Income Tax Appellate Tribunal - Chennai
Vellammal Educational Trust vs Assistant Commissioner Of Income Tax on 11 January, 2005
Equivalent citations: (2005)95TTJ(CHENNAI)665
ORDER
Chandra Poojari, A.M.
1. These two appeals, one by assessee and the other by Revenue, emanate from common order of CIT(A), dt. 19th Dec., 1997, for the asst. yr. 1994-95. The issues involved in these appeals are common and hence these are clubbed together, heard together and disposed of by this common consolidated order for the sake of convenience.
2. The assessee has raised following grounds :
(i) The assessment order is time-barred assessment as the special audit ordered by the AO is to buy time to complete the assessment.
(ii) The denying exemption of under Section 10(22) of the IT Act, 1961, is unwarranted.
(iii) Addition to trust income on account of credits in the accounts of the trustees to the tune of Rs. 95,02,436 without establishing that the fund of trust was actually transferred from the trust.
3. On the other hand, the Revenue raised the following ground :
(i) The CIT(A) is not justified in deleting a sum of Rs. 95,02,436 though he satisfied that the amount was diverted from trust to the accounts of the trustees.
4. The brief facts of the case are that the assessee is a registered trust under Section 12AA of the IT Act. The assessee has filed nil return for the above assessment year and claimed exemption under Section 10(22) and the return was originally processed under Section 143(1)(a) and later it was selected for scrutiny and assessment was concluded wherein relief under Section 10(22) was denied and a sum of Rs. 28,66,569 was treated as income of the trust along with adding of Rs. 95,02,436 being credits in the trustees bank accounts as income of the trust on the reason that these credits were the funds diverted from the trust. On appeal, the CIT(A) deleted the addition of Rs. 95,02,436 on the reason that the diverted funds by trustees were not available to trust and loss to the trust and observed that the diverted funds would be the income of trustees, however, held that the trust was not entitled to exemption under Section 10(22) and hence sustained the addition of Rs. 28,66,569. Aggrieved by this action of CIT(A), both the assessee as well as Revenue are in appeal before us.
5. The learned counsel for the assessee submitted that the assessment was barred by limitation. It was submitted that the assessee's return of income was filed on 17th Nov., 1995, as the assessment ought to have been completed latest by 31st March, 1997, even considering the provision of Section 154(1)(b). The learned counsel submitted that the benefit of extended time provided under Clause (iii) of Expln. 1 to Section 153 being the period commencing from the date on which the AO directed the assessee to get his accounts audited and ending with the date of submission of the audit report, would not be available in the assessee's case on account of the following reasons :
"The provisions of Section 142(2A) have no application to the assessee's case. The AO was wrong in invoking Section 142(2A). Section 142(2A) can be invoked only if the twin conditions--nature and complexity of the accounts and the interests of the Revenue provided in the section are satisfied. The receipts of the assessee-trust, which is running the educational institutions, consist of fees, including admission fees, book fees and term fees and other miscellaneous collection, viz., books and amenities, hostel fees, bus fare and exam fees. The institution also received collections towards building fund and parents deposit. The institutions incur the usual expenditure on salary to teaching staff, purchase of books/note books, maintenance and running of buses for students/staff, etc. It is beyond one's comprehension how the accounts of the trust can be said to be complicated. It may be seen from the assessment order that the AO had ordered special audit under Section 142(2A) to consider only the genuineness of four entries in the accounts in respect of the advance of Rs. 25 lakhs to TNBA in November and December, 1995, and the AO failed to establish that there was complexity in the accounts.
In this context, the learned counsel for the assessee relied on the decision of the Hon'ble Allahabad High Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT (1988) 171 ITR 634 (All) and submitted that the High Court has held that the power under Section 142(2A) could not be exercised lightly and should be based on objective assessment regard being had to the nature of the accounts. The word 'complexity' used in Section 142(2A) is a nebulous word and anything that is difficult to understand should not be regarded as complex. What is complex to one may be simple to another. Sometimes, what appears to be complex on the face of it may not really be so if one tries to understand carefully. There should be an honest attempt to understand the accounts of the assessee. If the AO doubts the building fund collections accounts and some further details and information are required, it is open to the AO to call for the same. Instead, he cannot imagine complexity in the accounts and direct audit under Section 142(2A) in order to gain extended time to complete the assessment. The Calcutta High Court in the case of Bata India Ltd. and Anr. v. CIT (2002) 257 ITR 622 (Cal) has held that complexity of the accounts could not be equated with doubts being entertained by the assessing authority either with regard to the correctness thereof or the need for obtaining certain vital information not ascertainable from the accounts. Similarly, in the case of Gurunanak Enterprises v. CIT (2003) 259 ITR 637 (Del), the Delhi High Court has observed that although the object in enacting the provision is to assist the AO in framing the assessment. When he finds the accounts of the assessee to be complex is to protect the interest of the Revenue, recourse to the provision cannot be had by the AO merely to shift his responsibility of scrutinising the accounts of the assessee to determine the true and correct income to an auditor. The Court also pointed out that there has to be a genuine and honest attempt on his part to understand the accounts of the assessee, appreciate the entries therein and if in doubt seek explanation from the assessee or his representative, rather than pass on the buck to the special auditor. Further, Rule 14A, Form No. 6B and the instructions of the CBDT (1076, dt. 12th July, 1997) show beyond doubt that the audit contemplated under Section 142(2A) is to business transactions only and is not applicable to the present case and any direction under that section is inappropriate. It is submitted that the AO resorted to the provisions of Section 142(2A) of the Act only to gain time for completion of the assessment.
