VIKAS EDUCATRIONAL SOCIETY,,VISAKHAPATNAM vs. THE ITO, WARD - 3(2),, VISAKHAPATNAM

आदेश /O R D E R Per Shri D.S.Sunder Singh, Accountant Member : The assessee has filed appeals against the orders of the Commissioner of Income Tax (Appeals) [CIT(A)], Visakhapatnam in ITA Nos. 490/11-12/ITO, Wd.-3(2)/VSP/2013-14 and 387/13-14/ITO, Wd- 3(2)/VSP/2013-14 dated 28.03.2014 for the A.Y 2009-10 & 2010-11. Since the issues involved in these appeals are common, these appeals are

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clubbed, heard together and a common order is being passed for the sake of convenience as under.

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is not justified in making an addition of Rs.6,55,440, also CIT(A) is not justified in confirming the addition of Rs.3,93,264, hence liable to be deleted in the hands of the assessee.

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Visakhapatnam. The educational institutions run by the society at various places are as under : Nalanda Talent School Seethammadhara Airport Campus College Visakhapatnam Sheelanagar Mahila Kalasala NAD Kotha Road Hyderabad Oakridge International School Khajaguda, Nanakram Guda Road Tirupathi Junior College, K.C.Road 6.1. During the previous year relevant to the assessment year 2009-10, the assessee has debited the sum of Rs.6,00,00,000/- to the Profit and Loss account (P&L account) and paid to M/s People Combine Avenues Ltd. [formerly M/s Vikas Educational Institutions (P) Ltd.(in short VEIL)]. On 31.03.2009 and the provision for TDS was made on the payment of Rs.6,00,00,000/- but not remitted to the Government account before the due date for filing the return of income. The said TDS was deducted on rental payment and paid to Government account on 05.10.2009 amounting to Rs.1,35,96,000/- after the due date for filing the return of income i.e. 30.09.2009. Since the payment was covered by the provisions of section 194I of Income Tax Act and the assessee failed to remit the same to the Government account, the AO issued show cause notice to the assessee, as to why the expenditure claimed should not be disallowed u/s 40(a)(ia) of the

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Act for non deduction of tax at source. In response to the notice issued by the AO, the assessee canvassed before the AO that the payment was made to M/s Vikas Educational Institutions Ltd., (VEIL) towards the use of infrastructure facilities and not for the rent, hence argued that the payment made to VEIL was not liable for deduction of tax at source. VEIL was to receive net income of Rs.600 lakhs and instead of making the advance tax payment the tax was deducted at source. The assessee argued that there was no provision in the Income Tax Act, for deduction of TDS on infrastructure charges and further submitted that the TDS provisions are very specific and if the nature of payment / expenditure does not cover the said provisions, no TDS liability would arise. The assessee further explained to the AO, the definition of infrastructure and the infrastructure facilities provided by VEIL to the assessee in a note and the same was reproduced by the AO in page No. 3 of the assessment order which reads as under : “1. The term infrastructure denotes all/every facility whether identified with a particular name or not, available at a place at the disposal of the user of the facility this includes, a. Huge extent of building/floor area available/offered at the satisfaction of the authorities according permission for particular course of study. b. Play grounds including swimming pools for conducting sports, games and other events.

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c. In house mess/canteen facilities bath for the students and the staff at all the times. d. Books, periodicals and library for use of both students, staff Confidence that will be created in the minds of both parents, students) e. authorities concerned from whom the institution is to get necessary approvals, permissions, that the group is having huge buildings, campuses, to cater to the needs of the students. f. That the entire facilities are at the disposal of the students of the Vikas Educational Society only. Construction of buildings/creation of floor space including arrangement g. of furniture, fixtures, providing computers including hardware, software, strictly to suit the requirements of students of the Vikas Educational Society. Confidence/assurance to meet the future needs of the society towards its h. requirements, in facilities with respect to increase in the strength of the students vis-a-vis additional courses to be offered. Flexibility in payment of user charges, at the end of the financial year also i. extending financial support by incurring expenditure on behalf of the VES/investment on behalf of the VES” 7. The AO examined the explanation of the assessee and facts of the case and observed that the assessee has made the payment towards the Land, Building and other items specified in the definition of 194I of the Act and viewed that it is squarely covered by the definition of rent. The AO found from the balance sheet and depreciation statement that the block of assets held by VEIL as on 31.03.2009 were as under : Nature of Asset WDV as on 31.03.2009 (Rs.) Buildings 19,32,83,932 Computers & Equipment 17,23,301,

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Duplicating Machine 12,97,943 EPABX 2,06,760 Fax Machine 13,587 Generators 22,90,207 Refrigerators 7,906 Televisions 23,455 Water Coolers 99,537 Air Conditioners 1,70,78,172 Audio Equipment 6,14,411 Electrical Fittings 71,53,476 Furniture 3,83,96,432 Other Equipment 29,08,345

7.1 From the above Depreciation Statement, the AO found that the assessee was given building, furniture, air conditioners and other equipment mentioned in the block of assets of VEIL on lease and the assessee is using the said buildings and other assets and making the payment of rent, thus, viewed that the charges paid by the assessee for use of the above assets are nothing but the rent payment and the provisions of section 194I are clearly applicable. The AO further observed that, in the immediately preceding assessment year also the assessee paid the rent of Rs.350 lakhs and deducted the TDS and remitted to the Government account on 28.09.2008 before the due date for filing the return of income. In the impugned assessment year, though the assessee has deducted the TDS, the same was remitted to government account on 05.10.2009 beyond

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the time limit provided in the Act, thus, not complied with the provisions of section 40(a)(ia) of the Act, hence, invoked the provisions of section 40(a)(ia) and accordingly made the addition of Rs.6,00,00,000/- in the hands of the assessee u/s 40(a)(ia) of the Act.

