ACIT(E), LUCKNOW vs. M/S. BHAGWANT INSTITUTE OF TECHNOLOGY, BIJNOR

PER KUL BHARAT, VICE PRESIDENT.: This appeal, by the Revenue, is directed against the order of the Learned Commissioner of Income-tax (Appeals)-Moradabad dated 17.03.2020, pertaining to the assessment year 2013-14. The Revenue has raised the following grounds of appeal: -

1. 2. Ld. Commissioner of Income Tax (A) has erred in law and facts in deleting the addition/disallowance of Rs.37,55,277/- ignoring the fact that the assessee could not substantiate it’s claim with documentary evidences Page 2 of 23 expenditure could not be verified for want of documentary evidences and further fees, Training and placement expenses require deduction of TDS.

3. Ld. Commissioner of Income Tax (A) has erred in law and facts in deleting the addition/disallowance of Rs.3,36,15,623/- ignoring the fact that the assessee society cannot claim that it has been followed accrual system so the disbursed amount of scholarship be allowed as expenditure and undisbursed amount should be treated as income of the society. 4, Ld. Commissioner of Income Tax (A) has erred in law and facts in deleting the addition/disallowance of Rs.6,11,75,999/- ignoring the fact as a matter of facts the funds of the assessee society were diverted to the business concerns being run by the member of the managing committee of the society and view of unsatisfactory replies amount is treated as unexplained expenditure.

5. Ld. Commissioner of Income Tax (A) has erred in law and facts in deleting the addition/disallowance of Rs. 4,42,09,433/- ignoring the fact as a matter of facts the funds the assessee society were used by the assoclate concerned for commercial activity.

6. Appellant craves leave to modify/amend or add any one or more grounds of appeal

.”

2. The brief facts of the case are that in this case the assessee filed its return of income in ITR-7 on 25.09.2013, declaring income at Nil. Subsequently, the case was selected for scrutiny under Computer Assisted Scrutiny System (CASS). Accordingly, notice u/s 143(2) of the Income Tax Act, 1961 (“Act”, for short) was issued and served upon the assessee. Thereafter, the AO was asked to explain about the entitlement of charging of fee amounting to Rs.2,39,18,200/-. In response thereto, the assessee had submitted his replies. Thereafter, the Assessing Officer considering that no Educational Institution can charge fee in excess that is fixed by the authorities. Therefore, he proceeded to make addition in respect of excess of income over expenditure amounting to Rs.2,66,94,072/-. Further, the Assessing Officer disallowed the depreciation claimed by the assessee and made an addition of Rs.1,80,77,713/- on this account. The Assessing Officer also disallowed certain expenditure on the ground that the same could not be verified. Thus, 25% of such expenditure Page 3 of 23 was disallowed and made addition of Rs.37,55,277/- in this regard. Further, the Assessing Officer made addition in respect of the scholarships amounting to Rs.3,36,15,623/-. The Assessing Officer disallowed the payments made to M/s. Baxil Pharma Pvt Ltd (BEDS) of Rs.87,02,756/- and M/s. Baxil Pharma Pvt Ltd (BIP) of Rs.5,24,73,243/- total amounting to Rs.6,11,75,999/-. Further, the Assessing Officer also disallowed the payments made to M/s. Concrete Technologies Pvt Ltd and M/s. Bhagwant Universal Educational Society and M/s. TMC Associates. Thus, he made an addition of Rs.4,42,09,433/- on the ground that the society could not have a corporate office at New Delhi. Therefore, he assessed income at Rs.18,75,28,120/-. Aggrieved by this, the assessee preferred an appeal before the Ld. CIT(A) who after considering the submissions deleted the additions and allowed the appeal of the assessee. Now, the Revenue is in appeal before this Tribunal.

4. On the other hand, the Ld. Counsel for the assessee opposed the submissions and has also filed a voluminous written submissions in respect of all the issues. In sum and substance, the assessee has supported the order of the Ld. CIT(A).

