TaxTMI 
TaxTMI 
TaxTMI 
2025 (7) TMI 521
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....s incurred by the Assessee. The ld. CIT (A) passed a detailed order in respect of AY 2017-18 and followed the same in the orders for other 4 assessment years. The appeal for A.Y 2017-18 is taken first as a lead case. 3. The grounds of appeal are as under: 1. "The order of the learned (Ld.) CIT (A) is erroneous, arbitrary and is liable to be quashed as the same is contrary to the facts of the case and provisions of law. 2.1 The Ld. CIT (A) grossly erred in upholding the assessment made by the AO, as the same has been made in the absence of any incriminating material to substantiate the same. 2.2 It being settled law that no addition can be made in a search assessment in the absence of any incriminating material, the Ld. CIT (A) erred in upholding the assessment made. 3.1 The Ld. CIT (A) erred in failing to delete the addition of Rs. 48,07,552/- and ought to have allowed the expenses in full. 3.2 The Ld. CIT (A) erred in restricting the expenses of 'software usage charges' to the extent it is paid to Microsoft Azure & salary paid to staff of M/s. TFMSS and in disallowing the remaining balance as not applied for the objects of the Trust u/s. 13(1)(c). 4.1 The Ld....
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.... Any other grounds that may be raised at the time of hearing." 3.1 The brief facts of the case are that the Assessee is a Public Charitable & Educational Trust registered u/s. 12AA of the Act. It runs an educational institution by name 'Karunya Institute of Technology and Sciences' (KITS), which has been granted the status of 'Deemed to be University' by the University Grants Commission. Mr. Paul Dhinakaran is the Managing Trustee of the Assessee Trust as well as an associate Trust M/s.Jesus Calls which is a religious and charitable Trust. There was a search u/s. 132 of the Act on 20.01.2021 in the case of the Assessee and it's associate M/s. Jesus Calls. During the search various books of accounts, loose sheets / electronic devices found and seized. 4. The Assessee had used software named as 'Campus Management System' (CMS) developed by Dimensions Innovations Lab, Kerala in the early years of 2000 until 2012. The software malfunctioned in 2012 and stopped responding. The associate entity M/s.Jesus Calls also had many challenges in using its software which was also provided by Dimensions Innovations Lab, Kerala. Due to malfunctioning of CMS, a new software 'MyKarunya' for K....
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....e terminated in June 2020 by TFMSS as PWDS threatened to move the outsourced work to some other company by giving 30 days' notice consequent to exchange of unpleasant mails by her. In her sworn deposition recorded during search, Smt. Grace deposed in response to few queries that the software 'Eduserve' and 'Peopleserve' were the renamed versions of old software 'MyKarunya' of KITS and 'Family Card System' of Jesus Calls. The software products were renamed while uploading the same on the Cloud in Microsoft Azure. She further stated that source codes of both old and new software products are similar with few modifications. 4.5 Smt. Grace admitted that Mr. Timothy Jackson of PWDS visited India from time to time for meetings. While in service with TFMSS, Smt. Grace used to address a number of mails to Mr. Timothy Jackson of PWDS regarding various issues arising on day-to-day development of software seeking and getting guidance. Statement of Mr. Jebamalai Robinson (Mr. Jebamalai), software developer of TFMSS was also recorded during search. In his statement, he was mainly confronted with the statement of Smt. Grace. In response, he confirmed whatever was deposed by Smt.Grace. 4.6 Smt.....
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....enditure. 6.1 Aggrieved with the decision of the AO, the assessee assailed the order by way of appeal and the ld. CIT (A) substantively confirmed the disallowance made in the assessment order and granted part relief. While deciding the appeal, he relied on the statement of Smt.Grace, Mr. Jebamalai, Digital Forensic Report (DFR) obtained by the DDIT(Inv.) from a technical expert during post search proceedings and Whatsapp chats exchanged by Mr. Paul Dhinakaran with others during the period 01.02.2019 to 19.01.2021 reproduced in the order, especially the following: a. Chat dated 27.06.2019 - Mr. Jackson was asked to transfer $ 20,000/- to IReach Global, USA in which Mr. Paul was a partner/Director. b. Chats dated 21.03.2019 & 22.03.2019 - Discussion on money from PWDS to the bank accounts of IReach Global, USA and Pears World Ltd etc. [Chats on page 77/CIT(A)] c. Chat dated 04.06.2019 - Mr. Jackson reported to Mr. Dhinakaran about transfer of money from TFMSS to PWDS and routing it to accounts of his entities. [Chat on page 80/CIT(A)] d. Chats dated 09.11.2020 to 28.11.2020 - discussion on buying shares of TFMSS and forming a Trust. [Chats on page 91-93/CIT(A)] 6.2 Besi....
