M/S. SARAKKI EDUCATIONAL SOCIETY,BANGALORE vs. INCOME TAX OFFICER, WARD-3(EXEMTIONS), BANGALORE

, 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 3 of 19 3. The revenue has raised following grounds of appeal in for the AY 2017-18:-

4.1 Further, the AO noted that as per the terms and conditions of MOU, M/s. EESPL had been permitted to appoint teachers and to guide them about teaching techniques for the benefits of students who are admitted in EKYA School. The assessee society will reimburse the entire expenditure relating to maintenance, electricity, water, salaries, rates and taxes and other government levies to the company. In effect, the assessee’s society is only name lander and the entire scheme of education is corporatized indirectly motivated by profit. This contention on the profiteering is accentuated by the , 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 5 of 19 condition that while the company effectively manages the affairs of the schools administratively and academically, the assessee trust is bound to pay an additional sum computed @ of 35% of the gross collections to the company.

4.2 The main contention of the AO is that the company has been employed with sole purpose to divert the income of the society. Secondly M/s. EESPL does not possess any extraordinary qualification or an intangible asset so as to demand such a huge payment. Further, nearly 62% of the gross receipts of the society were diverted to the company and therefore it was essential to verify as to whether an equivalent value of services had been rendered by the company to the assessee’s society or not. Further, the AO noted that the income credited to the profit and loss account of the company comprises receipts from two enterprises, viz. the assessee’s society and other being M/s. CMR Janardhana Trust which is again the group of institution. The related parties/ specified persons drew huge sum of money as salaries and in effect, the charitable society is funding the same. These facts are clearly elucidated in summary of related party transactions incorporated in the audit report of the company M/s. EESPL for the AY 2017-18. Thus, the AO is of the opinion that when the profit margins of the company, who’s gross receipts are predominantly from the related enterprises only, before payment of salaries to the specified persons u/s. 13(3) and after payment of the same are in order of 85.18% and 75.37% respectively, it substantiates that transaction between the assessee society and M/s. EESPL is not at arm’s length in terms of section 13(2)(c) and 13(2)(g) of the Act.

4.3 The AO relying on the decision of the Hyderabad ITAT in the case of M/s. NTR Memorial Trust in ITA NO: 461 & 462/HYD/2010 dated 18/03/2011 held that the benefit conferred is unduly , 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 6 of 19 excessive and unreasonable and such quantum of profits in the hands of the company in excess of 5% is treated as non-application of income. Further, the AO relied upon the decision of the Hon’ble Kerala High Court in the case of M/s. Agappa Child Centre reported in 226 ITR 211 and the decision of the Hon’ble Andhra Pradesh High Court in the case of M/s. AWARE reported in 263 ITR 43 and held that for the purpose of section 13(1)(c) of the Act, the word “benefit” is not limited to advantage of pecuniary nature alone but extends to any intangible and indirect benefit also and accordingly the amount which is being treated as non-application of income was calculated below:- Particulars Amount in Rs. Quantum of transaction with person specified u/s. 13(3)-[A] 3,76,60,868/- Profit percentage in the hands of the company-[B] 85% Turnover of the company M/s. EESPL –[C] 9,79,09,808/- Profits for the year including salary to Directors-[D] 8,33,93,551/- Value of actual services rendered-[E] 1,45,10,257/- Percentage component of actual services rendered-[F] 14.82% Value of actual services rendered by the company to the Assessee 55,81,691/- –[G=FXA] Add: Reasonable profit margin at the rate of 5% [H] 2,79,084/- Value of transactions determined to be at arm’s length 58,60,775/- u/s.13(2)(c) [I = G+H] Excessive and unreasonable payment made to persons specified 3,18,00,092/- u/s. 13(3)- [J] 4.4 Further, Since the assessee society provided undue benefit in terms of section 13(2)(c) and 13(2)(g) r.w.s. 13(3) and 13(1)(c) of the Act, the surplus generated in the hands of the society was brought to tax but denial of exemption u/s. 11 of the Act and accordingly the AO re-drawn the taxable income as detailed below:-

, 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 7 of 19 (+)(-) Particulars Amount in Rs. Amount in Rs. Gross Receipts 6,03,67,389/- Less Application for revenue 6,71,30,573/- expenditure Less Excessive payment 3,18,00,092/- made to persons specified u/s. 13(3) [Table in Para 9 above] Eligible quantum of 3,53,30,480/- application Balance 2,50,36,908/- Exemption u/s. 11 NIL Taxable income at 2,50,36,908/- Maximum Marginal Rates, as the entire sum falls under 13(1)(c)

