Income Tax Appellate Tribunal - Jodhpur
M/S. Harpavat Charitable Trust , ... vs Assessee on 5 May, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
JODHPUR BENCH, JODHPUR
BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND
SHRI N.K.SAINI, ACCOUNTANT MEMBER
ITA No. 186/JU/2014
[A.Y: 2006-07]
M/s Harpavat Charitable Trust Vs. The C.I.T
30-C, Madhuban, Udaipur
Behind Bhartiya Lok Kala Mandal
Udaipur
PAN No. AAATH 0592 G
(Appellant) (Respondent)
Assessee by : Shri N.M. Ranka
Shri N.K. Jain
Shri O.P. Chaplot
Department by : Dr. Deepak Sehgal, CIT-DR
Date of Hearing : 05.05.2014
Date of Pronouncement : 22.05.2014
ORDER
PER HARI OM MARATHA, J.M.
This appeal has been filed by the assessee for A.Y 2006-2007 against the order of the CIT, Udaipur, dated 2 10.03.2014, passed u/s 12AA(3) r.w.s 293C of the Income Tax Act, 1961 ['the Act', for short].
2. Briefly stated, the facts leadings to this appeal are that Dr. Ganesh Harpavat and Dr. (Smt.) Kiran Harpavat, both Non-Resident Indians [NRIs], residing in Lewisville, Dallas, Texas, USA, with the avowed object primarily to impart education and other medical and charitable objects, settled a Public Charitable Trust in the name of "Harpavat Charitable Trust" with its principal office at Bhandari Mansion, Opp. Town Hall, Udaipur, vide Deed of Declaration dated February 11, 1991. After execution of a valid deed, an application for registration u/s 12A in Form No. 10A was made on 13.3.1991 to the ld. CIT as prescribed under Rule 17A of the I.T. Rules, 1962.
Original Instrument with its copy was also filed alongwith the application for registration filed u/s 12A of the Act. The Registering Authority, after verification and complete satisfaction as to validity of the deed, accorded registration on 14.5.1991, and also sent a copy to the Income-tax Officer, Ward 2, Udaipur and DY CIT, Udaipur. This registration, as per the assessee, remained intact.
Subsequently, the Trust was advised to get it registered with 3 Devasthan Department. This department wanted the assessee to affix stamp duty as applicable as in the year 2006. Therefore, non-
judicial stamp of Rs.100/- was purchased and original deed was rewritten and executed and notarized. Form 6 along with Trust Deed was submitted on 21.12.2006. This department, after due enquiry, verification and complete satisfaction, granted registration on 11.5.2007 registering the Trust with the Devasthan Department, Udaipur on 11.5.2007. A registration certificate was issued on 11.5.2007. Subsequently, the Trust purchased/acquired certain agricultural land, got it converted and constructed school and Institute and all the documents are in the name of the Trust and none has challenged validity of indenture of trust.
2.1 Subsequently, during the course of assessment proceedings for the A.Y. 2006-07 to 20011-12 it has been observed by the AO that the trust is engaged in the activities for the personal interest of some specified persons and not for public charitable purpose as envisaged in the objects of the trust. In coming to the above conclusion, the A.O. has noticed the following violations of the relevant provisions:
4(i) A Memorandum of Understanding dated 26.11.2006 has been entered into between Dr. Ganesh Harpavat, who is the founder/Settlor of the trust and Shri Nirmal Bhandari, who was the Chairman/Managing Trustee of trust. From perusal of the MOU it is absolutely evident that the trust's activities were not for the purpose of charity and though apparently object of the trust was not for profit motive but in reality the activities of trust was to run in such a manner so as to provide personal benefit to settler and chairman of the trust.
(ii) On perusal of the MOU between Ld DR. Ganesh L. Harpavat and Shri Nirmal Bhandari it is seen that the Settlor and the Managing trustee/the Chairman will be 50-50% partner in the project, which further indicates that
(a) The trust was engaged in the activities not with the charitable purpose thereby in violation of object clauses of trust deed.
