Sri Krishna Educational & Social Trust, Plot v. The Income Tax Officer, Ward-1(1), Cuddalore

IN THE HIGH COURT OF JUDICATURE AT MADRAS and Tax Case (Appeal) Nos.2204 & 2205 of 2006and M.P.Nos.1 & 2 of 2006 and M.P.Nos.1 & 2 of 2007 Sri Krishna Educational & Social Trust,Plot No.14, 1st Main Road,Ponmeni Jainagar, Madurai 625 010... Appellant in both Tax CasesVs. The Income Tax Officer,Ward-1(1), Cuddalore ... Respondent in both Tax Cases APPEALS under Section 260A of the Income Tax Act, 1961 againstthe orders of the Income Tax Appellate Tribunal, Chennai 'C' Bench,dated 06.07.2006, in ITA Nos.169/Mds/2006 and 170/Mds/2006 againstthe order of Commissioner of Income tax (Appeals) VIII Chennai dated19.10.2005 and made in ITA Nos.370/05-06 & 372/05-06 respectivelyagainst the order of the Income Tax Officer ward 1(1), Cuddaloredated 31.3.05 for the assessment years 1998-99 and 2000-2001respectively. S.Vimala, J., The assessee is a Charitable Trust running various educationalinstitutions. The assessee claimed exemption under the provisions ofSection 10 (22) of the Income Tax Act, 1961, (hereinafter will bereferred to as "the Act"). The assessee has been regularly https://hcservices.ecourts.gov.in/hcservices/ submitting the returns and the Revenue granted exemption. But inrespect of the assessment year 2001-2002, the assessment was reopenedunder Section 148 of the Act. During the course of that proceedings,the assessments, beginning from the assessment year 1997-1998 onwardstill 2000-2001 were also reopened. 2. The assessments were finalised under Section 143 (3) readwith Section 147 of the Act holding that the claim for exemptionunder Section 10 (22) was not tenable. The Assessing Officer alsomade additions amounting to Rs.21,00,000/-, which were the loansreceived from Swamiappan (Rs.4,00,000/-), Rajendran (Rs.5,00,000/-)and Bhargarwathraj (Rs.12,00,000/-), which is the subject matter inTax Case (Appeal) No.2204 of 2006 in respect of the assessment year1998-1999. 2.1. In respect of the assessment year 2000-2001, addition wasmade for a sum of Rs.18,00,000/-, which was the loan received fromBhargarwathraj, which is the subject matter in the Tax Case (Appeal)No.2205 of 2006. 3. On appeal, the Commissioner of Income Tax (Appeals) upheldthe order of the Assessing Officer to the extent of bringingRs.16,00,000/- to tax in respect of assessment year 1998-1999 and anamount of Rs.18,00,000/- in respect of the assessment year 2000-2001. 4. Contending that the entire income ought to have beenexempted, by the application under Section 10 (22) of the Act, theassessee preferred appeal before the Income Tax Appellate Tribunal.It was further contended that the production of confirmation lettersfrom the persons lent money is sufficient proof and the assesseeought to have been given an opportunity to examine Bhargarwathraj,who denied having given any money to the assessee. The Income TaxAppellate Tribunal held that the assessee did not have a right tocross-examine the witness who made adverse report, especially whenthe records do not indicate that the assessee had made any attempt toproduce witnesses. 5. Challenging those findings, the assessee has preferred theseappeals raising the following substantial questions of law:- "1) Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal is right in lawin rejecting appellant's appeal? 2) Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal is right in lawin rejecting and holding that the addition u/s 68 waspossible even where the income of the appellant was exemptunder Section 10 (22) of the Act? 3) Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal is right in lawin holding that there was no violation of the principle ofnatural justice since an opportunity to cross examineMr.Bhargarwathraj was not granted to the appellant inspiteof his request?" "1) Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal is right in lawin rejecting appellant's appeal? 2) Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal is right in lawin rejecting and holding that the addition u/s 68 waspossible even where the income of the appellant was exemptunder Section 10 (22) of the Act? 3) Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal is right in lawin holding that there was no violation of the principle ofnatural justice since an opportunity to cross examineMr.Bhargarwathraj was not granted to the appellant inspiteof his request?" 6. The main contention of the learned counsel for the appellantis that the assessee, as an educational institution, existing solelyfor educational purposes and not for the purpose of profit, withinthe ambit of Section 10 (22) of the Act, is entitled to exemption.The disallowance made under Section 68 of the Act is assailed aserroneous. The finding of the Income Tax Appellate Tribunal thatthere was nothing to indicate that the money was used for educationalpurposes and not for the purpose of earning profit is contended to bewithout any basis. 6.1. It is relevant to extract Section 10 (22) of the Act, asthe entire case is based upon that provision as the edifice:-"10. Incomes not included in total income. - Incomputing the total income of a previous year of anyperson, any income falling within any of the followingclauses shall not be included- ....