Case Law Details
Registration Under Section 12A of Income Tax Act, 1961 can not be cancelled Merely because some amount has been spent by assessee-society which is not in accordance with its aims & objects
Cancellation of Registration U/s. 12A for expenditure not related to aims & objects ?
IN THE ITAT RANCHI BENCH
Institute of Science & Management
v.
Commissioner of Income-tax, (Central), Patna
IT Appeal No. 13 (Ranchi) of 2011
MARCH 12, 2012
ORDER
B.R. Mittal, Judicial Member
This appeal is filed by assessee against order of Ld. CIT (Central) dt. 29.6.2011 vide which he has cancelled the registration of assessee society u/s. 12AA(3) of the Income-Tax Act, on following grounds:
“1. For that the learned CIT, Central, Patna has erred in canceling registration granted by the then CIT u/s 254 (1)/12AA dt. 27.9.2001.
2. For that the learned CIT Central, Patna has erred in cancelling the registration which was directed to be granted by the order of Hon’ble Tribunal and hence the CIT has no jurisdiction/authority to cancel the registration granted to the appellant at the instance of Hon’ble Tribunal.
3. For that the learned CIT, Central, Patna has erred in relying on the findings contained in the assessment order for A.Ys. 2003-04 to 2009-10 as well as on order of DGIT (Inv.), Patna dated 29.12.2010 withdrawing the approval u/s 10(23C) granted vide notification dated 29.04.2009 by the then CCIT, Ranchi.
4. For that the learned CIT, Central, Patna has violated the principles of equity, natural justice and fair play by not confronting the appellant with the findings and material used for the purposes of canceling the registration in the order impugned.
5. For that the learned CIT, Central, Patna has erred in holding that vide notice dated 15.02.2011 (wrongly noted as 03.03.2011 in the order impugned) the appellant was required to prove the genuineness of work carried out by the institution.
6. For that the notice dated 15.02.2011 bearing no.4742 (copy enclosed) merely requires the presence of the appellant on captioned subject and was signed by the headquarters of the commissioner and not by the Commissioner himself that too without assigning any reason whatsoever and/or without confronting the appellant on the material/evidences/findings used while passing the order impugned.
7. For that the order passed is violative of principles of equity natural justice and fair play.
8. For that the whole order is ab-initio void for want of compliance to the rule of natural justice.
9. For that the learned CIT, Central, Patna has erred in holding that the activities of institution are not being carried out in accordance with the objects of the institution.
10. For that the learned CIT, Central, Patna has not brought on record contravention of any of the objects by the appellant.
11. For that the learned CIT, Central, Patna has failed to appreciate that the appellant’s society exists solely for educational purposes and no other activity has been found in course of survey and / or establish by the department at any point of time.
12. For that the learned CIT, Central, Patna has erred in holding that the appellant is engaged in business activities raising surplus income year after year.
13. For that the learned CIT, Central, Patna has ignored the provisions of law and the circular issued by CBDT while alleging carrying on of business activity and surplus.
14. For that the learned CIT, Central, Patna has failed to appreciate that surplus, if any, cannot be a ground for alleging carrying on of business activities.
15. For that the learned CIT, Central, Patna has erred in holding that the appellant is making payment to salary of office bearers which is disproportionately high.
16. For that the learned CIT, Central, Patna has erred in holding that funds have been utilized by the office bearers for personal purposes.
17. For that the observation of CIT that funds have been utilized for personal purposes of office bearers is wholly misconceived and contrary to the records of the appellant’s case.
18. For that the learned CIT, Central, Patna has erred in holding that expenses on guest entertainment is inadmissible whereas the facts remains that the same has been incurred for achieving the aims and objects of the appellant.
19. For that the learned CIT, Central, Patna has failed to appreciate that the condition precedent for invoking section 12AA(3) is absent in the appellant’s case and hence cancellation of registration is wrong, illegal and unjustified on the facts and in the circumstances of the appellant’s case.
