2013 (7) TMI 574 - HC - Income Tax

Exemption u/s 11 - whether the assessee is entitled to the exemption under section 11 of the Act - assessee sought exemption u/s 11- the AO denied it on the ground that the pre-condition for an educational institution is to impart education on non-profit motive - the profit arising from its activity is not to be distributed among the members and should be utilized for building up the infrastructure to impart education with non-profit motive Held that - Section 13 is an adjunct to section 11 and exemption of income from property held for charitable purposes under section 11 cannot be granted where the activity of a charitable institution comes within the purview of section 13 - It is a settled principle of interpretation of statutes that the court should avoid a construction which would render a part of the statute devoid of any meaning or application - it is not possible to ignore the provisions of sub-section (2) of section 13 while deciding the issue - It is true that the words Without prejudice to the generality of the provisions of clause (c) and clause (d) of sub-section (1) occurring in sub-section (2) of section 13 suggest that the provisions of sub-section (2) should not be understood as cutting down the provisions of clause (c) and clause (d) of sub-section (1) of section 13 but this does not mean that in a situation like the present where sub-section (2) can apply, it should be ignored. Royalty u/s 13(2) - whether the act of the assessee in paying royalty amounts to diversion of the funds of the assessee attracting section 13(2) (g) - Held that - merely because such facility was provided by SSSPL and royalty was being paid to it by the assessee in that behalf, the Revenue cannot contend that it is impermissible Held that -The observations of the Tribunal that income of the assessee is given to SSSPL, a company whose activity is commercial and not charitable - that payment of royalty by the assessee is not incurred for purpose of the assessee s business - that the students or staff of SSSPL were not bound to join the assessee once it was formed by SSSPL - and the payment was intended to benefit the members of assessee society - that it is a collusive transaction to transfer the profit of the assessee society to interested persons are wholly irrelevant and perverse- The Tribunal appears to have misdirected itself and considered totally irrelevant issues - In Polisetty Somasundaram Charities (1986 (11) TMI 4 - ANDHRA PRADESH High Court) - the court held that the income of a trust held wholly for charitable or religious purposes is exempt from tax subject to the conditions regarding application of income in section 13 - any other interpretation would set at naught the proviso and would defeat the very purpose for which the proviso was added in section 13 - merely because the assessee was registered by SSSPL to run the school after SSSPL s application for approval was rejected by the CBSE, it cannot be said that the assessee s payment by way of royalty to SSSPL is prohibited and consequently the assessee deprived of exemption under section 11 appeal decided in the favour of assesse.

Issues Involved:
1. Denial of exemption under section 11 of the Income-tax Act, 1961.
2. Reasonableness of royalty payments to SSSPL.
3. Application of section 13(1)(c) and section 13(2) of the Income-tax Act, 1961.
4. Alleged diversion of funds to SSSPL.
5. Interpretation of relevant case laws and statutory provisions.

Detailed Analysis:

1. Denial of Exemption Under Section 11:
The assessee, a society formed by directors of SSSPL, sought exemption under section 11 for the assessment years 1998-99 to 2002-03. The Assessing Officer denied the exemption, citing that the assessee was not operating on a non-profit basis, with profits being diverted to SSSPL through rent and royalty payments. The Commissioner of Income-tax (Appeals) reversed this decision, stating that the royalty payments were reasonable and linked to the use of the "Chirec" brand and infrastructure. The Tribunal partially allowed the Revenue's appeal, maintaining the denial of exemption under section 11, asserting that the payments to SSSPL constituted a diversion of funds for the benefit of members of the assessee society.

2. Reasonableness of Royalty Payments to SSSPL:
The Commissioner of Income-tax (Appeals) found that the royalty payments were reasonable, noting that the Assessing Officer failed to establish what would be a reasonable amount. The Tribunal, however, disagreed, suggesting that the payments were not for the business purpose of the assessee and were intended to benefit SSSPL. The High Court emphasized that the reasonableness of the payments should be considered under section 13(2) and not dismissed outright. The court noted that the payments were for the use of the "Chirec" brand and infrastructure, which were necessary for the assessee's operations.

3. Application of Section 13(1)(c) and Section 13(2):
Section 13(1)(c) disallows exemption if any part of the income is used for the benefit of specified persons. Section 13(2) provides specific instances where income is deemed to be used for the benefit of such persons, including payments that are excessive or unreasonable. The High Court held that these provisions must be read harmoniously. The court found that the royalty payments were not excessive or unreasonable and were necessary for the assessee's operations, thus not attracting the provisions of section 13(1)(c).

4. Alleged Diversion of Funds to SSSPL:
The Tribunal concluded that the payments to SSSPL represented a diversion of funds for the benefit of members of the assessee society. The High Court disagreed, stating that the payments were for legitimate business purposes, including the use of the "Chirec" brand and infrastructure. The court emphasized that the Revenue failed to prove that the payments were unreasonable, and therefore, the payments did not constitute a diversion of funds.

5. Interpretation of Relevant Case Laws and Statutory Provisions:
The High Court referenced several cases, including New Noble Educational Society, Polisetty Somasundaram Charities, and Span Foundation, to support its interpretation that the reasonableness of payments must be considered under section 13(2). The court distinguished the present case from others cited by the Revenue, such as Rattan Trust and Muthoottu Charitable Trust, noting that those cases involved clear violations of section 13. The court concluded that the Tribunal misdirected itself by focusing on irrelevant issues and failing to consider the provisions of section 13(2).

Conclusion:
The High Court allowed the appeals, set aside the Tribunal's order, and restored the Commissioner of Income-tax (Appeals)'s decision, granting the assessee exemption under section 11 for the relevant assessment years. The court emphasized the need to consider the reasonableness of payments under section 13(2) and found that the payments to SSSPL were legitimate and necessary for the assessee's operations.

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