(22) any income of a university or other educationalinstitution, existing solely for educational purposes andnot for purposes of profit.". 7. The main contentions of the Revenue are:- (i) when the source of income to the educational institution isnot known, then it cannot be said that those amounts have beenreceived by the assessee from its activities of running educationalinstitutions. (ii) when the source of income is not known, those income cannoteven fall under the head 'income from other sources'. In support ofthese contentions the learned counsel for the Revenue pointed out thedecision reported in 247 ITR 290 (Fakir Mohammed Haji Hasan vs. CIT)wherein it has been held as follows:- "... The provisions of Sections 69, 69A, 69B and 69C,treat unexplained investments, unexplained money, bullion,etc., and unexplained expenditure as deemed income where thenature and source of investment, acquisition or expenditure,as the case may be, have not been explained orsatisfactorily explained. Therefore, in these cases, thesource not being known, such deemed income will not falleven under the head "Income from other sources." https://hcservices.ecourts.gov.in/hcservices/ 7.1. Per contra, the learned counsel for the appellant contendedthat, (a) The assessee has satisfactorily explained the source ofincome by producing confirmation letters from two of the persons lentmoney. (b) When one out of the three person disputed the advancement ofmoney, the Revenue ought to have afforded a reasonable opportunity ofcross-examining that person and having denied the opportunity, it isnot open to the Revenue to contend that the assessee has failed toprove the same. (c) In any event, the source of income need not be proved as theSection uses the word 'any income'. (d) There is a finding that the assessee is an educationalinstitution running for educational purposes and not for profitpurposes which has attained finality and the Revenue, having notappealed against, is now estopped from disputing the same. 7.2. In support of the contention, the learned counsel for theappellant relied upon the following three decisions:- (b) When one out of the three person disputed the advancement ofmoney, the Revenue ought to have afforded a reasonable opportunity ofcross-examining that person and having denied the opportunity, it isnot open to the Revenue to contend that the assessee has failed toprove the same. (c) In any event, the source of income need not be proved as theSection uses the word 'any income'. (d) There is a finding that the assessee is an educationalinstitution running for educational purposes and not for profitpurposes which has attained finality and the Revenue, having notappealed against, is now estopped from disputing the same. 7.2. In support of the contention, the learned counsel for theappellant relied upon the following three decisions:- (i) (1997) 224 ITR 310 (Aditanar Educational Institution v.CIT). In this decision, it has been held that we may state thelanguage of section 10(22) of the Act is plain and clear and theavailability of the exemption should be evaluated each year to findout whether the institution existed during the relevant year solelyfor educational purposes and not for purposes of profit. Aftermeeting the expenditure, if any surplus results incidentally from theactivity lawfully carried on by the educational institution, it willnot cease to be one existing solely for educational purposes sincethe object is not one to make profit. The decisive or acid test iswhether on an overall view of the matter, the object is to makeprofit. The issue involved in this case is with reference to the phrase"solely for educational purposes" when there was surplus leftincidentally from the activities carried on by the educationalinstitutions. Only in this context, it was held that the decisive oracid test is whether on an overall view of the matter, the object isto make profit. (ii) (2000) 243 ITR 229 (CIT v. A.M.M.Arunachalam EducationalSociety). Section 10(22) of the Income tax Act, 1961 exempts"any income" of an educational institution which wouldclearly include dividend income as well. Granting ofexemption to the income of the educational institutions isto enable such institutions to utilise the monies availablewith them for the purpose of running the educationalinstitutions. The source from which the money is receivedis not of any consequence, what is relevant is theapplication. So long as the institution is an educationalinstitution which is not engaged in earning profit, theincome of such institution is exempt under Section 10(22). (iii) (2005) 278 ITR 152 (Director of Income Tax v. KeshavSocial and Charitable Foundation). "...to obtain benefit of the exemption underSection 11 of the Act, the assessee was required to showthat the donation was voluntary. In the present case, theassessee had not only disclosed its donations, but had alsosubmitted a list of donors. The fact that the complete listof donors had not been filed or that the donors had not beenproduced did not necessarily lead to the inference that theassessee had tried to introduce unaccounted money by way ofdonation receipts." (iii) (2005) 278 ITR 152 (Director of Income Tax v. KeshavSocial and Charitable Foundation). "...to obtain benefit of the exemption underSection 11 of the Act, the assessee was required to showthat the donation was voluntary. In the present case, theassessee had not only disclosed its donations, but had alsosubmitted a list of donors. The fact that the complete listof donors had not been filed or that the donors had not beenproduced did not necessarily lead to the inference that theassessee had tried to introduce unaccounted money by way ofdonation receipts." 