2025 (6) TMI 53 - AT - Income Tax

Exemption u/s. 11 - funds received by the assessee were used by the trustee for his personal purposes and therefore the provisions of section 13 are hit - non receipt or refund of fees addition on account of alleged unaccounted expenditure of payments made to agents and Fees income - respective conclusions in the assessment order based on dumb diaries and dumb seized material. HELD THAT - As all the additions made in the hands of this assessee appellant is based only on seized diaries written by Mr. H B Shivarm without any corroborative material in the form of statements of parents of the student who allegedly paid the fees or two whom the fees is refunded or to the alleged agents to whom the marketing and commission expenditure is paid. DR could not show any other material other than the diaries written by H B Shivram. There was also no answer how the contradictory statements of that person has been dealt with in the assessment of assessee or the assessment of that person. Therefore we direct the ld AO to delete the addition made on account of (i) non receipt or refund of fees (ii) addition on account of alleged unaccounted expenditure of payments made to agents and (iii) Fees income.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in this matter pertain to the validity and evidentiary value of additions made to the income of a charitable trust based on seized diaries and other materials during a search and seizure operation, and the consequent denial of exemption under sections 11 and 12 of the Income-tax Act, 1961. Specifically, the issues include:

1. Whether the seized handwritten diaries and loose sheets, maintained by an individual not formally connected to the trust, constitute admissible and reliable evidence to support additions under sections 69A and 69C of the Act.

2. Whether the additions made on account of 'fee not received / fee refunded' amounting to Rs. 7,65,54,000/- and unexplained expenditure of Rs. 1,21,75,000/- are justified and sustainable.

3. Whether the addition of Rs. 7,74,75,000/- as unaccounted receipts under section 69A is valid, especially when the amounts are allegedly handed over to a deceased trustee for charitable purposes.

4. Whether the principle of telescoping should apply to the additions relating to fee refund, unexplained expenditure, and unaccounted receipts.

5. Whether the denial of exemption under section 11 of the Act is warranted based on the alleged receipt and utilization of unaccounted capitation fees.

6. Whether the assessing officer's failure to provide the assessee opportunity to cross-examine witnesses whose statements were relied upon violates principles of natural justice and vitiates the assessment.

7. The applicability and interpretation of evidentiary provisions under sections 34, 68, 69A, 69C, 132(4), 153A, 153C, and 292C of the Income-tax Act, and relevant judicial precedents concerning the evidentiary value of seized documents and statements recorded during search proceedings.

Issue-wise Detailed Analysis:

1. Evidentiary Value of Seized Diaries and Loose Sheets

The seized material primarily comprised handwritten diaries and loose sheets maintained by Mr. H.B. Shivaram (HBS), who was neither a trustee nor an employee of the trust. These documents contained entries relating to student fees, fee refunds, and payments to agents. The assessing officer (AO) relied heavily on these diaries to make additions under sections 69A and 69C, treating them as incriminating evidence of unaccounted income and expenditure.

The assessee contested the reliability and admissibility of these diaries, asserting they were 'dumb documents' lacking signatures, formal authentication, and proper narration. The diaries did not bear the trust's name or authorization, contained illegible and overwritten entries, and were not part of the trust's books of account. The assessee also emphasized that the AO failed to verify or cross-examine the authors or other relevant parties, and that the diaries were maintained for the personal convenience of HBS.

The Tribunal extensively examined the legal framework governing the evidentiary value of such documents, particularly section 34 of the Indian Evidence Act, which restricts the evidentiary weight of entries in books of account, and the Supreme Court's ruling in V.C. Shukla and Common Cause cases. These rulings clarify that loose sheets or unbound papers do not constitute 'books of account' and that entries therein cannot alone form the basis for charging income without independent corroborative evidence.

The Tribunal found that the diaries lacked the essential characteristics of books of account as they were loose, unsigned, and not regularly maintained in the course of business. The AO's reliance on these documents without corroboration or cross-examination violated principles of natural justice and was legally unsustainable. The Tribunal also noted the absence of any recovery of unaccounted assets or corroborative evidence such as cash, jewellery, or investments linked to the alleged unaccounted income.

