TMI Blog2022 (5) TMI 880X X X X Extracts X X X X X X X X Extracts X X X X ..... affairs of the assessee company as well as HRG and also held the controlling capacity in the Board of Governor, in such situation it is no doubt that he played very crucial role in controlling the whole operations. It is fact on record that Shri Shekar has not directly held substantial shares in the HRG but held substantial interest in TIPL. The restrictions specified in the section 13 has to be evaluated holistically, not just based on shareholding. The controlling of the other unit plays important role, the controlling interest concept includes the controlling thru shareholding, it does include the controlling the other institution by indirect influence. In the given case, Shri Shekar controls the whole affairs in the assessee company, HRG and also plays a role in the Board of Governors. This shows that Shri Shekar has a say in the decision making process of all the units under his control or in the control of the family. Shri Shekar controls the assessee company and HRG thru indirect holding of shares in TIPL. Therefore, in our considered view, the assessee has shared the revenue with the related concern, the related concern which is indirectly related by applying the concep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the assessee holistically, not restrict themselves to one aspect of assessment merely to complete the assessment, it is their duty to assist the assessee also in their affairs specially when there exist multiple benefits to the assessee. In this case, the assessee specifically placed their alternate plea which was rejected by the Assessing Officer, without properly evaluating the case, merely proceeded to reject the plea on focusing the rejection of benefit under section 11. We direct the Assessing Officer to redo the assessment under mutuality concept de novo. - ITA NO. 6459/MUM/2012, 7108/MUM/2010, 6393/MUM/2011, 5840/MUM/2011 - - - Dated:- 29-3-2022 - SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, HON'BLE JUDICIAL MEMBER Assessee by: Shri Percy Pardiwala Shri Niraj Sheth Department by: Shri C.T. Mathews ORDER PER S. RIFAUR RAHMAN (ACCOUNTANT MEMBER) 1. These appeals are filed by assessee against the different orders of Learned Commissioner of Income Tax (Appeals)-1, [hereinafter in short Ld.CIT(A) ] dated 31.05.2010, 16.05.2011 and 05.07.2012 for the A.Y.2007-08, 2008-09 and 2006-07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h were amounts advanced by the assessee to HRG from time to time for carrying out research work. The advances so paid were set off against the payments due to them. 6. Mr. Shekar Swamy, who was a director in the assessee company, and his family members, held 100% shares in a company called Tiruvengadam Investment Pvt. Ltd. ( TIPL ) and TIPL, in turn, held 64.19% shares in HRG. 7. The Assessing Officer (pages 8-10 of the assessment order) held that the provisions of section 13(1)(c) read with sections 13(2) and 13(3) were applicable in the case of the assessee and, hence, the benefit under section 11 would be unavailable to the assessee. He contended that if the corporate veil of TIPL was lifted, then, Mr. Shekar Swamy and his relatives held a substantial interest of 64.19% in HRG and, therefore, HRG was to be regarded as a person covered by section 13(3)(e) of the Act. The assessee objected that he did not explain how he considered Mr. Shekar Swamy and his relatives as persons covered under sections 13(3)(a) to 13(3)(d). Assessing Officer of the view that Mr. Shekar Swamy would be covered under section 13(3) since he is a director of HRG by removing the corporate veil (se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be received. It may be noted that the assessee's submission has not been correctly reproduced by the AO. The assessee vide its submission dated 18th December 2009 had given a detailed working to show that the effective rate was less than the amounts paid to unrelated entities (pages 8-13 of PB @ pg 9 read with pages 12 and 13). 9. The assessing officer rejected the contentions of the assessee and completed the Assessment order with the following observations: (from Page No. 11 to 15) 6.11 The assessee contended that that no direct or indirect benefit was given to the person covered u/s 13(3). It was argued that: Reasons for giving Advances to Research Agencies The research / survey is carried out by the Research Agencies by way of an extensive exercise covering various parts of Indian and large number of people. It is a long drawn expensive exercise for which the method of remunerating is as explained in Annexure V For such an expensive and extensive exercise, the Agencies will need funds in advance. It will be noticed that the told debit to Income and Expenditure A/c for payment of research Agencies is Rs. 5.15 crore whereas the Advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87.5 Rs.300-475L 85.0 IRS 2006 Hansa Research Group Pvt. Ltd., Upto 330 Lacs 90.0 Rs.330 365 Lacs 85.0 IRS 2007 Hansa Research Group Pvt. Ltd., Upto 350 Lacs 90.0 Rs.350-400 L 85.0 You will observe that the payment to Operations Research India Ltd., and Marg Marketing Research Group Pvt. Ltd. and NFO MBL India Ltd. are comparable 6.12. The assessee was asked to give the actual sale statistic in different years and to compare the common total sale vis- -vis payment made to different agencies. The data submitted by the assessee is reproduced for sake of ready reference: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titution, any part of such income enures, or (ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly Or indirectly for the benefit of any person