SANAWAR MONTESSORI EDUCATIONAL SOCIETY,CHANDIGARH vs. THE COMMISSIONER OF INCOME TAX (EXEMPTIONS), CHANDIGARH

In the present appeal Assessee has raised the following grounds:

Brief facts of the case are that the assessee society filed an application seeking registration under section 12A(1)(ac)(ii) of the Act. During the course of proceedings, the learned CIT(E) issued a detailed questionnaire and notices requiring the assessee to furnish documentary evidences regarding the genuineness of activities, financial transactions, charitable activities and compliance with statutory requirements. In response thereto, the assessee furnished certain details stating that it was running a school at Sector-11B, Chandigarh and was engaged in educational activities. Copies of registration certificate, annual accounts, income tax returns and certain ledger accounts were also furnished before the learned CIT(E).

1 However, on examination of the financial statements and supporting documents, the learned CIT(E) observed that salary and interest on unsecured loans were being repeatedly paid to persons specified under section 13(3) of the Act. The learned CIT(E) further noticed that despite having substantial funds in the form of FDRs and bank deposits, the assessee society had borrowed unsecured loans from specified persons and paid interest thereon. The details of such payments and the persons covered under section 13(3) were reproduced in the impugned order. Accordingly, the learned CIT(E) concluded that the funds of the society were being utilized for the benefit of specified persons and, therefore, the genuineness of activities of the assessee society stood adversely affected.

Against the order of the Ld. CIT(E) the assessee preferred an appeal before the Tribunal.

Before us, the Ld. AR reiterated the submissions made before the Ld. CIT(E) and submitted that the assessee society has been carrying on educational activities since long and that mere payment of salary or interest to specified persons could not be made a ground for rejection of registration. It was argued that the issue regarding applicability of section 13 could only be examined during assessment proceedings.

The Ld. DR, on the other hand, strongly supported the impugned order and submitted that the Ld. CIT(E) has recorded categorical findings regarding violation of section 13 of the Act after detailed examination of the financial statements and ledger accounts furnished by the assessee itself. It was submitted that the assessee failed to justify the payments made to specified persons and also failed to furnish any material establishing the reasonableness of such payments.

We have heard the rival submissions and perused the material available on record. We have also carefully gone through the impugned order passed by the Ld. CIT(E). The record reveals that during the course of proceedings, the Ld. CIT(E) had specifically called upon the assessee to clarify as to whether any part of the income of the institution enures, directly or indirectly, for the benefit of persons specified under section 13(3) of the Act. In response thereto, the assessee merely submitted that no part of the income of the society was used directly or indirectly for the benefit of persons specified under section 13(3) of the Act. However, except making a bald assertion, the assessee failed to substantiate the same with any cogent documentary evidence.

1 We further note that the Ld. CIT(E), after examining the financial statements and ledger accounts furnished by the assessee, specifically confronted the assessee in para 4.1 of the impugned order by pointing out that salary and interest on unsecured loans were repeatedly being paid to persons specified under section 13(3) of the Act. The findings recorded by the Ld. CIT(E) in para 4.1 of the impugned order read as under:- “4.1 However, on perusal of the financials of the applicant, it is seen that salary and interest on unsecured loans are being paid repeatedly to the persons specified u/s 13(3)

2 Before us also, the assessee has failed to place any material establishing the educational qualifications, experience, nature of duties, specific role or responsibilities of the related parties/specified persons to whom salaries were paid. In absence of such foundational details, the argument advanced by the assessee that the salaries were being paid on arm’s length basis and commensurate with services rendered cannot be accepted merely on assertions. Unless the educational qualifications, experience profile, exact nature of services rendered and comparable justification are brought on record, the reasonableness of the payments cannot be independently verified either by the lower authorities or by this Tribunal.

3 We also find considerable force in the findings recorded by the Ld. CIT(E) that despite having substantial funds parked in the shape of FDRs and bank deposits, the assessee society had raised unsecured loans from specified persons and paid interest thereon. The assessee failed to furnish any commercial justification necessitating such borrowings. The said conduct clearly gives rise to a reasonable inference that the funds of the society were being utilized in a manner conferring direct or indirect benefit upon specified persons covered under section 13(3) of the Act.

4 At the stage of grant of registration under section 12AB, the competent authority is duty bound to satisfy itself not only about the charitable objects but also regarding the genuineness of activities of the institution. The genuineness of activities necessarily encompasses examination of financial conduct and application of funds. Where the assessee fails to furnish basic evidences justifying payments made to specified persons and the material on record indicates violation of section 13 of the Act, the Ld. CIT(E) cannot be faulted for drawing an adverse inference against the assessee.

5 In the present case, the Ld. CIT(E) has recorded clear and categorical findings that the assessee society violated the provisions of section 13 of the Act and that the funds of the society were being utilized for the benefit of specified persons. The assessee has not been able to rebut these findings by placing any credible or supporting material on record. No evidence has been brought before us to demonstrate that the payments made to specified persons were reasonable, unavoidable or wholly incidental to the charitable activities of the society.

6 Considering the entirety of facts and circumstances of the case, we do not find any infirmity in the order passed by the Ld. CIT(E) rejecting the application filed by the assessee under section 12A(1)(ac)(ii) of the Act. Accordingly, the order of the Ld. CIT(E) is upheld and the appeal filed by the assessee is dismissed.

In the result, the appeal of the assessee is dismissed.

""थ"/ The Respondent 3. आयकर आयु"/ CIT 4. आयकर आयु" (अपील)/ The CIT(A) 5. िवभागीय "ितिनिध, आयकर अपीलीय आिधकरण, च"ीगढ़/ DR, ITAT, CHANDIGARH 6. गाड" फाईल/ Guard File