Income Tax Appellate Tribunal - Cochin
Kunhitharuvai Memorial Charitable ... vs The Cit, Cochin on 16 January, 2018
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Kunhitharuvai Memorial Charitable Trust
IN THE INCOME TAX APPELLATE TRIBUNAL
COCHIN BENCH, COCHIN
Before Shri George George K. (JUDICIAL MEMBER)
AND
Shri G Manjunatha (ACCOUNTANT MEMBER)
I.T.A No. 246/Coch /2014
Kunhitharuvai Memorial vs CIT (Central), Kochi
Charitable Trust, KMCT
Corporate Office, Malabar
Christian College Cross Road,
Calicut-673 011
PAN : AAATK4733C
APPELLANT RESPONDEDNT
Appellant by Shri A.S. Narayanamoorthy
Respondent by Shri A Dhanaraj
Date of hearing 12-12-2017
Date of pronouncement 16-01-2017
ORDER
Per G Manjunatha, AM :
This appeal filed by the assessee is directed against order of the Commissioner of Income-tax(Central)-Kochi, dated 27-03-2014, challenging cancellation of registration of the trust u/s 12AA(3) of the Income Tax Act, 1961 w.e.f. Asst. year 2011-12.
2. The assessee has raised the following grounds of appeal: 2
Kunhitharuvai Memorial Charitable Trust "1. The order of the Commissioner of Income Tax is against law and facts.
2. The commissioner of Income Tax should have appreciated that it cannot be concluded that the trust is a family trust merely because the trustees are members of the same family or are closely related to one another. The Commissioner should have noted that nothing has been done by the trust nor has_there been any change in the objects or actual conduct of its affairs since the granting of registration on 21.01.02. Nothing has come on record to point out that the activities of the trust have been run for the benefit of a family or for private benefit and hence there is no justification for coming to the conclusion that the trust is a family trust. The seized paper , CH-21-VJ-18 was only a discussion draft to make arrangements for the bifurcation of the trust into medical and technical campuses for smooth administration of the trust as the regulatory and service rules applicable to medical and technical institutions were widely different. The learned Commissioner should have appreciated that no change, in the structure or constitution of the trust could be brought about by merely having_an unsigned document purportedly holding out that the trust was a family trust and as long as that there_was no registered document altering the deed already registered the basic character of the trust could not be changed.
3. The Commissioner has totally erred in cancelling the registration on the ground that books of account were not finalized and no audit of accounts was conducted and no returns were filed till date of search. It is true that the returns from the assessment year 2007-08 have been filed belatedly in response to notice u/s 153A/ 148. The Commissioner of Income Tax should have noted that there is no specific provision in section 12A like in section 10A/10B where it is provided that deduction under section 10A /10B will be allowed only if returns of income are filed within the due date specified u/s 139(1) or in section 80AC where it is similarly provided that deductions under section 80-IA, 80-IB , 80- IC, 80-ID or 80-IE will be allowable only if return of income is filed within the due date u/s 139(1). Moreover the learned Commissioner should have appreciated that the appellant had filed returns for all the years though belatedly . In other words, filing of returns under section 139(l) is a precondition for availing exemption /deduction mentioned in s.10A/10B,etc which is not the case of availing exemption under section 12A. Hence belated filing of return is not fatal to the claim under section 12A. The Commissioner should have considered that cancellation of registration already granted can be done only for reasons specified in section 12AA (3). As per this section, the registration can be cancelled only if the activities of the trust or 3 Kunhitharuvai Memorial Charitable Trust institution are not genuine or are not being carried out in accordance with the objects. Hence there is no provision to cancel the registration for delayed filing of the return of income as long as there is no finding that the activities of the trust are not in accordance with the objects of the trust.
4. The appellant had not collected any additional fees except during the financial year 2011-12 relevant to the assessment year 2012-13. The appellant had collected some additional fees from the MBBS and BAMS students during the financial year 2011-12 which was duly accounted by the appellant in the books. The Commissioner of Income Tax should have noted that additional fees collected has been fully utilized for furtherance of the principal object of the trust - namely imparting of education. The learned Commissioner of Income tax should have appreciated that if at all capitation fees has been accepted, it may be a_violation of the educational rules formulated by the state government but is not a ground for cancellation of the registration of the trust granted under section 12A. "The Commissioner of Income Tax should have known that , Finance Act 1983 has deleted the words "not involving the carrying on of any activity for profit" from the definition of charitable purpose under section 2(15) and hence, even if the educational institution is run on commercial lines that will not be ground for cancellation of registration if the surplus is used for the furtherance of the objects of the trust
5. The Commissioner is also not justified in alleging that the trust_funds_were_diverted for the benefit of the trustees by advancing amounts to Dr K M Navas, a trustee . The Commissioner should have appreciated that as per section 13(2), the exemption under section 11 and 12 will be lost only when the income or property of the trust is inter-alia lent without adequate interest. The trustee to whom the funds were temporarily advanced , had paid interest at 16% per annum , the maximum rate at which funds were borrowed by the trust and hence the above provisions of section 13(2) were not applicable to the trust.
6. Running educational institutions was the predominant object of the appellant trust though the trust had also other objects of charity like relief of the poor, establishment of destitute homes, etc. The Commissioner should have appreciated that it is not required for the trust to carry on all the objects mentioned in the trust deed, to continue to have the registration granted under section 12A. The Commissioner should have concluded that so long as it is established that income of the trust has been applied for the purpose of running educational institutions, the conditions of registration was satisfied." 4
Kunhitharuvai Memorial Charitable Trust
3. Brief facts of the case are that the assessee, Kunhitharuvai Memorial Charitable Trust Calicut was formed by virtue of a trust deed dated 22-7-1999 as a public charitable trust with the desire for providing education and training to young boys and girls as well as adults in educational and vocational pursuits and for development of character as to produce law-binding, fearless and healthy citizens. The trust is formed with the main object of to establish and run educational institutions of all kinds at all levels including schools, colleges, polytechnics in all subjects including, medical, engineering, paramedical, Agriculture, Law and Veterinary science etc. The Trust was granted registration u/s 12AA of the Income Tax Act, 1961 by an order of the Commissioner of Income-tax, Calicut dated 21-1-2002 from Asst. Year 2001- 02 onwards. The trust is running 17 educational institutions, offering various graduate and post graduate degrees in Medicine, Engineering, Pharmacy, Management studies and Nursing. There are more than 5000 students studying in all institutions. All colleges and institutions are approved by regulatory bodies like, Medical Council of India, All India Council for Technical Education and Boards and Universities regulating education in the state of Kerala.
4. A search and seizure action u/s 132 of the Income Tax Act, 1961 was conducted in the premises of Trust and trustees on 31-10-2011. During search and post search enquiry revealed that even though, the trust is registered as 5 Kunhitharuvai Memorial Charitable Trust charitable trust, in reality, it was running like a family trust as all the trustees are family members. The trust is not maintaining proper books of accounts and no returns of income were filed for the A.Y. 2006-07 onwards. Though returns of income were filed for Asst years prior to A.Y. 2006-07, such returns were filed in response to notice u/s 148 of the Act. The information gathered during search and post search enquiries further revealed that the trust is collecting additional fees from students admitted under management quota in Medical and Ayurveda colleges. The trustees are diverting trust funds for the benefit of persons specified, thereby infringing the provisions of section 13(1)(c) and violating provisions of section 11(5) of the Income Tax Act, 1961.
5. The CIT(Central), Calicut issued a show cause notice u/s 12AA(3) of the Act, and asked as to why registration granted u/s 12AA shall not be cancelled for the reasons recorded in his show cause notice. The CIT, has recorded reasons for issue of show cause notice at para 2, on pages 1and 2 of her order. The CIT, observed that though, the trust is registered as charitable trust, in reality, it was running like a family trust as all the trustees are family members. The trust is not maintaining proper books of accounts and no returns of income were filed for the A.Y. 2006-07 onwards. Though returns of income were filed for Asst years prior to A.Y. 2006-07, such returns were filed in response to notice u/s 148 of the Act. The trust is collecting additional fees from students admitted under management quota in Medical and Ayurveda 6 Kunhitharuvai Memorial Charitable Trust colleges. The trust funds are diverted for the benefit of specified persons. The CIT has discussed the points which triggered issue of notice for cancellation of registration in para 5 to 9, on pages 2 to 5 of her order.
