2019 (10) TMI 348 - AT - Income Tax

Assessment of trust - AO assessing the extra fee collected from students as the income of the family head of the trustees instead of equally allocating among the trustees - CIT-A confirmed the addition - HELD THAT - In our opinion, the CIT(A) passed a detailed order stating that there is evidence in the form of seized material marked as TP-4, TP-5 KRS placed. It is also supported by sworn statement of Shri Jose Thomas on 19/03/2009 and also of Smt. GracyBabu on 04/03/2009 placed. Being so, we do not find any force in the argument of the Ld. AR in pleading that collection of unaccounted fees should be allocated among the trustees of the Trust. Accordingly, we confirm the findings of the CIT(A). Assessment of fee - contention of the assesses is that only actual fees collected by the assessee is to be assessed and the amount receivable cannot be assessed - HELD THAT - In earlier assessment years, the Assessing Officer had taxed only extra fees actually received and not the receivables. The CIT(A) also considered only the actual receipt of extra fees received in other assessment years except assessment year, 2009-10. CIT(A) only for this assessment year directed the Assessing Officer to take the entire extra fees both received and receivable. In our opinion, the CIT(A) cannot follow different yardstick for different assessment years. Accordingly, we direct the Assessing Officer to consider the actual extra fees received by the assessee to tax as unaccounted income. Thus, this ground of appeals of the assesses are partly allowed in both appeals. Treatment of amount received on sale of agricultural property vide registered sale deed as the amount received for relinquishment of trusteeship in the Trust - contention of the AR is that since there is no cost of acquisition, it is not possible to compute capital gain as section 55(2) of the I.T. Act does not include this kind of asset as capital asset - HELD THAT - As concluded in BC SRINIVASA SETTY (AND OTHER APPEALS) 1981 (2) TMI 1 - SUPREME COURT an asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head Capital gains as opposed to assets in the acquisition of which no cost at all can be conceived. There was no cost of acquisition, which was determined and on the basis of which the Assessing Officer could have proceeded to levy and assess the gains derived as capital gains. Sub-section (2) of section 55 clause (a) having been amended, there is no stipulation with regard to relinquishment of trusteeship. However, even in the case of tenancy right, the view taken by the Supreme Court, after the provision was substituted w.e.f. 1st April, 1995, is as above, which is squarely applicable to the assessee's case also. The further argument of the Ld. AR is that the relinquishment of trusteeship cannot be brought within the tax net though it was capable of being transferred. The Supreme Court held that it must be capable of being acquired at a cost or that has to be ascertainable, then only transfer of capital asset is subject to tax. A specific insertion would therefore be necessary so as to ascertain its case for computing the capital gains. Since the assessee had not incurred any cost of acquisition in respect of gain on account of relinquishment of trusteeship in Carmel Educational Trust, it cannot be brought to tax as capital gains. Accordingly, we hold that capital receipt accrued to the assessee in AY 2009-10 and in that assessment year on relinquishment of trusteeship, which being a capital asset was acquired without any cost of acquisition, the same cannot be brought to tax - Decided in favour of assessee Assessment of amount received for civil construction work as income derived by the Trustees from the relinquishment of public charitable trust which was charged under the head other sources and also ignoring the expenses incurred - HELD THAT - The Believers Church had disclosed this construction in its Balance Sheet as on 31/03/2010 and 31/03/2011. Being so, there was construction activity and the Believers Church paid the contract amount to these two assesses. By any stretch of imagination, it cannot be considered as an amount paid towards relinquishment of trusteeship in Carmel Educational Society. In our opinion, it is appropriate to estimate the income from construction contract amount at 8% for these assessment years. Directed accordingly. Thus the appeals of the assessee are partly allowed. Addition of sum received by St. Thomas Educational Society in which the assessee's were Trustees - HELD THAT - This amount of ₹ 8 crores each was treated as income in the hands of these two assesses which was paid by Believers Church to St. Thomas Educational Trust where Shri Jose Thomas and Smt. Gracy Babu were trustees. The Assessing Officer assessed the amount of ₹ 8 crores in the hands of these two assesses as income from other sources as the receipt was in lieu of relinquishment of trusteeship in Carmel Educational Trust which was managed by Believers Church after the relinquishment of trusteeship by these two parties. The amount of ₹ 8 crores was not received by these two assesses but by St. Thomas Educational Trust, hence, it cannot be treated as income of these two assesses, as these assessees are different from Trust. Being so, we do not find any infirmity in the order of the CIT(A) and the same is confirmed. Denial of exemption u/s. 11 - HELD THAT - It cannot be said that there is violation of section 13(1)(c)(ii) of the I.T. Act. If the Trustees themselves collected extra fees from the students for admission and retained it without authority, the Trust has nothing to do with that action of the Trustees and it cannot be said that the Trustees have been given any benefit or fruits of the Trust. The Trustees have unauthorizedly used the name of the Trust for the personal benefit of the Trustees and if the Trustees have failed to discharge their duty, with bona fide and earned certain benefit from the Trust, the Trust is not aware of that fact, the benefit of exemption u/s. 11 of the Act cannot be denied to the valid Trust. The Trust is only liable for the amount received from the Trustees out of the excess fees collected by them. If the excess fees collected by the Trustees was received by the Trust which was not accounted, the department can tax the same in the hands of the Trust and exemption u/s.11 of the Act can be denied on that amount and total denial of exemption u/s 11 is not possible. In the present case, the extra fees received by the assessee-Trust from the trustees was not accounted in the books of accounts of the assessee and also there is no evidence to show that it was applied for the purpose of charitable activities of the assessee-Trust. Thus, it is deemed that it was applied for purposes other than charitable purpose of the assessee-Trust - portion of extra fees received by the assessee-Trust is to be taxed at maximum marginal rate. The other income of the Trust is entitled to exemption u/s. 11 of the I.T. Act. And directed accordingly.This ground of appeals of the assessee is partly allowed. Enhancement by CIT(A) - excess capitation fees collected - CIT(A) observed that trustees of the assessee trust were collecting capitation fees from the students, part of which they were pocketed and the remaining was being handed over to the trust which was undisclosed in the books of accounts of the trust - enhancement made by the CIT(A) without giving any opportunity of hearing to the assessee - HELD THAT - Unaccounted income received by the assessee -Trust from the Trustees is to be taxed at maximum marginal rate, there cannot be any enhancement of income so as to assessee the entire amount collected by the Trustees in the hands of the assessee- Trust. More so, the amount retained by the Trustees has been assessed in their respective hands. Thus, there cannot be any double addition. This enhancement was also made by the CIT(A) without giving any opportunity of hearing to the assessee which is violation of principle of natural justice. Thus, this ground of appeals of the assessee is allowed. CIT(A) observed that trustees of the assessee trust were collecting capitation fees from the students, part of which they were pocketed and the remaining was being handed over to the trust which was undisclosed in the books of accounts of the trust Enhancement made by the CIT(A) - Amount paid for construction of building - HELD THAT - There was construction activity carried out by those two assesses as evidenced by the agreements cited supra and the construction was reflected in the balance sheet of the present assesses which was subjected to TDS. Thus, by any stretch of imagination, it cannot be said that there was no construction activity carried out by the assesses and it cannot be said that payments were not made towards construction of building which was for the establishment of educational institution. Thus, this ground of appeals of the assessee is allowed. Set off of excess application of earlier years - HELD THAT - Since we have held that the assessee is entitled for exemption u/s. 11 of the Act, excess application of earlier years could be set off against deficits in the next assessment year. This view of ours is supported by various judgments in the cases cited by Ld. AR wherein it was held that the expenditure incurred by the Trust on religious/charitable purposes in earlier year or years can be adjusted against the income of the subsequent year irrespective of the head of income under which it was incurred. Accordingly, the Assessing Officer has to re-compute the income.

