2019 (9) TMI 897 - AT - Income Tax

Grant of registration as charitable society u/s 12AA - denial of registration as applicant society was primarily indulging in commercial activity of selling milk and on noting that there was substantial deposit of cash in its bank account during demonetization period showing that the activities of the applicant society were not transparent and further for the reason that the change in the constitution of the governing body of the society had not been shown to be accepted by the Registrar of Societies HELD THAT - As regard the commercial activity carried out by the applicant society, the contention that it had owned primarily non-milching cows while the milching cows were very few is a vital fact pointed out by the the assessee, which, if found correct may have impact on the conclusion drawn vis a vis the activity carried out by the applicant society being primarily commercial or not. The applicant society has submitted detail of the nature of cows owned by it, but the same, we find, needs to be verified and investigated further before arriving at any finding on the issue. Further the issue of change in constitution of the governing body not being accepted by the Registrar of Society, the contention of the society that there was no such requirement in the Act also, needs to be looked into. Regarding the finding of excess currency/cash being deposited in bank during demonetization period, the assessee has contended that the same has nothing to do with its own income and could in fact be attributed to people who were disposing off their demonetized currency to charitable societies during this period. We find that all the issues raised by the Ld.CIT(E) need to be examined and investigated further before arriving at the conclusion vis a vis the eligibility of the applicant society to grant of registration u/s 12AA of the Act, in view of the above contentions raised by the Ld.Counsel for the society. We, therefore, consider it fit to restore the issue back to the Ld.CIT(E) to consider the grant of registration afresh after giving due opportunity of hearing to the applicant society. Appeal of the applicant society is allowed for statistical purposes.

Summary

Issues:
- Appeal against refusal of registration as charitable society u/s 12AA of the Income Tax Act, 1961.
- Primarily indulging in commercial activity of selling milk.
- Substantial cash deposits during demonetization period.
- Change in governing body not accepted by Registrar of Societies.

Analysis:
1. Refusal of Registration:
The appeal was filed against the denial of registration as a charitable society u/s 12AA of the Income Tax Act. The Commissioner of Income Tax (Exemptions) had refused registration based on various grounds, including the commercial nature of activities and lack of transparency. The society's aims and objects were centered around taking care of cows and running a gaushala. However, the Commissioner found that the society's predominant aim was the commercial activity of selling milk, as evidenced by a significant increase in receipts from milk sales in recent years.

2. Commercial Activity of Selling Milk:
The Commissioner noted a substantial increase in total receipts of the society due to the sale of milk, indicating a commercial nature of activities. The society's financial statements revealed a significant portion of revenue generated from milk sales, raising doubts about its charitable purpose. The Commissioner highlighted the discrepancy between the society's claims of charitable activities and the substantial income from commercial milk sales, leading to the rejection of registration.

3. Substantial Cash Deposits During Demonetization:
Another reason for the refusal of registration was the substantial cash deposits in the society's bank account during the demonetization period. The Commissioner raised concerns about the transparency of the society's financial transactions, especially during a period of significant currency changes. The society's involvement in cash deposits during demonetization without proper documentation cast doubt on the legitimacy of its activities.

4. Change in Governing Body:
The Commissioner also questioned the change in the governing body of the society, noting that there was no evidence of acceptance of the change by the Registrar of Societies. The lack of proper documentation regarding the change in the composition of the governing body raised doubts about the society's compliance with regulatory requirements. The absence of acceptance by the Registrar of Societies regarding the change further contributed to the rejection of registration.

5. Appellate Tribunal Decision:
Upon hearing the appeal, the Appellate Tribunal decided to restore the issue back to the Commissioner for reconsideration. The Tribunal acknowledged the contentions raised by the society's counsel, highlighting the need for further investigation and verification of crucial facts. The Tribunal emphasized the importance of examining the nature of cows owned by the society, the change in the governing body, and the source of cash deposits during demonetization before reaching a final decision on the eligibility for registration u/s 12AA.

In conclusion, the Appellate Tribunal allowed the appeal for statistical purposes and directed the Commissioner to reevaluate the grant of registration after providing a fair opportunity of hearing to the applicant society.