Cancellation of registration of charitable trust – Order passed by CIT(E) based on mere surmises and conjectures need to be set aside.

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Cancellation of registration of charitable trust – Order passed by CIT(E) based on mere surmises and conjectures need to be set aside.

Overview:

Where CIT(E) had cancelled the registration granted to the assessee-trust under section 12AA on the allegation that assessee was charging capitation fees from parents of students, the order of CIT(E) was quashed because revenue had not made out a case that the donation received by assessee was not taken as part of income and was applied for non-charitable purposes.

Assessee-educational trust was granted registration under section 12AA. Based on the allegation the assessee-trust had received donation on making payment in cash, CIT(E) passed orders under section 12AA(3) of the Income Tax Act, 1961 cancelling the registration granted to the assessee-trust under section 12AA and under section 80G(5)(vi) de-recognizing the assessee under the provision. CIT(E) alleged that assessee might be charging capitation fees from parents of students.

It was held that Revenue had not made out a case that the donation received by assessee was not taken as part of income and was applied for non-charitable purposes. Even if assessee had received donation on making payment in cash and it may be its own money which was introduced in the trust through circuitous means, but it was applied for charitable purposes, and could not be added under section 68. Therefore, order passed by CIT(E) based on mere surmises and conjectures was set aside.

Decision: In assessee’s favour.

Referred: Andaman Timber Industries v. CCE (2016) 38 GSTR 117 (SC) Bhagwat Saran Educational Trust v. CIT (ITA No. 780/Lucknow/2015 dated 21-3-2016) CIT (Asst.) v. Srinivas Rao (V. B.) 37 CCH 237 (Hyd) CIT v. Uttaranchal Welfare Society (2014) 364 ITR 398 (All); (2014) 42 taxmann.com 361 (All-HC): 2014 TaxPub(DT) 2470 (All-HC) DIT v. Hans Raj Samarak Society (2013) 35 taxmann.com 642 (Delhi) DIT v. Keshav Social and Charitable Foundation (2005) 278 ITR 152 (Del-HC) : 2005 TaxPub(DT) 1343 (Del-HC) DIT v. Neel Gagan Charitable Trust (2013) 357 ITR 86 (Del-HC) : 2013 TaxPub(DT) 2183 (Del-HC) Fateh Chand Charitable Trust v. CIT (Exemption) (2016) 49 ITR (Trib) 276 (Luck-Trib) : 2016 TaxPub(DT) 3365 (Luck-Trib) ITO v. Saraswati Educational Charitable Trust (2015) 42 ITR (Trib) 393 (Luck-Trib) : 2015 TaxPub(DT) 3840 (Luck-Trib) Joginpally BR Educational Society v. CIT (2013) 1 ITR (Trib)-OL 639 (Hyd) Padanilam Welfare Trust v. Deputy CIT (2011) 10 ITR (Trib) 479 (Chen-Trib) : 2012 TaxPub(DT) 0116 (Chen-Trib) Ram Swaroop Memorial Charitable Trust v. CIT (ITA Nos. 44 and 45/Lucknow/2016 dated 7-4-2017) S. RM. M. CT. M. Tiruppani Trust V. CIT (1998) 230 ITR 636 (SC) : 1998 TaxPub(DT) 1159 (SC) andScientific Educational Advancement Society v. Union of India (2010) 323 ITR 84 (P&H-HC) : 2010 TaxPub(DT) 0342 (P&H-HC).

 

IN THE ITAT, LUCKNOW “B” BENCH

P.K. BANSAL, V.P. & AMARJIT SINGH, J.M.

Varunarjun Trust v. CIT (Exemptions)

ITA Nos. 138 and 147/Lucknow/2016

A.Y. 2015-16

26 July, 2017

Assessee by: Rakesh Garg, Advocate

Department by: Himanshu Pandey, Senior Departmental Representative

ORDER

P.K. Bansal, V.P.

Both these appeals filed by the assessee have arisen out of the order of the Commissioner (Exemptions), Lucknow dated 15-2-2016 passed under section 12AA(3) of the Act cancelling the registration granted under section 12AA and the order of the Commissioner (Exemptions), Lucknow dated 15-2-2016 passed under section 80G(5)(vi) of the Income Tax Act derecognising the assessee under the said provision with effect from 1-4-2014. Both these appeals were heard together and are being disposed of by this consolidated order for the sake of convenience.

