2019 (4) TMI 1215 - AT - Income Tax

Withdrawal of registration granted U/s 12AA(3) U/s 10(23C)(vi) - allegation relate to diversion of fund of the assessee society for personal purposes, non-genuine scholarship expenses and addition to fixed assets in view of the payments made to Rajasthan Housing Board in contravention of Section 11(5) r.w.s 13(1)(c) - HELD THAT - Diversion of the funds of the assessee society for personal purposes - collection of old denomination note as fee and deposit the same in related Co-operative Bank - HELD THAT - We therefore find that there was suspicion in the mind of authorities that assessee s funds have been diverted as the cash book doesn t reflect any outward movement of cash. Further, even the Bank has not recorded such funds and there are allegations regarding exchange of old currency notes with new notes. To our mind, once the cash is found in possession of the bank where the assessee maintains its bank account and it is confirmed by the Bank officials that the cash so found belong to the assessee society, there is no basis to hold onto such suspicion as far as the assessee society is concerned. In the instant case, firstly the funds belonging to the assessee society have been physically found in the possession of the Bank at its strong room and not in possession of Shri keshav Badaya. Secondly, such funds have not been used or applied and have been physically found and thus, there is no benefit which can be said to have actually been gained by Shri Keshav Badaya either directly or indirectly in his individual capacity by having such funds in the possession of the Bank. In light of above, we are of the considered view that the provisions of section 13(1)(c) are not attracted in the instant and the contentions so advanced by the Revenue and the ld CIT DR cannot be accepted. Therefore, we find that it is a case of mere suspicion and not a conclusive finding and even the Department itself has given a clean chit to the Bank. As far as the assessee society is concerned, bank officials as well as the assessee s records conclusively prove that the funds so found are fees collected from the students duly recorded in the books of accounts and infact, such amount has been seized by the Department which further proves that there was no diversion of funds and no application for personal benefit of any person. Therefore, there is no basis to sustain the findings of the ld Pr CIT. Only in a scenario, where it is proved beyond doubt that the funds of the assessee society have actually been diverted for purposes other than the stated objects of the assessee society, it can be said that such funds have not been utilized for the purposes the exemption under the Income Tax Act has been granted to the assessee society and to the extent of such diversion, the provisions of section 11 and 12 shall not apply. Further, where the Revenue through its investigation finds that there is actual diversion of funds of the assessee society and such diversion has actually resulted in direct/indirect benefit of the related persons so defined u/s 13(3) of the Act, the activities and the conduct of the assessee society will surely come under the cloud. In the instant case, the cash has been physically found in possession of the assessee s bank and the said cash belongs to the assessee society as corroborated by the statements of the bank employees, there is thus no basis to hold that there is any diversion of funds of the assessee society for the personal benefit of Badaya family and the same cannot be a basis to withdrawn the exemption so granted to the assessee society u/s 12AA. Non-Genuine Scholarship Expenses - we find that the Revenue authorities have to appreciate that a student studying in a College or University cannot be equated with a regular vendor or a service provider. A student involvement is limited to the educational sphere and to a limited extent where he/she and their parents/guardians are required to pay his fees and receive scholarship wherever he/she is eligible for the same and nothing beyond that. Therefore, where there is a non compliance on part of certain students to respond to such notices/summons in a timely manner and in some cases, where they have responded though with wrong facts, the authorities have to appreciate the same in a more realistic manner rather than in a ritualistic manner and their conclusions should not be guided solely by non-appearance of certain students before them. In other words, unless the Revenue authorities are ceased of sufficient material or information and such material/information is credible enough to prove that the assessee society is withdrawing the funds of the society in the guise of scholarship expenses systematically over a period of time and such funds are not reaching the students concerned in whose name the scholarship payments have been shown to have been made, in such a case, the authorities have all the right and the jurisdiction to proceed against the society. However, in the instant case, there is nothing on record which has been brought on record to prove such mis-management and diversion of society funds. In our considered view, scholarship payments are genuine payments made by the assessee society and there is no basis to hold that the assessee society has misused the society funds in guise of scholarship payments. Therefore, the said findings of the ld Pr CIT cannot be sustained and cannot be made a basis to hold that the assessee society is not carrying out its activities as per its objects and the exemption granted u/s 12AA should be withdrawn. Payment made to Rajasthan Housing Board in contravention of Section 11(5) read with Section 13(1)(c) - We therefore find that the assessee society has entered into an agreement to sell with Adarsh Gyan Vidhalaya Samiti wherein the former has agreed to purchase an institutional plot of land which has been allotted to the latter vide conveyance cum perpetual lease deed for 99 years by the Rajasthan Housing Board. There are enabling provisions in the conveyance cum perpetual lease deed which allows such transfer subject to approval and sanction of Rajasthan Housing Board. Necessary permission has been sought from the Rajasthan Housing Board for such transfer in favour of the assessee society and the same is currently awaited and on receipt thereof, formal sale deed shall be executed in favour of the assessee society. The assessee society has already paid substantial amount of ₹ 6.73 Crores, out of total purchase consideration of ₹ 7.54 Crores in terms of agreement to sell, directly to Rajasthan Housing Board. Further, the assessee society is in effective possession of the said plot of land as it has since built a school building thereon and carrying on its educational activities and the fees so received have been reflected in its books of accounts. In the instant case, the assessee society having entered into an agreement to sell with Adarsh Gyan Vidyalya Society and having paid a substantial amount in consideration for purchase of land and in possession of the said land has clearly made an investment in an immoveable property though the same is subject to approval of Rajasthan Housing Board and signing of the final conveyance deed. Accordingly, in light of above discussions and in the entirety of facts and circumstances of the case, the payment to Rajasthan Housing Board is not in contravention of section 11(5) r/w section 13(1)(c) of the Act. Therefore, the findings of the ld Pr CIT cannot be sustained and cannot be made a basis to hold that the assessee society is not carrying out its activities as per its objects and the exemption granted under section 12AA should be withdrawn. In light of above discussions and in the entirety of facts and circumstances of the case, the findings of the ld Pr.CIT relating to diversion of fund of the assessee society for personal purposes, nongenuine scholarship expenses and payments made to Rajasthan Housing Board in contravention of Section 11(5) read with Section 13(1)(c) of the Act cannot be sustained. These are merely apprehension which have been raised by the ld. Pr. CIT and there is no credible evidence on record which can conclusively demonstrate that the assessee is not working as per the objects for which registration was initially granted, that the activities of the assessee s society are not genuine or any personal benefit has been derived by any person so defined u/s 13(3) of the Act. The case of the assessee therefore doesn t falls U/s 12AA(3) and 12AA(4) of the Act. In light of our details discussion and findings, the registration of the assessee society u/s 12AA is hereby directed to be restored from the date the same was withdrawn and cancelled by the ld. Pr. CIT in terms of the impugned order.

