ITO (EXEMPTIONS), NEW DELHI vs. CAREER LAUNCHER EDUCATION FOUNDATION, NEW DELHI

The learned departmental representative vehemently opposed the arguments of the authorised representative. It was stated that the learned authorised representative submitted that the withdrawal of registration could only be made with effect from 1/10/2014. It was further stated that the decisions relied upon by the learned authorised representative pressing the argument that registration can be withdrawn only from assessment year 2014 – 15, it was stated that that honourable Supreme Court and honourable Delhi High Court have upheld that registration can be withdrawn from retrospective date of 1/10/2014 that is the date on which subsection 3 of section 12 AA was introduced, wherein the CIT was given power to cancel the registration which was granted under clause (b) of subsection (1) of section 12 AA of the act. The learned departmental representative further relied upon the decision of the coordinate bench in case of Indian medical trust vs principal Commissioner of income tax 99 taxmann.com 273 wherein it has been held that withdrawal can be made from retrospective date if the evidences and material has been found about the non-genuineness of the activities of the trust. It was further submitted that since in the case of the assessee there are specific material and evidences to show that the assessee‟s activities from assessment year 2009 – 10 onwards has been on genuine and therefore cancellation order of approval should be done from assessment year 2009 – 10 onwards. Therefore, the learned DR vehemently stated that that issue is squarely covered on this issue in favour of the revenue.

We have carefully considered the rival contention and perused the order of the learned CIT exemption, which was passed on 19/05/2015 cancelling the registration u/s 12 AA of the act of the assessee with effect from assessment year 2009 – 10. The provisions of subsection for of section 12 AA has been inserted with effect from 01/10/2014. This sub-section (4) in section 12AA provides with effect from October 1, 2014 that where a trust or an institution has been granted registration, and subsequently it is noticed that its activities are being carried out in such 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, namely, (i) its income does not inure for the benefit of general public ; (ii) it is for benefit of any particular religious community or caste (in case it is established after commencement of the Act) ; (iii) any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc. ; or (iv) its funds are invested in prohibited modes, The Principal Commissioner or the Commissioner may cancel the registration if such trust or institution does not prove that there was a reasonable cause for the activities to be carried out in the above manner. Apparently in this case the order was passed by CIT exemption on 19/5/2015 i.e. only after the amendment with effect from 1/10/2014. Further, the amendment made with effect from 1/10/2014 is not speaking that such violation should have occurred only after that date and there is no power available to cancel the registration of the trust if such violation is found prior to 1/10/2014 is devoid of any merit. In view of this, we also dismiss this argument of the assessee that the amendment with effect from 1/10/2014 giving a power for withdrawal of registration u/s 12 AA of the act, applies only if the violation of the respective provisions of the income tax act is post 01/10/2014. The honourable Bombay High Court in 343 ITR 23 in Sinhgad Education Society Vs Commissioner Of Income Tax had an occasion to consider the powers conferred u/s 12 AA (3) for cancellation of the registration of the trust where the issue was the cancellation of the registration of the about trust with effect from assessment year 99 – 2000, though the amendment came with effect from finance act 2010 applicable from 01/06/2010. The honourable court held that as a result of the amendment of section 12 AA (3) of the income tax act 1961 by the finance act 2010 with effect from 01/06/2010, the commissioners has been specifically empowered to cancel the registration obtained u/s 12 A, as it is to prior to its amendment by the Finance (No 2) Act 1996. The effect of the provision is to empower the Commissioner to cancel the registration of a trust where he is satisfied that the activities of the trust are not genuine or not being carried out in accordance with the object of the trust or institution. This cannot be regarded as a retrospective alteration of the law. Similarly, in the present case the amendment made with effect from 01/10/2014 empowers Commissioner to cancel the registration of the trust on violation of certain provisions of the law. Therefore, the argument of the assessee that the order passed by the learned CIT exemption is contrary to law is devoid of any merit.