6. In response to show cause notice, the assessee's authorized representative Shri. A.S. Narayana Moorthy appeared and furnished reply, explaining observations of the CIT. The assessee further submitted that the trust is a public charitable trust, formed with the object of imparting education and it is continued to pursue its objects by establishing various educational institutions. The assessee further submitted that, the trust was earlier granted registration u/s 12AA after duly satisfying with its object and its activities and without any material changes in facts, registration cannot be withdrawn, that too, for the reasons stated in the show cause notice. The assessee further submitted that the CIT has neither pointed any objects which are not in the nature of charitable purpose as defined u/s 2(15) nor made out a case of non genuine activities which are two conditions essentially required for invoking provisions of section 12AA(3) of the Act. The assessee has countered allegations made by the CIT, by filing various details and submitted that reasons given by the CIT did not make out any case, which can show the activities of the assessee are not genuine or that the activities of the assessee are not being carried out in accordance with the objects of the trust or institution. Non maintenance of regular books of account, belated filing of 7 Kunhitharuvai Memorial Charitable Trust return of income, violations of provisions of sec.13(1)( c) of the Act inasmuch as the trustees were paid loan are all by way of passing reference having no relevance to whether or not the assessee was pursuing education as its main object. Therefore, there is no reason for cancellation of registration u/s 12AA(3) for the above reasons.
7. The CIT, after considering explanation of the assessee, observed that the activities of the trust are not being carried out in accordance with the objects of the trust and hence, registration granted u/s 12AA on 21-2-2002 has been cancelled with effect from 1st June 2010, i.e. from A.Y. 2011-12 onwards. The CIT, further observed that eligibility of registration is not only based on objects of the trust, but also on genuineness of activities of the trust. Though the trust objects are charitable in nature, its activities are not carried out in accordance with its objects which is evident from the facts gathered during search and post search investigation as per which though it is registered as public charitable trust it is managed by family members, the trust is not maintaining proper books of account and has not filed regular returns of income as prescribed under law, there are few instances of violation of sections 11(5) and 13(1)(c) and the trustees are siphoning trust funds for purchase of properties in their personal name. The CIT further observed that though the trust is imparting education through various educational institutions, such education is provided with profit motive which is evident from the fact that 8 Kunhitharuvai Memorial Charitable Trust it has collected additional fees from students admitted under management quota in medical colleges. The CIT further alleged that additional fees collected from students is not accounted in the books of accounts and it was used for payment of on-money for purchase of property in the name of trustees which is confirmed by the trustee Shri. K.M. Navas in his statement recorded during search, which was further confirmed by some of the parents of students in their sworn statement. The CIT further observed that it is well settled that even if nomenclature of the trust may indicate it is meant for charitable purpose, but if activities reveal otherwise, that should weigh the authorities, who grant registration. In the absence of any facts indicating that the activities carried out are charitable in nature, it is held that the trust is not for public charitable purpose and it is only a trust carrying out its activities for earning profit and such profit is utilised for the benefit of the trustees and not for the general public. Therefore, he opined that activities of the trust are not being carried out in accordance with the objects of the trust and hence, it is not eligible for registration u/s 12AA. Accordingly, registration granted u/s 12AA on 21-2-2002 has been cancelled with effect from 1st June 2010, i.e. from A.Y. 2011-12 onwards. Aggrieved by order of the CIT, the assessee is in appeal before us.
8. The Ld. AR for the assessee, submitted that the ld. CIT was erred in cancelling registration granted u/s 12AA, by invoking provisions of 9 Kunhitharuvai Memorial Charitable Trust section12AA(3) without appreciating the facts that the trust is a public charitable trust and its activities are carried out in accordance with its objects. The ld. AR referring to the order of the CIT, further submitted that even the CIT herself admitted that objects of the trust are charitable in nature and such objects are pursued by establishing various educational institutions, but cancelled registration merely on the ground that its activities are not carried out in accordance with its objects without any reference to non genuine activities in her order. The points considered by the CIT for invoking her powers conferred u/s 12AA(3) are only a passing remarks which are not relevant for the purpose of section 12AA(3). The observations of the Commissioner, with regard to management and control of trust by family members, non maintenance of books of account and not filing regular returns of income, collection of additional fees from certain students admitted under management quota and siphoning of funds by trustees for their personal use, are only few shortcomings in day to day affairs of the trust, but not a non genuine activity and carrying out something which is contrary to the objects of the trust. The assessee has explained all issues pointed out by the CIT, with necessary evidences. The AR further submitted that the CIT neither pointed out any objects which are not in the nature of charitable purpose as defined u/s 2(15) nor made out a case of non genuine activities which are the two conditions essentially required for invoking provisions of section 12AA(3) of the Act. The assessee has countered allegations made by the CIT, by filing 10 Kunhitharuvai Memorial Charitable Trust various details and submitted that reasons given by the CIT do not make out any case, which can show the activities of the assessee are not genuine or that the activities of the assessee are not being carried out in accordance with the objects of the trust or institution. Non maintenance of regular books of accounts, belated filing of returns of income, violation of provisions of Sec.13(1)( c) of the Act inasmuch as the trustees were paid loan are all by way of passing reference having no relevance to whether or not the assessee was pursuing education as its main object. The assessee's objects are predominantly charitable in nature and such objects are pursued by establishing 17 educational institutions in various subjects including medical, engineering, nursing, and pharmacy and management studies. All colleges and institutions are approved by regulatory bodies like, Medical Council of India, All India Council of Technical Education and Boards and Universities in Kerala State. More than 5000 students are studying in various colleges run by the trust and more than 900 faculty members are working. The trust has spent huge amount for creation of infrastructure and facilities. All the years, its application of income for charitable purpose is more than its income generated from property held under trust.
9. The Ld. AR further submitted that the Ld. CIT cancelled registration granted u/s 12AA of the Act, without any change in material facts that stood prevailed at the time of granting registration. The CIT came to the conclusion 11 Kunhitharuvai Memorial Charitable Trust that though the trust is registered as public charitable trust, in reality, it is running like a family trust only on the basis of composition of trustees who belongs to one family. The question whether the trust is charitable or not depends upon its objects and its activities. If objects of the trust are in the nature of charitable purpose as defined u/s 2(15) and its activities are carried out in accordance with its objects, it is irrelevant whether it is managed by family members or outsiders. In this case, all trustees are doctors by profession having common agenda of providing charity, established a trust, with the main object of education and such objects is carried out in accordance with its objects; therefore the CIT was incorrect in coming to the conclusion that the trust is family trust not existing for charitable purpose. As regards observations of the CIT with regard to non maintenance of books of accounts and non filing of regular returns of income it was submitted that it is true returns of income from A.Y. 2007-08 have not been filed regularly and such returns have been filed only after search but before the Commissioner issued her show cause notice on 6-9-2013 which is evident from the fact that returns of income up to A.Y. 2011-12 have been filed before 21-8-2013. The trust has filed regular returns for A.Y. 2012-13 and subsequent years. The AR further submitted that even assuming that there is delay in filing return of income, could it be said that it is fatal so as to withdraw registration u/s 12AA(3). Non filing of returns is purely a procedural laps which can be cured by filing return of income or some other penal provision is provided to deal with 12 Kunhitharuvai Memorial Charitable Trust non filing return of income, but it cannot be a ground for cancellation of registration as long as the trust objects are charitable in nature and its activities are carried out in accordance with its objects.
10. The Ld. AR further referring to other observations of the CIT with regard to collection of additional fees from certain students and diversion of funds to trustees, submitted that these are passing remarks by the CIT which cannot be considered as non genuine activities. The trust has collected fee from students as prescribed by the authorities. In some cases, additional fees collected from students admitted under management quota and such additional fees has been accounted for in the books of account and also applied for objects of the trust. The trust has collected additional fees in two years from students admitted under management quota and such additional fee does not exceed the limit prescribed by the authorities. The private unaided management colleges are permitted to fix their own fees in respect of management quota seats considering their feasibility and collect such fees from students. The additional fees and advance fees collected from students is hardly 4.46% of total fees collected from students. The additional fees collected have been accounted for in the books, therefore, it is incorrect on the part of the CIT to make baseless allegations that additional fees collected was not accounted for in the books of account and such additional fees has been used for payment of on-money for purchase of property in the name of 13 Kunhitharuvai Memorial Charitable Trust trustees. The CIT made such comment on the basis of sworn statement of Shri. K.M. Navas, Managing trustee. But, if you refer the statement, nowhere the managing trustee has admitted that additional fees has been used for payment of on-money for purchase of property. In the said statement, he admitted that the trust has collected additional fees and the same has been used for objects of the trust. As regards allegation of diversion of funds, it was submitted that the trust has given temporary advance to Dr. K.M. Navas, managing trustee of the trust with interest @16% per annum and such loan has been repaid within a short period. The CIT completely erred in cancelling registration on the ground that trust funds are diverted for the benefit of trustees without appreciating the fact that advances to trustees is with adequate interest and security and such interest has been charged at double the bank rate. Even assuming that there is diversion of funds in contravention of sections 11(5) and 13(1)(c), for these reasons, registration cannot be cancelled as the newly inserted sub section 4 to section 12AA with effect from 1-10-2014 is applicable from A.Y. 2015-16 onwards. The trust is running educational institutions which is coming within the meaning of charitable purpose as defined u/s 2(15) and such objects are carried out by establishing more than 17 colleges. The CIT cannot exercise his powers conferred u/s 12AA(3) mechanically. To invoke provisions of section 12AA(3) the commissioner should satisfy that the activities of the trust are not genuine and are not being carried out in accordance with the objects of the trust. If both the 14 Kunhitharuvai Memorial Charitable Trust conditions are absent, then the registration granted earlier cannot be cancelled on some grounds which are either irrelevant or non-existent.