ITA No. 138/Lucknow/2016

  1. In this appeal the assessee has raised as many as four grounds but the grievance of the assessee is against the cancellation of registration as per the impugned order passed by the Commissioner (Exemp­tions) dated 15-2-2016 cancelling the registration under section 12AA(3) of the Act with effect from 1-4-2014.
  2. The learned counsel for the assessee submitted that the identical issue under the identical facts was disposed of by this very Bench of the Tribunal in the case of Fateh Chand Charitable Trust v. CIT (Exemptions) in ITA No. 792/Lucknow/2015vide its Order, dt. 18-3-2016–(2016) 49 ITR (Trib) 276 (Luck-Trib) : 2016 TaxPub(DT) 3365 (Luck-Trib)and the Tribunal is bound to follow the order of the co-ordinate Bench.
  3. The learned Departmental Representative also agreed that the facts of the present case are similar to the facts in the case of Fateh Chand Char­itable Trust v. CIT (Exemptions) in ITA No. 792/Lucknow/2015–(2016) 49 ITR (Trib) 276 (Luck-Trib) : 2016 TaxPub(DT) 3365 (Luck-Trib).
  4. The learned counsel for the assessee also pointed out that the similar issue has been decided by this very Bench in ITA No. 780/Lucknow/ 2015in the case of Bhagwat Saran Educational Trust v. CIT (Exemptions) vide Order, dt. 21-3-2016. It was further submitted that a similar issue has been decided by this very Bench vide Order, dt. 7-4-2017 in the case of Ram Swaroop Memorial Charitable Trust v. CIT (Exemptions) in ITA Nos. 44 and 45/Lucknow/2016.
  5. The learned Departmental Representative did not dispute the facts involved. Even he did not submit any contrary decision in which this Tribunal might have taken a contrary view which has been taken in these two decisions.
  6. We have heard the rival submissions, carefully considered the same along with the order of the Commissioner (Exemptions). We have also gone through the case law, the copies of which were filed before us. We find that this Tribunal “A” Bench in the case of Fateh Chand Char­itable Trust in ITA No. 792/Lucknow/2015, order pronounced on 18-3-2016–(2016) 49 ITR (Trib) 276 (Luck-Trib) : 2016 TaxPub(DT) 3365 (Luck-Trib), has decided the similar issue in favour of the assessee on the similar facts. The relevant paras of this Tribunal are paragraph Nos. 13 to 23 which are reproduced as under (page 283) :–

“13. Having carefully examined the order of the learned Commissioner (Exemptions) in the light of the rival submis­sions, we find that on receipt of certain information from the learned Commissioner (Exemptions), Kolkata the learned Commissioner (Exemptions) has issued notice under section 12AA(3) of the Act to the assessee on 13-11-2015, for compliance on 24-11-2015. On 24-11-2015, the assessee sought adjournment and hearing was adjourned to 27-11-2015. On 27-11-2015, the assessee has filed a detailed reply to the charges levelled against it in the show-cause notice. The assessee emphatically denied the allegations levelled against the assessee that it has received a donation of Rs. 1 crore through cheque after making payment of the same in cash to M/s. Herbicure Health Care Bio Herbal Research Foundation. The reply filed by the assessee is available at pages 19 to 25 of the compilation of the assessee running into seven pages and in paragraph 8 of it, the assessee has specifically asked the learned Commissioner that in case there is any authentic material available with him which could throw some light on this issue, the same may be given to the assessee so that specific reply on the same could be submitted on it, besides denying the allegations levelled against him. For the sake of refer­ence, we extract paragraph 8 as under :–

‘8. That your goodself has, in your notice dated 13-11-2015, alleged that the assessee has received a donation of Rs. 1,00,00,000 from M/s. Herbicure Health Care Bio Herbal Research Foundation in the assessment year 2011-12 by paying an amount of Rs. 1,00,00,000 in cash to M/s. Herbicure Health Care Bio Herbal Research Foundation itself. This allegation is totally untrue as nothing of this sort has been written or mentioned in the confirmation, given by M/s. Herbicure Health Care Bio Herbal Research Foundation.

