TMI Blog2017 (6) TMI 1119X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent : Shri Anand Baiwar, CIT, DR ORDER Per Shri A.T.Varkey, JM This is an appeal preferred by the assessee against the order passed by the CIT(E) u/s. 12AA(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) dated 05.08.2016 withdrawing the registration earlier granted u/s. 12A of the Act. The following grounds of appeal have been raised by the assessee: 1. For that on the facts and in the circumstances of the case, the Commissioner of Income Tax (Exemptions) erred in invoking the provisions of section 12AA(3) and cancelling the registration granted u/s 12A of the Income Tax Act, 1961 with effect from 01.04.2011. 2. For that on the facts and in the circumstances of the case, the Commissioner of Income Tax (Exemptions) erred in holding that the activities of the Trust are not genuine and not being carried out in accordance with the objects of the Trust. 3. For that on the facts and in the circumstances of the case, the Commissioner of Income Tax (Exemptions) erred in holding that the Trust has violated the objects of the Trust and alleging that the Trust was involved in converting unaccounted cash into cheque through bogus d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000/- from M/s. Society for Welfare of The Handicapped Persons in the F.Y. 2011-12. It is evident that by accepting bogus donation, you have indulged in money laundering which is illegal, not genuine and not at par with the objects of the trust/society. In view of the above you are requested to explain why the registration u/s 12A/12AA will not get cancelled by invoking the provision of Section 12AA(3) of the I T Act, 1961. You are requested to furnish the following documents - a) Income Expenditure Ale and Balance Sheet for the assessment years 2011-12 to 2015-16. b) Certificate u/s 12A /12AA, u/s 80G and any other registration certificate granted by the Income Tax authorities. c) List of corpus/non-corpus donations received by you along with their PAN, name and address from 01.04.2009 to 31.03.2015. d) List of corpus/non-corpus donations paid by you along with their PAN, name and address from 01.04.2009 to 31.03.2015. 3. Pursuant to the show cause notice, supra, hearings were conducted on various dates and ultimately the impugned order was passed on 05.08.2016 wherein the Ld CIT(E) made following observations: The subject matter of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons to the tune of several crores of rupees have been received u/s 35 (i)/(ii). The contribution received was either cash withdrawn through second layer society or paid as bogus donation to the needy society who are ready to pay cash for donation received. The second layer organization in this case is Society for Rural Urban Development, Kolkata Community Rural Orient Service Society, Hyderabad. c) The assessee trust has received bogus donation in lieu of cash not from M/s. Society for Welfare of the Handicapped Persons, Durgapur but from many other societies and companies who were indulging the practice of providing accommodation entries for donation. Some of such societies and companies are as under - Name Mundakayam Medical Trust Hospital Society, Kerala 1,00,00,000 - Do- 1,00,00,000 UNO Metals Ltd 50,00,000 AKG Finvest Ltd 50,00,000 d) The use of such donation received in lieu of cash is donation to group trusts/societies, i.e. Harmony Foundati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y genuineness to defend since the basis of formation of such transaction was initiated with fraudulent bank account through which the assessee was in receipt of the cheques. The modus operandi followed by the fraudulent person maintaining parallel financial activities in the name of the society just to materialize his greed and lush of making easy money by whatsoever activities depriving an organization with fund for performing charitable activities by making arrangement of inflow or outflow of fund from the false bank account towards donation and refund of the same after keeping a handsome percentage on the transaction money. As far as the assessee is concerned, the alleged modus operandi followed by the fraudulent person of receiving contributions through cheques and refund the same through cash and vice versa can never by the objective of the Trust and thereby clearly violated the provisions of section 12AA(3) of the Income Tax Act, 1961 beyond its objects. 