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that the company is providing infrastructure facilities (reproduced in the assessment order) such as huge extent of building, floor area, play ground, swimming pools for conducting sports, games and other events, in house mess / canteen facilities both for the students and the staff all the time, books, periodicals and library for use of both the students and the staff. These facilities are offered by the VEIL to the assessee and the same cannot be equated with the letting out of the concrete building and structures hence, argued that there is no case for deduction of tax at source and the same cannot be treated as rent payment. Hence, argued that there is no case for application of 194I in the case of the assessee and the disallowance u/s 40(a)(ia) is not applicable in the assessee’s case accordingly requested to set aside the orders of the lower authorities and allow the appeal of the assessee.

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Though the assessee stated that the assessee is making payment towards infrastructure facilities, the Ld.CIT(A) has considered the premises and the facilities made available to the assessee and held that section 194I is applicable in the instant case. Accordingly, confirmed the disallowance made by the AO and dismissed the appeal of the assessee. For the sake of clarity and convenience, we extract relevant part of the order of the Ld.CIT(A) from para 6.5 to 6.7 which reads as under : “6.5. I have considered the submissions arid details filed. At the outset, it is an admitted position that there is no agreement between the assessee and the company VEIL regarding provision of certain facilities/services. There is no written agreement between the parties to understand what are the services required to be provided by VEIL for which payment is made by the assessee and the basis of arriving at the quantum of such payment. The inter se rights and obligations between the parties and basis of consideration is not known. In the absence of specific agreement and documentation the claims made regarding rendering of / provision of infrastructure facilities is not verifiable. 6.6. From a perusal of the submissions made, it can be seen that infrastructure facilities said to be provided related to provision of floor space, playgrounds facilities, canteen facilities, books and periodicals, transport facilities, flexibility in payment facilities, buildings and floor space to suit the requirement of assessee, etc. Further it was also claimed that the society was provided with technical knowhow in the form of affiliation with various universities, recruitment of excellent faculty, addition to new courses, continuous guidance of top educationalists, children psychologists, etc. In relation to the disallowance made under section 40A(2), the assessee had claimed the basis for the payment in the following manner:

Total costs A.Y.2009-10 estimated (per annum) Rs. In Lakhs Gachibouli Campus 472.50 Airport campus, Vizag 144.00 Sports facilities 52.80 Buses 360.00 Technical know-how 200.00 Total 1229.30

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6.7. Thus, it could be seen that the claim for infrastructure charges is said to be paid for space (building with facilities) and certain technical or managerial services As already discussed, it is not verifiable what are technical services provided by VEIL The assessee has also not demonstrated provision of such technical knowhow with reference to specific details or evidence No information was furnished as to what were the collaborations tied up during the relevant year, or what were the new courses introduced, what are the faculty recruitment made during the year for which the impugned payment was to be made. The facts apparent from the various details filed is ,that- the VEIL has provided building floor space along with requisite furniture and fitting to run educational institution to the assessee society. The service component embedded in such payment has not been demonstrated. It is evident that the assessee has used the land, building and facilities owned by the company VEIL for which payment has been made, and therefore, apparently the Impugned payments would fall within the purview of rent under section 1941. It was, however, contended that a lessor would not provide these many facilities and therefore the transaction cannot be characterized as one of rent. I am unable to accept this argument. The definition of 'rent' under section 194I is quite wide to include payment by whatever name called, under any lease, tenancy or any other agreement or arrangement for use of land or building or machinery / plant/equipment/furniture whether or not any or all of the above are owned by the payee. Therefore the prerequisite condition to invoke section 194I is that there should be use of the space (land or building) with or without facilities. In this instant case such prerequisite condition is found to be fulfilled. Any additional services provided to the assessee would not take away the transaction from the purview of section 1941 and would not totally alter the nature of the impugned transaction. Further even if it is assumed that the assessee has provided other technical services in relation to infrastructure facilities, it could be at best be termed as 'facilitation management services' and would fall within the purview of 'technical consultancy' or 'fee for technical services' under section 194J of the Income-tax Act, and in such event also tax would be required to be deducted. Thus even in case of provision of space along with services in a composite manner, there would be liability to deduct tax either under section 194I or 194J of the Income Tax Act or both depending on the amount paid for them. As, such a break up was not given, and the composite nature of the transaction was not demonstrated and as it is quiet evident that the impugned transaction is one within the purview of section 194I, I find that the assessing officer is justified in holding that there Is violation of section 194I and has rightly invoked the provisions of section 40(a)(ia) of the Income-tax Act. Accordingly the disallowance made by the assessing officer is confirmed. This ground of appeal is dismissed.”

