N.R.S. Ganesan, Judicial Member - This appeal of the revenue is directed against the order of the CIT(A)-I, Kochi dated 10-08-2005 and pertains to block period 01-04-1996 to 28-05-2002.
2. Shri K.K. John, the ld. DR submitted that the assessee, a private family trust, established a higher secondary school at Anchal. There was a search in the premises of one Dr V.K. Jayakumar on 28-05-2002. During the course of search operation, incriminating documents were found which disclosed undisclosed income of the assessee. According to the ld. DR, Mrs. Sula Jayakumar is the managing trustee of the trust. Her children are the sole beneficiaries of the trust. According to the ld. DR, the trust was established for the benefits of the children of Mrs. Sula Jayakumar. During the course of examination, the managing trustee admitted the receipt of unaccounted money outside the books of account. Apart from that unaccounted receipts were said to be deposited in Palluruthy Mandalam Service Co-operative Bank in her name and her husband. According to the ld. DR, the assessee has collected development fund during the admission of the students over and above the prescribed fees. The development fund collected, though routed through intermediary society by the name "Sabarigiri School Society, was managed by Mrs. Sula Jayakumar. According to the ld. DR, no books of account were maintained for collection of the development fund. However, it is entered in a note book. According to the ld. DR, the assessee trust claimed before the assessing officer that the trust existed solely for the educational purpose, therefore, it was eligible for exemption u/s 10(22) of the Act as it was then in existence. The seized material found during the course of search operation shows excess collection over and above the fees in the name of development fund. The funds so collected were not accounted in the books of account of the trust. The collection of the funds in the name of the trust was admittedly deposited in the individual account of the trustee, viz. Mrs. Sula Jayakumar. Since the development fund collected by the assessee was not brought into the books of account and it was deposited in the individual account of the trustee, Mrs. Sula Jayakumar, the assessing officer treated the same as undisclosed income of the trust. Since it is a family trust for the benefit of children of Mrs. Sula Jayakumar, the assessing officer rejected the claim of the assessee for exemption u/s 10(22) and 10(23C) of the Act. However, on appeal by the assessee, the Appellate Commissioner allowed the claim of the assessee on the ground that it is a capital receipt.
3. According to the ld. DR, when the assessee collected money from the students for admission over and above the prescribed fees, it cannot be capital receipt. Even the money was not credited in the books of account of the trust. When the money was deposited in the individual account of the trustee, Mrs. Sula Jayakumar, naturally, the money will go to the children of Mrs. Sula Jayakumar either as a legal heirs or beneficiaries of the trust. Therefore, according to the ld. DR, the trust is in existence with profit motto.
4. According to the ld. DR, during the course of search operation 10 deposits were found to the extent of Rs.5 lakhs in the name of Dr V.K. Jayakumar. The same was treated as unaccounted income of Dr V.K. Jayakumar in his assessment. However, on appeal by the assessee, the CIT(A) directed that this deposit should be considered only in the hands of the trust. Therefore, according to the ld. DR, the assessing officer made addition since it was not declared in the return filed by the assessee for the assessment year 2002-03. According to the ld. DR, the deposit of Rs.5 lakhs was not declared to the department in the return filed by the trust, therefore, as per the direction of the CIT(A), in the case of Dr V.K. Jayakumar, it was treated as income of the trust. On appeal by the assessee, however, the CIT(A) directed the assessing officer to verify the claim of the assessee that it was collected as deposit from the teachers while seeking appointment in Sabarigiri High School. According to the ld. DR, it is not known under what capacity, the money was collected from teachers while seeking appointments in the High School. Moreover, the money was deposited in the name of Dr V.K. Jayakumar. Therefore, this has to be treated as unaccounted income of the trust and it cannot be considered to be the money received from the teachers, who were seeking appointments in the High School.
5. Referring to the next addition made by the assessing officer, the ld. DR pointed out that seized material 'AM-127' shows the receipt of monthly fee, term fee, etc. Verification of books of account shows that the monthly fee, term fee, etc. was completely omitted to be accounted for in the cash book. An explanation was called for from the assessee with regard to omission to account the monthly fees and term fees in the cash book. After the search, the assessee filed the return of income, that too, after issuing notice u/s 158BD of the Act. Since this money would not have been disclosed to the department, but for the search, according to the DR, this unaccounted monthly fees and term fees have to be treated as undisclosed income of the trust. However, on appeal, the CIT(A) deleted the addition on the ground that the Madhya Pradesh High Court in CIT v. Nitin Munje[2003] 264 ITR 628/132 Taxman 452 declined to admit the appeal filed by the department against the decision of the Indore Bench of this Tribunal wherein it was held that where the time limit for filing the return of income u/s 139(1) has not lapsed the income pertaining to that period found at the time of search cannot be treated as undisclosed income. According to the ld. DR, the definition of undisclosed income is very clear. The income which would not have been disclosed to the department otherwise has to be treated as undisclosed income. In this case, the assessee has not entered the monthly fees and term fees in the cash book maintained in the regular course. Therefore, this would not have been disclosed to the department had it not been unearthed during the course of search operation. Therefore, according to the ld. DR, the CIT(A) is not justified in deleting the addition of Rs.19,82,672.
