Loading judgment…
No AI summary yet for this case.
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 22ND DAY OF OCTOBER, 2021
PRESENT
THE HON’BLE MRS.JUSTICE S.SUJATHA
AND
THE HON’BLE MR. JUSTICE RAVI V. HOSMANI
I.T.A.No.47/2013
BETWEEN :
1 . THE COMMISSIONER OF INCOME TAX EXAMINATION, C.R.BUILDING, QUEENS ROAD, BANGALORE
2 . THE DIRECTOR OF INCOME TAX (EXEMPT) C.R.BUILDING, QUEENS ROAD BANGALORE
...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND :
M/s KRUPANIDHI EDUCATIONAL TRUST CHIKKABELENDUR CARMELARAM POST VARTHUR HOBLI, OFF SARJAPUR ROAD BANGALORE-560035
…RESPONDENT
(BY SRI V.CHANDRASHEKAR, ADV. A/W SRI S.ANNAMALAI, ADV. FOR SRI K.KIRAN KUMAR, ADV.)
THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 14.09.2012 PASSED IN ITA NO.86/BANG/2012, PRAYING TO I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE THE
- 2 -
ORDER OF THE ITAT, BANGALORE IN ITA NO.86/BANG/2012 DATED 14.09.2012 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DIRECTOR OF INCOME TAX (EXMP), BANGALORE.
THIS APPEAL HAVING BEEN HEARD AND RESERVED, COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
This appeal is filed by the Revenue assailing the order dated 14.09.2012 passed by the Income Tax Appellate Tribunal Bengaluru Bench ‘B’, Bengaluru (‘Tribunal’ for short) in ITA. No.86(BNG)/2012 whereby the appeal filed by the assessee challenging the order passed by the Director of Income Tax (Exemption), Bengaluru (‘DIT (E)’ for short) has been allowed.
This appeal was admitted by this Court to consider the following substantial questions of law: “1. Whether on the facts and in circumstances of the case the Tribunal was correct in quashing the order u/s 12AA(3) of the Income Tax Act, 1961 without taking into
- 3 -
consideration the reasons assigned for cancellation and recorded a perverse finding? 2. Whether on the facts and in circumstances of the case, the Tribunal in holding that amendment of the trust deed without the consent of the department would not be sufficient ground to exercise the power u/s 12AA(3) of the Act without taking into consideration that the earlier registration under Section 12A of the Act was granted on the basis of the un-amended Trust Deed? 3. Whether the Tribunal was correct in holding that proceedings under Section 12AA(3) of the Act is not open to the revenue to review its earlier registration granted under Section 12A of the Act, by not appreciating that the granting authority has inherent power to cancel the registration? 4. Whether the Tribunal was correct in holding that the DIT exemption has not recorded any finding in order under Section 12AA(3) of the Act with regard to the genuineness of the activities of the Trust or that the activities were not in accordance with the objects of the Trust but has noticed some shortcomings in functioning and the shortcomings by themselves cannot be put on par with lack of genuineness or activities not
- 4 -
being carried out in accordance with the objects of the Trust without appreciating that commercialization of education being against the public policy and would disentitle the assessee to claim benefit under Section 12A and 11 of the Act? 5. Whether the Tribunal committed an error in not appreciating charging of hefty fees, payment of commission to the brokers is in violation of the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984 and was against the public policy disentitling the society from registration under Section 12A of the Income Tax Act? 6. Whether the Tribunal committed an error in not taking into consideration that the assessee has paid remuneration to the Trustees and further provided luxury cars (BMW) to the Trustees and the same is in violation of Section 13 of the Act and consequently the assessee is not entitled for registration under Section 12A of the Act?”
