Charitable purpose: Educational institution: Exemption u/s. 11 r.w.s. 13: A. Ys. 1998-99 to 2002-03: CBSE denied recognition to SSSPL being a corporate entity and insisted for a society structure: Assessee society formed by SSSPL was granted recognition by CBSE: Assessee running educational institution in the set up of SSSPL: Paid rent and royalty to SSSPL: No violation of section 13: Assessee entitled to exemption u/s. 11:

CBSE denied recognition to SSSPL, which established a corporate run school, on the ground that the school was run by a private limited company and insisted that a properly registered society of non-proprietary character was required to be constituted. Thereafter, SSSPL formed the assessee society. It took on lease, premises belonging to SSSPL. It was granted affiliation by the CBSE. It paid rent for the building and playground that belonged to SSSPL and royalty for using its name. The Assessing Officer denied exemption u/s. 11, on the ground that SSSPL was taking out huge receipts of the assessee in the shape of rent and royalty which has the effect of violating section 13(1)(c). The Tribunal upheld the disallowance of the claim for exemption.

On appeal by the assessee, the Andhra Pradesh High Court reversed the decision of the Tribunal and held as under:

“i) If the assessee had taken the infrastructure and the trade name of somebody, other than SSSPL, it could not be disputed that the assessee would incur similar expenditure like the one being paid to SSSPL towards royalty as no reasonable man would transfer user rights of name and other benefits without charging adequate consideration. Merely because such facility was provided by SSSPL and royalty was being paid to it by the assessee in that behalf, the Revenue could not contend that it was impermissible.

ii) Therefore, the Revenue’s contention that this amounted to diversion of funds by the assessee to SSSPL and clause (g) of s/s. (2) of section 13 was attracted was misconceived since the payment of royalty was necessary to secure the use of trade name and infrastructure of SSSPL.

iii) Merely because the assessee was registered by SSSPL to run the school after SSSPL’s application for approval was rejected by the CBSE, it could not be said that the assessee’s payment by way of royalty to SSSPL was prohibited and consequently the assessee shall be deprived of exemption u/s. 11. The assessee was entitled to the benefit of section 11.”