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TaxTMI 
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TaxTMI 
2015 (4) TMI 342
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....clearly prove that it was not doing any charitable activities as per Section 2(15) of the Act? (iii)Whether on the facts and in the circumstances of the case, the Tribunal was right in deleting the addition of capitation fees received from students who were admitted in the management quota? (iv)Whether on the facts and in the circumstances of the case, the Tribunal was right in not following the jurisdictional High Court judgment in the case of P.S.Govindasamy Naidu & Sons v. ACIT, 324 ITR 44? 2.1. The facts in a nutshell are as under: The respondent/ assessee is a trust registered under Section 12AA of the Income Tax Act, 1961 (for brevity, the Act). The trust is running various educational institutions, namely, (i) Bharathiyar College of Engineering Technology, Karaikal; (ii) Mahatma Gandhi Medical College, Pondy; (iii) Indira Gandhi Institute of Dental Science, Pondy; (iv) Kasturba Gandhi Nursing College, Pondy; (v) Sri Venkateswara College of Education, Pondy; (vi) Rajiv Gandhi College of Engineering and Technologies and others, for conducting various professional courses such as Engineering, MBA, Nursing and other Para-Medical courses, etc. 2.2. A search and survey opera....
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....such contributions received are involuntary. Along with the reply, the assessee also enclosed the details sought for by the Assessing Officer. 2.6. Based on these materials, the Assessing Officer came to the conclusion that the educational institutions run by the Trust collected huge amount of capitation fee under the guise of donation while admitting students under the management quota to various professional courses and no receipts were given for the capitation fee collected and it is also not disclosed in the income tax returns for taxation purposes. 2.7. To buttress the above said stand of the department, the statement recorded from the Chairman of the Trust at the time of search is relied upon, more particularly, the reply given to Question No.8. The said statement of the Chairman contains two components one is in relation to the fees charged for the courses and other relates to donation. In the said statement, it is averred that they charge regular fees for government quota students and it is not denied that there were donations taken in respect of NRI quota. It was clarified by stating that they did not get donations from all the students or their relatives. It was a....
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....to the Trust. In reply to question no.5, it was stated by Shri M.K.Rajagopalan that the cash book of the Trust was not maintained on day to day basis and that the aforesaid cash, found at his residence during the search, was not recorded in the books of account. In view of these facts, there is no doubt that the Trust did not fulfill the conditions laid down in Clause (iv) of section 80G(5) of the Act. 2.10. The Assessing Officer, after considering the response of the Chairman of the assessee-trust retracting his earlier statement, rejected the explanation given by assessee stating that retraction is belated; and that the assessee failed to submit the list of students admitted under management quota. It is also observed that the assessee was asked to submit the list of persons making voluntary contributions and this was tallied to verify the assessee's claim that the donations were not related to admissions under management quota. Thereafter, the Assessing Officer held that voluntary contributions were related to admissions of students and rejected the assessee's contention. Thus, the Assessing Officer worked out the income of the trust by multiplying the amount of donati....
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....tified this u/s.10(23C)(vi), there is no applicability of section 11 or 13 in those two years. The income of the trust is exempt u/s.10(23C)(vi) for those two years. Insofar as these two assessment years is concerned, the Commissioner of Income Tax (Appeals) rendered a finding that the Assessing Officer has failed to establish a case of breach of Section 10(23C)(vi) of the Act and, therefore, the respondent/ Trust will be entitled to the benefit of exemption contained therein. 3.3. With regard to the finding of the Assessing Officer that the amount stated in the loose sheets 5 to 22 seized during the search is donation received and returned to the students and this donation is capitation fee which is unaccounted, it is the specific case of the assessee that the amount reflected in the loose sheets is relatable to refund of fees to students who have not joined the institution during the year 2005-2006. The stand of the assessee is that it has returned the fees because of non admission of those students during that year in view of the restraint imposed by the Government of Puducherry to the effect that all the seats of medical college will go to the Government quota and no admissi....
