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2025 (5) TMI 325 - AT - Income TaxRejecting the application for grant of registration u/s 12A and cancelling the provisional registration granted earlier u/s 12AB - Assessee did not clarify properly regarding the advance and no documentary evidence or legal agreement which supports the claim of an understanding between the trust and Smt. Sushma Naik regarding the naming of the pharmacy college after her late husband s name. Also assessee did not provide any documentary evidence to substantiate the nature and purpose of the transaction with Yovak Kalyan Patsanstha HELD THAT - As stated by assessee the assessee has already applied before the Charity Commissioner for permission to avail loans and advances. However no action has been taken till now. We find it is the allegation of the CIT(E) that the assessee has failed to provide any documentary evidence which supports the claim of understanding between the trust and Smt. Sushma Naik regarding the naming of pharmacy college after her late husband s name. Similarly it is also his allegation that the trust failed to provide any documentary evidence to substantiate the nature and purpose of the transaction with Yovak Kalyan Patsanstha. It is the submission of assessee that given an opportunity the assessee is in a position to substantiate its case by filing the requisite details before the Ld. CIT(E) to his satisfaction. We deem it proper to restore the issue to the file of the Ld. CIT(Exemption) with a direction to grant one final opportunity to the assessee to substantiate its case by filing the requisite details to his satisfaction and decide the issue as per fact and law. The grounds raised by the assessee are accordingly allowed for statistical purposes.
The primary issue before the Appellate Tribunal was whether the assessee trust was entitled to registration under section 12A of the Income Tax Act, 1961, given the alleged irregularities in financial transactions and compliance with other applicable laws, specifically:
Issue-wise Detailed Analysis 1. Genuineness of Activities and Compliance with Other Laws Legal Framework and Precedents: Registration under section 12A requires the trust to prove genuineness of its activities and compliance with applicable laws. The Maharashtra Public Trust Act, 1950 mandates permission for borrowing under section 36A(3). The Supreme Court in McDowell and Company Ltd. v. Commercial Tax Officer held that tax planning must be within the law and colourable devices are impermissible. Court's Reasoning and Findings: The CIT(Exemption) observed that the trust failed to provide documentary evidence or legal agreements supporting the claimed understanding with Smt. Sushma Naik regarding the naming of the college. The advance remained unpaid since FY 2018-19 despite the trust holding fixed deposits, raising doubts about the transaction's true nature. Regarding the Rs. 57 lakhs advance from Yovak Kalyan Patsanstha, inconsistent financial reporting and lack of documentary evidence about the transaction's purpose were noted. The trust also failed to obtain mandatory permission under the Maharashtra Public Trust Act for borrowing. Application of Law to Facts: The Tribunal noted that the advances and loans were not transparently disclosed or compliant with statutory requirements, and the trust's explanations were unsatisfactory. The transactions appeared to be colourable devices aimed at misusing provisions meant for charitable trusts. Treatment of Competing Arguments: The assessee contended that the advances were genuine, supported by confirmation letters and banking transactions, and that permission from the Charity Commissioner had been sought. The assessee relied on the Bombay High Court decision in Director of Income Tax (Exemption) v. G.K.R. Charities, which held that non-compliance with trust laws in earlier years should not bar exemption under section 11 if the trust deed permitted such transactions and registration was granted under section 12A. Conclusion: While the CIT(Exemption) rejected the application, the Tribunal found merit in the assessee's argument that procedural lapses could be rectified and that the Bombay High Court precedent supported the trust's position. The Tribunal restored the matter to the CIT(Exemption) for fresh consideration after the assessee submits requisite documentary evidence. 2. Nature and Treatment of Advance of Rs. 50 Lakhs from Smt. Sushma Naik Legal Framework: For registration under section 12A, the trust must disclose and explain all significant financial transactions. The advance's linkage to naming rights raised questions about its character-whether it was a donation or a refundable advance. Court's Interpretation: The CIT(Exemption) emphasized absence of any legal agreement or documentary proof of the alleged understanding regarding naming rights. The refundable nature of the advance and its long outstanding status without repayment were suspicious, especially given the trust's fixed deposits. Evidence and Findings: Confirmation letter from Smt. Sushma Naik was filed, but no further documentary evidence was provided. The trust failed to clarify the purpose and utilization of the Rs. 50 lakhs. Application of Law: The lack of clarity and documentary support undermined the genuineness of the transaction, leading to suspicion that it was not a genuine advance but a disguised donation or vice versa. Competing Arguments: The assessee argued the advance was legitimate and supported by confirmation and banking records. The Tribunal acknowledged the possibility of rectification and opportunity to submit further proof. Conclusion: The issue was remanded for fresh consideration with directions to the assessee to produce necessary evidence. 