TaxTMI 
TaxTMI 
2018 (6) TMI 1571
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....A search & seizure action was carried out at the premises of the trust on 2.7.2010, during which certain incriminating documents such as registers, note books etc. were found and seized. They revealed that the trust is run for the purposes of profit and not solely for educational purposes. Subsequently, the A O issued notices for ays 2010-11 & 2011-12, respectively. The assessee failed to ; furnish books of account, explanation with regard to entries appearing in the seized books in spite of numerous opportunities afforded and failed to give any explanation with regard to the entries in the seized notebook/material towards the huge amounts collected from students viz., Rs. 8,05,000/- for a y 2010-11, Rs. 1,49,37,200/- for ay 2011-12, totalling to Rs. 1,57,42,700/- etc before the AO. After considering the seized materials, the sworn statements recorded from Shri P. Raja Rao, Chairman and Trustee and Shri Ramayya Vutukuri, DGM (Finance) and other materials etc , the A O held, inter alia, that from the facts gathered during the course of search and confronted to the Managing Trustee and the Officer-In-Charge of Accounts and as deposed by them, the assessee has violated the beneficial ....
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....thyusha , daughter of the managing trustee, for which there was no justification with reference to her qualifications and the services rendered and hence the impugned payment is not in accordance with the objects of the trust. 5. On the appeals filed before the Ld. CIT(A) against the assessment orders, he held, inter alia, that the exemption originally granted to the assessee has been cancelled by the DGIT (Inv.), Tamil Nadu and Pondicherry and the Pr. CIT Central-2, Chennai, vide orders dated 18-11-2014 and 07.12.2016, respectively, after giving due opportunity to the assessee. As on date, those orders cancelling the exemption, hold good and have not been set aside or reversed. Therefore, the Ld. CIT(A) cannot shut his eyes to the said factum of cancellation. Further, after considering the assessee's submissions, material etc., the Ld. CIT (A) dismissed both the appeals. Against all these 3 orders, the assessee filed these appeals. 6. At the time of hearing, the AR submitted that the decision to be made on the order of the Ld. PCIT, Central-2, Chennai, would decide the matters in all these appeals. The A R submitted that the assessee is a Public Charitable Trust having the m....
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.... them on competitive bidding, for construction of hostel for the students. As regards the payment of Rs. 4.92 lakhs to Ms Prathyusha , it was submitted that she is a MBA graduate and full time CEO of the educational institution run by the trust and the payment is therefore justified. The Ld. PCIT erred in holding that the judicial decisions relied upon by the appellant are not applicable to the facts of the case of the appellant and are distinguishable. 6.1 Per contra, the Ld. DR invited our attention to the relevant portions of the orders of the Ld. PCIT and submitted that Ld. PCIT on due consideration of the seized material , sworn statements recorded at the time of search, other material and applying the appropriate ratios, have arrived a clear finding on the impugned transactions and concluded that the assessee's activities are not in accordance with law and it is not carrying its activities in accordance with the objects of the trust and hence, cancelled the registration granted to the assessee. The Ld. DR submitted after this order was passed by the Ld. PCIT, the assessee pursued its appeals before the Ld CIT(A). Inviting our attention to the relevant portions of the order....
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....ion process for students to different Engineering colleges commences. Only upon selection of a student for admission to a particular engineering course in a particular Engineering college through the process of counseling, any amount received from that student by the concerned college authority can be considered for adjustment or treated as received towards advance fees from him. Prior to selection of a student for admission through counseling to an Engineering college, if any amount is or has been collected by that college Authority from that student, then the same should not be and also cannot be considered as towards advance fees received from such student. Therefore, when admittedly, such receipts total amounting to Rs~ 1,57,42,700/-, have been collected by the assessee trust from those students during the said financial years, prior to start of counseling, during such period, the same cannot be considered as towards advance fees. Rather, the same are in the nature of advance capitation fee collected by the assessee trust from such students for the purpose of giving admission in the engineering college run by it. 7.3 Further, in the submissions filed vide letter dated ....
