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Facts
The assessee, a charitable trust registered under Section 12A, sold its property and donated the sale proceeds to another charitable trust. The Assessing Officer (AO) denied exemption under Sections 11 and 12, alleging a lack of charitable activities and misuse of exemption provisions. The CIT(A), however, allowed the assessee's appeal, ruling that the trust was eligible for exemption.
Held
The Tribunal upheld the CIT(A)'s order, stating that the trust's registration under Section 12A was valid and could not be questioned by the AO regarding its charitable activities. It was further held that donating sale proceeds to another charitable trust constitutes a valid application of income for charitable purposes, and a temporary break in activities does not disqualify the trust from exemption.
Key Issues
Whether a registered charitable trust can be denied exemption under Sections 11 & 12 if it donates sale proceeds of its property to another charitable trust, and whether a temporary cessation of charitable activities invalidates its registration.
Sections Cited
11, 12, 12A, 143(3)
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Income Tax Appellate Tribunal, DELHI BENCH ‘F’: NEW DELHI
Before: SHRI YOGESH KUMAR U.S. & SHRI MANISH AGARWAL
O R D E R
PER MANISH AGARWAL, AM:
This appeal is filed by Revenue against the order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [‘Ld. CIT(A)’ in short] dated 25.07.2024 in Appeal No.40/10204/2018-19 for Assessment Year 2016-17 arising out of the order passed by AO u/s 143(3) of the Act (‘the Act’ for short) dated 30.12.2018.
Briefly stated the facts are that assessee is a charitable trust registered u/s 12A of the Act and filed its return of income on 13.10.2018 declaring Nil income. The case was selected for scrutiny under CASS and after considering the submissions made by assessee, the AO held that the assessee is not eligible for claiming
Against the said order, assessee filed appeal before the Ld. CIT(A) who vide impugned order dated 25.07.2024 had allowed the appeal of the assessee and held that the assessee is eligible for exemption u/s 11 & 12 of the Act.
Against the said order, Revenue is in appeal before the Tribunal by taking following grounds of appeal:
1. The Ld. CIT(A) has failed to appreciate that the issue is not of break in charitable activities but is that the assessee has donated the entire sales proceed to other trust who are not entitled for receiving donation.
2. The appellant craves leave to add, to alter or amend any ground of appeal raised above at the time of hearing.”
5. Before us, ld. CIT-DR drew our attention to page 2, para-3 of the assessment order wherein it is observed by AO that assessee has not expended even single rupee on charitable activities for last several years and sold the land owned by it for Rs.2,60,00,000/- which is the minimum price permissible under prevailing stamp duty law. The AO further observed that the entire sale consideration was given to other entity as donation. Accordingly, ld. CIT DR submits that assessee is not carried out any charitable activity nor any income was ever derived from such land which was sold during the year and further entire consideration was transferred as donation, therefore, it is clear misuse of exemption provisions and accordingly, the Ld. CIT- DR requested to restore the order of AO. He further filed detailed written submissions which read as under: “In this regard, it is submitted that as per the factual record, the registration under section 12A/12AA of the Act granted to the assessee trust, continues to remain in force and has not been cancelled by the office of the Commissioner of Income Tax ITO vs. Prakash Sewa Trust (Exemption) Delhi. However, the non-cancellation of the registration should not in any manner affect or nullify the merits of the assessment order passed by the Assessing Officer (AO), which is based on concrete facts and material evidence, and with due application of mind. In this case the Ld. CIT(A) held that the exemption u/s 11 cannot be denied to a charitable trust registered u/s 12A of the Act. However in this case, the exemption was denied by the assessing officer only on the ground that there was no charitable activity carried out by the assessee trust for last 4 years. The core issue is that the assessee trust has donated the entire sale proceed of the land property to the other trust, who are not entitle to received donation from the assessee trust. It is crucial to note that the mere act of donating funds to another trust does not satisfy the conditions for exemption under Section 11, as the trust itself must be actively engaged in charitable activities. It is submitted that the existence of a valid registration u/s 12A does not preclude the AO from scrutinizing the activities of the Trust and drawing an adverse inference where the facts on record show deviation from charitable activities or misuse of funds. The registration under Section 12A is a pre-condition for claiming exemption under Sections 11 and 12, but it is not an absolute bar against assessment of income on merits where such income is not applied for charitable purposes or is found to be in violation of the provisions of the Act. It clearly appears from the assessment order that AO during the assessment proceeding have the evidences that the entire consideration from the sale of property was immediately donated to other trust without proper investigation about the charitable activities being conducted by the receiving charitable trust. One of them does not appear to be a legitimate entity for receiving such donations, as required under the provisions of Section 11. The donation must be given to a trust that is recognized and engaged in charitable activities as per the Income Tax Act, 1961. Failure to ensure the proper utilization of these donations raised serious concerns regarding the validity of the exemption claim. Inter-charity donation is permissible as application of income but it is to be ensured that inter-charity donation is given for the objects for which the donor trust is created. In other words, the donor and donee should share similar objects. Whereas as per the information available with the AO, one of the recipient trust of donation of Rs. 50,00,000/- i.e., Sangneria Foundation for Health and Education has received also received similar corpus donation from Pradeep Jindal Group of entry operation with the allegation that the unaccounted money of the beneficiary is routed through the entries of donation. It is well-settled law that even if the trust is registered u/s 12A, the exemption u/s 11 & 12 can be denied if the trust is found to have diverted income, violated the objects of the trust, or applied income for non-charitable purposes. The AO has the authority to assess the application of income independently of the registration status, and where misuse or misapplication is found, the exemption may be denied, and income brought to tax accordingly.
