TMI Blog2017 (1) TMI 1671X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the Department as to how the approach of the assessee has turned to a commercial one. The predominant object of the assessee is and remains to carry out charitable purpose of advancement of education, and not to earn profit. In fact, no profit has been established to have been earned by the assessee. The CIT has failed to specify as to how profit earning is the predominant activity of the assessee instead of carrying out its said charitable purpose. On the other hand, the assessee has filed various details of income from property held under trust and application of income for charitable purpose as per which its application of income for its object is more than its income generated from property held under trust for all these years. CIT s observations are baseless as the administrative expenditure shown by the assessee in its financial statements predominantly consists of amount spent for objects of the trust which is evident from the fact that the assessee has filed a statement of expenditure showing details of administrative expenses which is enclosed in paper book page no. 159. Therefore, the allegation of the CIT that the trust is running education on profit motive in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .S. Narayanamoorthy For the Respondent : Shri A Dhanaraj ORDER Per G Manjunatha, AM : This appeal filed by the assessee is directed against order of the Commissioner of Income-tax(Central)-Kochi, dated 27-03-2014, challenging cancellation of registration of the trust u/s 12AA(3) of the Income Tax Act, 1961 w.e.f. Asst. year 2011-12. 2. The assessee has raised the following grounds of appeal: 1. The order of the Commissioner of Income Tax is against law and facts. 2. The commissioner of Income Tax should have appreciated that it cannot be concluded that the trust is a family trust merely because the trustees are members of the same family or are closely related to one another. The Commissioner should have noted that nothing has been done by the trust nor has_there been any change in the objects or actual conduct of its affairs since the granting of registration on 21.01.02. Nothing has come on record to point out that the activities of the trust have been run for the benefit of a family or for private benefit and hence there is no justification for coming to the conclusion that the trust is a family trust. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the objects of the trust. 4. The appellant had not collected any additional fees except during the financial year 2011-12 relevant to the assessment year 2012-13. The appellant had collected some additional fees from the MBBS and BAMS students during the financial year 2011-12 which was duly accounted by the appellant in the books. The Commissioner of Income Tax should have noted that additional fees collected has been fully utilized for furtherance of the principal object of the trust - namely imparting of education. The learned Commissioner of Income tax should have appreciated that if at all capitation fees has been accepted, it may be a_violation of the educational rules formulated by the state government but is not a ground for cancellation of the registration of the trust granted under section 12A. The Commissioner of Income Tax should have known that , Finance Act 1983 has deleted the words not involving the carrying on of any activity for profit from the definition of charitable purpose under section 2(15) and hence, even if the educational institution is run on commercial lines that will not be ground for cancellation of registration if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itutions. All colleges and institutions are approved by regulatory bodies like, Medical Council of India, All India Council for Technical Education and Boards and Universities regulating education in the state of Kerala. 4. A search and seizure action u/s 132 of the Income Tax Act, 1961 was conducted in the premises of Trust and trustees on 31-10-2011. During search and post search enquiry revealed that even though, the trust is registered as charitable trust, in reality, it was running like a family trust as all the trustees are family members. The trust is not maintaining proper books of accounts and no returns of income were filed for the A.Y. 2006-07 onwards. Though returns of income were filed for Asst years prior to A.Y. 2006-07, such returns were filed in response to notice u/s 148 of the Act. The information gathered during search and post search enquiries further revealed that the trust is collecting additional fees from students admitted under management quota in Medical and Ayurveda colleges. The trustees are diverting trust funds for the benefit of persons specified, thereby infringing the provisions of section 13(1)(c) and violating provisions of section 11(5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... institution. Non maintenance of regular books of account, belated filing of return of income, violations of provisions of sec.13(1)( c) of the Act inasmuch as the trustees were paid loan are all by way of passing reference having no relevance to whether or not the assessee was pursuing education as its main object. Therefore, there is no reason for cancellation of registration u/s 12AA(3) for the above reasons. 