2018 (5) TMI 234 - AT - Income Tax

Denying the assessee registration u/s. 12AA - Incomes not included in total income - inflation of costs - Held that - Charge of hefty fees undermines and violates the very basis or notion of charity, excluding those placed at the lower end of the societal strata. That apart, the assessee, by its constitution, is a non-profit society. The reasonableness afore-stated, however, is to be considered with reference to the cost of providing education, quality of which is to be maintained. The school is affiliated to the Punjab Board, running on CBSE pattern. There is nothing to suggest of the costs being inflated, as we not often, see, with a view to disclose a reasonable profit A surplus, by itself, which in fact is essential, would not render the society as not a non-profit society, even as, given its mandate as a non-profit body, it may well be contained, if not restricted further, from the level of 20% to 25% (of the gross receipt) which obtains for f.ys. 2014-15 & 2015-16, being only the second and third years of its operation. This is as the total fees (cost to the students) could be reduced by as much, while still meeting the cost, which would only stabilize in future. All the receipts and expenses being accounted, with the accounts being audited, we find no basis for drawing any adverse inference from the deposit of cash in bank post 08.11.2016. The facts are required to be seen in perspective, which we find has not been by the competent authority. We only consider it proper that the matter is restored back to the file of ld. CIT(E). We have already noted two aspects on which we find the assessee to have not furnished a satisfactory explanation, and which impinge directly on the acceptance or otherwise - being germane to the parameters laid down for the purpose, of the assessee s application u/s. 12A. The assessee, as assured by the ld. AR before us, shall clarify on those aspects before the ld. CIT(E), with a view to satisfy him thereon. It needs to be appreciated that it is, under law, the competent authority which is to be satisfied about the objects of the society as well as the genuineness of its activities. Assessee s appeal is allowed for statistical purposes.

Summary

Issues Involved:
1. Denial of registration under section 12AA of the Income Tax Act, 1961.
2. Genuineness of the activities of the assessee-society.
3. Structural issues related to the leasehold land and school building.
4. Examination of financial statements and other sources of income.
5. Reasonableness of school fees and surplus generated.
6. Procedural aspects and satisfaction of the competent authority.

Detailed Analysis:

1. Denial of Registration under Section 12AA:
The assessee-society, formed on November 8, 2011, applied for registration under section 12AA on November 30, 2016. The Commissioner of Income Tax (Exemptions) [CIT(E)] denied the registration, citing that the society had sources of income other than from the school, which were not disclosed, and activities apart from the school were pursued. The society's gross receipts for the financial years 2013-14 to 2015-16 were below ?100 lacs, claiming exemption under section 10(23C)(iiiad). However, anticipating gross receipts to exceed ?100 lacs, the society sought registration under section 12AA instead of section 10(23C)(vi).

2. Genuineness of Activities:
The CIT(E) questioned the genuineness of the society's activities, noting that the financial statements revealed undisclosed sources of income and a perfunctory response to the requirement of furnishing details of cash deposits post-demonetization. The school charged various fees, indicating it might be for profit. The Tribunal observed that the supplementary deed dated September 14, 2016, was not registered, affecting the amendments' validity. The leasehold nature of the school building and the potential transfer of assets to the founder members' relatives were also concerns.

3. Structural Issues Related to Leasehold Land and School Building:
The Tribunal highlighted the lease agreement beginning February 16, 2012, for 30 years, with the land being leasehold and belonging to the family members of the founder members. The lease's expiration could result in the school building, a principal asset, being lost to the society without suitable compensation. This structural defect adversely impacted the genuineness of the society's activities.

4. Examination of Financial Statements and Other Sources of Income:
The Tribunal noted discrepancies in the financial statements, with consolidated surplus lower than that of the school, indicating other sources of income. The society booked expenses like lease rent, depreciation, and interest on term loans in its accounts, which were part of the school expenditure. The Tribunal found no basis for adverse inference from the cash deposits post-demonetization, as all receipts and expenses were accounted for and audited.

5. Reasonableness of School Fees and Surplus Generated:
The Tribunal acknowledged that the school fees should be reasonable and not undermine the notion of charity. The surplus generated was essential but should be contained, with the total fees potentially reduced to meet costs. The Tribunal found no evidence of inflated costs and noted that the society's surplus funds could be better invested.

6. Procedural Aspects and Satisfaction of the Competent Authority:
The Tribunal restored the matter to the CIT(E) for reconsideration, noting that the assessee had not furnished satisfactory explanations on certain aspects impacting the acceptance of its application under section 12A. The Tribunal emphasized the need for the competent authority to be satisfied about the society's objects and the genuineness of its activities. The Tribunal followed the dictum by the Apex Court in CIT v. Walchand & Co. (P.) Ltd., ensuring all questions arising from the appeal were addressed.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, directing the CIT(E) to reconsider the application with clarifications from the assessee on the noted aspects. The order was pronounced in the open court on April 20, 2018.