Till date no evidence to the contrary has been made available to the assessee which could substantiate your honour’s allegation that the amount of Rs. 1,00,00,000 was paid by the assessee in cash to the donor in exchange of donation received by cheque. However, in case, there is any authentic material available with your honour which could throw some light on this issue, the same may be given to the assessee so that a specific reply on the same could be submitted on it.’

  1. It is also evident from record that the report received from the learned Commissioner (Exemptions), Kolkata, and the statement of Shri Swapan Ranjan Das Gupta, director of M/s. Herbicure Health Care Bio Herbal Research Foundation was simply shown to the assessee on 27-11-2015, but no opportunity was afforded to the assessee either to cross-examine the said witness or to make any further comments in this regard and the learned Commissioner (Exemptions) has passed an order on the very same day cancelling the registration earlier granted to the assessee. No doubt, the learned Commissioner (Exemptions) is empowered to cancel the registration as per the provisions of section 12AA(3), where the Principal 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. But in the instant case the learned Commissioner (Exemptions) has simply received infor­mation from the learned Commissioner (Exemptions), Kolkata, that M/s. Herbicure Health Care Bio Herbal Research Foun­dation was engaged in giving donations on receipt of cash through brokers but nowhere it has been stated that M/s. Herbicure Health Care Bio Herbal Research Foundation has paid donation to the asses­see on receipt of cash of the equal amount through brokers. Similar statement of Shri Swapan Ranjan Das Gupta was also made but in that statement also there was no reference of the assessee. The learned Commissioner (Exemptions) has simply shown this information to the assessee on 27-11-2015 but did not offer any further opportunity to make his comments in this regard. The assessee has emphatically denied the charges levelled against it in its reply filed on 27-11-2015, that if the learned Commissioner (Exemptions) has received any authentic mate­rial in this regard, the same may be providedto the assessee so that the assessee can make a proper reply. But without affording any further opportunity to the assessee, the learned Commissioner has passed an order of cancellation on the very same day.
  2. It is settled position of law that any evidence collected at the back of the assessee cannot be used adversely unless and until it is confronted to the assessee and the assessee is allowed to cross-exam­ine the witness, if any.
  3. Our attention was also invited to various judicial pronounce­ments in this regard and in the case of Andaman Timber Industries v. CCE (2016) 38 GSTR 117 (SC) : (2015) 62 taxmann.com3their Lord­ships of the Hon’ble Apex Court has categorically held that not allow­ing the assessee to cross-examine the witness by the adjudicating authority, though the statement of those witnesses were made basis of the impugned order, is a serious flaw which makes the order nullity inasmuch as it amounted to violation of the principles of natural justice because of which the assessee was adversely affected. Their Lordships have, however, held that it is to be borne in mind that the order of the learned Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statement and wanted to cross-examine, the adjudicating authority did not grant this oppor­tunity to the assessee. The Hon’ble Apex Court accordingly held that in the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action.
  4. We have also examined the arguments of the assessee that even if receipt of donation is to be treated as unexplained receipt under section 68 of the Act, the addition of the same cannot be made because the assessee itself has applied the entire receipts for the objects of the assessee-trust. In support of this proposition, our atten­tion was invited to the judgment of the Hon’ble jurisdictional High Court in the case of CIT v. Uttamnchal Welfare Society (2014)364 ITR 398 (All); (2014) 42 taxmann.com361 (All-HC): 2014 TaxPub(DT) 2470 (All-HC), in which their Lord­ships have held that section 68 of the Act has no application where the assessee had disclosed donations as its income. While relying on this proposition of law, their Lordships have followed the view taken by the Hon’ble Delhi High Court in the case of DTT (Exemption) v. Keshav Social and Charitable Foundation (2005) 278 ITR 152 (Del-HC) : 2005 TaxPub(DT) 1343 (Del-HC)arid the judgment of the Hon’ble Apex Court in the case of S. RM. M. CT. M. Tiruppani Trust v. CIT (1998) 230 ITR 636 (SC) : 1998 TaxPub(DT) 1159 (SC), in which it was held that section 68 of the Act has no application in such cases where the assessee has disclosed donations as its income.
  5. Similarly in the case of DTT v. Hans Raj Samarak Society (2013) 35 taxmann.com642 (Delhi),their Lordships of the Hon’ble Delhi High Court has held that the provisions of section 68 of the Act could not be applied as donation had already been shown by the assessee as income.
  6. Similar views were also expressed by the Chennai Bench of the Tribunal in the case of Padanilam Welfare Trust v. Dy. CIT (2011) 10 ITR (Trib) 479 (Chen-Trib) : 2012 TaxPub(DT) 0116 (Chen-Trib)in which it was held that merely because capitation fee was collected by the assessee-trust from students, the same would not constitute the violation of the provisions of granting registration under section 12AA of the Act where there was no valid allegation against the assessee that the income of the trust has not been applied for educational activities.
  7. Similar view was also expressed by the Hyderabad Bench of the Tribunal in the case of Asst. CIT v. V. B. Srinivas Rao 37 CCH 237 (Hyd).
  8. A reference was also made to the order of the Lucknow Bench of the Tribunal in the case of ITO v. Saraswati Educational Charitable Trust (2015)42 ITR (Trib) 393 (Luck-Trib) : 2015 TaxPub(DT) 3840 (Luck-Trib)(ITA No. 776/LKW/2014 in which it was held that if the donation received was taken as income of the assessee which was applied for charitable purposes, the provisions of section 68 of the Act cannot be invoked. The relevant observations of the Tribunal are extracted hereunder for the sake of reference (page 400) :–