6.1 The ld. CIT (A)/NFAC also held that to view the two distinct entities as one is incorrect. Further, in case of a charitable trust, it is only the income from a investment or deposit which has been made in violation of section 11(5) of the Act i.e. liable to be tax and violation u/s 13(1)(d) does not tantamount to denial of exemption u/s. 11 of total income of assessee-trust and thus in the present case exemption u/s. 11 of the Act is held to be allowable to the assessee to the extent admissible under the act. However, the amount so disallowed (out of Rs.2,50,36,908/-) by the AO suffers from the taxation at maximum marginal rate. Further, the ld. CIT (A)/NFAC held that income utilized for the purchase of capital assets, repayment of a loan for the purchase of capital assets, revenue expenditure, (subject to disallowance made), shall also be treated as application towards charitable purposes and hence exempted from tax to the extent of 85%, if registered u/s.12AA of the Act.

6.2 In view of the above discussion the ld. CIT (A)/NFAC directed the AO to recalculate the exemption u/s. 11 of the Act after restricting the disallowance to the 10% of amount actually paid to M/s. Edufice Educational Services Pvt. Ltd. (EESPL) (restricted to Rs.37,66,086/- only). Further, the amount not falling under the application of income (out of disallowance) will be taxes at maximum marginal rate and accordingly partly allowed the appeal of the assessee.

, 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 10 of 19 9. The ld. D.R. on the other hand vehemently submitted that the ld. CIT (A)/NFAC erred in law and in facts in allowing exemption u/s. 11 especially when the assessee is hit by section 13 of the Act and the entire gross receipts as to be taxed in the hands of the assessee. Further, the ld. D.R. vehemently submitted that it is a classic case of siphoned off the funds of the trust for the benefit of persons referred in section 13(3) of the Act thereby enriching the trustee/ relative of trustees and depriving the benefit to beneficiary. Lastly the ld. D.R submitted that the AO had brought on record the cogent evidence of the payment made to the specified person being unreasonable and unduly excessive as M/s. EESPL did not possess the extraordinary qualification and the huge payments made by the assessee were not commensurate to the services rendered by it.

10.1 On going through the Memorandum of Understanding entered with the M/s. Edufice Educational Services Pvt. Ltd. (EESPL), we take note of the fact that EESPL has been permitted to appoint teachers and guide them about teaching techniques for the benefit of the students. The society will be providing funds to the company for meeting the expenses relating to maintenance, electricity, water charges, salaries, rates and taxes and other Governmental levies that , 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 12 of 19 may arise from time to time. Further it is agreed that all the payments made shall be in the name of the society and copies of the payment vouchers should be submitted to the society. The EESPL will effectively manage the affairs of the school administratively, academically and the society should pay to the company 35% of gross collections per year. We noticed that it was a long-term arrangement of 10 years which can be further extended. It is submitted that M/S Edufice Educational Services Pvt. Ltd. (EESPL) has a specialization of managing educational institutions with outstanding faculty and most modern methods of teaching. The company also has the required expertise in the field of education and has a dedicated team of people engaged in imparting education. Further, as the main object of the society is to run educational institutions, the society is entitled to incur all necessary expenditures essential for the proper functioning and administration of its institution. It is contended that the payments made to EESPL were solely to improve the quality of education by using new age technique to teach the students academically. The services rendered by Edufice is the value added to the teaching profession, which are integral to the operation of educational institutions of the assessee society. We are of the considered opinion that the MOU entered with M/S Edufice Educational Services Pvt. Ltd. (EESPL) was in accordance with the object of the trust namely deeds for efficiently educating and training students to make them best citizens. Undisputedly, the main objects of the Trust are the activity of imparting education. Now the moot question is whether by entering into MOU with M/S Edufice Educational Services Pvt. Ltd. (EESPL), the assessee society is diverting any income or property of the trust in favour of any person referred to in section 13(3) of the Act. The AO claimed that the transaction between the assessee society and M/S Edufice Educational Services Pvt. Ltd. is not at arm's length in terms of section 13(2)(c) and 13(2)(g) of the Act mainly because of the profit , 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 13 of 19 margins of the M/S Edufice Educational Services Pvt. Ltd., whose gross receipts are predominantly from the related enterprises only, before payment of salaries to the specified persons u/s. 13(3) and after payment of the same are in order of 85.18% and 75.37% respectively. We are of the considered opinion that the AO while coming to the conclusion that the assessee society had diverted any income or property or the amount of professional fee so paid was in excess-of what may be reasonably paid for such services should have examine the FMV or comparable uncontrolled price of the services provided by the M/S Edufice Educational Services Pvt. Ltd. The AO instead went to determine what was the expected profit of the Company while providing the services to the assessee society. It is an undisputed fact that M/S Edufice Educational Services Pvt. Ltd. had provided the professional services to the assessee society.