The assessee is a charitable trust, registration was granted to it under Section 12A of the Income Tax Act, 1961 (‘the Act’ for short) on
- 5 -
02.06.1986. A survey was conducted in the premises of the assessee on 16.09.2011. According to the DIT (E), the survey revealed that the assessee was running an educational institution on commercial basis and violated 13 (1) (c) of the Act. Further it was noticed that the assessee had carried out amendments to the Trust Deed without the prior approval of the Department. On these grounds, a notice was issued to the assessee proposing to cancel the registration granted under Section 12A of the Act. The gist of the show-cause notice is as under: (i) the assessee was paying commissions to persons to solicit students to the assessee institution-M/s Krupanidhi Educational Trust to pursue studies; (ii) the assessee was generating surplus funds thereby purchasing properties to establish an international school; (iii) the assessee had purchased a BMW car
- 6 -
(iv) the Assessee was availing loans in cash from Sindhi financiers and was repaying in cash; (v) the assessee was not maintaining accounts on a regular basis; the assessee was migrating from a particular software to another software; (vi) the assessee violated 13 (1) (c) of the Act; and (vii) the original trust deed dated 10.01.1985 was amended by a deed dated 07.03.2005 without the approval of the Department.
The assessee filed a reply to the said show- cause notice denying the allegations made against it. The DIT (E), rejecting the reply, confirmed the proposal made in the show-cause notice and thereby cancelled the registration granted to the assessee invoking Section12AA of the Act.
Aggrieved by the said order, the assessee preferred an appeal before the Tribunal. The Tribunal having considered the matter, held that the reasons
- 7 -
assigned by the DIT (E) in the order under Section 12AA (3) of the Act cannot be considered as valid reasons to cancel the registration. Accordingly, the Tribunal allowed the appeal of the assessee setting aside the order passed u/s 12AA (3) of the Act-cancellation of registration.
Being aggrieved, the Revenue has preferred this appeal.
Learned counsel for the Revenue argued that the breach of Sections 13 (1) (c) and 13 (3) (cc) of the Act and the Explanation thereon being established by the conduct of the assessee viz., in paying the commission to the persons for getting students admitted to the courses, raising loans in cash and repaying the same in cash sans reflecting in the account books, making changes in the objects thereby carrying out amendments to the Trust Deed without the prior approval of the Department, the Tribunal ought not to
- 8 -
have disturbed the order of the DIT (E) in canceling the registration. Learned counsel argued that the Tribunal committed an error in not appreciating the hefty fees collected and payment of commission paid to the brokers which are in violation of the Karnataka Educational Institutions (Prohibition of Capitation Fees) Act, 1984 (the Act,1984’ for short) and was against the public policy disentitling the assessee-institution from registration under Section 12A of the Act.
Learned counsel for the Revenue has placed reliance on the following rulings: (i) Allahabad Agricultural Institute .v. Union of India [(2007) 163 Taxman 67 (Allahabad), (ii) Director if Income Tax (Exemption) .v. Karnataka. Badminton Association [(2017) 80 Taxmann.com 138] and (iii) Commissioner of Income Tax (Exemptions) Kolkata .v. Bhatnagar Education and Research Trust [(2021) 129 taxman.com 30 (SC)];
- 9 -
(iv) Ashwini Sahakari Rugnalaya and Research Centre vs. Chief Commissioner of Income Tax and others (Civil Appeal No.3453/2007, dated 15.09.2021).
Learned counsel for the assessee submitted that the first substantial question of law raised by the assessee is general in nature. As regards substantial question of law No.(2), it was submitted that the assessee has not amended the Objects of the institution against the original Objects which were prevailing at the time of granting registration under Section 12A of the Act. What was alleged to have been amended has been considered by the Tribunal comparing the original Trust Deed and the amended Trust Deed. By substituting sub-clause (a) of clause (3) of the original Deed, imparting technical and medical education was included amongst the masses in all the fields, subjects, culture and irrespective of religion, caste or creed. Sub-clause
(b) of clause (3) was substituted, thereby scholarships to
- 10 -
the poor, needy and meritorious have been awarded. Sub-clause (e) of clause (3) was amended to make benefits of the Trust open to all irrespective of caste, creed and religion. The amendments are in furtherance of the Objects of the charitable institution.