11. The Ld. AR made an alternate submission inasmuch as that the order passed by the CIT is bad in law and void-ab-initio as the CIT has not recorded his satisfaction which is a precondition for invoking provisions of section 12AA(3) which is evident from the fact that show cause notice was issued by Income Tax Officer(T) for Commissioner of Income Tax. The Ld. AR referring to section 12AA(3) and show cause notice submitted that it is very clear from provisions of section 12AA(3) that the CIT cannot delegate his powers to ITO and he himself/herself exercise powers only on recording his/her satisfaction of the circumstances that may warrant the exercise of such powers. In this case, the show cause notice was issued by the ITO(T) for the CIT and such notice is bad in law and orders passed on the basis of invalid notice cannot survive in the eyes of law. The Ld. AR relied upon following case laws:-
(i).CIT vs. Sree Narayana Chandrika Trust 212 ITR 456 (Kerala)
(ii).CIT vs. Pullickal Medical Foundation Pvt Ltd 210 ITR 299 (Kerala)
(iii).American Hotel and Lodging Association vs. CBDT 301 ITR 86(SC).
(iv). Brahmin Education Society vs. ACIT 227 ITR 317 (Kerala).
(v). VanithaVishram Trust vs. CCIT 327 ITR 121(Bombay).
(vi).Maharashtra Academy of Engineering Education Research vs. CIT 133 TTJ 706(Pune).
(vii).ACIT vs. B. Srinivasa Rao 97 DTR 132(Hyderabad).
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Kunhitharuvai Memorial Charitable Trust
(viii).ChaitanyaBharaty Institute of Technology vs. DIT(E)- unreported(Hyd).
(ix)CIT vs. Fr. Mullers Charitable Institute 363 ITR 230 (Kar).
(x). Kalinga Institute of Industrial Technology vs. CIT 336 ITR 389(Orissa).
(xi). CIT vs. Shri AdvaitAshrama Society 28. Taxmann.com 18(All).
(xii)Ajith Educational Trust vs. CIT 46 DTR 482 (Ahd-Trib).
(xiii) SarvodayaIIikkiyaPannai 343 ITR 300 (Mad).
(xiv). CIT v. Balaji Educational & Charitable Public Trust [2015] 374 ITR
274.(Mad).
(xv). CIT v. Islamic Academy of Education [2015] 229 Taxman 274 (Kar.).
(xvi).CIT v. Karnataka Lingayat Education Society [2015] 371 ITR 249 (Kar.).
(xvii). VignanaJyothi vs. DIT (E) (2017) 81 Taxmann.com 204(Hyd-Trib). (xviii).DIT Vs. Garden City Educational Trust, 28 DTR (Kar) 139.
12. The Ld. D.R., on the other hand, vehemently argued in support of order of the CIT. The D.R. further submitted that the CIT has rightly cancelled registration u/s 12AA(3) as the activities of the trust are not genuine and its activities are not carried out in accordance with the objects. The facts narrated by the CIT in the order of cancellation of registration throws light on the non genuine activities of the trust inasmuch as the trust is managed by family members, it is not maintaining proper books of account and has not filed regular returns, the trust is collecting additional fees in violation of law abolishing collection of capitation fee for admission and such additional fees is not accounted for in the books of accounts of the trust and also the same is 16 Kunhitharuvai Memorial Charitable Trust made available for trustees to pay on-money for purchase of properties. This fact has been accepted by Dr. K.M. Navas, Managing trustee in his sworn statement recorded at the time of search. The other points considered by the CIT for cancellation of registration throws light on the activity of the trust inasmuch as the trust is running educational institutions on commercial lines with an intent of profit motive. Running educational institutions on profit motive cannot be considered as charitable purpose, though the nomenclature states that the trust is charitable trust. Though the trust is registered as public charitable trust, in reality, it is running like a family trust, which is evident from the fact that material gathered during search revealed that the trust properties are shared by trustees. The trustees have purchased property in their personal name and the source has been arranged out of additional fees collected from students seeking admission and this fact has been confirmed by Dr. K.M. Navas, managing trustees in his statement. Non maintenance of books and non filing of returns was not disputed by the trustee. Though, returns of income have been filed subsequently, the fact that activities of the trust are not genuine was not countered by the assessee. Going by the provisions of section 12AA(3) of the Act, it is very clear that what is to be seen is objects of the trust and its activities. The CIT has brought out number of issues which shows light on non genuine activities of the trust which triggered cancellation of registration,as such the order of the CIT should be upheld. In this regard, he relied upon the following judgments.
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Kunhitharuvai Memorial Charitable Trust
(i).Travancore Education Society vs. CIT (2014) 369 ITR 543(Kerala).
(ii).Aditanar Educational Institutions v. Add. CIT [1997] 224 ITR 310.
(iii) Visvesvaraya Technological University v. Asstt. CIT [2016] 384 ITR 37.(SC);
(iv). Queens Educations Society v. CIT [2015] 372 ITR 699(SC).
(v). CIT v. National Institute of Aeronautical Engg. Education Society [2009] 315 ITR 428.
(vi).Voditala Educational Society v. Asstt. DIT (Exemption) [2008] 20 SOT 353 (Hyd.)
(vii). Dawn Educational Charitable Trust v. CIT [2015] 370 ITR 724 (Ker.)
13.We have heard both the parties, perused the materials on record and gone through the order of the Commissioner of Income -Tax cancelling registration granted u/s 12AA, by using her powers conferred u/s 12AA(3) of the Income Tax Act, 1961. The CIT, Central cancelled registration u/s 12AA(3) from A.Y. 2011-12 on wards on the ground that the objects of the trust are not charitable in nature and its activities are not carried out in accordance with its objects. The Commissioner of Income Tax cancelled registration u/s 12AA(3) of the Act, on the basis of her observations which are narrated in para.11, on page 5 of her order. According to the CIT, the trust never carried out its activities in accordance with its objects, as there is violation of sections 11(5) and 13(1)(c) in so far as utilization of trust funds, failure to maintain books of account and filing of returns of income and running education with profit motive. The CIT has brought out various reasons for drawing adverse inference on the objects 18 Kunhitharuvai Memorial Charitable Trust and its activities and the source of such information is search and seizure operation conducted u/s 132 of the Act, in the premises of trust and trustees on 31-10-2011. The information gathered during search has been discussed at paras 4 to 9 on pages 2 to 5 in her order dated 27-3-2014. The search revealed the following facts.
i. Though the trust is registered as public charitable trust, in reality, it is functioning as a family trust as its trustees are family members and also its activities are controlled and managed by family members.
ii. No proper books of account are maintained and returns of income from A.Y. 2006-07 onwards have not been filed as required under law.
iii. Collection of additional fees from students admitted under management quota in Medical, Ayurvedic and Dental colleges. iv. Diversion of trust funds for purchase of properties in the name of trustees.
14. The CIT has discussed these issues in her order with certain documents and evidences collected during search. The documents and evidences relied upon by the CIT includes, copy of trust deed, computer generated statements and sworn statements recorded from trustees. The first and foremost observation of the CIT was that the trust is not a charitable trust as its trustees 19 Kunhitharuvai Memorial Charitable Trust are family members and its affairs is controlled by them. The second observation with regard to non maintenance of books of account and non filing of regular returns of income as required under the Act. The CIT also observed that the trust has collected additional fees from students admitted under management quota and that fund has been used for payment of on-money payment for purchase of property in the name of trustees. These are four observations of the CIT which lead to drawing adverse inference on the objects and activities of the trust and cancellation of registration u/s 12AA(3) of the Act. The CIT never disputed the fact that the trust objects are charitable in nature as defied u/s 2(15) and it is pursuing its objects by imparting education through various educational institutions. The CIT has accepted the fact that the objects of the trust are predominantly providing education and such object iscarried out through number of educational institutions which is evident from the fact that the trust is running seventeen educational institutions offering various graduate and post graduate degrees in Medicine, Engineering, Pharmacy, Management studies and Nursing. There are more than 5000 students studying in all institutions. All colleges and institutions are approved by regulatory bodies like, Medical Council of India, All India Council for Technical Education and Boards and Universities regulating education in the state of Kerala. Therefore, under these facts and circumstances, one has to examine the case, in the light of provisions of section 2(15), 12AA and 12AA(3) and whether the objects of the trust are charitable in nature as 20 Kunhitharuvai Memorial Charitable Trust defined u/s 2(15) and its activities are carried out in accordance with its objects.
