TMI Blog2012 (12) TMI 1022X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be brought to tax cannot be accepted for the reason that ETF by its nature is refundable and it is common practice that students who do not get admission, seek refund of ETF. We therefore reject the grounds of appeal of the revenue in this regard and partly allow the grounds of appeal raised by the assessee. We also find that the AO assessing the Society has denied exemption u/s. 12 on the ground that the Society was collecting capitation fee. Since we have found that the Society was not collecting ETF, the benefit of section 11 of the Act should not be denied to the assessee Society. We therefore hold that the Society would be entitled to benefit of section 11. In conclusion on the issues, we hold that it is only MJB who was collecting ETF and not the Society. We also hold that ETF to the extent of 55% of the total collections of ETF as evidenced by the seized documents should be brought to tax in the hands of MJB on a substantive basis. The additions made in the hands of Society is directed to be deleted. It is also held that the benefit of section 11 of the Act cannot be denied to the Society as there are no circumstances justifying the denial of benefits of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his capacity as Secretary of the Society. One M.J.Balachander, (hereinafter called MJB), brother of the Secretary was appointed by the Society to look after the admission process of the various institutions. MJB had to report to the Secretary in matters relating to admission of students in the various educational institutions run by the Society. MJB was not in the Managing Committee of the society. One Mr. M.J. Ramani is the President of the society and member of the Managing Committee. MJB was the younger blood brother of M.J.Ramani and M.J.Mohan. The other members and office bearers were Dr. Arulmozhi, A.M. Venugopalan, K.C. Venkataramani, S. Govindarajan and B. Swaminathan. 6. MJB was a member of the Governing Council of MVJ College of Engineering, one of the institutions run by the society. As already stated, it is the society which manages all colleges and as Governing Council member, MJB had to act within the authority given to him by the Managing Committee of the society, in particular the Secretary and Correspondent Mr. M.J. Mohan, to whom he had to report on the duties allocated to him. 7. There was a search and seizure operation carried out u/s. 132 of the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd taken by the Society. MJB also submitted that the entire ETF collected as per the seized document should not be assessed as income because ETF was refunded to students who did not ultimately take admission. MJB also explained that ETF was collected from students who seek admission. Ultimately if they do not opt to join the colleges of the Society, they will be refunded the ETF. MJB claimed that 50% of the ETF was refunded. Therefore, only 50% of the ETF as evidenced by the seized document as having been collected should be assessed as income in his hands. 8. The Assessing Officer held that ETF was received by the Society and assessed it in the hands of the Society substantively. The AO assessed ETF protectively in the hands of MJB. The AO gave reduction in the quantum of ETF only to the extent of evidence produced for having refunded ETF to the students. The CIT(Appeals) held that ETF was to be assessed only in the hands of MJB and not in the hands of the Society. On the quantum of ETF to be assessed, the CIT(A) held that 60% of the ETF collected as per seized document has to be assessed to tax and 40% was held to have been refunded. 9. The major common issue to be decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded. Thus 50% of the ETF as per seized document was offered to tax by MJB. The claim in this regard was made by MJB vide letter dated 22.11.2010 addressed to the AO. 14. In the assessment of the society, the Assessing Officer referred to the statement of Dr. R.M.O. Gemson, Principal of MVJ College of Engineering recorded on the date of search. This statement is general and refers to the fact that there were two types of admission viz., (a) through CET (Common Entrance Test) which is Government allotment, and (b) Management Quota. The AO then referred to the statement of Dr. Rajeshwari, Dean of MVJ College Research Hospital, recorded at the time of search. In this statement, she had referred to the fact that 75 out of 100 seats are to be filled up through Karnataka Religious Linguistic Minority Professional Colleges Association (KRPLMPCA) through conduct of entrance exams. The AO then referred to the statement of M.S. Shanti, Guest Relations Executive. She in her statement had mentioned that apart from Tuition Fee, Extra Tuition Fee (capitation fee) was also collected ranging between ₹ 25,000 to Rs.One lakh, depending on the branches for which admission was sought. Anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007-08 5,00,80,500 2,75,000 4,98,05,500 2,53,56,850 2008-09 2,12,91,700 16,65,000 1,96,26,700 1,07,80,452 2009-10 7,53,71,119 16,50,000 7,37,21,119 3,81,02,861 TOTAL 