2018 (2) TMI 1371 - AT - Income Tax

Non granting registration under section 12AA - proof of charitable activities - scope of primary objects - unsecured loans taken - way in which education is imparted - complete intermingling of funds - Board of Governance as well as Board of Management is entirely controlled by Sponsoring Body namely Bhandari Charitable Trust - Held that - President shall be appointed by the sponsoring body in consultation with State Government for a period of three years by following such procedures and on such terms and conditions as may be prescribed by the statute. The president shall preside at the meeting of the governing body. Thus, in the Act a mechanism has been provided that there will be search committee and it will be searching eminent personalities and professionals to be appointed by the Board of management. At every stage there would be a consultation with the State Government. Apart from the above, it is pertinent to observe that how this aspect is relevant to test genuineness of objects of the university. Objects of the university are to impart education. Whether such education is being imparted in a controlled manner, financially or administratively, then those objects would not change. If some actions at the end of the assessee are being taken against the provisions of Income Tax Act and then section 13 etc. are already there to keep a check of misuse of powers. Next reasons assigned by the ld.DIT that university has shown unsecured loan of ₹ 3.15 crores from Bhandari Charitable Trust is not a relevant factor to determine genuineness of objects. All financial affairs if misused can be considered at the time of assessment proceedings with the help of section 13 In the present case, even if the assessee has taken funds from BCT it will not be affect its objects, if it has extended some undue benefits to BCT then safeguards are already there under section 13 of the Income tax Act. Registration cannot be rejected at the threshold only under an anticipation that something could be controlled either by the BCT or some undue benefit would be given to BCT . These are concerns which can always be looked into at the time of assessment proceedings. If a charitable institution enjoying benefit under section 12A is being dissolved then either those assets would be given to other institutions being charitable trust and enjoying benefit under section 12A, In case the assets are being parted with either individual entity or institution, who are not having charitable objects or registration under section 12A, then under the scheme of the Act it will first suffer tax, only thereafter, it will vest in such individual or entity. This is not a valid reason for rejecting registration under section 12A. The ITAT in the case of Rai University (2015 (6) TMI 633 - ITAT AHMEDABAD) has observed that at the time of registration, ld.DIT(E) has to satisfy with regard to genuineness of the activities of the trust, and not anything else. - Decided in favour of assessee

Summary

Issues Involved:

1. Denial of registration under section 12AA of the Income Tax Act, 1961.
2. Control and independence of the university.
3. Intermingling of funds between the university and the sponsoring body.
4. Dissolution provisions and asset reversion to the sponsoring body.

Issue-Wise Detailed Analysis:

1. Denial of Registration under Section 12AA of the Income Tax Act, 1961:
The primary issue revolves around the denial of registration under section 12AA. The Tribunal noted that the assessee, a private university, applied for registration under section 12AA to avail of tax exemptions. The DIT(E) rejected the application, citing four main reasons. The Tribunal evaluated whether these reasons were sufficient to demonstrate doubt on the genuineness of the assessee’s objects.

2. Control and Independence of the University:
The DIT(E) argued that the university was not independent but fully controlled by the sponsoring body, Bhandari Charitable Trust (BCT), which had been denied exemption under section 12A. The Tribunal observed that the DIT(E) failed to appreciate the provisions of the Gujarat Private University Act, 2009 (GPUA). The Tribunal highlighted that the GPUA provided a mechanism for appointing officers of the university in consultation with the State Government, ensuring a level of oversight. The Tribunal concluded that control by the sponsoring body does not affect the genuineness of the university’s objects, which are to impart education.

3. Intermingling of Funds:
The DIT(E) pointed out that there was intermingling of funds between the university and BCT, citing unsecured loans and various financial transactions. The Tribunal noted that such financial affairs, if misused, could be addressed during assessment proceedings with the help of section 13 of the Income Tax Act. The Tribunal emphasized that registration cannot be rejected based on an anticipation of misuse of funds, as safeguards are already in place under section 13.

4. Dissolution Provisions and Asset Reversion:
The DIT(E) expressed concerns that sections 41 and 42 of the GPUA allowed the sponsoring body to dissolve the university and reclaim its assets, which could be manipulated since BCT was not registered under section 12. The Tribunal found this apprehension misplaced, noting that the Income Tax Act already provided safeguards for such scenarios. The Tribunal explained that upon dissolution, assets would either be transferred to another charitable institution or taxed before being vested in a non-charitable entity. The Tribunal referenced the ITAT’s decision in the case of Rai University, which held that at the time of registration, the DIT(E) should focus on the genuineness of the activities rather than potential future misuse of assets.

Conclusion:
The Tribunal concluded that the reasons provided by the DIT(E) were not sufficient to reject the registration application. The Tribunal directed the DIT(E) to grant registration to the assessee-university under section 12AA of the Income Tax Act, 1961, emphasizing that concerns about financial control and asset reversion could be addressed during assessment proceedings.

Order:
The appeal of the assessee was allowed, and the DIT(E) was directed to grant registration under section 12AA. The order was pronounced on 20th February 2018 at Ahmedabad.