2025 (5) TMI 1640 - AT - Income Tax

Exemption u/s. 11 - assessee trust has received unaccounted cash receipts - capitation fees collected by the assessee trust - HELD THAT - Perusal of the receipts would show that the assessee has received cash from the students for the MD Seat under the Management Seat. It is universally accepted now that management seats are given after receiving the capitation fees. Therefore we are of the firm view that the amount of fees which was received by the assessee was in the nature of capitation fee though it is mentioned as Management fee in the receipt book unearthed during search. As in Mac Public Charitable Trust 2022 (11) TMI 137 - MADRAS HIGH COURT has categorically held that entitlement of benefits enumerated in section 11 12 are not available for capitation fees because charging of capitation fee from the students in lieu of management seats is not a charitable object at all depriving the benefit of sections 11 12 to the assessee. We further note that the CIT(A) s observation that the AO should have ascertained the total income of the appellant by adding unaccounted cash receipts to the declared income of the appellant and verified whether there was any accumulation of income over and above 15% or not is not at all relevant having regard to the fact that the impugned cash is capitation fees and in MAHARAJI EDUCATION TRUST 2024 (7) TMI 350 - DELHI HIGH COURT have categorically held that benefits of section 11 12 are not meant for amount collected as capitation fees. Filing of affidavits by the students before the AO is also of no use because no person would give any statement against his own interest. If in this case the student affirms that they have paid capitation fee then they will also be in trouble in terms of the provisions of the Act. Therefore the affidavits of the students have no relevance. Appeals of the revenue are allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

(a) Whether the unaccounted cash receipts represented capitation fees collected by the assessee trust and whether such receipts are liable to be taxed without exemption under section 11 of the Income-tax Act, 1961.

(b) Whether the assessee trust is entitled to claim exemption under section 11 and 12 of the Income-tax Act on the unaccounted receipts found during search and treated as capitation fees.

(c) Whether the retraction of statements recorded under section 132(4) by the assessee's representatives is valid and can be relied upon to disprove the incriminating statements.

(d) Whether the deletion of additions made by the Assessing Officer (AO) on account of unaccounted receipts was justified by the CIT(Appeals).

(e) Miscellaneous procedural and technical issues raised in the assessee's appeal such as validity of time given for filing return under section 153A, approval under section 153D, reference to valuation cell, time-bar of assessment, carry forward of prior year expenses, and levy of interest under sections 234A, 234B & 234C.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Nature of Unaccounted Receipts and Taxability

Relevant legal framework includes sections 11, 12, and 164(2) of the Income-tax Act, 1961, provisions dealing with exemption of income of charitable trusts and taxation of undisclosed income. The search under section 133A, converted into search under section 132, led to seizure of 300 receipts. Of these, 124 receipts were accounted for in books, while 176 receipts were unaccounted and found in receipt books but not issued to students.

The AO relied on statements recorded under section 132(4) from the trust's accountant and secretary, who admitted that the unaccounted receipts represented cash received as capitation fees and were distributed among trustees and others. The AO taxed these amounts at the maximum marginal rate under section 164(2).

The CIT(Appeals) confirmed the finding that unaccounted cash receipts were received but allowed exemption under section 11 on the ground that the amounts were applied for charitable purposes. This finding was challenged by the revenue.

The Tribunal noted that the receipts related to fees collected from students for management seats, which are universally recognized as capitation fees, albeit labeled as "Management fee" in the receipt books. The Tribunal held that such receipts are capitation fees and not legitimate course fees.

Precedents considered include the Delhi High Court's decision in PCIT v. Maharaji Education Trust and the Madras High Court's decision in Mac Public Charitable Trust, which held that collection of capitation fees is not a charitable activity and thus not eligible for exemption under sections 11 and 12. The Supreme Court decisions in TMA Pai Foundation and P.A. Inamdar were also cited, emphasizing that charging capitation fees is forbidden and inconsistent with the charitable nature of educational institutions.

The Tribunal applied these principles to the facts and concluded that the unaccounted receipts were capitation fees, which are not charitable income and therefore not entitled to exemption under section 11. The revenue's appeal on this issue was allowed.

(b) Validity of Retraction of Statements Recorded Under Section 132(4)

The assessee contended that the statements recorded under section 132(4) were retracted by the Secretary of the trust and the accountant, and that such retraction should be accepted. The Tribunal examined the legal position and relied on the Madras High Court decision in Mac Public Charitable Trust, which held that retraction of statements recorded under section 132(4) must be made promptly, supported by a sworn affidavit and convincing evidence. Retraction made after a long delay (237 days in the cited case) is not credible and cannot be accepted as a matter of law.

