2021 (10) TMI 911 - AT - Income Tax

Exemption u/s 11 - withdrawing/cancelling the registration u/s.12AA - search and seizure action u/s 132 - loose papers found in search relied upon - treating the assessee as carrying out business and not carrying out charitable activities, holding that funds of the society have been used for the benefit of members of the trust and cancelling registration 12AA of the Act with retrospective effect from 01.04.2008 - HELD THAT - It is settled issue that the registration u/s 12AA cannot be cancelled from retrospective effect. See case of Auro Lab 2019 (1) TMI 1478 - MADRAS HIGH COURT . Pr. CIT erred in cancelling the registration with retrospective effect from 01.04.2008 and secondly, we are also of the view that Ld. Pr. CIT erred in cancelling the registration u/s 12AA(3) and 12AA(4) of the Act without placing any material evidences which could indicate that the assessee society was not running for the charitable objects for which it was established and nor any doubt has been raised about genuineness of the activities carried out by the assessee society with regard to imparting of education and carrying out charitable activities. Addition based on loose papers - As in this case alleging that the fund of the assessee society have been misappropriated by the members of the society or there is any ambiguity in the claim of expenses, it can well be taken care of at the time of assessing the income and if needed the additions can be made to the income of the assessee and the same should be restricted only to the issue involved. However in no case the remaining income of the trust/society should be affected by way of denying the benefit of exemption u/s 11 12 of the Act. Whether Pr. CIT erred in invoking the provisions of section 12AA(4) of the Act as it was not applicable in the case of assessee because section 12AA(4) of the Act was inserted w.e.f. 01.10.2014? - This ground to be infructuous in nature firstly because the ld. Pr. CIT has carried out the proceeding u/s 12AA(3) of the Act as well as 12AA(4) of the Act. Though rightly contended that amended provision i.e. section 12AA (4) of the Act were inserted from 01.04.2014 but it in itself cannot challenge the validity of the impugned order because Ld. Pr. CIT has also invoked the provisions of sections 12AA(3) of the Act. Had Ld. Pr. CIT carried out the proceedings only u/s 12AA(4) of the Act the assessee may had case - in the instant case both subsection (3) (4) of section 12AA of the Act were invoked and Ld. Pr. CIT(A) was well within in his jurisdiction to carry out the impugned proceedings. We accordingly dismiss ground no.5 raised by the assessee. Whether CIT erred in invoking the provision of section 12AA(3) of the Act merely on the basis of his finding that the provisions of section 13(1)(c)(ii) are applicable on the assessee? - We find that the alleged seized documents only pertains to financial year 2009-10 i.e. A.Y. 2010-11 and not for any other year. Nothing adverse has been observed by Ld. Pr. CIT(Central) from the date of registration u/s 12AA of the Act i.e. 01.04.2008 till the date of passing impugned order except for A.Y. 2010-11. It is judicially settled that if provisions of section 13(1)(c) of the Act are attracted, the benefits of exemption under section 11 12 of the Act are not available to the assessee, it is subject matter of the assessment proceedings as to whether the exemption u/s 11 12 of the Act is to be denied or forfeited to the extent of violation of provision of section 13(1)(c) of the Act is formed by the Ld. AO but it can in no way lead to cancellation of registration granted u/s 12AA of the act unless any cogent and positive material is brought on record to establish that the society is not carrying out genuine charitable activities as per the objects for which it has established. If the provisions of section 13 are violated, it empowers the assessing officer to forfeit the exemption permissible u/s 11 12 of the act only to the extent of amount not allowed u/s 11 12 of the Act. However, such violation cannot form a ground for cancellation of registration u/s 12AA(3) - Thus violation of u/s 13 of the Act cannot be the basis for cancellation of registration 12AA - Decided in favour of assessee. Initiation of proceedings u/s 148 - contention of the assessee that nothing corroborating cogent/positive and independent evidence has been brought on record which could support the adverse influence drawn by AO - HELD THAT - As no merit in the contention of assessee because there were loose papers found during the course of search bearing No. LPS-6, LPS-7 LPS-11which contained the details of salary of teaching staff and non-teaching staff, person wise details of salary payment, summery of source of funds, sundry creditors and also hand written documents showing the amount of fees collection and other details. So far as these documents are concerned they are having connection to the assessee society and it cannot be said that Ld. AO proceeded without having any adverse material in its possession. We, therefore, find no merit in this ground no.1 raised by the assessee and the same stands dismissed. Treating income of assessee as business income - assessee not carrying ay charitable activity u/s 2(15) - HELD THAT - We are of the view that assessee is not carrying out any business of profession and it is established that the assessee is a charitable society running for charitable purpose and imparting education through its colleges and institutions and the objects of the assessee society failed under the provisions of section. 