15. The provisions of section 2(15) defines the term charitable purpose, which includes, Relief to the poor, Education, medical relief, and the advancement of any other object of general public utility. An entity with a charitable object of the above nature was eligible for exemption u/s 11. However, it was seen that number of entities who were engaged in commercial activities were also claiming exemption u/s 11 on the ground that such activities were for the advancement of objects of general public utility in terms of fourth limb of the definition of charitable purpose. Thereafter, to check misuse of exemption, section 2(15) was amended, vide Finance Act, 2008, by inserting a proviso which states that the "advancement of any other object of general public utility" shall not be treated as charitable purpose if it involves the carrying out of any activity in the nature of trade, commerce or business and also rendering any services in relation to any trade, commerce or business for cess or fees or any other consideration, irrespective of the nature of use or application. Therefore, what emerges from the amendment to section 2(15) of the Act, is that the provisions of section 2(15) was unaltered even after amendment insofar as first three limbs of definition "charitable purpose", i.e. Relief to the poor, Education and Medical relief. The amendment brought out to section only changed the position insofar as it relates to fourth and final 21 Kunhitharuvai Memorial Charitable Trust limb of definition, i.e. advancement of any other object of general public utility, where if the activity of any trust shall not be treated as charitable purpose, if it involves carrying out any activity in the nature of trade or commerce. In this case, the objects of the trust are predominantly based on imparting education which comes under first three limbs and the trust is continued to pursue its activities in accordance with its objects by running educational institutions. Therefore, we are of the view that where the purpose of the trust is relief to the poor, education and medical relief, the requirement of the definition of charitable purpose would be fully satisfied, even if an activity for profit is carried on, in the course of carrying out the primary purpose of the trust. This position is further strengthened by the decision of Hon'ble Supreme court in the case of Surat Art Silk Cloth Manufacturers Association vs. Addl.CIT (1980) 121 ITR 1 and Honble Kerala High Court Decision in the case of Dharmadeepti vs CIT (1978) 114 ITR 454. This position is further clarified by Hon'ble Supreme Court in the case of Queen's Education Society vs. CIT (2015) 372 ITR 699 and American Hotel & Lodging Association Educational Society vs. CBDT (2008) 301 ITR 86.
16. Having said so, let us examine the powers of the Commissioner to grant registration u/s 12AA and cancellation of registration u/s 12AA (3) of the Act. The power to cancel registration already granted u/s.12AA of the Act is contained in Sec. 12AA(3) of the Act and it reads as follows: 22
Kunhitharuvai Memorial Charitable Trust "(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) and subsequently the 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."
The provisions of section 12AA of the Act, deals with procedure for registration of trust/institutions. As per said section, the Commissioner shall look into the objects of the trust and its activities and satisfy himself about that the objects of the trust are charitable in nature and its activities are genuine and such activities are carried out in accordance with its objects. Sub-section (3) inserted with effect from 1st Oct., 2004 empowers the Commissioner to cancel the registration of a trust or institution granted under clause (b) of sub-section (1) when subsequent to grant of registration the Commissioner is satisfied that activities of trust or institution are not genuine or are not being carried out in accordance with objects of the trust or institution.Basic purpose of s. 12AA(3) is to check misuse of exemption under pretext of carrying out charitable activities when the same are not so. The CIT has to make out clear case for exercising powers u/s. 12AA(3). In this case, so far as object of trust is concerned, it is nowhere disputed that assessee is engaged in imparting education. Once an institution came within the phrase "exists solely for 23 Kunhitharuvai Memorial Charitable Trust educational purpose and not for profit" no other condition like application of income was required to be complied with. The mere existence of profit/surplus did not disqualify the institution. Breach of the conditions of the trust deed would not disentitle the institution from getting the benefit which the institution had been granted earlier being a charitable trust. Nowhere in her order, the CIT has taken any objection to the charitable and educational nature of the institution. In fact, the objects of the institution as declared in the trust deed do reflect that all are philanthropic or benevolent in nature, precisely, for the purpose of imparting education. Strange enough, there is no finding recorded by the CIT contrary to this fact.Rather, this is also not the case of the CIT that the institution is doing some other activity of earning profit other than the activity of running educational institutions. The established factual position is that the institution is not doing any other activity except running educational institutions. In such circumstances, the action of cancellation of registration cannot be upheld. As far as the object of the assessee is concerned, this is not the case of the Revenue that the assessee was not imparting education. Since the question about the imparting of education has not been doubted or challenged by the Revenue, the impugned order passed by the CIT is unsustainable in law. Strange enough again, there is nothing on record to prove even sightlessly that the purpose of imparting education was not fulfilled by this institute, thus the Revenue Department has failed to establish that 24 Kunhitharuvai Memorial Charitable Trust there was any illegal activity or infringement of law so as to doubt the genuineness of the activities.
17. The CIT's approach for deciding the eligibility of registration of a trust should be different from the angle by which an assessment of an income is made by the AO. What purpose does it serve to Revenue by cancelling a registration if the activities are in public interest because in case of any breach of the laws the same is subject to tax under ss. 11 and 12. These two provisions and few other provisions are competent enough to tackle firmly a defaulter of philanthropic application of income or funds of the trust. The other adverse side of cancellation is that on refusal of registration the entire receipts shall be subject to assessment without granting benefit of ss. 11 and 12 to assess income which does not form part of total income though the factual position could be that major part might have been devoted towards achieving the objects i.e., imparting education, as in this case, but the AO shall be automatically forbidden to grant advantage of exemption consequent upon the cancellation, as is mandatory in statute. The outcome of the deliberation made in detail hereinabove is that mercurial opinion is to debar the CIT to enter into the area of investigation of source of income and also application of income, so that the amount of correct exempt income shall not be prejudice. If the CIT had an information of some wrongful means of earning fees in the form of a donation or if an information tells about excessive charging of fees; then, the 25 Kunhitharuvai Memorial Charitable Trust CIT, in his right can pass on the information to the concerned office bearers working under the Regulatory bodies who control capitation fee menace. These authorities have enough power to deal with such nature of default, side by side the CIT is to limit his jurisdiction within the ambit of provisions of the Act and expected to give a finding on facts that either the objects are not for general public utility or not achieved as prescribed under law. However presently the situation is that the Revenue has not said about any immoral activity of the appellant or the collection of fees was by wrongful means. Prima facie no case was made out by the CIT so as to even vaguely demonstrate that the activities of the appellant were not genuine or activity of imparting of education, for which the trust was created, were not carried out. Even the CIT has failed to establish that any part of the income/receipt of the trust was in any manner misutilized by the trustees for their personal benefit i.e., not in fulfillment of the object of the trust. Otherwise also there are three ways to look at this problem. One is, that the donations are raised but not utilized for achieving the objects i.e., towards imparting education; then such an institution must bear the consequence of cancellation of registration since ipso facto infringed s. 12AA(3) condition. Second aspect is, that though the donations received are meant to fulfill the objects but together with fees have infringed Anti Capitation Prohibition Act; that comes within the clutches of that Act but definitely not under s. 12AA(3) provisions. The provisions of section 13(1) are thus not directly relevant in this regard. "Nothing contained in section 11 or 26 Kunhitharuvai Memorial Charitable Trust section 12 shall operate so as to exclude, from the total income of the previous year, of the person..." which clearly envisages operation of section 11 or section 12 before the provisions of section 13 can be applied or invoked in a given case. It also shows that the said provisions can be applied or invoked only at the time of computation of total income of the previous year of the person who is claiming exemption under section 11 or section 12. Both these situations contemplated in section 13 can arise only and only if registration under section 12A is granted to the said person. If the same is not granted and the person is refused registration under section 12A, he would not be entitled to claim any benefit available under section 11 or 12 and there will be no occasion to the Assessing Officer to invoke or apply section 13 in his case. This position would not only be contrary to the scheme of the Act as laid down in sections 11, 12, 12A, 12AA and 13 but the same may also cause prejudice/hardship to the persons in certain cases.
18. Coming to the specific observations of the CIT in the impugned order cancelling registration u/s 12AA(3) of the Act, The CIT's first observation with regard to nature of trust. According to CIT, though the trust is registered as public charitable trust; in reality, it is running like a family trust only on the basis of composition of trustees who belongs to one family. The question whether the trust is charitable or not depends upon its objects and its activities. If objects of the trust are in the nature of charitable purpose as 27 Kunhitharuvai Memorial Charitable Trust defined u/s 2(15) and its activities are carried out in accordance with its objects, it is irrelevant whether it is managed by family members or outsiders. In this case all trustees are doctors by profession having common agenda of providing charity, established a trust with the main objects of education and such objects are carried out in accordance with its objects, therefore the CIT was incorrect in coming to the conclusion that the trust is family trust not existing for charitable purpose. Merely because, all the trustees are family members, it does not mean that trust is not public trust. As a matter of fact the trust is genuine and because of this, the CIT granted the exemption under s. 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. This proposition finds support from the decision of Hon'ble Supreme Court in the case of DeokiNandan vs. Murlidhar&Ors. AIR 1957 SC
133.