Coming to 2nd limb of the argument of the ground number 2 that order withdrawing the registration u/s 12 AA has been passed on the issue raised in order passed by CIT for not granting approval u/s 80 G of the act. The issues raised for not granting registration u/s 80 G were that the payments were made to person specified u/s 13 (3) of the act and the assessee is hit by the proviso to section 2 (15) of the act. The argument of the assessee is that all these issues are covered by the judgment of the coordinate bench in case of the appellant wherein these issues have been decided in favour of the assessee. Therefore, it was contended that when the original issues on which the process of cancellation of registration was initiated no more survives therefore the subsequent order based on that cancelling the registration also does not survive.

The learned departmental representative submitted that provisions of section 12 AA of the income tax act and section 80 G of the income tax act are para materia different. Therefore, any observation made by the coordinate bench cannot be implied for the provisions of section 12 AA of the act. He further stated that the learned CIT exemption has given a categorical finding that there is a violation of the provisions of section 12 AA of the income tax act and therefore there is a withdrawal of the registration. Even otherwise, he submitted that the order of the coordinate bench has been challenged by the revenue before the honourable High Court and therefore it does not have any impact on the issue in this appeal. 15. We have carefully considered the rival contention and perused the orders of the lower authorities on this count. It is further to that cancellation of the registration u/s 12 AA of the act was initiated only based on the order of the director of income tax (exemption), New Delhi dated 7/5/2010 the copy of the same is placed at page number 1 of the paper book filed by the assessee. The assessee challenged the above order before the coordinate bench in ITA number 2849 (Del) 2010. The coordinate bench passed in order dated 10/2/2012 wherein in para number 33 it has been held that that the action of the learned director of income tax (exemption) in refusing to grant continuation of approval u/s 80 G of the income tax act to the assessee trust is illegal, irregular, arbitrary and unsustainable in the eye of law. 1 of the main reason as mentioned in paragraph number 14 of the order it has been held that that when the assessee is holding registration u/s 12 A of the act, which has not been withdrawn, the revenue cannot contest that activities of the assessee are not charitable in nature. It has been held that that once the registration u/s 12 A of the act stands granted, the charitable character of the activities of the trust cannot be challenged/doubted. Therefore, in the assessment proceedings, the revenue is not entitled to hold the objects of the assessee to be not charitable in nature. Therefore on the finding of the coordinate bench also it was necessary to withdraw the registration granted to the assessee u/s 12 A of the act. To support this finding the coordinate bench referred to the decision of the honourable Supreme Court in case of assistant Commissioner of income tax vs Surat state Gymkhana 170 taxman 612 (SC) where the issue was with respect to the assessment proceedings. However, we are here to find out whether independently the registration granted to the assessee trust can be withdrawn or not. Circular No 1/2015 Provides the methodology of cancellation of the registration with effect from 1/10/2014 as under:- Finance (No. 2) Act, 2014 – Circular No. 1/2015, dated 21-1-2015

Further with respect to the process of cancellation of Registration, CBDT also issued another circular on 27/5/2016 where the activity of the trust is held to be at the object of general public utility and it crosses the specified threshold limit in one particular year, the circular is important in the present case because as per para number 4 of the order of the adjudicating authority the revenue has taken a stand for assessment year 2010 – 11 onwards that the activity of the assessee has been held to be in the nature of general public utility and the proviso to section 2 (15) has been involved for denying the exemption u/s 11. The circular provides as s under :- :-

Section 2(15) of the Act provides definition of "charitable purpose". It includes "advancement of any other object of general public utility" provided it does not involve carrying on of any activity in the nature of trade, commerce or business etc. for financial consideration. The 2nd proviso to said section, introduced w.e.f. 1-4-2009 vide Finance Act 2010, provides that in case where the activities of any trust or institution is of the nature of advancement of any other object of general public utility and it involves Page | 13 carrying on of any activity in the nature of trade, commerce or business; but the aggregate value of receipts from such commercial activities does not exceed Rs. 25,00,000/- in the previous year, the purpose of such trust/institution shall be deemed as "charitable" despite it deriving consideration from such activities. However, if the aggregate value of these receipts exceeds the specified cut-off, the activity would no longer be considered as charitable and the income of the trust/institution would not be eligible for tax exemption in that year. Thus an entity, pursuing advancement of object of general public utility, could be treated as a charitable institution in one year and not a charitable institution in the other year depending on the aggregate value of receipts from commercial activities. The position remains similar when the first and second provisos of section 2(15) get substituted by the new proviso introduced w.e.f. 1-4-2016 vide Finance Act, 2015, changing the cut-off benchmark as 20% of the total receipts instead of the fixed limit of Rs.25,00,000/- as it existed earlier.