In the circumstances, the attention of De Hon'ble Bench may respectfully be drawn to the fact that the merit of the additions made by the AO in the assessment order is completely independent of the issue of cancellation of registration. The AO's findings are well-reasoned and supported by cogent evidence. The order clearly lays down the chain of events, the movement of finds, and the ultimate misuse of such funds under the guise of donation, such donation, found to be devoid of charitable substance and routed to an entity engaged in accommodation entries, constitutes a clear case of misapplication of income. Hence in nutshell it is seen that this is a classic case of misuse of the exemption provisions available to charitable institutions. The land is purchased in the trust out of public donations. No activity whatsoever is carried med out towards charitable object for several years for the purpose of which the trust is created and funds are kept in the form of immovable assets. No income is derived from those immovable assets or no income is shown from such asset. After some years the immovable property is sold at minimum value possible and the same is donated to some organization. It may not be out of place to mention that many of the organizations to whom the money was given had received corpus funds from established entry operators, For example, as per the information circulated by the Investigation wing of the Department, Sangneria Foundation for Health and Education to whom the assessee has given Rs. 50,00,000 on 10.09.2015 had received similar corpus donations from Pradeep Jindal Group of Entry Operators', with the allegation that the unaccounted money of the beneficiary is routed though the entries of donations. In other word, the donation received by it is given back in cash or the cash is given to the entry operators to route it back to the beneficiary in the form of donation. Thus the nature of donation and the manner in which the donations was given also raises a doubt on genuineness thereof. In conclusion, while the registration u/s 12A of the Act has not been cancelled, this fact should not dilute or nullify the assessment findings. The additions made are not dependent on such cancellation but are rooted in the actual misuse of income and violation of charitable principles. Hence, the assessment order is sustainable in law and facts.”
6. On the other hand, Ld. AR for the assessee supported the order of Ld. CIT(A) and submits that sole reason for denying exemption since the entire proceeds received from sale of land as donation to another trust. The Ld. AR submits that assessee is holding valid registration certificate u/s 12A since 1980 and claiming benefit od section 11 & 12 of the Act since then. The charitable status of the trust was accepted by the Department in preceding years also and, therefore, under ITO vs. Prakash Sewa Trust identical circumstances, the benefit of exemption u/s 11& 12 of the Act should not be denied. Ld. AR also filed detailed written submissions in this regard which reads as under: “1. Respondent assessee is trust created vide declaration of trust dated 13.11.1979 and is registered us 12A/12AA vide order dated 06.02.1980. Same is continuing and is never revoked and assessee is continuously claiming exemption u's 11/12 post said registration from 1980.