“Appellant has charged certain fees from the students apart from Tuition fees under various heads.AO questioned the same on the ground that appellant was not entitled and not authorized to charge any fees apart from tuition fees, hostel fees, mess charges and bus fees duly authorised by Admission and Fee -Regulation Committee, Technical Education, Govt of Uttar Pradesh. Appellant has charged under the heads Admission & smart card fees, Exam Fee, Fees receipts, Project Fees, Uniform Fees, Internet Fees and Book Bank Receipts. As per letter No. 296/Pra.Fee.Ne.Sa./2010 dated 21.03.2010 issued by Admission and Fee Regulation Committee, Technical Education, Govt of Uttar Pradesh, the statutory body formed by the State Government for deciding the fees to be charged from each BTech/MBA/MCA student, a sum of Rs. 60,100/- per student is to be charged by the appellant from the students. AO held that charging the fees and charges from the students other than tuition fee is contrary to the contents of Para No 6 of the letter dated 21.03.2010, which categorically prohibits the assessee society from charging fees and charges other than tuition fees except Hoste: fee and caution fee. AO held that since the above said letter does not allow the appellant to charge Admission & Smart Card Fees, Exam Fee, Fees Receipts, Project Fees, Uniform Fees, Internet Fees and Book Bank Receipts from the students, the charging of the same amount to the commercialization of education. AO relied upon the judgment of Hon’ble Supreme Court in the case of Unni Krishann J.P & Others Vs State of Andhra Pradesh & Others 1993 AIR 217in this regard.AO accordingly held that appellant’s activities are not charitable and are purely in the nature of commercial activities for which exemption under the provisions of section 11 of the Act cannot be allowed and the income earned is to be assessed as income from Business. The appellant has submitted that AO has misinterpreted the Fee Fixation Committee letter dated 21 July, 2010.The Appellant submit that all the above charged from students separately & in addition to regular tuition fee are already approved by the fee fixation committee. They fix the tuition fee after considering and discounting all the other charges other than tuition fee being charged from students and the calculation for the same is specified in the letter (Page No: 81). The nature of dues from students varies from year to year as the requirements of the students. All the dues relevant for the year are, in the Books of Accounts that are audited. These Audited Financial day men statement produced for inspection of fee fixation committee for the Fee Fixation for the financial year 2010-11, 2011-12 & 2012-13 and after they verify the same as noted in the Clause No. 4 of the Fee Fixation Committee letter no. 296 dated 21 July, 2010, the Fee is approved after considering all the dues charged from the students Page 6 of 23 other than tuition fee. The Fee fixation Committee fixed lower tuition fee after considering the above dues being charged, else the final tuition fee determined would be higher than the current amount of Rs.60,100/-. The prevailing system adopted by the Fee Fixation Committee is not meant only for our institution rather the same is applicable for all the institutions in the state of UP covered by the Fee Fixation Committee according to the direction of the state government. I have gone through the facts and the written submissions filed along with the details filed enclose therein. It is clear that AO made this addition by ‘misinterpreting the fee fixation committee letter. AO failed to appreciate the para 4 of the fee fixation letter in which the committee clearly noted that the fee is fixed after considering the audited financial statements for the F.Y 2008-2009, fixing the fees for financial year 2010-2011, 2011- 2012 and 2012-2013. They consider all the income received under various heads being challenged by the AO and the final fee is calculated by the committee by taking into effect the expenditure under these heads from the total income as disclosed in the audited financial statements. This procedure for calculation is specified in point no 4 of the fee fixation committee letter. The AO passed the order only after considering the amount of excess amount being charged without considering the basis of calculation of the fee amount. The admission and smart card fees are charged from the students to issue the smart card to the students to mark the ~ attendance. The exam fee is collected from the students and deposited the same with the concerned university to allow the concerned students to appear in the examination. It is a fact that the examination fees amounting to Rs 1,10,76,500/- and B.Ed fee amounting to Rs 52,25,750/- is not governed by the fee fixation order. The examination fees is charged separately by the university from the students who are eligible for the examination which no institution can charge as a part of tuition fees. The fee receipts amounting to Rs 52,25,750/- is duly approved by the office of Regional Directorate Higher Education vide letter dated 16-01-2011 for B.Ed students and is not governed by the Fee Fixation Order relied upon by project fees are charged from specific students according to the creativity of individual mind of the students to attain the main objects of the students career. The uniform fee is charged from the students and the uniform is given to students without any mazgin. The internet fees is not required for each and every student and the same is paid by the specific students who are studying in the subject of telecommunication or electronics etc. The Books are used by the students from the book bank according to their requirements and they pay the fees accordingly. It is clear from the evidence placed on record that these fees are duly considered by the Fee Fixation Committee while fixing the discounted charge of Rs. 60,100/-. The Fee fixation Committee has fixed the lower tuition fee after considering the fact that above additional sums will be charged by the Society from various students, else the final tuition fee have been determined at higher amount than the current amount, to be Charged from the students. This is needed so that the institution in order to fulfil the main Objects of the society of providing educational activities can fulfil its objects. Fo, these activities additional facilities are provided by the college to the Student, and which are essential in nature. The amount so collected is utilized by the College for the benefit of students. Against the book bank charges, appellant, Maintains a update library for reference and education of the students similarly Amount collected under the other heads are used directly for the benefit of the Students. It is not the case of the AO that these expenses Page 7 of 23 were never incurred for the purpose for which they were charged from the students. AO has not examined in details the Fee Fixation Order before reaching his misconceived Conclusion. In my opinion what is to be looked into is the character of application of funds and the character of the activities carried out by an assessee and not the sources “out of which necessary funds were collected by the appellant. Similar view has taken by the Hon’ble ITAT Pune in the case of Deccan Education Society in The Hon’ble ITAT Pune in the case of AC1T vs. Symbiosis Society (ITA No. 829/PN/2009) A.Y. 2003-2004 held that such activities conducted by the assessee society are for the purpose of the education and not in the nature of the business promotion activities under taken by a commercial organization. The AO has quoted the judgment of Hon’ble Supreme Court in the case of Unni Krishann J.P & Others Vs State of Andhra Pradesh & Others1 993 AIR 217, with following observations: 4, Further the attention is drawn to the judgment in the case of Unni Krishann J.P & Others Vs State of Andhra Pradesh & Others (Review Petition No 483 of 1993 in Writ Petition No 678 of 1993) equivalent citation 1993-(003)-SCALE 0248B-SC & 1993-(004)-SCC-0111-SC 1993 - where the substantial question of law regarding treatment of fees in excess of the prescribed limits by the authorities, was decided the extracts of which are as follows: “Articles 14, 15, 21, 41, 45 and 46 Private unaided recognized affiliated educational institutions running professional courses like engineering and medical course -Whether entitled to charge a fee higher than that charged by Government institutions ~ Held: Entitled to charge a higher fee but such a fee cannot exceed the ceiling fixed in this regard However, commercialization of education not permissible fee - Meaning of.” On the basis of this head note AO held that any educational institution cannot charge fees in excess of the amount fixed by the authorities. A simple perusal of above headnote rather says that private educational institutions running professional and medical course are entitled to charge a professional courses like engineering and medical course are entitled to charge a higher fee but such a fee cannot exceed the ceiling fixed in this regard. A perusal of the whole order of the Hon’ble Court shows that in fact this judgement expanded the meaning of Right to life as enshrined in Art. 21 to include the Right to Education and addressing the issue of charging of capitation fees and not regular fees being charged. Government of India later amended the Constitution of India Art. 21 on the basis of this judgement. Now Art 21A of the. Constitution includes right to education in the ambit of Right to life available to citizens to provide Fundamental Right to Education by providing free education to its Children & compulsory upto the age between 6 to 14 years’ Hon‘ble Apex Court while concluding the case of Unni Krishann J.P & Others (Supra) held: “Regulatory measures must so ensure that private educational institutions maintain minimum standards and facilities. Admission within. all groups and categories should be based only on merit. There may be reservation of seats in favour of the weaker sections of the society and other groups which deserve special treatment. The norms for admission should be pre- determined, objective and transparent. Before the scheme, a question may arise whether a mandamus could issue for the enforcement of scheme if proposed by the Court. For this, we may look up at Suman Gupta and Ors. v. State of J & K and Ors., [1983] 3 SCR 985 at page 991:

