INDIAN EDUCATION SOCIETY,HISAR vs. CIT, HISAR

ORDER

PER I.C. SUDHIR: JUDICIAL MEMBER The appellant – Indian Education Society (the Society for short) has preferred this appeal against the cancellation of registration under section 12AA of the Income-tax Act, 1961 by the Learned CIT on the following four grounds: 1. On the facts and in the circumstances of the case and in law, the CIT erred in holding that the Assessee society did not exist for educational purposes, without assigning any cogent reasoning for this conclusion; 2. On the facts and in the circumstances of the case and in law, the CIT erred in ordering cancellation of the Assessee’s registration under section 12-AA of the Income-tax Act; 2 3. Without prejudice to the grounds at (1) & (2) above, the CIT erred in ordering the cancellation of registration under section 12-AA of the Income-tax Act with effect from 28.08.2008, without any material or adverse finding for any period before the year 2012; 4. On the facts and in the circumstances of the case and in law, the CIT erred in relying on material which was extraneous, irrelevant, and which was not properly confronted to the Assessee.

3.1 On 28.08.2012 a survey under sec. 133A of the Act was carried out on the Society during which various officials of the Society including the office-bearers were interrogated and their statements were recorded on oath. These statements were relied upon later for the purpose of cancelling the Society’s registration u/s 12AA of the Act. The statements relevant to this point are contained in the Paper Book at Page No. 100, 133 and 186.

3.2 It remained the submission of the Appellant Society that these statements taken during survey u/s 133A of the Act recorded on oath have no evidentiary value. They cannot be taken cognizance of any legally valid proceedings under the Act. It was contended on the authority of the rulings of the Hon’ble Supreme Court in CIT vs. S. Khader Khan Son (2013) 352 ITR 480 (SC) and the Hon’ble Delhi High Court in CIT vs. Dhingra Metal Works (2011) 328 ITR 384(Del.) and the Hon’ble Kerala High Court in Paul

4 Mathews & Sons vs. CIT (2003) 263 ITR 101(Ker.) and of the Hon’ble Madras High Court in (2008) 300 ITR 157(Mad.).

3.3 In the survey several documents and papers including accounting papers, registers and voucher were impounded. These papers relate to the period beginning with 2011and extend up to the date of the very survey i.e. 28.02.2012. All these papers are discussed in detail in about 70 pages of the impugned order while withdrawing registration. The seriousness of the charge in terms of the withdrawal order is that the activities of the society/institution are not genuinely carried out for charitable purposes and further are not being carried on in accordance with the avowed aims and objectives of the Society. The several alleged irregularities on the financial front have been discussed at pages 4 to 70 of the impugned order, which are arising out of several ‘day-book’ entries and vouchers of the various educational institutions run from one central office of the Society. What is added ultimately in the orders of assessment is the excess of the income over expenditure. Also an estimated addition of Rs. 1 lakh in the A.Y. 2009-10 &, 2010-11 and Rs. 1.50 lakhs in AY 2011-12 for unvouched expenses has been made in the A.Y. 2012-13 as the Assessing Officer refused to go by the accounts. He chose to follow the allegations made in the impugned order of 5 withdrawal of registration. The assessment order is the subject matter of the appeal before Ld. CIT(A). In the orders for A.Y. 2009-10 to 2011-12 benefit of section 11 has been refused only on the ground that the registration u/s 12AA has been withdrawn.

