If it is to be held that the assessee has incurred certain expenditure and the source of expenditure remains unexplained, the amount can be added under section 69C of the Act. However, if on one hand the amount is added as unexplained expenditure, still it retains the character of the expenditure incurred on the object of trust.
Therefore, the assessee will be entitled to claim deduction while computing its income under sections 11 & 12 of the Act. The Proviso inserted to section 69C by Finance (No.2) Act, 1998 w.e.f. 1.4.1999 will not apply as in the present case the income of the assessee is not computed under any head of income but under the provision of sections 11 & 12 of the Act. Thus on one hand, income derived from property held under trust is chargeable to tax, to the extent the amount spent or applied for the charitable or religious purposes shall not form part of the total income of the assessee. The income of a trust is not computed under the various heads of income as prescribed in section 14 of the Act. Therefore, the Proviso to section 69C which bars allowability of deduction of such unexplained expenditure under any head of income will not apply in the case of an assessee being a trust whose income is to be computed under sections 11 & 12 of the Act. Thus the addition made under section 69C will be nullified by the expenditure incurred on the object of the trust and hence no further addition is called for.”
INCOME TAX APPELLATE TRIBUNAL, DELHI
ITA No. 277/Chd/2008 – Assessment Year: 2006- 07
Maharishi Markandeshwar Education Trust
Commissioner of Income Tax (Central), Ludhiana.
PER I.P. BANSAL, JUDICIAL MEMBER
This is an appeal filed by the assessee. It is directed against the order passed by the CIT, (Central), Ludhiana dated 31st January, 2008 u/s 12AA (3) of the Income Tax Act, 1961 (the Act). The grounds of appeal read as under:-
1. That order u/s 12AA (3) of the Income Tax Act, 1961 passed by Commissioner of Income Tax (Central), Ludhiana canceling the registration granted to the Trust u/s 12AA (1)(b)(i) is against law and facts on the file in as much he was not justified to hold that the Trust was not engaged in genuine charitable activities.
2. That he was further not justified to hold that the President or other members of the Governing Body have appropriated the benefits accruing to the Trust from commercialization of education.
3. That the Ld. CIT came to these conclusions without application of mind and solely relying on the conclusions drawn by the ld. Assessing Officer framing the assessment for A.Y.2006-07.
4. That the order passed is against principles of natural justice and no reasonable opportunity was provided to the appellant to explain its case.”
2. The assessee is a trust running nine educational institutions under various names catering to different kind of education like Management, Engineering, Medial Sciences, Nursing, Pharmacy, etc. It was granted registration u/s 12AA (2) of the Act by CIT, Panchkula vide his order dated 30th May, 2001 w.e.f. 26th November, 1993. A search was conducted at the official premises of the assessee as well as on the residential premises of its trustees on 7th September, 2005. During the course of search, unexplained assets as well as incriminating documents were seized on the basis of which ld. CIT has drawn a conclusion that the activities of the trust were not being carried out in accordance with the objects for which it was set up. Accordingly, he initiated proceedings u/s 12AA(3) of the Act and issued show cause notice to the assessee as to why the registration should not be cancelled. The ld. CIT after referring to the examination of the pages 1 to 7 of the bunch of documents captioned as A-37 seized during the course of search has found that the assessee had made payments in cash to the doctors of medical and dental colleges run by the assessee. Such payments were calculated at a sum of Rs. 45,66,372/- and these documents were shown to Shri Darshan Kumar Bansal, Sr. Accountant of the assessee trust who stated on oath that he himself has made these payments in cash outside the books of account to various teachers. Similar statement was given by Dr. R.P. Aggarwal, the principal of one of the medical colleges. Ld. CIT, further referred to page 81 of the bunch styled as A-35 which contained entries of payments in cash towards advance, traveling allowance and increments. The said documents were signed by Shri Tarsem Garg being the Chairman of the assessee trust. On perusal of all these documents ld. CIT has come to the conclusion that there is a manipulation in the books of account and cash transactions have been made outside the books of account. He referred to the fact that total cash found at the time of search was a sum of Rs. 13,98,476/- as against the cash available as per books of account of Rs. 26,61,781/- and, thus, he arrived at a conclusion that the assessee trust is not maintaining its books of account properly and the trustees are manipulating the accounts to siphon off the funds of the trust for their personal benefits. He ignored the contention of the assessee that the Assessing Officer in the assessment order for Assessment Year 2006-07 has accepted that the assessee trust is engaged in genuine charitable activities in terms of Section 2 (15) of the Act. Ld. CIT observed that as the benefit of registration can be given to the trust only if it is engaged in genuine charitable activities and referring to these discussions ld. CIT has cancelled the registration. The assessee is aggrieved, hence, has raised the aforementioned grounds of appeal.