“Though the Revenue has taken a plea that for anonymous dona­tion, the provisions of section 115BBC of the Act can be invoked but in the instant case where the assessee has filed various documents to prove the identity of the donors, these donations cannot be called to be anonymous. So far as applicability of the provisions of section 68 of the Act is concerned, it has been held by various High Courts including the jurisdictional High Court that once donation received was taken as income of the assessee which was applied for charitable purposes, the provisions of section 68 of the Act cannot be invoked. Since we do not find any infirmity in the order of the learned Commissioner (Appeals), we confirm the same as he has adjudicated the issue in the light of various judicial pronounce­ments. Accordingly we confirm his order.’

  1. Undisputedly, the assessee has taken receipt of donation as part of its income and the same was applied for charitable purposes and these facts are borne out from the consolidated balance-sheet of the assessee available at page 8 of the compilation of the assessee. The Revenue has not made out a case that the donation received by the assessee was not taken as part of income and was applied for non-charitable purposes. The allegation of the Revenue is only that the donation was received by the assessee on making payment in cash to M/s. Herbicure Health Care Bio Herbal Research Foundation but to substantiate this claim, no evidence was brought on record by the Revenue, It was simply an oral assertion and moreover the asses­see was not afforded any opportunity to cross-examine the witness, whose statement was relied on by the learned Commissioner (Exemptions) for cancellation of registration under section 12AA of the Act earlier granted to the assessee. Even assum­ing, for the sake of argument, that if the assessee has received dona­tion on making payment in cash and it may be his own money which was introduced in the trust through circuitous means but it was applied for charitable purposes, therefore, it cannot be added under section 68 of the Act. Thus, even on the merits, we do not find any force in the allegations raised by the Revenue. The learned Commissioner (Exemptions) has cancelled the registration under section 12AA of the Act on the basis of conjectures and surmises, as he has observed in his order that the assessee might have been charging capitation fee from the parents of the students, but in this regard no evidence was brought on record. It is also obvious from the record that the learned Commissioner (Exemp­tions) has passed an order on the same day when the assessee has furnished detailed explanation in writing and even without verifying the same. Therefore, we find no merit in the order of the learned Commissioner (Exemptions). Accordingly, we set aside the order of the learned Commissioner (Exemptions).
  2. In the result, the appeal of the assessee stands allowed.”

7.1 Respectfully following this Tribunal order on the similar line for the present case also, the issue involved is decided in favour of the asses­see.

  1. As a result, the order passed by the Commissioner (Exemptions) dated 15-2-2016 stands quashed and we restore the registration granted to the assessee.