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....order. (emphasis supplied) 3.4. The next issue is relating to seizure of cash of Rs. 44 Lakhs from the residence of the Chairman. It is the specific case of the assessee that the said amount was not recorded in the books of account, but the Chairman had offered this amount as income in his own hands and paid tax thereon. It was pleaded that the said amount is not relatable to the affairs of the trust nor is the amount relatable to receipt for or on behalf of the Trust. The finding of the Commissioner of Income (Appeals), in this regard, is as follows: 2. Cash of Rs. 44 lakhs found and seized at the residence of Sri M.K.Rajagopalan, Managing Trustee of the appellant trust: There is no doubt that the cash of Rs. 44 lakhs was found and seized from the bed room of Sri M.K.Rajagopalan during the search operation of on 13/14.8.07. During the statement on 13.8.07, Sri M.K.R has stated that the cash belongs to the trust. However, subsequently on 31.8.07, statement of M.K.R. was recorded by the ADIT and offered Rs. 2 crores as additional income and has specifically mentioned that this disclosure of unaccounted income is on account of various assets. His statement has been reproduced in ....
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....the form of statement from any one of the donors students or parents or any such person to the effect that donations received by the trust from whatever source was not voluntary and that it will partake the character of capitation fee. The assessee also relied upon a response dated 14.7.2014 received from the Public Information Officer for a query raised under the Right to Information Act, wherein it is stated that There is no any complaint received from any student/parent regarding capitation fee charged by the above institutions so far. 3.6. On the above said issue, the Commissioner of Income Tax (Appeals) observed that there is no investigation done either by the Investigation Wing or the Assessing Officer to prove that donations were not voluntary and they partake the character of capitation fee. He, therefore, held that the presumption drawn by the Assessing Officer that all management quota admissions are subject to capitation fee is based on no material. 3.7. The Commissioner of Income Tax (Appeals) also accepted the plea of the assessee that there was no benefit derived by the trustees or any member of the Trust. The source of income to the charitable institution ....
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.... Officer that capitation fee collected by the trust should be treated as undisclosed is erroneous. 4.4. We shall now consider the issue as to how the Tribunal has considered the facts, as has been addressed by the Original Authority and the Commissioner of Income Tax (Appeals). The Tribunal, as in the case of the Commissioner of Income Tax (Appeals), relied upon the order passed under Section 264 of the Act by the jurisdictional Commissioner for the assessment years 1998-1999 to 2001-2002, to come to the conclusion that the donations received from students or the parents are voluntary in nature. Similar allegations made by the Revenue have been considered and rejected, as admission of students is done as per the procedure prescribed by the Director of Health and Family Welfare Services, Government of Puducherry. For clarity, we set out paragraph (33) of the order passed by the Tribunal: 33.1. The first such conclusion is that there is no basis for the Assessing Officer to allege that the activities carried on by the assessee trust are not genuine. The assessing authority himself has noted down the names of about eight prominent educational institutions carried on by the assessee ....
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.... in the following manner: 33.2. Another allegation made out by the Revenue is that the assessee trust is not maintaining regular books of accounts. This is without any basis. The Commissioner, Pondicherry in his order passed u/s 264 for the assessment years 1998-99 to 2001-02 has examined a similar allegation made out by the Revenue that the assessee was not maintaining proper books of account. After detailed examination of the materials and evidences placed before him, the CIT came to the conclusion that the assessee was maintaining regular books of accounts in its ordinary course of activities. As far as the impugned assessment years are concerned, there again the Assessing Officer has not brought any adverse materials on record to substantiate the allegation that the assessee is not maintaining proper accounts. It is a fact to be borne in mind that the assessee has been claiming exemption of its income from taxation on the ground of educational activities since long in the past. Earlier it was enjoying the said benefit u/s. 10(22) and 10(23C)(vi) and thereafter u/s 11 and 13. The assessee is registered u/s 12AA of the Income Tax Act 1961. The assessee is filing regular returns....
