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TMI Blog2005 (1) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... ified in deleting a sum of Rs. 95,02,436 though he satisfied that the amount was diverted from trust to the accounts of the trustees. 4. The brief facts of the case are that the assessee is a registered trust under s. 12AA of the IT Act. The assessee has filed nil return for the above assessment year and claimed exemption under s. 10(22) and the return was originally processed under s. 143(1)(a) and later it was selected for scrutiny and assessment was concluded wherein relief under s. 10(22) was denied and a sum of Rs. 28,66,569 was treated as income of the trust along with adding of Rs. 95,02,436 being credits in the trustees bank accounts as income of the trust on the reason that these credits were the funds diverted from the trust. On appeal, the CIT(A) deleted the addition of Rs. 95,02,436 on the reason that the diverted funds by trustees were not available to trust and loss to the trust and observed that the diverted funds would be the income of trustees, however, held that the trust was not entitled to exemption under s. 10(22) and hence sustained the addition of Rs. 28,66,569. Aggrieved by this action of CIT(A), both the assessee as well as Revenue are in appeal before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arded as complex. What is complex to one may be simple to another. Sometimes, what appears to be complex on the face of it may not really be so if one tries to understand carefully. There should be an honest attempt to understand the accounts of the assessee. If the AO doubts the building fund collections accounts and some further details and information are required, it is open to the AO to call for the same. Instead, he cannot imagine complexity in the accounts and direct audit under s. 142(2A) in order to gain extended time to complete the assessment. The Calcutta High Court in the case of Bate India Ltd. Anr. vs. CIT (2003) 179 CTR (Cal) 147 : (2002) 257 ITR 622 (Cal) has held that complexity of the accounts could not be equated with doubts being entertained by the assessing authority either with regard to the correctness thereof or the need for obtaining certain vital information not ascertainable from the accounts. Similarly, in the case of Gurunanak Enterprises vs. CIT (2003) 180 CTR (Del) 203 : (2003) 259 ITR 637 (Del), the Delhi High Court has observed that although the object in enacting the provision is to assist the AO in framing the assessment. When he finds the acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reach the erroneous conclusion that the building funds collections of the trust were diverted for personal purposes. The assessee-trust was created by a registered trust deed dt. 22nd Jan., 1986. The copies of the trust deed and amendments enclosed in pp. 1 to 16 of the paper book would reveal that none of the clauses in the trust deed authorises, directly or indirectly, the founder or the trustees to make use of the funds income and the assets of the trust for their private purposes. It is further submitted that from the inception of the trust the assessee has been pursuing the main object of education and in the assessment order the AO had listed the educational institutions functioning under the management and administration of the assessee-trust during the previous year relevant to the asst. yr. 1994-95. The note on the activities and growth of Vallammal Educational Trust and the brochure may be referred to. The entire income and the funds of the trust have been applied only in furtherance and promotion of the educational purposes as would be evident from the return of income, statement of income, the expenditure account and the balance sheet placed at pp. 110 to 113 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will not automatically lead to the inference that all the investments came out of the building fund collections. If the case of the Revenue that all the investments and credits in the bank accounts of the trustees and their sons aggregating to Rs. 95,02,436 came out of the diverted building funds of the trust is accepted, it will have to be taken that the assessee-trust had collected Rs. 1 crore by way of building funds collections from the new students of 829 admitted in the schools during the relevant previous year which is impossible, having regard to the place where the said schools are functioning as mentioned earlier. The AO has not proved that the AO had not accounted for any of the building fund collections. He assumed that the there must be unaccounted collections because no receipts were issued. The only reason for not issuing receipts is that the State Government, prohibited collection of such amounts compulsorily from the students. The assessee-trust accepted such donations voluntarily paid by a few parents and some paid in instalments. The assessee has furnished the list of donors, dates, amounts collected and the address of the donors. The AO stated that on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esults incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes, since the object is not to make profit. According to the Supreme Court, the decisive or acid test is whether on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity. The Supreme Court added that merely because certain surplus arises from its operations, it cannot be held that the institution is being run for the purpose of profit so long as no person or other individual is entitled to any portion of the profit an the said profit is used for the purposes and promotion of the objects of the institution as in Governing Body of Rangaraya Medical College vs. ITO (1979) 117 ITR 284 (AP) at p. 290, which decision was approved by the Supreme Court in Aditanar Educational Institution Etc. vs. Addl. CIT (1997) 139 CTR (SC) 7 : (1997) 224 ITR 310. The trust deed in the present case does not have any object of providing for carrying on of any activity for profit. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 839.02 is fully covered under the VDIS declaration, no further addition was called for. 9. The learned counsel further submitted that the trust did not get any financial assistance from Government. The trustee, Sri M.V. Muthuramalingam, was able to establish the institutions of the trust solely with help of borrowings from Multani financiers. These financiers were unwilling to lend money directly to the trust and chose to lend the same to Sri M.V. Muthuramalingam who in turn gave the monies to the trust which were used towards building construction, etc. by the trust. The learned counsel also drew attention to the statement of the AO in this revised assessment order dt. 29th March, 2000, the manner in which the loans were taken from these financiers and the list of loans exceeding a crore of rupees. Learned AO also stated that the total disclosure under the VDI Scheme by Sri M.V. Muthuramalingam and his family members was Rs. 1.14 crore. Learned counsel thus submitted that the private borrowings offered to tax under VDI Scheme was the source of the investments/credits in the trustees bank accounts. The statement of accounts under the VDI Scheme and the VDIS certificates issued by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds through donations, gifts, etc., as long as these were ploughed back into the system itself, i.e., of imparting education. The decision of the Calcutta Bench of the Tribunal in Shree Educational Society vs. Asstt. CIT (2003) 80 TTJ (Cal) 365 : (2003) 85 ITD 288 (Cal) where it was held that mere existence of profit will not disqualify the institution if the sole purpose of its existence is not making of profits but are educational only, was also cited. 11. Learned counsel for the appellant-trust concluded by stating that the AO was not justified in law in denying exemption under s. 10(22). 12. With regard to the claim of the appellant-trust that the assessment was barred by limitation and that recourse of the provisions of the s. 142(2A) was taken merely as a ploy to gain time to complete the assessment, the learned Departmental Representative submitted that the AO did have all the facts on record to complete the assessment well within the due date even without recourse of the provisions of s. 142(2A). The special audit was ordered specifically to investigate the various issues as listed in the assessment order relevant to the assessee-trust which are all cited in detail in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The Court should not generally intervene. An authority who has to pass an order, undoubtedly should satisfy itself subjectively or objectively, but even the subjective satisfaction which may be arrived at by an authority while passing an order must be based on objective materials." 14. The learned Departmental Representative submitted that the findings of the AO in his order of assessment were material and vital in coming to the conclusion that the trust is not entitled to the benefit of the exemption under s. 10(22) of the IT Act. 15. The learned Departmental Representative drew our attention to para 7.1 of the assessment order where the AO has stated that no evidence was available for the business carried on by the trustees prior to commencement of the trust. The finding of the AO that Smt. M. Kuncharavalli, trustee and wife of Sri M.V Muthuramalingam, had no idea of her business of commission agency was yet another vital point to prove that she did not in fact earn any income of her own The findings of the AO upon examination of the three sons of Sri M.V. Muthuramalingam were also drawn attention to. The eldest son though shown to be carrying on 'money lending business' w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the trustees showing no awareness to their returned sources of income. 18. The learned Departmental Representative further stated that the VDI declarations were only an afterthought and should not be relied upon and there is no sources of income to trustees hence, they availed the benefit under the VDI Scheme and VDIS gives immunity to the declarant only and not to the trust and moreover, the VDI declaration will also support the claim of the AO that the money was transferred from the trust. 19. Further, he submitted that the trustees have no definite source of income as they were actively involved in the activities of the trust and AO rightly observed that the funds in trustees bank account are the diverted funds of the trust and also submitted that observation of CIT(A) in pp. 16 and 17 is irrelevant and there is no equity in taxation laws and if somebody used the trust money or swindle the trust property, the assessee-trust cannot claim the deduction of that amount from its income as allowable expenditure and only expenses incurred for the purpose of earning trust income or incurred for the purpose of discharging objects of the trust are allowable expenditure and hence thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustees who siphoned off the money. Further, he placed reliance on CBDT Circular No. 584, dt. 13th Nov., 1990, and submitted that if the profit of the educational institution was diverted by the trustees for the personal use of them, then the income of the educational institution will be subject to tax. When all the objects of trust are educational, the trust is existing for educational purpose only and not for the purpose of profit. However, if the surplus used for non-educational purposes, in such circumstances, the trust is not entitled for exemption under s. 10(22) and in this case, the applicability of s. 11 can be examined and if the conditions laid down therein are satisfied, the income will be exempt under s. 11. Further, he submitted that the assessee was getting exemption under s. 10(22) of the Act upto asst. yr. 1992-93 and also assessee got same exemption in subsequent asst. yrs. 1997-98, 1998-99 and exemption under s. 10(23C) for the asst. yr. 1999-2000 because there was no violation of provisions of s. 10(22) or 10(23C) and this cannot be taken as a defence for the assessment year under consideration and each assessment year should be considered independent and separat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore directing the assessee to get the accounts audited by an accountant. The twin requirements of forming of an informed objective opinion by the AO and prior approval of the Chief CIT or CIT are conditions precedent for passing an order in exercise of powers under s. 142(2A) of the Act. In the absence of any of the two conditions the order of the AO will be contrary to law. In the exercise of powers under sub-s. (2A) of s. 142 of the Act, there are three consecutive stages, namely, (a) formation of opinion by the AO; (b) grant of approval by the Chief CIT or CIT; and (c) order by the AO directing the assessee to get the accounts audited by the defined accountant. Stages (a) and (b) pertain to the mode and manner in accordance with which the AO will exercise the power of passing the order directing the assessee to get the accounts audited by the designated accountant. In the present case on hand, the complexity of accounts coupled with interest of Revenue, the AO opted to order for special audit. This action of Revenue is in accordance with the provisions of s. 142(2A). 