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TMI Blog2024 (7) TMI 1178X X X X Extracts X X X X X X X X Extracts X X X X ..... n in some amnesty scheme like PMGKY does not absolve the assessee from the wrongdoing. Intent of any amnesty scheme is to comply and rectify previous non-compliance. In the judgement of Union of India v. Dharmendra Textile Processors [ 2008 (9) TMI 52 - SUPREME COURT] held that mens rea (intention) is an essential ingredient of fraud and that heavy penalties can be imposed for fraudulent acts. In the present case, we have no hesitation to say that the intent was to defraud the object of the trust. In case of CIT v. Suresh N. Gupta [ 2008 (1) TMI 396 - SUPREME COURT] . discussed the principles of amnesty schemes and held that such schemes aim to promote voluntary compliance and cannot be equated with fraudulent conduct. Thus, in the present case, the stand of assessee that their participation in PMGKY is absolving them from defaults is not correct. CIT(A) failed to provide specific reasons demonstrating how the assessee was meeting the objects of the trust. Given the systematic fraudulent activities uncovered, the accounts of the trust cannot be relied upon. Additionally, the principle of res judicata does not apply in income tax proceedings, and each assessment year must be evaluat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee in accordance with Section 164 of the Income Tax Act. Since the trust is found to have violated the provisions of Sections 13(1)(c) and 13(1)(d) of the Act, resulting in the denial of exemptions under Sections 11 and 12 of the Act, the income of the assessee trust should be taxed at the maximum marginal rate as specified under Section 164(2) of the Act. This recalculation should exclude any benefits of exemptions previously claimed under Sections 11 and 12, and all additions made on account of unaccounted income and bogus expenses should be included in the taxable income. The AO should take care in avoiding duplication of addition as pointed out by Ld.CIT(A) and give due credit of income disclosed in PMGKY with taxes paid. - Shri Siddhartha Nautiyal, Judicial Member And Shri Makarand V. Mahadeokar, Accountant Member For the Assessee(s) : Shri Samir Parikh, AR For the Revenue : Shri Sudhendu Das, CIT-DR ORDER PER BENCH: Out of these five appeals, two appeals being ITA Nos.991 992/Ahd/2023 filed by the assessee, namely, Parul Arogya Seva Mandal Trust and ITA No.993/Ahd/2023 filed by the assessee namely, Parul University for Assessment Years (AYs) 2016-17, 2017-18 2017-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO received information from the investigation wing of the income tax Department along with the incriminating material. 2.5. Following are the observations of AO relating to such information and material found: 1. Survey u/s 133A was conducted in the case of Parul Arogya Seva Mandal Trust and Parul University on 31/01/2017. 2. During the survey, various incrimination documents were found along with data in the form of MS Excel files and impounded which show that the trustees of Parul Group were involved in the practice of receiving back the portion of salary paid by the trust to its staff in cash and cheque. 3. The salary payments were made through cheques and amount were recorded in the books as salary expenses. 4. Staff members were asked to return the portion of their salary to the trustees in cash and also by cheques. 5. An accountant used to collect blank bearer cheque from all staffs/employees working in the trust, before making payments for salary. 6. This amount which was required to be returned in cash to the trustees, was withdrawn by the accountant/trusted employee using those bearer cheques. 7. The accountant, in turn would prepare a report on the amount of salary rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g staff, and they have participated in the PMGKY (Pradhan Mantri Garib Kalyan Yojana) Scheme, 2016. Details of benefit of scheme PMGKY availed by them are: F.Y. 2016-17 2016-17 A.Y. 2017-18 2017-18 PAN AAATP4313K AADAP4925C Name Parul Arogya Seva Mandal Trust Parul University Total Income Disclosed in Rs. 10,90,00,000 8,00,00,000 Tax in Rs. 3,27,00,000 2,40,00,000 Surcharge in Rs. 1,07,91,000 79,20,000 Penalty in Rs. 1,09,00,000 80,00,000 Total Taxes Paid in Rs. 5,43,91,000 3,99,20,000 Challan No. (Form 287) 43077 43014 Challan Dated 24/03/2017 27/03/2017 2.7. The assessee was involved in this activity of taking cash back from employees since last many years. Therefore, AO on the basis of the said MS excel file and as confirmed by Trustee, extrapolated the unaccounted cash receipt out of salary. Taking the average amount of Rs. 77,01,076/- per month AO calculated the total cash withdrawal for the F.Y. 2015-16 to Rs. 9,21,33,866/- and for F.Y. 2016-17 to Rs. 7,72,89,804/- 2.8. During the course of assessment proceedings, the assessee relied on the notifications, circulars and press release of the PMGKY Scheme and stated that the amount of undisclosed income declared under the PMGKY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Y. 2017-18 and the declaration was never for F.Y. 2015-16 and earlier years. 