(b) The trust was/is not formed for charitable purpose but for personal benefit of these two persons which was to be shared 50-50%. Even when there is no profit, then also the personal benefit 5 will be taken by way of so called remuneration by Shri Nirmal Bhandari and interest @ 9% on investment by Dr. Ganesh Harpavat. This is in violation of provisions of sec. 13(3) of the IT. Act.
iii) On perusal of copy of bank account with AXIS Bank Ltd. and Oriental Bank of Commerce, it has been observed that substantial amount is found transferred in the name of Shri Nirmal Bhandari, which is in violation of section 13(3) of the IT. Act.
iv) Further it has also been found that the trust has accepted loan of Rs. 12.55 Crore from Dr.Ganesh Harpavat and Smt. Kiran Harpavat, the non-resident, in violation of provisions of FCRA 1976 (now FCRA 2010). The loan of Rs. 12.55 Crore has now been claimed to have been converted in to donation/contribution towards corpus fund w.e.f. 02.03.2011. However, the issue of acceptance of foreign funds in violation of FCRA 1976 (now FCRA 2010) still exist."
2.2 Accordingly, the ld. CIT issued a show-cause notice, in the form of letter No. 3619 dated 15.01.2014, requiring the trust to furnish reply or explanation with proper supporting evidence in respect of above mentioned issues. The show cause notice was 6 replied through Shri O.P. Chaplot, ld. A.R. of the trust, who filed submissions dated 05.02.2014, 11.02.2014 and 19.02.2014. But the Commissioner did not agree and has reasoned that how the Trust deed can be executed on 11.02.1991 purchased on 27.11.2006 on a stamp paper of the denomination of Rs. 100/-. Moreover, he has also found that the stamp paper was issued by the Treasury to the Stamp Vendor as late as on 16.11.2006. it is found that Dr. Ganesh Harpavat & Dr. Kiran Harpavat have executed a Memorandum of Under -standing [MOU] on 26.11.2006 which is duly Notarized by Notary vide Registration No. 662, Udaipur.
Further this MOU and irregularity in the books of accounts have been confirmed in the various E-mails exchanged between Shri Nirmal Bhandari and Dr. Ganesh Harpavat. This MOU so executed has, inter-alia, the following clauses:
"1. First Party alongwith with his wife Dr. Kiran Harpavat has formed Trust in 1991 viz., Harpavat Charitable Trust ; Regd. Office Bhandari Mansion, Opp. Town Hall, Udaipur (Raj.)
2. This regd. Trust has bought agriculture land at village Balicha, Opp. Sneh Resorts in 2003. From the funds sent by the first party in name of this trust.7
3. Second Party has done change of land use from agriculture to educational purpose, convert this land from agriculture to educational purpose, develop this land, take permission for front side road construction, approved the map for school building.
4. First party is sending money from USA in name of the trust and second party is looking after the construction of school building on that i.e. First Party is Financer & Second Party is working party.
5..........................
6. First and Second party is willing to start school on this land at Balicha.
7. It has been mutually decided between First and Second Party that they will be 50-50% partner in this project and First party will invest the funds required for that and second party will be as working partner, (emphasis now supplied)
8. It has also been decided that Second Party will draw the funds out of this trust account as advance as and when required or on monthly basis not exceeding Rs. 50,000/- P.M. or Rs. 6,00,000/-P.A. till the project does not become profitable, (emphasis now supplied) 8
9. First Party will charge interest on their investment @9% from the date of funds remitted to this trust account from USA after 2003. But First Party will not draw this interest on their investment till school does not become profitable, (emphasis now supplied)
10. When School will be in profitable position then First Party's accumulated interest will be paid to them in installments as per mutual discussion between First and Second Party subject to amount of profit.
11. Second Party's advance will be adjusted out of profit in installments as per mutual discussion between First and Second Party subject to amount of profit.
12. If in any case Trust sell this land and building apartment thereto then profit out of that will be shared between First and Second Party after adjusting interest accumulated portion of first party and Second Party advance amount out of that. Net Profit whatever it comes will be divided 50-50% between First and Second Party.
