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Judgment
S. Vimala, J.—The assessee is a charitable trust running various educational institutions. The assessee claimed exemption under the
provisions of section 10(22) of the income tax Act, 1961 (hereinafter will be referred to as ""the Act""). The assessee has been regularly submitting
the returns and the Revenue granted exemption. But, in respect of the assessment year 2001-02, the assessment was reopened u/s 148 of the Act.
During the course of that proceedings, the assessments, beginning from the assessment year 1997-98 onwards till 2000-01 were also reopened.
The assessments were finalised u/s 143(3) read with section 147 of the Act holding that the claim for exemption u/s 10(22) was not tenable. The
Assessing Officer also made additions amounting to Rs. 21 lakhs, which were the loans received from Swamiappan (Rs. 4 lakhs), Rajendran (Rs.
5 lakhs) and Bhargarwathraj (Rs. 12 lakhs), which is the subject-matter in Tax Case (Appeal) No. 2204 of 2006 in respect of the assessment year
1998-99.
1.1. In respect of the assessment year 2000-01, an addition was made for a sum of Rs. 18 lakhs, which was the loan received from
Bhargarwathraj, which is the subject-matter in Tax Case (Appeal) No. 2205 of 2006.
On appeal, the Commissioner of income tax (Appeals) upheld the order of the Assessing Officer to the extent of bringing Rs. 16 lakhs to tax in
respect of the assessment year 1998-99 and an amount of Rs. 18 lakhs in respect of the assessment year 2000-01.
Contending that the entire income ought to have been exempted, by the application u/s 10(22) of the Act, the assessee preferred an appeal
before the income tax Appellate Tribunal. It was further contended that the production of confirmation letters from the persons lent money is
sufficient proof and the assessee ought to have been given an opportunity to examine Bhargarwathraj, who denied having given any money to the
assessee. The income tax Appellate Tribunal held that the assessee did not have a right to cross-examine the witness who made adverse report,
especially when the records do not indicate that the assessee had made any attempt to produce witnesses.
Challenging those findings, the assessee has preferred these appeals raising the following substantial questions of law:
(1) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal is right in law in rejecting the appellant''s appeal?
(2) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal is right in law in rejecting and holding that the
addition u/s 68 was possible even where the income of the appellant was exempt u/s 10(22) of the Act?
(3) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal is right in law in holding that there was no
violation of the principles of natural justice since an opportunity to cross-examine Mr. Bhargarwathraj was not granted to the appellant in spite of
his request?
The main contention of the learned counsel for the appellant is that the assessee, as an educational institution, existing solely for educational
purposes and not for the purpose of profit, within the ambit of section 10(22) of the Act is entitled to exemption. The disallowance made u/s 68 of
the Act is assailed as erroneous. The finding of the income tax Appellate Tribunal that there was nothing to indicate that the money was used for
educational purposes and not for the purpose of earning profit is contended to be without any basis.
5.1. It is relevant to extract section 10(22) of the Act, as the entire case is based upon that provision as the edifice:
Incomes not included in total income.--In computing the total income of a previous year of any person, any income falling within any of the
following clauses shall not be included--....
(22) any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit.
The main contentions of the Revenue are:
(i) When the source of income to the educational institution is not known, then it cannot be said that those amounts have been received by the
assessee from its activities of running educational institutions.
(ii) When the source of income is not known, those income cannot even fall under the head ""Income from other sources"". In support of these
contentions the learned counsel for the Revenue pointed out the decision Fakir Mohmed Haji Hasan Vs. Commissioner of Income Tax, wherein it
has been held as follows (page 294):
... the provisions of sections 69, 69A, 69B and 69C treat unexplained investments, unexplained money, bullion, etc., and unexplained expenditure
as deemed income where the nature and source of investment, acquisition or expenditure, as the case may be, have not been explained or
satisfactorily explained. Therefore, in these cases, the source not being known, such deemed income will not fall even under the head ''Income from
other sources''.
6.1. Per contra, the learned counsel for the appellant contended that,
(a) The assessee has satisfactorily explained the source of income by producing confirmation letters from two of the persons lent money.
(b) When one out of the three persons disputed the advancement of money, the Revenue ought to have afforded a reasonable opportunity of
cross-examining that person and having denied the opportunity, it is not open to the Revenue to contend that the assessee has failed to prove the
same.
(c) In any event, the source of income need not be proved as the section uses the word ''any income''.
(d) There is a finding that the assessee is an educational institution running for educational purposes and not for profit purposes which has attained
finality and the Revenue, having not appealed against, is now estopped from disputing the same.
6.2. In support of the contention, the learned counsel for the appellant relied upon the following three decisions:
(i) Aditanar Educational Institution Vs. Additional Commissioner of Income Tax, . In this decision, it has been held that we may state the language
of section 10(22) of the Act 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 for 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 one to make profit. The decisive or acid test is whether on an overall view of the matter, the object is to make profit.