20. For that the whole order is bad in facts and law of the case and is fit to be modified.
21. For that the other grounds, if any, shall be urged at the time of hearing of the appeal.
2. The relevant facts are that assessee is a society registered under the Societies Registration Act and formed on 30.9.1986. A copy of Memorandum of Association alongwith certificate of registration is placed at pages 73 to 91 of the Paper Book. On perusal of copy of Memorandum of Association, it is observed that there are various objects mentioned but dominant object of the assessee society is to impart education by running an institute namely “Institute of Science and Management (ISM). It is observed that assessee society was granted registration u/s. 12A/12AA of I.T. Act on 27th September, 2001 with effect from 1.4.2000. A copy of the said certificate is placed at page 23 of Paper Book.
3. Ld. CIT has stated in the impugned order dt. 29.6.2011 vide which he has cancelled the registration of assessee society that there was a search and seizure operation u/s. 132(1) of the I.T. Act in the residential premises of R.A.K. Verma group of cases on 20.3.2009 and subsequent dates. Along with said search and seizure operation, a survey operation u/s. 133A of the I.T. Act on 20.3.2009 was also carried out in the case of the assessee. He has stated that order u/s. 143(3) was passed on 30.12.2010 for assessment year 2009-10 and orders u/s. 153C r.w. s 143(3) were passed on 30.12.2010 for assessment years 2003-04 and 2008-09.
4. Ld. CIT has stated that assessee was granted approval for exemption 10(23C)(vi) of I.T. Act vide notification dt. 29.4.2009 but the same was withdrawn vide order of DGIT(Investigation) Panta dt. 29.12.2010, as it was noticed that assessee had contravened the provisions of Sec. 10(23C) of I.T. Act. It is relevant to state that Ld. CIT has stated the following reasons to form an opinion that activities of the institute were not been carried out in accordance with the objects of the institution.
“1. That salary has been paid to Shri RAK Verma, Chairman of the Institute of Science and Management in contravention of Sec. 13(3) of the I.T. Act, 1961.
2. That Rs. 2,40,000/- had been paid to Smt. Jyoti Verma, wife of Sh. RAK Verma, Chairman of Institute of Science and Management during F.Y. 2008-09.
3. That huge amount had been withdrawn by Shri RAK Verma and other office bearers/employees in the name of ‘Administrative expenses’. No details or bills etc. had been submitted by the assessee during the course of assessment proceedings to justify these withdrawals under the guise of “Administrative Expenses”. These amounts were nothing but defalcation of fund of the society by the members/and office bearers of the society.
4. That assessee had debited Rs. 3,07,175/- under the head ‘Student Activities & Welfare’. It was noticed that a substantial amount was being charged from the students under the head ‘Placement Charge’ which was spent on various officials and management personnel for their entertainment, wine and food under the head ‘Guest Entertainment Expenses’. Such expenses on entertainment are not allowable under the I.T. Act, 1961.
5. That the Institute had paid Rs. 11,32,000/- in F.Y. 2006-07 and Rs. 38,240/- on 25.2.2009 as advance to Shri B.K. Singh for construction of girls’ hostel. Since the girl’s hostel was a rented premises and the land lady was Mrs. Jyoti Verma, wife of the Trustee/office bearer of the Institute himself, this expenditure was personal in nature and had been paid in contravention of Sec. 13(3) of the I.T. Act, 1961.
6. That the assessee had contravened provisions of Sec. 11(1) and 11(5) of the I.T. Act 1961 as apparent from assessment orders for 2003-04 to 2009-10. Compliance to the provisions of Sec. 11(1) and 11(5) are essential conditions for availing exemption u/s. 11 of the I.T. Act, 1961.
7. That the surplus of income of the assessee generated over the period is as under:
Year |
2004-05 |
2005-06 |
2006-07 |
2007-08 |
2008-09 |
|
Excess of income over expenditure |
Rs.3466026/- |
Rs.806354/- |
Rs.6816587 |
Rs.1,41,01,153/- |
Rs.11891451/- |
|
Percentage |
22.13% |
25% |
28.825 |
41.48% |
35.98% |
From the above, it is quite apparent that the Institute had been earning huge income over the period of time. The main source of such surplus income is to be attributed to the fees taken from the students for their participation in different courses.”
5. In view of above reasons, Ld. CIT cancelled the registration of the assessee-society granted u/s. 254(1)/12A/12AA of I.T. Act dt. 27th September, 2001. Hence assessee is in appeal before Tribunal disputing the said order of Ld. CIT.
