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2022 (5) TMI 880 - AT - Income TaxExemption u/s 11 - seeking benefit on the ground of mutuality in case of denial of benefit of section 11 by invoking section 13 - amount paid to HRG was more than the amount paid to unrelated entities - whether the payment made by the assessee to HRG was excessive? - AO observed that HRG falls under the related person category within the meaning of section 13(3) by lifting the corporate veil, considering the fact that the key director (Shri Shekar Swamy) of the assessee company, who held indirect substantial interest in the HRG through TIPL - HELD THAT - As assessee shares the majority of the revenue with the other entity, whether related or unrelated, in that case the assessee has to conduct its affairs without violating any of the restrictions specified in section 13. On careful evaluation, we observe that the section 13 restrictions are very specific that the assessee cannot share the revenue or benefits with any of the persons specified in the section 13(3) directly or indirectly. We observed that Shri Shekar Swamy is the key director who controlled the affairs of the assessee company as well as HRG and also held the controlling capacity in the Board of Governor, in such situation it is no doubt that he played very crucial role in controlling the whole operations. It is fact on record that Shri Shekar has not directly held substantial shares in the HRG but held substantial interest in TIPL. The restrictions specified in the section 13 has to be evaluated holistically, not just based on shareholding. The controlling of the other unit plays important role, the controlling interest concept includes the controlling thru shareholding, it does include the controlling the other institution by indirect influence. In the given case, Shri Shekar controls the whole affairs in the assessee company, HRG and also plays a role in the Board of Governors. This shows that Shri Shekar has a say in the decision making process of all the units under his control or in the control of the family. Shri Shekar controls the assessee company and HRG thru indirect holding of shares in TIPL. Therefore, in our considered view, the assessee has shared the revenue with the related concern, the related concern which is indirectly related by applying the concept of controlling the affairs by exercising the control of management. When it is clear that Shri Shekar has management control, the corporate veil has to be lifted. Therefore, we are in agreement with the tax authorities in applying the provisions of section 13(3) in the present case. AO has established that by removing the corporate veil, one of the director falls within the meaning of section 13(3) and 13(2)(e) of the Act. Whether the revenue sharing with the other concern are within the arm s length is subjective, considering the fact that it is sharing 90% of the revenue and transaction with the unrelated party is not substantial and assignments in both the cases are totally different. Therefore, we reject the submissions of the assessee and grounds raised in this regard before us. Whether the advances given against the pending research assignments, we do not agree with the Assessing Officer that it falls within the meaning of loan given to the related parties. AO has acknowledged that there exists the transaction between the assessee and HRG, the advances given during the year can be considered as the advance paid for the purpose of business. It cannot be considered for the purpose of section 13 in order to deny the benefit u/s 11. We observe that the assessee has dealt with the 140 non-members and receipt of the total subscription from them which equal to 3.60% of gross subscription. We do not agree with the revenue authorities that it falls under significant dealing with the nonmembers. Therefore, whenever a mutual concern deals with the members they have to allow the facilities to non-members also due to various reasons for survival. When compared to their gross revenue, if it is within range, say less than 5% of their operation, still it will be regarded as mutual concern/entity. It is the responsibility of such mutual entity to maintain required books to establish the exclusiveness. We observe that the assessee has clearly gave the details to the Assessing Officer that it has dealt only with the 140 non-members and details of their subscriptions, it shows that the assessee kept the record of dealing with the non-members. Therefore, we are inclined to remit this issue back to the file of Assessing Officer to evaluate the allowability of benefit under mutuality concept to the assessee. It is the duty of the assessing authority to assess the case of the assessee holistically, not restrict themselves to one aspect of assessment merely to complete the assessment, it is their duty to assist the assessee also in their affairs specially when there exist multiple benefits to the assessee. In this case, the assessee specifically placed their alternate plea which was rejected by the Assessing Officer, without properly evaluating the case, merely proceeded to reject the plea on focusing the rejection of benefit under section 11. We direct the Assessing Officer to redo the assessment under mutuality concept de novo.
Issues Involved:
1. Denial of benefit of section 11 by invoking section 13. 2. Whether Hansa Research Group Pvt. Ltd. (HRG) is a person covered under section 13(3)(e) of the Income Tax Act. 3. Whether the advances given to HRG are considered loans under section 13(2)(a). 4. Whether the payments made to HRG are excessive under section 13(2)(c). 5. Applicability of the mutuality principle. 6. Disallowance of provisions for gratuity, leave encashment, and loss on sale of fixed assets. 7. Treatment of Rs. 12 lakh as income chargeable to tax for the assessment year 2008-09. 8. Accumulation under clause (2) of Explanation to section 11(1) for the current year amounting to Rs.25,50,000 as application towards objects of the institution. Detailed Analysis: 1. Denial of Benefit of Section 11 by Invoking Section 13: The assessee, a company registered under section 25 of the Companies Act, 1956, and under section 12A of the Income-tax Act, 1961, claimed benefits under section 11. The Assessing Officer (AO) denied these benefits, invoking section 13, on the grounds that the assessee had made payments to HRG, a company in which a director of the assessee held substantial interest through another company, TIPL. The AO contended that these payments were excessive and violated sections 13(1)(c), 13(2), and 13(3). 2. HRG as a Person Covered Under Section 13(3)(e): The AO argued that HRG was a person covered under section 13(3)(e) because Mr. Shekar Swamy, a director in the assessee company, held substantial interest in HRG through TIPL. The assessee contended that neither Mr. Swamy nor his relatives directly held shares in HRG. The Tribunal noted that Mr. Swamy controlled the operations of both the assessee company and HRG, indirectly through TIPL, and thus, the provisions of section 13(3) were applicable. 3. Advances Given to HRG: The AO treated advances given to HRG for research work as loans under section 13(2)(a). The Tribunal disagreed, noting that these advances were for pending research assignments and should be considered business advances, not loans. 4. Payments Made to HRG: The AO found that the payments made to HRG were excessive compared to payments made to unrelated entities for similar services, thus violating section 13(2)(c). The Tribunal upheld this view, noting that the revenue-sharing agreement with HRG was not at arm's length and favored HRG excessively. 5. Applicability of Mutuality Principle: The assessee argued that it should be considered a mutual concern, as the majority of its revenue came from members. The AO rejected this, citing significant dealings with non-members. The Tribunal remitted this issue back to the AO, directing a reassessment under the mutuality principle, noting that dealings with non-members were minimal. 6. Disallowance of Provisions: The AO disallowed provisions for gratuity, leave encashment, and loss on sale of fixed assets, as the benefit of section 11 was denied. The Tribunal remitted these issues back to the AO for reconsideration in light of the reassessment under the mutuality principle. 7. Treatment of Rs. 12 Lakh: The AO added Rs. 12 lakh to the taxable income for the assessment year 2008-09, representing an option exercised by the assessee in the previous year. The Tribunal found this unjustified, noting that the amount should not be taxed twice. 8. Accumulation Under Clause (2) of Explanation to Section 11(1): The Tribunal noted that the assessee's claim of Rs. 25,50,000 as accumulation under clause (2) of Explanation to section 11(1) was allowable if exemption under section 11 was granted. This issue was remitted back to the AO for reconsideration. Conclusion: The Tribunal upheld the AO's decision to deny the benefit of section 11 by invoking section 13, based on the excessive payments to HRG and the substantial interest held by Mr. Shekar Swamy. However, it remitted the issues of mutuality, disallowances, and specific income treatments back to the AO for reassessment. The appeal by the Revenue was dismissed due to low tax effect.
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