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Income Tax Appellate Tribunal, ‘A’ BENCH : CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI ABRAHAM P. GEORGE]
आदेश / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
In this appeal filed by the Revenue, it assails an order dated 17.02.2017 of ld. Commissioner of Income Tax (Appeals)-2, Madurai, in which it was held that there was no violation by the assessee, within the meaning of Section 13(1) (c) of the Income Tax Act, 1961 (in short ‘’the Act’’) and assessee was eligible for claiming exemption u/s.11 of the Act. registered u/s.12A (a) of the Act, had filed its return for the impugned assessment year declaring ‘’Nil’’ income after claiming exemption u/s. 11 of the Act. During the course of assessment proceedings, it was noted by the ld. Assessing Officer that assessee had paid a sum of �40,78,668/- to one M/s. Amali Builders Private Limited towards consultancy services. Ld. Assessing Officer noted that one Shri.
Cletus Babu and one Smt. J.X. Amali who were directors in M/s. Amali Builders Private Limited were also trustees of the assessee trust. As
per the ld. Assessing Officer, these two persons were in key management of M/s. Amali Builders Private Limited. Assessee was put on notice as to why the payments made to M/s. Amali Builders Private Limited should not be considered as a violation coming within Section 13(1)( c) of the Act. Reply given by the assessee is summarized here under:- (i) Total payments comprised of fees for services �36,30,000/-
and Service Tax �4,48,668/-. (ii) Tax wax deducted at source at the rate of 10%.
(iii) M/s. Amali Builders Private Limited was doing the work of Scad World School, Palladam a residential school run by the assessee trust, and was obtaining approvals required for putting up civil structures, coordinating with engineers and architects, selecting materials and arranging required work force. (iv) M/s. Amali Builders Private Limited was also doing maintenance and repairs works of M/s.Francis Xavier
Engineering College, Tirunelveli, M/s.FX Polytechnic College,
Tharuvai and M/s. St.Xavier’s Higher Secondary School,
Tirunelveli run by the assessee trust. (v) Construction work carried out by the Trust during the relevant period, for its various institutions was to the tune of �5,50,51,715/-.
Crux of the contention of the assessee was that the payments effected to M/s. Amali Builders Private Limited were in the normal course of its activities at market rates and there was no violation as contained in Section 13(1) (c) of the Act.
However, ld. Assessing Officer was not impressed by the above reply. He held as under at para 7 of its order:-
‘’The assessee's reply is considered. The services provided appear to be of very vague nature. The assessee has stated that the payments have been made on a monthly basis after making proper assessment in terms of the area of building constructed or maintained and quantum of man power provided .The details or the man power provided have not been furnished The basis or the working for fixation of services charges have not been provided. The details of repair work carried out by M/s, Amali Builders have not been furnished. The payments made during the year ₹40,78,668/- appear to be in excess of the services rendered. In these circumstances, the payment of Rs. 40,78,668/- made to M/s. Amali Builders Private Limited is considered as violation u/s 13(l)(c) of the IT Act’’. Ld. Assessing Officer took a view that that there was violation as contemplated u/s.13(1) (c) of the Act and denied the exemption claimed by the assessee trust u/s.11 of the Act.
Aggrieved, assessee moved in appeal before ld. Commissioner of 4.
Income Tax (Appeals). Ld. Commissioner of Income Tax (Appeals) noted that there was no excessive payments to M/s. Amali Builders Private Limited. According to him, the payments effected were only about 8% of the total construction cost. What was observed by the ld. Commissioner of Income Tax (Appeals) at paras 4.2 and 4.3 are reproduced hereunder:-
‘’4.2. I have considered the submissions of the representative and carefully considered the points raised by the Assessing Officer. The Assessing Of1icer himself stated in the concluding para of the assessment order that the services provided appeared to be very vague in nature and the payments made during the year at Rs.40,78,668/- appeared to be in excess of services rendered.
Accordingly, the Assessing Officer himself did not record any categorical finding that the payment was In excess of the services rendered. Admittedly, Mls Amali Builders Private Limited is in the business of civil construction from 2005 onwards and they had undertaken construction work for various other persons in the earlier years. Thus it cannot be doubted that Mls Amali Builders Private Limited was created only for the purpose of payment of service charges by the assessee. The Assessing Officer did not record any finding that the company did not render any services at all and according to him the service provided were very vague nature and in any case, he did not deny the fact that the services were rendered. Even if the appellant had entrusted the construction work to a building contractor, the trust has to pay profit which may vary from 8% to 10% and, therefore, the payment of services charges @ 8% on the construction cost of the appellant on month to month basis is reasonable having regard to the prevailing market conditions. In the circumstances, it cannot be said that there was any payment without consideration to the company in which the trustees are having substantial interest. It cannot be held that any part of income or property of the trust was used or applied directly or indirectly for the benefit of the company as the transaction was purely on commercial considerations. When the payment was purely on commercial consideration, the exemption u/s 11 cannot be denied and, therefore, the Assessing Officer was not justified in denying exemption u/s 11 4.3. Without prejudice to the above, even if any income or asset of the trust is used or applied for the benefit of company, only such portion of income can be taxed by denying exemption u/s 11 whereas the Assessing Officer denied exemption in respect of the entire income of the trust which is not correct. I have already given a finding that the service charges paid at RsA0,76,668/- @ 8% of the construction cost of the appellant is reasonable and, therefore, section 13(1) (c) is not applicable in this case and, consequently the Assessing Officer is directed to allow exemption u/s 11 in respect of the entire income’’.