The temporary excess of receipts beyond the specified cut-off in one year may not necessarily be the outcome of alteration in the very nature of the activities of the trust or institution requiring cancellation of registration already granted to the trust or institution. Hence, section 13 of the Act has been amended vide Finance Act, 2012 by inserting a new sub-section (8) therein to provide that such organization would not get benefit of tax exemption in the particular year in which its receipts from commercial activities exceed the threshold whether or not the registration granted is cancelled. This amendment has taken effect retrospectively from 1st April, 2009 and accordingly applies in relation to the assessment year 2009-10 onwards.

In view of the aforesaid position, it is clarified that it shall not be mandatory to cancel the registration already granted u/s 12AA to a charitable institution merely on the ground that the cut-off specified in the proviso to section 2(15) of the Act is exceeded in a particular year without there being any change in the nature of activities of the institution. If in any particular year, the specified cut-off is exceeded, the tax exemption would be denied to the institution in that year and cancellation of registration would not be mandatory unless such cancellation becomes necessary on the ground(s) prescribed under the Act.

With the introduction of Chapter XII-EB in the Act vide Finance Act, 2016, prescribing special provisions relating to tax on accreted income of certain trusts and institutions, cancellation of registration granted u/s 12AA may lead to a charitable institution getting hit by sub-section (3) of section 115TD and becoming liable to tax on accreted income. The cancellation of registration without justifiable reasons may, therefore, cause additional hardship to an assessee institution due to attraction of tax- liability on accreted income. The field authorities are, therefore, advised not to cancel the registration of a charitable institution granted u/s 12AA just because the proviso to section 2(15) comes into play. The process for cancellation of registration is to be initiated strictly in accordance with section 12AA (3) and 12AA (4) after carefully examining the applicability of these provisions.

The above may be brought to the notice of all concerned.