The issue involved in this case is with reference to the phrase ""solely for educational purposes"" when there was surplus left incidentally from the
activities carried on by the educational institutions. Only in this context, it was held that the decisive or acid test is whether on an overall view of the
matter, the object is to make profit.
(ii) Commissioner of Income Tax Vs. A.M.M. Arunachalam Educational Society, ).
Section 10(22) of the income tax Act, 1961, exempts ""any income"" of an educational institution which would clearly include dividend income as
well. Granting of exemption to the income of the educational institutions is to enable such institutions to utilise the monies available with them for the
purpose of running the educational institutions. The source from which the money is received is not of any consequence, what is relevant is the
application. So long as the institution is an educational institution which is not engaged in earning profit, the income of such institution is exempt u/s
10(22).
(iii) Director of Income Tax (Exemption) Vs. Keshav Social and Charitable Foundation, head note):
...to obtain benefit of the exemption u/s 11 of the Act, the assessee was required to show that the donation was voluntary. In the present case, the
assessee had not only disclosed its donations, but had also submitted a list of donors. The fact that the complete list of donors had not been filed or
that the donors had not been produced did not necessarily lead to the inference that the assessee had tried to introduce unaccounted money by
way of donation receipts.
6.3. So far as this decision is concerned, there is a further factual finding that the 75 per cent, of the donations were applied for charitable
purposes. As there had been a large number of donors and having regard to the major portion of the money having been spent for educational
purposes, the court took the view that it is not proper to deny the benefit of section 11. So far as this case is concerned, there had been only three
donors out of which one had chosen to dispute the factum of having donated any money to the institution. This denial had created doubt in the mind
of the taxing authorities that the money would not have been spent for educational purposes. But, as contended by the learned counsel for the
appellant, when the authorities entertained a doubt about the genuineness of the transaction, the Tribunal ought to have afforded opportunity for the
assessee to cross-examine the disputant.
6.4. The income tax Appellate Tribunal had given a finding that the assessee had not chosen to take steps to produce the donor and, therefore, he
is not entitled to seek an opportunity to cross-examine. It is not a case where the assessee has suppressed the income. The nature and source of
credit alone is brought under challenge by the Revenue. The Revenue has not accepted the explanation given by the assessee. The assessee would
not have expected one of the contributors, namely, Mr. Bhargarwathraj to have denied the factum of contribution by his letter dated March 26,
2005. This view is inevitable because but for this the assessee would not have opted to cross-examine the contributor. Therefore, when there is
unexpected change of facts/situation/circumstances, the party taken by surprise should not be deprived of the opportunity to cross-examine the
witness branded as the assessee''s witness. The Evidence Act also permits a party to cross examine his own witness under stated circumstances
therein.
6.5. Moreover, the Assessing Officer has given the following observations:
The objects of the trust had been modified by the supplementary deed dated January 2, 2002, which is not permissible.
Books of account have not been maintained properly.
The minute book and details of resolution were not available properly.
There had been a dispute between the family members of the trust and later on there was a compromise as per the documents dated May 23,
2002, and June 16, 2002.
6.6. With regard to these observations, the Commissioner of income tax has held that if the Assessing Officer had reasons to believe that the
appellant-trust was not being run for its genuine object and was being run for private profit of family members of the trustees, the Assessing Officer
should have reported the matter to the Commissioner of income tax, who could have initiated proceedings for withdrawal of exemption. The
income tax Appellate Tribunal has upheld the order of the Assessing Officer. The very receipt of money by the appellant for the purpose of running
the activities of educational institutions itself has been doubted by the income tax Appellate Tribunal. Hence, the income tax Appellate Tribunal is
justified in going into the facts which was incidental to the question of law raised and no estoppel plea can be raised by the assessee. Further, it
was noticed by the Assessing Officer that in a suit filed between trust members, there was asset-sharing compromise was arrived at.
6.7. From the overall facts and circumstances, it is evident that unless it is proved that the income derived is covered u/s 10(22) of the income tax
Act, 1961, it cannot be decided as to whether addition of the same u/s 68 of the income tax Act, 1961, is possible or not.
Therefore, on the facts and circumstances of this case, this court deems it appropriate to remand the matter for consideration of the Assessing
Officer in the light of the legal position and the observations indicated above. While conducting the enquiry, the Assessing Officer shall provide an
opportunity to the assessee to cross-examine the witnesses, whose evidence/report the Assessing Officer relies upon. In the result, the above tax
case appeals are allowed and the orders of the income tax Appellate Tribunal are set aside, which are the subject-matter of challenge in Tax Case
Appeals Nos. 2204 to 2205 of 2006 and the issue is remanded to the Assessing Officer with the observations stated above. No costs.
Consequently, the connected miscellaneous petitions are closed.