10.2 Further, as rightly contended by the Id. A.R. of the assessee, as per provisions contained in section 13(2)(c) of the Act, if any amount is actually 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 then the income of the property shall be deemed to have. been used or applied for the benefit of a person referred to in section 13(3) of the Act. In the present case, as contended by the Id. AR of the assessee, the professional fee had been paid as per the terms & conditions of the MOU & no amount is paid for the benefit of the Trustee or founder. When Bench enquired about the payment of the professional fee in excess of 35% as agreed, the Id. AR of the assessee submitted the detailed reconciliation as under- , 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 14 of 19 "Clarification regarding professional charges paid to M/S. Edufice Educational Services (P) Ltd for the A.Y.2017-18 & 2018-19 is as under:

1. The appellant society is following the cash system of accounting being an educational society. The payment to M/S. Edufice Educational Services (P) Ltd towards the professional charges is accounted as per cash system of accounting.

2. Assessment Year 2017-18 During the A.Y.2017-18 (i.e,. F.Y. 2016-17) the professional charges paid includes Professional charges payable for the A. Y.2016-17 (i.e., F. Y.2015-16). The professional charges debited to Profit & loss account during the F.Y.2016-17 is Rs.3,76,60,868/- which includes professional charges related to F.Y.2015-16 of Rs.1,71,02,308/-. Actual professional charges for the F. Y. 2016-17 is Rs.2,05,58,560/ From the above it is very clear that the appellant has paid 35% of the tuition fees collected as professional charges to M/S. Edufice Educational Services (P) Ltd as per the terms and conditions in Clause (6) of the supplementary Memorandum of Understanding dated 09.04.2015.

During the F.Y.2017-18 relevant to A. Y.2018-19, the appellant has paid Rs.2,96,37,026/- to M/s. Edufice Educational Services (P) Ltd as professional charges. In F.Y.2017-18 Rs.2,96,37,026/- includes GST of Rs. 45,20,902/-. The net payment towards the professional charges is Rs.2,51,16,124/- at 35% of the fees income considered for computation of professional charges payable to M/S. Edufice Educational Services (P) Ltd.

4. The appellant paid professional charges based on provisional figures available at the year ending i.e., before the statutory audit of the society. Hence, there is a small discrepancies in the professional fees paid between the provisional figures adopted and audited figures as per the profit & loss account. "

Thus, as can be verified except for some small discrepancies, the professional fees were paid as per the terms & conditions of the MOU. We are of the considered opinion that the action of the AO is highly , 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 15 of 19 superfluous in holding that such quantum of profit in the hands of the company in excess of 5% is treated as non application of income especially when the AO while passing the assessment order u/s 143(3) of the Act in the case of company named M/S Edufice Educational Services Pvt. Ltd. for the Asst. year 2017-18 had concluded the assessment of the company by accepting the returned Income. We could not understand when the returned income of the company is accepted by the AO, then how quantum of profit in excess of 5% can be treated as non-application in the hands of the assessee society. Further we observed that the AO's yardstick with regard to the profit percentage being at arm's length is based on the reliance of the decision of co-ordinate bench of ITAT in the case of M/S NTR Memorial Trust in & 462/Hyd/2010 dated 18/03/2011 which in our opinion is not at all applicable to facts of the present assessee. The Co-ordinate bench held that the profit percentage to the extent of 8% in the hands of the contractor is reasonable & not excessive. Therefore, we are of the considered opinion that AO's opinion that as the turnover is substantial and therefore a reasonable profit percentage would be 5% is completely baseless & fantasy. The AO failed to demonstrate the FMV/ Comparable uncontrolled price are lower than actual payment of the professional fees to the company. Even adoption of 10% of the Gross payment as held by the Id. CIT(A)/NFAC is completely without any basis, & based on surmises. In our opinion both the Authorities failed to substantiate that the payment of professional fee are in excess of what may be reasonably paid for such service.