The direction of the AO to conduct audit under Section 142(2A) in the present case is a clear abuse of power vested under this provision and invalid in law and cannot be sustained and the extended time provide under Clause (iii) of Expln. 1 to Section 153 has no application to the present case and that the assessment order dt. 12th July, 1997, is barred by limitation."
6. Regarding the second issue relating to eligibility of exemption under Section 10(22), the learned counsel for the assessee submitted as follows :
"The finding of the AO that the assessee-trust is not an educational institution existing for educational purposes but for the purpose of profit making is vitiated by extraneous and irrelevant facts. The Supreme Court in the case of Aditanar Educational Institution, Etc. v. Addl. CIT (1997) 224 ITR 310 (SC) ruled that for the purpose of exemption under Section 10(22), the factual position in the relevant previous year is to be considered to find out whether the institution existed for educational purposes and profit purposes. The advance of Rs. 25 lakhs to the TNBA was made in the months of November and December, 1995, and it is not relevant for the accounting year 31st March, 1994. Similarly, the foreign education of Mr. M.V.M. Sasikumar was in the year 1995-96 as he left India only on 15th July, 1994. Therefore, these two irrelevant and extraneous facts had influenced the mind of the AO to reach the erroneous conclusion that the building funds collections of the trust were diverted for personal purposes. The assessee-trust was created by a registered trust deed dt. 22nd Jan., 1986. The copies of the trust deed and amendments enclosed in pp. 1 to 16 of the paper book would reveal that none of the clauses in the trust deed authorises, directly or indirectly, the founder or the trustees to make use of the funds income and the assets of the trust for their private purposes. It is further submitted that from the inception of the trust the assessee has been pursuing the main object of education and in the assessment order the AO had listed the educational institutions functioning under the management and administration of the assessee-trust during the previous year relevant to the asst. yr. 1994-95. The note on the activities and growth of Vallammal Educational Trust and the brochure may be referred to. The entire income and the funds of the trust have been applied only in furtherance and promotion of the educational purposes as would be evident from the return of income, statement of income, the expenditure account and the balance sheet placed at pp. 110 to 113 of the paper book.
The assessee has been enjoying exemption under Section 10(22) from the asst. yr. 1987-88, onwards upto the asst. yr. 1993-94. Further exemption was granted for the asst. yrs. 1997-98 to 1999-2000. The Delhi High Court in the cases of Director of IT (Exemption) v. Tagore Education Society (2002) 124 Taxman 22 (Del) and CIT v. Lagan Kala Upvan (2003) 259 ITR 489 (Del) has considered the effect of exemption granted in an earlier year and the Court has held that where an assessee was given exemption in the earlier assessment year and such orders attained finality, since the Revenue was not able to point out any distinctive features in the year under consideration, the Tribunal was right in holding that the assessee was entitled to exemption under Section 10(22).
The AO rejected exemption under Section 10(22) only on the ground that the funds of the trust by way of building fund collections were diverted and misused for making investments in the name of trustees and their children. The finding or conclusion of the AO is that there was clear evidence that the income of the trust in the form of building fund collection had been diverted for the benefit of the trustees and their children, which is clearly against the provisions of Section 10(22). The income and expenditure statement filed along with the return will clearly show that the income of the trust had been used only for running the educational institutions and not other purposes the surplus of Rs. 28,66,569 was transferred to the general fund in the balance sheet, earmarked for educational purposes of the trust. Further, the schools administered by the assessee-trust are located in and around Mogappair and Ambattur, Chennai, where only low income or middle income group of people live. According to the assessee, the building fund collection during the previous year relevant to the asst. yr. 1994-95 was Rs. 3,25,600. The number of new admissions in this accounting year was 829 out of which the building funds were collected from the parents of a few students as per the list furnished to the AO. The Department had not established that the building fund collections were more than what was admitted by the assessee. The AO has not adduced any evidence to prove that the trustees and their sons siphoned off the building funds collected. Absence of proper accounting of the building funds will not automatically lead to the inference that all the investments came out of the building fund collections. If the case of the Revenue that all the investments and credits in the bank accounts of the trustees and their sons aggregating to Rs. 95,02,436 came out of the diverted building funds of the trust is accepted, it will have to be taken that the assessee-trust had collected Rs. 1 crore by way of building funds collections from the new students of 829 admitted in the schools during the relevant previous year which is impossible, having regard to the place where the said schools are functioning as mentioned earlier. The AO has not proved that the AO had not accounted for any of the building fund collections. He assumed that the there must be unaccounted collections because no receipts were issued. The only reason for not issuing receipts is that the State Government, prohibited collection of such amounts compulsorily from the students. The assessee-trust accepted such donations voluntarily paid by a few parents and some paid in instalments. The assessee has furnished the list of donors, dates, amounts collected and the address of the donors. The AO stated that on the basis of the list furnished by the assessee, he contacted a few of the parents who confirmed the payments. The AO also stated that at the back of the admission fee receipts, the payment made towards building fund was noted. The AO has not found any suppression or omission of the building funds collected. No material or evidence was brought on record to show that the building funds collected were more than Rs. 3,25,600. The findings of the AO that the income of the trust by way of building fund collections had been diverted and misused to source the investments and bank accounts of the trustees and their sons are based on conjectures and surmises. There is absolutely no evidence to support these findings. Without prejudice to the objection that the special audit under Section 142(2A) in the present case was unwarranted and the extended time-limit was not available the audit report given in the present case on the issue of diversion of funds, far from supporting the case of the Department, supports the case of the assessee. He has given a categorical finding that on the basis of information and explanation given and the entries in the accounts he did not find the funds of the trust being diverted for purposes other than maintenance and running of the schools/other institutions of the trust and the CIT(A) has also accepted the position that insofar as the funds accounted for by the educational institutions were concerned, there was no diversion for non-educational purpose.