7. The CIT, after considering explanation of the assessee, observed that the activities of the trust are not being carried out in accordance with the objects of the trust and hence, registration granted u/s 12AA on 21-2-2002 has been cancelled with effect from 1st June 2010, i.e. from A.Y. 2011-12 onwards. The CIT, further observed that eligibility of registration is not only based on objects of the trust, but also on genuineness of activities of the trust. Though the trust objects are charitable in nature, its activities are not carried out in accordance with its objects which is evident from the facts gathered during search and post search investigation as per which though it is registered as public charitable trust it is managed by family members, the trust is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal institutions, but cancelled registration merely on the ground that its activities are not carried out in accordance with its objects without any reference to non genuine activities in her order. The points considered by the CIT for invoking her powers conferred u/s 12AA(3) are only a passing remarks which are not relevant for the purpose of section 12AA(3). The observations of the Commissioner, with regard to management and control of trust by family members, non maintenance of books of account and not filing regular returns of income, collection of additional fees from certain students admitted under management quota and siphoning of funds by trustees for their personal use, are only few shortcomings in day to day affairs of the trust, but not a non genuine activity and carrying out something which is contrary to the objects of the trust. The assessee has explained all issues pointed out by the CIT, with necessary evidences. The AR further submitted that the CIT neither pointed out any objects which are not in the nature of charitable purpose as defined u/s 2(15) nor made out a case of non genuine activities which are the two conditions essentially required for invoking provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as incorrect in coming to the conclusion that the trust is family trust not existing for charitable purpose. As regards observations of the CIT with regard to non maintenance of books of accounts and non filing of regular returns of income it was submitted that it is true returns of income from A.Y. 2007-08 have not been filed regularly and such returns have been filed only after search but before the Commissioner issued her show cause notice on 6-9-2013 which is evident from the fact that returns of income up to A.Y. 2011-12 have been filed before 21-8-2013. The trust has filed regular returns for A.Y. 2012-13 and subsequent years. The AR further submitted that even assuming that there is delay in filing return of income, could it be said that it is fatal so as to withdraw registration u/s 12AA(3). Non filing of returns is purely a procedural laps which can be cured by filing return of income or some other penal provision is provided to deal with non filing return of income, but it cannot be a ground for cancellation of registration as long as the trust objects are charitable in nature and its activities are carried out in accordance with its objects. 10. The Ld. AR furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the newly inserted sub section 4 to section 12AA with effect from 1-10-2014 is applicable from A.Y. 2015-16 onwards. The trust is running educational institutions which is coming within the meaning of charitable purpose as defined u/s 2(15) and such objects are carried out by establishing more than 17 colleges. The CIT cannot exercise his powers conferred u/s 12AA(3) mechanically. To invoke provisions of section 12AA(3) the commissioner should satisfy that the activities of the trust are not genuine and are not being carried out in accordance with the objects of the trust. If both the conditions are absent, then the registration granted earlier cannot be cancelled on some grounds which are either irrelevant or non-existent. 11. The Ld. AR made an alternate submission inasmuch as that the order passed by the CIT is bad in law and void-ab-initio as the CIT has not recorded his satisfaction which is a precondition for invoking provisions of section 12AA(3) which is evident from the fact that show cause notice was issued by Income Tax Officer(T) for Commissioner of Income Tax. The Ld. AR referring to section 12AA(3) and show cause notice submitted that it is very clear fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not filed regular returns, the trust is collecting additional fees in violation of law abolishing collection of capitation fee for admission and such additional fees is not accounted for in the books of accounts of the trust and also the same is made available for trustees to pay on-money for purchase of properties. This fact has been accepted by Dr. K.M. Navas, Managing trustee in his sworn statement recorded at the time of search. The other points considered by the CIT for cancellation of registration throws light on the activity of the trust inasmuch as the trust is running educational institutions on commercial lines with an intent of profit motive. Running educational institutions on profit motive cannot be