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.... assessee trust, it clearly shows that the assessee trust has not carried out its activity as a charitable institution. Further such activity on the part of the assessee trust by collecting various amounts from the students, prior to admission to the Engineering college run by it, which are fully in the nature of capitation fee/donation collected by the assessee trust, is against the principles of law, as per the decision of Hon'ble Supreme Court in T.M.A Pai Foundation & Others vs State of Karnataka and Others (2002) 8SCC 481. By indulging such activity of collecting capitation fees from students for the purpose of getting admission to the engineering college run by the assessee trust, which is not permissible under law, keeping in view the said decision of Hon'ble Apex court, in my considered view, under such circumstances, it warrants cancellation of registration granted to the trust u/s 12AA treating as a Charitable institution. 7.4 Collection of Capitation fee from students, over and above the prescribed fee for admission, for getting admission into the Engineering college run by the assessee trust, is not permissible under Law. In T. M.A Pai Foundation & Othe....
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....l not be entitled for exemption u/s 11 of the Act. 7.6 Further, the Hon'ble ITAT, Hyderabad, in their decision in ITA No.585/Hyd/2012 & ITA No.586/Hyd/2012, dated 31.8.2012, in the case of M/s Joginpally BR Educational Society and M/s JB Educational Society, upheld the orders dated 29.3.2012 passed u/s 12AA(3) by the CIT(Central) Hyderabad, cancelling registration u/s 12AA in the case of the said two Societies on ground of collection of capitation fees by the said two societies, which were not recorded in the regular books of accounts. Following search & seizure operation conducted in the case of the said society, from the seized documents, it was found that the assessee has collected capitation fees from the students, over and above the prescribed fee, for the purpose of admission, which were not recorded in the regular books of accounts of the society. Under these circumstances, and since the activity carried on by the said society were found to be not of charitable nature, the registration granted u/s 12AA of the Act, was cancelled by the CIT(Central), Hyderabad, and the said orders of the CIT (Central), Hyderabad, was upheld by the Hon'ble ITAT, Hyderabad, vide....
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....submission and from the material gathered during the search, it stands proved that such amounts collected by the assessee trust from the students, prior to their admission, have not been entered/recorded in the books of accounts maintained by the assessee. This fact was noticed at the time of search conducted on 2.7.2010. In this context, it is necessary and also it is pertinent to refer to the reply given by Shri Ramaya Vutukuri, DGM-Finance of the assessee trust, to Query NosA to 8 of his sworn statement recorded during the course of search proceedings on 3.8.2010, which are reproduced as under :- "4. I am showing you ANN/JXP/REG/S-l seized from the college on 2/07/2010. Please explain the contents of the same. Ans : These are the receipts from the students. 5. Whether these receipts are entered in the software maintained in the college or the books of account maintained at M/s Prathyusha Educational Trust office. Ans : So far it has not been entered in any books of accounts. 6. Had any receipts has been issued for the amounts mentioned in the register ANN/JXP/REG/S-1. Ans: No. 7. Whether the transactions entered in the regist....
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....s such huge amounts collected in cash without giving any receipts have been diverted outside the trust's regular books of accounts and control. Thus, in the case of the assessee trust, the funds collected cannot be said to have been utilised solely for the purposes of running the educational institution ...... ....... In any case, the audit report of the trust did not incorporate such receipts. When those receipts are not recorded anywhere, the purpose of application of those receipts can only be for anything other than the objects of the trust, as such receipts were admittedly kept outside the regular books of accounts maintained by the trust". 8.3 However, to such issues raised vide that para 15 of the said show cause notice u/s. 12AA(3), the assessee trust has not given any reply in its written submissions filed on 08.08.2013. Further, even though reference was made to the said show cause notice issued dated 18.7.2013, in the second notice dated 26.9.2016 u/s 12AA(3) issued by me, no reply has been furnished with reference to such issue pointed out to the assessee, 'that the purpose of application of those receipts can only be for anything other than th....