25. We are unable to accept the contention of the learned counsel for the trust that recourse to the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust by the trustee even if present, cannot be a ground to penalize the trust. It is never in dispute that the assessee-trust was not validly created, nor that its objects, etc. provided for giving some benefits to the trustees. We also find merit in the finding of the CIT(A) during the course of appeal against the order of assessment of the trust that even looking at the issue from a practical point of view, moneys diverted from the trust are loss to the trust and are not available to it. In such circumstances, bringing the impugned amounts to tax would be against the principles of law. Also, the decision of Tribunal in the case of IAC vs. Matrusri Educational Society (1994) 49 TTJ (Hyd) 146 : (1994) 48 ITD 583 (Hyd) is also in favour of assessee. 27. The assessee-trust was denied exemption under s. 10(22) by the AO on the ground that it did not exist solely for the purpose of education and that it existed for the purpose of profit. The reasons for denial of exemption under s. 10(22) were as follows: (a) the advance given to TNBA amounting to Rs. 25 lakhs (b) the foreign education of Sri M.V.M. Sasikumar, trustee and son of Sri M.V. Muthuramalingam, out of trust funds. (c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividuals. True, it may be the case that some incomes so earned were shown as agricultural income without the fact of holding any agricultural land to derive his income. While this act may call for taxing of the that agricultural income, it too cannot be a reason to conclude that the monies represented as agricultural income were siphoned off from the trust. In short, no link/nexus between such incomes and trust funds has been clearly established and all that exists is a doubt whether such a siphoning off could have taken place. For such a mere doubt, we feel it is unjust to penalise the trust. Learned counsel for the assessee-trust has submitted that the trust was validly created by a registered deed of trust. None of its objects permitted any benefits to the trustees or other private persons. In this connection, we find merit in the submissions of the learned counsel of the assessee as taken from the report of the auditor appointed under s. 142(2A) which reads as under: "on the basis of information and explanation given to me and the entries in the accounts, I do not find the funds of the trust being diverted for purposes other than maintenance and running of the schools/other i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said profit is used for the purposes and for the promotion of objects of the institutions." 33. In the present case, the learned counsel for the assessee-trust has represented that the surplus earned by the trust was duly credited to the general fund of the trust. No portion thereof has been distributed to any person. Further, as the learned counsel has submitted, the entire surplus has been applied towards acquiring fixed assets for the institutions of the trust. 34. We have considered the rival submissions advanced by the respective representatives of the parties, perused the record carefully and gone through the case law cited by the learned counsel for the assessee and by the CIT(A). So far as factual position is concerned, we have already discussed in detail that the assessee-society is a registered society and as evident form the objects of the assessee-society, the main object is that of imparting education irrespective of caste, creed religion or community. In order to achieve this object, the assessee-society admittedly is running schools like Vellammal Matriculation Higher Secondary School, Vellammal School, Southern Pearl Junior College, Vellammal Academy for Woman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement of s. 10(22) of the Act. No other enquiry is contemplated by this section of the Act. We have to abide by the words used by the legislatures. The legislatures are wise enough and they must be fully aware about the applications of using words 'existing solely for education purposes'. If they were going to give more powers, the legislatures must have used the other words to enable the Revenue with that other powers to verify as to whether assessee-institution is carrying on such activities which may prima facie indicate that he is entitled to get benefit under s. 10(22) of the Act. Unless legislatures have not used those words, it is not within the competence of the authorities to add or delete any words or infer any implied words in any provisions of the Act. It is well-settled proposition of law that fiscal statutes are to be examined, as the same stand. The authorities concerned when interpreting the same are not permitted to add/alter any word here and there, but they are supposed to read it as it stands and to use the general meaning of the words used by this legislature. Here, the scope of the powers of the Revenue is confined to examine the existing of the institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue has not brought on record anything to show that the assessee diverted the building fund collections after collecting form students. The Revenue could have brought atleast something to show that the assessee has collected building fund more than actually shown in its books of account. There is also no material to show that from whom these building fund collected and when it was collected and how much fund was collected and date on which funds was transferred from trust account to trustees account and quantum of amount transferred. The lower authorities presumed that the funds lying in the bank accounts of trustees was transferred from trust building fund, the reason for this is that the trustees are having no source of income and there is no accepted method of accounting and internal control as no formal receipts are issued to parents and the entire management and control of the quantum and custody are with the chairman of the trust. Further, there is no external evidence as confirmation from the parents as to amounts paid by them towards building fund collections and the chairman has been treating the trust as a private enterprise. These reasons neither authorise the Revenue to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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