2024 (1) TMI 357 - AT - Income Tax

Exemption u/s 11 - assessment of trust - denial of claim as assessee has collected capitation fees - whether the assessee has collected Capitation fees or not? - AO has come to the conclusion that the assessee-trust has collected capitation fees on the basis of data found in laptops, pen drives, diary, loose papers seized from various employees from their residences and has also concluded that the cash found from the employees of the Trust are part of capitation fees collected by the assessee. HELD THAT - In the instant case, all the documents/materials have been seized from the employees only. It has been categorically stated by the trustees of the assessee trust that have not authorized anyone to collect capitation fees. The trustee has also stated that the employees might have collected it without the authority of the trust. Under the principle of vicarious liability, the employer is normally liable for any act performed by his employees during the course of employment. However, when an employee does anything that is neither directed nor controlled by the employer, then the said action of employee cannot be considered to be within the scope of his employment. In that kind of situation, the employer is not liable for the action of the employee and hence is not liable for damages. A.R further submitted that the relevant news paper report is placed at pages 279 280 of paper book relating to AY 2015-16. This information further supports the case of the assessee trust that it is not collecting capitation fees and only the employees might have collected money without its authority. We notice that the co-ordinate bench of Tribunal, in the case of Anil Mahavir Gupta 2016 (10) TMI 163 - ITAT MUMBAI has considered the issue as to whether the documents seized from employees could be relied upon for making addition in the hands of the assessee. It was decided in favour of the assessee As statements/materials do not vindicate or link the information/evidences found from the employees. The revenue also did not find/seize any credible material from the assessee trust to corroborate the information/document seized from the employees. In respect of alleged receipt of capitation fee and in respect of payments recorded in the materials, the AO did not make enquiries with the payer/recipient of money. In the absence of any independent material to link/vindicate the information found from the employees, we are of the view that the AO could not have made additions on the basis of that information. Thus we are of the view that documents seized from employees cannot be considered as having any evidentiary value and cannot be considered to have trustworthiness, since no other corroborative material was brought on record to support the veracity of the same . None of the material would show that the assessee trust was collecting capitation fees. Hence, the AO could not have placed reliance on the materials seized from the employees to draw conclusion that the assessee was collecting capitation fees. Thus additions made by the AO including the protective additions, on the basis information found in the laptops, diaries and other documents found/seized from the employees and third parties (employees of another trust) are liable to be deleted. Accordingly, we direct the AO to delete the addition made towards Capitation fees and other additions made on the basis of the materials seized from the employees in all the years under consideration. AO has rejected the claim for exemption u/s. 11 of the Act on the reasoning that the assessee cannot be considered to be a charitable trust, when it collects capitation fees - In the earlier paragraphs, we have held that there is no evidence to show that the assessee has collected capitation fees. Hence the reasoning given by the AO to reject the claim for exemption u/s. 11 would fail. As under the provisions of sec.11 to 13 of the Act, the AO is entitled to reject the exemption only when the provisions of sec.13 are attracted, i.e., there is any of the violations mentioned in sec. 13 of the Act. The possible case of the AO, in the instant case, would be that the trustees have siphoned off the capitation fees collected by the assessee trust, by not accounting the same in the books and it may attract the provisions of sec.13. We have noticed earlier that there is no evidence to show that either the trust or the trustees have collected capitation fees. We have also held that the AO has arrived at such a conclusion only on presumptions. In that view of the matter, it cannot be said that the trustees have siphoned off money belonging to the assessee trust. Hence it cannot be said that there was violation as mentioned in the provisions of sec.13 of the Act. Assessee should be granted exemption u/s. 11 of the Act in all the years under consideration - we hold that the corpus donations received in the form of development fees and also other corpus donations are eligible for exemption u/s. 11 of the Act. AO did not allow capital expenditure incurred by the assessee as application of income, since he had denied exemption u/s. 11 - Since we have restored the exemption u/s. 11 to the assessee, the income of the assessee for all the years under consideration has to be computed in accordance with the provisions of sec.11 of the Act. Hence the capital expenditure incurred by the assessee is required to be treated as application of income. Thus direct the AO to allow the above said capital expenditure incurred by the assessee as application of income u/s. 11(1) of the Act. Levy tax u/s. 115BBE - As the income has to be computed for all the years in terms of sec.11 of the Act. Accordingly, the tax could not be levied u/s. 115BBE of the Act in all the years under consideration. Accordingly, we set aside the order passed by Ld CIT(A) on this issue in all the years under consideration and direct the AO not to levy tax u/s. 115BBE of the Act. Depreciation denied on opening balance of assets on the reasoning that the value of concerned assets has been treated as application of income - We notice that such embargo to claim depreciation on the assets, whose value has been allowed as application of income has been brought into the statute with effect from AY 2015-16 only. Accordingly, we direct the AO to allow depreciation on the opening value of assets in AY 2013-14 and 2014-15. For other years, the disallowance of deprecation should be restricted only on those assets, whose value has been allowed as application of income in the earlier years. Set off of deficit brought forward from earlier years denied - Since we have restored the exemption u/s. 11 of the Act to the assessee, the claim of the assessee is allowable as per the decision rendered by Hon ble Bombay High Court in the cases of DIT (E) vs. Maharashtra Industrial Development Corporation 2013 (3) TMI 654 - BOMBAY HIGH COURT and CIT vs. Institute of Banking 2003 (7) TMI 52 - BOMBAY HIGH COURT Accordingly, we direct the AO to allow set off of deficit brought forward from earlier years. Bogus purchases - We have noticed that Smt Taruna Maheswari is not the employee of the assessee and the allegation of bogus purchases has been made on the basis of noting made by her. On the contrary, the assessee could prove the genuineness of purchases before the AO. On the contrary, the AO has placed reliance on the statement given by Smt Taruna Maheswari, which has been retracted by her later. When the assessee is able to prove the genuineness of purchases and payments, the AO should have accepted the same, since there was no other material to support the noting made by a third person, i.e., Taruna Maheswari. Accordingly, we are of the view that the Ld CIT(A) was not justified in confirming the addition of Rs. 84.50 lakhs made by the AO in AY 2014-15. Accordingly, we direct the AO to delete this addition. Cash balances seized from the employees with the assessee trust - As noticed that there is no material to link the above said cash balances seized from the employees with the assessee trust. Hence there is no reason to make this addition in the hands of the assessee on substantive basis, since the onus to explain the cash balances will lie upon Shri Pratap Patil and Shri Unmesh Khanvilkar. We noticed that both these persons have owned up the cash balances and offered the same as their income under Income declaration Scheme, 2016. Accordingly, we direct the AO to delete both the above said additions in AY 2017-18.

