2009 (9) TMI 952 - AT - Income Tax

Validity of cancellation of registration by invoking Section 12AA(3) - Survey action u/s 133A - documents inventorized and some were impounded u/s 131(3) - Donation and Capitation Fees for admission - issuance of receipt u/s 80 G; that collection of donation in contravention of Section 3(2) of Maharashtra Educational Institution (Prohibition of Capitation Fee) Act 1987 that non-issuance of receipt of money paid for admission - Whether CIT has to satisfy only about the genuineness of the activities of the trust and not the nature of activity by which the income is derived by the Trust AS, section does not speak anywhere that the CIT shall also examine the nature of income derived by the Trust ? - Interpretation of newly inserted Section 12AA (with effect from 01/04/1997) - HELD THAT - In the recent past Sub-section (3) was inserted in Section 12AA with effect from 01/10/2004 which gives power of cancellation of registration to the Commissioner, 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 Commissioner cannot exercise the power of cancellation of registration. To over-come 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 u/s 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. On careful reading section 12AA it was gathered that at this initial-stage there is no scope of any apprehension of mis-utilization of funds or to judge the taxability of income. The scheme of the Act otherwise do not subscribe and allow a trust to take the benefit of the provisions of Section 11 and 12 unless establish the prescribed utilization of the income, even if at all the trust hold the registration in its hands. Therefore at the stage of granting registration the Commissioner 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. We have also gone through a decision referred from the side of the (Revenue namely The J K Bank Priority Sector Asset Risk Fund v. The CIT Jammu in support of the argument that firstly the Commissioner has been vested with the powers vide Section 12AA(3), to enquire about the genuineness of the activities of a Trust and to satisfy himself that such activities are being carried out in accordance with the objects of the Trust. Secondly in case of dissatisfaction he is empowered to cancel the already granted registration. Thirdly in case it is found that the activities are not in conformity with the object that too is the good reason for cancellation of registration Fourthly the sweep of the Section is wide enough to empower the Commissioner to examine the nature of the object whether for general public utility and philanthropic in nature. In our conscientious view there is no disagreement about the above mentioned four legal proposition as eruditely laid down by the respected Amritsar Bench. Undisputedly we have also to decide this appeal more or less within these parameters. But the basic question is that before stepping towards the cancellation of registration the heavy burden is on the CIT to conclusively demonstrate that all had gone haywire i.e. objects are meant for personal benefits; that engaged in immoral activities or that there is no element of public benefit In the present appeal none of the above criteria for rejection of registration was in existence, however mainly confined to the finding that by charging donation the Trust has infringed the rules of Prohibition of Capitation Fee Act. Strange enough there is nothing on record to prove sightlessly that the purpose of imparting of education was not fulfilled by this institute thus the Revenue department has hopelessly failed to establish that there was any illegal activity or infringement of any law so that to doubt the genuineness of the activities. If it was so then it can be held that the allegations of the Revenue, remained unsupported thus deserves our dismissal. Based upon the facts of this case, we now sum up above discussion, the Sine-qua-non for cancellation of registration are two conditions prescribed in Section 12AA(3) needs to be satisfied are (a) That activities of the Trust/Institution are not genuine (b) That activities of the Trust are not carried out in accordance with the objects of the Trust/Institution. Thus the findings of the CIT has not to be only conceptual or contextual but should be within the four corners of law so that not surpassing the power, granted in Sub-section (3) of Section 12AA. But unfortunately the fallacy is writ large as gathered on perusing the impugned order. We can hold that the CIT's approach for deciding the eligibility of registration of a Trust should be different from the angle by which an assessment of an income is made by the A.O. We are afraid about the ramification if we 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 creation of the trust was defeated. While dealing with the facts ante, it was found that after exhaustive enquiry few instances; fifteen in nos.; were noticed by the Revenue authorities wherein it was alleged to be the infringement of Capitation Fee Act. But the irony is that in the same breath the CIT has accepted the stand of the assessee that it can charge five times the normal fees in case of admission in the defined Management Quota. Thereupon there was a circumvent in the approach of the CIT that the amount of donation be considered together with the fees to find out the violation of prohibition of Capitation Fee Act. But on facts that too did not stand the test of those provisions since admittedly did not exceed the prescribed limit. 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 mis-utilized by the Trustees for their personal benefit i.e. not in fulfillment of the object of the Trust Otherwise also there are three ways to look at this problem. One is, that the donations are raised but not utilized for achieving the objects i.e. towards imparting education; then such an institution must bear the consequence of cancellation of registration since ipso-facto infringed 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 mis-utilization other than the prescribed activity then no action can be suggested u/s 12AA(3). The assessee's case falls under the third category. Therefore, We reverse the findings of CIT. The order of cancellation of registration is hereby revoked. Grounds allowed.