Summary

Issues Involved:
1. Withdrawal of exemption granted under Section 12AA of the Income Tax Act.
2. Diversion of funds of the assessee society for personal purposes.
3. Non-genuine scholarship expenses.
4. Payment made to Rajasthan Housing Board in contravention of Section 11(5) read with Section 13(1)(c).
5. Withdrawal of exemption granted under Section 10(23C)(vi) of the Income Tax Act.

Detailed Analysis:

1. Withdrawal of exemption granted under Section 12AA of the Income Tax Act:
The assessee society challenged the order of the Principal Commissioner of Income Tax (Pr.CIT) which canceled its registration under Section 12AA of the Income Tax Act. The Pr.CIT based his decision on findings that the society was not operating according to its stated objectives and was involved in activities such as diversion of funds for personal purposes, non-genuine scholarship expenses, and improper payments to the Rajasthan Housing Board.

2. Diversion of funds of the assessee society for personal purposes:
The Pr.CIT alleged that the society diverted funds for personal use, citing evidence from a search operation at Integral Bank, where unaccounted cash was found. The cash was claimed to belong to the St. Wilfred group of colleges. The Pr.CIT concluded that the society collected fees in old denomination notes post-demonetization and did not record these in its books, implying fund diversion for personal use. The Tribunal, however, found that the source of the cash was indeed fees collected from students, which were recorded in the society's books. The Tribunal noted that the cash was found in the bank's possession and not used for personal benefit, thus rejecting the Pr.CIT's findings.

3. Non-genuine scholarship expenses:
The Pr.CIT questioned the genuineness of scholarship payments made by the society, based on non-receipt of replies to notices sent to students and denials from some students. The society contended that all scholarships were paid via account payee cheques, and the students were produced for verification. The Tribunal found that the society provided sufficient evidence, including bank statements and confirmations from students, proving the genuineness of the scholarship payments. The Tribunal concluded that the Pr.CIT's apprehensions were unfounded.

4. Payment made to Rajasthan Housing Board in contravention of Section 11(5) read with Section 13(1)(c):
The Pr.CIT held that the society's payment to the Rajasthan Housing Board on behalf of Adarsh Gyan Vidyalaya Samiti, a related entity, was in violation of Section 11(5) and Section 13(1)(c). The Tribunal found that the payment was made under an "agreement to sell" for the purchase of land, which was used for educational purposes. The Tribunal noted that the land transfer was subject to approval from the Rajasthan Housing Board and that the society was in possession of the land, using it for educational activities. The Tribunal concluded that the payment was a permissible investment in immovable property and not in violation of the cited sections.

5. Withdrawal of exemption granted under Section 10(23C)(vi) of the Income Tax Act:
Following similar reasoning as in the case of Section 12AA, the Pr.CIT withdrew the exemption granted under Section 10(23C)(vi). The Tribunal applied its findings from the Section 12AA case, concluding that the society's activities were genuine and in accordance with its objectives. The Tribunal directed the restoration of the exemption under Section 10(23C)(vi) from the date it was withdrawn.

Conclusion:
The Tribunal found that the Pr.CIT's findings were based on suspicions and not supported by conclusive evidence. The Tribunal directed the restoration of the society's registration under Section 12AA and the exemption under Section 10(23C)(vi), concluding that the society's activities were genuine and in line with its stated objectives.