2015 (3) TMI 493 - AT - Income Tax

Eligibility to the benefit of exemption of Sec. 11 & 12 denied - legitimacy of expenditure on advertisement - payment made to M/s. SBC in which the trustees of the assessee society are the partners - whether the assessee trust has violated the condition of Sec. 13(1)(c) r.w.s. 13(2)(c)? - CIT(A) held that the funds of the society are not applied or used or diverted for the benefit of the person referred to section 13(3) in violation of condition laid down u/s 13(1)(c) & 13(2)(c) - Held that - The Ld. AR explained with the chart that as per the card rates of the different newspapers which are placed on record, the assessee is more benefited by giving the work to M/s. SBC. He submits that the entire designing and art work required for the advertisement was compiled and prepared by M/s. SBC and no separate payment is made. The assessee has filed the comparative chart showing the benefit received by the assessee society vis- -vis other client. The assessee has also filed the copies of the Invoices and the Zerox copy of the respective newspapers like Sakal etc. The assessee has also filed the sample bills for the other agencies on which M/s. SBC has not given any discount at all. The assessee has also filed sample bills of M/s. SBC raised on the assessee trust i.e. Bill No. 823 dated 01-09-2007 on which the card rate charges are less than the Newspaper rate as per comparative chart filed by the assessee. The assessee has subsequently demonstrated before us that if the average rate of discount is worked out given to the assessee as compare to card rate which is almost 10%. We also find that M/s. SBC has also done the work for other clients i.e. non-related parties to whom no discount or reduction in the card rates are given. Considering the totality of the evidence before us, we concur with the finding of the Ld. CIT(A) that by giving the advertisement work to M/s. SBC, the assessee trust has not violated the conditions of Sec. 13(1)(c) to deprive to get the benefit of exemption u/s. 11 & 12 of the Act.- Decided against revenue.

Issues Involved:
1. Legitimacy of advertisement expenditure.
2. Alleged violation of Section 13(1)(c) read with Section 13(2)(c) of the Income-tax Act.
3. Applicability of exemption under Sections 11 and 12 of the Income-tax Act.
4. Disallowance under Section 40A(2) of the Income-tax Act.

Detailed Analysis:

1. Legitimacy of Advertisement Expenditure:

The Revenue challenged the expenditure on advertisement claimed by the assessee society, arguing that the funds were diverted to M/s. Sri Balaji Creativities (SBC), a firm where the trustees of the society have substantial interest. The Assessing Officer (AO) noted that the society paid a significant portion of its advertisement expenditure to SBC, which granted only a 2% discount to the society compared to higher discounts given to other clients. The AO concluded that the expenditure was not legitimate and was in excess of what may be reasonably paid for such services.

The CIT(A) and ITAT, however, found that the payments made by the society to SBC were reasonable and commensurate with the services rendered. The CIT(A) noted that SBC provided substantial discounts on card rates and additional services such as conceptualization, copy-writing, and designing without extra charges. The overall discount granted to the society was more than 15% of the card rates, and the expenditure was deemed legitimate for pursuing the objects of the society.

2. Alleged Violation of Section 13(1)(c) read with Section 13(2)(c):

The AO argued that the funds of the society were applied or diverted for the benefit of persons referred to in Section 13(3), violating Section 13(1)(c) and 13(2)(c), thereby denying the exemption under Section 11. The AO highlighted that the trustees had substantial interest in SBC and that the society's payments formed a major part of SBC's turnover.

The CIT(A) and ITAT disagreed, emphasizing that the payments did not exceed the card rates of newspapers and that the overall discount granted was substantial. The CIT(A) also pointed out that different percentages of discounts were granted by SBC to various clients based on demand and supply, and the AO's presumption of uniform discounts was unfounded. The CIT(A) concluded that the funds were not diverted for the benefit of interested persons and that the provisions of Section 13(1)(c) and 13(2)(c) were not violated.

3. Applicability of Exemption under Sections 11 and 12:

The AO denied the exemption under Sections 11 and 12, citing the alleged violation of Section 13(1)(c). The CIT(A) and ITAT, however, directed the AO to grant the benefit of exemption, as the payments made to SBC were found to be reasonable and necessary for achieving the society's objectives. The ITAT upheld the CIT(A)'s findings, confirming that the society was eligible for the exemption under Sections 11 and 12.

4. Disallowance under Section 40A(2):

The AO made disallowances under Section 40A(2), arguing that the payments made to SBC were excessive and unreasonable. The CIT(A) and ITAT found this issue redundant, as the society's assessment was to be completed in compliance with Sections 11 and 12, granting the benefit of exemption. Consequently, the disallowance under Section 40A(2) was dismissed.

Conclusion:

The ITAT upheld the CIT(A)'s orders for both assessment years, confirming that the advertisement expenditure was legitimate, the provisions of Section 13(1)(c) and 13(2)(c) were not violated, and the society was eligible for exemption under Sections 11 and 12. The disallowance under Section 40A(2) was also dismissed. The appeals of the Revenue were dismissed.

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