TMI Blog2010 (7) TMI 988X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year order under the head Royalty Rent as they were made after thorough examination. 3. Since factual background and issues involved are common in all these cases, for the sake of convenience, we may note brief with brief facts of the case from appeal of the assessee for assessment year 1998-99 (ITA 282/Hyd/2006). 4. The assessee is an educational society registered under the Public Societies Registration Act. For the assessment year 1998-99, denying the assessee s claim for exemption of its income u/s 11 of the IT Act on the ground that the assessee society paid Royalty of ₹ 12,38,395/- and paid excess/unreasonable rent for the premises, etc. taken on lease, which was determined at 20% of the actual rent paid, completed the assessment on a total income of ₹ 19,34,400 vide order of assessment dated 18.3.2005 passed u/s 143(3) read with 147 of the Act. 5. The assessee society, Chirec Educational Society, took on lease the premises belonging to Shri Shakthi Schools (P) Ltd.(SSSPL) situated at Kondapur Village, Serlingampally Mandal, RR District. The said SSSPL had the school buildings and all other infrastructure for running an educational instit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents falling due on 15th of May, 15th of September and 15th January. This royalty is claimed to be payable for extensive usage of brand name of CHIREC; part reimbursement of the various amounts spent by SSSPL for huge infrastructure, services and facilities rendered by SSSPL. At the time of agreement for the payment of royalty, the SSSPL is also claimed to have transferred students Numbering over 400 studying in classes I to VI besides its teaching staff, to the assessee. The assessing officer taking note of the fact that the Directors of the SSSPL are also members of the assessee society, disallowed the payment of ₹ 12,38,395 made by the assessee society to SSSPL as royalty. Thus, the assessing officer has completed the assessment on a total income of ₹ 19,34.395, with the above three additions. 8. In the other years under appeal, only two disallowances, viz. on account of disallowance of 20% of the actual rent paid and disallowance of royalty are involved. As for those years the premises leased out to the assessee for the entire year, the first disallowance made for the assessment year 1998-99 is not involved. While facts of the case in relation to the unreasona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at if the reasonableness of the royalty payment cannot be determined, entire findings of the Assessing Officer is without any support whatsoever. He ultimately directed the Assessing Officer to accept the claim of the assessee with regard to the Royalty payment, with the following further observations- 6.1 Along with the other submissions of the appellant, I am more convinced with the appellant's contention that no one would transfer user rights of name and other benefits without charging adequate consideration. Further, since the Assessing Officer himself has not given any finding with regard to the reasonableness of the Royalty Payment, the appellant's claim of Royalty payment cannot be held as unreasonable. The Assessing Officer is therefore directed to accept the claim of the appellant society in this respect. The appellant succeeds on this ground of appeal. 10. The CIT(A) also deleted the ad-hoc disallowance worked out at 20% of the rent paid by the assessee for each of these years, and also directed the Assessing Officer to allow the exemption under S.11 of the Act, claimed by the assessee, with the following observations- 9. The claim of the assessing off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iety, she submitted that even with all the facilities, if an institution is not having recognition of CBSE no child would join the school and forego his/her career. She submitted that the intention of SSSPL in shaping the school is to earn profit and not impart education on non-profit basis, and it was for that reason that the CBSE has put the condition that the society should be formed and it should be non-profit organization. It was in those circumstances, to make profit out of the establishments formed by the company, that an understanding was made with the society to part with it, receipts for the benefit of the company and a name was given to the profit sharing as Royalty for the service provided. Though the company, according to the Learned Departmental Representative, permitted the assessee society to use the name Chirec, part of the name was kept by the company SSSPL for its own pre-school, named as 'Chirec Pre- School'. She submitted that it is pre-requisite for an educational institution to impart education on non-profit motive and profit arising was not to be distributed among the members. Whatever profits arise to the educational society, the same have to be uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned counsel for the assessee reiterating the contentions argued before the lower authorities and submitted that the only claim of the assessing officer is that the payment of royalty, etc. by the assessee to the company, SSSPL is in violation of S.13(1)(c) of the Act. He submitted that this observation of the Assessing Officer is not at all correct and the provision of S.13(1)(c) stand violated only if the amount paid is not reasonable for the services rendered as provided under S.13(2) of the Act. According to the learned counsel, the assessing officer has merely referred to the provision of S.13(1)(c), overlooking the provision of S.13(2) of the act. He submitted that payment of royalty is reasonable and is not hit by the provision of S.13(2) of the Act. He submitted that even if there is violation of Sec.13(1) ( c) of the IT Act, the entire royalty amount cannot be disallowed or exemption u/s 12 can not be withdrawn. He submitted that according to the assessing officer the assessee cannot pay even one rupee as royalty, and if it pays it amounts to violation of Sec.13 (1) (c) of the IT Act and he does not took into the condition specified u/s 13 (2) of the IT Act which refers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erested, then assessee is disentitled for exemption u/s 11. In the case of Action for Welfare Awakening in Rural Environment (AWARE) Vs. Dy.CIT (2003) 263 ITR 13 (AP), the fixed deposits in the name of the assessee trust worth ₹ 16 lakhs were pleaded as security with the bank enabling one of members of the assessee, to avail loan without adequate security and consideration, and certain transactions of purchase of lands was routed through the assessing officer in which all members were directors and employees of the assessee. The misutilisation was glaring. Hon ble Andhra Pradesh High Court held that the assessee could not escape the clutches of law, nor any sympathy or equities could be extended, particularly for an organization, which received donations purely for the welfare of the under privileged and needy class of the society. In view of the fact that entire transaction was within personal knowledge of trustees, it could be said that the funds of assessee were diverted and mis-utilised. On fact, the assessee had violated provisions of section 13 (1) ( c ) (ii) read with Sec.13 (2) (b) and, thus, was not entitled for exemption. 18. The words any concern are compreh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the payment of royalty resulted in getting ready made school with all the infrastructure including students and staff. This argument of the assessee counsel has no merit. M/s SSSPL is not entitled to carry on school as it is not approved by CBSE. Further, M/s SSSPL itself carried on the pre-school classes for which CBSE approval is not required. Further, there is no compulsion on pre-school students of SSSPL to join the assessee s institution only. They are at liberty to join educational institution as they like. Regarding staff also, they are not the bonded employees of the SSSPL. Moreover, there is no contract between the staff of SSSPL to work with the assessee and same thing with the students. M/s SSSPL has no approval from CBSC carrying on the educational institution. Having no option, the Members of assessee s society indirectly intended to get profit out of the educational activity of the assessee society and in the name of royalty payment made to M/s SSSPL they got the benefit. In our opinion, this is a collusive transaction to transfer the profit of the assessee society to interested persons which cannot be allowed as business deduction. It is immaterial whether the co ..... 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