3. After narrating the facts, it was submitted by the learned AR that upon receiving the impugned order from CIT which is dated 31st January, 2008, the assessee again submitted the application for registration in prescribed proforma on 10th March, 2008 and the very same CIT vide his order dated 23rd May, 2008 has granted registration to the assessee. Copy of this order is placed at page 219 of the paper book. He submitted that in the same order ld. CIT has stated as follows:-
“2. Satisfied about the genuineness of the Trust and of its present activities, the undersigned is registering the Trust u/s 12AA of the IT Act, 1961 and its registration has been recorded at Sr. No.1/JB/12AA/2008-09 in the Register of Application under Section 12AA maintained in this office.
3. As per provisions contained in 12A (2) of the IT Act, this registration shall have effect from Assessment Year 2008-09 onwards.”
4. He further stated that in the impugned order ld. CIT has rejected the registration of the assessee on two grounds: firstly, regarding the payment of salary to the doctors aggregating to a sum of Rs.45,66,372/-. He submitted that this issue was considered by the Tribunal for Assessment Year 2006-07 in the case of the assessee and the Tribunal vide its order dated 30th October, 2009 in ITA No. 2489/Del/2008 (departmental appeal) has confirmed the deletion made by the CIT (A) and resultantly the departmental appeal was dismissed (refer to copy of order placed at pages 1-4 of the paper book). He referred to the following observations of the Tribunal from the said decision:-
“During the course of search, documents detailed as A-37 was seized. These pages are stated to contain entries regarding cash payments to doctors of the medical and dental colleges as per following details:-
|S.No.||Page No.||Relevant Date & content||Total Amount of payments mentioned.|
|1||Page 1/A-37||Payment to doctors of medical college on 01.07.05.||Rs. 9,26,450/-|
|2||Page 2/A-37||Payment to doctors of dental college on 01.07.05||Rs. 5,27,245/-|
|3||Page 3/A-37||Payment to doctors of medical college on 01.08.05||Rs. 9,62,335/-|
|4||Page 4/A-37||Payment to doctors of medical college on 01.08.05||Rs.6,82,375/-|
|5||Page 5/A/37||Payment to doctors of medical college on 01.09.05||Rs.8,27,617/-|
|6||Page 6/A-37||Payment to doctors of medical college on 01.09.05||Rs.6,40,350/-|
During the course of search statements of Shri D.K. Bansal, Accountant and Shri R.P. Aggarwal, Principal of M.M. Medical College were recorded on 7.9.2005. In their statements it was mentioned that apart from cheque payments towards salary, cash payments were also made. When the statements were confronted to Shri Tarsem Kumar Garg, Chairman of the Trust, he denied of having paid salary in cash. The Chairman sought for cross-examination of the Accountant and Principal. The Accountant and Principal retracted their statements and filed affidavits explaining as to how their statements were recorded which are not correct. The Assessing Officer however, observed that affidavits are self-serving documents which could have no evidentiary value. They have retracted from their statements under the influence of their pay-master. Accordingly, the amounts stated in the seized material were treated as unexplained expenditure and added under section 69C of the Act. The learned CIT (A) held that the only basis for making this addition is the entries made in the seized documents and statements of Accountant and Principal recorded during search. However, both these persons have retracted from their statements by filing affidavit during assessment proceedings. Even during re-examination, they have stuck to their statements made in their affidavits. There are about 74 doctors employed by the trust. Out of them, statements of only two doctors were recorded. All these doctors have filed affidavits during assessment proceedings denying any cash payment. Therefore, there is no justification for making addition in respect of 72 doctors ignoring their affidavits. Though the statements recorded during search have evidentiary value but the statement was not that of the assessee himself but of the third parties. Therefore, admission by third parties when retracted cannot be admitted in evidence. He accordingly deleted the addition. The revenue is in further appeal before us.