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....assessee trust has carried out activity, which are not in accordance with the object clauses i.e (q) & (v). Under these circumstances, that is when the assessee trust in this case, has not carried out activity in accordance with such two objects, as per clauses (q) & (v), explained above, the case is thus covered under the second limb of the conditions stipulated as per the provisions contained in section 12AA(3) of the Act, thereby warranting cancellation of registration granted u/s. 12AA, in the case of the assessee trust. " 7.1 The assessee filed appeals against the assessment orders before the Ld. CIT(A) and the Ld. CIT(A) disposed the appeals after considering the order of the Ld. PCIT and other material. In order to appreciate the entire facts and circumstances of this issue, the relevant portion of the order of the Ld. CIT(A) is extracted as under : "That apart, the document viz ., long size note book bearing ANN/JXP/REG/S at Sl. No. 1, which was seized during the course of search clearly defy the stand of the appellant. It is not open to the appellant to contend that the said seized document Is not an account book maintained in the regular course of business. Th....
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.... The appellant claims that - "these amount represents advance fees received from students which on confirmation of admission, have been adjusted against the fees' receivable and the balance has been returned to the student where the admission is not granted .... the students who approach the colleges enquiring about admission generally either makes a token payment towards reserving the admission or make substantial advance payments of fees to block a seat and ensure an admission which In the education industry called as admission shopping. Thereafter these students would be waiting for their counselling to get completed to get admission under the Government quota and it is only after knowing the outcome under the Govt quota counselling process these students will start shopping around for finalizing the admission and at this juncture eventually the advance received from students might result in admission or will result in refund. The uncertainty over the eventual admission process In relation to the student taking up the admission is considerably high and In order to mitigate the risk it has been the consistent practice that only upon confirmation of admission....
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.... advances have been entered was gone through. As a result the following glaring instances were found. Sl.No Student Name Advance paid Date Remark 1 3 S. Dinesh Kumar 50,000 1,00,000 23.11.09 16.12.09 Totally he has paid Rs. 1,50,000/- 2 4 P.S.S.D. Murthy 50,000 1,50,000 30.11.09 18.12.09 Totally he has paid Rs. 2,00,000/- 5 7 V. Srinath 20,000 1,05,000 12.01.10 13.02.10 Totally he has paid Rs. 1,25,000/- 6 9 K.M. Kumar 50,000 1,50,000 06.02.10 03.03.10 Totally he has paid Rs. 1,50,000/- 8 29 D. Lokesh 50,000 50,000 18.02.10 29.04.10 Totally he has paid Rs. 1,00,000/- 14 72 S. Nandini 5,000 1,00,000 06.04.10 29.05.10 Totally she has paid Rs. 1,05,000/- 15 20 V. Monisha 5,000 45,000 06.04.10 09.04.10 Totally she has paid Rs. 50,000/- 21 88 D. Vaishali 50,000 1,00,000 09.04.10 02.06.10 Totally she has paid Rs. 1,50,000/- 22 30 A Vinod 15,000 35,000 No date 29.04.10 Totally he has paid Rs. 50,000/- 25 31 N. Surendranath 50,000 75,000 No date 01.05.10 Totally he has paid Rs. 1,25,000/- 27 32 N.V.S.L. Keerthana 5,000....
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.... from the respective applicants subject to the finalization of admission process, nothing prevents the assessee from bringing those amounts in its regular books of account. Keeping such a huge amount of Rs. 18 lakhs outside the books of account cannot be justified at all. The assessee could have accounted the receipts as and when received under a particular provisional head. When the admission process is over, the provisional head could be closed by transferring the amounts to fees and dues account in the case of applicants admitted for the nursing course and by returning the amounts in respect of the applicants not selected for the course. Therefore the explanation of the assessee that the amounts were not recorded In the books of account for the reason that the admission process was not complete at the time of search is not acceptable In law. The details must be properly recorded at least in a rough book. It is a clear case that the entire amount of Rs. 18 lakhs was blacked out of the records of the assessee. In addition to this, the assessee has never explained how finally, this amount was adjusted or accounted in the books of account. The assessee has not furnished the....