20,45,53,319 37,20,000 20,08,13,319 10,35,00501 18. In the assessment of the Society, apart from making addition of ETF on a substantive basis, the AO also brought to tax income as per Income Expenditure account on the ground that registration granted to the society u/s. 12A had been withdrawn. But this ground no longer survives because the CIT in an order dated 17.02.2011 granted registration to the Society u/s. 12A of the Act, observing as follows:- 1. M/s Venkatesha Education Society had preferred an application on 01.01.2002 seeking registration u/s 12A of the IT Act which was rejected vide order dated 26.07.2002 of the DIT(Exemptions) u/s 12AA(1)(b)(ii). On appeal before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of assessment. The CIT(A) on the issue, whether ETF has to be assessed in the hands of the Society or MJB, held that ETF has to be taxed in the hands of MJB. The CIT(A) held that agreed with the stand of the Society that the whole process of admission was being carried out by MJB and the task of admission was delegated to him by the society and that the role of the managing committee of the Society was to administer the functioning of the colleges. The CIT(A) agreed with the stand of the Society once the powers are delegated to the various personnel there was no direct involvement of the managing committee. The CIT(A) also agreed with the stand taken by the society that to regulate the admission process, MJB was appointed and allowed autonomy to carry out functions related to admission and he regulated and closely controlled the admission process using the Head Office of the Society. The CIT(A) found that MJB was not member of the Society and that he had great influence over the administrative staff and hence his actions could not have been questioned by any of the administrative staff. The CIT(A) also held that none of the seized material establishes the involvement of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h belong to MJB and they were not accounted for by him in his books of accounts. However, the Assessing Officer did not made any addition on account of other assets found at the time of search of MJB for the reason that source of funds of the unexplained assets found at the time of search was ETF collected by MJB and that the value of the assets found was less than the ETF collected by MJB. This circumstance according to the CIT(A) also supported the view that ETF were collected by MJB. 20. On the issue of quantum of ETF claimed to have been refunded by MJB and the amount of ETF that has to be brought to tax in the hands of MJB, the CIT(A) firstly examined the question whether ETF was refundable in nature. On the above question, the CIT(A) found that out of the total additions pertaining to the ETF in five years put together amounting to Q 20,44,15,447/-, the A.O. had allowed refunds amounting to Q 37,20,000/- and the break-up for the five years were as under:- A.Y. ETF Collected ETF considered as refunded ETF assessed ETF admitted by MJB 2005-06 1,53,08,600 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,500/- has accepted as his income out of gross collections of Q 20,45,33,319/-. The CIT(A) also found that the A.O. himself has accepted Q 37,20,000/- as refunded for the five years by MJB. He was of the view that MJB could not furnish the entire details of ETF refunded and expenses incurred. Nevertheless the CIT(A) was of the view that the entire ETF collections cannot be brought to tax as income of MJB. Before CIT(A) MJB filed further affidavits from students to the effect that ETF was refunded by MJB to him. The value of ETF so refunded for the entire period in dispute was ₹ 2 Crore. The CIT(A) noticed that though ETF collected over the years was Q 20,44,15,447/-, no such corresponding cash or investment have been found by the department during the course of search. This according to him clearly showed that the amount of ETF as estimated by the Assessing Officer was never available in the possession of MJB since most of the amount was already refunded to the respective students. The CIT(A) noticed that MJB had on his own offered to tax as income to buy peace, 50% of the ETF collected in the respective years. Taking into consideration the above circumstances, the CIT(A) wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea of the Society cannot be accepted. 26. The ld. DR referred to seized document A/15/MVJCB relevant to AY 2005-06 wherein a comprehensive break-up of the ETF and normal Tuition Fee has been given. According to him, such details would not be maintained if MJB was collecting ETF without the knowledge and consent of the Society. He also drew our attention to seized document A/14/MVJE (page 54 and page 99 of A/18/MVJE) which refers to the fact that ETF collected in cash was deposited in the H.O. i.e., the society through different persons of the Society viz., Ms. Kavitha Prasad, Mohan Secretary of the Society, Indira and others. The documents are relevant to AY 2006-07 2007-08. According to him, these documents which are relevant for AY 2006-07 also goes to show that it was the Society which was collecting and appropriating ETF. The