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....er receipt of the order of ld. CIT(A), assessee requested the AO again vide letters dated 22.04.2025 and 05.05.2025 to provide a copy of the DFR used in the assessment order and appellate order but in vain. 8.2 The Ld.AR submitted a Digital Forensic Analysis Report (DFAR) obtained from a digital forensic expert based on data seized by the search parties, on the same issues dealt with in the DFR relied upon by the AO and ld.CIT(A). The assessee had no chance to submit this report (DFAR) at any earlier point of time. Therefore, he pleaded that it was just and necessary that this Tribunal admitted the additional evidence and take it on file in this appeal. He submitted that the non-filing of the DFAR before theAO and ld. CIT (A) was neither wilful nor wanton. He further submitted that if the above document was not admitted as an additional evidence, the Assessee would be put to great hardship and irreparable loss. The assessee certified that the DFAR now submitted was given based on detailed examination and analysis of the digital data available on the record of AO having been copied/backed up and seized during the searches and provided to him by the AO during the course of assessmen....
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....f the evidence could be treated as incriminating. 9.3 The ld.AR argued that even after making additions/disallowances, exemption u/s. 11 of the Act is available to the assessee on its gross income as the adjusted expenditure incurred was more than 85% of receipts. 9.4 The ld.AR argued that statements of Smt.Grace and Mr. Jebamalai could not have been relied upon by the AO and ld. CIT(A) considering that services of Mrs.Grace were terminated for deficiencies in her services and communications and she was hostile to the organisation. Mr. Jebamalai was her close aide. Moreover, it is patent from her statement that Mrs.Grace gave incorrect and evasive replies. In one of her responses, while confirming that Mr. Timothy Jackson of PWDS visited India from time to time for meetings, she stated that he visited TFMSS to say 'hello' which is factually incorrect as no one would visit India several times from UK to participate in meetings, just to say 'hello'. Moreover, seized data and record contains several mails exchanged between Smt. Grace to Mr. Timothy Jackson of PWDS seeking day-to-day guidance regarding development of software. The AO and ld. CIT(A) should have app....
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....ntenance, Cloud services were never used for using MyKarunya and Family Card System by the assessee and Jesus Calls respectively. PWDS made an extensive study and analysis of MyKarunya and Family Card System and diagnosed serious flaws in the software as well as system issues causing frequent disruptions thereby unsatisfactory performance. Accordingly, PWDS came out with an idea of uploading the software in the Cloud services after initially making adequate improvements and modifications to match it with the requirements of the service provider Microsoft. Thus, PWDS played a pivotal role not only in giving the idea of using Cloud services but also making necessary modifications in the software and uploading it in the Cloud server of Microsoft Azure. 9.7 Ld.AR pointed out that the Digital Forensic Report (DFR) used by the AO and ld. CIT(A) in their orders was not shared with the assessee by both the authorities during the entire proceedings, in spite of specific requests. The author of the report did not mention anywhere about the material (data) provided and examined by him and the corresponding data relied upon for drawing each of the inferences mentioned. None of the inferences ....
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....not contain any discussion on PWDS. It is regarding Pears World LLC, USA and Pears World Ltd, Cyprus and not PWDS, UK. The facts relied upon are incorrect and are misrepresented in the order. Conclusion drawn by the ld. CIT (A) is factually incorrect and baseless. c. Chat dated 04.06.2019 (page 80/CIT(A) -The ld. AR explained contents of the chat as given below: - The amount of Rs. 34 lakhs was remitted by TFMSS to M/s. Jerusalem Centre for Peace and Truth (JCPT) for the tour organised by it. Organising tours is the business activity of TFMSS and it collects charges from the client tourists. (Invoice and bank statement showing the remittance are enclosed at page no. 18 to 21/PB) - No payment of Rs. 70 lakhs was ever made. - The GBP 1,88,38,006/- (equivalent to about INR 163.89 cr) is an impossible figure in any combination of digits. No such payment was ever made nor intended to be made. There is a clear mistake in the conversation. d. Chats dated 09.11.2020 to 28.11.2020 (page 91 & 92/CIT(A) - The ld. AR submitted that it was discussion about restructuring operations of TFMSS and make each division accountable, more so after seeing the developments post te....