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....her the money has to be kept in a bank or in the safe custody of responsible persons. The Chairman of the assessee trust is a responsible person. The money was found in his custody. Even if that amount belonged to the assessee trust, think for a while, it is not possible to hold that the Chairman has utilized that much amount of money for his personal benefit. Keeping the money belonging to the assessee trust is essentially different from spending the money belonging to the assessee trust. The assessing authority has equated safe keeping of money to spending of the money. 33.4. The basis of allegation of the Assessing Officer regarding accepting capitation fee is that certain entries found in the seized materials relating to the refund of amounts collected from certain students, who were not ultimately admitted in the colleges run by the trust. The assessee has explained that during that particular financial year all the medical seats were taken over by the Govt. of Pondicherry and no seats were available in the hands of the assessee trust for allotment under management quota. It was in that contingency, the amounts collected earlier from the students had to be refunded. These det....
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.... relevance of arguing whether the contributions were voluntary or not? 36. Even if the contributions are treated as not voluntary what could be the legal consequence of that finding? Whether the Revenue will treat such involuntary contributions as capital and give exemption from taxation? No, it will not. The Revenue will still find such involuntary contribution as income liable for taxation. If so, what is the real distinction between voluntary contribution and involuntary contribution as far as the taxation of charities is concerned? In both cases, it will be brought for taxation if the assessee has not utilised the contributions for charitable purposes. 37. The expression "voluntary contributions" is used in the Act instead of "contributions" to highlight the principle of non-compulsion in matters of participating in charitable activities and to underline the gratuitous nature of donations and charitable activities. There is no compulsion in making contributions to charities. If the expression was "contributions" there could be a naunce of compulsion like contribution to provident fund and the like. 38. Therefore, we find that whether it is treated as voluntary or involuntary....
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....ns filed by the assessee-trust become infructuous and, therefore, to be dismissed. 4.11. Aggrieved by the said order, the revenue has filed these appeals. 5. We have heard Mr.T.R.Senthilkumar, learned Standing Counsel for the revenue and Mr.S.Sridhar, learned counsel for the assessee and perused the orders passed by the Tribunal and the authorities below. 6. Before adverting to the merits of the case, it is apposite to refer to Sections 11, 12 and 13 of the Income Tax Act: Section 11. Income from property held for charitable or religious purposes.- (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income-- (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property; (b) income derived from property held under trust in part onl....
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....g before the expiry of the time allowed under sub-section (1) of section 139, for furnishing the return of income, be deemed to be income applied to such purposes, during the previous year, in which the income was derived ; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived. Section 12. Income of trusts or institutions from contributions.- (1)Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of....
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....te ; (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof- (i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3) : Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution : Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or establishe....
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....ts and gains of business, being profits and gains of any previous year relevant to the assessment year commencing on the 1st day of April, 1984, or any subsequent assessment year : Explanation. - Where the trust or institution has any other income in addition to profits and gains of business, the provisions of clause (iii) of this proviso shall not apply unless the trust or institution maintains separate books of account in respect of such business. Explanation. - For the purposes of sub-clause (ii) of clause (c), in determining whether any part of the income or any property of any trust or institution is during the previous year used or applied, directly or indirectly, for the benefit of any person referred to in sub-section (3), in so far as such use or application relates to any period before the 1st day of July, 1972, no regard shall be had to the amendments made to this section by section 7 [other than sub-clause (ii) of clause (a) thereof] of the Finance Act, 1972. ..... (6) Notwithstanding anything contained in sub-section (1) or sub-section (2), but without prejudice to the provisions contained in sub-section (2) of section 12, in the case of a charitable or religious t....
