2021 (8) TMI 955 - AT - Income Tax

Validity of search u/s 132 - contention of the ld. AR is that search action was not valid and due procedure laid down u/s. 132 of the Act was not followed - HELD THAT - In this case, search was conducted u/s. 132 on 15.10.2015 by issuing valid warrant in the name of assessee and also Panchanama was drawn with proper local witnesses. As on date there was Explanation inserted in section 132 by the Finance Act, 2017 with retrospective effect from 1.4.1962 prohibiting appellate authorities to go into the reasons recorded by the concerned appellate authorities for directing search against the assessee. This amendment will have effect in the present case. Therefore, the Tribunal cannot be expected to go into the said question. It is only for the Constitutional posts to examine the validity of search action. More so, this issue was also decided in the case of Prathibha Jewellery House 2017 (11) TMI 1744 - KARNATAKA HIGH COURT where the writ petition was dismissed holding that law was amended by insertion of aforesaid Explanation by the Parliament in section 132 by the Finance Act, 2017 w.r.e.f. 1.4.1962 and it was held that the Appellate Authorities could not go into the reasons recorded by the concerned Income Tax Authority for directing Search action. In view of this, we are of the opinion that the assessee is precluded in challenging the validity of search action before the Tribunal. Validity of notice issued u/s. 153A - HELD THAT - As per clause (a) of sub section (1) of section 153A, at the stage of issue of notice u/s 153A, the only requirement is to ask the assessee to file return of income for relevant six years covered by section 153A and whether after filing of return of income, the assessment to be made by the AO will be assessment or reassessment has to be determined afterwards and not at the time of issue of notice u/s 153A. Similar view was taken in the case of Rajesh Exports Ltd. 2018 (12) TMI 278 - ITAT BANGALORE in para 17 of the Tribunal s order. In this view of the matter, this ground is dismissed. Status of the assessee - According to the ld. AR, trust is not a person referred to in section 2(31) of the Act and the CIT(Appeals) ought to have held that assessment made on a nonexistent status is bad in law - HELD THAT - In this case, the assessee itself has filed return of income in the status of trust and the same was followed by the AO in framing assessment u/s. 153A of the Act. Being so, we do not find any infirmity in the order of AO. This ground is dismissed. Validity of assessment u/s 153A - HELD THAT - There are various incriminating material found during the course of search and as rightly pointed out by the ld. DR, it cannot be accepted that no incriminating material was found during the search action. As in Canara Housing Development Co. case 2014 (8) TMI 642 - KARNATAKA HIGH COURT held that once the assessment is validly reopened, the AO has to take into account all the three types of income to complete the assessment or reassessment, as the case may be. The three types of income are (i) income disclosed in the return of income, (ii) undisclosed income during the search, and (iii) any other income which is not disclosed in the earlier return and not unearthed during the search. In our considered opinion, if incriminating material is found during the search u/s. 153A, all three types of income has to be assessed by the AO and in view of the judgment of Canara Housing Development Co. (supra) this legal ground has no merit. Unaccounted capitation fees in cash - Reliance on seized material and post-search statements - HELD THAT - Addition made by the AO is based on unsubstantiated loose sheets and jottings without proper cross-examination of the person who has admitted the contents therein. Being so, it cannot be stated as full-proof of material evidence to substantiate the addition. In our opinion seized documents do not support the AO s contention that assessee has received unaccounted capitation fees for admission of the students to the college. It also does not suggest that the assessee has paid commission to agents to bring the students for admission to college. Similarly it does not suggest payment of any amount to the trustees for their self-benefit. Going through the entire facts of the case it creates only a suspicion in the minds of the revenue authorities that the assessee has collected unaccounted capitation fee - the suspicion not enough to hold that the assessee has collected unaccounted capitation fees in absence of concrete evidence bought on record by the authorities concerned. The suspicion cannot replace the material evidence brought on record by the authorities Statement of 2 cannot be basis for making such huge additions on collection of capitation fees. It cannot be considered as appropriate sample to frame the assessment on the basis of their statement - assessee requested for cross examination of all the parties whoever have given the statements against the assessee, if any, which was not provided at all - such statements cannot be relied upon.The revenue authorities bound to follow the principle of natural justice and ought to have given proper opportunity of examination and cross examination of the parties concerned whose statements are relied upon to frame the assessment. In our opinion the discovery of documents not only sufficient to conclude the collection of unaccounted capitation fees, cross examination of concerned parties is also important. The revenue authorities recorded statement of only 5 students out of more than 800 students and out of 5 only 2 are confirmed. The two statements recorded cannot be relied upon without confronting the same to the assessee. The statement of these two persons confirming payment of capitation fees is fully uncorroborated and non-production of them for cross-examination cannot be considered as incriminating material so as to sustain the addition. The rough notings in the loose papers are not full-proof evidence without proving the correctness of the same. Nothing was recorded in the orders of lower authorities that assessee has deviated from its objects for which approval u/s. 12A was granted and not applied its funds towards its objects. No evidence was brought out to show that the amount of capitation fees alleged to have been collected resulted in creation of any unaccounted assets by the trust or trustees or by any interested person. On this count also the addition cannot be sustained. Evidence collected by the authority is not sufficient to establish that the stand that the assessee has collected unaccounted capitation fees for admission of students to various courses in the assessee s college. We are aware that entire evidence has to be appreciated in a wholesome manner and even where there is documentary evidence, the same can be overlooked if there are surrounding circumstances to show that the claim of assessee is opposed to normal course of human thinking, conduct and human probability. Even applying this