6 28.02.2012. All these papers are discussed in detail in about 70 pages of the impugned order withdrawing registration. The seriousness of the charge in terms of the withdrawal order is essentially that the activities of the society/institution are not genuinely carried out for charitable purposes and further are not being carried on in accordance with the aims and objectives of the Society. All these entries have in due course, been regularised and recorded in the regular books of accounts maintained in the normal course of educational activities. They have all been subjected to audit. All audit reports year after year are unexceptionably unqualified and clean. These audited accounts have been filed with the returns of the income for the respective years with the Assessing Authorities. These accounts have been scrutinized under section 143(3) of the Act during the assessment proceedings by the respective Assessing Officers year after year. No defect or deficiency of any nature serious or otherwise, impairing on the claim for the conduct of charity in the educational field has been noticed or reported by the Assessing Officers. Copies of the assessment orders for the Assessment years 2009-10, 2010-11, 2011-12 & 2012-13 have separately been field. Each of these orders categorically records the findings of the Society carrying out education activities. No other activity has either been notice or reported in the Assessment Orders. These orders take note of the 7 survey and to the seizure of the numerous documents therein termed uncharitably and erroneously as incriminating. The Assessing Officer choose to follow the baseless, unverified and unsubstantiated allegations made in the impugned order of withdrawal of registration. The audited accounts have been completely ignored by the Assessing Officer in this year. The assessment order is the subject matter of the appeal before Ld. CIT(A). In the orders for A.Y. 2009-10 to 2011-12 benefit of section 11 has been refused only on the ground that the registration u/s 12AA has been withdrawn. Corpus donations have been treated as normal income exigible to tax at MMR. All these actions in all the said years are the subject matter of appeal before the Appellate Authorities and are currently pending for want of an order of the Tribunal on the point regarding the validity of the withdrawal of registration.

4.1 The Learned AR submitted further that in all the assessments framed so far it has been held that the Society is only into the activity of the education. Even in the withdrawal order there is not whisper about any activity other than educational activity being carried out by the Appellant Society.

8 4.2 The several other allegations of financial irregularities which are contained in the withdrawal order have been the subject matter of consideration in the various assessments. As stated above the assessment for the A.Ys. 2009-10, 2010-11 & 2011-12 are all clean assessments and addition made and demands created on MMR basis are entirely because of the non-availability of benefit under section 11 of the Act. If the accounts were truly unreliable, manipulated or interpolated or whatever also then how was it that the Assessing Officers thought that such could be limited to just Rs. 1 lakh in the first two years and to Rs. 1,50,000/- in the third year. Be that as it may, any financial irregularity as may ultimately remain would be the subject matter of reprimand in terms of the punitive contents of section 11 of the Act. That is the mandate to the Department in terms of the decision in the case of Guru Gobind Singh Educational Society vs. CIT (2009) 118 ITD 207 (Asr) .

4.3 The Learned DR further contended that simply on the ground that there are financial irregularities, it was impermissible to drastically and arbitrarily act to withdraw the registration u/s 12AA of the Act. Even if accounts are irregular or are not maintained, section 12AA of the Act cannot be pressed into service to the detriment of the assessee. The Learned AR

9 placed reliance on the decisions in the cases of CIT vs. State Urban Development Agency (2013) 218 Taxman 147 (All), and CIT vs. Bharat Seva Sansthan (2013) 217 Taxman 337.

4.4 The Learned AR pointed out that on page 71 of the impugned order there is a charge for non-supply of information and explanation. That occurred because on the basis scanty/disparate details sought peremptorily and on the spot such that the needful could not be done. All that was however, done during the course of the assessment. There is nothing wrong with constitution and composition of the society. Allegations to this effect as are contained at page 73 of the impugned order are wrong. So long as the objectives of the Society are carried out in terms of the declared mandate, no objection can be raised as to the constitution and composition. The designation of the Chairman or President is interchangeable. Both of them refer to the head of the Society. By whichever designation the person is addressed makes no difference to the Society or to its objects. The allegation that the other office bearers are there for the name sake only is anomalous and as misleading. Each of the office bearers has carried out his responsibilities to the best of his abilities so as to enable the Society to achieve its avowed goal.

10 4.5 The Learned AR also furnished following parawise answers to the specific allegations labeled in Para 15.2 of the order impugned: i. The head of the society Sri Sunil Sharma has not drawn any remuneration from the Society. He has sufficient sources of income from other sources to meet his needs from his other bodies and entities. Even otherwise any head of the institution is entitled to draw remuneration such that it is neither excessive nor unreasonable. This has been ruled specifically in the case of CIT vs. Idicula Trust Society (2014) 104 DTR 9(P&H) by the Hon’ble jurisdiction High Court itself. So any complaint on this point is meaningless unless either excessiveness or unreasonableness is specifically pointed out. The authorities running the institutions can device their own ways and procedure for carrying out the activities. The department cannot prescribe the method by which an entity would carry out its activities. So clause 1 para is without any substance. ii. No fabrication has ever been done. This is baseless allegation made with the purpose of supplying strength to an order which is otherwise weak and emaciated. It is categorically denied that Sri Sunil Sharma has siphoned off any cash. If it was so, then why is it, that in none of the assessment orders framed for the AYs 2009-10 to 2011-12 after the Survey such propensity is pointed out. The allegation is fallacious. iii. All fees receipts are regularly issued in the normal course of collection. There is absolutely no fabrication. None has been brought on record in the assessment orders framed after the Survey. This allegation is thus without any substance.