7.3. So far as this decision is concerned, there is a furtherfactual finding that the 75% of the donations were applied forcharitable purposes. As there had been large number of donors andhaving regard to the major portion of the money having been spent foreducational purposes, the court took the view that it is not properto deny the benefit of Section 11. So far as this case is concerned,there had been only three donors out of which one had chosen todispute the factum of having donated any money to the institution.This denial had created doubt in the mind of the taxing authoritiesthat the money would not have been spent for educational purposes.But, as contended by the learned counsel for the appellant, when theauthorities entertained doubt about genuineness of the transaction,the Tribunal ought to have afforded opportunity for the assessee tocross examine the disputant. 7.4. The Income Tax Appellate Tribunal had given a finding thatthe assessee had not chosen to take steps to produce the donor andtherefore he is not entitled to seek an opportunity to cross examine.It is not a case where the assessee has suppressed the income. Thenature and source of credit alone is brought under challenge by therevenue. The revenue has not accepted the explanation given by theassessee. The assessee would not have expected one of thecontributor, namely, Mr.Bhargarwathraj to have denied the factum ofcontribution by his letter, dated 26.03.2005. This view is inevitable because, but for this the assessee would not have opted tocross examine the contributor. Therefore, when there is unexpectedchange of facts/situation/circumstances, the party taken by surpriseshould not be deprived of the opportunity to cross-examine thewitness branded as assessee's witness. Evidence Act also permits aparty to cross examine his own witness under stated circumstancestherein. 7.5. Moreover, the Assessing Officer has given the followingobservations:- 1. The objects of the trust had been modified by thesupplementary deed dated 02.01.2002, which is not permissible. 2.Books of accounts have not been maintained properly.3. The minute book and details of resolution were notavailable properly. 4. There had been a dispute between the family members of thetrust and later on there was a compromise as per documents, dated23.05.2002 and 16.06.2002. 7.6. With regard to these observations, the Commissioner ofIncome Tax has held that if the assessing officer had reasons tobelieve that the appellant trust was not being run for its genuineobject and was being run for private profit of family members of thetrustees, the assessing officer should have reported the matter tothe Commissioner of Income Tax, who could have initiated proceedingsfor withdrawal of exemption. The Income Tax Appellate Tribunal hasupheld the order of the Assessing Officer. The very receipt of moneyby the appellant for the purpose of running the activities ofeducational institutions itself has been doubted by the Income TaxAppellate Tribunal. Hence the Income Tax Appellate Tribunal isjustified in going into the facts which was incidental to thequestion of law raised and no estoppel plea can be raised by theassessee. Further, it was noticed by the Assessing Officer that in asuit filed between Trust members, there was asset sharing compromisewas arrived at. 7.7. From the overall facts and circumstances, it is evidentthat unless it is proved that the income derived is covered underSection 10(22) of the Income Tax Act, 1961, it cannot be decided asto whether addition of the same under Section 68 of the Income TaxAct, 1961, is possible or not. 8. Therefore, on the facts and circumstances of this case, thiscourt deems it appropriate to remand the matter for consideration ofthe assessing officer in the light of the legal position andobservations indicated above. While conducting the enquiry, theassessing officer shall provide an opportunity to the assessee tocross examine the witnesses, whose evidence/report the assessingofficer rely upon. 9. In the result, the above Tax Case Appeals are allowed and theorders of the Income Tax Appellate Tribunal are set-aside, which arethe subject matter of challenge in Tax Case Appeal Nos.2204 to2205/2006 and the issue is remanded to the assessing officer with theobservations stated above. No costs. Consequently, the connectedMPs are closed. srk Sd/Asst. Registrar/true copy/Sub Asst.Registrar To 1. The Assistant Registrar, Income Tax AppellateTribunal, Rajaji Bhavan, Besant Nagar, Chennai. 2.The Commissioner of Income Tax, Chennai.3.The Commissioner of Income Tax (Appeals) VIII, Chennai4.The Income Tax Appellate Tribunal, Bench C, Chennai 5.The Incime Tax Officer Ward 1 (1), Cuddalore + 2 CCs to Dr. Anita Sumanath, Advocate SR.5552+ 1 CC to Mr. J. Naryaanasamy, Advocate SR.5603Pre-Delivery Judgment in T.C.(A) Nos.2204 & 2205 of 2006 KSJ RR 20/02/2013 https://hcservices.ecourts.gov.in/hcservices/