6. On behalf of the assessee submissions were made firstly disputing the validity of the notice issued u/s 12AA(3) of the Income-Tax Act and secondly disputing the action of the Ld. CIT to cancel registration granted to the assessee society.
7. In respect of validity of validity of notice issued, Ld. AR referred to page 20 of Paper Book and submitted that said notice dt. 15.2.2011 was issued by Income Tax Officer stating the subject matter as cancellation of registration u/s. 12AA(3) of I.T. Act and asking the assessee to appear before Ld. CIT either personally or through its authorized representative. He submitted that in the said notice no reasons have been given on the basis of which registration is proposed to be cancelled. He further submitted that notice issued was not under the signature and seal of Ld. CIT and therefore, Ld. CIT has not assumed jurisdiction to proceed to cancel registration granted to the assessee. Ld. A.R. submitted that in response to notice dated 15.2.2011, assessee filed a reply dt. 3.5.2011, copy placed at page 21 and 22 of paper book wherein it was stated that assessee society is carrying on its activities for charitable purposes i.e. education as per section 2(15) of the Income-Tax Act and also requested that if any clarification is required, adequate and reasonable opportunity may be granted to enable the assessee to furnish the same before any adverse order is passed. Ld. A.R. submitted that no further and adequate opportunity was granted to the assessee and Ld. CIT has cancelled the registration by the impugned order dated 29.6.2011. Ld. A.R. submitted that purpose of notice issued u/s 12AA(3) is analogues to notice issued u/s 263 of Income-Tax Act by CIT. He relied on the decision of Hon’ble Madhya Pradesh High Court in the case of CIT v. Sattamdas Mohandas Sidhi [1998] 230 ITR 591/96 Taxman 263 and decision of Hon’ble Gujarat High Court in the case of Garden Silk Mills Ltd. v. CIT [1996] 221 ITR 861 submitted that it has been held that if the notice issued u/s 263 is not under the seal and signature and/or if notice issued, suffers from want of details on the basis of which Ld. CIT assumes jurisdiction that the order of the assessing officer is erroneous and prejudicial to the interest of revenue, on this very ground, the assumption of jurisdiction by Ld. CIT u/s 263 of the Act has been held to be invalid, illegal and order passed by Ld. CIT u/s 263 of the Act was quashed. The Ld. A.R. submitted that similar view has been taken by ITAT, Patna Bench in the case of Satish Kumar Keshri v. ITO (Technical) [2007] 104 ITD 382.
8. Ld. A.R. further submitted that the impugned order has been passed by Ld. CIT canceling the registration without confronting the assessee with the material used against it. Hence, there is violation of principle of natural justice and relying on the decision of the Hon’ble Patna High Court in the case of Ramanand Prasad v. State of Bihar 1983 BR&LJ 84 submitted that the order is liable to be annulled.
9. Thus Ld. A.R. has disputed validity of notice on 3 grounds i.e. (i) letter dated 15.2.2011 was not issued under seal and signature of the Commissioner of Income-Tax, (ii) Assumption of jurisdiction without a detailed show cause notice is invalid from its inception and (iii) non confrontation of materials/evidences relied upon for passing the impugned order.
10 (i) Without prejudice to above, Ld. AR submitted that grounds taken by Ld. CIT for cancellation of registration are not valid. He submitted that with regard to violation of Sec. 13(3) of I.T. Act considered by Ld. CIT owing to payment of salary to RAK Verma and his wife Smt. Jyoti Verma, Ld. CIT has misunderstood the intent and purport of Sec. 13(3) of the Act. He submitted that he has over looked provisions contained in sub-section (2) of Sec. 13. Ld. AR referred to clause (c) of sub-section (2) of Sec. 13 of the Act and submitted that if an amount is paid by way of salary in excess of reasonable sum, can only be deemed to have been used or applied for the benefit of person referred to in sub-section (3) of Sec. 13 of I.T. Act. Therefore, payment to the extent it is reasonable is not hit by section 13. He submitted that Ld. CIT has not disputed that Shri RAK Verma is Chairman and looking after day today affairs of the institute in his managerial capacity as Head of the Institution and as a teacher. Further it is not specified by the department as to what extent salary paid to Shri Verma is unreasonable and/or has not quantified the reasonable salary for the services rendered by Shri Verma. Ld. AR further submitted that Mrs. Verma is actively involved in the affairs of the institute of assessee as Counselor for admission. She is devoting 10-12 hours a day including holidays. He submitted that Mrs. Verma involved in the affairs of institute since long but has been paid salary for the first time in financial year 2008-09 amounting to Rs. 2,40,000/-. Ld. AR submitted that rendering of services by Mrs. Verma has not been disputed by department nor it has been specified by department as to what extent, the salary paid to Mrs. Verma is unreasonable and/or how much salary is reasonable for the services rendered by her. He submitted that allegation of violation of Sec. 13(3) of the I.T. Act with regard to payment of salary is devoid of any merit.