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....st has not kept clear and accurate accounts of the trust-property and failed to furnish with full and accurate information as to the impugned amount and state of the trust property. But for the search and seizure action, all the above facts would not have surfaced at all. In view of the above facts and circumstances and since the assesse has not laid any material to prove that the impugned sum was accounted for by the trust , used for the purposes of the trust etc, therefore, the decisions arrived by the Lower authority (ies) is/ are upheld and the corresponding grounds of the assessee's appeal are dismissed. 7.3 The above issue could be examined from another angle also. The assessee claims to be a public charitable trust. Section 4 of the Indian Trusts Act (ITA) , 1882 is extracted as under : OF THE CREATION OF TRUSTS 4. Lawful purpose :- A trust may be created for any lawful purpose. The purpose of a trust is lawful unless it is (a) forbidden by law, or (b) is of such a nature that, if permitted, it would defeat the provisions of any law, or (c) is fraudulent, or (d) involves or implies injury to the person or property of a....
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.... 1973 : 1974 AIR 1084 has held that there is a common area of legal principles which covers all trusts, private & public, and merely because they find a place in the ITA, they cannot become "untouchable" where public trusts are involved. The relevant portion is extracted as under : "Therefore, this 'elecent connotes a public' trust. The next question is whether the Indian Trusts Act, 1882, applies 1. (1923) 1 Ch. 258, 266. L748SCI/74 688 to the present case. The Courts below have argued themselves into an application of s. 83 of the Trusts Act. Sri Dixit rightly objects to this course because that Art relates only to private trusts, public charitable trusts, having been expressly, excluded from its ambit But while these provisions proprio vigore do not apply, certainly there is a common area of legal principles which covers all trusts, private and public, and merely because they find a place in the Trusts Act, they cannot became 'untouchable' where public trusts are involved. Care must certainly be exercised not to import by analogy what is not, germane to the general law of trusts, but we need have no inhibitions in administering the law by invoking the un....
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.... resulted in unearthing of evidences, inter alia, that the assessee collected huge amount of Rs. 1,57,42,700/- from students, in cash , without issuing any receipts and without entering them in the regular books of accounts maintained by the trust . When the assessee , a public charitable trust, has not kept clear and accurate accounts of the trust-property and failed to furnish with full and accurate information as to the impugned amount and state of the trust property, a finding was arrived that the impugned sum was lying with the Managing Trustee and others during the said period, which have not been used for the objects of the assessee trust. These facts have not been disproved. All these activities violate the provisions of the Indian Trusts Act, the Income Tax Act etc and hence the assessee's case clearly falls within the mischief of all the above clauses of Section 4 of the Indian Trusts Act , supra. An assessee which claims to be a Trust existing for Public Charitable Purposes but does not carry its activities in accordance with its objects would certainly fall within the prohibitions of clauses of S4 of The Indian Trusts Act 1882, as extracted above. Further, allowance of ....
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....essee trust and such advance was paid towards the cost of construction of the buildings are not tenable, when the entire facts and the copies of ledger accounts of PASPL-Construction filed by the assessee during the present proceedings, are analysed carefully. 9.2 It has been submitted that the contract for construction was awarded through a bidding process by a team of civil engineering experts from amongst bids received by the trust. It is further stated that the entire process of awarding the contract was a transparent one and is supported by records maintained for the purpose. In this context, it is submitted that during the course of hearing on 19.8.2013, the Ld. Authorised Representative of the assessee trust was requested to furnish copies of correspondence in respect to award of contract, calling and receiving of tenders for contract and approvals taken for construction . However, the requisite details have not been furnished. It may be mentioned here that in the covering letter to the details filed on 15.10.2013, under point no.6, the assessee has referred to furnishing of copies of tenders received from M/s AB Construction in connection with tenders for award of ....
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.... 9.4 As noticed, from the ledger account of PASPL - Construction for the period 01.04.2009 to 31.03.2010 furnished by the assessee, a sum of Rs. 6 crores was paid to PASPL - Construction on 08.02.2010 vide a cheque drawn on Indian Bank, T.Nagar, showing as for 'mobilisation of advance' for college construction. The said entire amount was lying as a credit balance as on 31.3.2010 against that PASPLConstruction. 9.4.1 As per the ledger account of PASPL-Construction for the period 1.4.2010 to 31.3.2011, the said amount of Rs .6 crores is shown as opening balance during the year. Later, the said PASPL -Construction has raised a bill for Rs. 1,23,67,390/- for work done at main building and work shop vide RA bill dated 12.4.2010. However, instead of adjusting that bill against the earlier advance given of Rs. 6 crores, the assessee has paid separately for the same, vide Cheque issued on 21.4.2010 through Indian Bank, T Nagar. Further later, on 7.5.2010, the said PASPLITA Construction has raised a bill for Rs. 88,60,312/- for certain work done at main building etc. This time also, instead of adjusting that bill against that advance of Rs. 6 crores given earlier, ....
