TMI Blog2018 (6) TMI 1571X X X X Extracts X X X X X X X X Extracts X X X X ..... ring them in the regular books of accounts maintained by the trust. When the assessee, a public charitable trust, has not kept clear and accurate accounts of the trust-property and failed to furnish with full and accurate information as to the impugned amount and state of the trust property, a finding was arrived that the impugned sum was lying with the Managing Trustee and others during the said period, which have not been used for the objects of the assessee trust. These facts have not been disproved. All these activities violate the provisions of the Indian Trusts Act, the Income Tax Act etc and hence the assessee’s case clearly falls within the mischief of all the above clauses of Section 4 of the Indian Trusts Act. - Decided against assessee Interest free advance given to sister concern - advances to prohibited persons - HELD THAT:- M/s Prathyusha Associates Shipping Pvt. Ltd. (PASPL), is a prohibited person, to whom ₹ 6 crore of the assessee’s money was advanced free-ofinterest etc are not disputed. Though, the assessee claimed to have ; advanced towards cost of construction of the buildings for the trust, awarded the contract to them on competitive bidding etc, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... numerous opportunities afforded and failed to give any explanation with regard to the entries in the seized notebook/material towards the huge amounts collected from students viz., ₹ 8,05,000/- for a y 2010-11, ₹ 1,49,37,200/- for ay 2011-12, totalling to ₹ 1,57,42,700/- etc before the AO. After considering the seized materials, the sworn statements recorded from Shri P. Raja Rao, Chairman and Trustee and Shri Ramayya Vutukuri, DGM (Finance) and other materials etc , the A O held, inter alia, that from the facts gathered during the course of search and confronted to the Managing Trustee and the Officer-In-Charge of Accounts and as deposed by them, the assessee has violated the beneficial provisions contained under the Income Tax Act in many ways. Such contumacious conduct in running the affairs of the Trust go against the basic tenets of the Trust and Trusteeship. Hence, the AO treated the assessee as an AOP and determined the income on 28.03.2013 without giving benefit of exemptions under sections 10 11 for both the a ys 2010-11 2011-12. Aggrieved, the assessee filed appeals before the Ld. CIT(A) for these a ys. 4. Meanwhile, based on the seized document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Chennai, vide orders dated 18-11-2014 and 07.12.2016, respectively, after giving due opportunity to the assessee. As on date, those orders cancelling the exemption, hold good and have not been set aside or reversed. Therefore, the Ld. CIT(A) cannot shut his eyes to the said factum of cancellation. Further, after considering the assessee s submissions, material etc., the Ld. CIT (A) dismissed both the appeals. Against all these 3 orders, the assessee filed these appeals. 6. At the time of hearing, the AR submitted that the decision to be made on the order of the Ld. PCIT, Central-2, Chennai, would decide the matters in all these appeals. The A R submitted that the assessee is a Public Charitable Trust having the main charitable object of education and runs an engineering college by the name M/s Prathyusha Institute of Technology Management . The assessee made a detailed submission before the Ld PCIT that the trust has not received any capitation fees and the sum of ₹ 1.57 crores is only the advance fees collected from students. It was further submitted that even if it is to be construed as capitation fees, the same cannot be a reason for cancellation of registration. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.1 Per contra, the Ld. DR invited our attention to the relevant portions of the orders of the Ld. PCIT and submitted that Ld. PCIT on due consideration of the seized material , sworn statements recorded at the time of search, other material and applying the appropriate ratios, have arrived a clear finding on the impugned transactions and concluded that the assessee s activities are not in accordance with law and it is not carrying its activities in accordance with the objects of the trust and hence, cancelled the registration granted to the assessee. The Ld. DR submitted after this order was passed by the Ld. PCIT, the assessee pursued its appeals before the Ld CIT(A). Inviting our attention to the relevant portions of the order of the AO and the Ld CIT(A) , the Ld. DR submitted that since the assessee is seeking the exemption, the onus is on it to place adequate and relevant material and seek exemption. In spite the search and seizure action, the assessee has not placed any material before the AO in support of the exemption. It could not produce any evidence to dispel the findings arrived by the Ld. PCIT. On the other hand, the Ld. CIT(A) has arrived a very clear finding on h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eering college, if any amount is or has been collected by that college Authority from that student, then the same should not be and also cannot be considered as towards advance fees received from such student. Therefore, when admittedly, such receipts total amounting to Rs~ 1,57,42,700/-, have been collected by the assessee trust from those students during the said financial years, prior to start of counseling, during such period, the same cannot be considered as towards advance fees. Rather, the same are in the nature of advance capitation fee