2020 (9) TMI 140 - AT - Income Tax

Exemption u/s 11 - entitlement for registration u/s 12AA rejected - income/funds of the society have been diverted for the benefit of interested parties i.e. the members and not for the charitable activities for public at large and attract proviso to section 13(1)(c) - CIT(E) has rejected the application purely on the ground that certain payments on account of salary vehicle rent house rent were made by the assessee society to the specified persons - HELD THAT - There is no prohibition under the law to hire services of related persons. But under the guise of hiring services the funds of society should not be diverted. It would be incumbent upon the Ld. CIT(E) while considering the application for registration under section 12AA of the Act to make such enquiries to satisfy himself regarding genuineness of activity of the trust whether the activity so carried out are as per objective of trust and such activity is in conformity with provision of law. In the case in hand ld. CIT(E) had not given any finding regarding activity of the society. Benefit of section 11 12 would not be available if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied directly indirectly for the benefit of any person referred to sub-section (3) of section 13 of the Act. It is therefore can be safely construed that where the revenue authority finds that during the previous year the assessee has applied any part of its income or any property of the trust or the institution directly or indirectly for the benefit of any person referred to in sub-section (3). It can decline the assessee society benefit of section 11 12 of the Act Considering the submissions of the assessee material placed on record and respectfully following the decision of MODERN DEFENCE SHIKSHAN SANSTHAN 2007 (2) TMI 255 - ITAT JODHPUR . We set aside the impugned order of Ld. CIT(E) and restore the application for seeking registration u/s 12AA to the file of Ld. CIT(E) considered in the light of the case laws as relied by the assessee. Appeal filed by the assessee is allowed for statistical purposes.

Issues Involved:
1. Denial of registration under section 12AA of the Income Tax Act.
2. Alleged diversion of income/funds for the benefit of specified persons.
3. Reasonability and justification of payments made to specified persons.
4. Applicability of section 13(1)(c) and section 13(3) of the Income Tax Act at the stage of granting registration under section 12AA.

Detailed Analysis:

1. Denial of Registration under Section 12AA:
The appellant society filed an application under section 12AA of the Income Tax Act, 1961, seeking registration. The CIT(Exemption) rejected the application on the grounds that the society's income/funds were diverted for the benefit of interested parties, thereby violating the proviso to section 13(1)(c) of the Act. The CIT(E) noted that payments were made to specified persons covered under section 13(3) of the Act, including salaries, vehicle rent, and house rent, without proper justification or evidence of educational qualifications and work experience.

2. Alleged Diversion of Income/Funds:
The CIT(E) observed that substantial payments were made to persons who were either members or relatives of the members of the society. The payments included salaries, vehicle rent, and house rent. The CIT(E) concluded that the society's income/funds were diverted for the benefit of interested parties, rather than for charitable activities for the public at large. The appellant argued that the payments were reasonable and justified, as they were made for services rendered to the society, such as liaising with government departments and administrative work.

3. Reasonability and Justification of Payments:
The appellant provided explanations for the payments made to specified persons, stating that the salaries were for administrative and liaison work, the vehicle rent was for a car used for guest and administrative purposes, and the house rent was for a property used as staff quarters. The appellant contended that the payments were made at prevailing market rates. However, the CIT(E) found these explanations unsatisfactory due to the lack of supporting documents, such as educational qualifications, work experience certificates, and rental agreements.

4. Applicability of Section 13(1)(c) and Section 13(3) at the Stage of Granting Registration:
The appellant argued that the CIT(E) should not consider the application of section 13 while granting registration under section 12AA. The appellant cited various case laws, including the Hon'ble Supreme Court's decision in Dawoodi Bohara Jamat, which held that section 13 applies only when exemption under sections 11 and 12 is claimed, and not at the stage of registration. The appellant also relied on the ITAT Jodhpur Bench's decision in Modern Defence Shikshan Sansthan, which stated that the issue of application of income should not be examined at the stage of registration under section 12AA.

Tribunal's Findings:
The Tribunal noted that the CIT(E) rejected the application based on the payments made to specified persons without proper justification. The Tribunal emphasized that there is no prohibition under the law to hire services of related persons, but such payments should be reasonable and justified. The Tribunal found that the CIT(E) did not make sufficient inquiries to determine whether the payments were commensurate with the services rendered and prevailing market rates.

The Tribunal held that at the stage of considering the application for registration under section 12AA, the CIT(E) should only satisfy himself about the objects of the trust and the genuineness of its activities. The Tribunal referred to the case laws cited by the appellant and concluded that the CIT(E) should not have invoked section 13 at the stage of registration.

Conclusion:
The Tribunal set aside the CIT(E)'s order and restored the application for registration under section 12AA to the CIT(E) for reconsideration. The Tribunal directed the CIT(E) to consider the application in light of the case laws cited by the appellant and to make necessary inquiries regarding the reasonability of the payments made to specified persons at the appropriate stage. The appeal filed by the appellant was allowed for statistical purposes.

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