referred to in sub-section 3 : The benefit prohibited is both directly or indirectly given to person who is covered ( under section 13(3) of the Act. The -point to be taken note of in the - resent case is that Shri Shekar Swam - who is director of the assessee and also director of Hansa Research Group is also in the Board of Governor of the assessee. He is undoubtedly at the helm of affair. The benefit whether huge or minuscule is prohibited. The assessee itself had argued in earlier years that unless there is Violation of section 11 or 13, benefit of section 11 cannot be denied. Now, when it is established beyond doubt that there is violation of section 13, the assessee is Providing self serving contradicting arguments. It is seen from careful perusal of Different data/statistic that the average common Sale in different years on which payment of fees is based is Rs. 3 crore. Therefore, the data to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rts have held that there can be no sympathy or equities could be extended, particularly for an organization, which received exemption purely for the welfare of the under-privileged and needy class of the society. Reliance is placed on the judgment in the following case: enabling one of members of the assessee, to avail loan without adequate security and consideration, and certain transaction of purchase of lands was routed through an AOP in which all members were directors and employees of assessee, the misutilization was glaring and it 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 misutilised. On fact, the assessee had violated provisions of section 13(1)(c)(ii) read with section 13(2)(b) and, thus, was not entitled for exemption - Action for Welfare Awakening in Rural Environment (AWARE) v. Dy. CIT[2003] 130 Taxman 82/263 ITR 13 (AP). In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee vide letter dated 27 November, 2009 that IRS subscription is received both from members and non members. It was further stated that Subscription of Rs. 21,00,749/was received for 140 non members. Thus it is seen that sizeable amount of subscription is made by non-members. Assessee has also NOT claimed to be a mutual association and Department has also NOT held the assessee has mutual association in earlier years. Reliance is placed on the judgment in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321(SC) wherein it was held rule of consistency must be followed. This judgment has been relied upon in the case of the assessee by the Hon'ble Tribunal. Further, in the case of Mafatlal Industries Ltd. v. Wealth-tax Officer, 95 ITD 66 (Mum.) it was held that General presumption is that a taxpayer should not take inconsistent view and expected to be consistent with the view already taken. It is also expected that taxpayer should not change its stand as Suits to its requirement and advantageous in different proceedings. Therefore, respectfully following the above referred judicial decisions, the claim of the assessee to be alternatively held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holds 100% in TIPL and TIPL holds 49.90% in BBDO. Therefore, these dues cannot be a reason for invoking section 13 of the Act. 12. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and Ld.CIT(A) concurred with the view of the Assessing Officer that section 13(3)(e) applied to HRG. In para 5.4 at page 13, the Ld.CIT(A) held that the advance of Rs.68,07,442 was covered by section 13(2)(a). In para 6.16 at page 21, he held that the payments to HRG were excessive and, therefore, section 13(3)(c) was attracted. 13. Before the Ld.CIT(A), assessee reiterated its submissions made before the Assessing Officer, the assessee further pointed out that HRG was not dependent on the assessee and that it worked with over 100 companies for research and did over 500 research reports in a year and that it had a 100% subsidiary in the US which did over 50 projects a year for US companies [page 10, para (e)]. 14. Ld.CIT(A) rejected the above submissions and observed as under: - 6.16 I have carefully considered the arguments of the Assessing officer and have also gone through the written submissions, oral submissions as also letter dated 18th December 2009. The authorized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot loans and hence not covered by the disabling provisions of section 13 (2) (a). IV. Without prejudice to Ground Il and assuming, without admitting, that Mr. Shekar Swamy and / or his relatives have a substantial interest in HRG, the learned CIT (A) has erred in holding that payments to HRG are in excess of what may be reasonably paid for the services rendered by them, or are otherwise violative of any provisions of section 13. 2. He failed to appreciate and ought to have held that payments made to HRG were not in excess of what may be reasonably paid for such services or are violative of any other provisions of Section 13. V. 1. Without prejudice to the above Grounds, the appellant submits that if, in the opinion of the CIT (A), the appellant was not entitled to exemption u/s 11, he erred in not granting exemption on grounds of mutuality to the entire Income other than income attributable to non members. 2. He failed to appreciate and ought to have held that if exemption is to be denied under section 11, the appellant is fully entitled to claim and be allowed exemption on grounds of mutuality in respect of income attributable to members. VI. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0% shares in HDFC Investment Ltd. and HDFC Investment Ltd. in turn held 6.25% in HDFC Bank Ltd. Therefore, the Revenue contended that the requirement of having more than 20% of the voting power was established when the holding of 16.39% was clubbed with the holding of 6.25% through the 100% subsidiary. Negativing the said contention, the Hon ble Bombay High Court held: (paras 27-31) 27. On a plain reading of the aforesaid provisions, we are unable to agree with the submissions of the Revenue. What Explanation (a) to section 40A(2)(b) clearly stipulates is that a person shall be deemed to have a substantial interest in a business or profession in a case where the business or profession is carried on by a company. such person is, at any time during the previous Veal. the beneficial owner of shares carrying not less than 20% of the voting pow. In other words, Explanation (a) when broken down, requires two conditions that need to be fulfilled. The first condition is that, that the person should be the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits); and second that these shares (of whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not possible to accept the contention that the shareholder acquires any interest in the assets of the company. The use of the word 'assets' in the passage quoted above cannot be exploited to warrant the inference that a shareholder, on investing money in the purchase of shares, becomes entitled to the assets of the company and has any share in the property of the company. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder vis-a-vis the company was explained in the Sholapur Mills Case [(1950) SCR 869, 9041. That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company. It is true that the shareholders of the company have the, sole determining voice in administering the affairs of the company and are entitled, as provided by the Articles of Association to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or internationally will have to depend upon their subsidiary companies in the national and international level for better returns for the investors and for the growth of the company. When a holding company owns all of the voting stock of another company, the company is said to be -a WOS of the parent company. Holding companies and their subsidiaries can create pyramids, whereby a subsidiary owns a controlling interest in another company, thus becoming its parent company. 257. The legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors. In Bacha F. Guzdar v. CIT [AIR 1955 SC 74], this Court held that shareholders' only right is to get dividend if and when the company declares it, to participate in the liquidation proceeds and to vote at the shareholders' meeting. Refer also to Carew and Co. Ltd. v. Union of India [(1975)2 SCC 791] and Carrasco Investments Ltd. v. Directorate of Enforcement [(1994) 79 Comp Cas 631 (Del)]. 258. Holding company, of course, if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, HDFC Ltd., by no stretch of the imagination can be said to be the beneficial owner of the shares that HDFC Investments Ltd. holds in the Petitioner. This is simply because the shares that HDFC Investments Ltd. holds in the Petitioner is its asset, and HDFC Ltd., though being a 100% shareholder of HDFC Investments Ltd., cannot be termed as the owner (beneficial or otherwise) of the assets and properties of HDFC Investments Ltd. In these circumstances, therefore, the shareholding of HDFC Ltd. and HDFC Investments Ltd. cannot be clubbed together to cross the threshold of 20% as required under explanation (a). This being the position, we have no hesitation in holding that the HDFC Ltd. does not have a substantial interest in the Petitioner, and therefore, is not a person as contemplated under section 40A(2)(b)(iv) for the present transaction to fall within the meaning of a SDT as set out in section 92BA (i) of the I. T. Act. 31. There is another reason for coming to this conclusion. If we were to interpret this provision as is sought to be contended by the Revenue, it would lead to an absurd situation, as correctly contended by Mr. Mistri. It is undisputed that there canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is further submitted that lifting of corporate veil of TIPL is not permissible in the present case. Corporate veil can be lifted only in cases where an attempt is made to defraud revenue by putting up facades which have no commercial substance, which is not so in the present case. In the present case, TIPL is assessed in its own right in respect of its income. It is not open to the Revenue to disregard the existence of TIPL for the limited purpose of applicability of Explanation 3. 18. Learned Counsel for the assessee submitted that if the above submissions are accepted, other issues raised in the present appeal as to whether or not the advance given to HRG is a loan and whether or not the amounts paid to HRG are excessive will not have to be decided as being of an academic nature. 19. Ld. Counsel for the assessee, however, for sake of completeness, submitted the submissions on these issues which are reproduced below:- General - Applicability of Section 13(1)(c) Since section 13(2)(a) and 13(2)(c) deal more specifically with payments for services and monies lent, section 13(1)(c) ought not to be invoked for such payments. In any event, the amounts are no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e letter dated 18th December 2009 [page 8-13 of PB]. These details show that the average effective rate of payment to Hansa was lower than the rate at which payments were made to unrelated parties. Therefore, the amounts paid to Hansa were not excessive. It may be noted that the payments made to AC Neilson during the year cannot be taken into account for comparison in view of the large difference in the scope, extent and nature