2012 (12) TMI 1022 - AT - Income Tax

Entitled to the benefits of section 11 - Whether Extra Tuition Fee ETF has to be assessed in the hands of the Society or in the hands of Mr. MJB? What is the quantum of EFT that has to be taxed, whether the entire receipt in the form of ETF or whether any deduction has to be allowed on account of refund of ETF? - Held that - AO having accepted that ETF is refundable and going by the prevailing practice that when a student does not avail of admission to the college, the same has to be refunded, it would be just and fair to resort to an estimate. No doubt the CIT(Appeals) has no basis for estimating the ETF refunded at 40%. Thus, we are of the view that it would be just and fair, if 45% of ETF collected has been refunded. Thus, this ground of appeal of the assessee is partly allowed. The claim of the revenue that the entire ETF has to be brought to tax cannot be accepted for the reason that ETF by its nature is refundable and it is common practice that students who do not get admission, seek refund of ETF. We therefore reject the grounds of appeal of the revenue in this regard and partly allow the grounds of appeal raised by the assessee. We also find that the AO assessing the Society has denied exemption u/s. 12 on the ground that the Society was collecting capitation fee. Since we have found that the Society was not collecting ETF, the benefit of section 11 of the Act should not be denied to the assessee Society. We therefore hold that the Society would be entitled to benefit of section 11. In conclusion on the issues, we hold that it is only MJB who was collecting ETF and not the Society. We also hold that ETF to the extent of 55% of the total collections of ETF as evidenced by the seized documents should be brought to tax in the hands of MJB on a substantive basis. The additions made in the hands of Society is directed to be deleted. It is also held that the benefit of section 11 of the Act cannot be denied to the Society as there are no circumstances justifying the denial of benefits of section 11 of the Act to the Society. Accordingly, the grounds of appeal of the revenue in the case of the Society and MJB are dismissed, while the grounds of appeal of the assessee in the case of MJB are partly accepted. Depreciation - Income derived from properties held under trust should be arrived at in the normal commercial manner and that a charitable institution running a school should be allowed depreciation

Issues Involved:
1. Whether Extra Tuition Fee (ETF) should be assessed in the hands of the Society or MJB.
2. The quantum of ETF that should be taxed.
3. The applicability of Section 11 benefits to the Society.
4. Disallowance of depreciation claimed by the Society.

Detailed Analysis:

1. Whether Extra Tuition Fee (ETF) should be assessed in the hands of the Society or MJB:

The primary issue was whether the ETF collected should be assessed as income in the hands of the Society or MJB. The Society argued that ETF was collected by MJB without its knowledge or authority. MJB accepted this stance, stating that he collected the ETF independently. The CIT(A) agreed with this position, noting that MJB managed the admission process and collected ETF autonomously. The tribunal found no evidence in seized documents indicating the Society's involvement in ETF collection. The tribunal concluded that ETF was collected by MJB independently and not by the Society, thus upholding the CIT(A)'s decision.

2. The Quantum of ETF that should be taxed:

The tribunal had to determine the amount of ETF to be taxed. MJB claimed that 50% of the ETF collected was refunded to students who did not take admission. The CIT(A) accepted that ETF was refundable but estimated that 60% of the ETF should be taxed, allowing for a 40% refund. The tribunal reviewed the evidence and circumstances, including the fact that only 9% of the total ETF collections were found as assets during the search. The tribunal decided that it would be fair to estimate that 45% of the ETF was refunded, and thus, 55% of the ETF should be taxed in MJB's hands.

3. The Applicability of Section 11 Benefits to the Society:

The AO denied the Society the benefits of Section 11 on the grounds that the Society collected capitation fees. However, since the tribunal found that the Society did not collect ETF, it ruled that the Society should not be denied the benefits of Section 11. The tribunal directed that the Society is entitled to the benefits of Section 11.

4. Disallowance of Depreciation Claimed by the Society:

The revenue argued that since the Society had already claimed the cost of assets as an application of income under Section 11, allowing depreciation would result in a double benefit. The tribunal referred to several high court decisions, including the Bombay High Court's decision in CIT v. Institute of Banking, which allowed depreciation even when the cost of assets was treated as an application of income. The tribunal followed the preponderance of judicial opinion and held that depreciation should be allowed, dismissing the revenue's appeal on this issue.

Conclusion:

The tribunal concluded that ETF should be assessed in MJB's hands and not the Society's. It determined that 55% of the ETF should be taxed. The Society was entitled to the benefits of Section 11, and the depreciation claimed by the Society should be allowed. The appeals by the revenue were dismissed, and the appeals by MJB were partly allowed.

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