2021 (2) TMI 469 - AT - Income Tax

Exemption u/s 11 - charitable activity u/s 2(15) - cancellation of registration u/s 12AA - CIT-E doubted genuineness of the activity of the society, because, he had observed certain defects with regard to profit for the F.Y. 2015-16, 2016-17 and 2017-18 - HELD THAT - Assessee has furnished financial statement and as seen from the financial statements, the same refers to the construction account undertaken by the assessee which was not reflected in the income and expenditure statement, but recorded in the balance sheet. Thus, there was an error in the finding of the Ld.CIT(E) with regard to profit making activity of the assessee society. Violation of provisions of section 13(1) - Unreasonable payment of rent - no basis for suspecting the source of income of the daughters for purchase of land. It is observed that the assessee society is paying the rent of ₹ 50,000/- per year for 1355 sq.yds of land which is leased to the society for 15 years for the purpose of construction of old age home which works out ₹ 3.00 per square yard for month. The rent of ₹ 50,000/- per year on 1355 sq.yds of land in the vicinity of Visakhapatnam district appears to be reasonable and there is no reason to suspect the reasonableness of payment of rent. Payment of salary to Sri P.Prabhakar, who is working in the orphanage home for 24 x 7 cannot be said to be unreasonable by any stretch of imagination - CIT(E) ought to have considered the minimum wages as per the act in the area as decided by the District Collector, working hours and compared the salary paid to Sri P.Prabhakar with the minimum wages to arrive at the reasonableness. Defects of donations, Loyola Sweet Home is stated to be the name of orphanage home and on the receipt, registered number of the society was also duly printed and no defects were brought on record with regard to accounting of the receipts in the society s books, thus, there is no reason to suspect the genuineness of the activity of the society. Donations deposited in the bank account on 15.11.2016 and 25.11.2016, the sums of ₹ 1.00 lakh and ₹ 10,000/- respectively, the assessee submitted that the same were directly deposited in the in the bank account and duly accounted in the books of accounts. If the Ld.CIT(E) suspects the donations, the CIT(E) ought to have taken action for assessing the same as income u/s 68 r.w.s. 115BBE as per law, but there is no case for suspecting the genuineness of the activity of the society. Purchase of Maruti van, it is observed that Maruti van was purchased by the society prior to registration and the same was not brought into books of accounts. Van was used exclusively for ambulance of the society. The invoices was also available for purchase of Maruti van and no depreciation was claimed. The Ld.CIT(E) ought to have taken the appropriate action for the A.Y.2010-11( relevant to the Previous year 2009- 10) if necessary as per law. Loans, genuineness cannot be doubted. The assessee has accepted the interest free loans, the creditors are identifiable and the no individual benefit was given by accepting interest free loans thus there is no reason for the CIT(E) to reject the registration u/s 80G of the Act. Bills for construction activity, the assessee stated that it would produce the bills given the opportunity. In the instant case, we find that though the assessee has filed application on 29.03.2019, the case was taken up by the Ld.CIT(E) at the fag end of the period i.e. 13.09.2019, thus there was no time for the Ld.CIT(E) to examine the issue properly. Though all the issues prima facie appears to be not a reason for rejection of application of the assessee society, all the above issues needs to be verified in detail to take further action. Therefore, in our considered opinion, the issue needs to be remitted back to the file of the CIT(E). Accordingly, we remit the matter back to the file of the Ld.CIT(E) with a direction to examine the issues with regard to genuineness of the society and take appropriate action as per law. Appeal filed by the assessee is allowed for statistical purpose.

Summary

Issues Involved:
1. Rejection of application for registration under Section 80G of the Income Tax Act, 1961.
2. Alleged profit-making activities of the assessee society.
3. Violation of provisions of Section 13(1) of the Income Tax Act.
4. Payment of salary to a relative of the founder.
5. Genuineness of donations received.
6. Non-inclusion of a Maruti van in the balance sheet.
7. Interest-free loans and their genuineness.
8. Bills for construction activities.

Issue-wise Detailed Analysis:

1. Rejection of Application for Registration under Section 80G:
The assessee society filed an appeal against the rejection of its application for registration under Section 80G. The Commissioner of Income Tax (Exemptions) [CIT(E)] rejected the application due to various defects observed during verification, questioning the genuineness of the society's activities.

2. Alleged Profit-Making Activities:
The CIT(E) noted that the society made profits ranging from 51% to 55% during the financial years 2015-16 to 2017-18, suggesting a profit-making motive rather than genuine charitable activities. However, the assessee argued that the surplus was spent on building construction, reflected in the balance sheet, and not indicative of profit-making.

3. Violation of Provisions of Section 13(1):
The CIT(E) observed that the society incurred expenditure on building construction on leased land owned by the daughters of the founder, potentially benefiting them and violating Section 13(1). The assessee countered that the land was acquired by the daughters from their own sources, and the lease terms were reasonable, negating any violation.

4. Payment of Salary to a Relative of the Founder:
The CIT(E) found that a salary of ?7500 per month was paid to the founder's brother-in-law, who also received lodging and boarding benefits. The assessee justified this by stating that the individual worked 24/7, taking care of over 50 patients, and the salary was below the minimum wage prescribed by the District Collector.

5. Genuineness of Donations Received:
The CIT(E) questioned the genuineness of donations received in the name of 'Loyola’s Sweet Home' and the lack of corresponding entries in the cash book for certain donations. The assessee clarified that 'Loyola Sweet Home' is the name of the orphanage/old age home, and all donations were accounted for, though some were deposited directly by donors without the organizers' knowledge.

6. Non-Inclusion of a Maruti Van in the Balance Sheet:
The CIT(E) noted that a Maruti van owned by the society was not listed in the balance sheet. The assessee explained that the van was purchased before registration under Section 12AA, and proper accounting practices were not followed at that time. The van was used exclusively for the society's purposes.

7. Interest-Free Loans and Their Genuineness:
The CIT(E) doubted the genuineness and creditworthiness of interest-free loans received by the society. The assessee provided confirmations and explained that the loans were taken for construction purposes, with creditors identifiable and no individual benefits derived.

8. Bills for Construction Activities:
The CIT(E) found that most construction expenditures were incurred in cash without producing corresponding bills, questioning the genuineness of the activities. The assessee stated readiness to produce the bills if given the opportunity.

Judgment:
The Tribunal found errors in the CIT(E)'s findings, particularly regarding the profit-making activities and the reasonableness of rent payments. The Tribunal noted that the issues needed detailed verification and remitted the matter back to the CIT(E) for de novo consideration, directing a thorough examination of the society's genuineness and appropriate action as per law, ensuring reasonable and sufficient opportunity for the assessee.

Conclusion:
The appeal was allowed for statistical purposes, with the case remitted back to the CIT(E) for further examination and appropriate action, ensuring due process and opportunity for the assessee to present its case.