ld. DR drew our attention to the statement of MJB at the time of search wherein he had stated that Mr. Mohan had given cash found at the time of search and that the same was tuition fee collected from students. A reference was also made to A/14/MVJB (page 56) relevant to AY 2006-07, wherein the fact that ETF collected was deposited in the Head off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. counsel submitted that in course of assessment proceedings, the assessee addressed a letter dated 22.11.2010 to the AO in which he had explained that the entire ETF was collected by him without authority of the Managing Committee of the Society. It was pointed out that MJB confessed having taken the liberty of collecting the ETF on his own, without the knowledge and directions of the Managing Committee of the Society. Another circumstance pointed out by the ld. counsel for MJB was the fact that along with the cash of ₹ 1.20 crores found at the time of search at MJB s residence, there was a paper containing the words handed over to Balachander Sir . Referring to the aforesaid document, the ld. counsel for MJB submitted that if the cash had been given by the assessee s elder brother Mr. Mohan, then the description in the loose paper found along with the cash could not read as cash given to M.J. Balachander Sir . 29. With regard to the quantum of ETF refunded by MJB, the ld. counsel for the assessee submitted that it was not possible for MJB to get confirmation from all the students to whom he had refunded the ETF. Our attention was drawn to the letter dated 22.11.2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployee beyond the scope of the powers given to him will not bind the Society. 31. We have given a very careful consideration to the rival submissions. For deciding the controversy as to whether the ETF has to be assessed in the hands of the Society or in the hands of MJB, it is necessary to have a look at the seized documents. In the A.Y. 2005-06, the AO for making the addition on account of ETF has placed reliance on A/15/MVJCE, pages 37 to 39 of the seized documents. Page 39 is a letter written by one Kavitha Prasad in which Kavitha Prasad has mentioned that she is giving the details of admissions done in the college for the academic year 2004-05. She has also mentioned that the total collections in cash and DD was a sum of Q 3,18,39,540. The details of the DDs deposited in Bank and cash deposited in the Head Office are also given in the said letter. It is very important to note that this letter is addressed to MJB (pages 37 and 38 of the seized documents) and gives a break-up of a sum of Q 3,18,39,540 referred to by Kavitha Prasad in the letter. It is pertinent to mention that the break-up given along with this letter is in the form of a table in which the bifurcation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he seized documents referred to be the AO in order of assessment for the A.Y. 2005- 06 has any connection with the society. 32. As far as A.Y. 2006-07 is concerned, the AO while making the addition on account of ETF in the hands of the Society has placed reliance on the seized documents A/14/MVJCE (pages 50 to 56). Page 56 of the seized documents is a letter written by one Indira Devi to MJB. This letter again gives a break-up of the collections in cash as well as in DD. In this letter also, there is a reference to cash deposited in the Head Office as in that A.Y. 2005-06. This seized document also gives a break-up of the agreed tuition fee and the Extra Tuition Fee (ETF) and also the balance to be collected. Apart from the above, page 54 of the seized documents also gives the details of the deposit of cash in the Head Office through whom. E.g., on 25.05.2005, cash deposited in the Head Office is stated to be in a sum of Q 5,69,000 and that the same has been deposited in the Head Office through Ms. Kavitha Prasad. In this description, which has a total of about 29 different dates, there is a reference to the cash having been deposited in the Head Office through Secretary Sir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted is to the tune of Q 5,26,63,500. The amount stated to have been deposited in the Head Office through the Secretary is a sum of Q 35,53,000 on 24.06.2006, a sum of Q 49,21,000 on 01.07.2006, a sum of Q 66,67,600 on 15.07.2006 and another sum of Q 51,11,500 on 19.07.2006. Thus, the total amounts referred to in this loose sheet viz., page 99 is less than the legitimate tuition fee which the Society can collect and which has been collected by the Society. In these circumstances, no adverse inference can be drawn on the basis of entries referred to by the ld. DR in the course of arguments before us. 35. As far as A.Y. 2008-09 is concerned, the AO has placed reliance on the seized material A/VES/01 (pages 60 to 72 74). We have seen the seized papers and we find that this seized paper only gives a list of clients (students) and the quantum of tuition fee and ETF. There is no other indication in these seized documents that the Society has received any payment on account of ETF. 36. As regards A.Y. 2009-10, the seized documents are pages 1 to 96 and 113 to 