considered as charitable purpose, though the nomenclature states that the trust is charitable trust. Though the trust is registered as public charitable trust, in reality, it is running like a family trust, which is evident from the fact that material gathered during search revealed that the trust properties are shared by trustees. The trustees have purchased property in their personal name and the source has been arranged out of additional fees collected from students s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation is search and seizure operation conducted u/s 132 of the Act, in the premises of trust and trustees on 31-10-2011. The information gathered during search has been discussed at paras 4 to 9 on pages 2 to 5 in her order dated 27-3-2014. The search revealed the following facts. i. Though the trust is registered as public charitable trust, in reality, it is functioning as a family trust as its trustees are family members and also its activities are controlled and managed by family members. ii. No proper books of account are maintained and returns of income from A.Y. 2006-07 onwards have not been filed as required under law. iii. Collection of additional fees from students admitted under management quota in Medical, Ayurvedic and Dental colleges. iv. Diversion of trust funds for purchase of properties in the name of trustees. 14. The CIT has discussed these issues in her order with certain documents and evidences collected during search. The documents and evidences relied upon by the CIT includes, copy of trust deed, computer generated statements and sworn statements recorded from trustees. The first and foremost observation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Thereafter, to check misuse of exemption, section 2(15) was amended, vide Finance Act, 2008, by inserting a proviso which states that the advancement of any other object of general public utility shall not be treated as charitable purpose if it involves the carrying out of any activity in the nature of trade, commerce or business and also rendering any services in relation to any trade, commerce or business for cess or fees or any other consideration, irrespective of the nature of use or application. Therefore, what emerges from the amendment to section 2(15) of the Act, is that the provisions of section 2(15) was unaltered even after amendment insofar as first three limbs of definition charitable purpose , i.e. Relief to the poor, Education and Medical relief. The amendment brought out to section only changed the position insofar as it relates to fourth and final limb of definition, i.e. advancement of any other object of general public utility, where if the activity of any trust shall not be treated as charitable purpose, if it involves carrying out any activity in the nature of trade or commerce. In this case, the objects of the trust are predominantly based on imparting e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (1) when subsequent to grant of registration the Commissioner is satisfied that activities of trust or institution are not genuine or are not being carried out in accordance with objects of the trust or institution.Basic purpose of s. 12AA(3) is to check misuse of exemption under pretext of carrying out charitable activities when the same are not so. The CIT has to make out clear case for exercising powers u/s. 12AA(3). In this case, so far as object of trust is concerned, it is nowhere disputed that assessee is engaged in imparting education. Once an institution came within the phrase exists solely for educational purpose and not for profit no other condition like application of income was required to be complied with. The mere existence of profit/surplus did not disqualify the institution. Breach of the conditions of the trust deed would not disentitle the institution from getting the benefit which the institution had been granted earlier being a charitable trust. Nowhere in her order, the CIT has taken any objection to the charitable and educational nature of the institution. In fact, the objects of the institution as declared in the trust deed do reflect that all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation of income, so that the amount of correct exempt income shall not be prejudice. If the CIT had an information of some wrongful means of earning fees in the form of a donation or if an information tells about excessive charging of fees; then, the CIT, in his right can pass on the information to the concerned office bearers working under the Regulatory bodies who control capitation fee menace. These authorities have enough power to deal with such nature of default, side by side the CIT is to limit his jurisdiction within the ambit of provisions of the Act and expected to give a finding on facts that either the objects are not for general public utility or not achieved as prescribed under law. However presently the situation is that the Revenue has not said about any immoral activity of the appellant or the collection of fees was by wrongful means. Prima facie no case was made out by the CIT so as to even vaguely demonstrate that the activities of the appellant were not genuine or activity of imparting of education, for which the trust was created, were not carried out. Even the CIT has failed to