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....c case of the assessee that during a particular financial year all the medical seats were taken over by the Government of Puducherry and no seats were available in the hands of the assessee trust for allotment under management quota and, therefore, the amounts collected earlier from the students had to be refunded. It is also not in dispute that these details have been brought out in the accounts maintained by assessee trust. The department has not controverted this finding of fact. It establishes the assessees case of bona fide refund. Nothing material turns on this fact to hold against the assessee. 7.5. As rightly held by the Tribunal, if the Assessing Officer had any doubt about the receipt of capitation fee or the explanation given, he should have conducted enquiry either with the students or with their parents or with any other person interested in the activities carried on by the assessee trust. But, without doing so, the Assessing Officer estimated the collection of contributions on the basis of the number of seats available under management quota multiplied by the amount of contribution attributable to individual seats. Any determination for purpose of tax cannot be based....
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....that the donations received do not partake the character of capitation fee. There is no element of involuntary nature of donation. A specific finding is given that no investigation has been done to show that any parent or student has complained about the nature of donation. The department has failed to dispel the finding of fact. 7.9. In any event, the learned Standing Counsel for the department pleads that since the assessee had not submitted the list of students, the Assessing Officer had to make an estimate adopting his own methodology. This we cannot accept for the simple reason that the show cause notice proceeds on the basis that the assessee has to submit the list of donors alone. A reply was submitted by the assessee and in paragraph 6(iii), the Assessing Officer states that all the statements tallied. However, the assessing officer comes to a different conclusion that contribution is not voluntary, and it is relatable to admission of students. We find this finding of the Assessing Officer, as has been rightly held by the Commissioner of Income Tax (Appeals) and the Tribunal, is not supported by documents, but on the basis of Assessing Officer's inference. It cannot be....
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.... is not even an iota of material to come to a conclusion to a different conclusion than what has been held by the CIT (Appeals) and the Tribunal. 7.15. We find that the department has not made out a case of collection of capitation fee under the guise of donation and it has not established a case of involuntary nature of donations. Therefore, the questions of law (i) and (ii) are answered against the revenue and in favour of the assessee. Question of Law (iii) 8.1. On the third question of law, Mr.T.R.Senthilkumar, learned Standing Counsel relied upon the letter dated 9.12.2009, which is the reply filed by the assessee, in which it is stated that the details will be provided later. We find that query in Question No.(x) is not in relation to admission of students or capitation fee. In any event, we find from the assessment order itself that records were tallied and verified. Therefore, whatever income was offered by the assessee as contributions will be entitled to exemption under Section 11 of the Act. 8.2. The true intent of Sections 11, 12 and 13 of the Act is utilization of funds for charitable purpose and the same has been highlighted by the Supreme Court in a recent decisi....
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....nder Section 11(1). In addition, under Section 11(1)(a), the assessee can accumulate 25% of its total income pertaining to the relevant assessment year and claim exemption in respect thereof. Section 11(1)(a) does not require investment of this limited accumulation in government securities. The balance income of Rs. 1,64,210.03 constitutes less than 25% of the income for Assessment Year 1970-71. Therefore, the assessee is entitled to accumulate this income and claim exemption from income tax under Section 11(1)(a).' We set aside the judgment of the Uttarakhand High Court dated 24th September, 2007. The reasoning of the ITAT (set aside by the High Court) is more in consonance with the law laid down by this Court, and we approve its decision. 24. The view of the Punjab and Haryana High Court has been followed by the Delhi High Court in St. Lawrence Educational Society (Regd.) v. Commissioner of Income Tax, (2011) 53 DTR (Del) 130. Also inTolani Education Society v. Deputy Director of Income Tax (Exemption), (2013) 351 ITR 184, the Bombay High Court has expressed a view in line with the Punjab and Haryana High Court view, following the judgments of this Court in the Surat Art S....
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....r that these orders cannot stand. Consequently, Revenue's appeals from the Punjab and Haryana High Court's judgment dated 29.1.2010 and the judgments following it are dismissed. We reiterate that the correct tests which have been culled out in the three Supreme Court judgments stated above, namely, Surat Art Silk Cloth, Aditanar, and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profit. In addition, we hasten to add that the 13th proviso to Section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institutions be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that revenue is at libert....