2022 (11) TMI 137 - HC - Income Tax

Exemption u/s 11 - Denial of exemption as quid-pro-quo element was involved in the trust accepting donations from donors - reliance on Statement recorded u/s 132(4) of donors - Whether ITAT was legally 'justified' in deciding the case on the ground that the AO has not enquired into the source of the donors? - HELD THAT - What is to be seen, is the existence of the systemised mechanism to collect the capitation fee as donation through other entities. These principles laid down in the above-stated cases while expounding the concept of lifting the corporate veil, especially in cases relating to tax evasion, and in cases where public interest and policy are sought to be defeated by fraud, are squarely applicable to the present appeals where while the Assessee Trusts are controlled by common trustees and are in indeed sister Trusts, this Court may be constrained to lift the veil to see the real beneficiaries and the object of the donations by relatives/friends of parents as quid pro quo for admissions into the Assessee educational institutions as well as the other Assessees who are not educational institutions. On lifting the veil, it is clear as daylight that the modus operandi adopted by the Assessee Institutions and Trusts are with the twin objectives of circumventing/violating the provisions of the Capitation Fee Act as well as evading tax while seeking tax exemption under the corporate veil of being different and distinct entities receiving funds from each other for purely charitable purposes. Suffice it to say, nothing can be farther from the naked truth that cannot hide itself sufficiently behind the fig leaf of the legal cover sought to be taken by the Assessees under the guise of being charitable trusts and seeking exemption thereof. An elaborate exercise was undertaken by AO by issuing summons to various persons and their sworn statements were recorded. These sworn statements point to the factum of payment of amounts extending to atleast around Rs. 5 Lakhs in each of the cases as well as the nexus between the Assessee institutions. The fact that these payments were made by the relatives/friends of the parents of the students who obtained admission in the Assessee institutions would prove the nature of the donations and the reasons therefor. That apart, it is clearly evident that the funds that have been given for admissions, have been routed through the other trusts. The fact that there have been some statements and their change subsequently can at best be said to be under fear of being exposed, which would ultimately tell on the future of the students. Statement recorded u/s 132(4) of the Act and later, confirmed in statement recorded u/s 131 of the Act, cannot be discarded simply by observing that the assessees have retracted the same, because such retraction ought to have been generally made within a reasonable time or by filing complaint to superior authorities or otherwise brought to notice of the higher officials by filing duly sworn affidavit or statement supported by convincing evidence. Such a statement when recorded at two stages cannot be discarded summarily in cryptic manner by observing that the assessees in the belatedly filed affidavit have retracted from their statements. Such retraction is required to be made as soon as possible or immediately after the statement of the assessees was recorded. Duration of time when such retraction was made, assumes significance and in the present case, retraction has been made by the assessees after eight months to be precise, 237 days. It is settled position of law that the admission though important is not conclusive. It is open to the assessee who made the admission to show that it is incorrect as held by in Pullangode Rubber Produce Company Ltd. v. State of Kerala Another 1971 (9) TMI 64 - SUPREME COURT - The onus falls on the person who had earlier admitted to prove it wrong. Therefore, the statements could form the basis of assessment. Statements given to the AO under Section 132 (4) have legal force. Unless the retractions are made within a short span of time, supported by affidavit swearing that the contents are incorrect and it was obtained under force, coercion and by lodging a complaint with higher officials, the same cannot be treated as retracted. There is preponderance of evidence that the contributions are non-voluntary considering the multitude of facts, such as, the detailed sworn statements of the persons, who had made the contributions, being the relatives/friends of the parents of the students, who were given seats in the Assessee educational institution, the nexus between the other Assessee institution, which collected and passed on the contribution though not an educational institution by itself, having common trustees being well-knit, as can be seen from the facts. That apart, the fact that no action has been initiated by the State cannot be a reason to allow the exemption under the provisions of the Act or absolve the liability of the assessees, that too after the device to route the capitation fee was discovered. Illegality cannot be perpetuated. Similarly, any decision even in the assessees' own case cannot have any bearing on the adjudication of the issues before us, because each assessment is independent and has to rest on its own facts. As such, when the contributions cannot be treated as voluntary, the further question of their application to charitable purposes or otherwise, need not be gone into, meaning thereby that the assesses are not entitled to the benefits of Sections 11 and 12 of the Act. Assessing officer, not enquiring about the source of the donors, it is an undisputed fact that the sums have been paid by the parents or acquaintances to the institutions/trusts for securing the seat. Such persons are the source for the assessees. As rightly contended by the learned Senior Standing Counsel for the Revenue, it is not necessary for the assessing officer to go into the source of the source to tax the assessees under assessment and the same cannot be a reason to allow the deduction, which the assessees are not otherwise entitled to. CONCLUSION - In view of our above findings that the amounts collected by the assessees are capitation fee in quid pro qua for allotment of seat in deviation of the Tamil Nadu Educational Institutions (Prohibition of Collection of Capitation Fee) Act, 1992 and the same are neither a voluntary contribution nor to be treated as applied for charitable purpose, the orders of the Appellate Authority as well as the Tribunal, which are impugned in these appeals, are absolutely perverse in nature and therefore, they are set aside. Accordingly, all the substantial questions of law are answered in favour of the Revenue and against the Assessees.