Summary

Issues Involved:
1. Assessment of extra fees collected from students.
2. Allocation of income among trustees.
3. Validity of additional grounds of appeal.
4. Taxability of donations received by trustees.
5. Denial of exemption u/s 11 of the I.T. Act.
6. Enhancement of income by CIT(A).
7. Set-off of excess application of earlier years.

Detailed Analysis:

1. Assessment of Extra Fees Collected from Students:
The Assessing Officer (AO) assessed the extra fees collected from students as the income of the family head of the trustees instead of allocating it equally among the trustees. The CIT(A) confirmed this finding, ignoring the submission of the assessee. The Tribunal upheld the CIT(A)'s decision, stating that the collection of unaccounted fees should not be allocated among the trustees of the Trust.

2. Allocation of Income Among Trustees:
The trustees argued that the extra fees collected should be allocated among all trustees as they acted on behalf of their families. The Tribunal found no force in this argument and confirmed the CIT(A)'s findings that the collection of unaccounted fees should not be allocated among the trustees.

3. Validity of Additional Grounds of Appeal:
The assessee did not press the additional grounds of appeal regarding the assessment of fees collected by the trustees in their official capacity. Hence, the Tribunal dismissed the additional grounds as not pressed.

4. Taxability of Donations Received by Trustees:
The AO found that the trustees collected donations from students for admission to the management quota seats, which were not accounted for in the Trust's books. The CIT(A) directed the AO to adopt the share of donation as per the seized material after deducting expenses and amounts refunded. The Tribunal upheld this decision, stating that the actual extra fees received by the trustees should be taxed as unaccounted income.

5. Denial of Exemption u/s 11 of the I.T. Act:
The AO denied exemption u/s 11 of the I.T. Act, stating that the Trust's funds were misutilized by the trustees for personal profit. The CIT(A) confirmed this finding. However, the Tribunal held that the Trust should not be penalized for the illegal activities of a few trustees and that the Trust is entitled to exemption u/s 11. The Tribunal directed that only the unaccounted income received by the Trust from the trustees should be taxed at the maximum marginal rate.

6. Enhancement of Income by CIT(A):
The CIT(A) enhanced the income of the Trust by adding the amounts collected by the trustees as capitation fees. The Tribunal found that this enhancement was made without giving an opportunity of hearing to the assessee, which is a violation of the principle of natural justice. The Tribunal directed that only the unaccounted income received by the Trust from the trustees should be taxed.

7. Set-off of Excess Application of Earlier Years:
The CIT(A) denied the set-off of excess application of earlier years, stating that the Trust lost its status on account of denial of exemption u/s 11. The Tribunal held that since the Trust is entitled to exemption u/s 11, the excess application of earlier years should be set off against deficits in subsequent years. The AO was directed to re-compute the income accordingly.

Conclusion:
The Tribunal dismissed the appeals of the assesses in ITA Nos. 27 to 30/Coch/2019 and 32 to 34/Coch/2019. The appeals of the assesses in ITA Nos. 31 & 35/Coch/2019, 208 to 213/Coch/2019, and 304 to 310/Coch/2019 were partly allowed. The appeal of the assessee in ITA No. 207/Coch/2019 was allowed. The appeals of the revenue in ITA Nos. 54, 55/Coch/2019, 238, and 239/Coch/2019 were dismissed.