Consequently, the Tribunal held that additions based solely on these seized diaries and loose sheets were not justified and directed their deletion.

2. Additions on Account of 'Fee Not Received / Fee Refunded' (Rs. 7,65,54,000/-)

The AO added Rs. 7,65,54,000/- on the basis that certain fees noted as 'not received' or 'refunded' in the diaries were not reflected in the trust's books of account and thus represented undisclosed income under section 69A. The assessee argued that most of these amounts were indeed received and accounted for, except approximately Rs. 56 lakhs, and that the AO failed to consider supplementary submissions and explanations. It was further contended that the diaries did not conclusively prove non-receipt or refund and that the AO selectively accepted parts of HBS's statements while rejecting others without justification.

The Tribunal observed that the diaries showed amounts as due but not necessarily received, and that the AO did not verify if payments were made directly to the trust outside the diaries' scope. The Tribunal also noted the lack of corroborative evidence such as confirmation from students or bank records. The AO's approach of treating diary entries as conclusive proof of income without independent evidence was found to be flawed.

Following the principle that additions under section 69A require the sum to be credited in the books of account or at least linked to the assessee's income, and that mere diary entries cannot substitute books of account, the Tribunal deleted the addition except for the amount confirmed by the CIT(A) as unaccounted.

3. Addition of Rs. 7,74,75,000/- as Unaccounted Receipts under Section 69A

This addition related to amounts recorded under the head 'PP' (Parama Pujya) in the diaries, allegedly handed over to the late Sri Balagangadharanatha Swamiji, a deceased trustee. The AO held that these amounts were unaccounted income and that their utilization by the Swamiji constituted violation of section 13(1)(c)(ii), leading to denial of exemption under sections 11 and 12.

The assessee contended that the Swamiji was a sannyasi with no personal assets and that the amounts were used exclusively for charitable purposes aligned with the trust's objects. There was no evidence of personal benefit or diversion of funds. The assessee also highlighted that the AO did not demonstrate possession of unaccounted assets or personal enrichment by the Swamiji or trustees.

The Tribunal noted the absence of any concrete evidence that the amounts were diverted for personal benefit. It emphasized that mere diary entries without corroboration cannot establish unaccounted income or violation of section 13. The Tribunal also stressed that the trust cannot be held liable for unauthorized collections or payments made by individuals in their personal capacity, citing the principle that 'lifting the veil' is not applicable to trusts as established by the Supreme Court.

Accordingly, the Tribunal deleted the addition of Rs. 7,74,75,000/-.

4. Additions on Account of Unexplained Expenditure (Rs. 1,21,75,000/-)

The AO added Rs. 1,21,75,000/- under section 69C as unexplained expenditure relating to marketing and promotion charges allegedly paid to brokers for soliciting students. The assessee denied making such payments and argued that the diaries lacked evidentiary value and that no corroboration was provided by the AO through examination of the alleged agents or other evidence.

The CIT(A) reduced the addition to Rs. 76,56,000/- after treating Rs. 45,19,000/- as income rather than expenditure. The Tribunal agreed with the assessee that the addition was based on uncorroborated diary entries and statements, and that the AO failed to examine the alleged payees or produce independent evidence.

The Tribunal held that additions based solely on such seized documents without proper corroboration or opportunity for cross-examination are unsustainable and deleted the addition.

5. Application of Telescoping Principle

The assessee contended that the additions relating to fee refund, unexplained expenditure, and unaccounted receipts should be telescoped to avoid double taxation, as these entries represented inflows and outflows of the same funds.

The Tribunal noted the merit in this contention but emphasized that since all these additions were deleted on grounds of lack of reliable evidence, the issue of telescoping became infructuous.

6. Denial of Exemption under Section 11

The AO denied exemption under section 11 on the ground that the trust received capitation fees and carried on activities contrary to its objects. The assessee submitted that it was a registered charitable trust, conducting genuine educational activities, and that no evidence showed diversion of funds or violation of objects.