4. With the aforesaid observations, the Ld. CIT(E) was of the opinion that as per the provisions of sec. 12AA(3) of the Act, he has the authority to cancel the registration granted to a Trust if, in his opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d) Activities of the trust are not genuine as well as not being carried out in accordance with its declared objects. Assessee's case is covered within the both limb of Section 12AA(3). e) Even non-genuine and illegal activities carried on by assessee through money laundering do not come within the conceptual framework of charity vis-a-vis activity of general public utility envisaged by the Income Tax Act as laid down in Section 2(15) of the Income Tax Act, 1961. j) The assessee was not only involved in practicing money laundering by accepting cheques for unaccounted cash of trustees, but also has shown its unwillingness to assist in an investigation to unveil the truth behind a forgery. 5. Aggrieved by the aforesaid order passed by the Ld. CIT(E) withdrawing the registration granted u/s. 12A of the Act, the assessee has preferred this appeal before us praying for cancelling the order and restoring the registration back to it. 6. From the grounds of appeal, we find that there are several grounds raised by the assessee. Before us, the Ld. AR assailed the order of the Ld. CIT(E) on the ground that the order was an arbitrary exercise of power u/s. 12AA(3) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were bogus. In response, the Ld CIT(E) by his letter date 20.07.2016 supplied the assessee with copies of the letters written by one Shri Dhruba Chakraborty, President of SFWHP to ACIT, Durgapur, Axis Bank and Police authorities in Durgapur complaining about fraud committed on the said society (SFWHP) by some unknown persons by opening parallel account with Axis Bank, Kolkata and misappropriating the donations collected in its names. Relying on the allegations contained in the correspondence which were addressed to the various authorities by SFWHP, the Ld CIT(E) claimed that the donations received were in lieu of cash and assessee s name appeared in the Axis Bank statement. The Ld CIT(E), therefore, required the assessee to produce the managing trustee along with the reply for verifying the assessee s transaction with the SFWHP and compliance was required on 01.08.2016. In response, the assessee vide its letter dated 29.07.2016 submitted that SFWHP had filed complaints with various authorities such as police, I. T. Department, Axis Bank etc. since January 2011 alleging that some unknown persons had opened and operated a Bank account in its name and the donations collected through t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from SFWHP was utilized only for meeting its charitable objects. After the trustee s statement was recorded by EOW in December, 2013, no criminal charges were framed nor any penal action was instituted by EOW against the assessee trust or its trustees on the basis of complaints lodged by SFWHP. The Ld AR, therefore, vehemently argued that when the EOW had already conducted investigation and enquiry in 2013 but did not find any substance in the charges leveled against the assessee till 2016, the Ld CIT(E) based only on the letters written by SFWHP could not withdraw the registration granted to it by passing order u/s. 12AA(3) of the Act. The Ld. AR urged that since the complaints lodged by the SFWHP including FIR were criminal in nature, before drawing adverse inference it was necessary for the Ld CIT(E) to provide the assessee report of the Investigating Authority which indicted the assessee of committing financial irregularity or fraud. In the aforesaid background, the assessee requested the Ld CIT(E) to furnish specific information and grant opportunity of examining the persons set out in its letter. The relevant part of the assessee s letter dated 29.07.2016 is reproduced below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laint of Society for Welfare of the Handicapped Persons. 12. Copy of any report/findings of the investigation carried out by the CID, West Bengal Police based on complaint of Society for Welfare of the Handicapped Persons. We hope that considering the facts stated hereinabove, your Honour will very kindly accede to the request made hereinabove. On receipt of the relevant information we shall provide our reply to queries raised by your goodself. In the meantime the present proceedings u/ s 12AA(3) may kindly be kept in abeyance till the above mentioned details are brought on record. 8. The Ld AR brought to our notice that despite giving the aforesaid letter specifically requisitioned for incriminating documents, if any, or to allow the assessee to cross examine the persons named therein, the Ld CIT(E) proceeded to pass the impugned order alleging that assessee indulged in converting unaccounted cash of the trustees into cheque through bogus donations and the donations received were fictitious. According to Ld. AR, though in the impugned order the Ld CIT(E) claims to have given adequate opportunity to the assessee, but, the assessee failed to bring any evidence to establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of ₹ 70 lacs. The Ld. AR vehemently argued that even though FIR was lodged in July, 2011 till passing of the impugned order in August, 2016 the police authorities had not found any definite evidence/proof that fraud was actually committed against SFWHP and the assessee had any role in it. It was also pointed out by the Ld. AR that the FIR was filed with reference to an alleged offence committed in January, 2011 whereas the donations were received by assessee in the month of April, 2011 which proved that FIR annexed to the Ld CIT(E) s order had no connection what so ever with the assessee s transaction and, therefore, could not be used in evidence for drawing adverse inference against the assessee. 