19. Coming to other observations of the CIT for cancellation of registration of trust u/s 12AA(3). The CIT observed that the trust is not maintaining proper books of account and not filed regular returns of income as prescribed under law. As regards observations of the CIT with regard to non maintenance of books of account and non filing of regular returns of income it was submitted that it is true returns of income from the A.Y. 2007-08 have not been filed regularly and such returns have been filed after search but before the 28 Kunhitharuvai Memorial Charitable Trust Commissioner issued her show cause notice on 6-9-2013 which is evident from the fact that returns of income up to A.Y. 2011-12 have been filed before 21-8-2013. The trust has filed regular returns for A.Y. 2012-13 and subsequent years. The AR further submitted that even assuming that there is delay in filing returns of income, it cannot be said that it is fatal so as to withdraw registration u/s 12AA(3). Non filing of returns is purely a procedural laps which can be cured by filing return of income or some other penal provision is provided to deal with non filing return of income, but it cannot be a ground for cancellation of registration as long as the trust objects are charitable in nature and its activities are carried out in accordance with its objects. Therefore, we are of the view that non maintenance of regular books of accounts, belated filing of returns of income, are all by way of passing reference having no relevance to whether or not the assessee was pursuing education, as its main object. There are no facts brought out in the impugned order regarding the genuineness of the activities of the trust or as to whether the object of education was not pursued by the assessee as its main and predominant activity. In fact, the order of the CIT does not anywhere show that the assessee is not imparting education. The complaint of the revenue seems to be that education is being imparted on commercial lines. The definition of 'Charitable Purpose' is given in Sec.2(15) of the Act. The same refers to "relief to poor, medical relief, education and the advancement of any other object of general public utility". The proviso to Sec.2(15) of the Act introduced by the Finance Act, 2008 w.e.f. 29
Kunhitharuvai Memorial Charitable Trust 1.4.2008 regarding excluding organizations where there is profit motive from the definition of charitable purpose applies only to the category of trusts which has as its object, the object of "advancement of any other object of general public utility". It does not apply to the other categories of charitable purpose viz., "relief to poor, education and medical relief". It is also not a necessary element in a charitable purpose that it should provide something for nothing or for less than it costs or for less than the ordinary price. The surplus generated, if it is held for charitable purpose and applied for charitable purpose of the assessee, and then the assessee has to be considered as existing for charitable purpose. There are enough safeguards provided in Secs.12 and 13 of the Act to ensure that personal benefits of the persons in control of the trusts are not treated as having applied for charitable purpose and for being brought to tax like provisions of Sec.13(1)(c) of the Act which restricts unreasonable and excessive payments to certain category of persons connected with a trust or other institution. In such circumstances, we are of the view, that the order u/s 12AA(3) of the Act, cannot be sustained."`
20. The allegations of the Revenue that the Trust was collecting additional fees, Donations and siphoning off of income of the Trust for the benefit of the Trustees. As regards collection of additional fees from certain students and diversion of funds to trustees, these are passing remarks by the CIT which cannot be considered as non genuine activities. The trust has collected fee 30 Kunhitharuvai Memorial Charitable Trust from students as prescribed by the authorities. In some cases, additional fees collected from students admitted under management quota and such additional fees has been accounted for in the books of accounts and also applied for objects of the trust. The trust has collected additional fees in two years from students admitted under management quota and such additional fee has not exceeded the limit prescribed by the authorities. The private unaided management colleges are permitted to fix their own fees in respect of management quota seats considering their feasibility and collect such fees from students. The additional fees and advance fees collected from students is hardly 4.46% of total fees collected from students. The additional fees collected have been accounted for in the books, therefore it is incorrect on the part of the CIT to make baseless allegations that additional fees collected was not accounted for in the books of account and such additional fees has been used for payment of on-money for purchase of property in the name of trustees. The CIT made said comments on the basis of sworn statement of Shri. K.M. Navas, Managing trustee. But, if you refer the statement, no where the managing trustees admitted that additional fees has been used for payment of on-money for purchase of property. In the said statement, he admitted that the trust has collected additional fees and the same has been used for objects of the trust. As regards allegation of diversion of funds, it was submitted that the trust has given temporary advance to Dr. K.M. Navas, managing trustee of the trust with interest @16% per annum and such loan 31 Kunhitharuvai Memorial Charitable Trust has been repaid within a short period. The CIT completely erred in cancelling registration on the ground that trust funds are diverted for the benefit of trustees without appreciating the fact that advances to trustees is with adequate interest and security and such interest has been charged at double the bank rate. Even assuming that there is diversion of funds in contravention of sections 11(5) and 13(1)(c), for these reasons registration cannot be cancelled as the newly inserted sub section 4 with effect from 1-10-2014 is applicable from A.Y. 2015-16 onwards. If there is violations of section 11(5) and 13(1)(c), at the most,the same be taxed in the hands of the Trust or the Trustees as the case may be and may even trigger penal action against the Trustees in accordance with Law. Moreover, no conclusive findings supported by cogent evidence are established by the Revenue to prove that the trustees have siphoned off the income of the Trust. It is also not established before us by the Revenue that the trustees who have received funds by siphoning off the undisclosed income of the trust are brought to tax. On the other hand, the assessee proves that allegations made by the CIT are baseless and without any cogent materials. The activities conducted by the assessee Trust are only promoting education within the ambit of Section 2(15) of the Act and it was not engaged in any other activity other than imparting education. Therefore, we are of the view that the other reasons given by the CIT in the order u/s 12AA(3) of the Act, do not make out a case, which can show the activities of 32 Kunhitharuvai Memorial Charitable Trust the assessee are not genuine or that the activities of the assessee are not being carried out in accordance with the objects of the trust or institution.
21. Unquestionably, the onus for proving the existence of factors calling for cancellation of registration granted to an institution is on the Department rather than on the institution. In the present case, the CIT has miserably failed to discharge such onus. No material has been brought by the CIT that the assessee society exists for profit motive. The Department has not been able to discharge its onus of showing as to how the conditions for grant of registration have been breached by the assessee. The assessee remained enjoying the registration granted to it for the last number of years under the same unchanged facts and circumstances. It has also not been demonstrated by the Department as to how the approach of the assessee has turned to a commercial one. The predominant object of the assessee is and remains to carry out charitable purpose of advancement of education, and not to earn profit. In fact, no profit has been established to have been earned by the assessee. The CIT has failed to specify as to how profit earning is the predominant activity of the assessee instead of carrying out its said charitable purpose. On the other hand, the assessee has filed various details of income from property held under trust and application of income for charitable purpose as per which its application of income for its object is more than its income generated from property held under trust for all these years. In fact, its 33 Kunhitharuvai Memorial Charitable Trust application of income is more than 100% which is evident from the fact that the assessee has filed chart showing income and expenditure as per which its expenditure is 118% to 140% for the A.Y. 2007-08 to A.Y. 2011-12.(Refer page No. 157 of PB). In any of the year, the trust is having surplus. Insofar as the observations of the CIT with regard to expenditure incurred for charitable purpose, we find that the CIT's observations are baseless as the administrative expenditure shown by the assessee in its financial statements predominantly consists of amount spent for objects of the trust which is evident from the fact that the assessee has filed a statement of expenditure showing details of administrative expenses which is enclosed in paper book page no. 159. Therefore, the allegation of the CIT that the trust is running education on profit motive in baseless and without any application of mind. Therefore, the assessee Trust cannot be deprived of the benefit of promissory estoppel against the Department to allow the assessee to keep on enjoying the registration granted to it long ago. No finding has been recorded by the CIT that any part of the income of the assessee society has been misutilised. Thus, the cancellation of the registration granted to the assessee Trust has been erroneously ordered.
22. Coming to the case laws relied upon by the assessee. The assessee has relied upon plethora of judgments. Let us discuss few case laws relied upon by the assessee.
34
Kunhitharuvai Memorial Charitable Trust
(a) The Hon'ble Bombay High Court in the case of VanithaVishram Society vs. CIT (2005) 280 ITR 345 held that existing solely for educational purpose is sufficient for claiming exemption. The relevant portion of order is extracted below.
