2024 (5) TMI 1018 - AT - Income Tax

Assessment of trust - Genuineness of payment as commission to consultants and counsellors - disallowance of expenses on computers to students - Assessee trust diverted its income during the year in favour of sister entity - HELD THAT - Appellant / assessee is a charitable trust registered u/s 12A. Appellant assessee is engaged in field of education and running the Fostima Business School . Appellant/assessee has entered into memorandum of understanding dated 11.7.2011 with M/s. Fostima Integrated Learning Resources Private Limited (FILR). Appellant trust availed exemption of its income u/s 11 by complying with stipulated conditions u/s 12AA r.w.s. 11 and 13 of Income Tax Act 1961. AO disallowed sum under head of Business Support Services paid to FILR being violative of section 13(3) of Income Tax Act 1961. AO nowhere demonstrated as to how the business support expenses incurred by appellant trust was not commensurate with the market value of the services availed from FILR an entity covered u/s 13(3) and thus the appellant trust by filing services violated the conditions under section 13(2)(g) of the Income Tax Act 1961 and diverted its income. The statement of assessable income balance sheet and statement of profit and loss accounts of FILR shows income. How the business support expenses were not commensurate was not sustainable. Salary expenditure of Rs. 36, 60, 000/- to faculty members was disallowed due to non filing of qualifications and experience and elaborate the services rendered by persons. In fact appellant assessee trust had engaged in highly technical qualified persons in whole time management activities of trust as well as regular time teachers in business school. The details of educational qualification and experience in absence of any other evidence to the contrary cannot be said to be not just fair and reasonable. As per note payment of Rs. 15, 05, 000/- as commission to consultants and counsellors was justified. Keeping in view invoice quotations and student wise list the disallowance of expenses of Rs. 20, 50, 000/- on computers to students is not just fair and reasonable. In view of above material facts the impugned orders are not legal and sustainable.

Summary

Issues:
1. Disallowance of expenses under section 13(2)(g) and section 13(1)(c) of the Income Tax Act, 1961.
2. Disallowance of salary paid to faculty members under section 13(2)(c).
3. Disallowance of commission paid to various entities.
4. Disallowance of expenses on purchase of computers for free distribution to students.
5. Claim of depreciation against income.

Analysis:
1. The appeal challenged the order confirming the assessment of the assessee's income and the taxation of a specific amount at the maximum marginal rate. The appellant, a trust engaged in education, contested the disallowance of expenses under section 13(2)(g) and section 13(1)(c) of the Income Tax Act. The appellant argued that the payments made to a related entity were justified and not excessive, as the entity had incurred business losses. The Assessing Officer failed to demonstrate the lack of commensurateness in the expenses incurred, leading to a violation of section 13(2)(g) by the appellant.

2. The appellant also disputed the disallowance of salary paid to faculty members under section 13(2)(c). The appellant provided detailed profiles of the faculty members, highlighting their qualifications and roles within the educational institution. The appellant contended that the salaries were justified considering the qualifications and responsibilities of the faculty members, who were engaged in full-time management and teaching activities.

3. The appeal further contested the disallowance of commission paid to various entities. The appellant justified the commission payments as necessary to attract students to the educational institution, citing industry practices of negotiated amounts based on referrals and success rates. The appellant argued that the commissions were essential to meet fixed expenses and mitigate the decrease in student admissions.

4. Another point of contention was the disallowance of expenses on the purchase of computers for free distribution to students. The appellant provided supporting documents such as invoices, quotations, and a student-wise list to justify the expenses. The appellant argued that the disallowance was unjustified despite the filing of relevant documentation.

5. Lastly, the appellant raised the issue of depreciation claim against income, citing a Supreme Court ruling that charitable institutions registered under section 12A of the Income Tax Act are entitled to depreciation on the cost of assets. The appellant sought acceptance of the claim for depreciation, emphasizing the charitable nature of the trust and its compliance with relevant tax provisions.

In conclusion, the Tribunal allowed the appeal, setting aside the orders of the Assessing Officer and the Commissioner of Income Tax (Appeals) based on the arguments presented by the appellant and the lack of sustainable reasoning in the disallowances made. The judgment emphasized the justifiability of expenses, the qualifications of faculty members, the necessity of commission payments, and the entitlement to depreciation for charitable institutions.