4. At the time of hearing we have heard Shri Rajesh Kedia, Sr. DR for the revenue and Shri Ashwani Kumar, CA for the assessee.
5. There is no dispute that the assessee trust is registered under section 12AA and entitled to exemption under sections 11 & 12 of the Act. The basis of addition is the statements of Shri D.K. Bansal, Accountant and Shri R.P. Aggarwal, Principal of M.M. Medical College, recorded during the course of search. They are the witnesses on behalf of revenue and not on behalf of the assessee. The statement is not of the assessee or its principal officer. When the Chairman of the assessee trust sought for cross-examination, both these witnesses have retracted from their statements and filed affidavits also. The Assessing Officer has not examined any of the doctors stated to have received extra remuneration. Even when 2 of the doctors were examined, they have denied having received extra remuneration. The remaining 72 doctors have filed their affidavits stating having not received such extra remuneration. Thus there is no evidence remaining with the revenue to hold that any remuneration was paid over and above the recorded remuneration. Thus, there is no question of unexplained expenditure being proved. Accordingly, the addition was rightly deleted by the learned CIT (A). It is seen that addition is made invoking provision of section 69C of the Act. Under section 69C wherein in financial year the assessee has incurred expenditure and he offers no explanation about the source of such expenditure or the explanation offered is not in the opinion of the Assessing Officer satisfactory, the amount covered by such expenditure may be deemed to be the income of the assessee for such financial year. Therefore, even if it is to be held that the assessee has incurred certain expenditure and the source of expenditure remains unexplained, the amount can be added under section 69C of the Act. However, if on one hand the amount is added as unexplained expenditure, still it retains the character of the expenditure incurred on the object of trust. Therefore, the assessee will be entitled to claim deduction while computing its income under sections 11 & 12 of the Act. The Proviso inserted to section 69C by Finance (No. 2) Act, 1998 w.e.f. 1.4.1999 will not apply as in the present case the income of the assessee is not computed under any head of income but under the provision of sections 11 & 12 of the Act. Thus on one hand, income derived from property held under trust is chargeable to tax, to the extent the amount spent or applied for the charitable or religious purposes shall not form part of the total income of the assessee. The income of a trust is not computed under the various heads of income as prescribed in section 14 of the Act. Therefore, the Proviso to section 69C which bars allowability of deduction of such unexplained expenditure under any head of income will not apply in the case of an assessee being a trust whose income is to be computed under sections 11 & 12 of the Act. Thus the addition made under section 69C will be nullified by the expenditure incurred on the object of the trust and hence no further addition is called for.”
5. He further referred to the assessment order for Assessment Year 2006- 07 the copy of which has been placed at pages 124 to 151 of the paper book and showing the income computed therein it was submitted by him that the only addition made by the Assessing Officer to the returned loss of Rs. 22,03,50,033/- was a sum of Rs. 44,70,372/- reducing the loss of the assessee to Rs. 21,58,79,661/-. He submitted that the aforementioned addition of Rs. 44,70,372/- was out of the aforementioned amount of Rs. 45,66,372/- referred by the CIT.