11.1. In the instant case, there is no dispute that the VEIL has given its land and buildings along with infrastructure available to the assessee for its

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use and receiving the rent from the assessee. There was no written agreement between the assessee and the VEIL. VEIL is company and closely associated with the assessee. Since the assessee is using the land and building as well as the other furniture and fixtures available to the company, the Ld.AR contended that it is using infrastructure facilities. However, fact remains that the company, VEIL has given its premises along with the furniture and machinery, fittings etc as available in the Balance Sheet to the assessee for it’s use and receiving rent monthly/or yearly from the assessee. In the books of accounts of payee, the receipt was accounted for under the head ‘ rent account’. Apart from the rent, the company is also receiving various other revenues from the educational institutions located at Visakhapatnam, Hyderabad, Tirupathi etc. It is undisputed fact that the VEIL is the owner of the land and building and the other items of assets mentioned in the balance sheet and given it on lease to the assessee. In the instant case, as observed from the order of the AO and the Ld.CIT(A), block of assets shown by the VEIL consists of buildings, computers, air conditioners, electrical fittings and other furniture and fittings etc., which squarely fit into the definition of rent as defined in the

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Income Tax Act u/s 194I of the Act. For the sake of clarity and convenience, we extract section 194 I which reads as under : Rent. 93194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to 94[a resident] any income by way of rent 95, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, 96[deduct income-tax thereon at the rate of— 97[(a) two per cent for the use of any machinery or plant or equipment; and (b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings:]] Provided that no deduction shall be made under this section where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed one hundred and twenty thousand rupees : 98[Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid, shall be liable to deduct income-tax under this section.] Explanation.—For the purposes of this section,— 99[(i) “rent” means any payment, by whatever name called, under any lease, sub- lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,— (a) land; or (b) building (including factory building); or (c) land appurtenant to a building (including factory building); or (d) machinery; or (e) plant; or (f) equipment; or (g) furniture; or (h) fittings, whether or not any or all of the above are owned by the payee;]

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(ii) where any income is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.] 11.2. In the instant case, there was no agreement between the assessee and the company. The fact remains that the assessee is using the buildings and other furniture and fittings available to the company and the company is earning the income which was admitted in the financial statements as rents. As per the depreciation statement, the written down value of the buildings as on 31.03.2009 was Rs.32.00 crores and other assets mentioned in the depreciation statement was around Rs. 8.00 crores approximately. Thus, the major part of the payment was related to the use of the Land and building. Since the assessee is making the payment of composite rent for the purpose of use of the land and buildings and other equipment, the payment made to the company is squarely covered by the definition of 194I for the purpose of rent. It is observed from the assessment order that in the immediately preceding year, the assessee has made the payment of Rs. 350 lakhs to the company and deducted the TDS and remitted to Government account before the due date for filing the Return of Income. In the subsequent assessment year also, the assessee has deducted the TDS and made the payment. For a query from the Bench,

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the Ld.AR submitted that in the subsequent years, the assessee has entered into an agreement with the company and making the payment as rent and deducting the TDS. In the financial statement of the VEIL, the payment was categorised as rent and the assessee also has deducted the TDS during the financial year, relevant to the assessment year under consideration. It is observed from the records that the payee also never objected for deduction of TDS u/s 194I and in fact credited the income under the head Rents in the Profit and loss account. The assessee also failed to demonstrate that the payment was not in the nature of rent. All the above facts clearly establish that the payment made to the VEIL is nothing but the rent and attracts the provisions of TDS under section 194I of the Act. Having deducted the TDS, but not remitted to the Government account before the due date of filing the return of income, the provisions of section 40(a)(ia) attracts. There is no dispute that the assessee has deducted the tax and the payee did not dispute the deduction of tax. Thus, the payment made to the VEIL is nothing but the rent and having failed to remit the TDS to Government account, the provisions of section 40(a)(ia) are squarely applicable and we, do not find any infirmity in the order of the Ld.CIT(A) accordingly, we up hold the

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order of the Ld.CIT(A). The appeal of the assessee on this ground is dismissed.

11.3. This expenditure of rent, debited to P&L account which is disallowed u/s 40(a)(ia) is allowable in the year in which the TDS is remitted to government account. In the instant case the assessee had remitted the TDS on 05.10.2009. Therefore the assessee would be entitled for deduction in the F.Y.2009-10 relevant A.Y.2010-11. Accordingly we, direct the AO to allow the expenditure on payment basis after due verification of the facts.

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“(a) VEIL (Vikas Educational Institutions Ltd.) is part of the VES (Vikas Educational Society) came into existence, to create, own, operate and manage the necessary infrastructure for the purpose of VES. (b) Both VEIL and VES are housed in the same accommodation in all these centres. (c) To facilitate flexibility in borrowing/raising of the funds through term loan and working capital loan from nationalized banks and financial institutions for the purpose of creating infrastructure, VES is achieving all these objects through its branch/division by name VEIL (d) The managing Committee of VES controls affairs of the VEIL having presence in the Board of directors of VEIL. (e) For mobilizing/ raising funds through term loan / working capital arrangements from banks, both VES & VEIL are parties to the banks, executing common documents, undertaking the debt and repayment of the debt jointly, based on the strength of recognitions in the hands of VES, the loans are extended to VEIL, entire receipts are taken into consideration, before arriving credit decisions by the banks. (f) Both State & Central Government Authorities, public at large who are concerned, It is VES carrying educational activity, it is the responsibility of VES to provide necessary facilities as committed to students, to impart education / diffusion of knowledge. (g) From the Public/students point of view it is the recognized institute and hence, according to them they are getting admitted in VES, their desire/aim/intention of pursuing the recognised course with all facilities those are part of the said curriculum, the same has been fulfilled by VES without interruption, they are not concerned in whose name the infrastructure facilities are provided and therefore, the presence of VEIL is insignificant from the point of view of public/students”