6. Referring to the next addition to the extent of Rs.16,27,738 and Rs.3,61,040, the ld. DR submitted that this amount was disallowed u/s 40A(3) of the Act. According to the ld. DR, it was found during the course of search operation that the assessee has received money on sale of books and stationery. Documents 'AM-13 & AM-28' found during the course of search operation show the details. The ld. DR further submitted that on verification it was found that huge funds were given in cash or cash cheques to the book dealers. Though the assessee claims that sale of books was done by Sabarigiri School Society, the existence of Sabarigiri School Society was not established by producing any documentary evidence. Therefore, the profit on sale of books has to be assessed as undisclosed income of the assessee. However, on appeal by the assessee, the CIT(A) found that the assessee has produced registration certificate and certified copy of the Memorandum of Association of Sabarigiri School Trust and accordingly deleted the addition in the hands of the present assessee. According to the ld. DR, these are documentary evidences which are not produced before the assessing officer. The assessing officer has also disallowed a sum of Rs.3,61,040 since it is paid in cash beyond the prescribed limit.
7. The next ground of appeal is with regard to addition of Rs.6,47,000. According to the ld. DR, the CIT(A) directed the assessing officer to verify the confirmation letters filed by the assessee. According to the ld. DR, the CIT(A) has no power to remission, therefore, he cannot direct the assessing officer to verify the confirmation letter.
8. The next ground of appeal is with regard to levy of surcharge under Proviso to section 113 of the Act. According to the ld. DR, surcharge could be levied even though the amendment was carried out in the later years in view of the judgment of the Apex Court in the case of CIT v. Suresh N Gupta [2008] 297 ITR 322/166 Taxman 313.
9. On the contrary, Shri CBM Warrier, the ld. representative for the assessee submitted that the assessee is an educational trust, therefore, eligible for exemption u/s 10(22) of the Act as it was existed then. According to the ld. representative, an educational trust was not required to file return of income till 01-04-2006. Therefore, for the year under consideration, the assessee is not expected to file the return of income. Referring to provisions of section 10(22) of the Act as it existed then, the ld. representative submitted that the entire income of the assessee is exempt from taxation. Therefore, according to the ld. representative, the CIT(A) has rightly allowed the claim of the assessee.
10. Referring to the addition made by the assessing officer, the ld. representative submitted that the development funds were received by another society, viz. Parent Teacher Association and then it was given to the society for construction of the building. Therefore, as far as this society is concerned, it is a capital receipt, hence, it cannot be taxed. Even otherwise, the assessee is eligible for exemption u/s 10(22) of the Act, hence, the CIT(A) has rightly allowed the claim of the assessee.
11. As far as the addition of Rs.5 lakhs with regard to deposit is concerned, the ld. representative submitted that this was collected from the teachers, who were seeking appointment in Sabarigiri High School. The assessee has filed confirmation letters from 22 persons. The Commissioner has directed the assessing officer to verify the confirmation letters filed by the assessee. Since these are all amount paid by the teachers, who sought employments, according to the ld. representative, this cannot be treated as income of the assessee trust.
12. Referring to the addition of Rs.19,82,672, the ld. representative submitted that these are all monthly fees and term fees received from the students. The assessee is entitled for exemption u/s 10(22) and 10(23C) of the Act. Apart from this, according to the ld. representative, the receipt of funds from the teacher, who sought employment was disclosed in the return of income filed in the regular course after the search. According to the ld. representative, on the date of search, the period for filing the return of income was not expired. Therefore, it was disclosed to the department in the regular course. Therefore, according to the ld. representative, the CIT(A) has rightly deleted the addition.
13. Referring to the addition of Rs.16,27,738 towards sale of books, the ld. representative submitted that the books were sold by Sabarigiri School Trust which is a registered society. The assessing officer is not correct in saying that the assessee has not established the existence of trust In fact, the assessee has filed the registration certificate and the certified copy of the Memorandum of Association of the trust before CIT(A). The assessing officer, however, made the addition without proper enquiry. Therefore, the CIT(A) deleted the addition.
