Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2025 Supreme(Online)(ITAT) 13009

INCOME TAX APPELLATE TRIBUNAL (HYDERABAD BENCH)
Vijay Pal Rao, Vice President, Manjunatha G, Accountant Member
DCIT – Appellant
Versus
Sri Chaitanya Educational Committee – Respondent
ITA.No.325/Hyd./2023

Advocates:
For the Appellants/Petitioners: M. Narmada
For the Respondents: AV Raghuram

Disallowance of payments to related parties for services rendered requires the Revenue to establish unreasonableness through objective evidence, such as comparative market data or industry averages. Arbitrary disallowance based purely on estimation, conjecture, or historical base-year comparisons is legally unsustainable under the relevant tax provisions.

Headnote:(A) Income Tax Act, 1961 - Sections 11, 12A, 13(1)(c), 13(2)(c), 13(2)(g), 13(2)(h), 13(3), 40A(2)(a), 164(2) - Charitable trust - Exemption - Forfeiture - Disallowance of expenditure - Assessee entered into service agreements with related parties for management of institutions - Revenue alleged violation of provisions regarding use of trust funds for benefit of interested persons - Held that to invoke provisions regarding disallowance of excessive or unreasonable payments, department must bring on record evidence or comparative cases, or establish industrial average of such activity - Mere suspicion or usage of base figures from preceding years to arrive at arbitrary adjustments is not sufficient to deny exemption - Once it is established that services were rendered and payment is commensurate with such services, add-back on ad-hoc basis is unjustified. (Paras 7, 8, 9, 10, 11)

(B) Appeals - Burden of proof - In proceedings questioning reasonableness of payments made to related parties, burden lies upon Revenue to establish that such payments are excessive and unreasonable by comparing them with similar services provided by third parties in uncontrolled circumstances. (Para 11)

Facts of the case:
An educational entity registered under the relevant tax act entered into service agreements for the management, administration, and operation of its various colleges. The tax authorities observed that these services were sub-contracted to entities controlled by relatives of the founders. The assessing officer disallowed a significant portion of the payments as excessive and unreasonable, invoking sections pertaining to the diversion of funds to interested persons and standard business disallowance provisions. The appellate authority deleted these additions, finding them to be based on estimations rather than concrete comparable data.

Findings of Court:
The court observed that the revenue failed to provide evidence of comparable services or industrial standards to justify the disallowance. The calculations made by the assessing officer were based on a 'jugglery of figures' and failed to account for the actual services rendered and the lack of material change in operational scope between the current and preceding years. Furthermore, consistent treatment of similar payments in subsequent assessment years fortified the case for the assessee.

Issues: The primary issues were whether the payments made to related parties constituted a prohibited use of trust funds under the tax laws and whether the assessing officer was justified in applying an ad-hoc method to determine 'excessive' payments under business expenditure provisions.

Ratio Decidendi: Disallowance for excessive payment to related parties cannot be made on the basis of suspicion or surmises. To prove a violation, the revenue must demonstrate that the payment exceeds what is reasonable by comparing the transaction with similar services rendered by third parties in the relevant industry.

Result: Appeal of the Revenue dismissed.

Table of Content
1. factual assessment of service agreement payments and related party transactions. (Para 24 , 25 , 26)

ORDER

PER MANJUNATHA G. :

This appeal has been filed by the Revenue against the order dated 28.03.2023 of the learned CIT(A)-11, Hyderabad, relating to the assessment year 2012-2013.

The Revenue has raised the following grounds in the instant appeal :

1. “The Ld. CIT(Appeals) erred both in law and on the facts of the case in granting relief to the assessee.

2. In the facts and circumstances of the case, the Ld. CIT(Appeals) erred in holding that there is not violation of the provisions of section 13(1)(c) r.w.s.13(2)(c), 13(2)(g) and 13(2)(h) of the Act by the assessee society.

3. In the facts and circumstances of the case, the Ld. CIT(Appeals) erred in not appreciating that the service agreement entered into between the assessee Society and M/s. Sri Kalyan Chakravorthy Memorial Educational Trust (SKCMET) and the companies M/s. Varsity Education Management Pvt. Ltd. And M/s. Junior Varsity Education Pvt. Ltd. are all sham transactions as M/s. SKCMET is controlled by the same group and that it was clearly a device to benefit the interested persons i.e. the daughters of the members of the assessee society.

4. In the facts and circumstances of the case, the Ld. CIT(Appeals) erred in not appreciating the fact that the loss/profit incurred by a charitable society enjoying the benefit of Sec. 12 has no relevancy to determine whether the income of the society was used for the benefit of the specified persons u/s. 13(3) of the IT Act, in violation of the provisions of Sec. 13(1)(c), 13(2)(c) and 13(2)(g) of the IT Act.

5. In the facts and circumstances of the case, the Ld. CIT(Appeals) erred in concluding that the assessee society has not violated the provisions of Sec. 13(1)(c), 13(2)(c) and 13(2)(g) of the IT Act in current assessment year i.e. AY 2012-13 since the said provisions were not invoked by the AO for AY 2013-14 to 2016-17 ignoring that the assessment proceedings were separate and distinct for each year.

6. The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary.”

Brief facts of the case are that, the assessee society viz., Sri Chaitanya Educational Committee is registered under the Societies Registration Act and registered with Register of Societies, Machilipatnam, Krishna District in the year 1987 with the predominant object of establishing, running, aiding educational institutions and hostel for them. The society is also registered under section 12A of the Income Tax Act, 1961 [in short “the Act”] vide Order of the Commissioner of Income Tax, Visakhapatnam dated 14.08.1992. The appellant-society is operating 186 colleges/ institutions for imparting education at Intermediate level. Out of the 186 colleges, 80 colleges/institutions were established by the appellant-society and the remaining 106 colleges/ institutions were established by various Societies and Trusts, but, these colleges are being run and managed by the appellant-society. During the year under consideration, there was 2,21,891 students studying in all these colleges/institutions. The appellant-society has filed it’s return of income for the assessment year 2012-13 on 03.09.2013 after claiming exemption under section 11 of the Act. The appellant-society has reported gross receipts of Rs.575,27,14,974/- and application of income for it’s objects at Rs. 575,40,66,365/-.

The case of the appellant-society was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that, the appellant-society had entered into a “Service Agreement” with M/s. Sri Kalyana Chakravarti Memorial Educational Trust [in short “M/s. SKCMET”] for operation, management and administration of the colleges/institutions vide agreement dated 31.03.2011. The Assessing Officer further noted that, the said service agreement with above named trust was approved by the Executive Committee vide

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2025 Supreme(Online)(ITAT) 13009

INCOME TAX APPELLATE TRIBUNAL (HYDERABAD BENCH)Vijay Pal Rao, Vice President, Manjunatha G, Accountant MemberDCIT – AppellantVersusSri Chaitanya Educational Committee – RespondentITA.No.325/Hyd./2023

INCOME TAX APPELLATE TRIBUNAL (HYDERABAD BENCH)
Vijay Pal Rao, Vice President, Manjunatha G, Accountant Member
DCIT – Appellant
Versus
Sri Chaitanya Educational Committee – Respondent
ITA.No.325/Hyd./2023