The allegation as made in the 4th sub-clause issues out of a lack of iv. understanding of the procedure. The Society has three educational institutions and a common management with common pool of resources. No institution can therefore be viewed in isolation. That apart, financial irregularities will be a cause triggering the invocation of section 11 of the Act and nothing beyond. So long as the objects as declared have been faithfully pursued there can be no valid cancellation of registration. v. Introduction of the any unaccounted money in the ‘day book’ is categorically emphatically denied. The Assessing Officer conducting the assessment has not pointed out any such instance. The allegation emanates out of a misunderstanding by the author. vi. There is no negative cash balance at any time. Cash has to be adjusted inter se between the different three entities belonging to the different Institutions and only if so done would it balance. Cash is maintained compendiously. The assessments framed after the survey with the exception of the last one where the Assessing Officer has chosen to go by the findings of the CIT in the cancellation of order and has refused to look to the records as best ignored. Otherwise nothing of that sort has been pointed out in any year by any authority. vii. There are no discrepancies either in the assets or in the services procured by the Society. All allegations in this regard are imaginary and anamolous. viii. The salaries paid to the staff is on actual basis. Nobody has pocketed anything at anytime. All claims of salary as per the books of accounts

12 have been allowed without any demur by the concerned Assessing Officer. The allegation is totally meaningless. ix, x & xi These allegations have already been referred to in the earlier part of the narrative and are not repeated here in the interest of brevity. xii. The accounts have been maintained in the regular course of the Society’s activities. No fault has been found with them by the statutory auditor. The Assessing Officers in the first two of the three assessment years have accepted the accounts. This allegation is, therefore without any merit. xiii. The solitary activity of the Society is to provide education. Education is the basic right of a citizen under the constitution. That is dispensed by the Society in the best spirit of public policy. xiv. Discrepancy, mis-appreciation, violation of law etc. as stated in the impugned cancellation order are all false and fictitious. Those allegations do not find their echo in the regular assessment orders framed by the respective authorities. The complaint is totally erroneous. xv. No proper opportunity was given by the Commissioner. He was bent upon ensuring the closure of the Society’s educational institutions for the reasons best known to him. xvi. The Society has been carrying out its activities in the most appropriate manner as known to Society and to law and entirely in terms of the constitution/memo of the Society and always in the conformity with the law of the land. All allegation made in this contest are false and misleading.

13 4.6 The Learned AR submitted that the Society enjoys registration by many other authorities including the governmental and educational authorities. So long as the educational authorities have not found any discrepancy, deficiency or irregularity in the activity of imparting education by the Society there was just no authority or power with Commissioner to cancel the Registration u/s 12AA of the Act. The Learned AR cited the judgment of the Hon’ble Rajasthan High Court in DCIT v. Cosmopolitan Education Society (2000) 244 ITR 494(Raj.).

4.7 The Learned AR argued that it is an established principle that the cancellation of registration u/s 12AA of the Act has to await an assessment. He referred the decision in the case of Kalinga Institute of Industrial Technology v. CIT (2008) 23 SOT 74 (Cut). In the instant case the Commissioner has put the cart before the horse by cancelling the registration u/s 12AA of the Act even before any assessment was concluded. He has attempted to by prejudice the assessments themselves by so doing precipitately.