Summary

Issues Involved:
1. Validity of cancellation of registration under Section 12AA(3) of the Income Tax Act, 1961.
2. Examination of the genuineness of the activities of the Trust.
3. Consideration of the nature of income derived by the Trust.
4. Relevance of the Maharashtra Educational Institutions (Prohibition of Capitation Fee) Act, 1987.
5. Application of income versus the source of funds.
6. Allegations of irregularities in collection of fees and donations.
7. Applicability of Section 3(2) of the Maharashtra Educational Institutions (Prohibition of Capitation Fee) Act, 1987.
8. Misuse of Section 80G certificates.
9. Examination of the activities of the Trust in accordance with its objects.

Detailed Analysis:

1. Validity of Cancellation of Registration under Section 12AA(3):
The primary issue was whether the cancellation of registration by invoking Section 12AA(3) of the Income Tax Act was valid. The Tribunal analyzed the amended provisions which mandate that Charitable Trusts must have registration under Section 12A, and an appeal against cancellation lies to the Tribunal under Section 253(1)(a). The Tribunal noted that the Commissioner of Income Tax (CIT) must be satisfied about the genuineness of the activities of the Trust and whether these activities align with the Trust's objects.

2. Examination of the Genuineness of the Activities of the Trust:
The Tribunal reviewed the CIT's allegations, which included the Trust charging donations for admissions, issuing identical confirmation letters from donors, and not providing addresses of donors. The Tribunal found that the CIT's conclusions were based on assumptions and lacked concrete evidence. The Tribunal emphasized that the genuineness of activities should be examined based on whether the Trust's activities align with its stated objects and not on the source of its income.

3. Consideration of the Nature of Income Derived by the Trust:
The Tribunal noted that the CIT erred in examining the nature of income derived by the Trust. The Tribunal clarified that Section 12AA does not require the CIT to examine the nature of income derived by the Trust but rather to focus on the genuineness of the activities and their alignment with the Trust's objects.

4. Relevance of the Maharashtra Educational Institutions (Prohibition of Capitation Fee) Act, 1987:
The Tribunal found that the CIT improperly applied the provisions of the Maharashtra Educational Institutions (Prohibition of Capitation Fee) Act, 1987, to the case. The Tribunal noted that the Income Tax Act is an independent code, and the provisions of the Capitation Fee Act are not relevant for the purpose of granting or canceling registration under the Income Tax Act.

5. Application of Income versus the Source of Funds:
The Tribunal highlighted that in the case of charitable institutions, the focus should be on the application of income rather than the source of funds. The Tribunal cited several case laws to support this view, emphasizing that the source of funds is of no consequence as long as the income is applied towards the Trust's charitable purposes.

6. Allegations of Irregularities in Collection of Fees and Donations:
The Tribunal examined the CIT's allegations regarding irregularities in the collection of fees and donations. The Tribunal found that the CIT's conclusions were based on assumptions and lacked concrete evidence. The Tribunal noted that the Trust had provided receipts for all donations and that the donations were voluntary.

7. Applicability of Section 3(2) of the Maharashtra Educational Institutions (Prohibition of Capitation Fee) Act, 1987:
The Tribunal found that the CIT erred in applying Section 3(2) of the Maharashtra Educational Institutions (Prohibition of Capitation Fee) Act, 1987, to the case. The Tribunal noted that the Trust's activities were within the higher rates approved by the Government of Maharashtra and Pune University, and thus did not fall within the definition of 'Capitation Fee' as per the Act.

8. Misuse of Section 80G Certificates:
The Tribunal examined the CIT's allegations regarding the misuse of Section 80G certificates. The Tribunal found that the CIT's conclusions were based on assumptions and lacked concrete evidence. The Tribunal noted that the Trust had issued receipts for all donations and that the donations were voluntary.

9. Examination of the Activities of the Trust in Accordance with its Objects:
The Tribunal emphasized that the CIT must focus on whether the Trust's activities are carried out in accordance with its stated objects. The Tribunal found that the Trust's activities were in line with its objects of imparting education and that there was no evidence to suggest otherwise.

Conclusion:
The Tribunal concluded that the CIT's decision to cancel the registration was based on assumptions and lacked concrete evidence. The Tribunal found that the Trust's activities were genuine and carried out in accordance with its objects. Consequently, the Tribunal revoked the order of cancellation of registration and allowed the appeal.