Under Section 10(22), the twin conditions to be fulfilled are that the assessee is an educational institution and it exists for educational purposes and not for the purpose of profit. The legal position on the interpretation and scope of this provision is settled by the ruling of the apex Court in the case of Aditanar Educational Institution (supra). The Supreme Court has held that an educational society or a trust or other similar body running an educational institution solely for educational purposes of profit could be regarded as other educational institution coming within Section 10(22) of the Act. According to the Supreme Court, the language of Section 10(22) is plain and clear and the availability of the exemption should be evaluated each year to find out whether the institution existed during the relevant year solely for educational purposes and not purposes of profit. After meeting the expenditure, if any, surplus results incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes, since the object is not to make profit. According to the Supreme Court, the decisive or acid test is whether on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity.
The Supreme Court added that merely because certain surplus arises from its operations, it cannot be held that the institution is being run for the purpose of profit so long as no person or other individual is entitled to any portion of the profit an the said profit is used for the purposes and promotion of the objects of the institution as in Governing Body of Rangaraya Medical College v. ITO (1979) 117 ITR 284 (AP) at p. 290, which decision was approved by the Supreme Court in Aditanar Educational Institution Etc. v. Addl. CIT (1997) 224 ITR 310. The trust deed in the present case does not have any object of providing for carrying on of any activity for profit. None of the clauses in the deed authorities directly or indirectly the trustees to make use of the funds of the trust for their private purposes."
7. With regard to the addition of Rs. 95,02,346 made to income of the trust being investments/credits in bank accounts of the trustees and their HUF, learned counsel submitted that the onus to prove that the apparent is not the real rests on the Department. It is for the Department to prove by evidence and establish a nexus between the funds of the trust and the credits/investments appearing in the bank accounts of the trustees and that the said credits came out of suppressed building fund collections of the trust. Learned counsel cited the decision of the apex Court in CIT v. Daulat Ram Rawatmull (1973) 87 ITR 349 (SC) and that of the Bombay High Court in Sukhdayal Rambilas v. CIT (1982) 136 ITR 414 (Bom), wherein it was held that "some nexus has to be established between the trust and the investments. In the appellant-trust's case, the Revenue had thoroughly failed to establish such nexus. No evidence was let in to support the allegation of the Revenue that the income of the trust was the source of such investments.
8. The learned counsel submitted that the CIT(A) had rightly deleted the addition of Rs. 95,02,346 to the income of the trust and directed that the addition of the same amount be done in the hands of the trustee, Sri M.V. Muthuramalingam. The CIT(A) directed that considering the revolving nature of the credits it is "peak credit" alone that is to be so assessed. Learned counsel submitted that in the revised assessment order dt. 29th March, 2000, of Sri M.V. Muthuramalingam made to give effect to the direction of the CIT(A), the AO clearly stated that after a complete analysis of all the bank accounts of Sri M.V. Muthuramalingam and his family members, the peak credit was arrived at Rs. 10,08,839.92. The AO also accepted the position that the credits in the bank accounts of the trustees had all come solely from private borrowings by the individuals and not from siphoning of building fund collections of the trust. The AO also referred to the disclosure of Rs. 21,41,790 made under the VDI Scheme by Sri M.V. Muthuramalingam, the source of which has been declared as "unexplained private borrowings". The AO finally held that as the peak credit of Rs. 10,08,839.02 is fully covered under the VDIS declaration, no further addition was called for.
9. The learned counsel further submitted that the trust did not get any financial assistance from Government. The trustee, Sri M.V. Muthuramalingam, was able to establish the institutions of the trust solely with help of borrowings from Multani financiers. These financiers were unwilling to lend money directly to the trust and chose to lend the same to Sri M.V. Muthuramalingam who in turn gave the monies to the trust which were used towards building construction, etc. by the trust. The learned counsel also drew attention to the statement of the AO in this revised assessment order dt. 29th March, 2000, the manner in which the loans were taken from these financiers and the list of loans exceeding a crore of rupees. Learned AO also stated that the total disclosure under the VDI Scheme by Sri M.V. Muthuramalingam and his family members was Rs. 1.14 crore. Learned counsel thus submitted that the private borrowings offered to tax under VDI Scheme was the source of the investments/credits in the trustees bank accounts. The statement of accounts under the VDI Scheme and the VDIS certificates issued by the CIT, Central II, Chennai, were placed on record. Learned counsel vehemently argued that the view taken by the AO while finalising the assessment of the trust that the trustees had no source of income and that all the investments made by them were sourced from building fund collections of the trust was wholly incorrect and without any basis. The source of such investments and necessary statement of account was filed under the VDI Scheme which the CIT, Central E, Chennai, had accepted and issued certificate under VDI Scheme. Learned AO thus submitted that the whole case of the Department that there was diversion of building fund collections of the trust stands demolished and falls.