principle to the present case, we have difficulty in rejecting the assessee s plea as opposed to normal course of human conduct. The circumstances surrounding the case are also not enough to reject the assessee s explanation. We have considered all the material on record and also the statement of the parties as discussed in the earlier paragraphs. No evidence was brought on record to show that amount of alleged capitation fees which have been collected was misused by the assessee or by any interested persons.There is no allegation that the assessee is not imparting education and it is an admitted fact that thousands of students are studying in the college and assessee has been carrying on educational activities imparting medical education. It fulfilled the requirement of imparting education which are not doubted or challenged by the authorities. Being so, exemption u/s. 11 of the Act cannot be denied. The unsubstantiated and uncorroborated seized material alone cannot be considered as conclusive evidence to frame these assessments. The words may be presumed in section 132(4) of the Act given an option to the AO concerned to presume these things, but it is rebuttable and it does not give a definite authority and conclusive evidence. The assessee is having every right to rebut the same. No addition can be made in the absence of any corroborative material. Since there was no examination or cross-examination of persons concerned, the entire addition in the hands of the assessee on the basis of uncorroborated writings in the loose papers found during the course of search cannot be sustained. The evidence on record is not sufficient to uphold the stand of revenue that assessee is collecting huge unaccounted capitation fees in the guise of carrying on educational activities. As already held that there are various loose sheets, scribblings, jottings and Excel sheets taken from the computer having no signature or authorization from the assessee s side. These are unsubstantiated documents and there is nothing to suggest any undisclosed assets of assessee found during the course of search. More so, it does not show any recovery of the undisclosed assets in the form of landed property, building, investments, money, bullion, jewellery or any kind of movable or immovable assets - Decided in favour of assesee. Denial of exemption u/s. 11 - AO denied the exemption under sec 11 of the Act for the major reason that the trust has received capitation fee in cash and has been carrying on the activities which are not in accordance with the objects of the trust - HELD THAT - Unless the department shows that there was breach of conditions laid down for grant of exemption u/s. 11 of the Act, the benefit of exemption u/s. 11 cannot be denied. The assessee enjoyed registration granted during this period and the assessee also demonstrated that the assessee s predominant objects remain the same i.e., carrying out the charitable activities for the purpose of advancement of education and not to earn profit. Earning surplus income by carrying out educational activities is not a reason to deny exemption u/s. 11 of the Act. The assessee s predominant activity is carrying out educational activities which is charitable in nature. The trust cannot be deprived of the benefit of exemption u/s. 11. Further, as we have discussed in elsewhere in the order there is no concrete evidence for collection of unaccounted capitation fees and it is not possible to deny the exemption u/s 11 of the act. It is also noted that even if the assessee constructed the temple inside the campus of the education institution for the benefit of the students and employees and also for public, it cannot be construed as violation of section 12(1)(a) of IT Act. There was one more allegation that assesse has collected exorbitant fees but in our opinion the fees has been fixed by the state authority and there was no violation noted by the state authority or MCI. As discussed in earlier para of this order about the authenticity of the seized material, we have held that it is not foolproof. In such circumstances it cannot be relied upon - Decided in favour of assessee. Allowance of depreciation - HELD THAT - The assessee is entitled for depreciation u/s. 32 on assets where it has been laid out as application of income for charitable purposes u/s. 11(1)(a) of the Act. The amendment brought to section 11(6) of the Act by the Finance (No.2) Act, 2014 which became effective from AY 2015-16 and depreciation in such case being precipitation in nature. Accordingly, by placing reliance on the decision of the Hon ble Supreme Court in the case of CIT v. Rajasthan Gujarati Charitable Foundation Poona , 2017 (12) TMI 1067 - SUPREME COURT the AO is directed to grant depreciation for AY 2010-11. Undisclosed cash receipts - HELD THAT - We have already held in earlier para of this order that unsubstantiated material cannot be full-proof material evidence to sustain the addition. We also hold that mere existence of concealment even in one year is not sufficient to estimate the income of other years on that basis. It is pertinent to place reliance on the order of this Tribunal in the case of Anjaneya Brick Works. 2002 (1) TMI 256 - ITAT BANGALORE wherein it was held that estimation of income could not be made relying on the seized documents which related to another accounting period and not the accounting year under consideration and, therefore, addition could not be made on the basis of incriminating documents relating to subsequent year. So the rule of uniformity cannot be and should not be applied on the estimate basis. There can be time and times when the uniformity can be maintained but for that case there should be some direct evidence available in a given case - As decided ANAND KUMAR DEEPAK KUMAR. 2006 (8) TMI 166 - DELHI HIGH COURT merely because some discrepancies were found in assessee s books in the pre-search period of unaccounted sales, it could not be presumed that such a discrepancy continued even in the post-search period, when there is no evidence to support such a view, and, therefore, addition could not be made on the basis that the assessee had made unaccounted sales throughout the accounting year. Being so, there is no question of extrapolation of income in all these assessment years. Disallowance of donation u/s 37 - HELD THAT - The donations have been given to the registered and approved institution i.e., R.L. Jalappa Foundation which is duly registered u/s. 12A of the Act by way of account payee cheque and the same is to be allowed as an application of income. This ground of the appeal of the assessee is allowed. Rate of Tax - contention of the AR is that even if exemption u/s. 11 is denied, maximum margin rate of tax cannot be applied in view of the CBDT circular number 320 dated 11/01/1982 - HELD THAT - We are agreeing with the contention of the AR. in our opinion this ground of appeals does not require any adjudication as we have already held that assessee is entitled for exemption 11 of the I.T. Act.