10. The Ld. AR took our attention to the para 5(B) of the impugned order wherein the Ld CIT(E) observed that the contributions received by SFWHP were either withdrawn in cash through second layer societies or paid as bogus donations to the needy societies who were ready to pay cash for donations received. The Ld CIT(E) particularly stated that the second layer organization in this case was Society for Rural and Urban Development, Kolkata Community Rural Orient Service Society, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the Handicapped persons was bogus. However in Para-5(C), the Ld CIT(E) categorically observed that the bogus donation was not received by the assessee from SFWHP but from other societies and companies whose names were set out in Para-5(C) above. Thus, according to the Ld. AR the Ld CIT(E) s finding was thus, contrary to the show cause notice issued in March, 2016, wherein the Ld CIT(E) has never alleged that the donations received from M/s. Mundakayam Medical Trust Hospital Society, Kerala, UNO Metals Ltd AKG Finvest Ltd were bogus. It was argued by the Ld. AR that during the proceedings not even a shred of evidence or material which was in his possession was given to the assessee which could prove that the donations received from the said three parties were bogus. It was pointed out by the Ld. AR that neither in the impugned order nor in the show cause notice the Ld CIT(E) disclosed any document or information on the basis of which he reached the conclusion that the donation received from these parties were bogus nor the assessee was afforded opportunity of rebutting the Ld CIT(E)'s allegation that donations received from 3 parties were bogus. Thus, the Ld. AR submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble purpose. It was pointed out by the Ld. AR that even the donation of ₹ 70 Lacs received from SFWHP in April 2011 was utilized in paying donations to other charitable organizations which amounted to application of income for charitable purpose. The Ld. AR submitted that the specific aspect of utilization of donation received from SFWHP was enquired into by EOW as well. The Ld. AR submitted that the activities of the trust were genuine and these were conducted in accordance with the objects of the trust and the amount was used for the charitable purpose. He, therefore, submitted that none of the two conditions prescribed for attracting Section 12AA(3) were fulfilled and, therefore, the Ld CIT(E) was unjustified in passing the impugned order cancelling the registration granted earlier. The Ld.AR further submitted that except enclosing copy of the FIR and copies of the complain letters of Shri Dhruba Chakraborty to the various authorities the Ld CIT(E) did not bring on record any clinching evidence which established beyond doubt the Ld CIT's charge that assessee trust was used as a conduit for laundering unaccounted monies of the trustees. He submitted that the law require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he trust was applied for charitable purposes. We note from a perusal of the Objectives of the trust are reproduced as under: (a)To assist, finance, support, found, establish and maintain any trust, society or institution meant for relief of the poor, advancement of education, medical relief or advancement of any other object of general public utility. (b) To open, found, establish or finance, assist, grant aid and contribute to the establishment or maintenance of medical schools, medical colleges, research centres, hospitals, clinics, nursing homes, maternity homes, child health care centres, charitable dispensaries and/or institutions for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation. (c) To open, found, establish, assist, finance, promote, collaborate; support, maintain and manage schools, colleges, universities, technical institutions, polytechnic, libraries, reading rooms, laboratories, vocational institutes, hostels, boarding houses and other bodies and institutions of all description devoted to the caus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is expressly declared that no part of the Trust property or its income shall be applied for any purpose which is not a public charitable or public religious purpose in law and nothing herein shall be construed