2018 (2) TMI 602 - HC - Income Tax

Exemption under Section 10(23-C)(vi) denial - non charitable activities - withdrawal of approval - Held that - There was ample material on record to establish that the petitioner Trust had indulged in illegal activities and could not be said to be existing purely for Educational purposes, and rather various other business activities of the said family of Trustees and their money was passing through the cover and shields of the Books of Accounts of the petitioner - Trust rendering it as merely a skeleton for the purpose of exemption to Educational Trust and rather than a real Educational Trust, solely existing for the purpose of Education. Such sham or bogus Trusts cannot be held to be entitled to exemption under the provisions of Section 10(23-C) and therefore the Respondent Authority has rightly withdrawn the approval of the petitioner - Trust under the said provision. As far as the withdrawal of the approval with effect from 01/04/2009 is concerned, even that cannot be assailed, because the evidence and material discussed in detail in the impugned order reflect such entries in the Books of Accounts which reflect illegality having existing on record right from the Financial Year 2010-11 onwards and therefore the illegalities and transactions offending the said provisions cannot be split or bifurcated for the period in question only after the search and seizure operations were carried out on 16/12/2015 and the illegality cannot be allowed to be perpetuated for the preceding periods for which such evidence pointing out the illegalities exist on record. - Decided against assessee.

Issues Involved:

1. Withdrawal of approval under Section 10(23-C)(vi) of the Income Tax Act, 1961.
2. Allegations of capitation fees and misuse of funds by the Trust.
3. Compliance with principles of natural justice.
4. Validity of retrospective withdrawal of approval.
5. Applicability of case laws cited by the petitioner.

Issue-wise Detailed Analysis:

1. Withdrawal of Approval under Section 10(23-C)(vi):
The petitioner, an educational trust, had its approval for income tax exemption under Section 10(23-C)(vi) withdrawn by the Director General of Income Tax (Inv.), Bengaluru. The withdrawal was based on findings from a search and seizure operation that revealed the Trust was collecting capitation fees and using funds for non-educational purposes. The approval was initially granted on the condition that the Trust existed solely for educational purposes and not for profit.

2. Allegations of Capitation Fees and Misuse of Funds:
During the search and seizure operation under Section 132 of the Act, it was found that the Trust was collecting cash donations (capitation fees) for admissions to its medical courses. These funds were used for various non-educational purposes, including constructing a temple, election expenses, personal assets for trustees, and money laundering. The Trust's records showed significant unaccounted cash donations and misuse of funds for personal enrichment of trustees.

3. Compliance with Principles of Natural Justice:
The petitioner argued that they were not given adequate opportunity to be heard before the withdrawal of approval. However, the court found that a show cause notice was issued, and the petitioner had filed detailed objections. The court held that the principles of natural justice were complied with, as the petitioner was given a reasonable opportunity to present their case.

4. Validity of Retrospective Withdrawal of Approval:
The approval was withdrawn with retrospective effect from 01/04/2009. The court upheld this decision, noting that the evidence of illegal activities and misuse of funds dated back to the financial year 2010-11. The court found that the Trust's activities were not in accordance with the conditions of approval, justifying the retrospective withdrawal.

5. Applicability of Case Laws Cited by the Petitioner:
The petitioner cited various case laws to support their contention that the Trust existed solely for educational purposes. However, the court found these cases distinguishable on facts. The cited cases dealt with initial grant of approval or different fact situations, whereas the present case involved withdrawal of approval due to misuse of funds and illegal activities. The court emphasized that the Trust's activities must be genuine and solely for educational purposes to qualify for exemption under Section 10(23-C).

Conclusion:
The court dismissed the writ petitions, concluding that the Trust had misused its approval for exemption by engaging in illegal activities and not existing solely for educational purposes. The retrospective withdrawal of approval was justified based on the evidence of misuse of funds and capitation fees. The principles of natural justice were deemed to have been complied with, and the case laws cited by the petitioner were found inapplicable to the present case.

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