Page 8 of 23 "The Medical Council of India is directed to formulate a proper constitutional basis for determining the selection of candidates for nomination to seats in Medical Colleges outside the State in the light of the observations contained in this judgment. Until a policy is so formulated and concrete criteria are embodied — in the procedure selected, the nominations shall be made by selecting candidates strictly on the ‘basis of merit, the candidates nominated being those, in order of merit, immediately below the candidates selected for admission to the Medical Colleges of the home State." It cannot be gainsaid that profiteering is an evil. If a public utility like electricity could be controlled, certainly, the professional colleges also require to be regulated. Electricity Board v. S.N. Govinda Prabhu, [1986] 3 SCR it is held: It is a public utility monopoly undertaking which may not be driven by pure profit motive not that profit is to be shunned but that service and not profit should inform its actions. It is not the function of the Board to so manage its affairs as to earn the maximum profit even as a private corporate body may be inspired to earn huge profits with a view to paying large dividends to its shareholders. But it does not follow that the Board may not and need not earn of its for the purpose of performing its duties and discharging its obligations der the statute. It stands to common sense that the Board must manage. its affairs on sound economic principles. Having ventured into the field of Commerce, no public service undertaking can afford to say it will ignore business. The Board may not allow its character as a public utility undertaking to be changed into that of a profit motivated private trading or manufacturing house Neither the tariffs nor the resulting surplus may reach such heights as to lead ty the inevitable conclusion that the Board has shed its public utility character. - When that happens the Court may strike down the revision of tariffs as Plainly arbitrary." In Cil and Natural Gas Commission and Anr v. Association of Natural Gas Commission Industries of Gujarat and others, [1990] Supp. SCC 397 at 399 it is held: The notion that the ‘cost plus' basis can be the only criterion for fixation of prices in the case of public enterprises stems basically from the concept that such enterprises should function either on a no profit no loss basis or on a minimum profit basis. This is not a correct approach. In the case of vital commodities or services, while private concerns must be allowed a minimal return on capital invested, public undertakings or utilities may even have to run at losses, if need be and even a minimal return may not*be assured. In the case of less vital, but still basic commodities, they may be required to cater to needs with a minimum profit margin for themselves. But given a favourable area of operation, "commercial profits' need not be either anathema or forbidden fruit even to public sector enterprises." In Hindustan Zinc Ltd v. A.P.S.E.B., [1991] 3 SCC 299 at pages 306-307 it is held: "This Court expressly rejected the submission which had found favour with the Kerala High Court that in the absence of a specification by the State Government, the position would be as it was before the 1978 amendment, that is, the Board was to carry on its affairs and adjust the tariffs in such a manner as not to incur a loss and no more. While rejecting Page 9 of 23 the submission, this Court held as under: (SCC pp.213-14, para 10) "We are of the view that the failure: of the government to specify the surplus which may be generated by the Board cannot prevent the Board from generating a surplus after meeting the expenses required to be met. Perhaps, the quantum of surplus may not exceed what a prudent public service undertaking may be expected to generate without sacrificing the interests it is expected to serve and without being obsessed by the pure profit motive of the private entrepreneur. The Board may not allow its character as a public utility undertaking to be changed into that of a profit motivated private or manufacturing household. Neither the tariffs nor the resulting surplus, each such heights as to lead to the inevitable conclusion that the Board has is public utility character. When that happens the Court may strike down revision of tariffs as plainly arbitrary. But not until then. Not, merely because Us dep us has been generated, a surplus which can by no means be said extravagant. The court will then refrain from touching the tariffs. After all as has been said by this Court often enough ‘price fixation' is neither the forte nor the function of the Court." It cannot be contended that education must be available free and it must be run on a charitable basis. In this connection, we may usefully quote P.R. Ganapathy Iyer's The Law relating to Hindu and Mahomedan Endowments, as to the concept of charity which is elastic. At page 46 of Chap III it is stated: "A charitable establishment is a country, college, dispensary etc., while a religious establishment is a mosque, temple etc. For these endowments may be made.' At page 47 it is stated: "In English law the word ‘charity’ has both a popular and a technical meaning. The popular meaning of the word does not coincide with its legal or technical meaning. Even according to the popular or ordinary meaning the word is used in more senses than one. In a narrow and limited sense the ordinary acceptation of the word is "relief of physical necessity or want". (Per Lord Shand in Baird's Trustees v. Lord Advocate, 15 Sess. Cas. 4th Series 682) In a somewhat more extended sense, the ordinary and popular acceptation of the word is '‘relief of poverty’ and "a charitable act or purpose" consists in relieving poverty or want. (bid per Lord President (Ingfis). In a still more extended sense and in its popular and ordinary acceptation ‘charity’ comprehends all benefits, whether religious, intellectual or physical bestowed upon persons who, by reason of their poverty, are unable to obtain such benefits for themselves without assistance. (Per Lord Watsom in Commissioners for special purposes of Income-tax v. Pemsel (1891) A.C. 531 (557)." At page 49 it is stated: "Charity in its legal sense as understood in the English Law comprises four principal divisions:(1) trusts for the relief of poverty-, (2) trusts for the advancement of education; (3) trusts for advancement of religion; (4) and trusts for other purposes beneficial to the community not falling under any of the preceding heads.' In B.K. Mukherjee on the Hindu Law of Religious and Charitable Trust at page 58 para 2.7A it is stated: "2.7A. Education: The second category on charitable trusts in Lord McNaghten's classification comprises trusts for education. These trusts need not be meant exclusively for the poor. Of course, there must be a public purpose, something tending to the benefit of the community. There Page 10 of 23 must be general public benefit through the advancement or furtherance of some educational purpose. But if this, condition is satisfied, the scope of "education" would appear to be wide in several respects.' In St. Stephen's College v. University of Delhi, (1992) 1 SCC 