10(ii). Ld. AR further submitted that with regard to Administrative expenses, it represents various petty expenses incurred in achieving aims and objects of the assessee society. He submitted that this ground has been taken by department in view of Accountant’s statement recorded u/s. 133A but no opportunity was given to cross examine the said accountant and hence it is not an admissible evidence. Ld. AR submitted that AO while passing assessment orders disallowed entire expense on the ground that same had been spent against the aims and objects of the Trust and for personal use of office bearer/employees but no specific item has been identified in any of the years except one item that too under the head travelling expense which has been utilized against the aims and objects and/or spent for the benefit/personal use of the office bearers/employees. Ld. AR further submitted that Revenue relied on one impounded document bearing Identification mark S-5 at page 17 & 18 dt. 30.6.2007 which is of Rs. 3,734/- on private tour of Shri Verma and Mrs. Verma. He submitted that Shri Verma undertook travelling to various cities including Kolkata for admission and placement of students. That in one such trip, Mrs. Verma who was involved in the affairs of the institute as Counselor for admission accompanied him and while returning, one of his daughter also jointed from Kolkata to Ranchi. He submitted that since Mrs. Verma was involved in the affairs of the Institute since long and no remuneration/salary was paid to her prior to financial year 2008-09 and as a good gesture, it was thought fit and proper not to take reimbursement of expense incurred on travelling of Mrs. Verma and her daughter. Ld. AR submitted that disallowance under this head has been made by AO while making the assessment on adhoc basis @ 25% and thus the incurring of expense for achieving aims and objects of assessee society has not been denied.
10(iii). Ld. AR further submitted that in respect of debit of Rs. 3,07,175/- under the head student activities and welfare, collection of placement charges and expenditure under the head guest entertainment, there is no disallowance made by AO while passing assessment order for assessment year 2009-10 in respect of expenses incurred under the head student activities and welfare. He submitted that collection of placement charges from the students have not been found to be suppressed and/or have not been held to be charged illegally and/or charged not for the purposes of education. He further submitted that as far as expenses incurred on guest entertainment, the AO while passing assessment orders for assessment years 2003-04 to 2007-08 and 2009-10 has disallowed 25% of the expenses on the ground that “it is noticed that a substantial amount is being charged from the students under the head ‘placement charge’ which is spent on various officials and management personal for their entertainment, wine and food under the head ‘guest entertainment expense’. This kind of activity of serving wine does not allowable under the I.T. Act” . He submitted that it is not the case of AO that the expenditure is not genuine and/or are not vouched and verifiable. He submitted that the very fact that AO has allowed 75% of the expenditure, it proves that expenditure has been incurred for the purpose of achieving aims and objects of the assessee society i.e. imparting of education. He submitted that in respect of expenditure incurred on wine and food spent on various officials and management personnel is not allowable under the I.T. Act as per AO but the same is not hit by Explanation to Sec. 37(1) of I.T. Act as incurring of such expenditure is not an offence or is prohibited by law. Ld. AR further submitted that total of such expenses is only Rs. 2,490/- and stray example of consumption of liquor by the guest cannot be a ground for cancellation of registration.