Summary

Issues Involved:
1. Entitlement to benefits under Section 11 of the Income Tax Act for receipts termed as donations or capitation fees.
2. Legality of donations received by trusts in lieu of admission of students.
3. Compliance with the Tamil Nadu Educational Institution (Prohibition of Collection of Capitation Fee) Act, 1992.

Detailed Analysis:

1. Entitlement to Benefits under Section 11 of the Income Tax Act:
The primary issue was whether the Assessees were entitled to the benefits of Section 11 of the Income Tax Act with respect to the receipts of capitation fees/monies under the head donation from sister trusts. The Tribunal had previously held in favor of the Assessees, granting them exemption under Section 11. However, the Revenue contended that these receipts were not voluntary donations but capitation fees collected in exchange for admission to educational institutions, which is against public policy and the provisions of the Tamil Nadu Educational Institution (Prohibition of Collection of Capitation Fee) Act, 1992.

2. Legality of Donations Received by Trusts:
The Revenue argued that the donations received by the trusts were, in fact, capitation fees collected for securing admissions in educational institutions. The Assessing Officer conducted an elaborate exercise, issuing summons and recording sworn statements from various persons, which revealed that the amounts were paid in lieu of procuring seats in the educational institutions. The Tribunal, however, dismissed these contentions, stating that the donations were voluntary and that the Assessing Officer did not provide credible evidence to prove otherwise.

3. Compliance with the Tamil Nadu Educational Institution (Prohibition of Collection of Capitation Fee) Act, 1992:
The Revenue emphasized that the collection of capitation fees was in direct violation of the Tamil Nadu Educational Institution (Prohibition of Collection of Capitation Fee) Act, 1992. The Act prohibits the collection of any amount in excess of the fee prescribed under Section 4 of the Act. The Tribunal's decision to grant exemption under Section 11 was challenged on the grounds that it overlooked the provisions of the Capitation Fee Act and the illegal nature of the donations.

Court's Findings:

On Entitlement to Benefits under Section 11:
The Court found that the amounts collected by the Assessees were indeed capitation fees and not voluntary donations. It was determined that the donations were made as a quid pro quo for securing admissions, which is contrary to the principles of charity and the provisions of the Income Tax Act. The Court emphasized that such collections, being illegal, cannot be treated as voluntary contributions eligible for exemption under Section 11.

On Legality of Donations:
The Court held that the donations received by the trusts were capitation fees collected in violation of the Capitation Fee Act. The nexus between the trusts and the systematic routing of funds to evade taxes and regulations was evident. The Court noted that the trusts were used as tools to transfer capitation fees under the guise of donations, thereby evading tax liabilities and violating public policy.

On Compliance with the Capitation Fee Act:
The Court underscored that the collection of capitation fees, whether directly or indirectly, is prohibited under the Capitation Fee Act. The practice of collecting donations in exchange for admissions was found to be a clear violation of the Act. The Court criticized the Tribunal for not considering the provisions of the Capitation Fee Act and for giving perverse findings that overlooked the illegal nature of the collections.

Conclusion:
The Court set aside the orders of the Appellate Authority and the Tribunal, holding that the amounts collected by the Assessees were capitation fees and not voluntary donations. The Assessees were found to be in violation of the Capitation Fee Act, and their claim for exemption under Section 11 of the Income Tax Act was denied. The Court directed the Assessing Authority to proceed further based on the assessment orders and to take steps for the cancellation of the registration certificates issued to the Assessees under Section 12A of the Act. The Court also emphasized the need for the Central and State governments to take measures to eradicate the collection of capitation fees in educational institutions.