6. He further submitted that the second allegation of the CIT in his order is regarding shortage of cash found at the time of search in the hands of the trust. He submitted that no adverse inference of this fact has been drawn by the Assessing Officer in the assessment order for Assessment Year 2006-07 though a search was effected on 7th September, 2005. He further submitted that the excess cash was found to be with Shri Tarsem Garg and Shri Sanjeev Garg in whose hands the additions were made despite the fact that the cash found with them was belonging to the trust and the addition in their hands were deleted by the CIT against which department had preferred an appeal before the Tribunal and the Tribunal vide order dated 30th November, 2009 in ITA No.2490/Del/2008 in the case of Shri Tarsem Garg and in ITA No.2491/Del/2008 in the case of Shri Sanjeev Garg has confirmed the deletion. The learned AR referred to the relevant portion of this decision which is reproduced below and copy of which is placed at pages 8-13 of the paper book:-
“7. We have heard both the counsels and perused the records. As per the admitted fact of the case the impugned cash were found at the residence of the assessees during the course of search. It is also admitted that the assessee had mentioned before the search party that some amount of cash is from the Trust. The AO has relied heavily on the basis of statement of Shri DK Bansal, Sr. Accountant. The AO has drawn adverse inference on the basis of the fact that assesses had not exactly quantified the amount taken from the Trust on the date of search. Further reliance has been placed upon the statement of Shri DK Bansal.
7.1 We find that Shri DK Bansal has himself accepted that he was not handling the cash and four other persons were handling cash. Now we refer the statement, of Shri DK Bansal that due to cash shortages in the accounts of the trust and the on the advice of trustees, he used to put in fictitious credit entries. These statements only show that there may be expenditure out of unaccounted cash of the trust at the instance of trustees/assesses. Hence, the preponderances of the probability shows that the cash relating to the Trust was lying with the assessee. Further, M/s MMET had finalized the accounts and as per the audited account total cash was Rs. 51,95,580/-. M/s MMET has also filed income tax return and the audited balance sheet, wherein the sums have been shown as lying with respective assesses. As observed by the ld. CIT(A) no adverse inference has been taken in this regard i.e. with reference to the Accounts and return submitted by the MMET wherein these cash have been shown as lying with the assesses.
7.2 In the background of the aforesaid discussion and precedent, we do not find that as per the circumstances, it cannot be concluded that the sums are unaccounted income of the assessees themselves. The revenue having accepted the return of MMET and the audited accounts therein displaying the fact that these cash belong to the trust and were lying with the assesses, cannot again subject to tax the same cash in the hands of the assessee as their undisclosed income. Accordingly, we do not find any infirmity or illegality in the order of the ld. CIT (A) . Hence, we affirm the same.
8. The next issue raised is that the ld. CIT (A) erred in deleting an addition of Rs. 60,780/- made by the AO on account of unexplained jewellery not disclosed.”
7. Referring all these facts, it was submitted by him that both the grounds on which ld. CIT has cancelled the registration do not subsist and, moreover, ld. CIT himself has accepted that the activities of the trust are genuine, therefore, the registration has wrongly been withdrawn by ld. CIT and his order should be quashed.
8. On the other hand, the learned DR relying upon the order passed by the CIT, pleaded that in view of the facts mentioned in the order of ld. CIT the registration of the assessee has rightly been cancelled and his order should be upheld.
9. We have carefully considered the rival submissions in the light of the material placed before us. The reasons upon which ld. CIT has arrived at a conclusion that activities of the assessee trust are not genuine, do not subsist as deletion of both the additions have been upheld by the Tribunal. The relevant portion of both the orders of the Tribunal on these aspects have already been reproduced. Moreover, immediately after rejecting the registration, ld. CIT vide his order dated 23rd May, 2008 has held that the activities of the assessee are charitable in nature and the activities are genuine. Therefore, we find substance in the arguments submitted by the learned AR and it is held that the registration has wrongly been withdrawn. Keeping in view the entirety of the facts mentioned above, we quash the order passed by ld. CIT and allow the appeal filed by the assessee.
10. In the result, the appeal is allowed.
The order pronounced in the open court on 23.03.2012.