10. The learned counsel cited the decision of the Madras High Court in the case of the Thanthi Trust (1973) 91 ITR 261 (Mad) where it was held that if the trust had been validly and really created, any deviation by its founder or its trustees from the declared purposes would amount only to a breach of trust and would not detract from the declaration of the trust. Hence, the subsequent conduct of the founder of the trust in dealing with trust funds long after its creation would not put an end to the trust itself. Learned counsel submitted that the aforesaid pronouncements of the Madras High Court were also approved by the apex Court in the case of Sri Agastyar Trust v. CIT (1999) 236 ITR 23 (SC). The learned counsel also cited the decision of the Hyderabad Bench of the Tribunal in the case of IAC v. Matrusri Educational Society (1994) 49 TTJ (Hyd) 146 : (1994) 48 ITD 583 (Hyd), where it was held that the purpose of existence of artificial entities like societies or trusts should be enquired and found in the veil of the memorandum of association/rules and regulations or deed of trust, as the case may be, and when that does prove that its sole purpose was education, no further enquiry would be necessary for the granting of exemption under Section 10(22). The decision of the Delhi Bench of the Tribunal in the case of Shanti Devi Progressive Education Society v. Asstt. CIT (1999) 65 TTJ (Del)(TM) 181 : (1999) 68 ITD 01 (Del)(TM) was also quoted by the learned counsel where it was held that placing reliance on the decision of the apex Court in the Aditanar case (supra) that it was quite apparent that their Lordships have not disapproved the practice of collecting funds through donations, gifts, etc., as long as these were ploughed back into the system itself, i.e., of imparting education. The decision of the Calcutta Bench of the Tribunal in Shree Educational Society v. Asstt. CIT (2003) 80 TTJ (Cal) 365 : (2003) 85 ITD 288 (Cal) where it was held that mere existence of profit will not disqualify the institution if the sole purpose of its existence is not making of profits but are educational only, was also cited.
11. Learned counsel for the appellant-trust concluded by stating that the AO was not justified in law in denying exemption under Section 10(22).
12. With regard to the claim of the appellant-trust that the assessment was barred by limitation and that recourse of the provisions of the Section 142(2A) was taken merely as a ploy to gain time to complete the assessment, the learned Departmental Representative submitted that the AO did have all the facts on record to complete the assessment well within the due date even without recourse of the provisions of Section 142(2A). The special audit was ordered specifically to investigate the various issues as listed in the assessment order relevant to the assessee-trust which are all cited in detail in pp. 3 to 5 of the assessment order. Reading of these issues by itself will go to show that complexities in fact did exist in the case of the assessee-trust. No evidence was also let in by assessee-trust to prove that there was no objective satisfaction on the part of the AO to hold that the accounts were not of a complex nature. That the AO had applied his mind to the facts and circumstances of the case to warrant calling for audit under Section 142(2A) was evident from the mandate given to the special auditor covering 21 points to be investigated. Learned Departmental Representative cited the decision in the case of CIT v. N.C. John & Sons Ltd. (1998) 230 ITR 326 (Ker), where it was held that the Tribunal was right in holding that a direction to have an audit under Section 142(2A) can be issued by an AO when some proceedings are pending before him. Learned Departmental Representative submitted that the Court even held that even if audit under Section 142(2A) has any defect by reason of non-pendency of any proceedings before the AO at the material time, the materials gathered in the course of audit and found from the audit report could certainly be made use of against the assessee. The Court in its decision also drew support from the decision of the apex Court in Pooran Mal v. Director of Inspection (Inv.)(1974) 93 ITR 505 (SC), where the contention of the Revenue regarding authenticity of an special audit got prima facie support.
13. The learned Departmental Representative also cited the recent decision in the case of Sahara India Mutual Benefit Co. v. CIT (2002) 269 ITR 563 (All), where it was held that at any rate it was a matter of satisfaction of the authorities concerned and that the AO had arrived at a definite conclusion on the basis of available material and exercised his powers under Section 142(2A). Learned Departmental Representative submitted that in the said decision it is relevant to note that one of the reasons for calling for the special audit under Section 142(2A) was that the assessee failed to produce books of account. Learned Departmental Representative also drew attention to the remarks in the judgment reading as follows :
"It is well-settled that the taxing provisions in any Act should be construed strictly in the interests of Revenue and any irregularity should not affect adversely. The Court should not generally intervene. An authority who has to pass an order, undoubtedly should satisfy itself subjectively or objectively, but even the subjective satisfaction which may be arrived at by an authority while passing an order must be based on objective materials."
14. The learned Departmental Representative submitted that the findings of the AO in his order of assessment were material and vital in coming to the conclusion that the trust is not entitled to the benefit of the exemption under Section 10(22) of the IT Act.
15. The learned Departmental Representative drew our attention to para 7.1 of the assessment order where the AO has stated that no evidence was available for the business carried on by the trustees prior to commencement of the trust. The finding of the AO that Smt. M. Kuncharavalli, trustee and wife of Sri M.V. Muthuramalingam, had no idea of her business of commission agency was yet another vital point to prove that she did not in fact earn any income of her own. The findings of the AO upon examination of the three sons of Sri M.V. Muthuramalingam were also drawn attention to. The eldest son though shown to be carrying on 'money lending business' was unaware of the persons to whom money was lent. Neither was any license for doing such business produced before the AO. The statement of the second son of Sri M.V. Muthuramalingam also revealed that no evidence was adduced to support his claim of money lending business or agricultural income. In fact, he did not own any agricultural land even, thus the agricultural income shown by him is nothing but diversion of trust funds. The statement of the third son too was no different from that of the other brothers. He too had no idea of the activities of the business, its source of capital, etc. Similar was the case with the HUF of Sri M.V. Muthuramalingam. The income of the HUF from its agricultural lands was only meagre and that too had to be shared with the brother of Sri M.V. Muthuramalingam. Thus, the real source of income of the HUF too was out of nothing but trust funds. Learned Departmental Representative also drew our attention to the relevant paras in the assessment order relating to credits in the bank accounts of the trustees for which no source was explained, especially considering the genuineness of the incomes by the trustees in their tax returns.