2. The sole issue which has arose between assessee and revenue in extant case is assessee has sold one immovable property (village mundka delhi) for Rs.260,00,000 acquired for Rs. 11,86,960 (admittedly and continuously same is shown as asset in assessee trust balance sheet from period of acquisition till disposal) and assessee has made donations to other organizations registered u/s 12AA AS APPLICATION of income against stated sale consideration (Rs 25300,000)); so the issue is whether revenue could have disallowed said application of income (donation to other registered organization against sale consideration) and resultantly tax the gross receipts and also whether Ld. AO could indirectly withdraw the registration of assessee u/s 12A/12AA by overreaching operative/existing registration u/s 12A/12AA? 3. Relevant paragraph of ld cita order which may please be referred are: Para/Page Relevant aspect/issues Answered 7.1/page 6 Issues involved in present Para 7.7 page 9 (conclusion) case culled out Denial of Held a) when there is no violation exemption to other of provisions of sec 11 or 13 by a registered charitable charitable trust registered u/s organization 12A exemption u/s 11 can not be denied; b) exemption u/s 11 cannot be denied for the break in charitable activities by a charitable trust for few years; c) AO cannot dictate any assessee regarding the conduct of its business; d) donations given by one charitable trust to another charitable trust is application of income So denial of exemption u/s 11 and resultant addition is held not sustainable. 7.2/page7 Whether exemption u/s 11 Held once registration u/s 12A is can be denied to a charitable granted benefit of exemption u/s trust registered u/s 12A of 12 is to be allowed subject to the Act? fulfilment of relevant conditions ITO vs. Prakash Sewa Trust 7.3/page 7 Whether exemption u/s 11 Held break in carrying out the &8 can be denied when no activities can not be a reason for charitable activity is carried denial of exemption u/s 11. out by appellant trust ? 7.4/page Whether AO cannot dictate Held break in carrying out the 8/9 the appellant trust whether it activities can not be a reason for can sale its trust property denial of exemption u/s 11. and the way in which it can sale its trust property ? 7.5/page 9 Whether the appellant trust Held Yes reference made to who itself is a charitable Hon’ble Kar HC decision in case trust can give donations to of PCT vs St. Jospech Monastery another charitable trust and whether such donations can be treated as application of income ? 7.6/Page 9 Donations given to Held mere making remark organization whose without any contrary evidence activities are controlled by can not be reason for treating the accommodation entry donations as bogus and illegal provided ? 4. That is, once assessee is holding valid registration u/s124(a) from 06.02.1980 Grom more than 35 years) which has remained throughout undoubted and is fully accepted /operative and once the subject immovable property purchase in hands of trust is fully accepted in past/previous year(s) from 1995 (for more than 20 years), and assessee "charitable" status is also fully accepted in past, to hold in present /instant sale year that entire exemption u/s 124 is wrongly claimed for want of charitable activity is totally illegal and impermissible, it is not in dispute that purchase/acquisition of subject "immovable" property is made prior to period of July 1995 in various trenches during continuance/existence of "charitable" status of assessee trust (assessed registered u/s 12A(a) on 06.02.1980) refer purchase deed filed with reply dated 22.10.2018 duly accounted in books of assessee trust and duly appearing in balance sheet of assessee as "asset". decision of Ld AO in present AY 2016-2017 (sale year) to re-write and undo everything in past/concluded assessment(s) and to retrospectively withdraw assessee's registration in garb of subject/impugned denial of exemption u/s 11 from "inception" is totally "impermissible" and "unlawful" exercise.