As regards substantial question of law No.3, it was fairly submitted that the Commissioner has the power to review its earlier registration granted under Section 12A of the Act, however, the same renders academic in the present case.
As regards substantial question of law No.(4), it was submitted that the assessee is running several institutions like Krupanidhi Residential PU College, Krupanidhi Pre-University College, Krupanidhi College of Nursing, Krupanidhi College of Physiotherapy, Krupanidhi Degree College, Krupanidhi School of Management, Krupanidhi College of Pharmacy and Asia Pacific World School. The assessee is not running any
- 11 -
engineering or medical colleges but imparting basic education.
It was submitted that the Proviso to Section 2
(15) of the Act which pertains to carrying on activities in the nature of trade, commerce or business is not applicable to the assessee as it is engaged in charitable activities of imparting education. The same is clarified by the Circular No.11/2008 dated 19.12.2008 issued by the Board.
As regards substantial question of law No.(5), learned counsel argued that there is no bar in the provisions of the Act, 1984 in incurring expenditure to propagate the services rendered by the educational institutions to the students. No proceedings have been initiated by the concerned authorities under the Act, 1984 on the assessee for contravention of the provisions of the said Act.
- 12 -
Regarding substantial question of law No.(6), it was argued that paying remuneration and vehicles to the trustees for carrying out the objects of the Trust smoothly cannot be construed as violation of Section13 of the Act. In sum and substance, it was submitted that the twin conditions for invoking the provisions of S.12AA (3) of the Act, are: (i) the activities of the Trust are not genuine; and (ii) the activities of the Trust are not being carried out in accordance with the objectives of the Trust.
Placing reliance on the rulings of this Court in (i) CIT .v. Children’s Educational Society (2013) 358 ITR 373 and (ii) CIT .v. Father Muller’s Charitable Institution (2014) 363 ITR 230 (Kar.), learned counsel argued that no parameters set out in
- 13 -
Section 12AA(3) of the Act are violated to cancel the registration.
We have carefully considered the rival submissions canvassed by the learned counsel appearing for the parties and perused the material on record.
Section 2 (15) of the Act reads thus: “”charitable purpose” includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places of objects of artistic or historic interest and the advancement of any other object of general public utility:
Section 12A of the Act deals with the conditions for applicability of Sections 11 and 12. The said Section contemplates that the conditions for non- applicability of Sections 11 and 12 in relation to the
- 14 -
income of any trust or institution unless the conditions stipulated therein are fulfilled.
Section 12AA of the Act deals with the procedure for registration. It reads thus: “12AA. Procedure for registration.— (1) The Principal
Commissioner
or Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) 4 or clause (aa) 5 or clause (ab) of sub-section (1) of section 12A, shall— (a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and (b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he— (i) shall pass an order in writing registering the trust or institution; (ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant:
- 15 -
Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.”
Section 12AA (3) of the Act reads thus: “(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 the Principal Commissioner or Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution: Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.”
A conjoint reading of these provisions would make it clear that the Principal Commissioner or Commissioner is empowered to cancel the registration
- 16 -
of the Trust or institution which has obtained registration at any time under Section 12A of the Act on satisfying the following twin conditions: (i) the activities of the institution are not genuine; (ii) Such activities are not being carried on in accordance with the objects of the Trust.
In the case of Karnataka Badminton Association (supra), a co-ordinate Bench of this Court observed that the receipts of commercial activities are more compared to the overall receipts of charitable institution can neither lead to the conclusion that the activities of the Trust or institution are not genuine, nor can it be said that the activities of the Trust or institution are not being carried out in accordance with the two conditions stipulated under the provisions of Section 12(3) of the Act do not exist, the objectives of the trust or institution. The registration granted was
- 17 -
cancelled in view of the amendment of first proviso to Section 2(15) of the Act, which is not a ground specified in the statute for cancellation of the registration. The Co-ordinate Bench of this Court considering Section 12AA(3) of the Act has held that a registration granted under Section 12A can be cancelled under two circumstances i.e., (i) if the activities of such trust or institution are not genuine, and ii) the activities of the trust or institution are not being carried out in accordance with the object of the trust or institution. Only on these two conditions/grounds found to be satisfied, the registration granted could be cancelled by the authorities under Section 12A.