establish that any part of the income/receipt of the trust was in any manner misuti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities are carried out in accordance with its objects, it is irrelevant whether it is managed by family members or outsiders. In this case all trustees are doctors by profession having common agenda of providing charity, established a trust with the main objects of education and such objects are carried out in accordance with its objects, therefore the CIT was incorrect in coming to the conclusion that the trust is family trust not existing for charitable purpose. Merely because, all the trustees are family members, it does not mean that trust is not public trust. As a matter of fact the trust is genuine and because of this, the CIT granted the exemption under s. 12AA. There is no finding or allegation in the impugned order that activities carried out by the trust are not in accordance with the objects of the trust or institution. This proposition finds support from the decision of Hon ble Supreme Court in the case of DeokiNandan vs. Murlidhar Ors. AIR 1957 SC 133. 19. Coming to other observations of the CIT for cancellation of registration of trust u/s 12AA(3). The CIT observed that the trust is not maintaining proper books of account and not filed regular returns of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relief . It is also not a necessary element in a charitable purpose that it should provide something for nothing or for less than it costs or for less than the ordinary price. The surplus generated, if it is held for charitable purpose and applied for charitable purpose of the assessee, and then the assessee has to be considered as existing for charitable purpose. There are enough safeguards provided in Secs.12 and 13 of the Act to ensure that personal benefits of the persons in control of the trusts are not treated as having applied for charitable purpose and for being brought to tax like provisions of Sec.13(1)(c) of the Act which restricts unreasonable and excessive payments to certain category of persons connected with a trust or other institution. In such circumstances, we are of the view, that the order u/s 12AA(3) of the Act, cannot be sustained. ` 20. The allegations of the Revenue that the Trust was collecting additional fees, Donations and siphoning off of income of the Trust for the benefit of the Trustees. As regards collection of additional fees from certain students and diversion of funds to trustees, these are passing remarks by the CIT which cannot be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rustees as the case may be and may even trigger penal action against the Trustees in accordance with Law. Moreover, no conclusive findings supported by cogent evidence are established by the Revenue to prove that the trustees have siphoned off the income of the Trust. It is also not established before us by the Revenue that the trustees who have received funds by siphoning off the undisclosed income of the trust are brought to tax. On the other hand, the assessee proves that allegations made by the CIT are baseless and without any cogent materials. The activities conducted by the assessee Trust are only promoting education within the ambit of Section 2(15) of the Act and it was not engaged in any other activity other than imparting education. Therefore, we are of the view that the other reasons given by the CIT in the order u/s 12AA(3) of the Act, do not make out a case, which can show the activities of the assessee are not genuine or that the activities of the assessee are not being carried out in accordance with the objects of the trust or institution. 21. Unquestionably, the onus for proving the existence of factors calling for cancellation of registration granted to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to it long ago. No finding has been recorded by the CIT that any part of the income of the assessee society has been misutilised. Thus, the cancellation of the registration granted to the assessee Trust has been erroneously ordered. 22. Coming to the case laws relied upon by the assessee. The assessee has relied upon plethora of judgments. Let us discuss few case laws relied upon by the assessee. (a) The Hon ble Bombay High Court in the case of VanithaVishram Society vs. CIT (2005) 280 ITR 345 held that existing solely for educational purpose is sufficient for claiming exemption. The relevant portion of order is extracted below. The intention of the Legislature appears to be to grant exemption to the institution, under section 10(22) if it solely exists for educational purposes and not for the purposes of profit. [Para 10] The legal position is well established on the strength of the various decisions that if a trust or society exists solely for educational purposes and it runs an educational institution, its income will be the income of the educational institution and, therefore, exempted under section 10(22 ). The fact that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinued to carried on by the assessee, then the CIT had no jurisdiction to cancel registration u/s 12AA(3). The relevant portion of order is extracted below. In the recent past sub-section (3) was inserted in section 12AA with effect from 1-10-2004 which gives power of cancellation