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....ssessee received software and maintenance services from TFMSS which was confirmed in all the sworn statements recorded and FDI report used in the orders of AO and ld.CIT(A). But for receiving such services, the whole system would have collapsed and could not have run for 5 years (2016 to 2021) till the date of search and thereafter. The ld. CIT(A) admitted that software services were received by the assessee from TFMSS and hence, allowed some part of payments/claims like salaries paid to the software team of TFMSS and charges incurred for uploading and using the Cloud services of Microsoft Azure by TFMSS or PWDS as the case may be. 9.12 In case the AO/ ld. CIT(A) found the expenditure claimed was excessive or unreasonable compared to the fair market value (FMV), the only option available in the Act is to consider invoking provisions of section 40A(2) of the Act and restrict it to FMV instead of arbitrarily disallowing the whole claim. In the orders, neither the AO nor ld. CIT(A) brought on record or considered the FMV of similar services in the market. None of them indicated as regards how assessee and TFMSS are related parties within the scope of clause (b) of section 40A(2) of t....
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....r software development and maintenance. The issues to be decided in these grounds of appeal of the assessee for A.Y 2017-18 are regarding whether the entity True Friend Management Support Services Ltd (TFMSS) had provided substantive services for software development and maintenance to the assessee, payments made were for genuine services received, payments were made at FMV and the transaction was done at arm's length. The other issue to be seen is whether any of the payments made towards software charges by the assessee and Jesus Calls to TFMSS had flown to the accounts of the Managing Trustee of the assessee and Jesus Calls Mr. Paul Dhinakaran, his family members or his entities through PWDS, UK. 13.1 We find that the AO has observed that the assessee created a mechanism to intentionally divert Trust funds to a related foreign entity in the guise of software development charges without actual services. The AO meant the 'related foreign entity' to be PW Data Solutions (PWDS), UK incorporated by Mr. Timothy Jackson. Mr. Timothy Jackson is reportedly worked as Professor of Management in Karunya Institute of Technology (KITS) run by the assessee from 1995 to 2003. He immigrated to U....
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.... he may restrict it to the FMV. Instead of following the due process of law, the AO made casual remarks which are not relevant to the issue under consideration. 13.3 The AO further observed that TFMSS was incorporated solely for separating software development, which was earlier done in-house. During the hearing, the ld. AR took us through page 55 of the paperbook which is a summary of income, expenditure and profit of TFMSS from AY 2017-18 to 2021-22. He pointed out that during AY 2017-18, receipts of TFMSS from other activities such as organising tours, providing matrimony services, running a family TV channel etc., were Rs. 872.05 lakhs whereas receipts from software development and maintenance were a mere Rs. 51 lakhs, which is 5.52% of total receipts. Similar is the picture in other years with some variations in proportion of receipts from different activities. Hence, we find that the observation of the AO is factually incorrect. 13.4 Another observation of the AO was that Mr. Timothy Jackson or his team from PWDS did not provide training or guidance to the software team of TFMSS. During the hearing, ld. AR filed sample copy of mails addressed by Smt.Grace, Project....
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....T(A) appreciated the fact of receiving services from TFMSS and allowed a part of the service charges incurred by the assessee. 14.1 While substantively confirming the disallowance made in the assessment order, ld. CIT (A) relied on the statements of Smt.Grace, Ex-Project Manager and Mr. Jebamalai, software developer of TFMSS. When the assessee objected to use their statements as evidence considering that no opportunity of cross-examination was allowed, ld. CIT(A) held that even if statement of Smt. Grace is not taken into account, statement of Mr. Jebamalai still holds good as an independent statement on account of findings during the search. It is to be seen that there is no selective exception to use the statements when both of them are on the same footing. It is also an admitted fact that assessee wanted to cross-examine both of them, the ld. CIT (A) gave a direction to the AO to provide cross-examination of both the witnesses. The AO furnished a remand report expressing his inability to provide the same and requested the ld. CIT (A) to decide the issue on merits. However, ld. CIT (A) picked up some responses selectively from the statements of Smt.Grace [page 34 to 39 of order ....
