2016 (4) TMI 84 - AT - Income Tax

ITAT rules in favor of assessee, disallows fees, and modifies assessment orders

Sree Educational Society Versus Asst. Commissioner of Income-Tax

Sree Educational Society Versus Asst. Commissioner of Income-Tax - [2016] 49 ITR (Trib) 148 Issues Involved:1. Jurisdiction of the search on the Society.2. Status of the assessment as an Association of Persons (AOP).3. Addition of undisclosed income based on extrapolation of capitation fees.4. Denial of exemption under Section 11 and Section 10(23C).5. Disallowance under Section 40(a)(ia).6. Assessment of total income of the Society.Issue-wise Detailed Analysis:1. Jurisdiction of the Search on the Society:The assessee contended that the search on the Society was without proper jurisdiction and that the Assessing Officer (AO) did not acquire jurisdiction to conduct the assessments, which should be declared a nullity. However, this argument was not upheld as the search was conducted based on credible information regarding unaccounted income and investments.2. Status of the Assessment as an Association of Persons (AOP):The AO assessed the income of the Society in the status of an AOP, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) observed that the Society was involved in activities that were not solely for educational purposes but for profit, thus justifying the assessment as an AOP.3. Addition of Undisclosed Income Based on Extrapolation of Capitation Fees:The AO quantified unaccounted receipts for various years based on seized documents and statements recorded during the search, concluding that the Society was collecting capitation fees over and above the prescribed fees. The CIT(A) upheld the AO's estimation of suppressed income for the years 2004-05 to 2007-08 based on the evidence found for subsequent years, stating that the practice of collecting capitation fees was not an isolated instance.4. Denial of Exemption under Section 11 and Section 10(23C):The AO denied the exemption under Section 11 and Section 10(23C)(vi) on the grounds that the Society was collecting capitation fees and using the funds for personal benefits, thus violating the provisions of Section 13(1)(c). The CIT(A) upheld this denial, emphasizing that the Society's activities were not solely for educational purposes but for profit. However, the ITAT had previously restored the Society's registration under Section 12AA, stating that the excess fees were collected by an individual (Shri K.T. Mahi) without the authority of the Society.5. Disallowance under Section 40(a)(ia):The AO disallowed certain expenditures under Section 40(a)(ia) due to non-payment of TDS on payments towards contracts, rent, and professional charges. The CIT(A) upheld these disallowances. However, the ITAT, following the decision in Mahatma Gandhi Seva Mandir vs. DDIT(E), held that Section 40(a)(ia) is not applicable to charitable trusts where income and expenditure are computed under Section 11.6. Assessment of Total Income of the Society:The AO computed the total income for the assessment years 2004-05 to 2010-11 by adding unaccounted receipts and disallowing certain expenditures. The CIT(A) upheld these computations, but the ITAT held that the additional fees collected should be assessed only in the hands of Shri K.T. Mahi, not the Society, to avoid double taxation.Conclusion:The ITAT concluded that the additional fees collected should be assessed in the hands of Shri K.T. Mahi, not the Society. The disallowances under Section 40(a)(ia) were deleted, and the extrapolation of income for earlier years was not justified without cogent material. The appeals of the assessee were allowed, and the assessment orders were modified accordingly.