3. Nature and Treatment of Rs. 57 Lakhs Advance from Yovak Kalyan Patsanstha Legal Framework and Statutory Compliance: Borrowing by a trust requires permission under section 36A(3) of the Maharashtra Public Trust Act. Financial statements must accurately reflect the nature of transactions. Court's Reasoning: The CIT(Exemption) found inconsistent classification of the advance as loan only after failure to repay within a year. Payments from these funds to related entities without documentary evidence raised concerns of financial transparency and propriety. Evidence and Findings: No documentary evidence was provided to substantiate the nature and purpose of the transactions. The trust failed to prove compliance with statutory borrowing requirements. Application of Law: Non-compliance with statutory provisions and lack of transparency warranted rejection of registration. Competing Arguments: The assessee contended that the advance was utilized for construction of college building, was routed through proper banking channels, and that permission applications were pending before the Charity Commissioner. Conclusion: The Tribunal allowed the assessee an opportunity to furnish evidence and directed reconsideration by the CIT(Exemption). 4. Allegation of Colourable Device Legal Framework: The Supreme Court's ruling in McDowell prohibits use of colourable devices for tax planning. Registration under section 12A must not be granted if transactions are artificial or designed to circumvent law. Court's Reasoning: CIT(Exemption) considered the advances and loans as potentially colourable devices, given the lack of documentary evidence and suspicious conditions attached to the advances. Application of Law: The Tribunal did not conclusively uphold this view but emphasized the need for proper evidence to dispel such concerns. 5. Applicability of Bombay High Court Precedent in Director of Income Tax (Exemption) v. G.K.R. Charities Legal Framework and Precedent: The Bombay High Court held that non-compliance with provisions of the Trust Act in earlier years should not preclude exemption under section 11 if the trust deed permits the transaction and registration under section 12A is granted. The Court distinguished cases where trusts carried out unauthorized profit-making activities. Court's Interpretation: The Tribunal found this precedent applicable, noting that the assessee had applied for permission from the Charity Commissioner and no adverse action had been taken. Application of Law: The Tribunal reasoned that procedural irregularities could be rectified and should not automatically result in denial of registration. 6. Procedural Opportunity and Direction for Reconsideration Court's Reasoning: Considering the submissions and the precedent, the Tribunal directed the CIT(Exemption) to grant one final opportunity to the assessee to submit all requisite details and evidence. The assessee was directed to comply without seeking adjournments, failing which the CIT(Exemption) could pass an appropriate order. Significant Holdings "The advance of Rs 50 Lakhs has been outstanding since FY 2018-19 and as per Smt. Sushma Naik's confirmation letter, it remains unpaid till date. This raises concerns regarding the true nature of the transaction... the assessee has failed to prove the genuineness of the transaction." "Any form of loan, whether short-term or long-term, should be accurately reflected in the financial statements as a loan from the outset. The trust's inconsistent reporting raises questions about its financial transparency." "The trust's failure to comply with this provision [Section 36A(3) of the Maharashtra Public Trust Act, 1950] further raises questions about its adherence to legal requirements of other laws applicable in its case." "In light of these facts, the transactions in question may have been executed as 'colourable devices' to exploit favorable provisions meant for charitable trusts." "Once the registration has been granted u/s 12AA of the Act, the exemption u/s 11 cannot be withdrawn unless there is violation of provisions of Section 13 of the Act or the registration u/s 12AA(3) of the Act is cancelled." "Non-compliance with provisions of Trust Act in earlier years could not obstruct claim of exemption u/s 11." "Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the Ld. CIT(Exemption) with a direction to grant one final opportunity to the assessee to substantiate its case by filing the requisite details to his satisfaction and decide the issue as per fact and law." The Tribunal's final determination was to allow the appeal for statistical purposes and remit the matter to the CIT(Exemption) for fresh adjudication after the assessee submits complete documentary evidence and clarifications. The order of rejection and cancellation of registration was set aside subject to compliance with directions.
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