2018 (6) TMI 1571 - AT - Income Tax

Registration u/s 12AA cancelled - non charitable activities - Search & seizure action was carried out at the premises of the trust - incriminating documents revealed that the trust is run for the purposes of profit and not solely for educational purposes - Object of the trust - huge amount was collected from students, in cash without issuing any receipts and without entering them in the regular books of accounts - HELD THAT - The authorities granting exemptions are duty bound to verify for any such violations. As the tax concessions involve a sacrifice of public revenue, it becomes imperative to ensure the tax concessions are not abused and enjoyed only by those charitable Trusts which actually deserve. The assessee trust has carried its activities which invited the search and seizure action by the Revenue, which resulted in unearthing of evidences, inter alia, that the assessee collected huge amount from students, in cash , without issuing any receipts and without entering them in the regular books of accounts maintained by the trust. When the assessee, a public charitable trust, has not kept clear and accurate accounts of the trust-property and failed to furnish with full and accurate information as to the impugned amount and state of the trust property, a finding was arrived that the impugned sum was lying with the Managing Trustee and others during the said period, which have not been used for the objects of the assessee trust. These facts have not been disproved. All these activities violate the provisions of the Indian Trusts Act, the Income Tax Act etc and hence the assessee s case clearly falls within the mischief of all the above clauses of Section 4 of the Indian Trusts Act. - Decided against assessee Interest free advance given to sister concern - advances to prohibited persons - HELD THAT - M/s Prathyusha Associates Shipping Pvt. Ltd. (PASPL), is a prohibited person, to whom ₹ 6 crore of the assessee s money was advanced free-ofinterest etc are not disputed. Though, the assessee claimed to have ; advanced towards cost of construction of the buildings for the trust, awarded the contract to them on competitive bidding etc, it has not laid contemporaneous material substantiating its contentions before the Ld. PCIT as well as before the Ld. CIT(A) When the payment was made to a prohibited person, when its rationale is being questioned, the onus is on the assessee to place adequate contemporaneous material to show that how it quantified the project costs and on whose advice, when and how it went for bidding , how many bids were received , whether the impugned person had adequate experience in similar projects but assessee not laid any such contemporaneous material. As regards the payment to Ms Prathyusha, the daughter of Managing Trustee the Appellant had not produced any documentary evidence as to the functioning of the lady, nature of work allotted to her, what are the official matters which she attends everyday etc., and as to how such a huge salary of ₹ 4,92,000 is reasonable. In the circumstances the action of the AO does not warrant any interference. - decided against assessee

Issues Involved:
1. Cancellation of Registration under Section 12AA(3)
2. Collection of Capitation Fees
3. Interest-Free Advance to Sister Concern
4. Payment to Managing Trustee's Daughter

Detailed Analysis:

1. Cancellation of Registration under Section 12AA(3):
The Principal Commissioner of Income Tax (PCIT) cancelled the registration of the assessee trust, granted under Section 12AA, effective from 1.4.2009, based on three primary grounds:
- The trust collected ?1,57,42,700/- from students without issuing receipts and without recording them in the regular books of account.
- The trust advanced ?6 crores to M/s Prathyusha Associates Shipping Pvt. Ltd. (PASPL), a sister concern, interest-free, without transparent tendering.
- The trust paid ?4.92 lakhs to Ms. Prathyusha, the daughter of the managing trustee, without justification related to her qualifications and services rendered.

2. Collection of Capitation Fees:
The trust collected ?1,57,42,700/- from students as recorded in the seized documents. The trust claimed these were advance fees, but the PCIT found them to be capitation fees collected before the commencement of the counseling process. The amounts were not recorded in the books of account, and no receipts were issued. The trust’s actions were deemed to violate the principles of law as per the Supreme Court’s decisions in T.M.A Pai Foundation and other cases, which prohibit the collection of capitation fees by educational institutions.

3. Interest-Free Advance to Sister Concern:
The trust advanced ?6 crores to PASPL, a sister concern, purportedly for construction work. However, the PCIT found that the trust did not follow a transparent tendering process and that the advance was not used for the intended construction purposes. Instead of adjusting construction bills against the advance, the trust made separate payments for the bills raised by PASPL. This indicated that the advance was not for the trust’s objectives, leading to the conclusion that the trust’s activities were not in accordance with its objects.

4. Payment to Managing Trustee's Daughter:
The trust paid ?4.92 lakhs to Ms. Prathyusha, the daughter of the managing trustee, claiming she was a qualified MBA graduate and full-time CEO of the educational institution. However, the PCIT and CIT(A) found the payment excessive and unjustified, as the trust failed to provide documentary evidence of her role and contributions. The Assessing Officer (AO) allowed only ?1.80 lakhs as reasonable salary and disallowed the remaining ?3.12 lakhs.

Conclusion:
The ITAT upheld the PCIT’s decision to cancel the trust’s registration under Section 12AA(3). The tribunal found that the trust collected capitation fees, advanced funds to a sister concern without proper justification, and made excessive payments to the managing trustee’s daughter. The trust’s activities were not in accordance with its declared objects and violated the principles of law, justifying the cancellation of its registration and denial of tax exemptions. Consequently, the appeals filed by the assessee were dismissed.

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