4.8 The Learned AR contended that under section 12AA review what is open to scrutiny is only the pursuit of objects as registered. Examination of 14 the application of funds is not open to the CIT for scrutiny. That is the prerogative of the AO during the assessment. In CIT vs. Surya Educational & Charitable Trust (2011) 203 Taxman 53 (P&H) it has been held that the CIT ought not to concern himself and with application of funds. Beyond examining the genuineness of the pursuit of the avowed objects there is nothing else falling to the fold of the Commissioner for scrutiny or comments in an issue like this. He placed reliance on the decisions in the case of Tamil Nadu Cricket Association vs. DI(E) (2014) 360 ITR 633 (Mad); CIT vs. Baba Kartar Singh Dukki Educational Trust (2014) 221 Taxman 493 (P & H); CIT vs. Jankiji Education Society (2013) 219 Taxman 69 (P&H).

4.9 The Learned AR contended that registration granted under section 12AA of the Act cannot be cancelled for any collateral or oblique reasons. It is only when the registered objectives are not pursued or that the very pursuit of activities is bogus or sham then only a cancellation order can survive and endure. This is submitted in terms of the authorities in CIT vs. Sarvodaya Ilakkiya Pannai (2012) 343 ITR 300 (Mad); Chaturvedi Har Prasad Educational Society (2011) 45 SOT 108 (Luck); Maharashtra Academy of Engineering & Educational Research vs. CIT (2010) 133 TTJ (Pune) 706;

15 Ajit Education Trust vs. CIT (2010) 42 SOT 415 (Ahd); CIT vs. Ved Vidya Dham (2013) 219 Taxman 115 (P&H).

4.10 The above submissions have been made compendiously with regard to the several grounds of appeal as raised before the Tribunal. It has been pointed out that the exercise of survey was one of harassment and torture and that indiscriminately the records were impounded and further that no proper opportunity was ever provided during the survey to reconcile and explain the entries in the several documents belonging to the various educational institutions which are being managed by the Society. All the papers recovered during the survey pertain to assessment years 2009-10 to 2012-13. The assessments for the AYs 2009-10 to 2011-12 are all clean assessments. Thus the charge as foisted on the Society by the Learned Commissioner in the withdrawal order is all erroneous and unsustainable. So far as the assessment year 2012-13 is concerned the Assessing Officer refused to go by the book version and the records of the Society. He preferred to adopt the observations and findings of the Learned CIT as made in the withdrawal order. That was patently erroneous. Nevertheless against that order an appeal is pending. There is no finding anywhere in any record that the Society has not carried out its objective of imparting education. Equally true is the fact that there is no finding at all anywhere of any activity

16 other than education having not been pursued by the Society. In the circumstances, therefore, the cancellation of registration is erroneous and untenable, in as much as, the objectives are charitable and the activities have been carried out in accordance with the objects truthfully and faithfully. The ingredients of sub-section (3) of Section 12AA of the Act as to any abstraction or aberration is conspicuously absent despite excruciating scrutiny in assessment. All that happened in the face of the withdrawal order was biased and perverse and which was on record. It is, therefore, prayed that directions be kindly issued quashing the order withdrawing the registration u/s 12AA of the Act and to restore the status-qua-ante prevailing on to the date of the search.

5.1 The several discrepancies in the accounts as listed in the impugned order and as referred to supra were cited by the Ld. CIT-DR as material sufficient for the cancellation of the registration granted to the society ab initio.

5.2 The Ld. CIT-DR quoted extensively instances from the impugned order where from it was clear that the cash of the society was appropriated without any authorization and was siphoned off in lieu of the bogus salary and bogus expenses. He also drew our attention to the factum of cheques being paid across the counter even though they were shown in the accounts as account-payee cheques.

5.3 Receipts were being shown as fee receipts so as to balance the post dated expenses. Cash was taken away from one set of books of one Institute to another Institute without making the necessary entries in that regard in the respective books.

18 5.4 The Learned CIT(DR) submitted that Unaccounted money had been introduced qua day book entries in contravention of law and accounting principles and such monies remained unrecorded in the regular business books of account. No explanation for the source of expenses much less possible reason for the negative balances of cash was tendered. The third party verification done in respect of the purchases from certain parties supplying goods/services to the Society revealed that they were bogus. They were mere entries made siphoning off cash.