14. With regard to the addition of Rs.3,61,040 according to the ld. representative, these are purchases made by Sabarigiri School Trust. Therefore, if there is violation of provisions of section 40A(3), the disallowance, if any, has to be made only in the case of the trust, Sabarigiri School Trust and not in the hands of the assessee trust.
15. Referring to the addition of Rs.6,47,000 the ld. representative submitted that the assessee has filed confirmation letter before the Commissioner of Income-tax (Appeals), who directed the assessing officer to verify the confirmation letter. Therefore, there is no infirmity in the order of the CIT(A). The ld. representative for the assessee further submitted that no part of the income was used for a purpose other than educational purpose. The entire receipt of money was used for educational purpose only and not for anything else. Therefore, according to the ld. representative, the entire income of the assessee is eligible for exemption u/s 10(22) of the Act as it was in existence at the relevant point of time.
16. We have considered the rival submissions on either side. The first question arises for consideration is whether the assessee is entitled for exemption u/s 10(22) and 10(23C) of the Act as it was in existence at the relevant point of time. Section 10(22) has been omitted with effect from 01-04-1999 by Finance (No.2) Act, 1998 and this section has been re-enacted in section 10(23C). We are concerned with block period 01-04-1996 onwards. So, section 10(22) before its omission is applicable from the period 01-04-1996 to 31-03-1999 and section 10(23C) is relevant for the period 01-04-1999 onwards. Sub section (22) of section 10 before its omission from 01-04-1999 read as follows:
"(22) any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit."
Section 10(23C) reads as follows:
"10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included - (23C) any income received by any person on behalf of -
(iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed;"
From the above section it is obvious that the educational institution exists solely for educational purpose and not for purposes of profit is eligible for exemption. In this case, the trust is established for the benefit of the children of Mrs. Sula Jayakumar. It is a private family trust. Therefore, the question arises for consideration is when the trust itself was established for the benefit of the two children of Mrs. Sula Jayakumar, whether the trust has any profit motive or not?
17. We have carefully gone through the copy of the trust deed filed by the assessee. A bare reading of the trust deed under which the assessee came into existence clearly shows that the trust was established for the benefit of two children of Mr. Sula Jayakumar. There is a clause in the trust deed which enables the children of Mrs. Sula Jayakumar to appropriate the profit. The assessee has no obligation to reinvest the profit in the educational activities. Therefore, this Tribunal is of the considered opinion that the assessee is not in existence solely for educational purpose. The assessee trust exists only for profit motive. Hence, the assessee is not eligible for exemption u/s 10(22) or 10(23C) of the Act. This view of the Tribunal is fortified by the judgment of the Apex Court in Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234. While examining the words "charity" and "profits", the Apex Court found that the use of the expression "profit motive" is not intended that profit must in fact be earned. The Apex court found that it pretexts a motive. Therefore, wherever, there is a motive to earn money, the Apex court found that such trust exists only for the purpose of profit. Hence, the trust cannot be said to be existing not for the purpose of profit. Such trust cannot be considered to be a charitable trust. In fact, the Apex Court has observed as follows at pages 255 & 256 of the ITR:
".... As a rule, if the terms of the trust permit its operation "for profit", they become, prima facie, evidence of a purpose falling outside charity. They would indicate the object of profit making unless and until it is shown that terms of the trust compel the trustee to utilize the profits of business also for charity. This means that the test introduced by the amendment is : Does the purpose of a trust restrict spending the income of a profitable activity exclusively or primarily upon what is "charity" in law? If the profits must necessarily feed a charitable purpose, under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity". In that obligation is there, the income becomes entitled to exemption. That, in our opi9nion, is the most reliable test."
18. In view of the above observations of the Apex Court, when there is no obligation to utilize the profit arising out of charitable activity for charitable purpose, the income is not entitled for exemption. In this case, the trust is admittedly established for the benefit of children of Mrs. Sula Jayakumar and there is no obligation to use the surplus funds for the charitable purpose, viz. "education". As per the trust deed, the profit would go to the benefit of children of Mrs. Sula Jayakumar. Therefore, this Tribunal is of the considered opinion that so long as there is no obligation to invest the money for charitable purpose, the assessee is not entitled for exemption u/s 10(22) or 10(23C) of the Act. It is not known how an amount collected over and above the prescribed fees would be a capital receipt. The claim of the assessee that it was capital receipt was not examined by the Assessing officer. Apparently, this issue was not raised before the assessing officer. Therefore, this Tribunal is of the considered opinion that the assessing officer has to examine the claim of the assessee. Accordingly, the order of the CIT(A) is set aside and remanded back to the file of the assessing officer. The assessing officer shall examine the claim of the assessee and find out whether it is capital receipt or revenue receipt and thereafter decide the same in accordance with law after giving reasonable opportunity of hearing to the assessee.