In the present case, the retraction was signed by the Chartered Accountant and Advocates as authorized representatives, but not by the declarants themselves. The Tribunal held that there is no provision under the Income-tax Act or Rules permitting retraction by representatives on behalf of the declarants. Therefore, the retraction was treated as an afterthought and rejected.

(c) Entitlement to Exemption Under Sections 11 and 12 on Unaccounted Receipts

Section 11 exempts income of a charitable trust if it is applied wholly for charitable purposes. The Tribunal noted that the trust was registered under section 12A and continued to hold valid registration. However, the Supreme Court and High Courts have consistently held that charging capitation fees is not a charitable activity and amounts collected as such cannot be treated as exempt income.

The Tribunal cited the Delhi High Court's observation that the word "wholly" in section 11 relates to the purposes for which income is applied, not merely the source of income. If the activity involves charging capitation fees, the trust's object is not purely charitable, and exemption cannot be allowed.

The Tribunal further noted that the CIT(Appeals)'s direction to ascertain accumulation beyond 15% under section 11(1)(a) was irrelevant since capitation fees are not eligible for exemption at all. The affidavits filed by students denying payment of capitation fees were held to be of no evidentiary value, as students would be reluctant to admit illegal payments.

(d) Deletion of Addition by CIT(Appeals)

The CIT(Appeals) partly allowed the assessee's appeal by deleting the addition of Rs. 2,47,06,000 on the ground that the amounts were applied for charitable purposes, despite confirming that unaccounted receipts existed. The revenue challenged this deletion.

The Tribunal found that the CIT(Appeals) erred in allowing exemption under section 11 for capitation fees, contrary to binding judicial precedents. The deletion was therefore set aside, and the addition restored.

(e) Miscellaneous Procedural and Technical Grounds Raised by Assessee

The assessee raised ten grounds of appeal, including challenges to the time allowed for filing return under section 153A, approval under section 153D, reference to valuation cell, time-bar of assessment, carry forward of prior year expenses, and levy of interest under sections 234A, 234B & 234C.

The Tribunal dismissed these grounds for lack of merit or failure to produce supporting evidence. Specifically, the time given for filing return was found to be more than 30 days, contrary to the assessee's claim of only 7 days. The ground regarding approval under section 153D was unsupported by any material or request to summon records. Grounds related to valuation cell and time-bar were held irrelevant or inadequately argued. The claim for carry forward of expenses was abandoned, and the levy of interest was held mandatory and consequential.

3. SIGNIFICANT HOLDINGS

"The AO was right in holding that the appellant trust had received unaccounted cash from students and they were not recorded in the books of account as income." (para 4.5 of CIT(A) order)

"It is universally accepted now that management seats are given after receiving the capitation fees. Therefore, we are of the firm view that the amount of fees which was received by the assessee was in the nature of capitation fee though it is mentioned as Management fee in the receipt book unearthed during search." (para 11)

"Charging of capitation fee must be forbidden and the object of education is mandatorily charitable in nature... An educational institution cannot charge such a fee as is not required for the purpose of fulfilling that object." (Supreme Court in TMA Pai Foundation, para 27)

"Capitation fee cannot be permitted to be charged and no seat can be permitted to be appropriated by payment of capitation fee... Profiteering is also not permissible." (Supreme Court in P.A. Inamdar, para 28)

"Collection of any amount in excess of what has been prescribed as fee or in the nature of donation or voluntary contribution either directly or indirectly to the institution... would render the activity ungenuine and deprive the assessees of the benefits of sections 11 and 12 of the Act." (Madras High Court in Mac Public Charitable Trust, para 29)

"Retraction of statements recorded under section 132(4) must be made within a reasonable time and supported by duly sworn affidavit or convincing evidence. Retraction made after long delay is not acceptable." (Madras High Court, para 15)

"No person would give any statement against his own interest. Affidavits of students denying payment of capitation fees have no evidentiary value." (para 17)

Final determinations:

- The unaccounted receipts seized during search were capitation fees and not legitimate charitable income.

- The assessee trust is not entitled to exemption under sections 11 and 12 on such capitation fees.

- The retraction of incriminating statements was not valid and cannot be relied upon.

- The addition made by the AO on account of unaccounted capitation fees is upheld.

- Miscellaneous procedural and technical grounds raised by the assessee are dismissed.

- The appeals filed by the revenue are allowed; the appeal filed by the assessee is dismissed.