13. Second Party is Chairman of Harpavat Charitable Trust and First Party is author of the trust. This relationship will continue till this project is in operation.9
14. Second Party is Chairman of this trust so he will be Managing Trustee/ Director for running of this school project.
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16...........................
17.........................................
18.............................
19. if at any time First and Second Party want to terminate this memorandum of understanding between each other, then financial settlement between each other will be on mutual basis, on the basis of year's contribution for this project either as Financer and as Working Partner. If any dispute on financial mutual settlement arises then clause No. 17 will apply to this MOU.
20. This Memorandum of understanding will be in force till this school project/Educational institution are in operation."
2.3 Against this, the ld. A.R. has submitted that the MOU dated 26.11.2006 is a waste paper, illegal and void ab-initio as it is not for and behalf of the assessee trust and the Board of trustees have neither authorized nor approved or acted upon this document. He further submitted that the so-called MOU was not between the 10 Settler and managing trustee but was between two individuals, in their individual capacity. Rather, the assessee trust was unaware of such MOU. There was no evidence of alleged sharing of income of the school. Subsequently, this MOU was cancelled by Shri Nirmal Bhandari, who also resigned on 1st May, 2010, but the school is still in operation. However, the ld. CIT after mentioning the above noted points in the MOU has found that the submissions of authorized representative is not correct as per the obtaining facts on record. He has given point-wise reasons in paras 7 to 10 of his order and has finally cancelled the registration dated 25.05.1991, from F.Y. 2006-07 onwards vide the impugned order dated 10.3.2014. The assessee-trust is aggrieved and has filed this appeal.
3. We have heard the rival submissions and have carefully perused the entire material on record. Both the parties have reiterated their earlier arguments for and against. The oral submissions made by the ld. A.R. of the appellant trust Shri N.R. Ranka, Sr. Advocate, are concentrated in the following written submissions filed by him and which reads as under:
11"(i) The so called "Memorandum of Understanding"
(MOU) (PB 45-48) dated 26.11.2006 is a waste paper, is bad, illegal, in-operative, non-existent and void ab- initio. It is not witnessed by two independent witnesses and is not an agreement or contract. It is apparent that the alleged MoU is in between (i) Dr. Ganesh Harpavat and (ii) Mr. Nirmal Bhandari. It is not for and on behalf of the assessee Trust and the Board of Trustees have neither authorized nor approved or acted upon. The Board of Trustees too had no such power and competence to enter into such MoU. Dr. Ganesh Harpavat, in terms of the Deed of Declaration of Trust, had no right, power, competence and authority to enter into the said MoU for and on behalf of and on account of the assessee -Trust. Similarly, Mr. Nirmal Bhandari had not entered into the so called MoU for and on behalf of and on account of the assessee -Trust. He had no authority, power or competence to enter into such MoU for and on behalf of and on account of the assessee Trust. Both the signatories might have entered into such MoU in their individual capacity with its no effect on the assessee Trust. The assessee-Trust was unaware of such MoU and has not approved. It has not been acted upon and remained as a unenforceable waste paper.
12It is asserted in unequivocal words that Indo American Public School is the product unit and activity of the assessee Trust alone. It has been established by the Assessee Trust in achievement of its objects and has been and is continuously run and carried on by the Board of Trustees and not by Mr. Nirmal Bhandari individually. As recorded in the so called MoU, there is no partner in Indo American Public School but it is a proprietary concern of the assessee-Trust. There is no evidence as to alleged sharing of income of Indo American Public School. In case the Id. Assessing Officer or your honour have noticed any sharing in accordance with the terms and conditions of the so called MoU by the assessee Trust, we request to provide the same. We as sure to adduce evidence in rebuttal. However, it is reasserted that no part of income/receipt of Indo American Public School has ever been parted with the said two persons.