3. Assessee has not given any year-wise bifurcation in the letter given to DDIT(Investigation) Baroda to whom they stated that they are participating in the PMGKY Scheme with declaration of Rs. 10.90 Cr for Parul Seva Trust and Rs. 8 Cr for Parul University. 2.10. The AO thus made an addition of Rs. 9,21,33,866/- in income of F.Y. 2015-16 and Rs. 7,72,89,804/- in the income of F.Y. 2016-17 as unaccounted cash. 2.11. The data related to amounts received back from salary of teaching staff by cheque was also found from the impounded documents marked as Annexure A-13. The total of such amounts received by cheque from employees for the month of March 2016 was Rs. 83,96,700/-. During the course of survey assessee could not contradict this. Even during the course of assessment proceedings, the assessee could not contradict these facts. The assessee only reiterated that they have made disclosure in PMGKY and stated that all the discrepancies are covered in the said disclosure. Therefore, AO calculated total amount received from salary of teaching staff by cheque and accounted as Corpus Donations for the financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be held to be for the charitable or religious or educational purposes and hence assessee is not entitled to claim the benefit of Section 11 12 of the I.T. Act, 1961. 2.17. Accordingly, AO computed the income of the assessee as normal business income as it is established that the assessee is engaged in the activity other than the object for which it was established. Since the income of the assessee was computed as normal income without giving benefit of the exemptions, the capital expenditure claimed by the assessee was also not allowed as application / exempt. 2.18. In case of Parul University, the AO concluded that the amount of bogus salary was Rs. 16,47,64,572/- for the F.Y. 2016-17. The disallowed capital expenditure amounted to Rs. 7,93,12,126/-. The AO also identified unexplained transaction of Rs. 89,21,987/- and added to the total income. 2.19. While assessing the income of the assessee for A.Y. 2017-18, the AO gave credit of Rs. 8,01,76,700/- in case of Parul Arogya Seva Mandal Trust and Rs. 8,00,00,000/- in case of Parul University relating to PMGKY, 2016. 3. The Assessee, being not satisfied with the order of AO, filed an appeal in all the cases with the Ld.CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax (Exemptions)[2023] 146 taxmann.com 367 wherein it was held that the department has not established a case that the assessee had in this case not utilized the donations or income for charitable purpose. The clear finding of the Tribunal is that if the assessee had not utilized the amount for charitable purpose, it would automatically become taxable, and the assessee would not be entitled to exemption. But, on the contrary, without there being a finding of violation of section 13 of the Act, an inference is drawn on an alleged receipt of donation and consequently, the allegation is made that there is a violation of section 13(1)(d) of the Act. A hypothetical finding is given that because capitation fee is charged, it is not an income in terms of section 11 of the Act and, therefore, there is a violation of section 13(1)(d) of the Act. The Tribunal held that such a reasoning cannot be accepted because if the donations are offered for income and if the department wants to disprove the nature of income on the basis of material, as has been pointed out by the Commissioner of Income-tax (Appeals), it should be borne out by records based on investigation, which the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of Section 13 of the Act and not on entire income earned by trust. If exemption under Section 11 is not available due to application of Section 13, then the income of the trust is taxable under Section 164 of the IT Act. Section 164 provides that where 'the whole or any part of the relevant income' is not exempt under Section 11 or 12, tax shall be charged on the relevant income at the maximum marginal rate. The use of the expression whole or any part of the relevant income in Section 164, lends a meaning that denial of entire exemption is not contemplated in Section 13. As there is no apparent violation of provisions of Section 13 as discussed herein above, benefit provided in Section 11 and 12 cannot be denied. 