2(15) of the Act and is not in the nature of advancement of any other object of general public nor it is involved in carrying out of any activity in the nature of trade, commerce or business. Therefore neither the proviso to section 2(15) are applicable to the assessee nor it can be held that assessee is carrying out business of profession. Disallowance of bogus salary expenditure - Addition based on loose papers - HELD THAT - It is a settled law that any document can be either accepted as a whole or denied in its entirety. When the salary expenditure showing in the income and expenditure account is less than the alleged amount shown in the loose sheets, there remains no justification of disallowing the salary expenditure. Even otherwise except these loose papers no other incriminating material was found. There is no statement of any employee stating that they were paid higher amount in cheque and difference amount was repaid by them to the members of the society. No appropriate account was taken by the ld. AO for cross checking contents of seized loose sheets with the concerned employee. In the instant case, the alleged seized documents on the basis of which disallowance of bogus salary has been made are merely loose sheets which are not corroborated any other evidence to prove the contents of such loose papers. We, accordingly are of the considered view that Ld. CIT(A) erred in sustaining the disallowance of bogus salary - Decided in favour of assessee. Payment to one of the trustees as based on the seized loss sheet and violation of provisions of section 13(1)(c) - HELD THAT - It seems that the alleged figure for assets expenses, liabilities source of funds etc. In the last line of the sheet is mentioned that shortage of cash is linked to Vijay sir and the date is 30th June 2010 which falls under the A.Y. 2011-12. However, Ld. AO has made the addition for A.Y. 2010-11. This fact in itself proves that the action of the Ld. AO of making addition during A.Y. 2010-11 was wrong. As there are various other items with figures mentioned in front of them. Ld. AO had not made any comment nor made any efforts to examine the correctness of these figures, AO has merely picked up some figures as per his comfort which shows that either the remaining entries are not material or they are merely rough jottings. It is also not proved that Mr. Vijay Hariramani has taken money because in the alleged loose sheets only says shortage of cash with mentioned to Vijay Sir. It nowhere indicates that the alleged sum has been taken by Mr. Vijay Hariramani from the society - we are of the view that the alleged addition has been made by the Ld. AO merely on surmises and conjectures which deserves to be deleted - allow ground raised by the assessee. Suppressed unrecorded fees - HELD THAT - From perusal of the alleged loose sheet which is neither signed no the author of it is known we observe that some jottings of fees collection, major expenses, bank loan, unsecured loan, assets are written. Prima facie, it looks to be a some estimate or projection or rough jottings which may have been carried out at any particular time. It in itself indicates that this sheet is a dumb document/rough jottings which cannot be correlated to the actual figures for F.Y. 2009-10. Such loose sheets are not signed and author of such sheet is not known. The same cannot be treated as part of the regular books of accounts of assessee, therefore, entries in such loose sheets are irrelevant. Even otherwise the Ld. AO has taken a particular version whereas as Ld. CIT(A) has taken another version which raises doubts on the correctness of the loose sheets and it further lays emphasis that this sheets is merely a rough jotting. We, therefore, in absence of any corroborative evidence brought on record by both lower authorities and Ld. CIT(DR) find no justification in finding of Ld. CIT(A) sustaining the addition. Disallowance of deduction for capital expenditure incurred towards application of income - HELD THAT - As the assessee is a charitable society carrying out genuine activities for its charitable objects falling under the provision of section 2(15) of the Act and is therefore eligible for benefit of exemption u/s 11 12 of the Act. We have already held that the ld. AO erred in making the additions for A.Y. 2010-11 on the basis of loose sheets and all these disallowance and additions have already been deleted by us. Therefore, under the given facts and circumstances of the case, the assessee is eligible to claim the deduction for capital expenditure u/s 11 12 of the Act on an application of societies fund for charitable activity. Thus relevant finding of Ld. CIT(A) is set aside. - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction of Pr. CIT(Central) to cancel registration under section 12AA.
2. Cancellation of registration under section 12AA(3) and 12AA(4) retrospectively.
3. Alleged misuse of funds and applicability of section 13(1)(c).
4. Treatment of income as business income under section 28.
5. Disallowance of salary expenses as bogus.
6. Addition for unrecorded fees.
7. Deduction for capital expenditure.