collected by the assessee trust from such students for the purpose of giving admission in the engineering college run by it. 7.3 Further, in the submissions filed vide letter dated 6.10.2016, in response to the second notice dated 26.9.2016 u/s 12AA(3) of the Act, almost the same submission has been made. It has been contended that such amount recorded in that seized note book represents advance fees received from students, which on confirmation of admission have been adjusted against the fees receivable and the balance has been returned to the student, where the admission has not been granted. It has been submitted that the students who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ai Foundation Others vs State of Karnataka and Others (2002) 8SCC 481. By indulging such activity of collecting capitation fees from students for the purpose of getting admission to the engineering college run by the assessee trust, which is not permissible under law, keeping in view the said decision of Hon'ble Apex court, in my considered view, under such circumstances, it warrants cancellation of registration granted to the trust u/s 12AA treating as a Charitable institution. 7.4 Collection of Capitation fee from students, over and above the prescribed fee for admission, for getting admission into the Engineering college run by the assessee trust, is not permissible under Law. In T. M.A Pai Foundation Others vs State of Karnataka and Others (2002) 8SCC 481, the Hon'ble Supreme Court held that education is a noble occupation on no profit no loss basis and thus those who establish and manage educational institutions are not expected to indulge in profiteering or commercialize it. Further in Islamic Academy of Education Another vs State of Karnataka Others (2003) 6 SCC 697, the Hon'ble Supreme Court held that there could be no profiteering and no capitation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo societies, which were not recorded in the regular books of accounts. Following search seizure operation conducted in the case of the said society, from the seized documents, it was found that the assessee has collected capitation fees from the students, over and above the prescribed fee, for the purpose of admission, which were not recorded in the regular books of accounts of the society. Under these circumstances, and since the activity carried on by the said society were found to be not of charitable nature, the registration granted u/s 12AA of the Act, was cancelled by the CIT(Central), Hyderabad, and the said orders of the CIT (Central), Hyderabad, was upheld by the Hon'ble ITAT, Hyderabad, vide their said order in ITA No.585/Hyd/2012 ITA No.586/Hyd/2012, dated 31.8.2012. 7.7 Further, the Hon'ble Madras High Court in their decision in the case of P.S Govindasamy Naidu Sons (324 ITR 44), have held that the amounts paid by the parents of students over and above the prescribed fee, is a capitation fee and the institution collecting such fee existed only for the purposes of profit and not solely for educational purposes and therefore is not entitled for exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment recorded during the course of search proceedings on 3.8.2010, which are reproduced as under :- 4. I am showing you ANN/JXP/REG/S-l seized from the college on 2/07/2010. Please explain the contents of the same. Ans : These are the receipts from the students. 5. Whether these receipts are entered in the software maintained in the college or the books of account maintained at M/s Prathyusha Educational Trust office. Ans : So far it has not been entered in any books of accounts. 6. Had any receipts has been issued for the amounts mentioned in the register ANN/JXP/REG/S-1. Ans: No. 7. Whether the transactions entered in the register has been reflected in the cash book maintained in the college or the trust office. Ans: No 8. Could you please confirm with your accounts staff whether the receipts mentioned in the register ANN/JXP/REG/S-1 are entered in the software maintained in the college or the books of account maintained at M/s Prathyusha Educational Trust office. Ans : I confirmed with the accounts staff Shri Sivaprakasam and Smt Sivagama Sundari. The receipts mentioned in the said register has not been entered in the books of accounts maintained at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceipts were admittedly kept outside the regular books of accounts maintained by the trust . 8.3 However, to such issues raised vide that para 15 of the said show cause notice u/s. 12AA(3), the assessee trust has not given any reply in its written submissions filed on 08.08.2013. Further, even though reference was made to the said show cause notice issued dated 18.7.2013, in the second notice dated 26.9.2016 u/s 12AA(3) issued by me, no reply has been furnished with reference to such issue pointed out to the assessee, 'that the purpose of application of those receipts can only be for anything other than the objects of the trust, as such receipts were admittedly kept outside the regular books of accounts maintained by the trust'. Rather, silence on the part of the assesse to such specific point raised in that show cause notice u/s 12AA(3), it indirectly shows that such funds amounting to Rs.l,57 ,42, 700/-, constituting income of the assessee trust, have not been utilised for the purpose of objectives of the assessee trust, as mentioned in the trust deed. 8.4 As mentioned above, the assessee trust has 24 objects mentioned in the trust deed executed on 01.8.2000. All