The Tribunal reiterated the legal position that exemption under section 11 can only be denied if income is not applied to charitable purposes or if there is violation of section 13. It found no evidence of deviation from objects or personal benefit to trustees. The Tribunal relied on judicial precedents holding that unauthorized collections by personnel in their personal capacity do not affect the trust's exemption.

Accordingly, the Tribunal upheld the exemption claim.

7. Violation of Principles of Natural Justice and Cross-examination

The assessee repeatedly sought opportunity to cross-examine witnesses whose statements were relied upon by the AO, including HBS, agents, students, and parents. The AO failed to provide such opportunity, relying solely on statements and seized documents.

The Tribunal emphasized that denial of cross-examination of adverse witnesses violates principles of natural justice and vitiates the assessment. It relied on Supreme Court and High Court judgments underscoring the necessity of cross-examination for statements used against an assessee.

Consequently, the Tribunal held that additions based on such statements without cross-examination cannot be sustained.

8. Reliance on Judicial Precedents

The Tribunal extensively referred to authoritative decisions, including:

• V.C. Shukla (Supreme Court): Loose sheets and diaries are not books of account and lack evidentiary value.
• Common Cause (Supreme Court): Entries in books of account require independent corroboration to be admissible.
• Sunil Kumar Sharma (Karnataka High Court): Additions based solely on loose sheets and diaries are unsustainable.
• Padmashree Dr. D.Y. Patil University (ITAT Mumbai): Additions based on seized diaries and statements without corroboration are invalid.
• Andaman Timber Industries (Supreme Court): Denial of cross-examination leads to nullity of order.
• K.T. Doctor (Supreme Court): Lifting the veil is not permissible in the context of trusts to attribute personal acts of trustees to the trust.

The Tribunal also relied on various coordinate bench decisions of the ITAT and High Courts reinforcing the principles that additions must be based on speaking documents, corroborative evidence, and adherence to natural justice.

Conclusions

The Tribunal concluded that the additions made by the AO and confirmed by the CIT(A) were primarily based on uncorroborated seized diaries and statements without proper evidentiary value or opportunity for cross-examination. The AO failed to produce independent, admissible evidence linking the alleged unaccounted income and expenditure to the assessee trust.

Accordingly, the Tribunal:

• Deleted the additions of Rs. 7,74,75,000/- (unaccounted receipts under section 69A), Rs. 7,65,54,000/- (fee not received/refunded), and Rs. 76,56,000/- (unexplained expenditure under section 69C).
• Upheld the exemption under section 11 of the Act, finding no evidence of deviation from charitable objects or violation of section 13.
• Dismissed the appeal filed by the AO as infructuous in view of the deletion of additions.
• Allowed the appeal filed by the assessee partly.

Significant Holdings and Core Principles Established:

"Loose sheets or scraps of paper cannot be termed as 'books' for they can be easily detached and replaced. A collection of papers in a portfolio, or clip, or strung together on a piece of twine which is intended to be untied at will, would not, in ordinary English, be called a book... Entries in such loose sheets are wholly irrelevant as evidence being not admissible under section 34 so as to constitute evidence with respect to the transactions mentioned therein being of no evidentiary value."

"Entries in books of account regularly kept in the course of business are relevant but such statements shall not alone be sufficient evidence to charge any person with liability. There must be independent evidence of the transaction to which the entries relate and in absence of such evidence no relief can be given."

"Additions based solely on uncorroborated seized material and statements recorded under section 132(4) without giving the assessee opportunity of cross-examination are vitiated and cannot be sustained."

"The trust cannot be held liable for unauthorized acts of its personnel in their personal capacity. Lifting the veil is not permissible in the context of trusts."

"Suspicion, conjectures, and surmises cannot substitute for material evidence in making additions to income."

"Denial of exemption under section 11 requires proof of deviation from objects or violation of section 13, which was not established."