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Income Tax Appellate Tribunal, “ A ” BENCH, AHMEDABAD
Before: SHRI T.R. SENTHIL KUMAR & SHRI MAKARAND V. MAHADEOKAR
PER SHRI MAKARAND V. MAHADEOKAR, AM: This appeal by the assessee is directed against the order of the Ld.Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “Ld.CIT(A)” ], dated 26.02.2024, for the Assessment Year (AY) 2011-12 arising out of assessment order passed by the Assessing Officer (hereinafter referred to as “AO”) under section 143(3) r.w.s. 147 of the Income Tax Act,1961 [hereinafter referred to as “the Act”]. Ideal Education Trust vs. The ITO-Ward Exemption Asst. Year : 2011-12
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The assessee has raised the following grounds of appeal:
“1. The learned CIT Appeal has erred both in law and on facts in not granting benefit of exemption under section 10(23C)(iiiad) of the Income tax Act, 1961 even though all the condition laid down under said sub section have been complied by the appellant.
Without prejudice to the above, the Id learned CIT Appeal erred both in law and on facts in confirming an addition of Rs. 15,12,601/- on account of alleged unexplained cash credit under section 69A. The addition is confirmed by Hon. CIT(A) not accepting the submission made during the course of appeal proceeding.
Appellant Craves leave to add, alter or amend any of the grounds of Appeal mentioned above, either at or before the time of hearing.”
Facts of the Case:
The assessee is a charitable trust registered under the Bombay Public Trust Act, 1950, established primarily for providing education. The assessee is running a school in the name "Ideal School." For the AY 2011-12, the assessee did not file the original return of income. Later on, notice u/s.148 of the Act was issued to the assessee, after recording the reasons for reopening and the assessee filed its return of income on 27.08.2018, in response to a notice issued u/s.48 of the Act, declaring total income of Rs.21,530/-. Notices under section 143(2) and 142(1) of the Act were issued to the assessee and those notices were complied with. The AO observed that the assessee is not registered u/s.12A of the Act and treated as AOP instead of AOP (Trust). Ideal Education Trust vs. The ITO-Ward Exemption Asst. Year : 2011-12
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On verification of bank account, the AO also observed that the total deposits in the bank account amounted to Rs.1,07,71,565/- including cash deposit of Rs.79,13,984/- and the assessee has shown gross receipts of Rs.13,48,200/- in the return of income. The assessee was asked to explain the sources. In reply thereto, the assessee submitted the details which are summarized as follows –
The assessee trust, which manages a school, entered into an arrangement with two hostel owners, namely, Thakorbhai Manubhai Patel, who runs the "Ideal Hostel," and Shakuntalaben Rajibhai Patel, who operates the "Naman Hostel." These hostels provided accommodation to students enrolled in the school.
The trust collected both school fees and hostel fees from students at a single point, which were credited into the trust’s bank account with Dena Bank, Vadodara, under the name "Ideal Education Trust." The account (No. 055910007557) received fees through both cash and cheque deposits.
During the relevant financial year, total deposits into the account amounted to Rs. 1,07,80,265/-, while total withdrawals amounted to Rs.1,01,65,453/-. Cash deposits totalled Rs. 72,73,050/-, with cash withdrawals amounting to Rs. 19,55,750/-. Cheque/clearing deposits amounted to Rs. 35,07,215/- (net of Rs. 2,36,500/- in returned cheques). It was clarified that the total cash deposits were inaccurately reported as Rs.79,13,984/- in the notice instead of Rs.72,73,050/-.
The assessee provided details of income and expenses for the trust and the two hostels. The surplus for Ideal Education Trust was Rs.21,531/-, with total income of Rs.13,48,200/- and expenses of Rs.13,26,669/-. Ideal Hostel, run by Thakorbhai Manubhai Patel, had a surplus of Rs.4,82,131/-, with total income of Rs.36,97,744/- and expenses of Rs.32,15,613/-. Naman Hostel, operated by Shakuntalaben Rajibhai Patel, had a surplus of Rs.4,79,803/-, with income of Rs. 35,04,720/- and expenses of Rs.30,24,917/-. Ideal Education Trust vs. The ITO-Ward Exemption Asst. Year : 2011-12
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Both hostel owners duly filed their income tax returns. Thakorbhai Manubhai Patel filed his return on 22.09.2012, declaring a total income of Rs. 4,82,131/-, while Shakuntalaben Rajibhai Patel filed her return on 29.03.2012, declaring a total income of Rs. 4,79,803/-. Copies of their income tax returns, and profit & loss accounts were submitted for verification.
The assessee trust did not file a return of income as its surplus of Rs.21,531/- was below the taxable limit.
