2017 (5) TMI 15 - AT - Income Tax

Cancelling the registration u/s 12AA(3) - salary have been paid to specified persons in violation of clause 5 of the Memorandum of Association, because these two persons were also the office bearers of the society - Held that - As seen that so far as the first allegation that the assessee has paid salary to the office bearers in violation of clause 5, we find that the said clause itself provides that remuneration can be paid to any members of the institution if he is appointed as officer of the school. Such a payment again has not been held to be excessive under the terms of section 13(2)(c) read with section 13(3) in order to show that the payment of salary is in violation of section 13. It is incumbent that certain bench marking vis-a-vis some comparable instances should be brought on record to show that if these services would have been rendered by the person from outside he would have been paid lesser amount. Thus such a payment cannot lead to any adverse inference for doubting the genuineness of the activities carried out by the assessee s society. So far as the observation of the Ld. CIT that their appointment cannot be said to be fair and transparent, this again is a very general proposition, because unless it is pointed out that the payment made to such person falls within the realm of diversion of funds or giving undue benefit to the persons specified u/s 13(3), no adverse inference can be drawn. Even if it is held that no salary at all was required to be paid to these persons, then also after invoking the provisions of section 13, the entire surplus can be taxed. Thus, these allegations do not hold ground for the cancellation of registration within the scope of section 12AA (3) albeit it could be subject matter of scrutiny and addition or forfeiting of surplus amount during the course of assessment proceedings and in terms of section 13 the entire surplus of the assessee can be taxed if the assessee s society is being found to be violating the conditions laid down in various clauses of section 13. Assessee has been charging bus fees from the students - Held that - Providing of bus facilities to students and charging fees is directly related to the objects of the society, i.e. imparting education to the students and facilitating the students for picking and dropping to and from the school. Even if certain buses plied were belonging to the office bearers then also no adverse inference can be drawn on the facts of the present case for the reason that none of the expenditure relating to buses have been borne by the school and again nothing has been brought on record that any payment for plying of bus or the fees charged for the bus fees violates the concept of reasonableness as enshrined in section 13(2)(c). As regards the filing of an affidavit of the Principal before the RTA that bus charges will not be charged from the students, then again it cannot be point of adverse inference to doubt the genuineness of the activities of the assessee albeit it can be some kind of violation under Road Transport Laws which is not relevant for the conditions laid in section 12AA (3). Again this is subject matter of scrutiny during the assessment proceedings and from the perusal of the reassessment orders passed in the subsequent to the cancellation of the registration it is seen no adverse inference with regard to the bus charges or for violation of any law has been drawn. Assessee has been found to maintained two parallel registers for annual general meeting for certain period - Held that - Maintenance of two parallel registers does not lead to any adverse inference because it is neither in violation of any of the objects nor leads to any inference regarding non genuine activity if any carried out by the assessee, because nothing incriminating is indicated from such parallel register maintained for the brief period. Assessee appeal allowed.

Summary

Issues Involved:

1. Cancellation of registration under section 12AA(3) of the Income Tax Act.
2. Allegations of salary/remuneration paid to office bearers.
3. Allegations regarding bus charges and tax evasion.
4. Allegations of maintaining parallel registers for annual general meetings.

Detailed Analysis:

1. Cancellation of Registration under Section 12AA(3):

The main issue in the appeal was the cancellation of the registration granted to the assessee under section 12AA(3) of the Income Tax Act by the Commissioner of Income Tax (CIT), Hisar. The CIT canceled the registration retrospectively from 01.04.2001, citing that the activities of the assessee society were neither genuine nor carried out in accordance with the objects of the society.

2. Allegations of Salary/Remuneration Paid to Office Bearers:

The CIT noted that Shri Ajit Twickley, a life member and Secretary of the society, was paid a salary of ?1,25,130/- for supervising building construction and maintenance, which was claimed to be in violation of clause 5 of the Memorandum of Association (MOA). Similarly, Mr. K.P. Mathur, another office bearer, was paid a salary for administrative work. The CIT held that the assessee failed to prove that these payments were made following a fair and transparent procedure and that the services rendered added value to the school.

The assessee argued that the payments were made in accordance with the MOA, which allowed remuneration to members appointed as officers of the school. The payments were reasonable and had been allowed in previous income tax assessments. The CIT’s findings were based on the lack of evidence of proper appointment procedures and the actual performance of duties by the office bearers.

3. Allegations Regarding Bus Charges and Tax Evasion:

The CIT found that the school charged transport fees from students despite an affidavit filed with the Regional Transport Authority (RTA) stating that no charges would be levied. This was seen as an evasion of passenger tax. Additionally, the operation of school buses was awarded to office bearers, raising concerns about the fairness and transparency of the process.

The assessee contended that the bus fees were duly accounted for in the books and that the affidavit was a procedural requirement. The buses were hired, and the school did not incur expenses for their operation. The CIT, however, held that the charging of bus fees violated the affidavit and constituted tax evasion.

4. Allegations of Maintaining Parallel Registers:

The CIT observed that the assessee maintained two parallel registers for annual general meetings, which raised doubts about the authenticity of the records. The assessee explained that one register was misplaced, and a new one was started.

The CIT found discrepancies in the dates and recordings, which eroded confidence in the records presented by the society.

Findings and Conclusion:

The Tribunal analyzed the allegations and found that the CIT's reasons for canceling the registration were not sufficient to conclude that the assessee’s activities were not genuine or not in accordance with its objects.

- Salary/Remuneration: The Tribunal noted that the MOA allowed remuneration to members appointed as officers. The payments were not shown to be excessive or unreasonable under section 13(2)(c) of the Act. The CIT did not provide evidence that the payments violated the objects of the society or constituted diversion of funds.

- Bus Charges: The bus fees were accounted for, and providing transport facilities was related to the educational activities of the society. The affidavit issue was a procedural matter under transport laws and did not affect the genuineness of the society’s activities.

- Parallel Registers: The maintenance of parallel registers did not indicate non-genuine activities or violation of the society’s objects.

The Tribunal concluded that the CIT's reasons did not justify the cancellation of registration under section 12AA(3). The order of the CIT was set aside, and the registration was restored.

Judgment:

The appeal of the assessee was allowed, and the registration under section 12AA was restored. The Tribunal emphasized that the issues raised could be scrutinized during assessment proceedings, but they did not warrant cancellation of registration.