Further as per circular number 1/2015 as per para number 9.2 it specifically provides that there are cases where the trust, particularly year in which they had substantial income claimed to be exempt under the provisions of the income tax act, there have been cases where the income is Page | 14 not properly applied for charitable purposes or is diverted for the benefit of certain interested persons. Therefore, to invoke the above provision the learned CIT – exemption has to first ascertain that there is a benefit to specified persons. In the present case, the CIT exemption has merely alleged as per paragraph number 3.1 of the order that the activities of the assessee trust are not in the nature of education and can at the most be termed as of general public utility. Further the assessee has violated the provisions of section 13 (1) © of the act. Further in the decision of the coordinate bench in assessee‟ own case also held that merely because there is a payment to a related party it cannot be inferred that there is „benefit‟ to that specified person. To ascertain the benefit one has to arrive and ascertain the market value of such services and if the payment is found in, excess of the market value, then only it can be said that there is a benefit enuring to the specified person. Unless, this exercise is carried out, it is not possible to ascertain that whether there is any violation of provision of section 13 (1) (c) of the act. During the course of hearing assessee has submitted a chart for 5 financial years starting from 2007 – 8 to 2011 – 12 demonstrating that excluding the expenditure that has been held by the revenue has payment made to specified persons and hit by the provisions of section 13 of the income tax act, the assessee has incurred huge deficit for all these years. Therefore, the contention of the assessee is that there is no diversion of moneys by the assessee for the payment persons. However on careful analysis of the above chart it is apparent that out of the gross income of INR 2 65598314 financial year 2009 – 10 relevant to assessment year 2010 – 11, the assessee has made a payment of INR 1 3017870/– to specified persons. Further for financial year 2010 – 11, relevant to assessment year 2011 – 12, the assessee has earned gross income of Rs. 4 7164812/–, out of which the assessee has paid expenses to specified persons of Rs. 66990800/–. Further for financial year 2011 – 12 relevant to assessment year 2012 – 13, out of the total income earned of INR 3 9430640/– the assessee has made payment to specified person of INR 7 8657639. These facts in figure are also to be correlated with the ultimate result that the assessee trust has surrendered its registration u/s 12 A of the income tax act on its own. Further, the learned CIT exemption has noted that the assessee has paid a sum of Rs. one crore is infrastructure fee to Messer‟s career launcher India Ltd and also license fee to 2 different organizations namely carrier launcher India Ltd for trademark and carrier launcher education infrastructure and services Ltd for education soft skills amounting to INR 8 727000/– and INR 7 500000/– respectively. For all these three transactions, the assessee has not stated before the CIT exemption that how these sums have been paid to specified persons and what is the market rate of the services. Naturally, it is for the assessee to benchmark that there is no benefit to the specified persons and therefore assessee is eligible for exemption on the whole of the sum u/s 11 and 12 of the income tax act. This exercise has not been carried out by the assessee before the CIT exemption in spite of specific queries raised by him. Further, the learned CIT exemption also presumed that whole of the sum paid by the assessee is a benefit accruing to a specified person. Such finding of fact cannot be reached unless the true value of the services (fair market value of the services, if any) is derived first. In the present case, no attempt has been made by the assessee to substantiate before the CIT exemption with respect to the fair market value of the services nor the CIT exemption provided to determine the value of benefit derived by the specified persons. Merely submissions of the agreement by the assessee did not prove that the services are at fair market value and no benefit of accrued to the specified persons. For the CIT exemption, merely reproducing the clauses of the agreement also does not justify that there is any benefit accrued to the specified persons. Further, there is no reason to hold that in absence of any benefit to the specified persons, the registration granted to the assessee trust can be drawn. Further if the benefit is granted to the specified persons, then after 01/10/2014, the CIT exemption is empowered to withdraw the registration u/s 12 AA of the income tax act. In view of this we set aside the whole issue back to the file of the learned CIT exemption with a direction to the assessee to substantiate before him that by making such a huge payment to the specified persons from assessment year 2009 – 10, no benefit has accrued to the specified persons as envisaged under section 13 (1) of the act. Accordingly, ground number 2 of the appeal is set aside to the file of the learned CIT exemption for fresh determination about withdrawal of registration u/s 12 AA (3) read with section 12 AA (4) of the income tax act with effect from assessment year 2009 – 10. As the fate of the appeals for assessment year 2010 – 11 and 2011 – 12 filed by the assessee as well as the learned assessing officer largely depends upon the order of the learned CIT exemption with respect to the cancellation of registration u/s 12 A of the income tax act in the hands of the assessee, we direct the assessee to submit the requisite detail including the fair market value of the services rendered by the specified persons to the assessee and whether any benefit has accrued to the specified persons are not within 3 months from the date of this order and the learned CIT exemption is also directed to preferably dispose of the matter of the cancellation of the registration within 2 months after the assessee submits the complete detail.

Accordingly, appeal of the assessee in ITA number 4760/del/2015 is partly allowed for statistical purposes.

Now we come to the appeals for assessment year 2010 – 11. The assessee has filed appeal in ITA number 2371/del/2015 and the learned assessing officer has filed the appeal in ITA number 3660/del/2015 against the order of the Commissioner of income tax (appeals) – 40, New Delhi dated 16/3/2015.

The assessee raised following grounds of appeal in for Assessment Year 2010-11:- “1. Disallowance by Commissioner of Income Tax (Appeals) of expenses or payments of Rs 32,54,467/- @ 25% of total expenses or payments of Rs.1,30,17,870/- made to related concerns is arbitrary, without any finding ofAssessing Officer or of Commissioner of Income Tax (Appeals) that expenses or payments made to related concerns are in excess of market price and is based on mere assumption that payments made to related parties are excessive. Disallowance is contrary to facts and law and therefore is liable to be deleted.”