PROPOSITION 1: that Ld. AO while making assessment in hands of registered trust can not go behind the registration u/s 12A reference is made to This is firstly against well settled principle that Ld. AO while making assessment in hands of registered trust cannot go behind the registration u/s 12A reference is made to: following judicial pronouncements: Hon'ble Gujarat high court in ITO vs. Prakash Sewa Trust case of Hiralal Bhagwati v. Commissioner of Income tax [2000] 246 ITR 188 (Guj.) where it was held that once the registration under section 12A(a) was granted, the grant of benefit and exemptions could not be denied, approved by hon'ble apex court in case of In Asstt. CIT v. Surat City Gymkhana [2008] 300 ITR 214/170 Taxman 612 (SC), the Supreme Court held that once registration is provided than the AO cannot probe into the objects as the relevant observation is as under: "The registration of a trust once done is a fait accompli and the Assessing Officer cannot thereafter make further probe into the objects of the trust." Also The Supreme Court in U.P. Forest Corpn. v. Dy. CIT [2008] 297 ITR 1/165 Taxman 533 held that once an order of registration under section 12AA is passed by the Commissioner, the entire income of the trust becomes exempt under the provisions of sections 11 and 12 because registration of a trust is a condition precedent for claiming benefit under section 11(1)(a). In the case of Ahmedabad Urban Development Authority v. Dy. Director of Income Tax (Exemption) [2011] 335 ITR 575/[2010] 233 CTR 407/[2010] 40 DTR 76 (Guj. - HC) the Gujarat High Court held that if the 12A registration was not withdrawn on the date of the assessment order then the income of the assessee was exempt in entirety. The AO could not have travelled beyond the certificate of registration granted under section 12AA. The effect of such a certificate of registration under section 12AA, therefore, cannot be ignored or wished away by the AO by adopting a stand that the trust or institution is not fulfilling conditions for applicability of sections 11 and 12. That is, Ld. AO cannot sit in "appeal" over valid "accepted"/ "operative" charitable status of assessee u/s 12A as done in extant case. Same is Mumbai bench ITAT decision in case of Goregaon Sports Club 6621/Mum./2012 Date of Order-21.10.2014. It is further submitted that even competent authority (concerned PCIT/CIT) who can withdraw registration u/s 12AA/ 12A(b) (note sec 12A(b) part added u/s 12AA(3), by finance act 2010 w.e.f. 01.06.2010) w.e.f. 01.10.2004 u/s 12AA(3) as held in series of "HC" decisions could not have cancelled registration from retrospective effect (Hon'ble Allahabad high court decision in case of ACIT vs Agra Development authority: (2018) 407 ITR 562: (2018) 302 CTR 308; Hon'ble Madras high court decision in case of AURO LAB VS ITO (2019) 411 ITR 308: (2019) 307 CTR 6; Hon'ble Rajasthan high court in case of Indian Medical Trust vs PCIT (2019) 414 ITR 296: (2019) 311 CTR 19: Third Member Allahabad ITAT decision in case of JEEWAN JYOTI CHARITABLE TRUST VS PCIT CENTRAL 20.05.2022-weight of special bench decision; Delhi G bench ITAT decision in case of URMILA DEVI CHARITABLE TRUST ITA 4136/DEL/2017 order dated 13.06.2019), the to say Ld. AO during assessment proceedings u/s 143(3) could be permitted to usurp power of PCIT/CIT u/s 12AA(3) which otherwise is not available to said authority also is classical case of doing indirectly what could not be done directly (refer latim maxim Quando aliquid prohibetur ex directo, prohibetur et per obliquum: When anything is prohibited directly. It is also prohibited Indirectly. [Co. Litt. 223) applied Refer: hon'ble apex court decision in case of Modi Naturals Ltd.... Appellant; Versus Commissioner of Commercial Tax UP... Respondent.2023 SCC OnLine SC 1424"44. Applying the aforesaid principles of interpretation, ITO vs. Prakash Sewa Trust we find it difficult to accept the case put up by the revenue as doing so would permit the assessing authority to do something indirectly what he cannot do directly i.e., get around the mandate of the exception carved out by Section 13(3)(b) read with Explanation (iii) by invoking Section 13(1)(f) of the UP VAT Act."