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....re development and maintenance. We also note that he had scheduled a review meeting with Smt.Grace on 21.01.2019 at 11 AM. It is further observed that these are only a few select Emails out of a pile of such Emails extracted from the laptop used by Smt.Grace before her termination from TFMSS. 14.3 Our attention was drawn to some such Emails extracted on random basis and placed in the paperbook at page no. 22 to 53 for our perusal. Our attention was specifically drawn to the Emails containing references to skype video calls they had besides a number of telephonic conversations. Smt.Grace was totally silent on the day-to-day Emails exchanged, video and audio calls she had with Mr. Timothy Jackson seeking his guidance and supervision regarding software development and maintenance. We find that unless Mr. Timothy Jackson and his team were fully involved in all aspects of the project like owning, creating a detailed structure, design, technology, platform, language and source codes for the software Eduserve and Peopleserve, he would not make such intense efforts to train, guide, supervise and review the work of Project Manager and her team on regular basis. This obviously was done by M....
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....thy Jackson and his team from PWDS in the software development and maintenance services provided to TFMSS regarding Eduserve and Peopleserve. There is no contra material on record to controvert whatever was deposed by her. Hence, statement of Smt.Yamini Prabha, Sr. Software Developer is accepted as valid evidence reinforcing the assessee's claim of receiving genuine services from TFMSS and PWDS regarding Eduserve and Peopleserve. 15.2 It is an admitted fact that the assessee had used software named as Campus Management System (CMS) developed by Dimensions Innovations Lab, Kerala since the early years of 2000 until 2012. The software malfunctioned in 2012 and MyKarunya & Peopleserve were developed by e-governance team of KITS in 2013 for the assessee and Jesus Calls. Smt.Grace, ex-Project Manager of TFMSS was on record stating [Q.No.36 on page 36 of order of CIT(A)] that MyKarunya was very similar to CMS. She also deposed that the same software 'MyKarunya' was renamed as Eduserve and no development work was done until her exit in June 2020. The lower authorities relied upon her version and got a digital forensic report in conformity with her view. We find that the same CMS software....
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....al Forensic Report' (DFR), we find that the AO relied upon it and referred in para 8.6.17 on page 32 of the assessment order. Whereas the ld. CIT (A) substantially relied on it and reproduced the same in his appellate order at page 49 to 65. It is noted that the purported report was prepared by an organisation by name FDI Labs and submitted to DDIT(Inv.), Unit - 3(4), Chennai on 26.07.2021. The letter does not state any reference regarding the authority who ordered/directed such study and under whose authority. We have gone through the correspondence the assessee had with AO seeking copy of the DFR and taken note that the DFR was never shared with the assessee. Even after receipt of the order of ld. CIT(A), the copy of DFR was not shared despite of specific requests by the assessee. 17.2 We have gone through the DFR relied upon by the ld. CIT (A) vis-a-vis the arguments of ld. AR in this regard. The DFR does not contain particulars of data, if any provided to FDI Labs for examination and analysis and hence the purported DFR is a self-serving document prepared at the instruction of revenue. The DFR also does not contain any information regarding the data which was examined by them ....
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....Ed Tech and Data Research there. The forensic expert meant that he was migrated to London in 2003 and waited there for fulfilling the mission to set up PWDS in 2015 i.e. 12 years later. In our considered opinion it is a prima facie absurd, irrelevant and baseless inference. Similar allegation was made about some other unnamed senior professors who worked with KITS. If they were immigrated to foreign countries by Mr. Paul Dhinakaran to suit his business interest, he must be paying them salary or remuneration over these years. During extensive searches conducted by the Department, the authorised officers with the help of computer experts scrutinised all kinds of available data pertaining to several years. No finding was given in any order regarding any payments made to the ex-faculty members who were supposed to have been immigrated to foreign countries at the instance of Mr. Paul Dhinakaran. 17.5 We have also observed another inference drawn in the DFR under clause XII on page 57 of the order of ld. CIT(A), it is mentioned as - "One entity Jesus Calls has been disintegrated into PW Data Solutions (PWDS), True Friend Management Support Service (TFMSS), Karunya Institute of Technol....
