DCIT, DEHRADUN vs. M/S. WOOD STOCK SCHOOL, DEHRADUN

O R D E R PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by Ld A Deputy Commissioner of Income tax , Circle -1, Dehradun [ The ld AO ] against order of ld CIT (A)-I, New Delhi [ The ld CIT (A)] dated 11.04.2014 for Assessment Year 2010-11. 2. The ld AO has raised following grounds of appeal:-

1. Given AO’s finding that assessee had made excess payment of Rs. 24,46,326/- to M/s. Mars Catering Services Pvt. Ltd, and there being no contradiction of same, ld CIT(A) erred in facts and in law in allowing deduction for entire sum of Rs. 62,26,326/-.”

3. Assessee is a registered Society assessed as resident; association of person filed its return of income on 13/10/2010 declaring nil income as it is registered under section 12 AA of The Income Tax Act [The Act]. It has gross receipt of INR 218557877/- and it disclosed deficit of Rs. 29017712/–. During course of assessment proceedings, only issue in dispute in appeal is disallowance of Rs. 6226326/– by learned assessing officer with respect to payment made to Mars catering services.

4. Brief fact shows that assessee incurred expenditure on students boarding expenditure. Learned AO questioned that assessee has made payment to above company for upgrading its foodservice Department to offer a high level Page | 1 of quality catering services and has therefore paid above sum. Recipient agreed to provide above services and has responsible for productively employ services of specialized person essential to carry out above services. Ld AO also noted that Mars Enterprises owns some hotel, which has been taken by assessee, and in that hotel, such catering services are to be provided by Mars Caterers. AO also noted that Mars Enterprises entered in to agreement with assessee and later on transferred agreement by assignment in favour of Mars catering services. Assessee explained that as assessee is operating a school. School has lodging and boarding facilities both. Therefore, for managing and operating food services of school at Mussoorie it has employed above company. The company is one of experts in specified services. Assessee explained terms of agreement, which are reproduced in assessment order at relevant pages 9 – 11. Learned assessing officer noted that as per terms of agreement INR 3,780,000 should have been paid. Assessee paid a sum of Rs. 41,69,000 and plus a debit balance of INR 2,056,000 was also made and thus total payment of INR 6,226,000 was paid to above company and therefore learned assessing officer asked assessee to explain why this debit be not disallowed as payment was made for a purpose which was beyond object of assessee society. Assessee explained rationale behind payment of above sum. However, learned assessing officer was of view that main purpose of all such debits is to allow undue monetary benefit to above company as an advance in garb of alleged agreement as such whole of amount is being disallowed. Consequently assessment order under section 143 (3) of income tax act was passed on 29/01/2013 determining total income of assessee at INR 8 068967/–.

5. Assessee aggrieved with order of learned AO preferred an appeal before learned CIT – A, Dehradun. Ld CIT (A) passed order dated 11/4/2014 deleting above disallowance holding that learned assessing officer has not doubted that society continues to impart education, it has been doing that for past many years. Hence, it is a logical corollary to educational activity of boarding and lodging of students as it is being a fully residential school. It has to be treated as part of main activity of imparting education. In light of this broad assertion it is seen that payments made to above company are seen to have only marginally impacted cost of food over immediately preceding year and increase in expenses on food is seen to be reasonable keeping with general trend in rise of cost of food articles. Therefore, it is clear that no abnormality is visible due to involvement of Mars enterprises. It was further noted by him that payment made by assessee for society are not to persons covered in any way under section 13 of income tax act. Learned assessing officer aggrieved with order of learned CIT – A, has preferred this appeal before us.

6. Learned departmental representative submitted that para number 7 of assessment order needs to be looked at before deciding issue. She extensively read para number 7 of order and stated that Mars catering services private limited is an entity of Hotel Rockbee Manure, which is stated to be hostel of assessee. She further stated that on 01/04/2010 Marsh catering services made agreement with Sri Sonam Bhutia to cover above guesthouse with stipulation that primary use for hotel would be to provide accommodation for school alumni for whom services are taken. She further referred to fact that Mars catering services private limited is a private limited company, in which share holding pattern shows shares of Anjali Tendulkar, wife of Shri Sachin Tendulkar holds 2, 50,000 shares, Shri Ajit Tendulkar holds 5000 shares and Sri Sanjay Narang holds 245000 shares. She further submitted that student of assessee was also residing in above hotel, which is owned by Mars catering services group. She therefore stated that apparently it is an agreement to operate hotel. She submitted that operating a hotel is not an educational activity. This cannot be a charitable object as per section 2 (15) of the act. Therefore, she stated learned assessing officer has correctly made that above disallowance. She submitted that learned CIT – A has not looked into above facts and merely stated that assessee is running a school and therefore lodging and boarding facilities are required to be provided to students of assessee school and therefore he allowed claim of assessee. She submitted that if looked at from angle as mentioned in para number seven of assessment order above expenditure has been correctly disallowed by learned assessing officer, as it is not an object of society to hire a hotel and provide catering facilities therein. She stated that it could not be remotely related to educational activity of assessee.

It is imperative that for students residing in that impugned hostel are required to provide catering facilities. For provision of services, assessee has engaged Mars catering services, which is also part of Mars enterprises. There is an agreement also of assignment of original agreement from Mars enterprise to Mars catering services private limited. Expenditure has been incurred by assessee only for purpose of educational facilities to be given to student of lodging and boarding for staying in Mussoorie and studying in the assessee society. It is not denied or can be disputed that assessee is providing education to students and lodging and boarding facilities are incidental to education. No violation of section 13 has been pointed out by learned AO. In view of this, it cannot be said that expenditure incurred by assessee is not for purpose of education. For all these considerations as stated above learned CIT – A has deleted addition. Merely because some celebrities are holding shareholding in one of entities to which assessee society has engaged for provision of services does not make any difference in allowance or disallowance of a particular expenditure for object of society. Further, merely because a hotel is rented by assessee society for using, as a hostel for student, does not make any difference, as far as student of the society exclusively uses the same. These facts do not exclude assessee from provision of section 2 (15) of the act. It is also not the case of AO that assessee is carrying on business activity, which is tainted with profit motives and is not an educational activity. The LD AO in this appeal does not dispute further repair expenditure of such hotel used as hostel by assessee. Hence, we do not find any infirmity in order of learned CIT – An in disallowing above claim. In result, ground number 1 of appeal of learned assessing officer is dismissed.