558 at page 609-10 it is held: "The educational institutions are not business houses. They do not gene, Wealth, they cannot survive without public funds or private aid. It is said there restraint on collection of students fees. With the restraint on collection, the minorities cannot be saddled with the burden of maintain, educational institutions without grant-in-aid. They do not have advantage over others. It is not. possible to have educational institutions With, State aid. This was also the view expressed by Das, CJ., in Kerala Education bills Case, (1970) 2 SCC 417: [1971] 1 SCR 734. The minorities cannot, therefore, be asked to maintain educational institutions on their own. ' The time is not yet ripe to hold that education must be made available on 3 Charitable basis. It is true whenever trusts are made for advancement go education it was held to be a charitable purpose. In Special Commissioners of Income-tax v. Pemsel, 3 Tax Cases 53 at 96 the dictum of Lord Macnaghten is as follows: "No doubt, the popular meaning of the words "charity' and "charitable" does not coincide with their legal meaning, and no doubt it is easy enough to collect from the books a few decisions which seem to push the doctrine of the Court to the extreme, and to present a contrast between the two meanings in an aspect almost ludicrous. But still it is difficult to fix the point of divergence, and no one has yet succeeded in defining the popular meaning of the word “charity'. The learned counsel for the Crown did not attempt the task. Even the paraphrase of the Master of the Rolls is not quite satisfactory.......... "Charity' in its, legal sense comprises four principal divisions: trusts for the relief of poverty, trusts for the advancement of education, trusts for the advancement of religion, and trusts for -other purposes beneficial to the community not falling under any of the preceding heads. The trusts last referred to are not the less charitable in the eye of the law because incidentally they benefit the rich as well as the poor, as indeed every charity that deserves the name must do, either directly or indirectly." A perusal of the above case shows that the case relied upon by AO addressed a concern of private professional educational facilities challenging the constitutionality of state laws regulating capitation fees charged by such institutions. This case has nothing to do with the issue raised by AO. The Supreme Court in this case held that the right to basic education is implied by the fundamental right to life (Article 21) when read in conjunction with the directive principle on education (Article 41). The Court held that the parameters of the right must be understood in the context of the Directive Principles of State Policy, including Article 45 which provides that the state is to endeavor to provide, within a period of ten years from the commencement of the Constitution, for free and compulsory education for all children under the age of 14. The Court ruled that there is no fundamental right to education for professional degree that flows from Article 21. It held, however, that the passage 44 years since the enactment of the Constitution had effectively converted the non-justiciable right to education of children under 14 into one enforceable under the law. After reaching the age of fourteen, their right to education is subject to the limits of economic capacity and development of the state(as per Article 41).Quoting Article 13 of the International Covenant on Economic, Social Page 11 of 23 and Cultural Rights, the Court stated that the state's obligation to provide higher education requires it to take steps to the maximum of its available resources with a view to achieving progressively the full realization of the right of education by all appropriate means. Rather Hon‘ble apex court held that the court refrains from touching the content of tariffs in public sector undertaking as the 'price fixation’ is neither the forte nor the function of the Court and it cannot be contended that education must be available free and it must be run on a charitable basis. Apex court ruled that the time is not yet ripe to hold that education must be made available on a charitable basis and it is true whenever trusts are made for advancement of education it was held to be a charitable purpose. It is therefore clear that the reliance made by AO on this judgement is misplaced and rather supports the case of appellant. The above dues are important source of revenue from the students to attain the main objects of the society. These dues being charged are in the knowledge of prescribed authorities who are fixing the tuition fees at a discounted rate. No objection has been raised by the Fee Fixation Committee in this regard. Therefore, the fees being charged by the appellant cannot be challenged and disallowed by AO unless or until this charging of fees is challenged by students before the appropriate authorities and the same is held to be illegal and violative of the Fee fixation order of prescribed authority. The above activity of charging cannot make the activity of supplying education as commercial activities as these charges are the core charges and net the capitation charges without which the appellant cannot provide all these educational activities to the students of own campus. AO has accepted these activities as charitable in the assessment orders of appellant since the date of incorporation (27-8-1999) and in subsequent AY 2014-15& 2015-16. There is no difference in the facts of the case in the year under consideration. CBDT vide Circular no. 14/2015 Dt. 17/08/2015has clarified that collection of amount under different heads of fees from students cannot be termed as profit making activity. Relevant Para no. 4 is reproduced below: - Collection of amounts under different heads of fees from students. It has been brought to the notice that collection of small amounts from students by way of application fee, examination fee, fee for issuing transfer certificate subscription fee for library etc. is being treated by some Assessing Officers as profit making activity’ resulting in denial of exemption U/s. 10(23C)(vi). Collection of small and reasonable amounts under different heads of fee, which are essentially in the nature of fee connected with imparting education and do not violate any Central or State regulation does not, in general, represent a profit making activity. Hence there is no justification for treating the charging of small amounts under different heads of fee as profit making activity unless the amount in the nature of ‘capitation fee' is charged directly or indirectly”. AO has not made out any case to prove that extra charges being charged by appellant are in fact in the nature of Capitation Fees. AO’s whole order is describing the concept of capitation fee and its implications but there is no specific finding that these extra amounts are in the nature of capitation fees, which then only would have justified the addition under the above circular issued by CBDT Circular no. 14/2015 Dt. 17/08/2015.Hence, Page 12 of 23 action of the AO in disallowing the exemption u/s 11 cannot be sustained, is therefore deleted. This ground is allowed.”

