Sh. Chander Chinar Bada Akhara Udaseen Society Vs ITO, (Exemption) (ITAT Amritsar)
The Income Tax Appellate Tribunal (ITAT), Amritsar, partly allowed the assessee trust’s appeal arising from the assessment order passed under Section 143(3) of the Income Tax Act, 1961. The assessee, a trust registered under Section 12AA and engaged in running a hospital, medical college, and nursing college, had filed its return declaring nil income while claiming exemption under Sections 11 and 12. The Assessing Officer denied the exemption for alleged violations of Sections 13(1)(c) and 13(1)(d), made an addition of ₹56.95 lakh under Section 41(1) in respect of unrefunded student caution money, and disallowed interest paid to specified persons under Section 40A(2).
Before the Commissioner (Appeals), the assessee obtained partial relief regarding the denial of exemption under Section 11 and substantial relief on the interest disallowance. However, the Commissioner (Appeals) sustained the addition of ₹56.95 lakh under Section 41(1), treating the unpaid caution money relating to periods prior to 2011 as a static liability whose non-refund amounted to cessation of liability. The Commissioner also upheld a reduced disallowance of ₹1,59,744 on account of interest paid to specified persons.
Before the Tribunal, the assessee submitted that the caution money represented refundable security deposits collected from students at the time of admission. The deposits became refundable only after completion of the respective courses, internship where applicable, and after students obtained no-objection certificates from all concerned departments. It was contended that the deposits remained refundable even after several years and could not be treated as income merely because they remained unclaimed.
The assessee further argued that Section 41(1) was inapplicable because the caution money had never been claimed as a deduction, was reflected only as a liability in the balance sheet, did not constitute a trading liability, and had neither ceased nor been remitted. The liability continued to be acknowledged by the trust, and no unilateral write-back or agreement evidencing cessation had occurred. The assessee relied upon judicial precedents supporting the proposition that mere lapse of time does not extinguish a liability.
The Revenue supported the Commissioner (Appeals)’s order, contending that the prolonged dormancy of the deposits established cessation of liability. It was argued that after allowing sufficient time for completion of the medical courses, the caution money ought to have been refunded and, upon expiry of the limitation period, became taxable income.
After considering the rival submissions, the Tribunal held that unrefunded or unclaimed student caution money in the hands of a charitable trust is not taxable under Section 41(1). It observed that such deposits are neither trading liabilities for which deductions had previously been allowed nor write-backs of business expenditure. The caution money constituted capital receipts or current liabilities and had never been claimed as revenue deductions.
The Tribunal further found that the assessee continued to acknowledge the liability in its books of account, had not forfeited or written back the deposits, and there was no unilateral act or agreement indicating cessation of liability. Referring to the Limitation Act, 1963, the Tribunal also noted that, on the facts before it, the limitation period for claiming refund still existed.
Relying on CIT V Sugauli Sugar Works (P) Ltd 102 Taxman 713 (SC), the Tribunal held that mere expiry of limitation does not extinguish a liability and that cessation requires a unilateral act or agreement. Accordingly, it held that the Commissioner (Appeals) was not justified in sustaining the addition under Section 41(1) and deleted the addition of ₹56.95 lakh.
With respect to the disallowance of ₹1.59 lakh representing excessive interest paid to specified persons under Section 40A(2), the Tribunal agreed with the Commissioner (Appeals) that the interest rate of 18% was excessive in the circumstances and upheld the addition.
Ground No. 3 was withdrawn by the assessee during the hearing. The appeal was therefore partly allowed, with relief granted in respect of the Section 41(1) addition while sustaining the reduced disallowance relating to excess interest.
FULL TEXT OF THE ORDER OF ITAT AMRITSAR
This appeal is filed by the assessee against the order of ld. CIT(A), NFAC, Delhi, passed u/s 250 of the IT Act, 1961, ( henceforth the Act ) dated 20.02.2025 which has emanated from the order of AO, NFAC, Delhi, passed u/s 143(3) of the Act, dated 27.12.2019.
2. The grounds of the appeal in Form 36 are as under:
“1 That the Id. CIT(A) has erred in law and on facts in confirming the order of the AO that the Trust has given undue benefits to the specified persons vide Para 5.3 Page 34 of the order of the CIT(A), ignoring the fact that the amount was advanced to the specified persons for the attainment of the objects of the Trust.
2. That the ld. CIT(A) has erred in law and on facts in confirming the addition of Rs.56,95,846 /- being the amount of Caution Money lying with the appellant trust prior to the year 2011-12 as Income of the assessee on account of cessation of Liability u/s 41(1) vide Para 7 Page 41 of the order of the CIT(A).
3. That the Id. CIT(A) has erred in law and on facts In confirming the disallowance of interest of Rs.11,65,504 u/s 40A(2) and 13(3) of the Act vide para 8.3 Page 57 of his order.