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....e extensive improvements and additional features to the extent of 30 to 40% per year carried out in the software. Even though, the DFAR disproves the DFR and the decision of AO and ld.CIT(A), the same is not taken into consideration keeping the request of ld. DR to refer it to the AO. We have already held that the DFR used by the lower authorities is not tenable in the eyes of law and hence does not support the disallowance made in the orders. Moreover, the DFR cannot be taken into consideration as the same was not mandatorily furnished with the assessee at any stage of the proceedings necessitating the assessee to obtain and furnish additional evidence in the form of DFAR. Having failed to furnish the DFR at two stages by the lower authorities, we are not inclined to give a second innings and fresh lease of life by referring DFAR to AO. As decided supra, the DFR is considered as invalid evidence and rejected. Consequently, there is no need for the assessee to separately rely on DFAR and its consideration or otherwise is only academic. Even if the DFAR was considered or not considered, it would not make any difference to the issue under consideration and remanding it to the AO will....
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....were considered by a selection committee consisting of 3 members (minutes at page 1 to 4 of paperbook) who after detailed evaluation recommended TFMSS as service provider. In the process, not only the service provider was shortlisted but FMV of the product was also discovered. Considering all the circumstances, Eduserve development work was given to TFMSS at FMV. As mentioned in paras 9.11 and 9.12 supra, the ld.AR argued that the lower authorities do not have any discretion under the Act to alter the consideration paid for receiving genuine services as long as the transaction was done at arm's length, the parties are not related and the consideration was as per FMV. After considering all the facts and circumstances, we find that software services received were genuine and the consideration paid for such services was as per FMV. As such, we do not allow interference with the claim made by the assessee in this regard. 21. After carefully considering all the facts available on record and the circumstances, we find that the lower authorities completely ignored and kept aside the relevant and crucial evidence in support of the claim made by the assessee. Such evidence included the swo....
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....siness consultancy charges paid and the international placement & research opportunities for the students of the Trust. ii. The ld. CIT (A) failed to consider and appreciate the evidence furnished by the assessee with respect to the international promotion activities. iii. The ld. CIT (A) erred in blatantly stating that the business consultancy charges are similar to that of software charges i.e. to divert the funds outside the country, without any basis." 24.2 The ld. AR submitted that an inadvertent error occurred on his part while finalizing the grounds of appeal and filing the appeals. From the appeal papers received, it was seen that the Ld.CIT (A) decided the appeal in AY 2017-18 by passing a detailed order and followed the same in other 4 assessment years. There are no other issues in the remaining assessment years except for A.Y. 2020-21. The grounds of appeal were finalised and filed under the mistaken impression that the issue decided by the Ld. CIT (A) in A.Y. 2017-18 was the sole issue in all assessment years. The mistake was noticed while preparing the case for arguments for the hearing fixed on 05.06.2025. Immediately after realising the mistake, t....
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....e ld.CIT(A), assessee furnished details of students who were benefited from such an agreement by means of securing international placements, students who were taken into foreign universities for carrying out research work, student exchange programs etc., and requested for deleting the disallowance and allowing the claim. The Ld.CIT (A) confirmed the disallowance on the ground that the assessee did not provide direct correlation between the charges paid and international placement and research opportunities achieved by students of KITS with comparative data. The other reason given by ld. CIT(A) is that TFMSS was floated to divert funds outside the country for the benefit of Mr. Paul Dhinakaran and his family members and payment of Business Consultancy Charges was also for the same purpose. He was of the opinion that Business Consultancy Charges was also similar to software development charges and confirmed the disallowance for the same reasons. 27.1 The Ld. AR submitted that before entering into the agreement, no foreign company visited KITS for campus recruitment and none of the students got opportunities to participate in global conferences and hardly any student was taken by for....
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.... of business consultancy charges of Rs. 2.36 crores. It is seen that the AO had no occasion to apply his mind regarding the claim as the same got clubbed with the software charges. He disallowed it mechanically along with software charges without even realising that the claim of business consultancy charges was included in it. 29.2 We have noticed that ld. CIT(A) confirmed the disallowance in a mechanical manner without due application of find. It is admitted in the order that in support of the claim, the assessee submitted the agreement and details of students who got benefited consequent to the agreement. If he was not satisfied with the details, he should have required the assessee to furnish details in the manner he intended. If the assessee failed to do so, it is open for him to decide the issue. The assessee discharged the onus cast on his part whereas ld. CIT (A) simply brushed it aside giving vague reasons. We have gone through page 15 to 17 of the paperbook wherein details of foreign universities with which the assessee entered into MOUs and collaboration agreements regarding student exchange programs and opening research facilities to students. It also contained det....