10.3 Further, we are of the opinion that the provisions of section 13(3) of the Act will trigger only in cases where the amount so paid to the trustee by way of salary or allowance or otherwise out of the resources of the trust or institution for services rendered by that person is in excess of what may be reasonably paid for such services.

, 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 16 of 19 Therefore, merely by paying the professional fee for the services or involvement in any of the project or program run by the trust which are paid reasonably for the services rendered will not violate the conditions for applicability of section 11 & 12. The law pertaining to fees paid to Trustees or Board Members is very enabling and allows reasonable fee to Trustees or Board Members under section 13(1)(c) read with section 13(2)(c) of the Act. The Supreme Court in CIT vs Kamala Town Trust [2005] 279 ITR 89 (All) held that section 13 of the Act, carves out an exception to the general, exemption granted under sections 11 and 12 of the Act, to the income derived by a trust / charitable institution. The onus lies on the Revenue to bring on record cogent material /evidence to establish that the trust / charitable institution is hit by the provisions of section 13.

10.4 Further, we are of the considered opinion that any contractual compensation against services rendered is permissible, however any benefit paid/provided is not permissible. A benefit means something which is not due to a person. Under this understanding any unreasonable over and above what is reasonably due shall be treated as a benefit. Forfeiture under section13(1)(c) of the Act can be done only if any benefit is provided to the Board members or interested functionaries. Section 13(1)(c) does not prohibit payment of professional fees as per the MOU; it gets attracted if any benefit is provided to interested persons. If the functionary is providing professional services in terms of the MOU which are in accordance with the object of the Trust and therefore, is being paid Professional fee which is a obligation on the part of the Trust then such professional fees is permissible. There has to be a reason or cause of action to infer and conclude that any benefit was provided to the functionary. A benefit implies payment of anything which is not legally due to a person, therefore, the professional fees paid cannot be treated as a benefit. It may also be noted that payment of , 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 17 of 19 professional fee per se is not a benefit. To establish that some benefit was passed under section 13(1)(c) of the Act, it will be incumbent on the AO to have reasons to believe that the remuneration were legally not due to the functionaries. Once the legal eligibility of the company having more than 20% of voting rights of trustees/ board members to receive professional fee as per the MOU is not disputed, then the only option available is to see the reasonableness of the professional fee under section 13(2)(c) of the Act. Therefore, we agree with the contention of the Id. A.R. of the assessee that the provision of section 13(3) of the Act cannot be pressed into play to decide the eligibility of registration of the Trust. In view of the above discussion, we set aside the order of the Id. CIT(A) and direct the AO to delete the addition of Rs. 37,66,086/-.

1. 1. The order of the learned Commissioner of Income Tax (Appeals), NFAC, Delhi is opposed to the facts of the case and law applicable to it.

2. The learned Commissioner of Income Tax (Appeals), NFAC, Delhi erred in confirming disallowance to the extent of Rs.29,63,702/- out of the total disallowance of Rs.2,77,98,345/- made by the Assessing Officer holding that, out of the total professional charges paid to M/s. Edufice Education Services (P) Ltd being a specified person U/s. 13 of the act, as excessive and disallowable while computing the income under the provisions of section 11 of the act.

3. The learned Commissioner of Income Tax (Appeals), NFAC, Delhi erred in confirming disallowance to the extent of Rs.29,63,702/- as excessive ignoring the facts of the appellant that, there is no such excessive payment made to M/s. Edufice Education Services (P) Ltd and hence no disallowance was warranted , 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 18 of 19 4. The learned Commissioner of Income Tax (Appeals), NFAC, Delhi, erred in holding that, the disallowance to the extent of Rs.29,63,702/- confirmed will be charged at maximum marginal rate.

PRAYER The appellant prays that the Hon'ble Tribunal may kindly hold that, i for the facts and circumstances of the appellant there was no case of confirming the disallowance to the extent of Rs.29,63,702/- out of the total payments made to M/s. Edufice Education Services (P) Ltd. ii without prejudice to the prayer (i) above, the disallowances are to be considered while computing income U/s. 11 of the act and no portion of the disallowance is taxable under maximum marginal rate.

, 1974, 1991 & 1992/Bang/2024 M/s. Sarakki Educational Society, Bangalore Page 19 of 19 14. Since the issue involved in the cross appeals for the Asst. year 2018-19 are similar to that of the cross appeals for the assessment year 2017-18, the findings of the appeal in & will apply mutatis mutandis to these cross appeals also.

Order pronounced in the open court on 19th Dec, 2025