The case was reopened under Section 148 of the Income Tax Act, 1961, on account of cash deposits of Rs.72,73,050/- reported in the Annual Information Return (AIR), which were attributed to the trust based on its PAN linked to the bank account. The assessee submitted that the cash deposits in question did not exclusively belong to the trust but also included funds from Ideal Hostel and Naman Hostel.
The assessee trust is not registered under Section 12AA of the Income Tax Act, 1961, and, therefore, its status is considered as "AOP" (Association of Persons) rather than "AOP Trust."
A student-wise list of fees collected by the trust and both hostels was furnished, along with supporting evidence.
In response to the auditor’s observation that no receipts were issued for fees and fines, the assessee clarified that the fee register was maintained in digital form and had been made available during the audit. Receipts were computer-generated and copies of sample receipts were enclosed. The auditor also verified the salary expenses through the pay sheets prepared by the school. For certain expenses such as exam and office expenses, the assessee submitted that most payments were made via account payee cheques, and supporting evidence was available for the majority of transactions, including the auditor’s fee. Ideal Education Trust vs. The ITO-Ward Exemption Asst. Year : 2011-12
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After going through the details submitted by the assessee, the AO observed that there is a discrepancy of Rs.15,12,601/- in the reconciliation. As explained by the assessee, the discrepancy was on account of –
i) Rs. 10,46,141/- as advance fees for FY 2011-12. ii) Rs. 28,353/- as interest income credited to the bank account. iii) Rs. 4,00,000/- as a fixed deposit amount. iv) Rs. 38,107/- as a redeposit of cash withdrawn earlier.
1. Summary of AO’s findings and addition is given below –
(i) Advance Fees of Rs.10,46,141/-:- Upon verification of the balance sheets of both Ideal School and Ideal Hostel, the AO found that no such advance fees or liabilities were reflected as on 31.03.2011. Since the balance sheets did not indicate any advance fees or liabilities, the AO rejected the assessee's claim and treated the amount of Rs.10,46,141/- as unexplained cash/cheque credit under section 69A of the Act, thereby adding it to the total income of the assessee.
(ii) Interest Income of Rs.28,353/-:- The assessee had shown an amount of Rs.28,353/- as interest income credited into the bank account. However, on examining the Income & Expenditure Account and the computation of income, the AO observed that this interest income was not disclosed as income for the year under consideration. Therefore, the AO added the interest income of Rs.28,353/- to the total income of the assessee.
(iii) Fixed Deposit Claim of Rs.4,00,000/-:- The assessee claimed that Rs.4,00,000/- was related to a fixed deposit. However, the AO found no Ideal Education Trust vs. The ITO-Ward Exemption Asst. Year : 2011-12
6 reflection of this fixed deposit in the balance sheets of Ideal School or Hostel. Additionally, upon verification of the bank statements, no entries related to the encashment of fixed deposits were found. The assessee also failed to provide any supporting evidence to substantiate the existence of such a fixed deposit. As a result, the AO disallowed the claim and treated the amount of Rs.4,00,000/- as unexplained cash/cheque credit under section 69A of the Act, adding it to the total income of the assessee.
(iv) Cash Deposit of Rs.38,107/-:- The assessee explained that Rs.38,107/- was out of a cash withdrawal that was subsequently deposited into the bank account. However, the assessee did not provide any documentary evidence to support this claim. In the absence of such evidence, the AO did not accept the explanation and treated the amount of Rs.38,107/- as unexplained cash/cheque credit under section 69A of the Act, adding it to the total income of the assessee.
2. Based on the above findings, the AO concluded that the assessee had fabricated data to reconcile the difference of Rs.15,12,601/- between the cash/cheque deposited in the bank account and the corresponding entries. Accordingly, a total sum of Rs.14,84,248/- (Rs.10,46,141/- + Rs.4,00,000/- + Rs.38,107/-) was treated as unexplained cash/cheque credit under section 69A of the Act, and added to the total income of the assessee. In addition, the interest income of Rs.28,353/- was also added, making a cumulative addition of Rs.15,12,601/-.
In response to the show-cause notice dated 22.11.2018, the assessee stated that Shri Thakorbhai M. Patel, the Proprietor of Ideal Hostel, had not Ideal Education Trust vs. The ITO-Ward Exemption Asst. Year : 2011-12
7 disclosed the Dena Bank account in his return of income and instead mentioned only his personal bank account with the State Bank of India. The assessee contended that all transactions in the Dena Bank account were recorded in his books of accounts. However, upon verification, the AO found that the Dena Bank account was not disclosed in the return of income or balance sheet of Ideal Hostel, nor was any bank balance reflected. The AO held that if Shri Thakorbhai M. Patel was using the Dena Bank account for business purposes, it should have been disclosed in his books of accounts. Furthermore, the balance-sheet did not show any capital account or sundry creditors, rendering it unreliable. As a result, the AO concluded that the cash/cheque deposits of Rs.36,97,744/- into the Dena Bank account constituted undisclosed income. The entire amount was added to the total income of the assessee under section 69A of the Act.