5.8 So far as the activities of the trust are genuine, and income of the trust are applied for the purpose for which registration u/s 12A was granted and there in no violation of section 13 is found, the trust is eligible to get exemption under section 11 12 of the Act in presence of registration granted u/s 12A of the Act. Similar view also given by Hon'ble Madras High court in case of Commissioner of Income-tax, Central- Ill, Chennai V. Balaji Educa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earing. In case of appeal by Assessee in ITA No.993/Ahd/2023 for A.Y. 2017-18 1. The Hon CIT Appeal erred both in law and on facts in confirming disallowance of Rs. 6,93,09,682/- on account of bogus salary expenses to employees who are not on pay roll and alleged cash generated out of salary paid to employees presumed to be received back in cash and disallowance of Rs. 8,01,76,700/- on account of salary received back from employees as Corpus Donation, aggregating disallowance of Rs. 16,97,06,274/- Rs. 6,93,09,682 + Rs. 8,01,76,700/-) by ignoring the submissions made to Ld. CIT(Appeal) during the hearing. The Ld. CIT(Appeal) confirmed addition of corpus donation of Rs. 8,01,76,700/- in the hands of appellant as it has been already disallowed and made additions in the assessment of Parul Arogya Seva Mandal Trust. 2. The assessee craves leave to add, amend, alter, delete, change or modify any or all grounds of appeal before or at the time of the hearing. In case of appeal by Assessee in ITA No.992/Ahd/2023 for A.Y. 2017-18 1. The Hon. CIT Appeal erred both in law and on facts in confirming an addition of Rs. 3,90,59,807/- towards corpus donation wholly without considering submission m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining to various earlier assessment years and worked out an amount of Rs. 10.90 Crores for A.Y. 2016-17 in case of Parul Arogya Seva Mandal Trust and Rs. 8 Crore for A.Y. 2017-18 in case of Parul University. Such working was based on all documents found during the course of survey. This fact is noted by AO at para 4.6 of the assessment order. A file containing the documents found during the course of survey based on which, the computation of undisclosed income of Rs. 10.90 Crores is made was referred in the assessment order. As can be seen from the said file where in the total of seized document's comes to Rs 15,21,75,433/- and hence total disclosure, of Rs. 18.90 Crores as admitted during the course of survey statement has already been covered by disclosure in PMGKY viz the total amount of Rs. 10.90 Crores declared under PMGKY 2016 in Parul Arogya Seva Mandal Trust and Rs. 8.00 Crores in Parul University. The disclosure therefore fully covers all such papers and materials pertaining to income in respect of all the years and hence the observation of the AO that the declaration does not cover all the undisclosed income of all the earlier years is not correct and is contrary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed order u/s 143(3) r.w.s to 147 of the Act on 04/03/2021 accepting returned income and after giving benefit of exemption under sections 11/2 of the Income Tax Act. He further stated that disclosure made in PMGKY in A.Y. 2014-15 was also subject matter of assessment wherein similar exemption is given to appellant and similar claim was allowed by AO in the assessment order passed for A.Y. 2018-19 A.Y. 2020-21. 5.8. The AO contented that there has not been any withdrawal of registration granted u/s 12A to the appellant. The AO also invited our attention to the fact that the Ld.CIT(A) has relied on the judgement of Hon'ble Supreme Court in case of ACIT Vs Surat City Gymkhana [2008] 170 Taxman 612 in which it was held that Registration under section 12A of the Act is a fait accompli to hold Assessing Officer back from further probe into objects of trust. 5.9. The Ld.AR pointed out that as held by the Ld.CIT(A) that there is nothing to suggest that the trust has deviated from the objects for which registration was granted and not applied the funds for its objects and no evidence was brought on record to show that amount of alleged cash recovery, Bogus Salary etc. which have been c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aries back in cash after payments were made via cheques. Blank bearer cheques were collected from staff before salary payments, and the recovered amounts were recorded as corpus donations. Various employees confirmed these practices during the survey. The AO calculated total cash withdrawals and bogus corpus donations based on incriminating documents and extrapolating the available data. The AO disallowed exemptions under Sections 11 and 12, treating the income as normal business income due to violations of the trust's objectives. The Ld.CIT(A) partially upheld the AO's additions but allowed the exemptions under Sections 11 and 12, concluding there was no apparent violation of Section 13 of the Act. 7.1. We have also noted that the survey was conducted on 31/01/2017 and the taxes relating to PMGKY were paid in the month of March-2017. Cash collected from employees was used by the trustees for the period till it is deposited in bank as corpus donations. Some expenses are also incurred in cash which were not accounted for and could not be explained during the course of survey and assessment. There was some discrepancy even after providing year-wise bifurcation to the