12.1. The AO found during the impugned assessment year that the assessee has made the payment of Rs.6.00 crores to VEIL against the payment of Rs.3.5 crores in the immediately preceding assessment year towards the rent for Visakhapatnam premises. The AO was of the opinion

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that there is no justification for payment of rent of Rs.6.00 crores by increasing Rs.250 lakhs which works out to 70% increase within one year, hence, the AO called for the explanation from the assessee and the assessee justified the payment stating that during the year there was increase in the floor space at (i) Oakridge International School, Hyderabad, Batchupalli, (ii) NSTL campus at Visakhapatnam (iii) Oakridge International school at Visakhapatnam and (iv) Lawsons Bay Colony etc. The Ld.AR further submitted that there was increase in the students and the payment of rent was paid as per the fair market value and the legitimate business needs of the assessee, hence supported the increase in rent. The AO considered the explanation of the assessee and verified the additions made to assets to the VEIL and found that there was not much increase in the space provided to the assessee. The details of the information extracted from the balance sheet for F.Y. 2008-09 and 2009-10 in page No.9 is as under : As per the depreciation statement of M/s Vikas Educational Institutions (P) Ltd., the additions to assets during the F.Y.2008-09 relevant to assessment year 2009-10 are as follows : Nature of Asset Additions during the F.Y.2008-09 Buildings 67,14,792 (upto 30.09.2008) 5,71,83,793 (upto 31.03.2009) Computers & Equipment 14,88,758 Duplicating Machine 0 EPABX 58,000 Fax Machine 0

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Generators 0 Refrigerators 0 Televisions 0 Water Coolers 0 Air Conditioners 19,04,289 Audio Equipment 0 Electrical Fittings 14,84,000 Furniture 1,57,99,392 Other Equipment 10,276

12.2. The AO further observed that there were no additions to the NSTL and Oakridge International School Campus at Visakhapatnam as claimed by the assessee. The AO further observed that there was increase in buildings of Oakridge International School, Hyderabad after 30.09.2008. The AO further observed that the additional floor area relating to dining hall, hostel mess are utilised by the company itself and only the floor area relating to the class rooms and library are used by the assessee. Though there was substantial increase in the additions to buildings after 30.09.2008 i.e. in the middle of financial year, by the time the classes were already started and there was no advantage to the society on increasing the additional floor area. There was no agreement between the assessee society and the company with regard to the additional space made available to the assessee. The assessee has furnished the copies of the board resolutions of the company dated 28.02.2008 for increase of rent

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from Rs.350 lakhs to Rs.600 lakhs. The AO did not convince with the explanation offered by the assessee and as per the observations made by him from the information furnished by the assessee, the AO held that the payment of Rs.4.00 crores was reasonable and hence disallowed the sum of Rs.2.00 crores u/s 40A(2) of the Act as excess payment.

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Increase in area of floor space:

a. During the A.Y. there was huge increase in floor space at the following centres viz., Oakridge International School, Hyderabad - 75000 (approx) SF1  additional floor area including dining halt. Oakridge International School, Batchupalli Campus - 20000 (Approx.)  SF1 newly inaugurated. NSTL campus at Visakhapatnam - 26820 SFT (approx) is brought to 7  operation, full campus is in operations. Oakridge International School Campus - Viskhapatnam - newly commenced  own campus with an area of 30000 sit (approx.) partly completed that was put to operation. Oakridge International School Campus - Rental campus - Lawsons Bay  colony, Visakhapatnam where Nursery to P.P-2 are in operation. b. Increase in students Since there was floor space available/accommodation with all features available the same was contributed towards increasing strength of the students, which in turn led to increase in all costs related to infrastructure facilities provided by the company to the assessee.

Need for agreement between the Assessee and the Company and reasons for not having agreement. a. At every stage of approvals before the Government agencies in the hands of the assessee, when asked/called for having support of the infrastructure available, the company would also submitting necessary consent letters/ documentary evidence, affidavits or undertakings that the entire infrastructure created in the hands of the company would be at the exclusive disposal of the society, therefore, there was no insistence for the agreement between these two concerns from any govt. departments. b. Necessary resolutions passed at assessee society and the company would be submitted whenever called for the same, out of the past more than one and half decade experience, the resolutions passed at these both society and company were accepted and there was no issue on this score. c. Both the society and company are controlled by the same Management, hence, there was no insistence for agreement. d. Unless a Govt. agency insist for the agreement, there was no need for internal agreement by incurring huge stamp duty and registration fees, the same would reduce the profits of the organization in turn reduce the tax payment. e. In both society & company, there is no stake of the public and, hence, every rupee saving in expenditure is the ultimate motto of the