5.5 The Learned CIT(DR) contended that the salary paid to the staff was different than the one shown in the regular books of account the balance of which obviously was pocketed by the persons controlling the affairs of the society. The designation of the Administrator himself was dubious and misleading. There was ample evidence of the fact that the society existed only on paper and was used as a veil to cover the misdeeds of the person controlling the affairs of the Society. Private properties were procured by the Administrators out of the Society’s funds for personal benefit. The President and his wife did not have any ostensible source of income commensurate with their high standard of living. The Society was used as a milch-cow to pay for the personal needs of the President and his wife. Even the 19 installments of the loan for the purchase of a Tata Safari vehicle owned by Shri Sharma was paid by the Society. The running cost of such vehicles was also met by the Society.

5.6 The Learned CIT(DR) submitted that the accounts were not written in the regular course and they presented a colored picture. They did not reflect the true state of affairs. Thus no credibility could be attached to the accounts. The running of a charitable institution in such a manner was against the spirit of the public policy and law of the land. The cancellation order was not exhaustive of the faults and that the discrepancies, misappropriation and violation of law as pointed out in it were only suggestive. The requisite information as sought had not been furnished. There was an attempt to impede the course of law for reasons quite obvious. The violations and discrepancies were certainly against the letter and spirit of the constitution/memorandum of the Appellant’s society as well as certain provisions of law.

5.7 The Ld. CIT-DR emphasised that it was established beyond doubt, that the activities of the Society were neither genuine nor were the activities of the Society carried out in accordance with the objects of the Society as 20 stated in the Memorandum. Since from inception the control and management was with the same group of persons it was a clear case of exploitation in the name of Charity. Neither were the activities genuineness nor were the pursuit of objects authentic. In the end it was pleaded by the Ld. CIT-DR that it was a fit case for revocation of the cancellation order with effect from 01.04.2008 and that the order must be upheld.

21 have been appraised at the time of the grant of registration by the then Commissioner. Since inceptions and up to AY 2011-12 the assessment framed after scrutiny were all clear cases where the authenticity of the educational pursuits had been conceded by the Assessing Officers themselves. No other activity had even been alleged. Such findings of the Assessing Officer could not be overturned by the CIT-DR without relevant material being brought on record. As to the genuineness of the educational activities, there was no doubt for in all the assessment orders including the last one for AY 2012-13 the AO’s have repeatedly confirmed that the Society’s activity was only educational and the pursuit was to run the educational institutions. Ld. AR for the Appellant concluded his arguments by submitting the objections as raised in the cancellation order and now being reiterated by the learned CIT-DR superfluous and irrelevant and were completely devoid of merit and that the cancellation order as passed by the Commissioner ought to be quashed and the four grounds of appeal as raised in the appeal be allowed.

7. Having gone through the provisions laid down under sec. 12AA of the Income-tax Act, 1961, it is clear that a Learned CIT can exercise powers under sec. 12AA(3) of the Income-tax Act, 1961 for withdrawal of 22 registration granted to the assessee-society under section 12AA(1)(b) of the Act only when he is satisfied that the activities of the society are not genuine or are not being carried on in accordance with objects of society. Similar view has been expressed in the above cited decisions by the Learned AR. In the case of CIT vs. Sarvodaya Ilakkiya Pannai (supra), the assessee trust was formed with objects of publishing and selling Sarvodaya literature and also Gandhian and Sarvodaya ideology. The Learned CIT granted registration to the assessee trust under sec.12A of the Act. Subsequently, Learned CIT passed an order under sec. 12AA(3) cancelling registration on the ground that the assessee was engaged in purchase and sale of books which was a commercial activity. On appeal, the ITAT set aside order of the Learned CIT holding that none of the conditions under sec. 12AA(3) of the Act were violated and, therefore, satisfaction which was arrived at by Learned CIT was not justified. The order of the ITAT was upheld by the Hon'ble Madras High Court. Hon'ble High Court held that the only reason given by the Learned CIT to cancel the registration was that the activities of the trust were not charitable and, therefore, the trust was not entitled to exemption under sec. 11 and consequently cancelled the registration granted under sec. 12AA of the Act. It was held that when the trust was registered with definite objects, carrying on such activities would be in terms of the object for which 23 the registration was made. In fact, if those activities are not carried on, the trust may violate the objects for which the registration was granted. Under section 12AA, the Learned CIT is empowered to grant or refuse the registration and after granting registration he would be empowered to cancel and that too, only on above stated two conditions laid down under sec. 12AA(3) of the Act. As to whether the income derived from such transaction would be assessed for tax and as to whether the trust would be entitled to exemption under sec. 11 are entirely the matter left to the Assessing Officer to decide as to whether it should be assessed or exempted. In the case of Ajit Education Trust vs. CIT (supra), the assessee trust was imparting education by running a school. It was granted registration under sec. 12A(a) of the Act. Subsequently, the Learned CIT in exercise of power under sec. 12AA(3) of the Act cancelled the registration mainly on the ground that funds of trust were misused by not accounting for receipts as well as expenses. It was held that application of income and utilization of funds would be subject to scrutiny by Assessing Officer at the time of assessing the income of the trust under sec. 11 and 12 of the Act. It was not justifiable on the part of the Learned CIT to deny registration.