“Facts in this case are not disputed. The appellant society has debited Rs. 4,68,38,188/- as scholarship expenses in Income and Expenditure account and a sum of Rs. 3,36,15,623/- is shown as outstanding amount, which has not been applied for the purposes of education during the year. AO held that only the disbursed amount should be allowed as expenditure and the undisbursed amount should be treated as income of the society. The appellant is following accrual! system of ‘accounting, however AO held that by allowing the provision of scholarship expenses as expenditure, further siphoning off to the associated concerns as discussed later in this assessment order, will happen. AO held that by debiting scholarship expenses but not actually disbursing the appellant has tried to show application of income to reach statutory level of 85% as envisaged in the law. AO also held that ‘there is quite apprehension that with such mindset it would have siphoned off the society through payments in cash in subsequent years’ and held the claim of Scholarship Expenses as bogus. Since appellant could not produce any documentary evidence in support of claim of expenditure AO added the undisbursed amount of scholarship amounting to Rs. 3,36,15,623/- to the taxable income. Appellant contention is that the Scholarship Expenses amounting to Rs 3,36,15,623/- which remained outstanding as payable to the students as 31st march 2013 pertains to previous years & not to AY 2013-14 and the Page 16 of 23 appellant paid the entire amount out of the total expenditure incurred amounting to Rs 4,68,38,188 during the AY 2013-14 as per chart above. I have considered the facts and legal position of the case. The term ‘basis of accounting’ refers to the timing of recognition of revenue, expenses, assets and liabilities in accounts. The commonly prevailing basis of accounting are: Under the cash basis of Accounting, transactions are recorded when the relate cash receipts or cash payments take place. Thus, the revenue of education a, Institutions, such as donations, grants, etc. is recognised when funds are actually received. Similarly, expenses are recorded when the related payments are made. The end-product of cash basis of accounting is a statement of Receipts ang Payments that classifies cash receipts and cash payments under different heads. Accrual basis of accounting Is the method of recording transactions by which revenue; expenses, assets and liabilities are reflected in the accounts in the period in which they accrue. The accrual basis of accounting includes considerations relating to accrual of income, provisioning of expenses, deferral, allocations like depreciation and amortization. This basis is also referred to as ‘Mercantile Basis of Accounting’. Accrual basis of accounting records the financial effects of the transactions and other events in the period in which they occur rather than recording them in the period(s) in which cash is received or paid. Accrual basis recognises that the economic events often do not coincide with the cash receipts and payments. The goal of accrual basis of accounting is to relate the accomplishments (measured in the form of revenue) and the efforts (measured in terms of costs) so that the reported net income measures an enterprise’s performance during a period rather than merely listing its cash receipts and payments. Apart from income measurement, accrual basis of accounting recognises assets, liabilities or components or revenue and expenses for amount received or paid in cash in past, and amounts expected to be received or paid in cash in future. Accrual is the scientific basis of accounting and has conceptual superiority over the cash basis of accounting. It is, therefore, recommended that educational institutions should maintain their books of account on accrual basis. It is true that income and expenditure account is prepared by an educational institution in lieu of a profit and loss account. An income and expenditure account contain all revenues earned and expenses incurred by an educational institution during an accounting period. Since, the fund based accounting has relevance for educational institutions, the Income and Expenditure Account have to show all the funds restricted, unrestricted fund, ‘Corpus’, ‘Designated Funds’ and ‘General Funds’. The AO disallowed the scholarship expenses payable amounting to Rs. 3,36,15,623/- out of the total scholarship expenditure incurred amounting to Rs. 4,68,38,188/- during the assessment year 2013-2014 thinking that the scholarship payable’ pertains to the assessment year 2013-2014. The Audited Balance Sheet for the FY 2011-2012 and its comparison with the Audited Balance Sheets for the financial year 2012-2013 shows that the disallowed payable amount does not pertain to the AY 2013-2014 but to earlier years. Appellant paid (Rs.4,72,97,398/- during the Assessment Page 17 of 23 Year 2013-2014 against the claim of expenditure of Rs. 4,68,38,188/- A perusal of chart-above shows that all the sums accrued and/or paid are coming from a mixed pool of scholarships that keeps changing every year depending upon new students coming in and going out who were found eligible for the scholarship by the college. There can be many reasons why some scholarship was not disbursed like students leaving the college, unsatisfactory performance in the studies subsequently, etc. As per the submission of appellant the scholarship payable amount of Rs. 3,36,15,603/- actually pertains to the FY 2008-09. The appellant recorded the entry in the books of accounts by debiting the “Zila Samaj Kalyan Board” and crediting the ‘Scholarship Payable’ account. The above amount was neither accrued as the receipt or income nor as an expenditure. The amount was accounted for in the books of accounts to calculate the claim receivable from “Zila Samaj Kalyan Board”. The “Zila Samaj Kalyan Board” did not pay the same and the appellant reversed the same amount during the Financial Year 2013-14. AO has noi gone into this specific reasons as to why this amount is standing. payable but held that this outstanding liability is bogus without giving any reasons whatsoever of any kind. It is settled legal proposition that no addition can be made on the basis of conjecture and surmise. Since AO has failed to bring on record anything in support of his contention of this liability being bogus, same cannot be disallowed simply because they are outstanding. AO has not invoked any section under which the addition is being made. They cannot be held to be bogus and added as an income of the appellant in absence of any evidence being brought on record by AO. In view of the same the addition made by AO is deleted. This ground is allowed.”

