2018 (4) TMI 2007 - AT - Income Tax

Educational institution exemption denied due to insufficient evidence of sole educational purpose operation

Vidyodaya Educational Society Versus DCIT, Circle-4 (1), Visakhapatnam.

The ITAT Visakhapatnam dismissed the assessee's claim for exemption under section 10(23C) as an educational institution, finding insufficient evidence ... Exemption u/s 10(23C) - assessee claimed that it is an educational institution and the gross receipts are less than Rs. 1 crore, hence, the assessee is entitled for exemption - AO held that the assessee is not entitled for exemption u/s 11 and for the assessee’s failure to produce books of accounts and the relevant vouchers, the A.O. disbelieved the claim of the assessee that it is existing solely for educational purpose - HELD THAT:- In the instant case, though the assessee is claimed to have running educational institution solely for educational purpose, the assessee has not established with relevant evidences, books of accounts and the documents that the assessee is solely engaged for the education. Therefore, we do not find any infirmity in the order of the lower authorities, hence, the assessee’s ground for treating the institution as educational institution existing solely for the purpose of education is dismissed. Accordingly, the assessee is not entitled for exemption u/s 10(23C) of the Act. Submission of the assessee is that the entire gross receipts should not be treated as income and only the profit element required to be assessed to tax - Once it is believed that the assessee is carrying on business activity, the expenditure relatable to earning income required to be allowed as deduction. In the instant case, as per the books of accounts and the profit & loss account, the gross receipts of the assessee were Rs. 19,65,000/- and the expenditure was Rs. 19,64,330/- resulting in profit of Rs. 18,670/-. As per the assessment order, the assessee has claimed the expenditure such as salaries, vehicle maintenance, office expenses, insurance, depreciation, interest on loans and telephone charges, etc., but there was no proper evidence. During the appeal hearing, for a query from the bench, the Ld. A.R. expressed no objection for estimation of income @ 20% of the gross receipts. Thus direct the A.O. to estimate the income @ 20% on gross receipts and assesses the same as income. The assessee’s appeal on this ground is partly allowed. Taxing the income at maximum marginal rate - As per section 167B of the Act, in case of an assessee registered under Societies Act, the same is excluded for taxing the income at for maximum marginal rate. The assessee is a society registered under Societies Act, 1860 as evidenced from the registration certificate. The facts are similar in this case, therefore, following the decision of coordinate bench and section 167B we hold that the income of the assessee is to be taxed at normal rates but not at maximum marginal rate, accordingly, we set aside the order of the CIT(A) and allow the appeal of the assessee on this ground. Appeal of the assessee is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an institution claiming exemption under section 10(23C) can be denied that exemption where it fails to produce books of account, vouchers and registration under section 12A, and the Assessing Officer disbelieves that it exists solely for educational purposes. 2. Whether, if an institution is held not to be existing solely for educational purposes and is treated as carrying on business/profit activity, the entire gross receipts can be assessed as income or only the profit element (i.e., receipts less allowable expenditure) should be taxed. 3. Whether income of an entity registered under the Societies Registration Act, 1860 is liable to tax at the maximum marginal rate under section 167B(1), or instead chargeable at normal rates. ISSUE-WISE DETAILED ANALYSIS Issue 1: Denial of exemption under section 10(23C) for failure to prove existence solely for educational purposes Legal framework: Exemption under section 10(23C) applies to institutions existing solely for educational purposes, subject to statutory conditions and evidence; compliance with record-keeping and supporting documentation is material to establish that status. Registration under section 12A (relevant for section 11/12) is distinct but the existence and genuineness of activities are determinative for tax-exempt status. Precedent treatment: The authorities below disbelieved the assessee's claim due to absence or late production of books, reliance on self-made vouchers and lack of corroborative documents; the Tribunal accepted the factual finding that evidence was inadequate. No precedent was overruled or distinguished in the instant reasoning. Interpretation and reasoning: The Tribunal examined the materials produced before the Assessing Officer and on remand (cash book, ledger, vouchers) and observed that expenditures were in cash and supported by self-made vouchers, with absence of bank statements and proper bills for routine payments. Given the evidentiary deficiency, the Tribunal found it was reasonable for the AO and CIT(A) to disbelieve that the institution existed solely for educational purposes. The Tribunal emphasised that documentary proof