PROPOSITION 2: once purchase of subject immovable property by assessee trust is continuously and without any adverse inference is fully accepted from purchase year and afterwards then to hold contrarily in sale year is simply not permissible. Secondly once purchase of subject immovable property by assessee trust is continuously and without any adverse inference is fully accepted from purchase year and afterwards then to hold contrarily in sale year is simply not permissible. This is based on well accepted and acknowledged legal principle of "consistency" and "stare decisis". Refer hon'ble sc decisions in cases of Parsuram Pottery Works Co Ltd vs ITO 106 ITR 1; Radhasoami Satsang vs CIT 193 ITR 321; CIT vs Excel Industries Ltd 358 ITR 295 (three judge bench); Shasun Chemical & Drugs Lid vs CIT 388 ITR 1; Godrej & Boyce Manufacturing Company Ltd vs DCIT 394 ITR 449; PCIT vs Maruti Suzuki ltd 416 ITR 1). Nothing prevented revenue to hold in purchase year and later on that assessee trust has not bonafidely purchased held subject immovable property for "charitable" purposes of trust. Having missed though out, to take "impromptu" adverse decision in instant sale year is totally unsustainable 7. PROPOSITION 3: Ld. AO did not have any option but to make necessary computation of income in hands of assessee trust as per specific and special mandate section 11(1)/(1A) of 1961 Act dealing with "income" arising from sale of capital asset in hands of registered trust. Thirdly in above stated factual matrix, Ld. AO did not have any option but to make necessary computation of income in hands of assessee trust as per specific and special mandate section 11(1)/(1A) of 1961 Act dealing with "income" arising from sale of capital asset in hands of registered trust. In identical circumstances, recently hon'ble Karnataka high court in case of PCIT vs St Joseph Monastery ITA 840/2018 dated 23rd November 2021 where high court has upheld impugned ITAT order that sale proceeds arising from transfer of capital asset can be validly transferred to another charitable trust as inter trust donation is valid "application of income" in hands of transferor /donor trust. In this decision important reference is made to a) explanation to section 11(2) bar for donations to other trust from accumulated amount b) hon'ble Calcutta high court decision in case of CIT vs East India Charitable Trust 206 ITR 162 and c) hon'ble Karnataka high court decision in case of CIT vs Maria Social service Society 408 ITR 462 and d) Bangalore bench ITAT decision in case of Al Ameen education society vs DIT (exemptions) 2012 (26 taxman 25). Further reference is made to Ranchi bench ITAT decision in case of ACIT vs Bhartiya Yug Vashista Sanga ITA 211/Bang/2014 order dated 09.09.2016 fully supporting case of ITO vs. Prakash Sewa Trust assesse trust, in this decision it is held after considering CBDT circular 72/06.01.1972 in para 10 "10. We have given a careful consideration to the rival submissions. A charitable trust can spend away the proceeds of the capital gain on sale of the capital assets in the following modes-A It con apply proceeds to charitable purposes as was allowed prior to insertion of Section 11 (14) of the Actand as is allowed even after insertion of Section 11(1A) of the Act. B. It can accumulate proceeds within the limits generally and beyond the limits by following laid down procedure that is filing Form No. 10 under Section 11(2) of the Act. C. It can make donation to other charitable trusts, D IT can invest proceeds of sale of capital assets in acquiring new capital asset and the capital gain shall be deemed to have been applied to charitable or religious purposes because of insertion of Section 11(1A) of the Act which has been specifically inserted to allow this exemption by Finance No. 2 Act 1971 with retrospective effect from 1.4.1962" This fully applies to facts of present case. Above stated legal position more strongly applies to facts of present case as once revenue accepts the genuineness and factum of very same donation in hands of recipient organizations, taking opposite view in hands of present assessee/trust is in teeth of following well settled legal principle: humble reference is made to recent decision of Hon'ble delhi high court in case of CCIT (Central) OSD-1 delhi vs Vishnu Apartments pvt ltd ITA 673/2023 order dated 01.12.2023 that "As was correctly concluded by the Tribunal, the amount received by MGF had been offered for tax and quite clearly, addition in that regard could not have been made in the hands of the respondent/assessee, once the remittance had been accepted in the hands of MGF. In a manner of speech, in our view, what is sauce for the goose is also sauce for the gander"
8. CONCLUSION: Once following are undisputed facts: a) There is not a single case where any "meaningful" inquiry u/s 133(6)/131 of 1961 act is done by Ld AO from recipient organizations. B) There is not a single case where any of the recipient organization is found to have been not engaged in charitable activities. C) There is no case of any wrong utilization made out at end of recipient organization. D) Further the factum of receipt and genuineness of subject "corpus" donation is accepted in hands of recipient organization. E) Further recipient organization are engaged in pursuing similar charitable activities is also not in doubt. There can be no case to deny benefit of application of income u/s 11(1), in hands of present registered -assessee trust vis a vis subject donations made to recipient "registered" charitable organizations.