to authorize the Trustees to utilize the trust assets or its income for any non-charitable purpose. All the powers and provisions hereof shall be construed as being subject to the restriction and limitation herein contained. Based on the aforesaid objectives, the assessee was granted section 12A and 80 G registration and continued to be assessed as a charitable organization consistently by the Revenue. However, it appears from the show cause notice (SCN) issued by the Ld CIT dated 3.3.2016 that some information was received by him as per which donation of ₹ 70 Lacs received by the appellant during F.Y. 2011-12 from Society for Welfare of the Handicapped Persons, Durgapur(SFWHP) was bogus. In the Ld CIT s opinion the appellant indulged in money laundering activity which did not constitute legitimate charitable activity nor such activity was in accordance with the objects of the trust and for which proceedings u/s 12AA(3) were initiated. A bare perusal of the SCN sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owledged its receipt. We find that the conclusions in Ld CIT s order were based only on the un substantiated allegations and complaints contained in the letters of Dr. Dhruba Chakraborty, addressed to authorities such as Durgapur Police, Chairman Axis Bank, ACIT, Durgapur etc, which also is not against the assessee/appellant. We however note that no material was disclosed by the Ld CIT in the impugned order which showed that before drawing adverse inference against the appellant the Ld CIT had personally examined the complainant/President of SFWHP or the Ld CIT had personally enquired into actual state of affairs. We further find that although the letters written by SFWHP to authorities were used in evidence against the appellant, the Ld CIT did not permit or allow the assessee an opportunity to examine Dr. Chakraborty in person even though his letters formed the sole basis for the Ld CIT to draw inference against the appellant. We find that although the assessee s letter requesting the Ld CIT to give opportunity of examining President of SFWHP was received by him on 2ndAugust 2016, the Ld CIT proceeded to pass the impugned order in utmost haste on 5th August 2016 and that too with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of SFWHP actually belonged to the trustees but received as donation. Even at the time of hearing of the appeal, the Ld.CIT DR was not able to throw any light as to any evidence/material on the strength of which the impugned action has been taken against the assessee and could not adduce any material to impute serious allegation of money laundering against the trustees and failed to substantiate before us the Ld CIT s said finding that the donations received by the appellant from SFWHP actually represented unaccounted income of the trustee which was laundered in the form of donation. For the reasons discussed in the foregoing therefore we are unable to sustain the Ld CIT s finding that the donation of ₹ 70 Lacs received in April 2011 represented unaccounted income of the trustees. 21. We also take note that apparently there were many other inconsistencies and contradictions in the impugned order of the Ld CIT. In Para-5B of the order the Ld CIT stated that the contributions received and deposited in Axis Bank were either withdrawn in cash through second layer society or paid as bogus donation in lieu of the cash received. However, we note that the entries in the Bank sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s even put to notice by the Ld CIT and so the impugned finding of the Ld CIT that the donations received from 3 parties were accommodation entries and not genuine donations is per-se fragile in the eyes of law for violation of natural justice and is unfair on the face of it and has caused serious prejudice to the appellent. We therefore find that the Ld CIT s order is besetted with self contradictions and the Ld CIT did not disclose the basis on which such contrary and contradictory findings were recorded. A reading of the Ld CIT s order in totality therefore gives an impression to us that the impugned order was passed not only in haste but without proper application of mind and conclusions in the impugned order were pre-determined and based on surmises and conjectures. 