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management. f. The charges that is to be incurred by the assessee society is not a fixed one, the nature and extent of the faculties to be availed from the company includes many items, and hence even if agreement entered into between these two, is likely to undergo change every year or in the middle of the year, hence, entering into a fixed agreement would defeat the purpose for which it is entered. g. In any case based on the need for infrastructure charges, extent of use, timely availability, place of availability are the main ingredients. Fair market value of the infrastructure charges a. If the fair market value of the infrastructure facilities availed by the society are put to terms and conditions of valuation the total charges payable by the assessee society would exceed more than Rs.600 lakhs what was paid during the AY, as it was difficult to get all the facilities at under one roof, to the extent of size, quality, need of the hour and timely presence. 7. Legitimate needs of the business of the assessee: a. Without the infrastructure support from the company to the assessee society, there was no scope of getting approvals, permissions, affiliations for commencing any course / maintaining campuses would not be there in the hands of the assessee society, therefore it is submitted that there would not be any business in the absence of infrastructure , in the hands of the assessee society. b. In nutshell, the approvals/permissions/affiliations in the hands of the society would remain on paper without converting the same into revenue / turnover and, hence, the infrastructure charges incurred by the society Is towards legitimate business needs of the assessee society. 8. The benefits derived / accruing to the assessee on receipt of such goods, services or facilities: a. The assessee society was having confirmed / agreed source of mobilizing infrastructure. The infrastructure facilities available were at the exclusive disposal b. of the assessee society. The provider of the infrastructure facilities is a reputed corporate c. body with organized set up which in-turn boost the image of the assessee society to get the necessary approvals, permission / affiliations. With a confidence that every increase in number of students or d. addition of further courses or additional approvals or additional courses the needs for the infrastructure would be met on time without scouting for the same. It will enhance the confidence in the minds of the assessee society e. With regard to its future business / prospects of the business. To create own infrastructure instead of availing from the company, f. the assessee society was required to mobilize term loans and working capita's from banks / financial institutions, however, without having pain of these responsibilities / burden hiring infrastructure would work out very cheap cost/nominal cost in the hands of the assessee society.

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In view of the above, it is again submitted / undertaken that is, Just because the assessee society and the company come under the common a. management the fair market value of the services were not over valued / over charged. In fact, keeping in view of the size, extent, quality of infrastructure b. available under one common roof also for exclusive use would yield better revenue if given to outsiders other than the assessee society. The company was having huge indebtedness to various nationalized banks / c. financial institutions / NSFCs, in addition to this all the assets including movable, immovable, were under mortgage when compared to the risk, interest burden, opportunity cost of lending if considered the infrastructure charges received from the assessee society was nominal only. There was no element of profit that was accrue in the hands of the d. members of the managing committee of the assessee society nor in the hands of the Directors of the company. The infrastructure charges received in the hands of the company was e. offered to tax" 13.1. The Ld.CIT(A) considered the submissions made by the assessee and found that there was substantial increase in payment of rent during the year from Rs.3.5 crores to Rs.6.00 crores and observed that the floor space was hired from VEIL only for two campuses i.e. Gachibouli Campus at Hyderabad and airport campus at Visakhapatnam. In respect of other campuses, lease has been taken from third parties. Out of the above two campuses, the Ld.CIT(A) observed that there was addition to fixed assets in respect of Oakridge Hyderabad campus to the tune of Rs.6,21,87,354/- and there was no addition to fixed asset in respect of campus at Visakhapatnam. Thus, the Ld.CIT(A) observed that claim of additional floor space was partially correct to the extent of additions made to Oakridge campus, Hyderabad. The Ld.CIT(A) verified the rental value at Gachibouli campus

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from the internet and found that the rent payable could be estimated at Rs.49,50,000/- to Hyderabad campus. In respect of Visakhapatnam campus, there was no justification for payment of additional rent, since, there was no additional space, let out by VEIL during the year. Thus, the Ld.CIT(A) taking into consideration of all the facts considered that the payment of rent of Rs.4.00 crores is reasonable and accordingly confirmed the addition made by the AO.

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to Rs.675 lakhs. The Ld.AR further submitted that sports facilities offered, fleet of buses offered by the company to the assessee and technical know- how given to the assessee and worked out the rental value at Rs.12.29 Lakhs and submitted that against which the assessee paid the rent of Rs.600 lakhs which is stated to be reasonable. The Ld.CIT(A) has extracted the submission of the assessee in para No.7.9 of the order and the same was reiterated by the Ld.AR during the appeal hearing which is extracted for the sake of convenience as under: “7.9 Further to the above, the AR of the appellant also made written submission vide letter dated 17.06.2013 which is as follows :- “With reference to the above, the following are the detailed workings on the cost of infrastructure, size of infrastructure and other facilities offered to the assessee society, viz., That the detailed explanations and the nature and size of infrastructure, offered by the company to the assessee society.