The assessee preferred an appeal before the Ld.CIT(A), who in his order dated 26.02.2024, partly allowed the appeal by deleting the addition of Rs.36,97,744/- but confirmed the addition of Rs.15,12,601/-. While deleting the addition of Rs.36,97,744/-, the Ld.CIT(A) observed that the primary issue pertains to the addition made by the AO concerning the hostel fees received from students residing at IDEAL Hostel. The assessee had argued that the income from the hostel fees was reflected in the Income Tax Return (ITR) of Shri Thakorbhai Patel, the actual owner of the hostel and, therefore, the addition made by the AO in the assessee's hands was unjustified. The AO, however, added this amount to the income of the assessee due to the absence of a Dena Bank account, in which the hostel fees were deposited, in the ITR of Shri Thakorbhai Patel. The Ld.CIT(A) further noted that the AO did not dispute that the said Dena Bank account was used to collect hostel Ideal Education Trust vs. The ITO-Ward Exemption Asst. Year : 2011-12
8 fees for both IDEAL Hostel and Naman Hostel. In fact, the AO had granted relief to another assessee, Smt.Shakuntalaben Patel, the owner of Naman Hostel, since she had reported the same bank account in her ITR. The Ld.CIT(A) further observed that the ITR and Profit and Loss account of Shri Thakorbhai Patel clearly showed that hostel fees amounting to Rs.36,97,744/- were declared and deposited in the Dena Bank account, thereby substantiating the assessee's claim that the income in question was rightly reflected in the ITR of Shri Thakorbhai Patel. The Ld.CIT(A) concluded that the addition made by the AO in the hands of the assessee was unwarranted and unjustified, as the income had already been accounted for in the ITR of the rightful owner, Shri Thakorbhai Patel. The Ld.CIT(A) also addressed the AO's disallowance of expenses related to the hostel fees. It was found that the AO did not bring forth any specific facts or reasons for disallowing the expenses connected to the hostel income. In the absence of any such justification, the Ld.CIT(A) held that the disallowance was not legally sustainable, as the income and related expenses should ordinarily be assessed together unless specific grounds for disallowance are established. Moreover, the Ld.CIT(A) observed that the AO had accepted the disclosure of hostel fees in the hands of Smt. Shakuntalben Patel in respect of Naman Hostel. Therefore, when it is established that the hostel fees for IDEAL Hostel were duly reported in the ITR of Shri Thakorbhai Patel, there was no justifiable reason for the AO to reject the assessee’s claim. Since the hostel fees were already shown in the ITR of the correct party, the addition made by the AO in the hands of the assessee was without merit and could not be upheld. The Ld.CIT(A) did not adjudicate the ground relating to denial of granting benefits of exemption u/s. 10(23C)(iiiad) of the Act stating that it is general and alternative in nature. Ideal Education Trust vs. The ITO-Ward Exemption Asst. Year : 2011-12
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The assessee is aggrieved by the confirmation of the addition of Rs.15,12,601/- and the denial of exemption under Section 10(23C)(iiiad) of the Act.
During the course of hearing before us, the Ld.Authorized Representative (AR) of the assessee explained that the assessee-trust has prepared separate financial statements for Ideal School / Trust, Ideal Hostel and Naman Hostel. The Ld.AR further stated that the Income as well as profit from Ideal Hostel and Naman Hostel is disclosed in the return of income of Shri Thakurbhai Manubhai Patel and Smt. Shakuntalaben Ravjibhai Patel respectively. The Ld.AR also explained that the discrepancy relating to advance fee of Rs.10,46,141/- is disclosed as liability in the balance-sheet of Naman Hostel i.e. in the hands on Smt.Shakuntalaben Ravjibhai Patel. About the Fixed Deposit of Rs.4,00,000/- the Ld.AR submitted the copy of ledger account of the same in the books of Ideal School/Hostel. However, the same fixed deposit was not reflecting the balance sheet of Ideal School which the Ld.AR could not explain. The Ld.AR could not explain the other amounts. The Ld.AR was also asked to provide the documentary evidence relating to arrangements with the hostel owner and why the amounts relating to hostel was deposited in the trust account, but the Ld.AR could not provide the explanation, or the documentary evidence asked for.
The Ld.Departmental Representative (DR) relied on the order of AO and pointed out the interest income of Rs.28,353/- is also not credited to any of the profit and loss accounts. Ideal Education Trust vs. The ITO-Ward Exemption Asst. Year : 2011-12
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We have heard both the parties and perused the material on the record. We note that the financial statements available before us are not complete. The Ld.AR could not sufficiently explain the discrepancies pointed out and then added by the AO and confirmed by the Ld.CIT(A). We also note that the assessee has failed in establishing the relationship between the trust and the persons in whose hands the receipts and expenses along with profit of hostel is attributable to. As observed from the Trust Deed, one of the initial trustees is Shri Kalpitkumar Thakorbhai Patel and the receipts relating to Ideal Hostel are attributable to Shri Thankorbhai Manubhai Patel. The Ld.AR could not explain the relationship and arrangements between trust and such persons.