He thus allowed the claim of exemption.
Now before us, ld. Departmental Representative strongly
assailing the order of the ld. Commissioner of Income Tax (Appeals) submitted that the key personnel of M/s. Amali Builders Private
Limited were trustees of the assessee trust. According to him,
Section 13(1) (c) of the Act was attracted since a part of the income of the assessee’s trust was applied in a manner which was directly beneficial to a concern in which the trustees were having substantial interest. Further, according to him, there was a clear finding by the ld. Assessing Officer that services provided by M/s. Amali Builders
Private Limited were of vague nature and assessee could not give the basis how the services charged were calculated. As per the ld.
Departmental Representative these was violation of Section 13 of the Act. According to him, Ld. Commissioner of Income Tax (Appeals) fell in error in holding that there was no such violation. Reliance was placed on the judgment of Hon’ble Kerala High Court in the case of Agappa Child Centre vs. CIT, (1997) 226 ITR 221 and decision of Delhi Bench of this Tribunal in the case of Parivar Sewa Sanstha vs.
Deputy Director of Income Tax, (2005) 1 SOT 71.
Per contra, ld. Authorised Representative strongly supporting the order of the ld. Commissioner of Income Tax (Appeals) submitted that consultancy charges paid was less than 8% of the total cost of construction and thus reasonable. According to her, assessee was saved by clause (c) of Section 13(2) of the Act, since what was paid were only reasonable amounts.
We have considered the rival contentions and perused the orders of the authorities below. Case of the Revenue is that two of the directors of M/s. Amali Builders Private Limited namely Shri. Cletus Babu, Mrs. J.X. Amali were also trustees of the assessee trust and therefore Section 13(1) (c) of the Act was attracted. Ld. Assessing Officer also states that the payments made to M/s. Amali Builders Private Limited were on services which were vague and without properly assessing the basis for working out such service charges.
Section 13(1)(c) of the Act which is apposite here is reproduced hereunder:-
(1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof- (a) .................... (b) .................... (bb) ................. (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof- (i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or 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) : Persons referred to in Subsection (3) of Section 13 are as under:-
(3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely :- (a) the author of the trust or the founder of the institution ; (b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees ; (c) where such author, founder or person is a Hindu undivided family, a member of the family ; (cc) any trustee of the trust or manager (by whatever name called) of the institution ; (d) any relative of any such author, founder, person, member, trustee or manager as aforesaid ; (e) any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest.
Thus for applying Section 13(1) (c) of the Act, it is necessary to establish that the concern to which payments were made by an assessee trust is one where the trustees or manager, or founder or their relatives have substantial interest. Circumstances under which a person can be deemed to have substantial interest is set out in Explanation 3 to Section 13(1) (9) of the Act which is reproduced hereunder:-
‘’Explanation 3.— For the purposes of this section, a person shall be deemed to have a substantial interest in a concern,-
(i) in a case where the concern is a company, if its shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than twenty per cent. of the voting power are, at any time during the previous year, owned beneficially by such person or partly by such person and partly by one or more of the other persons referred to in sub-section (3) ;
(ii) in the case of any other concern, if such person is entitled, or such person and one or more of the other persons referred to in sub-section (3) are entitled in the aggregate, at any time during the previous year, to not less than twenty per cent. of the profits of such concern.
Apart from saying that two of the trustees were also directors of the M/s. Amali Builders Private Limited, ld. Assessing Officer has no where shown as to how the said concern satisfied requirement of Explanation 3 to Section 13(1) (9). Just because two trustees were directors would not mean that they were entitled to 20% of the profit or were having 20% of its voting power.
That apart, argument of the assessee all along was that 8. payments effected to M/s. Amali Builders Private Limited were not excessive or unreasonable. Total construction cost incurred by the assessee was undisputedly �5,50,51,715/- and the payments to M/s.
Amali Builders Private Limited came to �40,78,668/-. Excluding service tax �4,48,668/- the payment for services came to �.36,30,000/-. This was only about 6.6% of the total construction cost. There is nothing on record to show how the Revenue came to a conclusion that such payments were excessive viz-a-viz services rendered by them.
Coming to the judgment of Hon’ble Kerala High Court in 9.
Agappa Child Centre (supra), relied on by the ld. Departmental Representative, facts of that case show that a refrigerator purchased by the assessee trust was kept at the residence of its managing trustee. As against this there is nothing in the case before us to which show that any of the trustees had unduly benefited from the payments made to M/s. Amali Builders Private Limited.
As for the decision of Delhi Bench of the Tribunal in the case 10. of Parivar Sewa Sanstha (supra), there is a clear finding in the said case that an employee of the said society was paid incremental salary, much excessive to the services rendered by her, which was not comparable to salaries of other employees. Facts of the case before us are entirely on different. These cases in our opinion do not further the arguments of the Revenue in any manner. We thus do not find any reason to interfere with the order of the ld. Commissioner of Income Tax (Appeals).
In the result, the appeal of the Revenue stands dismissed.
Order pronounced on Thursday, the 3rd day of May, 2018, at Chennai.