4. That the Id. CIT(A) has erred In law and on facts in confirming the addition of Rs.1,59,744 made on account of excess rate of Interest paid to specified persons vide Para 8 Page 56 of his order.
5. That the order is bad in law and on facts
6. That the appellant craves leave to add or amend the grounds of appeal before the appeal is heard and disposed off.”
3. Brief facts emerging from record are that the assessee is a trust registered u/s 12AA of the Act , and is running a hospital and a medical college ( including nursing college), and has filed its return declaring NIL income , claiming exemption u/s 11, which was selected for scrutiny and after verification of documentary evidences and financials and after considering submissions filed , the assessment was completed on a total income of Rs. 32.62 crores rejecting the exemption claimed u/s 11 and 12 of the Act, for alleged violation of section 13(1)( c ) and 13(1) ( d ) of the Act, plus additions u/s 41(1) amounting to Rs.56.85 lakhs, due to existing liabilities in balance sheet representing un – refunded “caution money” collected from students plus addition of Rs. 11.65 lakhs, on account of excess interest paid on unsecured loans u/s 40A(2) .
4. The matter carried in first appeal has been allowed in part in respect of the exemption claimed u/s 11 , by restricting the disallowance to the extent of income that violates 13(1)(d), but has sustained the addition of 56.95 lakhs u/s 41(1) of the Act, by treating the unpaid portion of the caution money existing for the period prior to 2011 (more than five years back) by treating the same as a“static liability”, in absence of any fixed time limit prescribed for such refund .
5. It was further observed ( in para 7.3 of the CIT(A) order), that the assessee has not treated the receipt of the caution money collected year to year as income and has reflected the same in liability to be refunded , but not eventually refunding the same in respect of collections made prior to six years back , thereby reaping the benefits of such deposits amounts to cessation u/s 41(1) , but has allowed the right of claiming the same as deduction in the year of actual refund if made subsequently (para 7 of appeal order).
6. The disallowance of 11.65 lakhs on account of excess interest paid to specified persons covered u/s 40A(2) rws 13(1)( c ) / 13(3) , has been reduced to Rs. 1.59 lakhs , thereby granting relief of Rs. 10.05 lakhs on this count.
7. Now the assessee is before the tribunal on the grounds contained in the memo of appeal and in course of hearing before the tribunal the Ld AR of the assessee filed a written submission , relevant portion of which is being reproduced :
A. It was explained to the AO as well as CIT(A) that Caution Money is in the nature of security received from the students of MBBS, PG/MD and Nursing at the time of admission and is refundable after the Completion of Course and Internship. MBBS Course is for 5 years and 1 year Internship, PG/MD Course Is for 3 years and Nursing Course Is for 3 years. After Completion, students have obtained NOC from all the departments and then only the student can apply for refund of Caution Money and after verification, Caution Money Is refunded. The Caution Money Security is a deposit of the student and cannot be treated as income and the student can claim any time ever after ten years or so and as such the Society has no right to treat it as income.
B. The AO has made the addition by holding that Caution Money Is 13-14 years old which was not correct. From the perusal of the detail given at page 36 and 37 of CIT(A) order first amount of caution money pending is for Batch of financial year 2005-06 for which the course was completed after six years l.e. In the financial year 2012-13. That means the same was pending for 4 to 5 years only since the same was payable only after the completion of course and thereafter obtaining NOC from all the Departments and not 13-14 years. The same is the position for the subsequent years which means that for financial year 2008-19 to 2010-11 the refund of Caution Money was not even due for payments as on 31.3.2017.
C. Further, it was explained that unpaid caution money lying with the appellant cannot be taxed u/s 41(1). For the application of section 41(1) following two conditions are required to be satisfied:-
i. Earlier the amount was claimed as deduction
ii. Liability for the payment at the same has ceased
D. The addition of caution money is invalid. The AO invoked section 41(1) which was confirmed by CIT(A) which is not correct due the following reasons:
i. Caution money was never claimed as deduction
ii. The liability still exists.
iii. Deposits remain refundable.
The provisions of section 41(1) can only be applied when deduction was claimed earlier and liability have ceased. For application of Section 41(1) the following conditions must be satisfied: –
(a) There must be a trading liability whereas the caution money lying with the trust is not a trading liability. Caution money is a security deposit and received from the students and is refundable. It was not an expense or liability incurred in business. Therefore, it is not a trading liability.
(b) Deduction must have been claimed earlier Trust never claimed deduction of Caution Money. It is a balance sheet liability and not Profit & Loss expense, hence section 41(1) automatically fails
(c) Liability must have ceased or been remitted
There is no cessation of liability or remission of liability. Mere lapse of time is not cessation of liability. The students can claim refund anytime after complying with certain conditions. No time bar enforces. Liability is acknowledged by trust as payable as the same is appearing as payable in the Balance Sheet which is an acknowledgment of liability.