In our considered opinion, the cash deposited in the Bank Account of Trust must be accounted for in the books of Trust and the surplus/profit should have been taxed in the hands of assessee in absence of any express agreement between Trust and such persons in whose hands the receipts and corresponding income is taxed. It is also not clear that in whose names the Receipts of cash deposits are issued. Accepting the income (relating to cash deposits in the bank account of trust) in the hands of persons who have declared as income is not supported by any documentation except the return of income filed by those persons.
We also note that the Ld.CIT(A) has not decided on the first ground of assessee, relating to exemption u/s.10(23C)(iiiad) of the Act in both the appeals before him and before us. It is also observed that the assessee is granted registration u/s.12AA of the Act with effect from 23-02-2019 (i.e. A.Y. 2019-20), wherein the activities mentioned are “Relief of the poor, Ideal Education Trust vs. The ITO-Ward Exemption Asst. Year : 2011-12
11 Education, Medical Relief” which indicates that the trust is not exclusively engaged in the education.
We note that the AO has treated the status of the assessee as an "Association of Persons" (AOP) for the relevant assessment year, due to the lack of registration under Section 12A of the Act. The taxability of income arising from cash deposits in the bank account of the trust, in this context, becomes a crucial matter. In the absence of a valid registration under Section 12AA, the income of the trust is not eligible for exemption under Chapter III of the Act and, therefore, must be considered taxable.
The assessee’s contention that the cash deposits in the trust's bank account relate to hostel receipts attributable to third parties (i.e., the owners of Ideal Hostel and Naman Hostel) has not been adequately substantiated through documentary evidence or a formal agreement establishing the relationship between the trust and the hostel owners. In the absence of such documentation, the income relating to the cash deposits in the trust’s account should be considered in the hands of the assessee, i.e., the trust, as per the provisions of the Income Tax Act.
Furthermore, it is imperative that the Ld.CIT(A) to re-examine the classification of the trust as an AOP and the tax implications arising from this classification. In particular, the Ld.CIT(A) must ensure that any income deposited in the trust's account that is not backed by documentary evidence supporting its attribution to third parties is appropriately taxed in the hands of the trust. Ideal Education Trust vs. The ITO-Ward Exemption Asst. Year : 2011-12
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In light of the above, we set aside the impugned order of the Ld.CIT(A) and restore the matter back to the Ld.CIT(A) for fresh adjudication on the following points:
The Ld.CIT(A) shall adjudicate the assessee’s claim for exemption under Section 10(23C)(iiiad) of the Act and verify whether the trust satisfies the conditions laid down under the said provision.
The CIT(A) shall thoroughly examine the source and nature of the cash deposits in the trust’s bank account. In the absence of conclusive evidence attributing these receipts to third parties, the income should be treated as taxable in the hands of the assessee under the status of an AOP, as determined by the AO.
The Ld.CIT(A) shall ascertain the exact relationship between the trust and the persons in whose hands the hostel receipts have been attributed. This includes reviewing any agreements or arrangements between the trust and the hostel owners to determine the correct taxability of such receipts.
The Ld.CIT(A) shall ensure that the assessee is granted adequate opportunity to furnish relevant documents, agreements, and explanations, particularly with respect to the attribution of receipts to third parties and the eligibility for exemption under Section 10(23C)(iiiad) of the Act.
In conclusion, the order of the Ld.CIT(A) is set aside and the matter is remitted back for fresh adjudication in accordance with the law. The Ld.CIT(A) shall pass a reasoned order after considering all facts, evidence, and submissions made by the assessee. Ideal Education Trust vs. The ITO-Ward Exemption Asst. Year : 2011-12
In the result, the appeal of the assessee is treated as allowed for statistical purposes.
Order pronounced in the Open Court on 10th September, 2024 at Ahmedabad. (T.R. SENTHIL KUMAR) ACCOUNTANT MEMBER
अहमदाबाद/Ahmedabad, "दनांक/Dated 10/ 09/2024
ट".सी.नायर, व."न.स./T.C. NAIR, Sr. PS
आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant
""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त ( अपील ) / The CIT(A)-(NFAC), Delhi
"वभागीय ""त"न"ध , आयकर अपील"य अ"धकरण , राजोकट/DR,ITAT, Ahmedabad, 6. गाड" फाईल /Guard file.
आदेशानुसार/ BY ORDER,
स"या"पत ""त ////
सहायक पंजीकार (Asstt.