Whatever amount has beer, given to the Chairman of the trust. Mr. Nirmal Bhandari. Chartered Accountant is by way of remuneration, as authorized by the Trust and not in accordance with the term No.8 of the so called MoU. Similarly, no interest whatsoever has been provided or paid or credited to the account of Dr. Ganesh Harpavat. Verification may please be made from both of them directly. Their addresses are on records.
13It may also be mentioned that Mr. Nirmal Bhandari resiged from 1st May, 2010 and since then is not Chairman of the Trust. Present Chairman is Prof. Aventi Lai Harpavat, an educationist. It may be mentioned that Indo American Public School is in operation till date but without Mr. Nirmal Bhandari as Chairman of the Trust. He is not Managing Trustee/Director for the school/Institute. Whatever appointments have been made, have been made by the Board of Trustees and not by Dr. Ganesh Harpavat and Mr. Nirmal Bhandari.
When Dr. Kiran Harpavat, co-author of assessee-trust came to know of the so called MoU, she was surprised and immediately sent a letter dated March S. 2010 (PB
49) to Mr. Nirmal Bhandari stating therein that the so called MoU has no legal standing and is cancelled and revoked in its entirety and it is not binding on Harpavat Charitable Trust in whatsoever manner possible. She also stated: "You misled Dr. Ganesh Harpavat in signing this ill-prepared MOU for your own profit. Dr. Ganesh Harpavat has no profit motive and he only wants to serve his motherland without any profit desire". The so called MoU was declared as null and void from its inception. It is duly notarized by Notary Public, Taxas, USA. Dr. Ganesh Harpavat also sent a letter dated 3.5.2010 (PB 50) to Mr. Nirmal Bhandari revoking and 14 cancelling the MOU in its entirety. He also declared it as null and void and not binding on any one of them and the Trust. He restated that the assessee trust is charitable, not for profit organization and it has no motive of making any kind of profit. It is duly notarized by Notary Public, Taxas, USA. No verification was made from both, though request was made.
As stated herein above, the so called MoU is not between the settler and Managing Trustee/Chairman of the Trust but by two individuals. Further, there is no evidence of profit earning from the school and sharing by the two. It is declared in unequivocal words that the assessee-Trust exists solely for educational purposes and not for purposes of profit and further that the sole and dominant nature of the activity of the assessee-trust has been and is education and assessee- Trust all throughout exists solely for the purpose of imparting education without any profit motive. There is no sharing of profit and there is no violation of provisions of sec. 13(3) of the I.T. Act. In case your honour have any material in support of alleged violation of provisions of sec. 13(3) of the Act, we humbly request to pin pointedly provide such material. We reserve our right for rebuttal. No specific material was provided.
15Along with reply dated 11.2.2014 (PB 86) a certificate from Mr. Nirmal Bhandari dated 6.2.2014 (PB 87) was submitted with a request to make verification directly which was intentionally not done. Copy of letter dated 11.2.2014 along with certificate of Mr. Nirmal Bhandari (PB 86 - 87).
(ii) Withdrawals from the banks were duly explained.
Withdrawals made have been duly recorded in the regular cash book and have been utilized for the educational purposes of the Trust. Books are audited. Cash withdrawals from the bank account of the Trust with Oriental Bank of Commerce have been recorded in the cash book and have been utilized for the objects of the Trust. Books were carried on the date and can be reproduced. There are no irregularities, each entry is fully explainable. No violation was noticed by the Chartered Accountants. Otherwise also notified entries are only for the F.Y. 2006-07 and none for the subsequent years. Details of cash book for withdrawals from the Banks and its utilization for the objects (PB 51
- 70) 16
(iii) A show cause notice from FERA was received. Reply dated April 20, 2011 was sent by speed post to the Under Secretary containing all the information required in the questionnaire. In the said reply, it was also stated: "In May, 2007 our ex-chairman Mr. Nirmal K. Bhandari who is a registered chartered accountant, had submitted our FC - 8 application with the Ministry of Home Affairs, New Delhi to register and seek permission to accept funds from Drs. Ganesh and Kiran Harpavat for building the Indo-American Public School in Village Balicha, Udaipur, Rajasthan. A copy of this application is attached herewith (Annexure-1). Mr. Bhandari has resigned from the Chairmanship w.e.f. May 1, 2010 and as of to date Mr. Bhandari has not given us any information about the status of this application. Therefore, last month we have re-applied for the FCRA registration FC -8, prior permission FC-1A and condonation for any possible and unintended oversights by Mr. Bhandari with the Ministry of Home Affairs. New Delhi". The amount so received has been chanalized by the banking channel in accordance with the law as per understanding of the than Chairman at the relevant time. Though it is more than 33 months, no further action has been taken by the concerned authority. We have reasons to believe that the proceedings have been dropped and post permission has 17 been granted. We submit there was no willful or intentional default or violation. There was no mens rea. Act was bonafide not malafide. Technical default, if any, is highly regretted. Copy of show cause notice (PB 71 - 74). Detailed reply was filed (PB 75 - 85). On satisfaction, no action taken though it is more than three years. The loan was converted into donation.