23. In the instant case, the Ld CIT cancelled the registration of the Trust u/s 12A, in exercise of powers conferred u/s 12AA(3) of the Act. The powers given by the Parliament to the Ld CIT are extraordinary and therefore the authority exercising the power should not therefore exercise it lightly and on mere presumptions or pretext. The registration can be cancelled u/s 12AA(3) if and only if the Ld CIT is satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriated. We however find that the appellant had received the donations by cheque and the amount was accounted in the assessee s books and therefore it could not be said without any adverse material that the assessee was a party to misappropriation by withdrawing cash from the Bank A/c. In various letters written to authorities, President of SFWHP never accused the appellant of committing fraud or financial impropriety. Appellant had submitted before the Ld CIT that the complaint lodged by SFWHP with W. Bengal Police was acted upon and enquiry was conducted by EOW against the assessee in December 2013. We take note of the fact that an enquiry was conducted by EOW of police 3 years prior to passing of the impugned order, however it has not been brought to our notice the fate of the enquiry. The appellant brought to the notice of Ld CIT that pursuant to the very same complaint/allegation an enquiry was conducted by EOW of police 3 years and that neither any charge-sheet was filed nor any legal proceedings were instituted against the appellant on the basis of enquiry conducted by EOW. This fact that is no charge sheet or any legal proceeding initiated against the appellant finds no me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner u/s 12AA(3) only if the activities of the trust are not genuine or that the activities are not carried out in accordance with the objects of the trust. In the present case assessee was registered u/s 12A by the DIT (Exm) on being satisfied that objects of the trust were charitable. In the SCN dated 3.3.2016 the Ld CIT had required the assessee to furnish copies of the Audited A/cs for the period 2010-11 to2014-15 and also complete list of donations received and paid during the period 1.4.2009 to 31.3.2015. In response the assessee had furnished such documents along with Certificates in Form-10B. Copies of these documents were also furnished before us in Paper book. We find from these documents that the income derived by the assessee during this period was applied for charitable purposes. We also note that even though the appellant had furnished the relevant details, Ld CIT did not point out any specific instance where it could be held that income or donation received was not used for charitable purpose. Even at the time of hearing the Ld. CIT DR with reference to audit reports furnished in the Paper book did not point out any specific instance in any year which would show t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties of the trust were used and applied for charitable purposes only. The Court therefore held that it could not be said that the trust was not genuine. The Court also held that since the educational institution was actually imparting the education it could not be said that the activities were not carried out in accordance with objects of the trust. The Court held that when both the conditions were satisfied then the registration granted u/s 12A cannot be cancelled merely on the ground that trustees had misappropriated funds of the trust. In the opinion of the High Court misappropriation of funds by the trustees cannot be the ground for cancelling the registration when the activities of the trust were charitable in nature and the activities were conducted in accordance with the objects of the trust. The same view was again taken by the Karnataka High Court in the case of CIT Vs Karnataka Lingayat Education Society (supra) where the trustees were found to be receiving Capitation Fees for admission of students for medical course. 27. Similar view was taken by the Co-Ordinate Bench of the ITAT at Lucknow in the case of Fateh Chand Charitable Trust - ITA No. 792/LKW/2015 dated 18.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 70 Lacs which the assessee received in April 2011 from SFWHP was bogus. In support of this allegation the Ld CIT relied only on the complaints lodged by Dr. Dhruba Chakraborty with authorities. We however find that nowhere in the complaints filed the complainant had made allegations against the appellant. Even after the enquiry was conducted by EOW of West Bengal Police in relation to the donation received from SFWHP no penal proceedings have been instituted against the appellant nor the Ld CIT referred to any report if any of the investigating agency who had enquired into the complaint of SFWHP, indicting the appellant of committing any wrong doing. We also find that Dr. Chakraborty was never examined by the Ld CIT nor opportunity of examining him was provided to the appellant so the order of the Ld CIT is bad in law. Recently, vide order published on 16 November 2015, the Hon ble Supreme Court in Andaman Timbers vs CCE, held that failure to give the assesse the right to crossexamine witnesses whose statements are relied upon results in breach of Natural Justice and it is a serious flaw which renders the order a Nullity . In these circumstances; based on unverified and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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