116 of A/8/MVJCE and pages 247, 250, 272, 276, 280, 284, 286 and 387 of the seized material A/3/MVJCE. We have seen pages 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch only 9% of the total ETF collections were found in the form of assets from the possession of MJB. This according to MJB, it will only go to show that he was not holding the entire ETF and he had refunded substantial potion of the ETF. This circumstance, in our view, will be a factor which will be relevant in deciding as to what will be the quantum of ETF that can be considered as having been refunded by MJB. It has been the argument of the ld. counsel for MJB that the circumstances pointed out by the assessee should be accepted and only 50% of ETF offered to tax should be accepted as sufficient. 41. We have considered the claim of the assessee with reference to the refund of ETF and also the reasons given by the CIT(Appeals) for estimating the ETF that has to be brought to tax @ 60% of the total collections of ETF by MJB. We are of the view that there is no basis whatsoever for the CIT(Appeals) to have estimated the ETF @ 40% as refunded by MJB to the students. In this regard, we have to go only by the probabilities of the case. We are of the opinion that the AO having accepted that ETF is refundable and going by the prevailing practice that when a student does not avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been treated as an application of income, depreciation on the very same assets should not be allowed and if it is so allowed that would be conferring a double benefit to the charitable organization. The revenue in coming to the aforesaid conclusion, has placed reliance on the decision of the Hon ble Kerala High Court in the case of Lissee Medical Institutions v. CIT, 348 ITR 344 (Ker). In the aforesaid decision, the Hon ble Kerala High Court took the view that when the full value of capital expenditure on acquisition of assets is treated as application of income for charitable purposes and when the assessee has been allowed the benefit of exemption u/s. 11, the assessee cannot again claim the same in the form of depreciation, and such notional income would become cash surplus available with the assessee which was outside the books of accounts of the trust, unless it was written back which was not done by the assessee. The Court further held that it was not permissible for charitable institution to generate income outside the books of accounts in this fashion and there would be violation of section 11(1)(a). The Hon ble Kerala High Court has not accepted the view expressed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corts Ltd. (supra) was also considered by the Hon ble Punjab Haryana High Court. The following were the relevant observations of the Hon ble Court. 8. In all fairness to the learned counsel for the Revenue, reference is made to the judgment of the Hon ble apex Court in Escort Ltd. s case (supra), on which reliance has been placed by the learned counsel for the Revenue. The Hon ble Supreme Court in that case was dealing with a case relating to two deductions both under ss. 10(2)(vi) and 10(2)(xiv) of the 1922 Act or both under ss. 32(1)(ii) and 35(1)(iv) of the Act. The assessee therein had incurred expenditure of a capital nature on scientific research relating to the business which resulted into acquisition of an asset. The assessee had sought to claim a specified percentage of the written down value of the asset as depreciation and at the same time claimed deduction, in five consecutive years of the expenditure incurred on the acquisition of the asset. The apex Court observed : Where a capital asset used for scientific research related to the business of the assessee is also ipso facto an asset used for the purpose of the business, it is impossible to conceive of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that when the cost of a capital asset on which depreciation is claimed is considered as application of income by the charitable institution, depreciation on the very same asset should not be allowed and doing so would amount to giving two benefits. Contrary view has been taken by the Hon ble Karnataka High Court, in the case of Society of sisters of St.Anne, the Hon ble Punjab Haryana High Court in the case of CIT v. Market Committee, Pipli, 330 ITR 16 (P H) and the Hon ble Bombay High Court in the case of Institute of Banking (supra). The preponderance of judicial opinion is in favour of the Assessee and therefore, we respectfully following the decisions in favour of the Assessee, hold that the CIT(A) was justified in directing the AO to allow depreciation as claimed by the Assessee. The relevant grounds of appeal of the Revenue in ITA No. 100 to 106/Ban/2012 are thus dismissed. 49. The Assessee has filed two C.O. i.e., C.O.No.50/bang/2012 for AY 03-04 and C.O.No.51/ban/2012 for AY 04-05. These C.O.s to the extent they are supportive of the order of CIT(A) on issues decided in favour of the Assessee by CIT(A) cannot stand because Cross Objection can only be against that p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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