2017 (1) TMI 1671 - AT - Income Tax

Exemption u/s 11 - cancellation of registration of the trust u/s 12AA(3) - charitable activity u/s 2(15) or not? - search proceedings - 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) - trust is not maintaining proper books of accounts and no returns of income were filed for the A.Y. 2006-07 onwards - HELD THAT - onus for proving the existence of factors calling for cancellation of registration granted to an institution is on the Department rather than on the institution. In the present case, the CIT has miserably failed to discharge such onus. No material has been brought by the CIT that the assessee society exists for profit motive. The Department has not been able to discharge its onus of showing as to how the conditions for grant of registration have been breached by the assessee. The assessee remained enjoying the registration granted to it for the last number of years under the same unchanged facts and circumstances. It has also not been demonstrated 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 baseless and without any application of mind. CIT is not justified in withdrawing the registration granted u/s.12AA of the Act by invoking the provisions of section 12AA(3) of the Act. Such act of the Revenue will only affect the poor students, who are studying in the institution by paying nominal / normal fees and also other students thereby defeating the very purpose of these provisions of the Act, which are enacted with the intention of promoting education in the country. In the instant case, the material on record shows that the Trust has established educational institutions and was imparting medical education. Every year, students are admitted. Huge investment is made for construction of buildings for housing the college, hostel and for providing other facilities to the students who are studying in the College. The College is recognized by the Medical Council of India, State of Kerala and all other statutory authorities. Therefore, it cannot be said that the Trust is not genuine. Admittedly, the students are being admitted every year. Students are studying in all courses. Thus, the object of the constitution of the Trust namely imparting of education is going on uninterruptedly. Therefore, it cannot be said that the activities of the Trust are not being carried out in accordance with the objects of the Trust. When the aforesaid two conditions are fully satisfied, the registration of the Trust cannot be cancelled for the reasons stated by the CIT in her order, i.e. non maintenance of books, non filing of returns of income or belated filing of returns of income, collection of additional fees and diversion of funds in violation of sections 11(5) and 13(1)(c) as these are passing remarks which are not relevant for the purpose of section 12AA(3) and also all observations of the CIT has been negated by the assessee with enough evidences which are discussed in detail in foregoing paragraphs. Therefore, we are of the considered view that the CIT was erred in withdrawing registration granted u/s 12AA, by using her powers u/s 12AA(3). Hence, we set aside order passed by the CIT u/s 12AA(3) and restored registration granted u/s 12AA of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Cancellation of registration of the trust under section 12AA(3) of the Income Tax Act, 1961.
2. Allegations of the trust being a family trust.
3. Non-maintenance of proper books of accounts and non-filing of returns.
4. Collection of additional fees from students.
5. Diversion of trust funds for the benefit of trustees.
6. Predominant object of the trust being education.

Detailed Analysis:

1. Cancellation of Registration under Section 12AA(3):
The primary issue revolves around the cancellation of the trust's registration under section 12AA(3) of the Income Tax Act, 1961, which allows for such cancellation if the activities of the trust are not genuine or not carried out in accordance with its objects. The Commissioner of Income Tax (CIT) cancelled the registration based on several observations, including the trust functioning as a family trust, non-maintenance of proper books of accounts, non-filing of returns, collection of additional fees, and diversion of funds.

2. Allegations of the Trust Being a Family Trust:
The CIT observed that the trust was functioning like a family trust as all trustees were family members. However, the court noted that the question of whether the trust is charitable depends on its objects and activities, not on whether it is managed by family members or outsiders. The court cited the decision in DeokiNandan vs. Murlidhar&Ors. AIR 1957 SC 133, emphasizing that the trust's charitable nature is determined by its objects and activities, not by the composition of its trustees.

3. Non-Maintenance of Proper Books of Accounts and Non-Filing of Returns:
The CIT observed that the trust did not maintain proper books of accounts and did not file returns regularly. The court, however, found that non-maintenance of regular books of accounts and belated filing of returns were procedural lapses that could be cured by filing returns or other penal provisions, but these were not grounds for cancellation of registration as long as the trust's objects were charitable and its activities were carried out in accordance with its objects. The court cited the decision in Ajith Education Trust vs. CIT (2010) 143 TTJ 483, which held that non-maintenance and non-filing of regular returns cannot be a ground for cancellation of registration.

4. Collection of Additional Fees from Students:
The CIT noted that the trust collected additional fees from students admitted under management quota, which was allegedly used for the benefit of trustees. The court found that the additional fees collected were accounted for in the books and used for the objects of the trust. The court emphasized that the collection of additional fees, within the prescribed limits, did not constitute non-genuine activities. The court cited the decision in VignanaJyothi vs. DIT(E), (2017) 81 taxmann.com 204, which held that mere collection of donations from students at the time of admission does not warrant cancellation of registration under section 12AA(3).

5. Diversion of Trust Funds for the Benefit of Trustees:
The CIT alleged that trust funds were diverted for the benefit of trustees, specifically advancing amounts to Dr. K.M. Navas, a trustee. The court noted that the trust had given a temporary advance to the trustee with interest at 16% per annum, which was repaid within a short period. The court found that the CIT's allegations were baseless and unsupported by cogent evidence. The court cited the decision in CIT vs. Fr. Mullers Charitable Institutions (2014) 363 ITR 230 (Kar), which held that in case of a charitable trust, it is only income from investment or deposit made in violation of section 11(5) that is liable to be taxed, and such violation does not result in denial of exemption under section 11 on the total income of the trust.

6. Predominant Object of the Trust Being Education:
The court observed that the trust's predominant object was running educational institutions, which is a charitable purpose under section 2(15) of the Act. The court emphasized that the trust's activities were in line with its objects of imparting education and that there was no evidence to show that the trust was not pursuing its charitable objects. The court cited the decision in VanithaVishram Society vs. CIT (2005) 280 ITR 345, which held that existing solely for educational purposes is sufficient for claiming exemption.

Conclusion:
The court concluded that the CIT was not justified in cancelling the registration granted under section 12AA by invoking the provisions of section 12AA(3). The court set aside the order passed by the CIT and restored the registration granted under section 12AA of the Act. The appeal filed by the assessee was allowed.