19. The next ground of appeal is with regard to addition of Rs.5 lakhs. The assessing officer found 10 deposits of Rs.50,000 each in Palluruthi Mandalam Service Co-operative Bank to the extent of Rs.5 lakhs in the name of Mrs. Sula Jayakumar. While considering the appeal of Shri V.K. Jayakumar, the CIT(A) directed the assessing officer to consider the deposit in the hands of the present assessee. From the material available on record it appears that the order of the CIT(A) wherein a direction was issued to treat the above said deposit in the hands of the assessee has attained finality. Admittedly, the assessee trust has not included this Rs.5 lakhs in the undisclosed income. The assessing officer, by virtue of the direction of the CIT(A) included this amount of Rs.5 lakhs as undisclosed income in the hands of the trust. However, the CIT(A) found that the deposits were made from corpus fund for making infrastructure for the higher secondary school. The CIT(A) has not taken any pain to verify the source of the so-called corpus fund. However, the CIT(A) says that the assessee has explained the fixed deposit receipts. From the order of the CIT(A) it is not known what was the explanation offered by the assessee and under what circumstances, the CIT(A) accepted the explanation of the assessee is not known. The fact remains is that the assessee trust is not eligible for exemption either u/s 10(22) or u/s 10(23C) of the Act. The assessee trust is also not registered u/s 12A of the Act, and therefore, not eligible for exemption u/s 11 of the Act; hence, the income of the assessee trust has to be computed on commercial principles. Since the source of the so-called corpus fund was not explained by the assessee, this Tribunal is of the considered opinion that the CIT(A) committed an error in saying that the assessee has explained the source of fixed deposit receipt. In the absence of any material on record to show that the income was generated in the course of the activity of the assessee trust or it was received from identifiable sources, this Tribunal is of the considered opinion that the CIT(A) ought not to have deleted the addition made by the assessing officer. Hence, the order of the CIT(A) is set aide and that of the assessing officer is restored on this issue.
20. The next ground of appeal is with regard to addition of Rs.19,82,672. The assessing officer found that seized material 'AM 127' shows the receipt of monthly fee and the term fee for the school run by the trust. Seized material 'AM 16' is the regular cash book for the period 12-12-2001 onwards. The assessee also admitted before the assessing officer that the receipt of term fee and monthly fee was not accounted in the books of account. The only contention of the assessee is that on the date of the search, the period for filing the return of income has not expired. The receipt of monthly fee and term fee was disclosed to the department in the regular return of income filed subsequent to the search, therefore, it cannot be treated as undisclosed income.
21. We have carefully gone through the provisions of section 158BB(1)(d) which reads as follows:
"(d) where the previous year has not ended or the date of filing the return of income under sub-section (1) of section 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition relating to such previous years."
In view of this sub clause, viz. section 158BB(1)(d), wherever the date of filing of the return of income u/s 139(1) has not expired, the entries relating to income found in the books of account maintained in the normal course of activity before the date of search needs to be excluded. In this case, admittedly, the monthly fee and term fee collected from the students were not accounted in the books of account. It was unearthed during the course of search operation. But for the search, the collection of monthly fee and term fee from the students would not have come to light. The legislature has prescribed a specific mode of computation of undisclosed income. Wherever, the books of account are maintained in the regular course of activity and the entries were found in such books of account, the income arising out of such transaction has to be excluded in case the due date of filing of the return has not ended. In this case, the receipt, viz. monthly fee and term fee was not recorded in the books of account maintained in the regular course of activities, this Tribunal is of the considered opinion that merely because the time limit for filing the return of income has not expired, the receipt which was not entered in the books of account cannot be excluded. Therefore, the CIT(A) is not justified in deleting the addition made by the assessing officer. This Tribunal is of the considered opinion that the judgment of the Madhya Pradesh High Court in Nitin Munje (supra) is not applicable to the facts of the present case. Accordingly, the order of the CIT(A) is set aside and that of the assessing officer is restored.