is essential to establish entitlement to exemption and that pro forma or self-made vouchers do not suffice to discharge evidentiary burden. Ratio vs. Obiter: Ratio - Where a claimant for section 10(23C) exemption fails to establish by credible documentary evidence that it exists solely for educational purposes, exemption can be legitimately denied. Obiter - Observations on the absence of section 12A registration being immaterial to section 10(23C) entitlement (not extensively elaborated) are ancillary. Conclusions: The Tribunal affirmed the denial of exemption under section 10(23C) on facts, holding that the assessee did not prove it was solely engaged in education. The ground claiming entitlement to section 10(23C) was dismissed. Issue 2: Taxation of receipts where institution is held to be-profit oriented - gross receipts vs. profit element Legal framework: If an entity is treated as carrying on business or activity for profit, taxation should generally be on the net income (profit), i.e., receipts less allowable expenditure, subject to exclusions and disallowances under the Act. Assessment of entire gross receipts as income is permissible only where receipts represent income without deductible outgoings or where deductions are not provable. Precedent treatment: The Assessing Officer had taxed the entire gross receipts at maximum marginal rate; the Tribunal rejected taxing the entire receipts as income where expenditures-though poorly evidenced-are shown in books and profit & loss account. No prior case law was specifically cited to alter this legal approach. Interpretation and reasoning: The Tribunal acknowledged that the assessee produced books of account and a profit & loss account showing receipts of Rs. 19,65,000 and expenditure of Rs. 19,64,330 resulting in a small profit. Although many vouchers were self-made and evidentiary support weak, the Tribunal found it unreasonable to treat the whole receipt as income. Considering practicalities and submissions, and the assessee's counsel offering no objection to an estimated income, the Tribunal deemed an estimation of taxable income at 20% of gross receipts reasonable. The Tribunal directed the AO to assess income by estimating 20% of gross receipts as taxable income. Ratio vs. Obiter: Ratio - Even where genuineness of expenditure is questionable, the entire gross receipt should not be automatically taxed as income; taxable income can be estimated on a reasonable percentage of gross receipts where evidence is weak. Obiter - The specific selection of 20% as reasonable stems from factual agreement in this case rather than a universal standard. Conclusions: The Tribunal held that the whole receipts could not be taxed as income; it remitted or directed assessment with income estimated at 20% of gross receipts, thereby partly allowing the appeal on this ground. Issue 3: Applicability of maximum marginal rate under section 167B(1) to a society registered under the Societies Registration Act Legal framework: Section 167B(1) provides that where individual shares of members in the income of an association or body are indeterminate or unknown, tax shall be charged on total income at the maximum marginal rate, but expressly excludes certain entities including societies registered under the Societies Registration Act, 1860. Precedent treatment: The Tribunal relied on a coordinate bench decision holding that once a society is registered under the Societies Registration Act and distribution of surplus is prohibited, applicability of the maximum marginal rate does not arise. That coordinate bench conclusion was followed. Interpretation and reasoning: The Tribunal read section 167B(1) as excluding societies registered under the Societies Registration Act from the MMR provision because such societies are prohibited from distributing surplus to members; hence the premise for invoking MMR (indeterminate member shares) is inapplicable. The Tribunal found the assessee's registration certificate established it as a registered society and thus ineligible for taxation at the maximum marginal rate. The Tribunal treated the coordinate bench's reasoning as directly applicable and controlling on the facts. Ratio vs. Obiter: Ratio - Income of a society registered under the Societies Registration Act is not chargeable at the maximum marginal rate under section 167B(1) and should be taxed at normal rates. Obiter - Extended policy commentary about prohibition of surplus distribution supporting the exclusion is ancillary. Conclusions: The Tribunal set aside the assessment insofar as tax at maximum marginal rate was applied, held that the assessee (a registered society) must be taxed at normal rates, and allowed the appeal on this point. Cross-references and Outcome The Tribunal (a) upheld denial of section 10(23C) exemption due to insufficient documentary evidence of sole educational purpose (Issue 1), (b) directed assessment on a reasonable estimate of taxable income at 20% of gross receipts rather than taxing entire receipts (Issue 2), and (c) held that, being a society registered under the Societies Registration Act, the assessee's income is not taxable at the maximum marginal rate under section 167B(1) but at normal rates (Issue 3). The appeal was accordingly partly allowed.