ON DEMURRER TOTAL LACK OF SCN INVALIDAT THE IMPUGNED ASST: As evident from cursory look to impugned asst order dated 30.12.2018 ITO vs. Prakash Sewa Trust passed u/s 143(3) merely after notice u/s 142 11.10.2018 & 15.12.2018 impugned Asstt. is framed without any SCN (show cause notice) much less valid SCN being issued in terms as mandated by CBDT instruction 20/2015 dated 29.12.2015 and recent hon'ble apex court decision in case of Excise Comm vs Mysore Sales International reported at 466 ITR 205 19. Though there is no express provision in sub-section (6) or any other provision of Section 206C of the Income Tax Act regarding issuance of notice and affording hearing to such a person before passing an order thereunder, nonetheless, it is evident that un order passed under Section 206C(6) of the Income Tax Act, as in the present case, is prejudicial to the person concerned as such an order entails adverse civil consequences. It is trite law that when an order entails adverse civil consequences or is prejudicial to the person concerned, it is essential that principles of natural justice are followed. In the instant case, though show cause notice was issued to the assessee to which reply was also filed, the same would not be adequate having regard to the consequences that such an order passed under Section 206C(6) of the Income Tax Act would entail. Even though the statute may be silent regarding notice and hearing, the court would read into such provision the inherent requirement of notice and hearing before a prejudicial order is passed. We, therefore, hold that before an order is passed under Section 206C of the Income Tax Act, it is incumbent upon the assessing officer to put the person concerned to notice and afford him an adequate and reasonable opportunity of hearing, including a personal hearing." And recent hon’ble apex court in case of BASUDEV DUTT..APPELLANT(S) VERSUS THE STATE OF WEST BENGAL & ORS.... RESPONDENT(S) 2024 INSC 940 & & hon'ble delhi high Court detailed ruling in case of GE CAPITAL US HOLDINGS INC versus DY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION) CIRCLE 1(3) (1), NEW DELHI AND ORS W.P.(C) 1646/2022 Judgment pronounced on: 31 May 2024 & Hon'ble Bombay high court in case of Vivek Jaisingh Asher VS ITO 2024:BHC-OS:6508-DB 16th APRIL 2024 "9. The courts have time and again held that issuance of show cause notice is not an empty formality. Its purpose is to give reasonable opportunity to the affected persons to effectively deal with the allegations in the show cause notice. In our view, even the show cause notice dated 23rd August 2022 is defective in as much as even though it had reference to Section 56(2)(x) of the Act, it did not mention whether the Assessing Officer proposed to treat the stamp duty value as deemed Income of assessee under clause (a) or clause (b) of Section 56(2)(x) of the Act. This is because both are separate provisions and under either of these two clauses the stamp duty value could be treated as deemed income. By not specifying whether Section 56(2)(x)(a) or Section 56(2)(x)(b) of the Act was applicable, the A.O. first of all ITO vs. Prakash Sewa Trust has not given reasonable opportunity of showing cause to the assessee. Assessee would be totally unaware of the grownds which had prompted the A.O. to arrive at a prima facte conclusion and issue show cause notice. The power that the A.O. had was required to be executed properly. Moreover in the assessment order dated 29th September 2022 that is impugned in the petition, the A.O. has chosen to give Section 56(2)(x), a go by and treat the stamp duty value of the flat at Rs.11,68,99,000/- as from unexplained source under Section 69 of the Act. There is no reference to Section 36(2)(x) of the Act in the operative part of the order dated 29th September 2022.
10. In the circumstances, the impugned order dated 29th September 2022 cannot be sustained. The allegations in the affidavit in reply that assessee has claimed tenancy rights as colourable device in order to get an exemption under the provisions of the Act and evade the tax liability also cannot be accepted because if the A.O. had evidence to that effect the same should have been stated in the show cause notice dated 23rd August 2022. & Hon'ble JHARKHAND HIGH COURT IN CASE OF PASARI CASTING CASE REPORTED AT 463 ITR 469 "In the impugned Order the assessing authority has simply made additions in the returned income without stating whether it is a case of cash credit, unexplained investments, unexplained money, amount of investment, etc. not fully disclosed in books of account, unexplained expenditure, etc. The impugned Order is therefore without authority of law and bad in law. The impugned order is thus unreasoned, non-speaking and therefore not sustainable in law"
As stated herein above that the recorded reason/impugned Assessment Order is silent under which provision of the Act the additions are sought to be made. It is well settled that the reasons cannot be supplemented by assessment Order or Affidavit. The recorded reason is totally silent whether the amount sought to be taxed is 'income of the Petitioner and whether the addition is sought to be made on account of Cash Credit (Section 68), Unexplained Investments (Section 69), Unexplained Money (Section 69A), Amount of Investment, etc., not fully disclosed in books of account (Section 69B), Unexplained Expenditure, etc. (Section 69C). The requirement of each of the aforesaid sections are different and the rules of evidence and burden of proof are also different, hence, unless the Petitioner to put the notice as to the exact contravention or provisions of law under which assessment or additions are sought to be made, the Petitioner cannot defend his case."
Humble Prayer: So it is humbly submitted that impugned order of Ld CIT-A may please be dismissed.”