The intention of the Legislature appears to be to grant exemption to the institution, under section 10(22) if it solely exists for educational purposes and not for the purposes of profit. [Para 10] The legal position is well established on the strength of the various decisions that if a trust or society exists solely for educational purposes and it runs an educational institution, its income will be the income of the educational institution and, therefore, exempted under section 10(22 ). The fact that the assessee had other objects will not disentitle it to the exemption so long as the activity carried on by it in that assessment year was that of running an educational institution and not for profit. [Para 21] In the instant case, there was no dispute about the fact that the assessee-trust existed only for educational purposes, i.e., for running schools and not for the purposes of making profit. There was an integral unity between the trust and the school for the purposes of section 10(22 ). The amount invested belonged to the school. The school was not merely a building in which it was housed, or the equipment that was contained in it, but something more. It was an institution, and that institution belonged to the trust. In dealing with the question, whether the income was that of the school, the significance of the expression 'any income of a university or other educational institution' in section 10(22) had to be noticed. Both words 'any' and 'of' carry a definite meaning. It is not income from the educational institution that is exempted but any income of the educational institution. What appears to be relevant is that the income should reach the school to be utilised by it for educational purposes and not for the purposes of profit. [Para 22] It is, thus, obvious that granting exemption to the income of the educational institutions is to enable such institutions to utilise the money available with them for the purpose of running the educational institutions. The source from which the money are received is of no consequence, what is relevant is the application of income. So long as the income of the institution, which solely exists for educational 35 Kunhitharuvai Memorial Charitable Trust purpose and not for earning profit, is applied for the educational purpose, such income of the institution is exempted under section 10(22). [Para 24] Therefore, the assessee was entitled to exemption under section 10(22) on interest earned on surplus funds of the school run by it.
(b) The ITAT, Pune bench in the case of Maharashtra Academy of Engineering Education Research vs. CIT (2010)133 TTJ 706(Pune) held that if CIT had an information of wrongful means of earning fees in the form of donation or about excess charging of fees, the CIT can pass on the information to the concerned authority, but when there is no evidence of misutilisation of funds and the prescribed activity if continued to carried on by the assessee, then the CIT had no jurisdiction to cancel registration u/s 12AA(3). The relevant portion of order is extracted below. In the recent past sub-section (3) was inserted in section 12AA with effect from 1-10-2004 which gives power of cancellation of registration to the CIT, if he finds that the activities are not genuine or not being carried out in accordance with the object of the trust. The need for the enactment had arisen due to belief of some quarter that in the absence of explicit law the CIT cannot exercise the power of cancellation of registration. To overcome this hurdle this sub-section is incorporated and now in operation. Naturally these powers are conferred with a view to ensure that if once a registration has been granted under section 12AA, a trust or institution may not take any such liberty of misuse of the registration or the provisions by going haywire rather furthering the objects of the trust or genuinely not pursuing the activities for which it was established. [Para 11.4] The most important feature of section 12AA is that this section has only laid down the procedure of registration and this section nowhere speaks that while considering the application of registration, the CIT shall also look into the procedure of earning of income and sources from where receipts are derived. The argument was, it also does not speak anywhere that while considering the registration the CIT shall also see the manner in which the receipts 36 Kunhitharuvai Memorial Charitable Trust or the income is being spent by the trust. Various related provisions, the power of enquiry, in respect of sources of receipts and the utilization of income is entrusted in separate sections as already discussed ante. The language thus used in section 12AA only confines to enquire about the activities of the trust and its genuineness, which means, in consonance with the objects for which created and those objects as also activities should not be a camouflage but pure, sincere, charitable and for public utility at large. What is implicit is that the CIT has to sincerely examine that the objects as also the activities should not be prima facie against the basic structure for which beneficial law is made and also be not in conflict with the general public utility. Naturally an institution if established to carry out an illegal activity or activities are causing any type of nuisance not in the interest of the public at large should definitely lead to cancellation of registration. Therefore, this is the first requisite of the statute to mandate for the registration and in the absence of such registration disentitlement of exemption. So what is explicit is that though an institution may be doing charitable activities as prescribed but in the absence of registration cannot be entitled for the exemptions or benefits of sections 11 and 12. It is also explicit that registration ipso facto does not necessarily entitle an institution to get the receipts excluded from the income or exemption be granted automatically by just showing the registration certificate to the revenue authorities. [Para 11.5] Procedure of registration is a first step and a preliminary stage where the CIT shall restrict the enquiries as to whether the trust is actually and whole heartedly performing all the duties and activities for which it was created. On careful reading of this section it was gathered that at this initial stage there is no scope of any apprehension of misutilization of funds or to judge the taxability income. The scheme of the Act otherwise does not subscribe and allow a trust to take the benefit of the provisions of section 11 and 12 unless it establishes the prescribed utilization of the income even if at all he trust holds the registration in its hands. Therefore at the stage of granting registration the CIT is not expected to bother himself about the other provisions of the Act and supposed to confine himself to the procedure of registration as laid down therein. [Para 11.6] Another feature of the impugned order of the CIT is in fact bothering that nowhere he has taken any objection to the charitable and educational nature of the institution. In fact, the objects of the institution, as declared in the trust deed does reflect that all are philanthropic or benevolent in nature, precisely for the purpose of imparting education. Strange enough there is no finding recorded by the CIT contrary to this fact. Be that as it may, the real and the only substantial objection for refusal of registration was that the institution has collected donations thus adopted some wrong 37 Kunhitharuvai Memorial Charitable Trust means of collection of fees. But whether at this preliminary stage he had the right to draw an adverse inference so as to refuse registration or alternatively confine himself to the enquiry about the objects and the activities of the trust as per the limits of the jurisdiction of section 12AA. Rather this is also not the case of the CIT that the institution is doing some other activity of earning profit other than the activity of running educational institutions. The established factual position is that the institution is not doing in any other activity except running educational institutions. In such circumstances, can one uphold the action of cancellation of registration? Answer is obvious no. [Para 11.7] As far as the objective of the appellant is concerned this is not the case of the revenue that the assessee was not imparting education. The term education means to teach subjects to students for the development of his mind and also to equip students to deal with reality. The training process is either theoretical or practical but student has to be taught the essentials of the selected subjects so as to develop his skill and knowledge for the subjects studied by him. The appellant institute, admittedly, fulfils the requirements of imparting formal education by a systematic teaching and instructions. Since the question-about the imparting of education has not been doubted or challenged by the revenue therefore, the impugned order passed by the respondent is unsustainable in law. Strange enough there is nothing on record to prove sightlessly that the purpose of imparting of education was not fulfilled by this institute thus the revenue department has hopelessly failed to establish that there was any illegal activity or infringement of any law so that to doubt the genuineness of the activities. [Para 11.11] The sine qua non for cancellation of registration are two conditions prescribed in section 12AA(3) needs to be satisfied are: (a) That activities of the trust/institution are not genuine. (b) That activities of the trust are not carried out in accordance with the objects of the trust/institution. Thus the findings of the CIT has not to be only conceptual or contextual but should be within the four corners of law so that not surpassing the power, as listed above, granted in sub-section (3) of section 12AA. But unfortunately the fallacy is writ large as gathered on perusing the impugned order. The CIT's approach for deciding the eligibility of registration of a trust should be different from the angle by which an assessment of an income is made by the AO. About the ramification if one approve the action of CIT because in that case it may adversely affect the imparting of education especially when the revenue has not made out a case that the very purpose for creation of the trust was defeated. Rather one wonders that what purpose does it serve to revenue by cancelling a registration if the activities are in public interest because in case of any breach of the laws the same is 38 Kunhitharuvai Memorial Charitable Trust subject to tax under sections 11 and 12. These two provisions and few other provisions are competent enough to tackle firmly a defaulter of philanthropic application of income or funds of the trust. The other adverse side of cancellation is that on refusal of registration the entire receipts shall be subject to assessment without granting benefit of section 11 and section 12 to assess income which do not form part of total income though the factual position could be that major part might have been devoted towards achieving the objects, i.e., imparting education, as in this case, but the AO shall be automatically forbidden to grant advantage of exemption consequent upon the cancellation as is mandatory in statute; relevant section already reproduced ante. The outcome of the deliberation made in detail hereinabove is that percurian opinion is to debar the CIT to enter into the area of investigation of source of income and also application of income, so that the amount of correct exempt income be not prejudged. [Para 11.12] The aspect of morality as touched by the CIT is appreciable. Every vigilant and law abiding citizen has to be fair in his conduct and should refrain from immoral activities. But existing blue laws are derived from the numerous extremely rigorous laws designed to regulate morals and conduct. These laws are enacted in such a fashion that if implemented correctly and efficiently then there is no scapegoat for an offender. One is tempted to write an idiomatic language due to the sensitivity of the issue, that a CIT cannot be allowed to hold a baton of morality in his hand to hit an immoral; but the statute has given him a flexible stick for inflicting tax on defaulter; that includes a trust or educational institution. The gist is that if the CIT had an information of some wrongful means of earning fees in the form of a donation or the information tells about excessive charging of fees; then the CIT in his rights can pass on the information to the concerned office bearers working under the Maharashtra Capitation Fees (Prohibition) Act. These authorities have enough power to deal with such nature of default, side by side the CIT is to limit his jurisdiction within the ambits of provisions of the Act and expected to give a finding on facts that either the objects are not for general public utility or not achieved as prescribed under law. However presently the situation is that the revenue has not said about any immoral activity of the appellant or the collection of fees was by wrongful means; hence deregistration sans the Tribunal's approval. [Para 11.13] Prima facie no case was made out by the CIT so as to even vaguely demonstrate that the activities of the appellant were not genuine or activity of imparting of education, for which the trust was created, were not carried out. Even the CIT has failed to establish that any part of the income/receipt of the trust was in any manner misutilized by the trustees for their personal benefit i.e., not in fulfillment of the 39 Kunhitharuvai Memorial Charitable Trust object of the trust. Otherwise also there are three ways to look at this problem. One is, that the donations are raised but not utilized for achieving the objects, Le., towards imparting education; then such an institution must bear the consequence of cancellation of registration since ipso facto infringed section 12AA(3) condition. Second aspect is, that though the donations received are meant to fulfill the objects but together with fees have infringed Anti Capitation Prohibition Act; then comes within the clutches of that Act but definitely not under section 12AA(3) provisions. The third aspect is, that the donation plus fees do not exceed the prescribed limit of Anti Capitation Fee Act i.e., five times the normal fees; further that no evidence of misutilization other than the prescribed activity then no action can be suggested under section 12AA(3). The Assessee's case falls under the third category. With the result, totality of the circumstances thus warrants, in the light of the foregoing discussion, not to endorse the view of the CIT; consequence there upon reverse those findings. The order of cancellation of registration is hereby revoked".