10(iv). Ld. AR further submitted that in respect of payment of Rs. 11,32,000/- and Rs. 38,240/- to Shri B.K. Singh, it was an advance for construction of girl’s hostel which is in consonance to the object of the assessee society. He submitted that institute run by assessee is a co-education and the admission is being done on the basis of All India test. The girl candidates generally face problem in getting hostel. The assessee society decided to construct girl’s hostel in the building of Mrs. Verma and in this respect an agreement was executed on 10.1.2005 under which Mrs. Verma agreed to give upper open space of the building for construction of girl’s hostel. Ld. AR referred pages 53 to 57 of Paper book which is the copy of said agreement and submitted that ground floor and first floor of the said building had already been given to assessee society for hostel purposes. Therefore, the said advance was towards constructing girl’s hostel and the adverse inference drawn by Ld. CIT that substantial amount was advanced by assessee society to Mrs. Jyoti Verma for personal purposes is contrary to the facts. He submitted that there is no contravention of Sec. 13(3) of I.T. Act.
10(v). Ld. AR further submitted that objection of Ld. CIT that there is contravention of Sec. 11(3) of I.T. Act on the ground that surplus fund beyond reasonable proportion is not factually correct. He submitted that clause (a) of sub-section (1) of Sec. 11 permits accumulation upto 15% and explanation below sub clause (d) permits accumulation even beyond 15% in certain circumstances. Ld. AR submitted that details given by Ld. CIT at page-2 of impugned order to work out percentage of surplus is without considering the capital outlay. Ld. AR relying on the decision of Apex Court in the case of S.RM.M. CT.M. Tiruppani Trust v. CIT [1998] 230 ITR 636/96 Taxman 635 submitted that capital outlay expenses are application of fund. Ld. AR submitted that if capital outlay expenses and depreciation is considered, the percentage of accumulation is within permissible limit prescribed under the Act. Therefore, the said ground considered by Ld. CIT for cancellation owing to some surplus is not justified. Ld. AR further referred decision of Hon’ble Bombay High Court in the case of Vanita Vishram Trust v. Chief CIT [2010] 327 ITR 121/192 Taxman 389 and the decision of Hon’ble Punjab & Haryana High Court in the case of Pinegrove International Charitable Trust v. Union of India [2010] 327 ITR 73/188 Taxman 402 and also decision of Apex Court in the case of American Hotel & Lodging Association, Educational Institute vs. CBDT 2008 (301) ITR 86 SC and submitted that mere existence of profit/surplus do not disqualify the institute to be called an educational institution. Ld. AR also referred CBDT Circular No. 1112 dt. 29th October, 1977 and submitted that CBDT has held that benefit of Section 11 is to be conferred to educational institution existing solely for educational purposes and even if there is some surplus at the end of the year, an educational institution is eligible for exemption. Ld. AR submitted that there is no fact brought on record by Ld. CIT that profit/surplus fund of the institute has been diverted for personal use of the office bearer of the assessee. He further submitted that objection has also been taken by Ld. CIT of contravention of Sec. 11(5) of the Act because as per opinion of AO, there was cash in hand and demand draft with the assessee society and stated that same are not the modes prescribed by Sec. 11(5) of the Act. Ld. AR submitted that demand draft are money lying in bank thus covered u/s. 11(5)(iii) of the Act. He further submitted that benefit of exemption to the extent of 15% u/s. 11(1)(a) is unfettered and not subject to any condition. Ld. AR referred to Sec. 11(2) of the Act and submitted that it does not whittle down or to cut across the exemption provisions contained in Sec. 11(1)(a) so far as accumulated income of the previous year is concerned. He submitted that only the surplus covered u/s. 11(2) are required to be invested in terms of Sec. 11(5) and the accumulation within permissible limit of 15% entails no pre-requisite condition for investment and placed reliance on the decision of Hon’ble Apex Court in the case of Addl. CIT v. A.L.N. Rao Charitable Trust [1995] 216 ITR 697/83 Taxman 252. Ld. AR also referred CBDT Circular No. 8/2002 dt. 27.8.2002 to substantiate his above submission. He submitted that there is no violation of Sec. 11(5) owing to cash in hand and demand draft are duly recorded in the books of account and the audited set of accounts.