16. The learned Departmental Representative also drew our attention to the observation of the special auditor regarding mode of accounting of building fund collections and submitted that the sole control over such building fund collections vested with the chairman, Sri M.V. Muthuramalingam. No receipts were issued for the building fund collections made. Learned Departmental Representative also drew attention to the observations of the AO on the advance made to TNBA in November-December, 1995, when the books of the trust showed an insufficient cash balance for such a payment.
17. The learned Departmental Representative thus argued that on a consideration of the facts of the case as a whole, the AO was right in bringing to tax the diverted building fund collections and also in holding that the trust was not entitled to the exemption under Section 10(22). Learned Departmental Representative further submitted that merely "because the Department could not establish a clear nexus between the credits in bank accounts/investment of the trustees and the building fund collections of the trust it, cannot be concluded that there was no diversion of building fund collections, especially in the light of the statements of the trustees showing no awareness to their returned sources of income.
18. The learned Departmental Representative further stated that the VDI declarations were only an afterthought and should not be relied upon and there is no sources of income to trustees hence, they availed the benefit under the VDI Scheme and VDIS gives immunity to the declarant only and not to the trust and moreover, the VDI declaration will also support the claim of the AO that the money was transferred from the trust.
19. Further, he submitted that the trustees have no definite source of income as they were actively involved in the activities of the trust and AO rightly observed that the funds in trustees bank account are the diverted funds of the trust and also submitted that observation of CIT(A) in pp. 16 and 17 is irrelevant and there is no equity in taxation laws and if somebody used the trust money or swindle the trust property, the assessee-trust cannot claim the deduction of that amount from its income as allowable expenditure and only expenses incurred for the purpose of earning trust income or incurred for the purpose of discharging objects of the trust are allowable expenditure and hence this diversion of funds by trustees cannot be allowed as valid expenditure.
20. The learned Departmental Representative placed reliance on the decision in the case of Rao Bahadur AKD Dharmaraja Education Charity Trust v. CIT (1990) 182 ITR 80 (Mad), where it was held that in case where the trust exists for activities both educational and other activities, its incomes cannot be exempt under Section 10(22) since the trust did not exist solely for educational purposes. In the present case too, since the trust made advances to TNBA and diverted its building fund collections to benefit the trustees it cannot be said to exist solely, for educational purposes and hence the benefit of Section 10(22) exemption could not be granted to the trust.
21. The learned Departmental Representative also placed reliance on the decision in the case of Sumati Dayal v. CIT (1995) 214 ITR 801 (SC) in the matter of VDIS disclosure. Here, it was held that the test of human probabilities and surrounding circumstances are to be considered in deciding whether an assessee's claim is genuine. In the case relied by Departmental Representative, the assessee reported unusual and unbelievable frequency of winnings from horse races, in a situation where the assessee did not have requisite knowledge of the intricacies of horse racing. The Court while dismissing the appeal of the assessee held that the settlement commission after considering the surrounding circumstances and applying the test of human probabilities had rightly concluded that the appellant's claim of winning from horse races was not genuine. Learned Departmental Representative submitted that the surrounding circumstances of the present case did not merit the acceptance of the theory of private borrowings as being the source of the credits in the trustees bank accounts.
22. Finally, the learned Departmental Representative submitted that the action of the AO in having ordered the special audit under Section 142(2A), to bring to tax as income of the trust credits in bank accounts and other investments/incomes of the trustees to the tune of Rs. 95,02,346 and in denying the exemption under Section 10(22) of the IT Act was fully justified and prayed that the AO's action be upheld and the CIT(A) is not justified in holding that the diverted funds would not be the income of the assessee, instead it would be the income of the trustees who siphoned off the money. Further, he placed reliance on CBDT Circular No. 584, dt. 13th Nov., 1990, and submitted that if the profit of the educational institution was diverted by the trustees for the personal use of them, then the income of the educational institution will be subject to tax. When all the objects of trust are educational, the trust is existing for educational purpose only and not for the purpose of profit. However, if the surplus used for non-educational purposes, in such circumstances, the trust is not entitled for exemption under Section 10(22) and in this case, the applicability of Section 11 can be examined and if the conditions laid down therein are satisfied, the income will be exempt under Section 11. Further, he submitted that the assessee was getting exemption under Section 10(22) of the Act upto asst. yr. 1992-93 and also assessee got same exemption in subsequent asst. yrs. 1997-98, 1998-99 and exemption under Section 10(23C) for the asst. yr. 1999-2000 because there was no violation of provisions of Section 10(22) or 10(23C) and this cannot be taken as a defence for the assessment year under consideration and each assessment year should be considered independent and separate assessable unit.
23. We have heard the rival submissions and perused the materials. With regard to validity of ordering special audit under Section 142(2A), that the audit should be ordered at any stage of assessment if the AO, that having regard to the nature and complexity of the accounts of the assessee and the interests of the Revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief CIT or CIT, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below Sub-section (2) of Section 288, nominated by the Chief CIT or CIT in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the AO may require.
