2022 (4) TMI 530 - AT - Income Tax

Exemption u/s 11 - registration invoking section 12AA(3) w.e.f. 01.04.2014 cancelled - Allen Group has made DDPS (assesee) - subservient to their coaching programme - from the time Maheshwari brothers took management control over DDPS, this school which is the property of society is being used or applied directly for the benefit of Maheshwari brothers and M/s Allen Career Institute - AR has mentioned that the assessee-society was running into losses and therefore, Shri RK Verma approached the Maheshwari brothers to become member of the assessee-society and help the assessee-society to run the school efficiently. Thereafter, the Maheshwari brothers had extended loan to assessee-society at 9% interest rate and this loan was used to pay-back loan taken from Punjab National Bank at higher interest rate at 16% HELD THAT - The submissions made by the ld. AR of the assessee-society are not acceptable as they are in contrary to the facts at hand. Firstly, the Maheshwari brothers as well as Shri RK Verma have admitted on oath that the payment of ₹ 46 crore in cheque and ₹ 19 crore in cash by Maheshwari brothers to Shri R. K Verma as well as share investment of ₹ 8 crores by Maheshwari brothers in R. C. Jain Invest Finance Pvt. Ltd were all made in lieu of the deal between the Maheshwari brothers and Shri RK Verma for transfer of administrative control and management rights of Disha Delphi School from Shri RK Verma to the Maheshwari brothers and Allen Group. Therefore, the claim made by the ld. AR that the assessee-society is not connected in any way to these payments are completely opposite to the actual scenario. AR has also claimed that the Maheshwari brothers are just mere members of the assessee-society and the office bearers of the society have not changed even after the deal between Maheshwari brothers and RK Verma. With this argument, the ld. A/R is attempting to hide the true picture behind nomenclatures and designations. Irrespective of what designation is bestowed upon the Maheshwari brothers, it is undisputed fact that as on date, the administrative control and management of Disha Delphi School vests solely with the Maheshwari brothers and the Allen Group. This fact was not disputed anywhere by the A/R in his submission. Incriminating evidences have been gathered during search action in the cases of Allen Group, Resonance Group as well as surveys in the case of the assessee that the Maheshwari brothers exercise full control over Disha Delphi School and that they have made this school subservient to their coaching programme. It is solely for this purpose that huge money was spent by Maheshwari brothers to obtain management rights over Disha Delphi School. The facts and submissions as well as case laws relied upon by the ld. AR are not applicable as per facts of the present case, therefore, considering the totality of facts and circumstances, we found that the ld. CIT(A) has passed a speaking and well reasoned order discussing all the details of the case of the assessee, therefore, we do not find any reason to interfere into or deviate from the findings so recorded by the ld. CIT(A) and hence, we uphold the same. - Decided against assessee.

Summary

Issues Involved:
1. Cancellation of registration under Section 12AA(3) of the Income Tax Act, 1961.
2. Cancellation of registration under Section 12AA(4) of the Income Tax Act, 1961.
3. Validity of the order passed under Section 263 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Cancellation of Registration under Section 12AA(3) of the Income Tax Act, 1961:

The primary issue was whether the activities of the assessee society were genuine and carried out in accordance with its objects, as required under Section 12AA(3). The Pr.CIT cancelled the registration on the grounds that the society's activities were not genuine and not in line with its objectives. The Pr.CIT based this decision on evidence from a search conducted on the Allen Group, which revealed that the Maheshwari brothers paid substantial sums to acquire management and administrative control over the society's school, Disha Delphi Public School (DDPS). The payments included ?46 crores by cheque, ?8 crores invested in shares, and ?19 crores in cash. The Pr.CIT concluded that the society's activities were subservient to the coaching program of Allen Group, violating the society's objectives and making the activities non-genuine.

The assessee argued that the funds provided by the Maheshwari brothers were loans to repay high-interest loans and that the society's assets remained with the society. The assessee claimed that the payments to R.K. Verma were independent transactions unrelated to the society. However, the Pr.CIT rejected these arguments, emphasizing that the Maheshwari brothers had taken control over the society's school, which was used to benefit their coaching business.

The tribunal upheld the Pr.CIT's decision, agreeing that the society's activities were not genuine and not carried out in accordance with its objects. The tribunal noted that the Maheshwari brothers' control over the school and its subservience to their coaching business violated the society's objectives.

2. Cancellation of Registration under Section 12AA(4) of the Income Tax Act, 1961:

The second issue was whether the society's activities were carried out in a manner that the provisions of Sections 11 and 12 did not apply due to the operation of Section 13(1), as required under Section 12AA(4). The Pr.CIT found that the society's property (the school) was used for the benefit of the Maheshwari brothers and Allen Career Institute, violating Section 13(1)(c)(ii). The Pr.CIT concluded that the society's income could not be excluded from taxation due to this violation.

The assessee argued that the funds provided by the Maheshwari brothers were loans at a reasonable interest rate and that the payments to R.K. Verma were unrelated to the society. However, the Pr.CIT rejected these arguments, emphasizing that the society's property was used for the benefit of the Maheshwari brothers and their coaching business.

The tribunal upheld the Pr.CIT's decision, agreeing that the society's activities were carried out in a manner that violated Section 13(1)(c)(ii), making the society's income taxable.

3. Validity of the Order Passed under Section 263 of the Income Tax Act, 1961:

The third issue was the validity of the order passed under Section 263, which allows the Pr.CIT to revise an assessment order if it is erroneous and prejudicial to the interests of the revenue. The Pr.CIT held that the assessment order for AY 2016-17 was erroneous because the registration under Section 12A was not available to the assessee for that year, as the registration had been cancelled.

The assessee argued that the registration was valid at the time of the assessment order and that the Pr.CIT's order was invalid. However, the tribunal dismissed this appeal as infructuous, given that the cancellation of registration under Sections 12AA(3) and 12AA(4) had been upheld.

Conclusion:

The tribunal upheld the Pr.CIT's decision to cancel the registration of the assessee society under Sections 12AA(3) and 12AA(4) and dismissed the appeal against the order passed under Section 263. The tribunal found that the society's activities were not genuine, not carried out in accordance with its objects, and violated Section 13(1)(c)(ii), making the society's income taxable.