of registration to the CIT, if he finds that the activities are not genuine or not being carried out in accordance with the object of the trust. The need for the enactment had arisen due to belief of some quarter that in the absence of explicit law the CIT cannot exercise the power of cancellation of registration. To overcome this hurdle this sub-section is incorporated and now in operation. Naturally these powers are conferred with a view to ensure that if once a registration has been granted under section 12AA, a trust or institution may not take any such liberty of misuse of the registration or the provisions by going haywire rather furthering the objects of the trust or genuinely not pursuing the activities for which it was established. [Para 11.4] The most important feature of section 12AA is that this section has only laid down the procedure of registration and this section nowhere speaks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust to take the benefit of the provisions of section 11 and 12 unless it establishes the prescribed utilization of the income even if at all he trust holds the registration in its hands. Therefore at the stage of granting registration the CIT is not expected to bother himself about the other provisions of the Act and supposed to confine himself to the procedure of registration as laid down therein. [Para 11.6] Another feature of the impugned order of the CIT is in fact bothering that nowhere he has taken any objection to the charitable and educational nature of the institution. In fact, the objects of the institution, as declared in the trust deed does reflect that all are philanthropic or benevolent in nature, precisely for the purpose of imparting education. Strange enough there is no finding recorded by the CIT contrary to this fact. Be that as it may, the real and the only substantial objection for refusal of registration was that the institution has collected donations thus adopted some wrong means of collection of fees. But whether at this preliminary stage he had the right to draw an adverse inference so as to refuse registration or alternatively confine himself to the enqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is made by the AO. About the ramification if one approve the action of CIT because in that case it may adversely affect the imparting of education especially when the revenue has not made out a case that the very purpose for creation of the trust was defeated. Rather one wonders that what purpose does it serve to revenue by cancelling a registration if the activities are in public interest because in case of any breach of the laws the same is subject to tax under sections 11 and 12. These two provisions and few other provisions are competent enough to tackle firmly a defaulter of philanthropic application of income or funds of the trust. The other adverse side of cancellation is that on refusal of registration the entire receipts shall be subject to assessment without granting benefit of section 11 and section 12 to assess income which do not form part of total income though the factual position could be that major part might have been devoted towards achieving the objects, i.e., imparting education, as in this case, but the AO shall be automatically forbidden to grant advantage of exemption consequent upon the cancellation as is mandatory in statute; relevant section already repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but not utilized for achieving the objects, Le., towards imparting education; then such an institution must bear the consequence of cancellation of registration since ipso facto infringed section 12AA(3) condition. Second aspect is, that though the donations received are meant to fulfill the objects but together with fees have infringed Anti Capitation Prohibition Act; then comes within the clutches of that Act but definitely not under section 12AA(3) provisions. The third aspect is, that the donation plus fees do not exceed the prescribed limit of Anti Capitation Fee Act i.e., five times the normal fees; further that no evidence of misutilization other than the prescribed activity then no action can be suggested under section 12AA(3). The Assessee's case falls under the third category. With the result, totality of the circumstances thus warrants, in the light of the foregoing discussion, not to endorse the view of the CIT; consequence there upon reverse those findings. The order of cancellation of registration is hereby revoked . (c). The ITAT, Hyderabad bench in the case of ACIT vs. B. Srinivasa Rao (2014) 159 TTJ 483(Hyderabad), held that department can cancel reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee are not being carried out in accordance with the object of the trust or institution. There cannot be any other legally sustainable reasons for cancelling or withdrawing the registration granted to the assessee. [Para 34] (d). The Hon ble Karnataka High Court in the case of CIT. Vs. Fr. Mullers Charitable Institutions(2014) 363 ITR 230(Kar) held that in case of a charitable trust, it is only income from investment or deposit which has been made in violation of section 11(5) that is liable to be taxed and that violation under section 13(1)(d) does not tantamount to denial of exemption under section 11 on total income of assessee-trust. The SLP filed by the department before hon ble Supreme Court, has been dismissed, therefore, no denial of exemption, if there is a violation. (e). The Hon ble Allahabad High court, in the case of CIT vs. Shri Advait Ashram Society (2012) 28. Taxmann.com 18 (all) held that non filing of return of income for last several years cannot be a ground for declining registration u/s 12AA of the Act. (f) The Hon ble Madras High court in the case of CIT vs. SarvodayaIIakiyaPannai (2012) ITR 300(Mad) held that once Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve discussion, the cancellation of registration, on bo.th the counts i.e., on merits as also on the legality of jurisdiction, was not in accordance of law.