2016 (6) TMI 1336 - AT - Income Tax

Assessment u/s 153C - validity of notice under section 153A - denying exemption under section 11 - Held that - Initiation of proceedings under section 153A of the Act by the learned Assessing Officer is in accordance with law because from the search proceedings various materials revealed that there is a possibility of the assessee having undisclosed / concealed income due to furnishing of incorrect particulars. Therefore, as pointed out by the learned Departmental Representative and the decisions relied upon by him, we find that issuance of notice under section 153A in the case of the assessee is valid in law for all the three assessment years. Accordingly, this ground raised by the assessee is devoid of merits. Denial of exemption under section 11 by treating the donation received as capitation fees - proof of charitable activities - Held that - Based on surmises and conjectures, it cannot be presumed that the donations received by the assessee are capitation fees or forced extortion of money from the students for granting admission. Corpus donations received by the assessee cannot be treated as capitation fees and the surplus earned cannot be treated as income from business . The employees of the assessee could not have knowledge on the assessee s affairs. By earning surplus, it cannot be said that the assessee is carrying on business activity.The assessee is entitled to the benefit of section 11(4A) of the Act. Corpus donation received cannot be treated as capitation fee and therefore assessee cannot be denied benefit under section 11. Accordingly, we hereby direct the learned Assessing Officer to grant the benefit of section 11 to the assessee and delete the addition made by denying such benefits for all the relevant assessment years 2002-03, 2003-04 & 2004-05. - Decided in favour of the assessee. Maximum marginal rate of tax as per section 164(2) of the Act, interest under section 234A & 234B and change in method of accounting by Revenue from cash basis to mercantile basis - Held that - Since we have held that the assessee is entitled to the benefit of section 11 of the Act, the issue with respect to levy of tax at maximum marginal rate under section 164(2) of the Act will not arise in the case of the assessee and accordingly interest under section 234A & 234B of the Act cannot be levied. Further since the assessee is a charitable institution having registration under section 12A of the Act, application of income has to be made on the basis of receipt of income as per section 11 & 12 of the Act and therefore books of accounts have to be necessarily maintained on cash basis. Therefore, we hereby direct the learned Assessing Officer not to change the method of accounting adopted by the assessee which is on cash basis - Decided in favour of the assessee

Summary

Issues Involved:
1. Validity of notice under section 153A.
2. Denial of exemption under section 11 by treating donations as capitation fees.
3. Taxation at the maximum marginal rate under section 164(2).
4. Levy of interest under sections 234A and 234B.
5. Change in the method of accounting from cash basis to mercantile basis.

Detailed Analysis:

1. Validity of Notice under Section 153A:
The appellant contended that the notice under section 153A was invalid as no unaccounted income or assets were discovered during the search. The Commissioner of Income Tax (Appeals) observed that the provisions of section 153A require the issuance of notice when a search is initiated under section 132, regardless of the outcome of such seizure. The Tribunal upheld this view, stating that the initiation of proceedings under section 153A was in accordance with the law due to the possibility of undisclosed income from the search proceedings.

2. Denial of Exemption under Section 11 by Treating Donations as Capitation Fees:
The Assessing Officer concluded that the trust was engaged in commercial activities by collecting capitation fees disguised as voluntary donations, thus denying the benefit of section 11 and treating the receipts as business income. The Commissioner of Income Tax (Appeals) upheld this view, citing various pieces of evidence and sworn statements indicating the collection of capitation fees. However, the Tribunal referred to its earlier decision for the assessment year 2001-02, where it was held that the corpus donations cannot be treated as capitation fees and the surplus earned cannot be treated as business income. The Tribunal found no conclusive evidence in the seized materials to prove that the donations were capitation fees and directed the Assessing Officer to grant the benefit of section 11.

3. Taxation at the Maximum Marginal Rate under Section 164(2):
Since the Tribunal held that the assessee is entitled to the benefit of section 11, the issue of taxing the assessee at the maximum marginal rate under section 164(2) did not arise. The Tribunal directed the Assessing Officer to delete the addition made by denying the benefits under section 11.

4. Levy of Interest under Sections 234A and 234B:
The Tribunal held that since the assessee is entitled to the benefit of section 11, the interest under sections 234A and 234B cannot be levied.

5. Change in the Method of Accounting from Cash Basis to Mercantile Basis:
The Tribunal observed that the assessee, being a charitable institution registered under section 12A, is required to apply income based on receipt as per sections 11 and 12. Therefore, the books of accounts should be maintained on a cash basis. The Tribunal directed the Assessing Officer not to change the method of accounting adopted by the assessee.

Conclusion:
The Tribunal allowed all three appeals of the assessee for the assessment years 2002-03, 2003-04, and 2004-05, directing the Assessing Officer to grant the benefit of section 11 and delete the additions made by denying such benefits. The Tribunal also directed not to levy interest under sections 234A and 234B and not to change the method of accounting from cash basis to mercantile basis.