22. The next ground of appeal is with regard to addition of Rs. 16,27,738 on sale of books and Rs. 3,61,040 being the disallowance u/s 40A(3) of the Act. The only contention of the assessee is that Sabarigiri School Society is a genuine trust. The certificate of registration is claimed to have been produced before the CIT(A). However, from the order of the assessing officer it appears that the certificate of registration was not produced before him and the assessee has not established the existence of the Sabarigiri School Society. Therefore, the assessing officer has no occasion to examine the genuineness of the Sabarigiri School Trust. The CIT(A) also has not made any enquiry with regard to the genuineness of the so-called certificate said to have been produced by the assessee. When the assessee claims that the entire payment was made by another trust, viz. Sabarigiri School Society, the existence of the trust has to be established by producing the documentary evidence. The CIT(A), without making any enquiry accepted the so-called certificate of registration and other documents filed by the assessee to establish the existence of the trust, has accepted the contention of the assessee. This Tribunal is of the considered opinion that the document said to have been filed before the CIT(A) was not available before the assessing officer. Since the genuineness of the trust was not enquired into by the assessing officer, the issue needs to be examined by the assessing officer. Accordingly, the issue of genuineness of the trust is remitted back to the file of the assessing officer. The assessing officer shall reconsider the matter afresh in the light of the so-called registration certificate and other documents and thereafter decide the same afresh in accordance with law after giving reasonable opportunity of hearing to the assessee.
23. The next ground of appeal is with regard to disallowance of Rs. 6,47,000. The assessee appears to have filed confirmation letter before the CIT(A) and the CIT(A) directed the assessing officer to verify the confirmation letter. The only objection of the revenue is that the CIT(A) has no power to set aside the matter to the file of the assessing officer. The fact remains is that the assessee has filed confirmation letter before the CIT(A) which needs to be examined. The CIT(A) admittedly has no power to set aside the matter to the file of the assessing officer. The CIT(A) being an officer having power co-terminus with that of the assessing officer ought to have examined the genuineness of the confirmation letter, the identity of the party, genuineness of the transaction and creditworthiness of the creditor. Without doing so, the CIT(A) simply set aside the matter to the file of the assessing officer. This Tribunal is of the considered opinion that since the assessee has filed the confirmation letter it needs to be examined. Accordingly, in exercise of the powers of this Tribunal, the issue of addition of Rs.6,47,000 is remitted back to the file of the assessing officer. The assessing officer shall examine the issue after examining the confirmation letter and other documents filed by the assessee and thereafter decide the issue in accordance with law after giving opportunity of hearing to the assessee.
24. The next issue is with regard to levy of surcharge u/s 113 of the Act. The Apex Court in the case of Suresh N Gupta (supra) found that surcharge can be levied even before the amendment of section 113 of the Act in view of the Finance Act passed by the Parliament in the respective assessment year. Therefore, the CIT(A) is not justified in deleting the surcharge levied by the assessing officer. Accordingly, the order of the CIT(A) is set aside and that of the assessing officer is restored.
25. Now coming to the cross objection of the assessee, the first ground of appeal is with regard to validity of the block assessment made u/s 158BD of the Act. Admittedly, the search was conducted in the case of Dr. V.K. Jayakumar on 28-05-2002 u/s 132 of the Act. The assessee trust is not the searched person. In other words, the assessee trust is a person other than searched person. Therefore, this Tribunal is of the considered opinion that the proceedings have been validly been initiated u/s 158BD of the Act. Therefore, this Tribunal do not find any infirmity in the orders of the lower authorities. Accordingly, the order of the CIT(A) on this issue is confirmed.
26. The next ground of appeal is with regard to limitation. The legislature has specifically prescribed time limit u/s 158BE(2)(b) of the Act in respect of searches carried out after 01-01-1997. As per this section assessment could be completed within two years from the end of the month in which notice was served on the assessee. In this case, admittedly, the search took place on 28-05-2002 notice u/s 158BC r.w.s. 158BD was issued on 12-12-2002 and the assessment order was passed on 30-12-2004. Therefore, the order passed by the assessing officer is within the period of two years as provided in section 158BE(2)(b) of the Act; hence the contention of the assessee with regard to limitation is not sustainable.
27. The next ground of appeal is with regard to corrigendum issued by the assessing officer. The corrigendum issued by the assessing officer is only to correct the year of assessment. In respect of the additions, etc. the assessment order is intact. Therefore, this Tribunal do not find any infirmity in the order of the lower authority. Accordingly, the same is confirmed.
28. In the result, the appeal of the revenue is partly allowed and the cross objection of the assessee stands dismissed.