Facts of the Case

The Revenue challenged an order of the Income Tax Appellate Tribunal (ITAT) which had declared reassessment proceedings under Section 148 invalid for Assessment Year 2007-08 in the case of Maharaji Education Trust, a charitable trust engaged in educational activities.

The trust had originally filed its return declaring nil income. After scrutiny, an assessment order was passed making various additions and denying exemption under Section 11. Subsequently, a search under Section 132 was conducted in the Santosh Group, of which the trust formed a part. During the search, documents indicating receipt of capitation fees for admissions were discovered.

Based on this material, reassessment proceedings were initiated, resulting in additions on account of unaccounted receipts and denial of exemption under Section 11. The ITAT later quashed the reopening and granted relief to the assessee, prompting the Revenue’s appeal.

 Issues Involved

  1. Whether reassessment proceedings under Sections 147/148 were valid when based on search material showing undisclosed capitation fees.
  2. Whether an educational trust charging capitation fees is entitled to exemption under Sections 11 and 12.
  3. Whether reliance on orders of the Income Tax Settlement Commission (ITSC) for different assessment years was permissible.
  4. Whether difference in quantum of income between recorded reasons and final assessment invalidates reopening.

Petitioner’s (Revenue’s) Arguments

The Revenue argued that seized documents and statements recorded during search clearly indicated receipt of unaccounted capitation fees, constituting fresh tangible material justifying reopening of assessment.

It was further contended that collection of capitation fees is contrary to the charitable nature of educational institutions and disentitles the assessee from claiming exemption under Section 11. Reliance was placed on Supreme Court judgments emphasizing that charging capitation fee amounts to commercialization of education.

The Revenue also argued that the ITAT erred in relying on the Settlement Commission’s findings for other years, as such orders are final only for the specific assessment years covered.

 Respondent’s (Assessee’s) Position

The assessee did not appear before the High Court at the stage of final hearing. However, before the lower authorities, it had contended that it remained a registered charitable institution under Section 12A and Section 10(23C)(iv) and that exemption under Section 11 could not be denied.

 Court Order / Findings

The Delhi High Court allowed the Revenue’s appeal and set aside the ITAT order.

On Validity of Reopening:
The Court held that at the stage of issuing notice under Section 148, the Assessing Officer is only required to have “reason to believe” that income has escaped assessment. Sufficiency or correctness of material is not to be examined at that stage. The seized documents and admission regarding capitation fees constituted tangible material justifying reassessment.

On Exemption under Section 11:
The Court emphasized that charitable exemption requires the institution to exist wholly for charitable purposes. Charging capitation fees for admissions is inconsistent with the charitable object of education and amounts to commercialization.

Relying on precedents including T.M.A. Pai Foundation and P.A. Inamdar, the Court held that capitation fee is impermissible and undermines the charitable character of an educational institution. Consequently, the trust was not entitled to exemption under Sections 11 and 12.

On Settlement Commission Orders:
The Court clarified that orders of the Income Tax Settlement Commission are final only for the specific assessment years to which they relate and cannot be applied mechanically to other years.

Important Clarification

The judgment underscores that registration under Section 12A alone does not guarantee exemption. If the activities of the trust are not genuine or violate the charitable purpose—such as by charging capitation fees—the exemption can be denied.

It also reiterates that reopening of assessment requires only a prima facie belief based on tangible material, not conclusive proof of income escapement.

Link to download the order – https://www.mytaxexpert.co.in/uploads/1772176333_PR.COMMISSIONEROFINCOMETAXCENTRAL1VsMAHARAJIEDUCATIONTRUST.pdf 

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