Issue-Wise Analysis:

1. Jurisdiction of Pr. CIT(Central) to cancel registration under section 12AA:
The assessee argued that the Pr. CIT(Central) lacked jurisdiction to cancel the registration under section 12AA, as the power to grant and cancel such registration lies with the CIT(Exemption). It was contended that the transfer of jurisdiction under section 127 was only for coordinated assessments and not for administrative functions like cancellation of registration. The Tribunal, however, found that the jurisdiction was validly transferred under section 127 and dismissed the additional ground challenging jurisdiction.

2. Cancellation of registration under section 12AA(3) and 12AA(4) retrospectively:
The Tribunal observed that the cancellation of registration under section 12AA(3) and 12AA(4) was based on loose papers found during the search, which allegedly indicated misuse of funds. However, it was noted that there was no material evidence to prove that the activities of the trust were not genuine or not being carried out in accordance with its objects. Citing various judicial precedents, the Tribunal held that the registration could not be cancelled retrospectively and quashed the cancellation order.

3. Alleged misuse of funds and applicability of section 13(1)(c):
The Pr. CIT(Central) alleged that the funds of the trust were misused for the benefit of its members, invoking section 13(1)(c). The Tribunal noted that this allegation was based on loose papers with no corroborative evidence. It was held that even if there was a violation of section 13(1)(c), it could not be a ground for cancellation of registration but could only result in denial of exemption under sections 11 and 12 to the extent of the violation. The Tribunal allowed the grounds challenging the applicability of section 13(1)(c).

4. Treatment of income as business income under section 28:
The Tribunal found that the assessee was a charitable society running educational institutions and was approved by various regulatory bodies. It was held that the assessee was not carrying out any business or profession, and its income could not be assessed under section 28. The Tribunal allowed the ground challenging the treatment of income as business income.

5. Disallowance of salary expenses as bogus:
The disallowance of salary expenses was based on loose papers indicating higher salary payments and alleged cash repayments by employees. The Tribunal noted that there was no corroborative evidence or statements from employees to support the allegation. It was held that the disallowance was based on mere surmises and conjectures, and the ground challenging the disallowance was allowed.

6. Addition for unrecorded fees:
The addition for unrecorded fees was based on loose papers indicating higher fee collections. The Tribunal observed that these papers were rough jottings and not part of regular books of accounts. It was held that no addition could be made based on such loose papers without corroborative evidence. The ground challenging the addition was allowed.

7. Deduction for capital expenditure:
The Tribunal noted that the assessee was eligible for exemption under sections 11 and 12, and the capital expenditure incurred for charitable purposes should be allowed as an application of income. The ground challenging the disallowance of capital expenditure was allowed.

Conclusion:
The Tribunal allowed the appeals partly, quashing the cancellation of registration under section 12AA and allowing the grounds challenging the treatment of income as business income, disallowance of salary expenses, addition for unrecorded fees, and disallowance of capital expenditure. The jurisdiction of Pr. CIT(Central) to cancel the registration was upheld.