(c). The ITAT, Hyderabad bench in the case of ACIT vs. B. Srinivasa Rao (2014) 159 TTJ 483(Hyderabad), held that department can cancel registration granted to a society u/s 12AA when activities of trust are not genuine or activities of trust are not carried on in accordance with object of trust. The relevant portion of order is extracted below.
The provisions of section 12AA states that, the Department can cancel registration granted to a society under section 12AA if the activities of the trust are not genuine and the activities of the trust are not carried on in accordance with the object of the trust. [Para 32] In the present case, the Commissioner is not alleging that the assessee is not pursuing object of imparting of education. It is an admitted fact that the assessee had been carrying on educational institution imparting medical education and it fulfilled requirement of imparting education and the question of imparting education by the assessee has not been doubted or challenged by the Department. Being so, on this reason, registration cannot be cancelled. [Para 33] The Commissioner has relied on the certain materials to demonstrate 40 Kunhitharuvai Memorial Charitable Trust that the activities of the trust are not being carried out in accordance with the object of the trust. He expressly referred to the seized material to hold that the assessee's activities cannot be said to be for charitable purpose. These materials are independently not corroborated. Collection of capitation fee by the assessee was made out on the basis of Excel sheets found during the course of search. The Department is not conclusively sure whether the assessee has collected capitation fee or not so that it made assessment in the hands of the chairman, as well as the assessee trust. The cash found during the search action tallied with the books of account. The document relating to a parent cannot be relied as this was not subject-matter of cross-examination. Similarly, the evidence relating to another parent cannot be relied upon since he denied payment of any fees more than what was prescribed. He said that his son got admission in normal course. Similarly, in the case of another parent, the evidence is demolished by the assessee, that the details cannot be used against the assessee as the papers submitted to the assessee by the parents trust were for the purpose of facilitating the financial assistance from bank. Being so, the activities of the trust cannot be held as non-genuine or it can be said that the activities of the assessee are not being carried out in accordance with the object of the trust or institution. There cannot be any other legally sustainable reasons for cancelling or withdrawing the registration granted to the assessee. [Para 34] 41 Kunhitharuvai Memorial Charitable Trust
(d). The Hon'ble Karnataka High Court in the case of CIT. Vs. Fr. Mullers Charitable Institutions(2014) 363 ITR 230(Kar) held that in case of a charitable trust, it is only income from investment or deposit which has been made in violation of section 11(5) that is liable to be taxed and that violation under section 13(1)(d) does not tantamount to denial of exemption under section 11 on total income of assessee-trust. The SLP filed by the department before hon'ble Supreme Court, has been dismissed, therefore, no denial of exemption, if there is a violation.
(e). The Hon'ble Allahabad High court, in the case of CIT vs. Shri Advait Ashram Society (2012) 28. Taxmann.com 18 (all) held that non filing of return of income for last several years cannot be a ground for declining registration u/s 12AA of the Act.
(f) The Hon'ble Madras High court in the case of CIT vs. SarvodayaIIakiyaPannai (2012) ITR 300(Mad) held that once Commissioner grants registration to a trust under section 12AA(1)(b)(ii) after satisfying himself about activities of trust, such a registration cannot be cancelled by following very same provision of section 12AA(1)(b) to go into genuineness of activities of trust.
(g). The ITAT, Ahmadabad in the case of Ajith Education Trust vs. CIT (2010) 143 TTJ 483 held that non maintenance and non filing of regular returns 42 Kunhitharuvai Memorial Charitable Trust cannot be a ground for cancellation of registration. The relevant portion of order is extracted below.
The objects have explicitly stated that the trust was established for educational purposes. Nowhere in the order of the CIT there was an allegation that the trust was not running an educational institution. Therefore one has to examine the correctness of the cancellation of the registration in terms of the language of s. 12AA as prescribed in sub-s. (1) and particularly in cls. (a) and (b) of the section. So far as the running of the educational institution is concerned, even the AO while passing assessment orders for several years, has held that the trust is entitled for exemption under s. 10(23C)(iiiad). If the Revenue officer himself is qualifying this trust as an educational institution and then granting the said exemption, then as a result it was not justifiable on the part of the CIT to hold such a conflicting view, which can be said to be altogether contrary to the facts of the case. The allegation was that the books of account were not found in a proper manner. Because of the absence of the books of account, it was also doubted whether the educational fees received from the students was ever applied for the purpose of education. In the present case, the trust being an educational institution and undisputedly imparting education, therefore, it was not justifiable on the part of the CIT to deny the registration. Nevertheless, the application of income and the utilization of funds is always subject to scrutiny by the AO while assessing the income of the trust. It is therefore, clarified that merely by granting a registration under s. 12A/12AA a trust ipso facto is not entitled for the exemptions prescribed under ss. 11 and 12. Neither de jure nor de facto, i.e., neither in principle nor in practice, a trust can get exemption under ss. 11 and 12 merely on getting a registration under s. 12AA (in the past s. 12A). In the light of above discussion, the cancellation of registration, on bo.th the counts i.e., on merits as also on the legality of jurisdiction, was not in accordance of law.--Maharashtra Academy of Engineering & Educational Research (Maeer) vs. CIT (2010) 36 DTR (Pune)(Trib) 321 relied on
(h). In the case of CIT vs. Sree Narayana Chandrika Trust 212 ITR 456, the Hon'ble Kerala High Court held that application of income for charitable 43 Kunhitharuvai Memorial Charitable Trust purpose is sufficient for claiming exemption. Relevant portion of order is extracted below.
"Section 10(22A) provides that in computing the total income of a previous year of any person, any income of a hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, shall not be included. This section is akin to section 10(22) which excludes from levy income of a University or other educational institution existing only for educational purposes and not for purpose of profit. From the memorandum explaining the provisions of the Finance Bill, 1970 introducing section 10(22A) and CBDT Circular F. No. 194/16-17- IT(A-I) it is manifest that the object was to exempt the income of hospitals and similar institutions from the levy of tax, even if any surplus was derived, provided the surplus was used for philanthropic purposes, which need not be medical purposes. In other words, what was intended was a benefit to hospitals and to trusts or societies running them, provided the institution was not one run for profit. On the strength of various decisions under section 10(22) which, as mentioned above, is analogous to section 10(22A) the position is well established that if a trust or society exists solely for educational purposes and it runs an educational institution, its income will be the income of the educational institution, and, therefore, exempt under section 10(22). The fact that the assessee had other objects, will not disentitle it to the exemption so long its the activity carried on by it was that of running an educational institution, and its activities were not for profit. The same ratio must apply to hospitals as well The trust which is running the hospital and is existing solely for that purpose falls within the purview of section 10(22A) with exemption for its income, if the other requirements of the section are satisfied. It should be treated as the hospital itself, as it existed solely for running of the hospital and not for any other purposes. In other words, the society cannot be dissociated from the hospital which is run by it. They have to be treated as one and the same.
As regards exemption of the income derived by the trust as a partner of the firms, it must be mentioned that if there is an integral unity between the trust and the hospital for purposes of section 10(22A), 44 Kunhitharuvai Memorial Charitable Trust as held above, the amount invested belongs to the hospital and the income derived on such investment is also that of the hospital A hospital is not merely the building in which it is housed, or the equipments that are contained in it, but something more. It is an institution, and that institution belongs to the trust. In dealing with the question whether the income is that of the hospital, the significance of the expression 'any income of a hospital' in section 10(22A), has to be noted. Both the words 'any' and 'of' carry a meaning. It is not income from a hospital that is exempt but 'any income of hospital'. If the word had been 'from', the position would have been that the income should have been derived from the actual running of the hospital itself. What is relevant is that the income should reach the hospital to be utilised by it for philanthropic purposes and not for purposes of profit. The stress appears to be on the recipient of the income. If that is the hospital, that is the trust running it, section 10(22A) must apply. The emphasis is not on whether the income was derived from the educational institution, or hospital itself, but on the purpose for which the institution, trust or society was existing and utilising the income. Such an interpretation will subserve the object of the two provisions of clauses (22) and (22A) which appear to be to foster the growth of educational institutions and hospitals existing solely for such purposes and not for profit.