the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. CIT(A) and the Ld. CIT(A) disposed the appeals after considering the order of the Ld. PCIT and other material. In order to appreciate the entire facts and circumstances of this issue, the relevant portion of the order of the Ld. CIT(A) is extracted as under : That apart, the document viz ., long size note book bearing ANN/JXP/REG/S at Sl. No. 1, which was seized during the course of search clearly defy the stand of the appellant. It is not open to the appellant to contend that the said seized document Is not an account book maintained in the regular course of business. The position of law is that entries made in loose sheets of paper do not have the presumptive value as set out in Section 34 of the Indian Evidence Act 1872. Third parties cannot be implicated on the strength of such entries but where the authenticity and genuineness of the seized material are admitted by the appellant himself, the position is clearly different. In the present case, the appellant was specifically put on the facts with regard to the contents of the said note book. It has been admitted that the amounts mentioned therein were actually received by the appellant but were not reflected in the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nselling process these students will start shopping around for finalizing the admission and at this juncture eventually the advance received from students might result in admission or will result in refund. The uncertainty over the eventual admission process In relation to the student taking up the admission is considerably high and In order to mitigate the risk it has been the consistent practice that only upon confirmation of admission of the student, the fee collected will be entered In the books of accounts failing which the same is duly returned. If the appellant starts Issuing receipts for the advances accepted the college would be under obligation to accept the admission whatever may be academic performance of the student as these advances are generally paid immediately after the qualifying exams (Intermediate or +2 as the case may be) are over where the results would not have been announced. If the Trust issues receipts and accounts the same as income or advance it gets itself binding on its part to consider the admission for all the people who ever had paid the advance (if admission are denied, It gets into legal issues) and this would be a significant compromise by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K.M. Kumar 50,000 1,50,000 06.02.10 03.03.10 Totally he has paid ₹ 1,50,000/- 8 29 D. Lokesh 50,000 50,000 18.02.10 29.04.10 Totally he has paid ₹ 1,00,000/- 14 72 S. Nandini 5,000 1,00,000 06.04.10 29.05.10 Totally she has paid ₹ 1,05,000/- 15 20 V. Monisha 5,000 45,000 06.04.10 09.04.10 Totally she has paid ₹ 50,000/- 21 88 D. Vaishali 50,000 1,00,000 09.04.10 02.06.10 Totally she has paid ₹ 1,50,000/- 22 30 A Vinod 15,000 35,000 No date 29.04.10 Totally he has paid ₹ 50,000/- 25 31 N. Surendranath 50,000 75,000 No date 01.05.10 Totally he has paid ₹ 1,25,000/- 27 32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the assessee. Even if those amounts were collected by tl e assessee from the respective applicants subject to the finalization of admission process, nothing prevents the assessee from bringing those amounts in its regular books of account. Keeping such a huge amount of ₹ 18 lakhs outside the books of account cannot be justified at all. The assessee could have accounted the receipts as and when received under a particular provisional head. When the admission process is over, the provisional head could be closed by transferring the amounts to fees and dues account in the case of applicants admitted for the nursing course and by returning the amounts in respect of the applicants not selected for the course. Therefore the explanation of the assessee that the amounts were not recorded In the books of account for the reason that the admission process was not complete at the time of search is not acceptable In law. The details must be properly recorded at least in a rough book. It is a clear case that the entire amount of ₹ 18 lakhs was blacked out of the records of the assessee. In addition to this, the assessee has never explained how finally, this amount was adjuste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not correct etc. In the facts and circumstances, it is clear that the assessee trust has not kept clear and accurate accounts of the trust-property and failed to furnish with full and accurate information as to the impugned amount and state of the trust property. But for the search and seizure action, all the above facts would not have surfaced at all. In view of the above facts and circumstances and since the assesse has not laid any material to prove that the impugned sum was accounted for by the trust , used for the purposes of the trust etc, therefore, the decisions arrived by the Lower authority (ies) is/ are upheld and the corresponding grounds of the assessee s appeal are dismissed. 