Summary

Issues Involved:
1. Validity of Search and Seizure.
2. Validity of Notice Issued under Section 153A.
3. Status of the Assessee.
4. Validity of Assessment.
5. Reliance on Seized Material and Post-Search Statements.
6. Disallowance of Exemption Claimed under Section 11(1)(a).
7. Disallowance of Expenditure in the Nature of Capital Expenditure.
8. Disallowance of Donations.
9. Undisclosed Cash Receipts.
10. Denial of Exemption under Section 11.
11. Allowance of Depreciation.
12. Computation of Income under the Heads of Income Applying Provisions of Sections 28 to 43C.
13. Extrapolation of Income.
14. Disallowance of Donations under Section 37.
15. Rate of Tax.
16. Jurisdiction for Assessment Year 2016-17.
17. Levy of Interest under Section 234B.

Detailed Analysis:

1. Validity of Search and Seizure:
The Tribunal held that the search was conducted u/s. 132 of the Act by issuing a valid warrant and drawing a proper Panchanama. With the retrospective amendment to section 132 by the Finance Act, 2017, the Tribunal cannot examine the reasons recorded for the search. The Tribunal cited the Karnataka High Court decision in Prathibha Jewellery House v. Commissioner of Income-tax, which upheld that the appellate authorities could not go into the reasons for directing the search. Accordingly, the Tribunal rejected the challenge to the validity of the search.

2. Validity of Notice Issued under Section 153A:
The Tribunal found that at the stage of issuing notice u/s 153A, the requirement is to ask the assessee to file a return of income for the relevant six years. The determination of whether it is an assessment or reassessment is to be made later. The Tribunal dismissed the ground challenging the validity of the notice issued u/s 153A.