ITO vs. Prakash Sewa Trust 7. Heard both the parties and perused the materials available on record. In the instant case, the Ld. AO has withdrawn the exemption u/s 11 & 12 of the Act for the reason that assessee has transferred entire sale consideration to other charitable institution whereas the Ld. CIT(A) has deleted the same by holding that there is no violation of provisions of section 11 to 13 of the Act. The relevant observations of Ld. CIT(A) as contained in para 7.1 to 7.7 of the order are as under:
“7.1 I have duly considered the submissions of the appellant and the material on record. The basic issue involved in the case is denial of exemption u/s 11 by the AO. The appellant trust sold its trust property and the sale proceeds were donated to another charitable trust. The AO denied exemption u/s 11 of the Act for the reasons that (i) no charitable activity was carried out by the appellant trust in past several years; (ii) the appellant trust sold its trust property during the year under consideration and donated the sale proceeds to another charitable trust which was controlled by the accommodation entry providers; (iii) the property sold was an agricultural land, however, no agricultural income was offered by the appellant trust for the use of such agricultural land in past years, (iv) the land sold was situated in industrial area and hence cannot be considered as agricultural land; (v) the fact that the land sold was subjected to compulsory acquisition by the government was not disclosed by the appellant trust, (vi) no efforts were made by the appellant trust to find out the purchaser to fetch higher price and the land was sold just above the circle rate With these observations, the AO treated the transaction of the property to be non-genuine and made the additions rejecting exemption u/s 11 of the Act to the appellant. In connection with the grounds raised by the appellant, there are various issues requiring consideration which are discussed hereinbelow. 7.2 Whether exemption u/s 11 can be denied to a charitable trust registered u/s 12A of the Act- The AO has denied exemption u/s 11 for the reasons mentioned in earlier para. Now the first question arises as to whether the exemption can be denied when the appellant trust was registered u/s 12A of the Act. Registration u/s 12A of the Act is the pre-condition for availing exemption u/s 11 of the Act. The registration of the Trust once done is a fait accompli and the AO cannot therefore make further probe into the objects of the Trust which has been held by the Hon'ble Supreme Court in the case of CIT Vs Surat City Gymkhana (2008) 300 ITR 214 (SC). Similarly the registration of charitable Trust/Society u/s 12A is not an idle formality, it enables the Commissioner to come to the conclusion on the basis of ITO vs. Prakash Sewa Trust documents, accounts etc filed for the purpose, whether the trust/society deserves registration which has been held by the Hon'ble Calcutta High Court in the case of Ananda Marga Pracharaka Sangha Vs CIT [1996] 218 ITR 254 (CAL). In the case of DIT Vs Gemological Institute of India [2019] 105 taxmann.com 179 (Bombay), Hon'ble Bombay High Court has held that "This in view of the decision of the Apex Court in Asstt. CIT v. Surat City Gymkhana [2008] 170 Taxman 612/300 ITR 214 to the effect that once registration is granted a trust under Section 12A of the Act then it is not open to the Assessing Officer while examining compliance with Section 11 of the Act to revisit objects of the respondent-assessee and to hold contrary to the registration granted" Combined reading of these judgments implies that once the registration u/s 12A is granted, benefits of exemption u/s 11 are to be allowed upon satisfaction of the conditions envisaged in section 11. In view of the decisions discussed, it is apparent that once a trust is registered u/s 12A of the Act, the exemption u/s 11 has to be granted on fulfilment of the conditions given therein. 7.3 Whether exemption u/s 11 of the Act can be denied when no charitable activity carried out by the appellant trust in past - In the case of Jupiter Medical Research Centre Trust Vs DIT(E) [2010] 128 TTJ 118 (Ahmedabad) (UO), Hon'ble ITAT, Ahmedabad has held that "merely because the assessee has not carried out any activities, that does not mean that the trust has totally stopped the activity forever." Relevant extract of the order is reproduced below for the sake of clarity -