-Maharashtra Academy of Engineering Educational Research (Maeer) vs. CIT (2010) 36 DTR (Pune)(Trib) 321 relied on (h). In the case of CIT vs. Sree Narayana Chandrika Trust 212 ITR 456, the Hon ble Kerala High Court held that application of income for charitable purpose is sufficient for claiming exemption. Relevant portion of order is extracted below. Section 10(22A) provides that in computing the total income of a previous year of any person, any income of a hospital or other institution 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, existing solely for philanthropic purposes and not for purposes of profit, shall not be included. This section is akin to section 10(22) which excludes from levy income of a University or other educational institution existing only for educational purposes and not for purpose of profit. From the memorandum ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not income from a hospital that is exempt but 'any income of hospital'. If the word had been 'from', the position would have been that the income should have been derived from the actual running of the hospital itself. What is relevant is that the income should reach the hospital to be utilised by it for philanthropic purposes and not for purposes of profit. The stress appears to be on the recipient of the income. If that is the hospital, that is the trust running it, section 10(22A) must apply. The emphasis is not on whether the income was derived from the educational institution, or hospital itself, but on the purpose for which the institution, trust or society was existing and utilising the income. Such an interpretation will subserve the object of the two provisions of clauses (22) and (22A) which appear to be to foster the growth of educational institutions and hospitals existing solely for such purposes and not for profit. As regards exemption of the income of the assessee-trust for the years when the hospital was under construction, it was clear that the works relating to the hospital were started in the year 1973 though it became functional as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in favour of the assessee and against the revenue. [Para 8] (j) The ITAT, Hyderabad in the case of VignanaJyothi vs. DIT(E), (2017) 81 taxmann.com 204, held that where assessee society was carrying on activity of imparting education, mere fact that it had collected donation from students at the time of admission would not result in invoking provisions of section 12AA(3) so as to cancel its registration. The relevant portion of order is extracted below. As can be seen from the order, the DIT(E) based his conclusion on the basis of enquiry from four parents/relations in assessment proceedings concluded in the year 2007 for assessment year 2005- 06 and in year 2008 for assessment year 2006-07. Even though those findings in assessments were not conclusive and matters were restored to Assessing Officer for further enquiry, no such enquiry was made as can be seen from the orders passed again on 31-03- 2014 for the above years. These orders at present are pending adjudication before Commissioner (Appeals). Thus, the order of DIT(E) is based on premature conclusions and the contention of revenue stating that the department has 'conclusively proved' the colle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t registration have not been fulfilled. It is open to the authorities to deny the benefit under section 11 but this cannot be a ground for cancellation of registration. (k)The Hon ble Karnataka High Court in the case of DIT Vs. Garden City Educational Trust, 28 DTR (Kar) 139 held that where there is no dispute in respect of the objects of the trust, that of imparting education and also when there is no dispute regarding the fact that the trust has actually imparted education and not carrying on any other activities, the trust is qualified for getting registration u/s. 12A as a charitable institution and the question regarding the application of funds and allowability of benefit of exemption U/ss. 11 12 are matters which are to be examined by the assessing authority at the time of assessment and not by the registering authority . 23. Coming to the case laws relied upon by the Ld. D.R. The D.R. relied upon decision of Hon ble Kerala High Court in the case of Travancore Education Society vs. CIT (2014) 369 ITR 543(Kerala). We have gone through the decision of Hon ble High court and find that in the case, the treasurer of society has admitted collection of capit ..... 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