Brief facts of the case shows that assessee filed its return of income on 15/10/2010 declaring nil income along with the necessary audit report is annexures. The assessment proceedings were initiated as the assessee was having registration u/s 12 A of the income tax act. The learned assessing officer noted that assessee has made payment to C L Educate Ltd (formerly known as carrier launcher India Ltd in the form of infrastructure fees of Rs. 33090000/–, interest on loan of INR 28 9143/–, centre establishment fee of Rs. 1103000/–, website development expenditure of Rs. 551500/– and project management cost of INR 2 305088/–. It was further noted that trustee of the appellant is having a shareholding ratio of 29.16% in the recipient company as well as the trustees of the trust are also the director in the above company. The assessee has also made payments to carrier launcher education infrastructure and services limited for soft skill charges of INR 1 233215/–, interest on loan INR 5 341075/– and license fee of INR 5 40470/–. The AO noted that C L Educate Ltd is having a shareholding of 65.76 percentage and the trustee is also having a shareholding of INR 0.36 percentage. Further, the trustees are also the directors of the said company. AO further noted that assessee has made payment of Kestone integrated marketing services private limited of INR 8 20974/– in form of mobilization expenditure and INR 8 33405/– as recruitment expenses. Further, the directors of that company are also trustee in this appellant trust. Further, the recipient of the above sum is a subsidiary of CL Educate Ltd. Therefore the learned AO asked that the company and its directors are covered under the provisions of section 13 (3) of the income tax act and the above payment has been made and thereafter the total income of the assessee is Rs. to 6559831/– only. Assessee was directed to justify the above payment with sufficient detailed and reasonableness for making the above payment. It was further noted by the AO that the payments are in violation of the provisions of section 13 (1) © of the act. Therefore, the assessee was directed to show cause as to why the benefit of exemption u/s Page | 18 11 and 12 of the act should not be denied. The AO further noted that assessee is running a business school, which is neither recognized and not affiliated, to any appropriate authority and assessee is charging use fees for rendering of the services and all the activities are being running on commercial line and no charity is undertaken. The assessee replied and stated that though these persons are covered under provisions of section 13 (3) of the act but such payments are not bad at such payment should not be for the benefit of such persons. The learned assessing officer rejected the contentions of the assessee and held that though those the payments have been made to the party specified in section 13 (1) © of the act and the trustees are having the direct control over the facts of this company due to their majority shareholding on these companies benefit of these payments also amended to the person specified therein. Therefore he held that the provisions of section 13 (1) (c) of the act are clearly attracted. He further held that in view of this benefit of section 1112 of the act is not available to the assessee. He further held that the income of the assessee is also a business income as the assessee is imparting education for a particular class of public and not to general public and thus it is not for a charitable purpose within the proviso of section 2 (15) of the act therefore he denied the benefit of section 11 and 12 of the act on the whole of the income of the assessee. He further noted that the assessee has already been under the process of withdrawal of registration u/s 12 A of the income tax act 1961. Accordingly he determined the total income of the assessee at (-) 17659588/– and passed the assessment order u/s 143 (3) of the income tax act on 20/3/2013. The assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT – A. The learned CIT – A partly allowed the appeal of the assessee holding as under:- “4.5 I have considered the order of the AO and the submission of the assessee and I find considerable merit in the submission of the assessee that apparently the assessee is not involved in any trade, commerce or business to attract the mischief of the proviso to section 2 (15) and as such the assessee is eligible for exemption u/s 11 (1). However, it is also apparent that assessee has made the payment to its own sister concern unrelated concerns to the extent of INR 1 3017870/– and the AO has disallowed the entire expenditure as being excessive under section 13 (2). It is apparent that it is unreasonable to disallow the entire expenditure even though there is enough scope to suggest that there may be excessive payment to its own related concerns which are basically private limited companies like CL educate Ltd, carrier launcher education and infrastructure and services Ltd and Kestone integrated marketing services private limited wide the order of the AO. After considering all the facts and circumstances of the case, I am of the view that the assessee is eligible for exemption u/s 11 (1) has mischief of proviso to section 2 (15) is not applicable and accordingly the AO is directed to allow the exemption u/s 11 (1) but the expenses of payments related concerns are on the higher side as the entire expenditure has been disallowed and accordingly the addition of the disallowance to the extent of the estimated expenditure at the rate of 25% i.e. INR 3 25 1st 467/– is confirmed and the balance addition of INR 9 763403/– (INR 1 3017870/– -INR 3 254467/–) is deleted.”