In support the Ld AR relied on the following decisions :
i. CIT V Sugauli Sugar Works (P) Ltd 102 Taxman 713 (SC)
Held that mere expiry of limitation does not extinguish liability. There must be unilateral act or agreement showing cessation
ii. CIT V Kesaria Tea Co Ltd (2002) 254 ITR 434 (SC)
Held that liability continues unless written back. No cessation unless confirmed remission.
iii. ČIT V Jain Exports Pvt Ltd (2013) 89 DTR 265 (Del)
Held that unclaimed balances do not become income unless liability is written back.
iv) CIT V Chipsoft Technology Pvt Ltd (2012) 25 com 401 (Delhi) Held that liability remains unless assesee unilaterally treats it as income.
8. The Ld AR further submitted that even if this amount is to be treated as income derived by the trust it will fall under normal income of trust which will be eligible for exemption under section 11, and in support of his contention he relied upon the following decisions :
i. CIT V Institute of Banking Personnel Section (2001) 248 ITR 1 (SC) Held that income of the trust, irrespective of source, is eligible for exemption if applied for charitable purposes.
ii. CIT V Programme for Community Organization (2001) 248 ITR 1 (SC) Held that even surplus or incidental income is eligible for exemption
iii. CIT V Gujarat Maritime Board (2007) 295 ITR 561 (SC) Held that once entity is charitable, income remains exempt if applied.
9. GROUND NO.3 was withdrawn by the Ld AR .
10. Ground No.4, is against the confirmation of addition of Rs.1,59,744/-made by the AO on account excess rate, of Interest paid to specified persons. The total Interest paid to such parties @18% is Rs.3,25,823/- as against Interest of Rs.20,71,520/- paid to unrelated parties @18% (the detail of which are contained in page 44 & 45 of order of CIT(A). The Id.AO allowed Interest @18% paid to non related parties but disallowed 50% of interest paid @18%,to related parties l.e. specified persons. Your Honor will appreciate that when the Interest @18% has been accepted as reasonable in the case of non-specified persons there can be no reason to not to accept the rate of interest 18% to specified persons.
10.1 In any case the addition of Rs.1,59,744/- made on account of reduction in the interest rate the assessed income has been utilized for the purpose of the trust and in case the assesee has already utilized the excess amount the exemption u/s 11 is allowable as income of the trust under the normal income.
The Ld AR rested his arguments praying for adequate relief.
11. The Ld DR relied on the order of the Ld first appellate authority and submitted that in the instant case the liability to refund has ceased to exist because of the long period of dormancy where the unpaid caution money is retained by the assessee since the period 2005 – 06 ( which is nearly eleven years back ) and the Ld CIT(A) has taken the cut off period till 2010-11, after logically considering the time taken for completion of the medical course (five plus one ) ie six years for MBBS students , whereby the caution money should have been returned to the student doctor, thereafter, automatically , but in this case the same has not been done and upon expiration of the statute of limitation the unpaid money becomes part of the institution’s taxable income. He prayed for sustaining the appeal order.
12. We have heard the rival submissions and considered the materials on record. We are of the opinion that in case of charitable trusts the unrefunded or unclaimed student caution money is not taxable u/s 41(1) of the Act, because it is neither a trading liability where deduction has been previously allowed nor is it a write back of business expenses. Moreover, caution money deposits are generally treated as capital receipts or current liabilities and never claimed as revenue deductions and as such the said amount cannot be brought to tax u/s 41(1) of the Act. We further note that in the instant case the unclaimed caution money as per books, has not been forfeited and the assessee trust admits the existence of the liability as on the date of closure of financial accounts and the liability has not been written off and there is no unilateral act or agreement showing cessation .
13. Without prejudice we further take note that according to the Limitation Act 1963, a student has a standard time limit, which is generally three years, from the date the refund became legally due to be claimed by the student ( as per procedure ) after completion of course. In the instant case before us the limitation period still exists.
14. As such on the facts of the case, we respectfully rely on the decision in the case of CIT V Sugauli Sugar Works (P) Ltd 102 Taxman 713 (SC) where it has been held that mere expiry of limitation does not extinguish liability. There must be unilateral act or agreement showing cessation.
As such we hold that the Ld CIT ( A ) was not legally justified in sustaining the addition u/s 41(1) of the Act , and the said addition of Rs. 56.95 lakhs u/s 41(1) stands deleted.
This ground of the assessee is allowed.
15. Regarding the addition of Rs. 1.59 lakhs being the excess interest disallowed being paid to specified parties u/s 40(A)(2), we are in agreement with the views expressed by the Ld CIT(A) regarding the rates of interest @ 18% , being excessive and as such the said addition is upheld.
16. In the result the appeal of the assessee is partly allowed.
Order pronounced on 06.07.2026 under Rule 34(4) of the Income Tax Appellate Tribunal Rules 1963.