It has been further observed that notwithstanding the fact that the assessee is conferred registration under the provisions of 12A of the Act, unless the assessee falls within the provisions of Section 2 (15) of the Act, excluding the first proviso, it will not
- 18 -
be entitled to the benefit of exemption of tax. If the case of the assessee falls in the first proviso, the benefit of registration which flows from Section 12A of the Act is not available. But on that ground, registration cannot be cancelled and accordingly, dismissed the appeal filed by the Revenue.
In the case of Allahabad Agricultural Institute (supra), the income tax officer has held that a comparison has shown that the original objects have been totally altered without giving intimation about the change of the alteration in its Objects to the Department, and the said alteration which would remove the very foundation, after registration going contrary to the Objects of the trust or institution, would enable the Commissioner to exercise the power of cancellation, i.e. the wholesale change in the objects without giving its immediate information to the Commissioner.
- 19 -
But in the present case, the Tribunal has made a threadbare examination of the amendment with the original Objects of the Act and has given a finding that it is in furtherance of the Objects and not contrary to the Objects. Hence, this judgment would not come to the aid of the Revenue.
In the case of Bhatnagar Educational Trust (supra), in a survey conducted, it was prima facie found that the Trust was not carrying on its activities in accordance with the Objects of the trust, the answers given in the questionnaire by the managers to the trust therein, reflected the extent of misuse of the status enjoyed by the Trust, the answers indicated that donations were received by way of cheques out of which substantial money was ploughed back or returned to the donors in cash, resulting in bogus donations. But that is not the scenario in the present case.
- 20 -
The exemption under Section 11 of the Act is denied in the present case mainly alleging breach of Section 13(1)(c) of the Act. The payment in the name of professional services fees/administrative services fees made to Sri. Suresh Nagpal and Smt. Geetha Nagpal, the Tribunal having analyzed the matter in depth has given a finding that the said fees is not disproportionate to the services rendered by the said trustees. In ITA Nos.230/2016 and 231/2016, appeals filed by the Revenue, we have not interfered with the factual findings arrived at, by the Tribunal, more particularly in exercising the jurisdiction under Section 260A of the Act. As such, on this point, we are not inclined to further adjudicate upon this issue. However, we are of the considered view that payment made to the trustees towards the services rendered if found to be unreasonable, the same could not be construed as violation of Section 13(1)(c) to deny the exemption under Section 11 of the Act.
- 21 -
Learned counsel for the assessee has referred to the judgment of the Coordinate Bench of this Court in the case of Father Mullers Charitable Institutions, supra, wherein the Division Bench considering Section 13(1)(d) of the Act has held that it is only the income from such investment or deposit which has been made in violation of Section 11(5) of the Act that is liable to be taxed and that the violation under Section 13(1)(d) does not tantamount to denial of exemption under Section 11 on the total income of the assessee. Reference has been made to the judgment of the Hon’ble Bombay High Court in the case of DIT (Exemptions) vs. Sheth Mafatlal Gangalbhai Foundation Trust reported in (2001) 249 ITR 533 (Bombay), wherein the question “whether violation of Section 11(5) read with Section 13(1)(d) by the assessee- trust attracts the maximum marginal rate of tax and the entire income of the trust?” was considered and held that in case of contravention of Section 13(1)(d), the
- 22 -
maximum marginal rate of tax under Section 164(2), proviso is applicable only to that part of income of the trust which has forfeited exemption and not the entire income. The Hon’ble Delhi High Court in the case of DIT (Exemption) vs. Agrim Charan Foundation reported in (2002) 253 ITR 593 (Delhi) has held that the legislature has clearly contemplated that in a case, where the whole or part of the relevant income is not exempted under Section 11 by virtue of violation of Section 13(1)(d) of the Act, tax shall be levied on the relevant income or a part of the relevant income at the maximum marginal rate. The Co-ordinate bench of this Court concurring with these judgments has held that for violating Section 11(5) of the Act, the entire income of the assessee - trust cannot be assessed for the tax. The same analogy would be applicable even to Section 13(1)(c) of the Act also. Thus, the entire income of the respondent - trust cannot be assessed for tax even for violation of Section 13(1)(c) of the Act.