7.3 The above issue could be examined from another angle also. The assessee claims to be a public charitable trust. Section 4 of the Indian Trusts Act (ITA) , 1882 is extracted as under : OF THE CREATION OF TRUSTS 4. Lawful purpose :- A trust may be created for any lawful purpose. The purpose of a trust is lawful unless it is (a) forbidden by law, or (b) is of such a nature that, if permitted, it would defeat the provisions of any law, or (c) is fraudulent, or (d) involve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s dt 11 December 1973 : 1974 AIR 1084 has held that there is a common area of legal principles which covers all trusts, private public, and merely because they find a place in the ITA, they cannot become untouchable where public trusts are involved. The relevant portion is extracted as under : Therefore, this 'elecent connotes a public' trust. The next question is whether the Indian Trusts Act, 1882, applies 1. (1923) 1 Ch. 258, 266. L748SCI/74 688 to the present case. The Courts below have argued themselves into an application of s. 83 of the Trusts Act. Sri Dixit rightly objects to this course because that Art relates only to private trusts, public charitable trusts, having been expressly, excluded from its ambit But while these provisions proprio vigore do not apply, certainly there is a common area of legal principles which covers all trusts, private and public, and merely because they find a place in the Trusts Act, they cannot became 'untouchable' where public trusts are involved. Care must certainly be exercised not to import by analogy what is not, germane to the general law of trusts, but we need have no inhibitions in administering the law by invok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich resulted in unearthing of evidences, inter alia, that the assessee collected huge amount of ₹ 1,57,42,700/- from students, in cash , without issuing any receipts and without entering them in the regular books of accounts maintained by the trust . When the assessee , a public charitable trust, has not kept clear and accurate accounts of the trust-property and failed to furnish with full and accurate information as to the impugned amount and state of the trust property, a finding was arrived that the impugned sum was lying with the Managing Trustee and others during the said period, which have not been used for the objects of the assessee trust. These facts have not been disproved. All these activities violate the provisions of the Indian Trusts Act, the Income Tax Act etc and hence the assessee s case clearly falls within the mischief of all the above clauses of Section 4 of the Indian Trusts Act , supra. An assessee which claims to be a Trust existing for Public Charitable Purposes but does not carry its activities in accordance with its objects would certainly fall within the prohibitions of clauses of S4 of The Indian Trusts Act 1882, as extracted above. Further, allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the funds of the assessee trust and such advance was paid towards the cost of construction of the buildings are not tenable, when the entire facts and the copies of ledger accounts of PASPL-Construction filed by the assessee during the present proceedings, are analysed carefully. 9.2 It has been submitted that the contract for construction was awarded through a bidding process by a team of civil engineering experts from amongst bids received by the trust. It is further stated that the entire process of awarding the contract was a transparent one and is supported by records maintained for the purpose. In this context, it is submitted that during the course of hearing on 19.8.2013, the Ld. Authorised Representative of the assessee trust was requested to furnish copies of correspondence in respect to award of contract, calling and receiving of tenders for contract and approvals taken for construction . However, the requisite details have not been furnished. It may be mentioned here that in the covering letter to the details filed on 15.10.2013, under point no.6, the assessee has referred to furnishing of copies of tenders received from M/s AB Construction in connection with tenders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings. 9.4 As noticed, from the ledger account of PASPL Construction for the period 01.04.2009 to 31.03.2010 furnished by the assessee, a sum of ₹ 6 crores was paid to PASPL Construction on 08.02.2010 vide a cheque drawn on Indian Bank, T.Nagar, showing as for 'mobilisation of advance' for college construction. The said entire amount was lying as a credit balance as on 31.3.2010 against that PASPLConstruction. 9.4.1 As per the ledger account of PASPL-Construction for the period 1.4.2010 to 31.3.2011, the said amount of Rs .6 crores is shown as opening balance during the year. Later, the said PASPL -Construction has raised a bill for ₹ 1,23,67,390/- for work done at main building and work shop vide RA bill dated 12.4.2010. However, instead of adjusting that bill against the earlier advance given of ₹ 6 crores, the assessee has paid separately for the same, vide Cheque issued on 21.4.2010 through Indian Bank, T Nagar. Further later, on 7.5.2010, the said PASPLITA Construction has raised a bill for ₹ 88,60,312/- for certain work done at main building etc. This time also, instead of adjusting that bill against that advance of ₹ 6 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... huge payment of ₹ 6 crore made by the assessee trust to that sister concern was not for the purpose of objective of the assessee trust, as per the object clauses (q) (v) referred to in para 8,4 above. Thus, it may be noticed that such activity undertaken by the assessee, in advancing that amount of ₹ 6 crore to that sister concern PASPL for a considerable period of more than two years, starting from 8.2.2010, was not for the purpose of advancement of objects of the trust and under such circumstances, the case of the assessee trust, being covered under the second limb of the conditions stipulated in Sub-Section (3) of Section 12AA of the Act, it warrants