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....ssee trust to that sister concern was not for the purpose of objective of the assessee trust, as per the object clauses (q) & (v) referred to in para 8,4 above. Thus, it may be noticed that such activity undertaken by the assessee, in advancing that amount of Rs. 6 crore to that sister concern PASPL for a considerable period of more than two years, starting from 8.2.2010, was not for the purpose of advancement of objects of the trust and under such circumstances, the case of the assessee trust, being covered under the second limb of the conditions stipulated in Sub-Section (3) of Section 12AA of the Act, it warrants cancellation of registration earlier granted to the assessee trust u/s 12AA of the Act. " 8.1 From the above, it is clear that the Ld. PCIT requested the assessee to furnish copies of correspondence in respect to award of contract, calling and receiving of tenders for contract and approvals taken for construction etc . However, the requisite details have not been furnished. From the details/ material furnished, the Ld. PCIT held that (i) The assessee itself has obtained such document from the said party and filed the same, it rather indicates that the same h....
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....iate concern, as evident from the copies of said ledger accounts of that concern filed by the assessee, disprove such contention of the assessee. From the ledger accounts of PASPL, for the three different financial years (copies enclosed as Annexures '8'), it is thus evident that Rs. 6 crore made by the assessee trust to that sister concern was not for the purpose of objects of the assessee trust and hence warrants cancellation of registration earlier granted to the assessee trust and accordingly cancelled it. 8.2 The assessee challenged the above findings stating that the impugned sum was mobilisation advance towards the contract for construction of hostel for students which was awarded to the said concern based competitive bidding and the Ld. PCIT erred in holding that the advance made by the appellant to M/s Prathyusha Associates Shipping P Ltd is not towards construction of hostel. The Ld. PCIT failed to appreciate that the same represents mobilisation advance in respect of the contract awarded to them on competitive bidding, for construction of hostel for the students etc. 8.3 Before us also, the assessee has filed the same material filed before the Ld. PCIT viz ....
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.... such material and hence the corresponding grounds of the assessee are dismissed. 9. The above issues could be examined from another angle also. The trustees are bound to act reasonably and fairly in dealing with the property of the trust. They must conform their action with the same standard that meet the test of justness, fairness, reasonableness . As per Section 15 of the Indian Trusts Act , a trustee is bound to deal with the trust-property as carefully as a man of ordinary prudence would deal with such property if it were his own. They are bound to exercise their power in good faith in dealing with the property of the trust as an ordinary prudent man would exercise in the management of his own affairs to preserve and protect his own estate. Their acts should be reasonable, just and fair which must meet the eye and the offer accepted must be competitive and every attempt should be made to secure as maximum advantage as possible to the trust . 9.1 Section 13 of the Income Tax Act also barred the exemption, in the case of a Public Charitable Trust , subject to certain modifications, if any part of the income, or any property of such trust , was used or applied for the benef....
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....arding the so called contract and the trust's subsequent conduct render those actions invalid which would result in refusal of exemptions . In the instant case, the facts that M/s Prathyusha Associates Shipping Pvt. Ltd. (PASPL), is a prohibited person, to whom Rs. 6 crore of the assessee's money was advanced free-ofinterest etc are not disputed. Though, the assessee claimed to have ; advanced towards cost of construction of the buildings for the trust, awarded the contract to them on competitive bidding etc, it has not laid contemporaneous material substantiating its contentions before the Ld. PCIT as well as before the Ld. CIT(A) . When the payment was made to a prohibited person, when its rationale is being questioned, the onus is on the assessee to place adequate contemporaneous material to show that how it quantified the project costs and on whose advice, when and how it went for bidding , how many bids were received , whether the impugned person had adequate experience in similar projects and on what are other criteria on which it chose the impugned person over others, on what basis and material it advanced such huge amount to the impugned person, on what basis it continued t....