“The Ld. AO made the following additions on account of unexplained expenditure for payments made to Baxil Pharma Pvt Ltd for purchase of Labs till 31-3-2013 BEDS Rs.87,02,756/- BIP Rs.5,24,73,243/ Total Rs.6,11,75,999/- The Appellant advanced the above amount to M/s Baxil Pharma Private Limited the purchase and establishment of Lab & related equipment & to train the Pharmacy Students vide agreement dated 11-12-2009, copy enclosed as per Page No:175-179), The Bhagwant institute of Pharmacy carry pharmacy course for their students which provide laboratory training through Baxil Pharma Private Limited for the more scientific and professional knowledge to the students. The Appellant is providing in house training to the students from Baxil Pharma Pvt Ltd from AY2014-15 onwards. The Appellant started the training after completion of Labs by Baxil Pharma Pvt Ltd and paid Rs 46,97,449 on account of training to students of BIP during next AY 2014-15. The Appellant deducted the TDS on the payment made to Baxil Pharma Pvt Ltd, copy of 26AS of Baxil Pharma Pvt Ltd for AY 2014-15 is enclosed as Annexure-16 (Page No: 180- 181). The provisions of Chapter XVII-B of the Income Tax Act, 1961 are not applicable to the assessee as quoted by the Ld. AO because all these payments are made as advance for purchase of labs & equipment & never claimed in the books of accounts of the assessee as revenue expenditure. The provision to deduct TDS for sale of property started from 1-6- 2013.Since the amount has been paid for lab and related equipment in the previous year & as such the facts quoted in the assessment order regarding non compliance of TDS are not applicable to the assessee. Thus, entire addition is vague & without any substance. The Ld. AO did not consider the above facts before passing the assessment order & as such entire addition is completely illegal, arbitrary, fallacious, conjectural and bad in law and face as well. The Appellant paid only Rs 1,78,44,175/- during the AY2013-14,copy of ledger account is enclosed as Annexure-17 (Page No:182) whereas Ld AO made the addition of entire balance outstanding as on 31-3-2013 amounting to Rs 6,11,75,999/-. The application of funds amounting to Rs 4,33,31,824/- assessed during previous years wrongly added by the Ld AO during current AY 2013-14.