4. The assessee-Trust received a letter dated 12/2/2014 from the Income-tax Officer (Tech.) which was duly replied by reply dated 19.2.2014, wherein pointed E-mails were explained and clarified. Request was made to seek further clarifications from the senders which was not done. Copy of letter and reply (PB 88 - 97).
5. The learned Commissioner of Income-tax in para 7.5 of the impugned order has referred to the general power of attorney dated 27.11.2009, which was not referred to in the show cause notices or/and during the proceedings. Drawing of adverse inference is bad. It be excluded, is in violation of principles of natural justice. Otherwise also it does not supports the claim of the learned Commissioner of Income-tax. There is no evidence of assessee-trust being run for the personal profit of Dr. Ganesh 18 Harpavat and Nirmal Bhandari. The assessee-trust since commencement is run for education purposes and as per the objects of the assessee- Trust. Finding to the contrary is without material and bad. The allegation is emphatically denied and objected to. Copy of General Power of Attorney (PB98-
102).
6. The Trust is registered u/s. 12A in 1991 and not u/s. 12AA. Section 12A was inserted in the statue book by the Finance Act, 1972 w.e.f. 1.4.1973. It was omitted and was again restored w.e.f. 1.4.1989. Section 12A, as it stood at the time when it provided for registration of trust, nowhere provided for cancellation of the registration once granted. It is also pertinent to note that the words "such trust or institution is registered under section 12AA" were also substituted in this section with effect from 1st April 1997. In fact, this section even now nowhere stipulates about the cancellation or withdrawal of the registration, once granted under the said section. It is only under section 12AA, which came in the statute book with effect from 1st April, 1997, that a fresh procedure for registration of the trust or institution is prescribed. Even under this section 12AA, there was no provision for cancellation of registration once granted 19 till the enactment of sub-section (3) with effect from October 1, 2004. There is no dispute with regard to this fact that the provision regarding cancellation of registration came to be introduced for the first time by virtue of sub-section (3) in section 12AA with effect from October 1, 2004. This sub-section (3) provides that when 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.
A plain reading of this provision would show that section 12AA empowered the Commissioner of Income- tax to grant the registration in those cases where the assessee applied for such registration under subsection (1) thereof. But this power of cancellation of registration obtained under section 12A came to be incorporated by way of amendment introduced by the Finance Act, 2010, with effect from June 1, 201O. That being the interpretation of sub-section (3), it is amply clear that the power to cancel the registration once granted was only confined to the registration granted 20 under clause (b) of sub-section (1) of section 12AA till before June 1, 2010. Of course, now with effect from June 1, 2010, the power vests with the Commissioner even to cancel the registration granted under any of the clauses of sub-section (1) of section 12A. In that view of interpretation, we submit that there is no power vested with your honour to cancel or withdraw the registration granted to the assessee under section 12A(a) in the year 1994. Therefore question of cancellation prior to 1.6.2010 does not arise. It would be without jurisdiction and is objected to. We submit registration so granted cannot be cancelled till 30.5.2010. (Please refer Director of Income-tax(Exemptions) v. Mool Chand Khairati Ram Trust (2011) 339-ITR-622 (Del.); C.I.T. v. Manav Vikas Sewa Sansthan - I.T.A. No. 161 of 2009, decided on February 24, 2010 (2011) 336-ITR-250 (AIL).