cancellation of registration earlier granted to the assessee trust u/s 12AA of the Act. 8.1 From the above, it is clear that the Ld. PCIT requested the assessee to furnish copies of correspondence in respect to award of contract, calling and receiving of tenders for contract and approvals taken for construction etc . However, the requisite details have not been furnished. From the details/ material furnished, the Ld. PCIT held that (i) The assessee itself has obtained such document from the said party and filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same. Thus, the actual financial transactions made by the assessee with the said associate concern, as evident from the copies of said ledger accounts of that concern filed by the assessee, disprove such contention of the assessee. From the ledger accounts of PASPL, for the three different financial years (copies enclosed as Annexures '8'), it is thus evident that ₹ 6 crore made by the assessee trust to that sister concern was not for the purpose of objects of the assessee trust and hence warrants cancellation of registration earlier granted to the assessee trust and accordingly cancelled it. 8.2 The assessee challenged the above findings stating that the impugned sum was mobilisation advance towards the contract for construction of hostel for students which was awarded to the said concern based competitive bidding and the Ld. PCIT erred in holding that the advance made by the appellant to M/s Prathyusha Associates Shipping P Ltd is not towards construction of hostel. The Ld. PCIT failed to appreciate that the same represents mobilisation advance in respect of the contract awarded to them on competitive bidding, for construction of hostel for the students etc. 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also, the assessee is not able to assail how the above findings are wrong with reference to such material and hence the corresponding grounds of the assessee are dismissed. 9. The above issues could be examined from another angle also. The trustees are bound to act reasonably and fairly in dealing with the property of the trust. They must conform their action with the same standard that meet the test of justness, fairness, reasonableness . As per Section 15 of the Indian Trusts Act , a trustee is bound to deal with the trust-property as carefully as a man of ordinary prudence would deal with such property if it were his own. They are bound to exercise their power in good faith in dealing with the property of the trust as an ordinary prudent man would exercise in the management of his own affairs to preserve and protect his own estate. Their acts should be reasonable, just and fair which must meet the eye and the offer accepted must be competitive and every attempt should be made to secure as maximum advantage as possible to the trust . 9.1 Section 13 of the Income Tax Act also barred the exemption, in the case of a Public Charitable Trust , subject to certain modifications, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness at either of the two stages, ie when awarding the so called contract and the trust s subsequent conduct render those actions invalid which would result in refusal of exemptions . In the instant case, the facts that M/s Prathyusha Associates Shipping Pvt. Ltd. (PASPL), is a prohibited person, to whom ₹ 6 crore of the assessee s money was advanced free-ofinterest etc are not disputed. Though, the assessee claimed to have ; advanced towards cost of construction of the buildings for the trust, awarded the contract to them on competitive bidding etc, it has not laid contemporaneous material substantiating its contentions before the Ld. PCIT as well as before the Ld. CIT(A) . When the payment was made to a prohibited person, when its rationale is being questioned, the onus is on the assessee to place adequate contemporaneous material to show that how it quantified the project costs and on whose advice, when and how it went for bidding , how many bids were received , whether the impugned person had adequate experience in similar projects and on what are other criteria on which it chose the impugned person over others, on what basis and material it advanced such huge amount to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dge the above findings. Based on the discussions in para 9, supra, the corresponding grounds fail. 11. Inviting our attention to the sub-section 4 of section 12AA which was inserted wef 01.10.2014, the AR made a submissions that in case any sum is found unreasonable which may be disallowed. However, the exemption granted may be sustained. 12. We have considered such plea and find no merit in view of the decision of the Kerala High court in Agappa Child Centre vs Commissioner Of Income- Tax, 226 ITR 211 Ker, dt 8 August, 1996. Further, in this case , the authority empowered to grant registration of exemption, after due examination of the assessee s activities and the manner in which such activities were carried on and the surrounding circumstances etc has held , inter alia, supra, that the activities carried on by the public charitable trust are not in accordance with law, the trust s property, income, is not accounted for and they are not applied for the purposes of the trust and hence cancelled the registration earlier granted to it. We find for the elaborate reasons mentioned , supra, that such decisions are justified. Once the registration is cancelled, which is being uphe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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