24. In the present case, AO ordered for special audit due to the reason that the AO has doubted that the substantial fund of the trust was diverted by the trustees for other than charitable purposes. The reason for reaching this conclusion by the AO is of the enquiries conducted by the AO in the case of one Mr. A.M. Dhayaneswaran. During the course of enquiries the AO observed that the building funds collected by the trust from various students were not accounted properly in the trust books of account. To verify the correctness of accounts, each voucher and receipt need to be checked independently to ensure the proper accounting of the building fund receipts. There were voluminous transactions involved and this could not be verified by AO himself because of its complexity which requires special skill of an specialised professional. When the accounts are not maintained in proper manner, it definitely affects the interest of Revenue. At any stage of the proceedings before him, the AO, having regard to the nature and complexity of the accounts, Section 142(2A) of the Act authorises the AO to order for special audit. But before directing the assessee to get the accounts audited by an accountant, as defined in the Explanation below Sub-section (2) of Section 288, nominated by the Chief CIT or CIT in that behalf, he should form an informed objective opinion that it is necessary so to do, keeping in view the nature and complexity of accounts of the assessee and the interests of the Revenue. It also mandates the AO to obtain approval of the Chief CIT or CIT before directing the assessee to get the accounts audited by an accountant. The twin requirements of forming of an informed objective opinion by the AO and prior approval of the Chief CIT or CIT are conditions precedent for passing an order in exercise of powers under Section 142(2A) of the Act. In the absence of any of the two conditions the order of the AO will be contrary to law.
In the exercise of powers under Sub-section (2A) of Section 142 of the Act, there are three consecutive stages, namely, (a) formation of opinion by the AO; (b) grant of approval by the Chief CIT or CIT; and (c) order by the AO directing the assessee to get the accounts audited by the defined accountant. Stages (a) and (b) pertain to the mode and manner in accordance with which the AO will exercise the power of passing the order directing the assessee to get the accounts audited by the designated accountant. In the present case on hand, the complexity of accounts coupled with interest of Revenue, the AO opted to order for special audit. This action of Revenue is in accordance with the provisions of Section 142(2A).
25. We are unable to accept the contention of the learned counsel for the trust that recourse to the provisions of Section 142(2A) was only a ploy to gain time to complete the assessment. Merely because the assessee is running schools where the nature of incomes and expenses is routine, cannot be a ground to contend that complexity in the accounts did not exist. We have gone through the 21 points that the AO required the special auditor to look into and find that sufficient complexity did exist in these issues. We further find that in p. 2 of the order of assessment the AO had in fact stated that some of the details called for were not furnished on the ground that the computer data were damaged. In view of the above, we hold that the AO was absolutely right in ordering the special audit under Section 142(2A). As the special audit is valid, the AO definitely would get extended time as envisaged under Section 153(3)(iii) and accordingly, the assessment was not barred by limitation.
26. Regarding the addition towards bank credits/income of the trustees and their HUF, the AO has not brought on record to show that money found at the hands of trustees has moved out of trust funds or the trustees themselves have collected the building fund directly without raising any receipts/vouchers. Moreover, it is also an undisputed fact that the VDIS disclosures and certificates issues by the CIT, Central II, Chennai, accepted the source of income to trustees is as "private borrowings". We further find that the AO has in the revised assessment order dt. 29th March, 2000, in the case of Sri M.V. Muthuramalingam, passed consequent to the appellate order of the trust issued by the CIT(A), clearly held that the source of bank credits is from the private borrowings by Sri M.V. Muthuramalingam and his family members. The Revenue has not preferred any appeals against this assessment order which reached finality. The Revenue has absolutely failed to point out any direct nexus between the credits in the bank accounts of the trustees/their investments, etc. and the funds of the trust. It cannot be the case that merely because building funds collections were not properly evidenced by receipts and controlled, it is not proper to presume that these collections have been siphoned off. At best, it could be viewed as a "system failure" and not as one proving siphoning off of trust funds. The decision cited by the learned counsel of the trust in the case of Thanthi Trust (supra) is squarely applicable. Mere breach of trust by the trustee even if present, cannot be a ground to penalise the trust. It is never in dispute that the assessee-trust was not validly created, nor that its objects, etc. provided for giving some benefits to the trustees. We also find merit in the finding of the CIT(A) during the course of appeal against the order of assessment of the trust that even looking at the issue from a practical point of view, moneys diverted from the trust are loss to the trust and are not available to it. In such circumstances, bringing the impugned amounts to tax would be against the principles of law. Also, the decision of Tribunal in the case of IAC v. Matrusri Educational Society (1994) 49 TTJ (Hyd) 146 : (1994) 48 ITD 583 (Hyd) is also in favour of assessee.
27. The assessee-trust was denied exemption under Section 10(22) by the AO on the ground that it did not exist solely for the purpose of education and that it existed for the purpose of profit. The reasons for denial of exemption under Section 10(22) were as follows :
(a) the advance given to TNBA amounting to Rs. 25 lakhs
(b) the foreign education of Sri M.V.M. Sasikumar, trustee and son of Sri M.V. Muthuramalingam, out of trust funds.
(c) The alleged diversion of building funds collections to the private accounts of trustees.
(d) The absence of the proved sources of income for the trustees in support of their tax returns.
28. With regard to the loan to TNBA and the expenditure on foreign education of Sri M.V.M. Sasikumar, this issues too does not pertain to the year under appeal. The advance given to TNBA was in November-December, 1995. Similarly, the foreign education of Sri M.V.M. Sasikumar occurred only from. July, 1994. Thus, it is seen that both facts are extraneous issues insofar as the year under appeal, viz., 1994-95 is concerned.
29. As rightly pointed out by the Authorised Representative and relied on by him in the case of Aditanar Educational Institution Etc. v. Addl. CIT (1997) 224 ITR 310 (SC), where it was held that the entitlement to exemption under Section 10(22) should be evaluated on a year to year basis, we find merit in the contention and submissions made by the learned counsel for the assessee-trust in this regard. Therefore, the two facts aforestated need not be considered in evaluating the entitlement of the trust to the exemption under Section 10(22) for the year under appeal.