ITA No. 147/Lucknow/2016

  1. In this appeal the assessee has raised several grounds but the grievance of the assessee is only against the cancellation of recognition granted to the assessee under section 80G(5)(vi) of the Act as per the impugned order passed by the Commissioner (Exemptions) dated 15-2-2016 with effect from 1-4-2014.
  2. We have heard the rival submissions, carefully considered the same along with the order of the Commissioner (Exemptions). We noted that in this case the Commissioner (Exemptions) cancelled the recognition under section 80G of the Act by observing as under :–

“7. It is clear from the above that the trust is not doing any charity but it is making clear profit. Reliance is also placed in the case of Scientific Educational Advancement Society v. Union of India (2010) 323 ITR 84 (P&H-HC) : 2010 TaxPub(DT) 0342 (P&H-HC) decided on 10-2-2009 CWP No. 2052 of 2009 of the Hon’ble Punjab and Haryana High Court and Joginpally BR Educational Society, Hyderabad v. CIT (2013) 1 ITR (Trib)-OL 639 (Hyd) ITA No. 585/Hyd/2012 of the Hon’ble Income Tax Appellate Tribunal, Hyderabad. In this case it is not and cannot be the objective of the assessee-trust to manage donation from another trust/society by giving more amount in cash (including 5 to 10 per cent, as commission). It is clear from the above facts that the trust has taken donation by cheque after paying equal amount in cash, along with commission. Thus, the activities of the society cannot be said to be carried out in accordance with objects of the society. At the same time it can be inferred that no genuine activities are being carried out by the assessee. The registration granted to the assessee under section 12AA has already been cancelled with effect from 1-4-2014.

  1. Therefore, the recognition granted to the trust under section 80G(5) of the Income Tax Act is also hereby cancelled with effect from 1-4-2014.”

10.1 The main reason for cancelling the recognition granted under section 80G(5) was that the registration granted under section 12AA to the assessee has already been cancelled under section 12AA(3) of the Act but we quashed the order of the Commissioner (Exemptions) passed under section 12AA(3) and restored the registration to the assessee under section 12A. Once the registration granted to the assessee under section 12AA got restored, this objection of the Commissioner (Exemptions) does not have any leg to stand. We have also gone through the provisions of section 80G(5). For approval under section 80G(5), an institution is required to fulfil the following conditions:–

(i) The trust should not have any income which is not exempted, such as business income. If, the NGO has business income then it should maintain separate books of account and should not divert donations received for the purpose of such business.

(ii) The bylaws or objectives of the trust should not contain any provision for spending the income or assets of the NGO for purposes other than charitable.

(iii) The trust is not working for the benefit of particular religious community or caste.

(iv) The trust maintains regular accounts of its receipts and expen­ditures.

(v) The trust is properly registered under the Societies Registration Act, 1860 or under any law corresponding to that Act or is registered under section 25 of the Companies Act, 1956.”

Out of these conditions, the Commissioner (Exemp­tions) in his order has not given any finding that the assessee has violated any of these conditions as stipulated under section 80G(5) except that the registration of the trust has been cancelled under section 12AA(3) of the Act. Once the order passed by the Commissioner (Exemp­tions) under section 12AA has been quashed by this Tribunal, consequently it cannot be said that the trust is not registered under section 12AA of the Act. We do not find that the assessee has violated any of the conditions as stipulated under section 80G. The learned Departmental Representative vehemently relied on the order of the Commissioner (Exemptions). We noted that the Hon’ble Delhi High Court in the case of Director of Income Tax v. Neel Gagan Charitable Trust (2013) 357 ITR 86 (Del-HC) : 2013 TaxPub(DT) 2183 (Del-HC) held that exemption under section 80G could not be denied where violation under section 80G could not be established. Granting of exemp­tion under section 12AA of the Act is itself sufficient material to prove that the activities/operations of the trust/impugned institutions are genuine and carried out in accordance with the object of the trust. No contrary decision was brought to our knowledge by the learned Departmental Representative. We, therefore, quash the order of the Commissioner (Exemptions) dated 6-1-2016 and restore the registration granted to the impugned trust under section 80G(5) of the Act with effect from 1-4-2010.

  1. In the result, both the appeals of the assessee stand allowed.

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