- 23 -
In Commissioner of Income-tax, (Exemptions), Bangalore, vs. CMR Jnanadhara Trust reported in (2015) 55 taxmann.com 516 (Karnataka), considering the payment of the amounts to the trustees, out of the trust amount, when the trust was availing the services of the trustees and on account of the services rendered by them, there was a substantial growth in the trust and its activities, when the payments are made for such services rendered, held that it cannot be said that it contravenes Section 13(1)(c) of the Act. Consequently, there is no justification for denying the benefit under Section 11 of the Act.
The Hon’ble High Court of Bombay in the case of Vanita Vishram Trust vs. Chief Commissioner of Income-tax reported in (2010) 192 Taxman 389 (Bombay) while dealing with Section 10(23C) of the Act has analyzed whether fact that a surplus might incidentally arise from activities of trust
- 24 -
after meeting expenditure incurred for conducting educational activities, answered that it would not disentitle a trust to benefit of provisions of Section 10(23)(c) of the Act.
Learned counsel for the Revenue has cited the judgment of the Hon'ble Apex Court in the case of Ashwini Sahakari Rugnalaya and Research Centre, supra. The benefit of exemption granted to the assessee under Section 10(23C)(via) of the Act granted earlier was denied after ten years on the ground that remuneration was paid from the earnings of the IPD to the doctors who were not working in that department and secondly that the rates being charged by the assessee were at par with other hospitals which run on commercial basis. It was apparent from the pleadings in the writ petition that the remuneration payable to member doctors with regard to IPD patients’ receipts was not confined to the doctors performing the task. The decision on facts
- 25 -
made by the competent authority and affirmed by the High Court was held to be justifiable as no perversity was found calling for interference. However, it has been observed that if the assessee wants to rectify the position, as emerging from the discussions made therein, that would not preclude the assessee from claiming exemption for relevant subsequent years. We are of the view that this judgment would be of no assistance to the Revenue in the present set of facts.
As regards the amendment of trust deed, the Tribunal has returned the finding that the objects of the assessee - trust even after amendment of the trust being continued to be charitable; the amendment is a mere power conferred on the trust or other institution. There is no finding recorded by the authorities that the amendment to the object clause has resulted in the trust or institution becoming non-charitable in character. Thereby no reason is forthcoming to establish
- 26 -
the removal of foundation of charitable in nature on which the registration was granted was removed. We have no reasons to interfere with the finding recorded by the Tribunal since the Revenue itself was satisfied that the objects of the assessee - trust was imparting education and was charitable in nature. If any violation of Section 13(1)(c) of the Act is noticed, it was open to the assessing officer to examine the same and to bring the said transaction into taxable income but that would not be suffice to cancel the registration under Section 12AA(iii) of the Act. Adequate safe-guards being provided in Sections 12 and 13 of the Act, cancellation of registration on the allegation that education is being imparted on commercial lines is not valid reason for the cancellation of registration. We find no exception with the order impugned.
Accordingly, we answer the substantial questions of law (except question No.3) in favour of the
- 27 -
assessee and against the Revenue. Substantial question of law No.3 is answered in favour of the revenue but the same renders academic in the present case.
In the result, the appeal stands dismissed.
Sd/- JUDGE
Sd/- JUDGE
VGH/PMR