30. Coming to the third issue, i.e., regarding building fund contributions, the matter has already been discussed in the preceding para where the source of the investments/credits in bank accounts of trustees has been held to be from private borrowings and not out of siphoning off of building fund collections. Hence, this aspect too is not relevant in deciding the entitlement of the trust to exemption under Section 10(22) of the IT Act.
31. Considering the last issue, we find that a mere plea of ignorance by the wife and children of Sri M.V. Muthuramalingam of the details of the incomes returned by them does not constitute sufficient grounds to prove that they did not in fact earn such incomes and that these monies represented funds of the trust siphoned off. We find that there was considerable time lag between the earning of the income, viz., year ended 31st March, 1994, and the date of taking statements being June, 1997. It also could be the case that Sri M.V. Muthuramalingam carried on the business activities of his wife and children on their behalf. Hence, such a statement by itself does not appear sufficient reason to conclude that there were no incomes earned by these individuals. True, it may be the case that some incomes so earned were shown as agricultural income without the fact of holding any agricultural land to derive his income. While this act may call for taxing of the that agricultural income, it too cannot be a reason to conclude that the monies represented as agricultural income were siphoned off from the trust. In short, no link/nexus between such incomes and trust funds has been clearly established and all that exists is a doubt whether such a siphoning off could have taken place. For such a mere doubt, we feel it is unjust to penalise the trust. Learned counsel for the assessee-trust has submitted that the trust was validly created by a registered deed of trust. None of its objects permitted any benefits to the trustees or other private persons. In this connection, we find merit in the submissions of the learned counsel of the assessee as taken from the report of the auditor appointed under Section 142(2A) which reads as under :
"on the basis of information and explanation given to me and the entries in the accounts, I do not find the funds of the trust being diverted for purposes other than maintenance and running of the schools/other institutions of the trust."
32. The observations following of the CIT(A) in his appellate order pertaining to the trust have also been taken into consideration :
"No doubt, we have a trust validly created having only charitable objects. The school lands have been registered in the name of the trust and not in the names of the trustees. A few schools have been painstakingly developed reaching a student strength of more than 4,000 students. The capital fund also stands at Rs. 1.5 crores. Hence, it is clear that this was an institution validly created."
The CIT(A) has also in p. 9 of his order stated that "insofar as the funds accounted into the educational institutions are concerned, the trustees may be managing them without diverting them for non-educational purposes."
The decision cited by the learned counsel of the assessee-trust in the Aditanar case (supra) had clearly held that "after meeting the expenditure if some surplus results incidentally from the lawful activity carried on by the educational institutions, it will not cease to be one existing solely for educational purposes, since the object is not to make profit".
We also place reliance on the decision of the apex Court in the case of Sole Trustee, Loka Shikshana Trust v. CIT (1975) 101 ITR 234, where the apex Court observed that "the change bought out in the then Section 2(15) had gone further. However, in the case of an educational institution, even if education is imparted with a view to earn profit, though not private profit, where the income is not distributable but is ploughed back and applied to the educational purposes only, exemption under Section 10(22) would be available nonetheless."
The decision of the A.P. High Court in Governing Body of Rangaraya Medical College (1979) 117 ITR 284 (AP), which was specifically approved by the apex Court in the Aditanar case (supra) also is a case on the point. It was observed that :
"In this connection, it is relevant to note that the ITO has not recorded any finding, nor is it suggested in the counter-affidavit, that any surplus arising from operations of the institutions is distributed by way of profit to any individuals. Merely because certain surplus arises from its operations, it cannot be held that the institution is being run for the purposes of profit so long as no person or individual is entitled to any portion of the said profit and the said profit is used for the purposes and for the promotion of objects of the institutions."
33. In the present case, the learned counsel for the assessee-trust has represented that the surplus earned by the trust was duly credited to the general fund of the trust. No portion thereof has been distributed to any person. Further, as the learned counsel has submitted, the entire surplus has been applied towards acquiring fixed assets for the institutions of the trust.
34. We have considered the rival submissions advanced by the respective representatives of the parties, perused the record carefully and gone through the case law cited by the learned counsel for the assessee and by the CIT(A). So far as factual position is concerned, we have already discussed in detail that the assessee-society is a registered society and as evident form the objects of the assessee-society, the main object is that of imparting education irrespective of caste, creed religion or community. In order to achieve this object, the assessee-society admittedly is running schools like Vellammal Matriculation Higher Secondary School, Vellammal School, Southern Pearl Junior College, Vellammal Academy for Woman. The students' strength is more than 6,249 in academic year 1993-94 and strength of staff is also increased from thirty to few hundreds from 1985-86 to 1993-94. It is also admitted by the Department that assessee-society was getting exemption under Section 10(22) of the Act upto asst. yr. 1992-93 and also assessee got same exemption in subsequent asst. yrs, 1997-98, 1998-99 and exemption under Section 10(23C) for the asst. yr. 1999-2000. A perusal of Section 10(22)/10(23C)(iiiad) shall reveal that this exemption was available to those institution who was found/existing solely for educational purposes and not for purposes of profit. It means in these assessment years, the assessee-society was running colleges and schools and not earning any profit that is why its income was held exempted under these two Sections 10(22) and 10(23C)(iiiad) of the Act by the Department. Admittedly, during the year under consideration, the assessee was duly registered under Section 12AA of the Act and the Revenue was satisfied about the objects of the trust or institution and the genuineness of its activities.