4. Per contra, the ld. CIT-DR, Dr. Sehgal has repeated all the reasons which have been narrated by the ld. CIT(A) in the appellate order.
5. We have found that the bone of contention between the assessee-trust and the revenue, which has propelled the ld. CIT(A) to withdraw/cancel registration already granted u/s 12A is mainly 21 the existence of MOU. The objects of the Trust are still considered to be charitable in nature. It is the conduct, as per the department, of the settler and the Managing Trustee, in which they conducted themselves in executing the alleged MOU which has changed the charitable purpose to non charitable one. We may mention that no irregularity in the imparting of education via its secondary school or the B Ed. College has been alleged.
6. After considering the rival submissions with regard to the validity of the MOU [copy enclosed at paper book pages 4-48] dated 26.11.2006, we are also convinced that this is simply a waste paper.
The MOU suffers from various requirements. It has not been witnessed by the two independent witnesses. This MOU is between Dr. Ganesh Harpavat and Mr. Nirmal Bhandari. This MOU has nothing to do with the appellant trust. We are satisfied that there is no iota of proof regarding the fact that the Board of Trustees have neither authorized nor approved. This MOU has not even been acted upon. We have found that Dr Ganesh Harpavat had no right, power competence or authority to execute such a MOU for and on behalf of and on account of the assessee-trust. This MOU, 22 apparently, is a document which can, at best, bind two individuals but not the assessee-trust. There is no evidence to a whit to establish that there has been sharing of income of Indo-American Public School. Moreover, Shri Nirmal Bhandari had resigned w.e.f.
1st May, 2014 and since then he is not the chairman of the trust. On knowing about this MOU Dr. Kiran Harpavat the co-author of the trust deed, has exclaimed the existence of the same and has even attributed motives to Mr. Nirmal Bhandari. Subsequently, vide letter dated 3.5.2001. Ld DR. Ganesh Harpavat has also revoked and cancelled this MOU in its entirety. Thus, we are not convinced that through this MOU they shared any profit from the income of the schools. We are convinced that the trust is being run for charitable purpose only. The trust is being run for imparting education without any profit motive. Therefore, there is no violation of the provisions of section 13(3) of the Act. Regarding the show cause notice from FERA seems to be non-issue as no action has been taken thereon after the reply filed from the side of the Trust. The post dated stamp paper on which the deed was typed a fresh seems to be palpable explanation and no adverse inference should be drawn from this fact. Therefore, we have found that the 23 activities of the Trust are being carried out only for charitable purpose and not for the personal benefit of the founder and the Chairman. We have found that there is no violation of section 13(3) of the Act. The cash withdrawals made have also been properly explained. Why the cash withdrawals were not utilized towards the activities of the Trust has not been well reasoned by the ld. CIT(A).
The default under FCRA has been properly explained to the concerned authority and the CIT. Having come to the above conclusion, we will not enter into the nitty-gritty of whether the registration granted in the year 1991 can be cancelled under the new provision or not. Accordingly, we set aside the order of the ld.
CIT(Admn.) dated 10.3.2014 passed u/s 12AA(3) r.w.s. 293C cancelling the registration granted u/s 12A vide order dated 25.05.1991. We restore the registration dated 25.05.1991 and allow the appeal of the assessee-trust.
247. In the result, the appeal of the assessee stands allowed.
Order Pronounced in the Court on 22 nd May, 2014.
Sd/- Sd/-
(N.K.SAINI) [HARI OM MARATHA]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 22 n d May, 2014
VL/-
Copy to:
The Appellant
The Respondent
The CIT By Order
The CIT(A)
The DR
Assistant Registrar
ITAT, Jodhpur