Page 19 of 23 The Appellant paid Rs 5,24,73,243/- from account of Bhagwant Institute of Pharmacy & Rs 87,02,756/- from its own account & not paid any amount from Bhagwant College of Education to Baxil Pharma Pvt Ltd as wrongly noted by the Ld AO in the assessment order. The Bhagwant Collage of Education has nothing to do with pharma training of students. Decision: AO observed that certain amounts have been ‘diverted’ to the concerns in which the members of the Managing Committee are interested. Appellant submitted that since appellant carry out pharmacy courses for the students for which they need to provide Laboratory training and for this facilities it has paid these sums. AO rejected this submission and because the payment was made to a company in which Shri Anil Singh, the Chairman and Smt. Asha Singh, the General Secretary of the Managing Committee of the assessee society are Directors, AO yield it to be violation of the provisions of section 13(3) of the Income Tax Act. Further, AO held the claim of the appellant as false and bogus for the reason that the institute of the assessee society is situated at Bijnore while the factory of Baxil Pharma Pvt Ltd is located at Haridwar, the Pharmacy Institute of appellant itself has Laboratory, Equipment and Building and finally no TDS made u/s 194) of the Income Tax Act, 1961 on payment to Baxil Pharma Pvt Ltd. AO also found that appellant paid Rs. 5,24,73,243/- for training of pharmacy students when the total fees collected from the pharmacy students during the year was Rs. 1,36,13,400/- only and for B-Ed and BP- ed Courses appellant paid Rs. 87,02,756/- when the fees collected from the students was Rs. 52,26, 550/, Only. AO therefore held that funds of the assessee society were diverted to the business concerns being run by the members of the Managing Committee of the Society and AO treated it as an unexplained expenditure under the provision of Section 69C of the Income Tax Act and added to the income. Appellant has submitted that the above amount paid to M/s Baxil Pharma Private Limited is in fact for the purchase and establishment of Lab & related equipment which is to train the pharmacy students vide agreement dated 11-12. 2009, copy enclosed as Annexure-15(PageNo:175-179). The Bhagwant institute of Pharmacy carry pharmacy courses for their students and through Baxil Pharma Private Limited they provide laboratory training to the Students from AY2014-15 onwards. These Labs were set up by Baxil Pharma Pvt Ltd for which they were paid Rs 46,97,449/- on account of training to students of BIP during next AY 2014- 15. The Appellant deducted the TDS on the payment made to Baxil Pharma Pvt Ltd, copy of 26AS of Baxil Pharma Pvt Ltd for AY 201415 is enclosed as Annexure-16 (Page No: 180-181). I have considered the facts and legal position of the case. It is not clear form the order of AO as to what specific provision AO wants to invoke while disallowing the payment made, AO starts with the observation of diversion of funds, goes to violation of S. 13, then holding this agreement as bogus, violation of TDS provisions and finally makes addition u/s 69C as unexplained expenditure. AO has failed to pin point as to how this addition can be made u/s 69C of IT Act as unexplained expenditure. S. 69C refers to the ‘source of the expenditure’ and not to the Page 20 of 23 expenditure itself. Section 69C clearly stipulates that where, in any financial year, the assessee has incurred an expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if it is offered by him, is not, in the opinion of the AO, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year. Thus, the focus of Section 69C is on the “source” of such expenditure and not on the authenticity of the expenditure itself. It is an admitted position that this expenditure was shown by the appellant in its regular books of accounts and as the expenditure is accounted in the regular books, the source is obviously explained. The provisions of Section 69C are not applicable as was no unaccounted expenditure. What the AO attempted to do was to go into the authenticity of the expenditure and he returned a finding that the expenditure was bogus, me related persons and violated the provisions of TDS however, he added the said expenditure as unexplained expenditure under Section 69C. This is not a case which falls under Section 69C. Clearly, Section 69C refers to the source of the expenditure and not to the expenditure itself. Consequently, it is held that the AO was clearly wrong in treating the said expenditure as unexplained expenditure under Section 69C of the said Act and the said addition cannot be sustained only on this ground. Coming to the second aspect of the provisions of S. 13(3) of the Income Tax Act, 1961. These are also not applicable to the appellant as quoted by the AO because S. 13(3) refers to the class of persons for invoking clause (c) of subsection (1) and subsection (2) of S. 13 of IT Act. Now S. 13(1) & S. 13(2) are so exhaustive in nature, AO has to make specific case for violation of S. 13 by appellant. Simply quoting that appellant violated S. 13(3) is nothing but complete non-application of mind by AO. No evidence has been brought on record to prove as to how this agreement is bogus. Since all these payments are made for purchase of labs & equipment the provision to deduct tax at source are not applicable. The Appellant paid only Rs 1,78,44,175/-. during the AY 2013-14, whereas AO made the addition of entire balance outstanding as on 31-3- 2013 amounting to Rs6,11,75,999/-. The application of funds amounting to Rs 4,33,31,824/- assessed during previous years wrongly added by the Ld AO during current AY 2013-14.The Appellant paid Rs 5,24,73,243/- from account of Bhagwant Institute Pharmacy & Rs 87,02,756/- from its own account & not paid any amount from Bhagwant College of Education to Baxil Pharma Pvt Ltd as wrongly noted by the Ld AO in the assessment order. The Bhagwant Collage of Education has nothing to do with pharma training of students. Finally, the amount incurred is never claimed as application during the AY 2013-14 as such the question of disallowance does not arise. Thus, entire addition made is vague & without any substance therefore it is deleted.”