Thus the assessee is agreed with the order of the learned assessing officer in confirming the disallowance to the extent of 25% of those expenditure and the learned assessing officer is aggrieved with the order of the learned CIT – A in deleting the disallowance of INR 9 763403/– and allowing the exemption u/s 11 (1) of the act to the assessee and therefore both are in appeal before us.

The learned authorised representative submitted that the assessee is carrying on the educational activities and therefore is entitled to the benefit of the provisions of section 11 (1) of the income tax act. It was further stated that the assessee is eligible to claim exception u/s 11 and 12 of the income tax act as its registration u/s 12 A of the income tax act has not been withdrawn till date. It was further stated that when the registration u/s 12 A of the income tax act is intact, not withdrawn, the assessee cannot be denied of the benefit u/s 11 and 12 of the income tax act.

Further with respect to the payment made to specified person u/s 13 (1) of the income tax act it was stated that there is no benefit to those persons and therefore the disallowance of the whole expenditure and even restriction of disallowance to the extent of only 25% by the learned CIT – A is devoid of any merit.

The learned departmental representative vehemently supported the order of the learned assessing officer and stated that assessee is carrying on the business activities and therefore the provisions of section 11 and 12 does not apply to the facts of the case. Even otherwise he submitted that the assessee has made payment to the several specified persons under section 13 (1) of the income tax act and therefore the violation of the provisions of section 13 (1) (C) of the act has occurred and therefore the benefit u/s 11 and 12 of the income tax act also does not apply to the facts of the case. He further stated that now the registration to the assessee has already been withdrawn by the CIT exemption and therefore assessee is not entitled to the exemption u/s 11 and 12 of the income tax act.

We have carefully considered the rival contention and perused the orders of the lower authorities. Apparently in this case the mood issue that arises is whether the assessee is holding the benefit of registration u/s 12A of the income tax act or not. Apparently the registration has been cancelled by the CIT exemption and appeal of the assessee on the similar point has been decided by us by this order wherein we have set aside the whole issue back to the file of the learned CIT exemption with a direction to the assessee to show that the payment made to the specified persons by the assessee does not enure any benefit to the related parties. As the issue of registration to the assessee has been set aside to the file of the learned CIT – exemption, in all fairness, both the appeals of the assessee as well as the revenue should also go back to the assessing officer with a direction to decide the issue about the taxability in the hands of the assessee after the fate of registration to the assessee u/s 12 A of the income tax act.

In view of this, we set aside both the appeals back to the file of the learned assessing officer accordingly. Hence, appeals of the assessee as well as of the revenue are allowed for statistical purposes.

Now we come to the appeal of the assessment year 2011 – 12. The assessee has filed appeal in ITA number 1997/del/2016 and the learned assessing officer has filed appeal in ITA number 3307/del/2016 against the order of the Commissioner of income tax (appeals) – 40, New Delhi dated 10/3/2016. 30. The assessee raised following grounds of appeal in for Assessment Year 2011-12:- “1. Disallowance by Commissioner of Income Tax (Appeals) of expenses or payments of Rs 1,67,47,700/- @ 25% of total expenses or payments of Rs.6,69,90,800/- made to related concerns is arbitrary, without any finding ofAssessing Officer or of Commissioner of Income Tax (Appeals) that expenses or payments made to related concerns are in excess of market price and is based on mere assumption that payments made to related parties are excessive. Disallowance is contrary to facts and law and therefore is liable to be deleted.”