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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B R BASKARAN
Per N.V. Vasudevan, Vice President
This is an appeal by the assessee against the order dated 16.3.2020 of the CIT(Exemptions), Bangalore rejecting the application seeking registration u/s. 12AA of the Income-tax Act, 1961 [the Act].
The assessee is a trust which came into existence under the Deed of Trust dated 30.11.2012. The deed of trust was amended by another trust deed dated 1.9.2017. The objects of trust were to establish educational institutions for providing training in professional, technical, information technology, medical and general education from nursery to degree classes and also higher education.
On 14.8.2017 there was a survey conducted u/s. 133A of the Income-tax Act, 1961 in the premises of assessee. At the time of survey, it was noticed that the assessee had not obtained registration u/s. 12AA of the Act and had also not filed returns of income for several years. These findings were communicated by the DDIT(Inv.) who conducted the survey to the AO.
On legal advice, the assessee made an application for grant of registration u/s. 12A of the Act. The assessee accordingly filed Form 10A on 28.9.2017 seeking registration u/s. 12AA of the Act. The assessee also filed returns of income for AYs 2016-17 and 2017-18. In the return of income so filed, in anticipation of grant of registration u/s. 12AA of the Act, the assessee had also claimed exemption u/s. 11 in respect of surplus of income over expenditure for the aforesaid assessment years.
By an order dated 27.3.2019 the CIT(E) rejected the application for grant of registration. Against such order, the assessee filed appeal before the ITAT in challenging the refusal of registration. The Tribunal set aside the order of CIT(E) and remanded the plea of grant of registration to the CIT(E) for consideration afresh. The relevant observations of the Tribunal are as follows:-
“We have heard both parties and perused the material available on record. Although, the Id CIT(E) has listed out various description brought out during survey proceedings in respect of objects as well as the trust, but failed to carry out necessary enquiries to ascertain correct facts in light of facts brought out by survey proceedings, which is evident from the fact that the CIT(E) has passed order on 27/3/2018 without confronting the discrepancies contained in survey folder to the assessee. We further noticed that even the assessee has failed to address the issues questioned by the CIT(E) vide its show cause letter dated 6/1212017 which is evident from the fact that even though the CIT(E) has asked for various proof including brief note on charitable activities under taken by the assessee since its inception nothing has been filed in order to justify its case that its objects are charitable in nature and its activities are in accordance with its objects. Therefore, we are of the considered view that the issue needs to be reexamined by the id CIT(E) and hence, we set aside the issue to the file of the CIT(E) for fresh adjudication in accordance with law with a reasonable opportunity of haring to the assessee.”
Pursuant to the order of Tribunal, the CIT(E) examined the plea of assessee for grant of registration u/s.12AA of the Act, in the light of the observations of the Tribunal regarding enquiry on facts brought out in the survey proceedings and proof and evidence regarding activities carried out by the assessee. In the set aside proceedings before the CIT( E), the Assessee submitted that as per the provisions of section 12AA of the Act, the authority granting registration u/s.12AA of the Act, has to satisfy itself about the genuineness of the activities of the trust/institution and as to whether the objects of the trust are charitable in nature. The assessee submitted that its objects are to provide education which was a charitable object within the meaning of section 2(15) of the Act. The assessee also pointed out that as per the statement of accounts, receipts and outgoings clearly indicated that trust was carrying out the objects of running educational institution. The assessee thus pointed out that it has satisfied all the conditions for grant of registration u/s. 12A of the Act and therefore registration should be granted.
With regard to the findings of the survey proceedings u/s. 133A of the Act, the assessee pointed out the following:-
(a) It was stated in the survey report that the assessee has not registered u/s 12A of the Act, but the assessee has wrongly claimed exemption of income u/s 11 of the Act. On this observation in the Survey report, it was submitted by the assessee that application for grant of registration was made which was pending. The Assessee pointed out that the relevant provisions of Sec.12A of the Act stipulates that even in respect of assessments for which return of income filed are pending as on date of filing of application for registration, even in respect of those AYs, the Assessee can claim exemption u/s 11. The assessee submitted that the assessee was constituted by a deed dated 13.11.2012 with charitable objects. The assessee thus claimed that the above remarks in the survey report have nothing to do with or in any way a hindrance to grant of registration u/s. 12A of the Act. (b) With regard to the Survey finding that the applicant trust has not maintained proper books of accounts, the assessee submitted that all books of a/c are maintained and have also been filed. In fact final statement of account have also been filed as noted in the order of CIT(E). The assessee submitted that the non-maintenance of books of accounts was also an irrelevant consideration at the stage of grant of registration. (c) With regard to the allegation in the survey report that the assessee trust was found collecting huge cash as fee from students, the assessee submitted that students paid fees by cash and hence cash receipts were given. The assessee submitted that this was also an irrelevant consideration at the stage of grant of registration. (d) With regard to the allegation in the survey report that application of income was also carried on by payments of cash, the assessee submitted that there is no prohibition for cash payments and that section 40A(3) does not apply to charitable trusts. (e) With regard to the allegation in the survey report that the applicant trust also failed to deduct TDS from the appropriate expenditure debited in the profit and loss account in the referred AYs, the assessee submitted that the TDS Failure is also due to ignorance as to the TDS provisions. Since the assessee was not assessed to tax and was under the impression that it is not liable to Income Tax assessment. All the parties (recipients) have filed their return of income and paid the taxes. At best interest u/s sec 201(1A) is attracted. This is also an irrelevant consideration at the stage of grant of registration.
