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2019 (9) TMI 765 - AT - Income TaxExemption u/s 11 - as alleged trust applied its income for purposes other than those admissible u/s 11(2)(b) read with section 11(5) by diverting to its trustees and other specified persons - the assessee has spent money in cash for non-specified purposes, the assessee has violated the provisions of sec.13(1)(c) of the Act and the assessee has collected capitation fee - HELD THAT - AO has not brought on record any credible material to prove that the donations were not voluntary. The AO had placed his reliance on the statement given by two persons named Shri K J Pramod and Sri Shivarame Gowda. However, the AO has not allowed the opportunity of cross examining them. Further the statements so given by them is contrary to the books of accounts, i.e., no evidence was found to show that the assessee has collected money outside the books of accounts. It is stated that all the amounts collected by the assessee has been duly accounted for in the books of account. Hence the AO could not have placed his reliance on the statements so given by them. The Ld CIT(A) has observed that the prohibition to collect capitation fee has been implemented by the Government of Karnataka under Karnataka Educational Institutions (Prohibition of Capitation Fees) Act, 1984. AO has not brought any material on record that any action has been taken upon the assessee under the above Act. All these facts would show that it is the AO, who has taken the view that the development fee collected by the assessee is in the nature of Capitation fee and said view can only be held to be an inference drawn by the AO on the basis of surmises and conjectures. CIT(A) has also taken support of the decision rendered in the case of Balaji Educational and Charitable Public Trust 2015 (4) TMI 342 - MADRAS HIGH COURT wherein under identical set of facts, the Hon'ble High Court held that there is no material to show that the donations were not voluntary CIT(A) had deleted additions made by the AO and also held that the development fees collected by the assessee cannot be considered as Capitation fee. In the foregoing paragraphs, we have upheld the view taken by the CIT(A) on all the above said issues. Hence, the very foundation, based on which the AO had denied exemption u/s 11 of the Act to the assessee, has been reversed, we have no hesitation in upholding the view of Ld CIT(A) in holding that the assessee cannot be denied exemption u/s 11 of the Act. - Decided in favour of assessee. Addition of construction of building and depreciation thereon - expenses by way of cash - HELD THAT - As per the provisions of sec.11 of the Act, the methodology adopted for computing total income of charitable institution is different from that adopted for a business concern. Both capital expenses and revenue expenses incurred towards attainment of objects of the trust or institution are treated as application of income and deducted from the income derived from the property. We have also noticed that the provisions of sec.40A(3) and 40A(3A), which prohibits business concerns to incur expenses by way of cash over and above a prescribed amount, do not apply to the assessee during the years under consideration. Hence, merely because the assessee had incurred expenses by way of cash, should not be a ground for disbelieving the expenses incurred by the assessee towards construction of buildings. Assessee has submitted before the Ld CIT(A) that the said admission was given on wrong notion on fact and law. Before the AO also, the assessee has submitted that all the expenses have been duly accounted for in the books of accounts. Accordingly, we are of the view that the assessee has established that the admission made by it was incorrect. In any case, the admission was not related to Undisclosed income, which would warrant any addition, but it was only a plea to reduce the amount from the quantum of application of income, which in the present case was construction expenses incurred on buildings. The fact of construction of buildings by the assessee has been accepted by the tax authorities, in which case, they are not justified in accepting part of expenses and rejecting part thereof only for the reason that the same has been incurred in cash. Accordingly, CIT(A) was not justified in sustaining addition to the extent of ₹ 25.00 crores merely on the reason that the assessee has accepted the same. We have noticed that the assessee has established that the admission so made by it is incorrect. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition of ₹ 25.00 crores in aggregate made in AY 2010-11 to 2013-14. CIT(A) has sustained the addition to the extent of ₹ 25.00 crores, he took the view that the same may also represent inflation of construction expenses and hence depreciation claimed thereon should be disallowed. Accordingly he has directed the AO to disallow depreciation on the above said amount of ₹ 25.00 crores. The above said inference drawn by Ld CIT(A) is misplaced, since it is not the case of assessing officer at all. The AO has taken the view that the amount of ₹ 58.02 crores was not spent for the objects of the Trust. Hence the question was not related to inflation of expenses, but related to whether the expenses were incurred for the objects of the trust or not. We have deleted the addition sustained by Ld CIT(A) in the previous paragraphs. Hence, the disallowance of depreciation, being consequential in nature, would not survive on its own - Decided in favour of assessee.
Issues Involved:
1. Rejection of claim to exclude income offered by the assessee in the statement taken u/s 132(4). 2. Disallowance of depreciation on the amounts mentioned above. 3. Entitlement to exemption u/s 11 of the Act. 4. Alleged violation of provisions of sec. 13(1)(c) for the benefit of specified persons. 5. Collection of capitation/development fees and its impact on the charitable status. 6. Specific additions in certain years for payments made for non-specified purposes in cash. Issue-wise Analysis: 1. Rejection of claim to exclude income offered by the assessee in the statement taken u/s 132(4): The assessee admitted during the search that it might not be able to prove the utilization of funds made in cash and agreed to disallow ?25 crores from the application of income. The Tribunal noted that the assessee's books of accounts were audited and the expenses were duly recorded. The AO did not reject the books of accounts but relied on the search findings. The Tribunal held that the admission made by the assessee was not conclusive and could be retracted if proved incorrect. The addition of ?25 crores was deleted as the assessee demonstrated that the expenses were for the construction of buildings and duly accounted for. 2. Disallowance of depreciation on the amounts mentioned above: The CIT(A) disallowed depreciation on the ?25 crores, assuming it represented inflated expenses. The Tribunal found this inference misplaced as the AO's case was about the application of income, not the inflation of expenses. Since the addition of ?25 crores was deleted, the consequential disallowance of depreciation was also set aside. 3. Entitlement to exemption u/s 11 of the Act: The AO denied exemption u/s 11 based on the additions made and alleged violations. The Tribunal upheld the CIT(A)'s decision to allow the exemption, noting that the foundation for denial (additions and violations) was reversed. The assessee's activities were in line with its charitable objects, and the collection of development fees was not considered capitation fees. 4. Alleged violation of provisions of sec. 13(1)(c) for the benefit of specified persons: The AO added ?703.99 lakhs and ?554.50 lakhs in AY 2013-14 for alleged violations. The CIT(A) deleted these additions, finding that the transactions did not belong to the assessee and the AO's conclusions were based on surmises. The Tribunal upheld this deletion, noting that the AO did not provide detailed evidence or break-up of the amounts. 5. Collection of capitation/development fees and its impact on the charitable status: The AO considered the development fees as capitation fees and non-charitable. The CIT(A) found that the fees were voluntary donations, duly accounted for, and not collected from all students. The Tribunal agreed, citing the Madras High Court's decision in Balaji Educational and Charitable Public Trust, which held that voluntary donations do not partake the character of capitation fees. 6. Specific additions in certain years for payments made for non-specified purposes in cash: The AO added ?58.02 crores in AY 2012-13 to 2014-15, considering cash payments as non-specified purposes. The CIT(A) deleted these additions, noting that the AO did not provide a basis for the amounts and failed to identify specific violations. The Tribunal upheld this deletion, emphasizing that the AO did not reject the books of accounts and the expenses were for construction activities. Conclusion: The Tribunal dismissed the revenue's appeals and cross objections filed by the assessee, while allowing the assessee's appeals. The additions made by the AO were deleted, and the exemption u/s 11 was granted to the assessee. The Tribunal emphasized the importance of proper evidence and the distinction between voluntary donations and capitation fees.
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