Gachibouli campus :- Size 5.50 acres (Approx) of the land Extent of 2,25,000 sq.ft. construction Nature of Campus of international standard in each and every campus aspect, subject to close scrutiny / who are concerned for according permission / affiliation. Swimming pool, of international standard along with very wide play grounds, to accommodate, all types of games and sports, to meet the international standard requirements. Strategically located in very prime location like,

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Gachibouli, nearby reputed schools and colleges, Lanco Hills, 20 minutes drive to Airport, International School of Business, High-tech city, the growth of the entire city is focused towards these locations, cultural centers, major hotels, close proximity to Banjara Hills and Jubilee Hills. Valuation Rs.35/- per sq.ft / per month including entire infrastructure for the A.Y.2009-10 50% of floor area i.e. 1,12,500 sq.ft x Rs.35 x 12 months, comes to Rs.472.5 lakhs.

Airport Campus : Visakhapatnam : Size of the land 7260 sq.yds of land located adjacent to NH5, Sheelanagar, Visakhapatnam (near to airport) Extent of construction 1,60,000 sq.ft located at prime place, proximity to both commercial and residential locations, very close to airport, well connected by bus from all the locations and known as part of the main city. Nature of facilities The campus is having all the facilities, that a student requires Valuation 50% of total constructed area including entire infrastructure @Rs.15.0-0 which comes to Rs.144 lakhs

Sports facilities Other than play grounds, 2200 students x Rs.300 X 8 comes to Rs.52.80 swimming pool the cost of lakhs sports / games articles meant for use of the students at these locations (based on past experience)

Buses: A fleet of 45 buses are part of the infrastructure provided to the assessee society, the minimum rental value comes to i.e, Diesel shall be the expenditure of the user Driver salary shall also be the expenditure of the user With the above conditions, the bus in the market would fetch a rent of Rs.4000 per day (irrespective of age of the vehicle) as it can be easily ascertained from the motor field.

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The cost of infrastructure under this head comes to Rs.4000 X 45 X 200 days comes to Rs.360 lakhs Technical know-how: The assessee society is incorporate under the statute, the managing committee, are not paid with any remuneration / honorarium for the services rendered by them, scouting for continuous development in the field, updation of the infrastructure, addition of new courses, affiliation from various universities, located in other part of the world, research and development, inventing for recruitment of excellent faculty from the intellectuals, though the value of this cannot be measured in terms of monetary value, this is valued as Rs 200 lakhs per annum.

Continuous guidance / drive for future programs / plans as an inbuilt system. The assessee society is being provided with guidance of top educationalists, children psychologists, personality development, the costs were not estimated. Whenever the assessee society finds it difficult, due to non receipt of its fees, to pay the establishment costs, the same shall be assured by the company, as part of the infrastructure facility, hence, there was no debt burden to the assessee. The infrastructure charges of Rs.600 lakhs paid at the end of the financial year. Therefore, there was no pressure on the assessee society.

Total costs estimated (per annum) A.Y.2009-10 (Rs. in lakhs) Gachibouli campus Rs.472.50 Airport campus, Vizag Rs.144.00 Sports facilities Rs.52.80 Buses Rs.360.00 Technical Know-how Rs.200.00 Total Rs.1229.00

Accordingly the Ld.AR argued that the payment made to the company is reasonable and requested to set aside the order of the Ld.CIT(A) and allow the appeal of the assessee. The Ld.AR relied on the various decisions to support his case.

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Nalanda Talent School, NAD campus, VES campus at CBM Compound and other premises taken for the purpose of guest house etc.. and there was no increase in floor space etc. Out of the above campuses, floor space was hired from VEIL only for two campuses i.e. Gachibouli campus at Hyderabad and airport campus at Visakhapatnam. In respect of other campuses, lease was taken from third parties but not from VEIL. The Ld.CIT(A) found that there was addition to the fixed assets to the extent of Rs.6.21 crores in respect of Oakridge Hyderabad campus and there is no other additional space hired by the company. On verification of the P&L account placed before us in respect of Vikas Educational Society Institutions Ltd, the rent was received only for Visakhapatnam campuses. There was no mention of rent payment for Hyderabad Oakridge International campus, Hyderabad or Gachibouli campus. In fact the revenue from Oakridge International School-2, Hyderabad was only Rs.1,78,619/- which shows that activity was not commenced in Oakridge International School-2, Hyderabad. It appeared that the Ld.AR is trying to include all other facilities and all other premises to substantiate the increase in the rent. It is to be noted that the assessee is making separate payment for various other campuses which is accounted by the VEIL under

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the head income from revenue. There is no written agreement between the assessee and the company. In the absence of written agreement, the purpose of payment of various revenues and the expenses could not be linked to the rent. Though the assessee has claimed to have made the payment for Oakridge Hyderabad campus, there was no such mention in the P&L account of the company, VEIL which is also stated to be closely related institution to the assessee. The assessee claimed that both the VEIL and the assessee are travelling together for a common goal by imparting education to the students. In the instant case, there was no written agreement to substantiate the claim made by the Ld.AR. Unless there is an agreement specifying each activity such as floor area given to the assessee during the impugned year under consideration and the other facilities offered in the earlier year and subsequent years, increase remained unsubstantiated. There must be transparent and binding agreement between the lessor and the lessee for the premises, floor area, services leased or provided, for ascertaining the rental value of each of the service, floor space or cost of service etc.. In the absence of written agreement, it is remained undisclosed what was the floor area or the services offered to the assessee by the VEIL. Such responsibility would be more in the case of