4. The learned counsel of the assessee has filed the copy of acknowledgement of return of income for the assessment years 2005- 06 and 2006-07 along with audit report for the year ending 31st March, 2005 and 31st March, 2006. It is pointed out that from the perusal of the same, no activities are carried out by the trust. There is no violation of any of the provisions contained in the Act. Merely, all the trustees are family members, it does not mean that trust is not a public trust. This proposition finds support from the decision of Hon'ble Supreme Court in the case of Deokl Nandan v. Murlidhar & Ors. AIR 1957 SC 133(copy placed on record). As a matter of fact the trust is genuine and because of this, the leamed Director of IT (Exemption) granted the exemption under section 12AA. There is no finding or allegation in the impugned order that activities carried out by the trust are not in accordance with the objects of the trust or institution. Merely because the assessee has not carried out any activities, that does not mean that the trust has totally stopped the activity forever. In these circumstances, in our considered opinion, the learned Director of IT (Exemption) has not made out a case justifying cancellation of the registration granted under section 12AA. We, therefore, set aside the impugned order of the Director of IT (Exemption). However, we may clarify that the learned Director ITO vs. Prakash Sewa Trust of IT (Exemption) is at liberty to pass any order under sub-section (3) of section 12AA if any of the conditions under that section is fulfilled in future. Subject to this clarification, we allow the appeal of the assessee. Though, the above decision is in context of cancellation of registration u/s 12AA, it is relevant in the present case also. Therefore, break in carrying out of the activities cannot be a reason for denial of exemption u/s 11. 7.4 Whether AO cannot dictate the appellant trust whether it can sale its trust property and the way in which it can sale its trust property - Hon'ble Calcutta High Court in the case of CIT Vs. Edward Keventer (Private) Ltd. (1972) (86 ITR 370) has been held that "It is not for the Assessing Officer to dictate what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman". Thus, it is not for the AO to judge as how the transactions has been carried out by the appellant trust. The AO can verify whether there is any violation of statutory provisions of law and not the way in which the transactions are being carried out. The AD is required to verify whether the claim of the appellant is as per law and if it is not he has to take action as per law. 7.5 Whether the appellant trust who itself is a charitable trust can give donations to another charitable trust and whether such donations can be treated as application of income- The answer to this question is "YES" This proposition is supported by the decision of Hon'ble Kamataka High Court in the case of PCIT v. St. Joseph's Monastery (2022) 137 taxmann.com 133 (Kar), wherein it has been held that donation of sale proceeds of capital asset made by charitable trust to another trust was to be allowed as 'application of income for charitable purpose". Thus the donation given by the appellant to another trust is held to be valid application of income. 7.6 Donations given to organization whose activities are controlled by accommodation entry provider - The AO has just passed a remark that the appellant trust has given donations to another charitable trust which was controlled by the persons who were involved in providing accommodation entries. However, the AO has not brought anything on record demonstrating the illegality of the donee trust and the misuse of funds by the donee trust. Simply passing a remark without any contrary evidence cannot be a reason for treating the donations as bogus and illegal.
ITO vs. Prakash Sewa Trust 7.7 In view of the above discussion and considering the facts and circumstances of the case in totality, it is held that (i) when there is no violation of provisions of section 11 or 13 by a charitable trust registered u/s 12A, exemption u/s 11 cannot be denied; (ii) exemption u/s 11 cannot be denied for the break in charitable activities by a charitable trust for few years; (iii) the AO cannot dictate any assessee regarding the conduct of its business and (iv) the donations given by one charitable trust to another charitable trust is application of income. Accordingly, the action of the AO in denial of exemption u/s 11 and resultantly bringing an amount of Rs.2,60,00,000/- to tax is not sustainable and hence cannot be upheld. Therefore, the AO is directed to delete the addition. Accordingly, ground no. 2 raised by the appellant is allowed.”
The Hon’ble Karnataka High Court in the case of PCIT v. St. Joseph's Monastery reported in (2022) 137 taxmann.com 133 (Kar), vide its order dated 23rd November, 2021 held that the transfer of the fund to other charitable society could not be a ground for cancellation or rejection under section 12A of the Act and the said donation is to be considered as the application of income for charitable purposes.
9. In view of the above findings of the Ld. CIT(A) which was not controverted by the Revenue before us and further by respectfully following the judgment of Hon’ble Karnataka High Court in the case of PCIT v. St. Joseph's Monastery (supra) which is directly on the issue of donation to anther charitable institution by holding the same as application of income for charitable purpose, we are of the considered view that Ld. CIT(A) has rightly held the assessee as charitable institution and, accordingly, eligible for exemptions u/s 11 and 12 of the Act. Therefore, we uphold the order of Ld. CIT(A). Accordingly, all the grounds of appeal of Revenue are thus dismissed.