied for the benefit of a person referred to in section 13(3) if any one of the classes (a) to (h) of section 13(2) are applicable ; the person referred to in sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee trust on loans advanced and buildings leased out to certain concerns, they are not hit by section 13(2)(a) and the assessee is entitled to exemption under section 11. The above decisions also support our view that reasonableness or adequacy of payments by an assessee to the interested person have to be necessarily gone into (under section 13(2)) to determine whether the assessee would be entitled to exemption of income under section 11. In Rattan Trust [1997] 227 ITR 356 (SC) cited by the Revenue, the Supreme Court considered the effect of amendments to section 13 of the Act and section 21A of the Wealth-tax Act, 1957, by the Finance Act, 1970, with effect from April 1, 1971. The provisos thereto laid down that exemption under section 11 will not be denied if part of income or property of the trust or institution created before April 1, 1962, is applied for benefit of a person referred to in sub-section (3) of section 13 of the Act, if such use or application is in compliance with mandatory terms of the trust. In that case, there was no such provision in the trust deed dated March 28, 1942, of the assessee but was sought to be introduced by way of amendment t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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