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closely related concerns. General explanations and presumption do not justify the payment of rent by increasing 70% at one stroke within one year. Further the Ld.AR submitted that both the VEIL and the assessee are operating from the same premises. There is no bifurcation of the premises with clear boundaries for estimation of the rental value of the premises or the infrastructure facilities provided. The Ld.CIT(A) had considered the issue with regard to market rent of Gachibouli campus which was worked out to Rs.49.50 lakhs @Rs.22 per sq.ft. which is also not supported by any document. It is not known the breakup of revenue paid to VEIL to the extent of Rs.11.17 crores in respect of Hyderabad Oakridge School during the year under consideration. The issue of payment of rent required to be verified in the light of payment of other revenue of Rs.11.17 crores by Hyderabad and Rs.9.23 crores by Visakhapatnam campuses also. Payment of other revenue and the rents to be examined jointly. Though the assessee claimed to have paid the increase in value of rent for other facilities such as sports, buses, higher salary, cost of infrastructure etc., there is no evidence in the form of written agreement to support the same. It is also necessary to furnish the details of collection of separate charges for bus services, sports facilities from the students or not etc. It is undisputed fact that VES is a society to whom the Societies Act applies,

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whereas VEIL is a company to whom the Companies Act applies. The procedure for drawal, usage of money etc. are governed by the different Acts i.e. Societies Act and the Companies Act. The government places certain restrictions on the societies, especially educational societies for use of funds. Since both the institutions are inter linked and usage of funds are restricted by both the Acts differently, it is necessary to establish the reasonableness for increase in payment of rent to the company with proper documentation. The assessee could not substantiate the increase in rent with proper documentation. We find from the records that the assessee filed the return of income for the A.Y.2009-10 declaring loss of Rs.6457/- and admitting income of Rs.4,65,336/- for the A.Y.2010-11. At the same time, VEIL earned the profit of Rs.9,44,94,871/- for the A.Y.2009-10 and Rs.7,70,55,982/- for the A.Y.2010-11 from the payments made by VES. It is worthy to note that the assessee has made the payment of Rs.28.53 crore for the A.Y.2009-10 and Rs.33.30 crores for the A.Y.2010-11 to VEIL, which shows that the assessee is either incurring losses or declaring meager income, whereas the VEIL which is a company is earning huge profits. Coming to Visakhapatnam campus, VEIL has received a sum of Rs.9.23 crores under the Revenue apart from the rent of Rs.6,00,00,000/-. The AO

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has not examined the various payments made to VEIL. Therefore, the entire payment of (Rs.28.53 crores as per the P&L account of VEIL) has to be taken into consideration to determine the disallowance u/s 40A(2) in respect of rent payment. The AO has to examine all the payments made to VEIL with the nature and purpose of payment and then decide whether the rent payment made to VEIL is related to the premises or for any other infrastructure facilities also. Therefore, we are of the considered opinion that the issue needs detailed verification at the end of the AO in the light of the above discussion. The assessee is directed to furnish the details of other payments made to VEIL with nature and purpose and the detailed inventory of items for which the items are leased to the assessee in the earlier year and the year under consideration with proper evidence. The AO is directed to examine the entire issue and collect the details of various payments with nature and purpose and the market rate of rents and need for increase in rent and decide the issue afresh on merits after giving opportunity to the assessee.

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People Combine Avenues Ltd. The assessee also made TDS u/s 194I and remitted the same to the Government account. The AO disallowed the sum of Rs.201 lakhs as excessive u/s 40A(2) of the Act on identical facts of the earlier year. On appeal the Ld.CIT(A) confirmed the addition and the assessee is in appeal before us. Since the issue is on identical facts, we remit the matter back to the file of the AO for deciding the issue afresh on merits as per the directions given in the A.Y.2009-10. Accordingly both the appeals for the A.Y.2009-10 and 2010-11 are set aside on the disallowance u/s 40A(2) for denovo consideration of the AO.

17.1. The assessee relied on the various decisions to support it’s argument, not to make disallowance u/s 40A(2) of the Act. Since the issue is remitted back to the file of the AO, the assessee is free to raise all the issues before the AO. Accordingly the appeal of the assessee on the issue of disallowance u/s 40A(2) is allowed for statistical purposes.

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assessee claimed to have incurred the expenses towards snacks / food to parents / guests / counselors in the school / college. However, the assessee failed to submit the details of number of students, temporary staff, parents or guests taken lunch etc., therefore, the AO disallowed 20% of expenses and added back to the returned income.

“9.3. The authorized representative represented that some expenses in the nature of mess expenses are incurred by the society, when it provides snacks/food to parents/guests/counselors in the school / college premises. It was also argued that the amount of such expenses claimed is very reasonable taking into account the number of students and staff of the institution. I have considered the submissions. It is an admitted position that the company VEIL maintains the hostels and bears all mess expenses. In this context assessing officer had raised this issue of allowance of this expenditure. The assessee had submitted the salary expenses of employees, during the assessment proceedings, which the assessing officer felt should have been borne by the company In the normal course At the same time, some expenses as claimed by the assessee is also possible to meet expenses for guests/visitors, etc In the circumstances, I am of the view that it would be reasonable to restrict the disalIowance to 10% of the amount claimed. Accordingly, addition of an amount of ks.1,17,935/- is confirmed. This ground is partly allowed.”