(f) With regard to the allegation in the survey report that the chairman of the educational trust who is a non filer, was also running a bar and wine shop routed the funds through the applicant trust, the assessee submitted that the Chairman and the trust are two separate assessable entities and that any irregularity alleged can be considered in the case of chairman and this is also an irrelevant consideration at the stage of grant of registration. (g) With regard to the allegation in the survey report that the trustee's failed to offer the explanation on the source of investment made in the trust, the assessee submitted that all funds are either from trustees or students and the authority does not even state or point out single instance of failure to explain the sources. This is also irrelevant consideration at the stage of grant of registration. (h) With regard to the allegation in the survey report that since the assessee is not eligible for deduction u/ s 11 of the I.T. Act for the preceding years the excess of income over expenditure in those years also needs to taxed, the assessee submitted that as per the provisions of law if the trust is granted registration u/s 12A even the pending assessments of earlier years also enjoy the exemption. Hence the incomes of the earlier years also are exempt. This is also an irrelevant consideration at the stage of grant of registration. (i) With regard to the allegation in the survey report that had there been no Survey the trust may not even file the return of income, the assessee pointed out that the assessee has maintained all books and the reason for non filing of R.I was due to the fact that the assessee was under the bonafide impression that trust being a educational institute is not liable to tax and not liable to file Return of Income. The non filling of R /I is not on account of any intention that the R/I and other legal compliances to be carried out after survey. This is also an irrelevant ground for in regard to grant of registration u/s 12A. (j) With regard to the allegation in the survey report that there can be no such refundable contributions under the provisions of the IT Act and the conclusion that the said action indicates that the trustees who are non filers used the trust to divert their personal funds through the trust, the assessee pointed out that there are loans given by the trustees. There is nothing wrong in law in trustees giving loans to the trust to help or assist the trust as long as sec 13 is not fringed. There is no allegation of any infringement u/s 13 by the learned CIT(E). None of the above facts can lead to a conclusion that the trust is not genuinely established to carry out charitable activity.
The assessee placed reliance on the decision of Hon’ble Karnataka High Court in the case of CIT v. M/s. Garden City Educational Trust, 330 ITR 480 (Karn.). In the aforesaid decision, the assessee-trust had filed an application for grant of registration under section 12A. The application was rejected by the Commissioner on the following grounds (i) that amongst its object the trust also had activities which were commercial in nature such as starting of industries in rural areas; (ii) that the trust also had the object of carrying on business in import and export; (iii) the trust deed permitted the trustees to draw remuneration for services rendered and the trust was also charging fee or collecting fee both as tuition fee and otherwise from the students who were being admitted to the educational institutions run by the trust. The Tribunal noticed that the assessee-trust had education as one of its objects and in fact it was carrying on the activity of imparting education and running an educational institution. It held that the assessee-trust was entitled to registration. On appeal to the High Court held, dismissing the appeal, that so long as the trust had education as one of its objects which is one of the enumerated heads which qualify and come within the scope of charitable purpose as enumerated in sub-section (15) of section 2, it had to be accepted that the trust was having a charitable purpose as its object and could qualify for claiming exemptions in terms of section 11 and 12 subject to the trust fulfilling the conditions enumerated therein. Hence grant of registration so long as the procedural requirements were complied with was justified.
The CIT(E) examined the claim of assessee and came to the following conclusions:-
(1) He held that the decision of the Karnataka High Court in Garden City Educational Trust (supra) will not be of any use because sub-section (4) has been inserted to section 12AA of the Act by the Finance Act, 2014 w.e.f. 1.10.2014 and in terms of the aforesaid provision, the CIT(E) has powers to examine whether the activities of the trust are not being carried out in a manner that the provisions of Sec.11 and 12 do not apply or there is violation of provisions of Sec.13(1) of the Act. The relevant provisions of section 12AA(4) reads as follows:-
“(4) Without prejudice to the provisions of sub-section (3), where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and subsequently it is noticed that the activities of the trust or the institution are being carried out in a manner that the provisions of sections 11 and 12 do not apply to exclude either whole or any part of the income of such trust or institution due to operation of sub- section (1) of section 13, then, the Principal Commissioner or the Commissioner may by an order in writing cancel the registration of such trust or institution: Provided that the registration shall not be cancelled under this sub-section, if the trust or institution proves that there was a reasonable cause for the activities to be carried out in the said manner.” The CIT(E) thereafter went on to hold that if there a violation of the provisions of section 13(1) of the Act, then that will afford a good ground for refusal to grant registration.