Note:- Tax Exemptions: Capitation Fees in Educational Institutions: A Legal Quagmire

Issues Involved:
1. Collection of Capitation Fees
2. Rejection of Books of Accounts
3. Denial of Exemption u/s. 11
4. Corpus Donations and Development Fees
5. Capital Expenditure as Application of Income
6. Levy of Tax u/s. 115BBE
7. Depreciation on Opening Balance of Assets
8. Set Off of Carry Forward Deficit
9. Addition of Sale Value of Assets
10. Alleged Bogus Purchases
11. Protective Additions of Cash Seized
12. Unexplained Expenditure
13. Cash Seized from Shri Bhagirath Patil

Summary of Judgment:

1. Collection of Capitation Fees:
The Tribunal examined whether the assessee trust collected capitation fees. The AO's conclusion was based on materials seized from employees' residences. The Tribunal found no corroborative evidence from the assessee's premises linking it to capitation fees. Statements from trustees and employees were retracted, and the Tribunal held that materials seized from employees lacked evidentiary value without independent corroboration.

2. Rejection of Books of Accounts:
The AO rejected the books of accounts alleging unaccounted capitation fees. The Tribunal, finding no evidence of capitation fees collection, held that the rejection of books was unjustified and directed acceptance of the books of accounts.

3. Denial of Exemption u/s. 11:
The AO denied exemption u/s. 11, alleging the trust was not charitable due to capitation fees collection. The Tribunal restored the exemption, noting no evidence of capitation fees and that the registration u/s. 12A was intact.

4. Corpus Donations and Development Fees:
The AO denied exemption for corpus donations and development fees, presuming them non-voluntary. The Tribunal found no evidence supporting this presumption and directed exemption u/s. 11(1)(d) for these donations.

5. Capital Expenditure as Application of Income:
The AO disallowed capital expenditure as application of income due to denial of exemption u/s. 11. The Tribunal, restoring the exemption, directed that capital expenditure be treated as application of income.

6. Levy of Tax u/s. 115BBE:
The AO levied tax u/s. 115BBE due to rejection of books and denial of exemption. The Tribunal, restoring the exemption and accepting the books, directed not to levy tax u/s. 115BBE.

7. Depreciation on Opening Balance of Assets:
The AO disallowed depreciation on assets whose value was treated as application of income. The Tribunal directed allowing depreciation for AY 2013-14 and 2014-15 and restricting it for subsequent years only on assets whose value was allowed as application of income.

8. Set Off of Carry Forward Deficit:
The AO rejected the set off of carry forward deficit. The Tribunal, restoring exemption u/s. 11, directed allowing the set off as per relevant case laws.

9. Addition of Sale Value of Assets:
The AO added the sale value of assets as income. The Tribunal, restoring exemption u/s. 11, directed deletion of this addition.

10. Alleged Bogus Purchases:
The AO added amounts for alleged bogus purchases based on third-party statements. The Tribunal, finding the purchases genuine and the third-party statements retracted, directed deletion of the addition.

11. Protective Additions of Cash Seized:
The AO made protective additions for cash seized from employees. The Tribunal, finding no evidence linking the cash to the assessee and noting the employees' declarations under IDS, directed deletion of these additions.

12. Unexplained Expenditure:
The AO added amounts for unexplained expenditure based on entries in seized documents. The Tribunal, finding no corroborative evidence, upheld the deletion of these additions by the CIT(A).

13. Cash Seized from Shri Bhagirath Patil:
The AO added cash seized from Shri Bhagirath Patil to the assessee's income. The Tribunal, finding no link between the cash and the assessee and noting the retraction of statements, upheld the deletion of this addition by the CIT(A).

Conclusion:
The Tribunal allowed all appeals of the assessee and dismissed all appeals of the revenue, directing deletion of various additions and upholding the assessee's claims for exemption and application of income.

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