“AO observed that certain amounts have been paid to the concerns in which the members of the Managing Committee are interested. Appellant submitted that Society has paid Rs. 4,42,09,433/- to Concrete Technologies Pvt Ltd for the purchase of corporate office in New Delhi. AO rejected this submission and because the payment was made to a company in which Shri Anil Singh, the Chairman and Smt. Asha Singh, the General Secretary of the Managing Committee of the assessee society are Directors, AO held it to be violation of the provisions of section 13(3) of the Income Tax Act, 1961. Further, AO held the claim of the appellant as false and bogus for the reason that the purchase deed is not made available. AO therefore held that funds of the assessee society were diverted to the business concerns being run by the members of the Managing Committee of the Society and AO treated it as an unexplained expenditure under the provision of section 69C of the Income Tax Act and added to the income. Appellant has submitted that the above amount paid for the purchase of corporate office in New Delhi vide agreement dated 12-12-2006, copy enclosed as Annexure-18(page No:183-186) from where appellant is operating its corporate office for the admission of students from NCR. The documentary evidence for the. same is also enclosed as Annexure-19 (page Page 22 of 23 No:187). The title deeds for the transfer of property in the name of the Appellant is pending for execution as the completion certificate of DLF is pending with the Delhi Govt. I have considered the facts and legal position of the case. It is not clear form the order of AO as to what specific provision AO wants to invoke while disallowing the payment made. AO starts with the observation of diversion of funds, goes to violation of S. 13, and finally makes addition u/s 69C as unexplained expenditure. AO has failed to pin point as to how this addition can be made u/s 69C of IT Act as unexplained expenditure. S. 69C refers to the source of the expenditure’ and not to the expenditure itself. Section 69C clearly stipulates that where, in any financial year, the assessee has incurred an expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if it is offered by him, is not, in the opinion of the AO, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year. Thus, the focus of Section 69C is on the “source” of such expenditure and not on the authenticity of the expenditure itself. It is an admitted position that this expenditure was shown by the appellant in its regular books of accounts and as the expenditure is accounted in the regular books, the source is obviously explained. The provisions of Section 69C are not applicable as there was no unaccounted expenditure. What the AO attempted to do was to go into the authenticity of the expenditure and he returned a finding that the expenditure was bogus, given to related wore persons and violated the provisions of S. 13(3) however, he added the said net expenditure as unexplained expenditure under Section 69C. This is not a case which falls under Section 69C. Clearly, Section 69C refers to the source of the expenditure and not to the expenditure itself. Consequently, it is held that the AO was Clearly wrong in treating the said expenditure as unexplained expenditure under Section 69C of the said Act and the said addition cannot be sustained only on this ground. Coming to the second aspect of the provisions of S. 13(3) of the Income Tax Act, 1961. These are also not applicable to the appellant as quoted by the AO because S. 13(3) refers to the class of persons for invoking clause (c) of subsection (1) and subsection (2) of S. 13 of IT Act. Now S. 13(1) & S. 13(2) are so exhaustive in nature, AO has to make specific case for violation of S. 13 by appellant. Simply quoting that appellant violated S. 13(3) is nothing but complete non-application of mind by AO. No evidence has been brought on record to prove as to how this agreement is bogus. Since all these payments are made for. purchase of labs equipment the provision to deduct tax at source are’ not applicable. The Appellant paid the entire amount Rs 4,42,09,433/- during the previous years earlier than the year under consideration& paid nothing during AY 2013-14. Those payments are already assessed as application of funds in those years & cannot be added during current AY 2013-14. Finally the amount incurred is never claimed as application during the AY 2013-14 as such the question of disallowance does not arise. Thus, entire addition made is vague & without any substance therefore it is deleted.”

Page 23 of 23 28. On a perusal of the findings of the Ld. CIT(A), it is clear that the payments were made in the earlier years and that the consideration has nothing to do with the assessment year. This factual finding has not been controverted by the Revenue by bringing any adverse material on record. We, therefore, we do not see any reason to interfere into the finding of the Ld. CIT(A), the same is hereby upheld. The grounds raised by the Revenue is dismissed.

29. In the result, the appeal of the Revenue is partly allowed. Order pronounced in the open Court on 31/10/2025.