(2) The CIT(E) thereafter went on to hold that the assessee has not replied to the show cause notice issued by the erstwhile CIT(E) dated 6.12.2017. As we have already seen, this show cause notice was issued in proceedings which were ultimately set aside by the Tribunal. The Assessee has in fact sent reply dated 14.12.2017 to this notice and copy of the same is placed at pages 52 & 53 of Assessee’s paper book.
(3) The CIT(E) observed regarding activities of the trust as follows:- “8. On the contrary, the assessment orders passed in the case of the assessee for the AY 2016-17 & 2017-18 on 30.12.2018 & 27.12.2019 respectively clearly portray that the activities of the Trust do not conform to the objects of the Trust. In the order of assessment u/s. 144. for the AY 2016-17, an addition of Rs.2,17,02,742 has been made u/s. 69 being unexplained investment. Similarly, in the order u/s. 143(3) passed for AY 2017-18, there is a corresponding unexplained investment added to the total income u/s 69 of Rs.2,30,94,440/-. The assessee could not provide any satisfactory explanation with regard to its sources and intriguingly there had been no compliance to the repeated notices u/s. 142(1) issued seeking clarification on the correctness of income returned for these two assessment years.” (4) The CIT(E) thereafter observed that the assessee did not adhere to the directions of the Tribunal in giving necessary clarifications. He also held that the assessee failed to prove that its activities are genuine and thus its activities are carried out in a manner applying the objects of the trust. For all the above reasons, the CIT(E) rejected the application of assessee for grant of registration u/s. 12AA of the Act.
Aggrieved by the order of the CIT(E), the Assessee is in appeal before the Tribunal. We have heard the rival submissions. The ld. counsel for the assessee submitted that the reliance by the ld. CIT(E) in the impugned order on the insertion of section 12AA(4) of the Act is completely misplaced because the provisions so inserted also talks about the application of section 13(1) of the Act. He pointed out that in the impugned order no instance of violation of section 13(1) of the Act has been pointed out.
His next submission was that the provisions of section 12AA(4) are not applicable to a case of grant of registration and are applicable only to cases where the registration already granted is sought to be cancelled. It was submitted that the CIT(E)’s reliance on section 12AA(4) of the Act is completely misplaced.
He next pointed out that in reply to the show cause notice with regard to the findings of survey, the assessee has given clear explanation and the observations of the CIT(E) with regard to the lack of proper reply on the findings of the survey are ill-founded. The ld. counsel for the assessee also brought to our notice that the findings in para 8 of the impugned order are again incorrect. The addition made by the AO in AY 2016-17 is also in appeal before the CIT(Appeals). It was also submitted that the addition made u/s. 69 of the Act will not be a ground not to grant registration to an assessee.
The ld. DR relied on the order of CIT(E).
We have given a careful consideration to the rival submissions. The application in the present case has been made by the assessee for grant of registration u/s. 12A of the Act. The facts that need to be considered for grant of registration u/s. 12A of the Act has been laid down in section 12AA of the Act. A reading of the provisions of section 12AA(1) of the Act shows that before the grant of registration, the CIT(E) has to satisfy himself about the genuineness of the activities of the trust and also about the objects of the trust, whether it is charitable in nature or not. In the present case, there can be no dispute regarding the charitable nature of the objects of trust which is providing for education. As far as genuineness of the activities of the assessee is concerned, the only objection of the CIT(E) is contained in para 8 of his order in which there is a reference to the orders of assessment for AYs 2016-17 and 2017-18. The addition made u/s. 69 of the Act is already subject matter of challenge in the proceedings before the first appellate authority. It is not the case of the assessee that the addition u/s. 69 of the Act has anything to do with the activities of the trust. In these circumstances, there appears to be no basis for the CIT(E) in refusing grant of registration to the assessee. The Hon’ble Karnataka High Court in the case of Garden City Educational Trust (supra) has taken a view that grant of registration will not by itself confer benefits of exemption u/s. 11 and 12 of the Act to a trust and that so long as the activities are charitable in nature and if there is no evidence to show that the activities of the trust are not being carried out genuinely, then the registration has to be granted. The CIT(E) seems to have taken recourse to the provisions of section 12AA(4) of the Act which was inserted by the Finance Act of 2014 w.e.f. 01.10.2014. We find that those provisions are applicable only when the CIT(E) seeks to cancel the registration already granted to a trust. Those provisions cannot be made applicable for grant of registration u/s. 12AA of the Act. We also find that none of the findings given in the survey report can justify the refusal of grant of registration to the assessee and the reasons given by the assessee in this regard are found to be acceptable. The CIT(E) has fallen into an error in concluding that the assessee did not adhere to the directions of the Tribunal and provide the necessary clarification. We have already extracted the findings of the survey team and the assessee’s explanation on each of those findings. Besides the above, the assessee has also given clarification on other aspects, which will have a bearing on the grant of registration u/s. 12A of the Act. In the impugned order, the CIT(E) has neither dealt with those contentions nor has he found those contentions to be not correct. In these circumstances, we are of the view that the assessee should be given the benefit of registration u/s.12AA of the Act. We hold and direct accordingly.
In the result, the appeal by the assessee is allowed.
Pronounced in the open court on this 4th day of January, 2021.