35. We have perused the order of the CIT(A), which is a subject-matter of appeal before us, and does not show that CIT(A)/AO has given out any finding that activities of the assessee-society are not genuine. The case of the assessee was very much specific that assessee-society was found running a college and school and CIT(A)/AO had also looked into the accounts of school. The number of students of college and school as well as number of staff, which were found working in the institutions had not been doubted. The existence of college and school is also established. In view of this admitted fact, the scope of enquiry ends as and when finding is recorded to that effect that assessee-society was found running a college and school in which substantial number of students as well as staff was there. The second stage will be of claim of benefit from tax of assessee-society and that will be given power to the AO to examine as to whether assessee who is claiming benefit under Section 10(22) of the Act is fulfilling the requirement to claim that benefit or not. The fact remains that provisions of section are actually carrying on and existing solely for educational purposes and not for purpose of profit. The second requirement is whether the object of the assessee-society/institution is in consonance with the requirement of Section 10(22) of the Act. No other enquiry is contemplated by this section of the Act. We have to abide by the words used by the legislatures. The legislatures are wise enough and they must be fully aware about the applications of using words 'existing solely for education purposes'. If they were going to give more powers, the legislatures must have used the other words to enable the Revenue with that other powers to verify as to whether assessee-institution is carrying on such activities which may prima facie indicate that he is entitled to get benefit under Section 10(22) of the Act. Unless legislatures have not used those words, it is not within the competence of the authorities to add or delete any words or infer any implied words in any provisions of the Act. It is well-settled proposition of law that fiscal statutes are to be examined, as the same stand. The authorities concerned when interpreting the same are not permitted to add/alter any word here and there, but they are supposed to read it as it stands and to use the general meaning of the words used by this legislature. Here, the scope of the powers of the Revenue is confined to examine the existing of the institution for the sole purpose of education and to examine the object of the trust or institution. Once the Revenue has not doubted on the genuineness of the activities of the assessee-society, nor doubted the object, its powers ends and it cannot be allowed to travel beyond it and to enter into the scope to find out as to whether assessee is a charitable institution or not or whether assessee is carrying on any activity which is covered under the definition of Section 10(22) of the Act. It is to be noted that assessee was getting benefit under Section 10(22) of the Act upto asst. yr. 1992-93 as seen from the assessment order furnished by learned Authorised Representative and for the asst. yr. 1999-2000, assessee-trust got the benefit under Section 10(23C)(iiiad) and requirement of both the sections is that exemption can only be extended to those institutions who are not found working for profit. The claim of the assessee was found covered under Section 10(22)/10(23C)(iiiad) of the Act upto the just preceding year, i.e., asst. yr. 1992-93, then it can easily be inferred that assessee was not found working for profit. What transpired in the year under consideration, on which assessee-society can be said to have indulged diverting fund, has not come on record nor there is any finding by AO that the assessee has collected and diverted its building fund collection and the trustees have swindle money from the trust. There is no piece of material to show that assessee was found engaged in the business activities for any profit. Unless that finding is not specifically recorded on record, then the ratio of case law relied upon by learned Departmental Representative (supra) cannot be applied even though we have already concluded that powers of the AO under Section 10(22) of IT Act do not warrant that the AO/CIT(A) should go beyond the powers which are given under Section 10(22) of the Act to enquire about the objects and genuineness of the activities of the trust/institution. In the absence of any such finding, the observation of the CIT(A) that the trust is operating as a source of income parallels for itself and for the persons managing it and hence, assessee was not entitled of relief under Section 10(22) of IT Act is not proper. The observation is not based on specific findings of lower authorities. We have also carefully gone through the CBDT circular relied by the learned Departmental Representative. The Revenue has not brought on record anything to show that the assessee diverted the building fund collections after collecting form students. The Revenue could have brought atleast something to show that the assessee has collected building fund more than actually shown in its books of account. There is also no material to show that from whom these building fund collected and when it was collected and how much fund was collected and date on which funds was transferred from trust account to trustees account and quantum of amount transferred. The lower authorities presumed that the funds lying in the bank accounts of trustees was transferred from trust building fund, the reason for this is that the trustees are having no source of income and there is no accepted method of accounting and internal control as no formal receipts are issued to parents and the entire management and control of the quantum and custody are with the chairman of the trust. Further, there is no external evidence as confirmation from the parents as to amounts paid by them towards building fund collections and the chairman has been treating the trust as a private enterprise. These reasons neither authorise the Revenue to withdraw exemption under Section 10(22) nor tax the funds in the bank account of trustees as income of the trust. Though the Departmental Representative is prevailing over the issue that the trustees are having no source of income as disclosed to the Department, there is no iota of evidence to show the origin of collection of building fund and transfer of funds from trust account to trustees account. In the absence of, any positive material to show that the funds of trust were actually transferred from the trust account to trustees account for their personal use after collecting the same from various persons, we are unable to agree with the findings of the lower authorities. The special auditor appointed by the Revenue himself reported that :
"on the basis of information and explanation given to me and the entries in the accounts, I do not find the funds of the trust being diverted for purposes other than maintenance and running of the schools/other institutions of the trust."
The above factual finding of the special auditor is also against the Revenue. The special auditor appointed by the Revenue has gone through the entire records and came to the conclusion that there was no diversion of funds of trust. Moreover, the Revenue has admitted the VDIS declaration by the trustees relating to disclosure of peak credit in their bank account as private borrowings and failed to make specific finding regarding the fact that assessee-trust was existing for earning profit and also without tracing the definite path of movement of trust funds to the personal account of trustees and collection building fund out of books. In view of this, we incline to allow the grounds of assessee.
In the result, the appeal filed by the assessee is partly allowed and the appeal filed by the Revenue is dismissed.