3. Status of the Assessee:
The Tribunal noted that the assessee had filed returns in the status of a "trust," and the same status was followed by the AO in framing the assessment u/s. 153A. Hence, the Tribunal found no infirmity in the AO's order and dismissed the ground challenging the status of the assessee.

4. Validity of Assessment:
The Tribunal observed that various incriminating materials were found during the search, which were handed over to the AO. The Tribunal cited the Karnataka High Court decision in Canara Housing Development Co. v. DCIT, which held that once the assessment is validly reopened, the AO has to assess all three types of income. The Tribunal concluded that the framing of assessment u/s. 153A is valid and dismissed the ground challenging the validity of the assessment.

5. Reliance on Seized Material and Post-Search Statements:
The Tribunal found that the seized materials were loose sheets, unsigned entries in notebooks, and statements recorded from individuals. The Tribunal emphasized that the AO did not provide an opportunity for cross-examination of the individuals whose statements were relied upon. The Tribunal cited various judicial precedents, including the Supreme Court decision in Andaman Timber Industries v. CCE, which held that not allowing cross-examination is a serious flaw. The Tribunal concluded that the reliance on seized materials and statements without cross-examination is not justified and deleted the additions based on such materials.

6. Disallowance of Exemption Claimed under Section 11(1)(a):
The AO denied exemption u/s. 11 on the grounds that the assessee collected capitation fees and incurred non-charitable expenditures. The Tribunal found that the AO's conclusions were based on unsubstantiated loose sheets and statements without corroborative evidence. The Tribunal held that the assessee is entitled to exemption u/s. 11 as the activities of the trust were genuine and in accordance with its objects. The Tribunal allowed the ground challenging the disallowance of exemption u/s. 11.

7. Disallowance of Expenditure in the Nature of Capital Expenditure:
The AO disallowed the capital expenditure claimed as application since exemption u/s. 11 was denied. The Tribunal, having allowed the exemption u/s. 11, directed the AO to allow the capital expenditure as application of income.

8. Disallowance of Donations:
The AO disallowed donations on the ground that exemption u/s. 11 was denied. The Tribunal, having allowed the exemption u/s. 11, directed the AO to allow the donations as application of income.

9. Undisclosed Cash Receipts:
The Tribunal found that the AO's estimation of undisclosed cash receipts was based on unsubstantiated loose sheets and statements without corroborative evidence. The Tribunal held that the addition based on such materials is not sustainable and deleted the additions.

10. Denial of Exemption under Section 11:
The Tribunal emphasized that the activities of the trust were genuine and in accordance with its objects. The Tribunal found no evidence to support the AO's allegations of non-charitable activities and diversion of funds. The Tribunal allowed the ground challenging the denial of exemption u/s. 11.

11. Allowance of Depreciation:
The Tribunal directed the AO to grant depreciation as per the provisions of the Act, citing the Supreme Court decision in CIT v. Rajasthan & Gujarati Charitable Foundation Poona.

12. Computation of Income under the Heads of Income Applying Provisions of Sections 28 to 43C:
The ground was not pressed by the assessee and was dismissed as not pressed.

13. Extrapolation of Income:
The Tribunal found that the AO's extrapolation of income was based on unsubstantiated materials and conjectures. The Tribunal held that the addition based on extrapolation is not sustainable and deleted the additions.

14. Disallowance of Donations under Section 37:
The Tribunal found that the donations were made to a registered and approved institution by account payee cheque and directed the AO to allow the donations as an application of income.

15. Rate of Tax:
The Tribunal noted that the issue of the rate of tax does not require adjudication as the assessee was granted exemption u/s. 11.

16. Jurisdiction for Assessment Year 2016-17:
The Tribunal found that the assessment order for AY 2016-17 was passed u/s. 143(3) r.w.s. 153B and dismissed the ground challenging the jurisdiction.

17. Levy of Interest under Section 234B:
The Tribunal noted that the levy of interest u/s. 234B is consequential and mandatory and does not require adjudication.

Conclusion:
The Tribunal allowed the appeals of the assessee partly, granting exemption u/s. 11, allowing depreciation, and deleting the additions based on unsubstantiated materials. The Tribunal emphasized the importance of providing an opportunity for cross-examination and relying on corroborative evidence.