Ld.CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar without charging adequate rent or compensation. The Court held that the Managing Trustee was one of the prohibited persons as per Section 13(3). Therefore, the Court held that the entire exemption of the trust is to be denied. In the present case, we deal with the violation of Section 13(1)(c) and Section 13(1)(d) of the Act: 7.5. The AO presented substantial evidence indicating that the trustees benefited from the trust's income through the systematic recovery of staff salaries in cash and the misrepresentation of corpus donations. This evidence included employee statements and an MS Excel file detailing the cash recoveries, corroborating that trustee used trust funds for personal gain, in violation of Section 13(1)(c) of the Act, which prohibits the direct or indirect benefit of any interested person. 7.6. The AO established that the trust's funds were not invested or utilized in accordance with Section 11(5) of the Act. Instead, funds were diverted through fraudulent means such as inflating expenses and obtaining unaccounted cash, which were not aligned with the charitable objectives of the trust. These actions contravene the provisions of Section 13(1)(d) of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... probabilities and the overall context. The principle was applied to assess whether the taxpayer's explanation of her income was credible, given the surrounding circumstances and the lack of direct evidence. 7.13. The trust's consistent involvement in fraudulent activities was evident from the systematic recovery of staff salaries, bogus corpus donations, and other manipulative practices. The admission of undisclosed income under the Pradhan Mantri Garib Kalyan Yojana (PMGKY) itself is an acknowledgment that the trust deviated from its objects and violated the conditions of Section 13. Furthermore, the tax paid under PMGKY represents a gross misuse of the trust s funds, which were supposed to be applied exclusively for charitable purposes. 7.14. The decisions relied Upon by the Assessee and the Ld.CIT(A) can be distinguished as follows: ACIT vs. B.N. Corporation [2001] 116 Taxman 579 (Gujarat): Context: In this case, the Gujarat High Court held that the principle of extrapolation could be applied when there was sufficient evidence indicating systematic underreporting of income. Distinguishing Factor: The case involved a business entity where the extrapolation was based on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the trust is found to have violated the provisions of Section 13, which is the case here. The evidence shows that the trust engaged in activities that directly benefited the trustees, violating Sections 13(1)(c) and 13(1)(d) of the Act, which mandates the denial of exemptions regardless of the 12A registration status. 7.18 There are many judicial pronouncements relating to extrapolation and denial of exemption u/s 11 which upheld the principle of extrapolation, allowing tax authorities to estimate undisclosed income based on available evidence. The Courts have ruled that when there is sufficient evidence of systematic and recurring bogus transactions, the use of extrapolation is justified. In the present case, the trust's repeated practice of inflating salary expenses and recovering amounts in cash provides a reasonable basis for the AO's extrapolation of unaccounted income. Courts have supported the application of extrapolation in cases where there is substantial evidence indicating that the assessee has been systematically booking bogus expenses. The courts emphasized the need for a reasonable basis for such extrapolation. In the present case, the AO s detailed findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Ld.CIT(A)'s failure to specifically justify how the trust met its objects, coupled with the unreliable accounts and the consistent fraudulent activities by trustees, further supports this conclusion. The admission of undisclosed income under PMGKY and the misuse of trust funds to pay taxes under the scheme are clear indicators of deviation from charitable objectives. The principles of extrapolation applied by the AO are validated by the cited judicial precedents, reinforcing the decision to uphold the additions and disallowances made in the assessment order. 7.24. Thus, appeals filed by the assessee are dismissed, and the revenue s appeals are allowed to the extent that the exemptions under Sections 11 and 12 are denied, and the additions based on the AO s findings are confirmed. 7.25. The Assessing Officer is directed to recompute the income of the assessee in accordance with Section 164 of the Income Tax Act. Since the trust is found to have violated the provisions of Sections 13(1)(c) and 13(1)(d) of the Act, resulting in the denial of exemptions under Sections 11 and 12 of the Act, the income of the assessee trust should be taxed at the maximum marginal rate as specifie ..... 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