24 7.1 In the present case before us, while cancelling the registration under sec. 12AA(3) of the Act, it is nowhere alleged in specific terms by the Learned CIT that the appellant-assessee is not imparting education or not doing the other activities as a part of its objects on the basis of which registration under sec. 12A(a) of the Act was granted earlier. The trust being undisputedly running educational institution and imparting education, therefore, it was not justifiable on the part of Learned CIT to withdraw the registration as the application of income and the utilization of funds are always subject to scrutiny by the Assessing Officer while assessing the income of the trust. In other words, registration granted under sec. 12AA(1)(b) of the Act cannot be cancelled for any collateral reasons. It is only when the registered objectives are not pursued or that the very pursuit of activities is bogus or sham then only a cancellation order can survive and endure. In the present case, the allegations level by the Learned CIT on the basis of which he has cancelled/withdrawn the registration granted to the assessee under sec. 12AA, remained that there were several anomalies in maintenance of its funds. After detailed discussion, he has summarized these allegations in para No.15.2 of the order impugned. These allegations were based upon the statements of the office bearers of the appellant society recorded during the course of survey proceedings and the documents/papers

25 impounded during the course of that survey. The assessee tried to reply these allegations but the Learned CIT was not satisfied therewith. Before the ITAT also, the assessee has tried to meet out those allegations briefly summarized in the submissions of the Learned AR in para No. 4.5 above. In the assessments for the assessment years 2009-10 to 2010-11, the Assessing Officer has granted the claimed exemption in view of the registration granted to the assessee vide order dated 23.9.2008. The Assessing Officer has, however, not extended the benefit of exemption in the assessment for the assessment year 2012-13 in view of the impugned order whereby the Learned CIT has withdrawn the registration. Under section 12AA of the Act, a review what is open to scrutiny is only the pursuit of objects as registered. In the case of CIT vs. Surya Educational & Charitable Trust (supra) it has been held by the Hon'ble jurisdictional Punjab & Haryana High Court that the Learned CIT ought not to concern himself with the application of funds beyond examining the genuineness of the pursued of the avowed objects. Examination of the application of funds is the prerogative of the Assessing Officer during the assessment. Since there is no finding anywhere that the society has not carried out its objective of imparting education or in other words there is no finding that any activity other than education is being pursued by the society, we are of the view that the Learned CIT(Appeals)

26 was not justified in cancelling of registration invoking the provisions of sec. 12AA (3) of the Income-tax Act, 1961. It is reiterated that only when the registered objectives are not pursued or that the very pursued of activities is bogus or sham then only a cancellation order can survive and endure. In absence of such finding by the Learned CIT, we are of the view that he was not justified in cancelling the registration granted to the appellant-assessee under section 12AA of the Income-tax Act, 1961. We thus while setting aside such cancellation order of the Learned CIT questioned before us restore the registration granted under sec. 12AA of the Act vide order dated 22/23.098.2008. The grounds are accordingly allowed.

Date Draft dictated directly on computer 26.04.2016 Draft placed before author 26 .04.2016 Draft proposed & placed before the second member Draft discussed/approved by Second 26.04.2016 Member. Approved Draft comes to the Sr.PS/PS 26.04.2016 Kept for pronouncement on 26.04.2016 File sent to the Bench Clerk 27.04.2016 Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.