As regards exemption of the income of the assessee-trust for the years when the hospital was under construction, it was clear that the works relating to the hospital were started in the year 1973 though it became functional as a hospital only on 25-4-1978. All the activities in the meanwhile were geared to the establishment of the institution and its functioning as a hospital and, therefore, the income derived during the period was also the income of the hospital entitled to exemption. Adoption of any other view of the matter will be to syphon off the income required for the starting of a hospital by way of tax, thereby depleting the resources available to the institution, defeating the very object behind section 10(22A) for the years 1977-78 and 1979-80.
Therefore, the Tribunal was justified in holding that the assessee was entitled to exemption under section 10(22A)."
(i)The Hon'ble Karnataka High Court in the case of CIT vs. Islamic Academy of Higher Education (2015) 229 Taxmann. 274 held that where assessee trust 45 Kunhitharuvai Memorial Charitable Trust was fulfilling its main object of imparting education, registration of trust could not be cancelled on the basis that trustees were misappropriating trust funds. The Relevant portion of order is extracted below.
"In the instant case, the material on record shows that the trust has established educational institution and imparting medical education. Every year, students are admitted. Huge investment is made for construction of buildings for housing the college, hostel and to provide other facilities to the students who are studying in the college. The college is recognized by the Medical Council of India, State of Karnataka and all other statutory authorities. Therefore, it cannot be said that the trust is not genuine. Admittedly, the students are being admitted every year. Students are studying in all courses. Thus the object of the constitution of the trust namely imparting of education is going on uninterruptedly. Therefore, it cannot be said that the activities of the trust are not being carried out in accordance with the objects of the trust. When the aforesaid two conditions are fully satisfied, on the ground that the trustees are misappropriating the funds of the trust the registration of the trust cannot be cancelled. If the trustees are misappropriating the funds, if they are maintaining false accounts, it is open to the authorities to deny the benefit under section 11, but that is not a ground for cancellation of registration itself. That is precisely what the Tribunal has held. Therefore, the substantial question of law is answered in favour of the assessee and against the revenue. [Para 8]"
(j) The ITAT, Hyderabad in the case of VignanaJyothi vs. DIT(E), (2017) 81 taxmann.com 204, held that where assessee society was carrying on activity of imparting education, mere fact that it had collected donation from students at the time of admission would not result in invoking provisions of section 12AA(3) so as to cancel its registration. The relevant portion of order is extracted below.
46
Kunhitharuvai Memorial Charitable Trust "As can be seen from the order, the DIT(E) based his conclusion on the basis of enquiry from four parents/relations in assessment proceedings concluded in the year 2007 for assessment year 2005- 06 and in year 2008 for assessment year 2006-07. Even though those findings in assessments were not conclusive and matters were restored to Assessing Officer for further enquiry, no such enquiry was made as can be seen from the orders passed again on 31-03- 2014 for the above years. These orders at present are pending adjudication before Commissioner (Appeals). Thus, the order of DIT(E) is based on premature conclusions and the contention of revenue stating that the department has 'conclusively proved' the collection of capitation fee is devoid of any merit. [Para 10) As can be seen from the facts, only four cases were examined and on the basis of that, all the donations received including from Members of Society were considered as capitation fees and were brought to tax. Assessee filed the letters from the above four persons that the donations are voluntary and no capitation fee was collected. No further enquiry was conducted in spite of remitting matter for examination of the same. Even though the matter is pending adjudication before the Commissioner (Appeals) in assessment proceedings, these four isolated instances which were relied on by Assessing Officer do not conclusively establish that the society has violated the objects for which it was established and registration framed so as to invoke provisions of section 12AA(3) to cancel registration. [Para 10.1] The provision envisages that 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. Even though DIT(E) has used the above words in the order before cancelling the registration, there is no such finding that the activities are not genuine or are not being carried out in accordance with the objects. Assessee no doubt is running an educational institution and i.e., of charitable nature. Even though donations are collected, they are permitted by the Memorandum and as discussed above, permitted by the Statute also [Andhra Pradesh Educational Institutions (Regulation of Admission and Prohibition of Capitation Fee) Act, 1983]. There are no complaint or proceedings that assessee was collecting any fees more than what was prescribed. There are no allegation that any of the society funds were being misused/diverted for any purpose other than for 47 Kunhitharuvai Memorial Charitable Trust the objects of society. In view of the above, the provisions of section 12AA(3) were not satisfied so as to cancel the registration. [Para 13] As stated earlier, there is no allegation that funds are being misused or diverted or assessee is not imparting education. The activities of the trust cannot be considered as not genuine. Further, the trust is spending the funds for fulfilling the objects of the trust for which it is formed. Therefore, twin conditions prescribed for cancellation of trust registration have not been fulfilled. It is open to the authorities to deny the benefit under section 11 but this cannot be a ground for cancellation of registration."
(k)The Hon'ble Karnataka High Court in the case of DIT Vs. Garden City Educational Trust, 28 DTR (Kar) 139 held that "where there is no dispute in respect of the objects of the trust, that of imparting education and also when there is no dispute regarding the fact that the trust has actually imparted education and not carrying on any other activities, the trust is qualified for getting registration u/s. 12A as a charitable institution and the question regarding the application of funds and allowability of benefit of exemption U/ss. 11 & 12 are matters which are to be examined by the assessing authority at the time of assessment and not by the registering authority".
23. Coming to the case laws relied upon by the Ld. D.R. The D.R. relied upon decision of Hon'ble Kerala High Court in the case of Travancore Education Society vs. CIT (2014) 369 ITR 543(Kerala). We have gone through the decision of Hon'ble High court and find that in the case, the treasurer of society has admitted collection of capitation fee in addition to regular fees. Under those circumstances, it was held that a capitation fee was collected by trust in addition to fee prescribed and said fact was admitted by treasurer of 48 Kunhitharuvai Memorial Charitable Trust trust. In view of above, it was rightly held that object of trust was not charitable and registration granted to it u/s. 12AA was to be rejected. In this case, there was no capitation fees collection and the assessee has collected additional fees which were within the prescribed fees fixed for management quota seats, therefore, the case law relied upon by the ld. D.R. is not applicable for the facts of present case.
24. In this view of the matter and considering the ratios of case laws discussed hereinabove, we are of the considered view that the Ld. CIT is not justified in withdrawing the registration granted u/s.12AA of the Act by invoking the provisions of section 12AA(3) of the Act. Such act of the Revenue will only affect the poor students, who are studying in the institution by paying nominal / normal fees and also other students thereby defeating the very purpose of these provisions of the Act, which are enacted with the intention of promoting education in the country. In the instant case, the material on record shows that the Trust has established educational institutions and was imparting medical education. Every year, students are admitted. Huge investment is made for construction of buildings for housing the college, hostel and for providing other facilities to the students who are studying in the College. The College is recognized by the Medical Council of India, State of Kerala and all other statutory authorities. Therefore, it cannot be said that the Trust is not genuine. Admittedly, the students are being admitted every year. Students are studying in all courses. Thus, the object of the constitution of the Trust namely 49 Kunhitharuvai Memorial Charitable Trust imparting of education is going on uninterruptedly. Therefore, it cannot be said that the activities of the Trust are not being carried out in accordance with the objects of the Trust. When the aforesaid two conditions are fully satisfied, the registration of the Trust cannot be cancelled for the reasons stated by the CIT in her order, i.e. non maintenance of books, non filing of returns of income or belated filing of returns of income, collection of additional fees and diversion of funds in violation of sections 11(5) and 13(1)(c) as these are passing remarks which are not relevant for the purpose of section 12AA(3) and also all observations of the CIT has been negated by the assessee with enough evidences which are discussed in detail in foregoing paragraphs. Therefore, we are of the considered view that the CIT was erred in withdrawing registration granted u/s 12AA, by using her powers u/s 12AA(3). Hence, we set aside order passed by the CIT u/s 12AA(3) and restored registration granted u/s 12AA of the Act.
25. In the result, appeal filed by the assessee is allowed.
Order pronounced in the court on this 16th day of January, 2018.
Sd/- Sd/-
(George George K.) (G Manjunatha)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dt : 16th January, 2018
Pk/-
50
Kunhitharuvai Memorial Charitable Trust
Copy to :
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
/True copy/ By order
Asstt. Registrar, ITAT, Cochin