ITAT Deletes Section 41(1) Addition on Unclaimed Student Caution Money Deposits

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.