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the required details. However, it is not ruled out that the assessee also has to incur such hospitality expenses. Considering the facts and merits of the case, we restrict the disallowance to 5% against disallowance of 10% confirmed by the Ld.CIT(A). Accordingly the appeal of the assessee on this ground is allowed partly.

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“ 10.3. It could be seen that the assessee has debited expenditure to the tune of Rs 19,25,935/- towards miscellaneous expenses It was explained that these expenses are incurred towards staff who mobilize business for the institute and are in public relations It was also claimed that the expenditure incurred was towards TA & DA. However, the assessing officer had noted that most of the vouchers were self-made which was not disputed in appeal. The authorized representative contended that all these expenses are scrutinized by internal audit wing of the assessee. I have considered the submissions made. The TA & DA particulars could have explained with reference to tickets purchased and other supporting evidence. Taking into account, the nature of expenses, and the explanation offered, I consider it reasonable to restrict the disallowance to 10% of the amount debited. Accordingly, addition to the tune of Rs.1,92,598/- is confirmed. This ground is partly allowed.” 24. We have considered the rival submissions and it is a fact that the expenses were made with self made vouchers and the same was not disputed. Though the assessee claimed that the expenses were related to TA/DA public relations persons, the assessee did not furnish the details of names of the persons to whom the TA/DA was paid. Since the assessee is a society and claimed to be non profitable organization, it is not expected to incur public relations expenses which are not verifiable with the documentary evidence. However considering the arguments made by the Ld.A.R, we consider it is reasonable to restrict

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the disallowance to the extent of 5%. Accordingly, the appeal of the assessee is partly allowed.

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regard to affiliation, permission / recognition and was claimed to be public relation expenditure. It is not in dispute that the expenses were towards hotel bills and show room bills. It is possible that there is business purpose in respect of hotel bills; but such a view cannot be taken in respect of showroom bills which definitely involve an element of personal nature. Therefore, the disallowance at 50% appears to be on the higher side. Hence the Assessing officer is directed to restrict the disallowance to 30% of the amount 'aimed. Accordingly, addition of Rs.3,93,264/- is confirmed. This ground is partly allowed.”

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tenant. In the instant case, the assessee has paid the rent to the owner of the building and there was no specific agreement between the assessee and the owner for payment of municipal taxes in addition to the rent. Further the AO has disallowed the sum of Rs.2.00 cores as excessive. Therefore, the issue of payment of rent and the municipal taxes are interlinked and both the issues to be considered jointly. Since, we have remitted the issue of disallowance u/s 40A(2) back to the file of the AO, we deem it fit to send the issue of payment of municipal taxes also to the file of the AO and direct the AO to decide the issue afresh on merits. Accordingly, appeal of the assessee on the issue of payment of municipal taxes is allowed for statistical purpose.

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maintenance expenses’ for Visakhapatnam branch. The assessee explained that the guest house accommodations are being maintained at every campus and the expenses towards the officials / authorities visiting campus both within India and from outside India, public relation officers, counsels etc. were debited to the guest house expenditure. Ld.AR submitted before the AO that the expenditure was wholly and exclusively laid out for the purpose of business and accordingly requested to allow the same as business expenditure. However, the AO found that the assessee has not maintained the proper bills, vouchers and the details for the expenses, hence, disallowed 20% of the expenses amounting to Rs.88,473/-.

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disallowance to 10% of the expenses claimed. Taking into consideration of the explanation of the Ld.AR during the appeal hearing, we find that the disallowance is justified and do not find any reason to interfere with the order of the Ld.CIT(A), accordingly we uphold the order of the Ld.CIT(A) and dismiss the appeal of the assessee on this ground.

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accordingly confirmed the order of the AO. Against which the assessee filed the appeal.

A.Y.2010-11. 39. Ground No.5 for the A.Y. 2010-11 is related to Chief Minister’s Relief Fund. Since the issue is remitted back to the file of the AO, the Ld.AR has not pressed this ground, hence this ground is dismissed as not pressed.

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assessee has wrongly claimed the expenditure relating to M/s People Combine Group to the tune of Rs.3,74,153/- and added back to the income. On appeal, the Ld.CIT(A) confirmed the addition.

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Order pronounced in the open court on 30th October, 2019

Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर धसंह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER नवशधखधपटणम /Visakhapatnam नदनधंक /Dated : 30.10.2019 L.Rama, SPS

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आदेश की प्रतितिति अग्रेतिि/Copy of the order forwarded to:- 1. ननधधाऩरती/ The Assessee- M/s Vikas Educational Society, D.No.8-1-97/1/8, Ninitaas High, Pedawaltair, Visakhapatnam 2. रधजस्व/The Revenue – The Income Tax Officer, Ward-3(2), Visakhapatnam 3. The Commissioner of Income Tax-1, Visakhapatnam 4. The Commissioner of Income Tax (Appeals), Visakhapatnam 5. तिभागीयप्रतितिति, आयकरअिीिीयअतिकरण, तिशाखािटणम/DR, ITAT, Visakhapatnam 6.गार्डफ़ाईि / Guard file

आदेशािुसार / BY ORDER // True Copy //

Sr. Private Secretary ITAT, Visakhapatnam