of the work done by AC Neilson and by Hansa, as explained at page 7-8 of the statement of facts before the CIT(A). In any event, if a mechanical comparison is to be made of the initial slab (as was sought to be done by the AO), then, the highest slab of payment to AC Neilson was 100% since upto Rs.20 lakh, the amount was fully payable to Neilson and, therefore, even on that count, payment to Hansa is not excessive! Submissions The several differences between the work done by unrelated entities under IRS 2001 and the work done by Hansa under IRS 2007 must be kept in mind while determining the reasonableness of the payments made to Hansa. Mutuality The Assessing Officer rejected the assessee's plea that the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding of the Ld.CIT(A) on these disallowances. Submissions These issues are consequential in nature and if the benefit of section 11 is conferred, any increase in the income will also qualify for the said benefit. Ground VII - Add back of Rs. 12,00,000 In Para 13.4 of the Order, Assessing Officer has added amount of Rs. 12,00,000. This amount represents the option exercised by the assessee in the assessment year 2006-07 under clause (2) of the Explanation to Section 11(1) of the Act. The addition of Rs.12 lakhs are not justified irrespective of whether exemption under section 11 is allowed or denied. The explanation for not adding the above amount under either of the two alternatives is given below: I If exemption under Section 11 is not allowed (as has been done in the impugned Assessment Order) While assessing the total income of Assessment year 2006-07 at Rs.24,21,920, the amount of Rs. 12 Lakh was not allowed as an expenditure. Therefore, the same cannot be added to the taxable income in Assessment year 2007-08 as that would result in taxing the same amount twice. II If exemption under section 11 is allowed (as requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis of revenue stood, at 90% (10:90). The majority of the business was undertaken with the HRG and only small portion was undertaken with other unrelated party. The Assessing Officer observed that HRG falls under the related person category within the meaning of section 13(3) of the Act, by lifting the corporate veil, considering the fact that the key director (Shri Shekar Swamy) of the assessee company, who held indirect substantial interest in the HRG through TIPL. The assessee objected to the above view and it argued before the tax authorities and before us that Assessing Officer has not given clear finding how TIPL and Shekar Swamy violated the provisions of Section 13, when the definition does not attract directly to both the parties i.e., Shri Shekar and TIPL. We consider the submissions carefully and observed that the assessee shares the majority of the revenue with the other entity, whether related or unrelated, in that case the assessee has to conduct its affairs without violating any of the restrictions specified in section 13. On careful evaluation, we observe that the section 13 restrictions are very specific that the assessee cannot share the revenue or benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose, in order to restrict any kind of transactions with the related persons who are availing benefit u/s 11 of the Act (unless it is established that there is no benefit passed on to them directly or indirectly). We cannot equate the two sections, which are in two different chapters of the ACT as well as for different purposes. In this case, the Assessing Officer has established that by removing the corporate veil, one of the director falls within the meaning of section 13(3) and 13(2)(e) of the Act. Whether the revenue sharing with the other concern are within the arm s length is subjective, considering the fact that it is sharing 90% of the revenue and transaction with the unrelated party is not substantial and assignments in both the cases are totally different. Therefore, we reject the submissions of the assessee and grounds raised in this regard before us. 24. Coming to the other issue, whether the advances given against the pending research assignments, we do not agree with the Assessing Officer that it falls within the meaning of loan given to the related parties. The Assessing Officer has acknowledged that there exists the transaction between the assessee and HRG, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the Assessing Officer to consider the same while completing the assessment under Mutuality. 26. Accordingly, we allow the alternate plea made by the assessee in ground no V, accordingly, it is allowed for statistical purpose. Similarly ground no s VI, VII and VIII are also remitted to Assessing Officer and allowed for statistical purpose. ITA NO. 5840/MUM/2011 (A.Y: 2008-09) 27. With regard to Revenue appeal in A.Y. 2008-09, we observe that they are aggrieved with the order of Ld.CIT(A), who has directed the Assessing Officer to delete the addition on account of accumulation option u/clause (2) of explanation to section 11 for earlier year. At the time of hearing, both counsels agreed that the tax effect involved in this appeal is below tax limit prescribed in the CBDT Circular No. 17/2019 dated 08.08.2019. We find that the tax effect in this appeal is less than Rs.50 Lakhs and therefore the appeal of the revenue is not maintainable on account of low tax effect in view of the CBDT Circular No. 17/2019 dated 08.08.2019, accordingly, this appeal of the revenue is dismissed. 28. In the net result, all the appeals filed by the assessee are allowed for stat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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