10 (vi) Ld. AR further submitted that assessee is running an institute and till date it is recognized by AICTE. He submitted that about 450 students are studying in the institute run by assessee society. Ld. AR further submitted that assessee filed returns for assessment years 2010-11 and 2011-12 on due date claiming exemption u/s. 11 and AO has not disturbed the assessment till date. Ld. AR further submitted that it is nowhere provided under the I.T. Act that to avail exemption u/s. 11/12 of I.T. Act, education must be provided to the poor person only and/or free of cost. He submitted that conditions precedent for exercise of jurisdiction u/s. 12AA(3) of I.T. Act is absent as Ld. CIT has nowhere stated in the impugned order that activities carried on by assessee society are not genuine and/or have not been carried out in accordance with its objects. He submitted that assessee is carrying on its educational activities systematically and the receipts are utilized for the purpose of education as could be evident from the audited set of accounts filed alongwith return of income from year to year. Ld. AR submitted that the impugned order of Ld. CIT is not valid in law and same should be quashed.
11. On the other hand Ld. Departmental Representative supported the order of Ld. CIT. He submitted that there was a search and seizure operation in the premises of RAK Verma group of cases who are the managing Committee member of the society and simultaneously survey was carried out in the premises of assessee society. He submitted that pursuant to the irregularities found, notice was issued for cancellation of registration and the assessee filed its reply dt. 3.5.2011, a copy of which is placed at page 21 to 23 of Paper book. Ld. DR submitted that fair opportunity of hearing was given to assessee before cancellation of registration order was passed by Ld. CIT. Ld. DR submitted that activity of the assessee society is not in accordance with its objects as assessee was using its surplus funds for the benefit of ifs office bearers and trustees. He further submitted that if the activities are not carried on in accordance with aims and objects for which society is formed, cancellation of registration is justified. Ld. DR referred Sec. 2(15) of I.T. Act and submitted that as per amendment, if society is carrying out its activity in the nature of trade commerce or business or any activity of rendering any services in relation to any trade, commerce or business for a cess or for any other consideration, , it shall not be a charitable purpose. Ld. DR submitted that assessee is making surplus by charging higher fee from the students and therefore assessee is carrying on its activity of education in the nature of trade or business and hence it could not be considered as charitable purpose. Ld. DR submitted that Ld. CIT has rightly cancelled the registration granted to assessee society u/s. 12A/12AA of the I.T. Act.
12. In reply to submissions of Ld. D.R., Ld. A.R. referred CBDT circular no. 11/2008 dated 19.12.2008 and submitted that as per said circular it has been clarified that newly inserted proviso to section 2(15), on which Ld. D.R. has placed reliance, will not apply in respect of first 3 limbs of section 2(15)of the Act i.e. (i) relief of the poor, (ii) education or (iii) medical relief. He submitted that it was clarified that it will constitute charitable purpose even if it incidentally involves the carrying on of commercial activities. Ld. A.R. further submitted that if there is any utilization of fund which is not in accordance with aims and objects and/or in accordance with the provisions of the Act, the benefit could be denied in not giving exemption u/s 11 of the Act at the time of assessment but registration cannot be cancelled. Ld. A.R. submitted that the order of the Ld. CIT is not valid and the same should be quashed.
13. We have carefully considered the order of the Ld. CIT, submissions of Ld. Representative of the parties, the cases cited before us and have also perused relevant pages of the paper book placed before us.
14. We observe that the assessee is a society registered under the Societies Registration Act and its dominant object is to impart education by running an institute ISM. We observe that the assessee was granted registration u/s 254(1)/12A12AA of the Act on 27.9.2001 effective from 1.4.2000 and a copy of the said certificate is placed at page 23 of the paper book. We observe that there was a search and seizure operation in the residential premises of R.A.K. Verma Group of cases u/s 132(1) on 20.3.2009 and simultaneously a survey operation u/s 133A of Income-Tax Act was carried out in the case of the assessee.
15. We observe that on behalf of Ld. CIT, a notice u/s. 12AA(3) of I.T. Act dt. 15.2.2009 was issued under the signature of I.T. Officer (Hqrs.) Admn. & Tech, copy placed at P-20 of the Paper Book proposing to cancel the registration of the assessee granted u/s. 12AA of the I.T. Act. We consider it prudent to state the contents of said notice which reads as under:
“Government of India
Office of the Commissioner of Income Tax
(Central), Patna
F.No. CIT(C)/Pat/ISM, Ranchi/10(23C) &12AA(3)/2010-2011/4742 15th February, 2011
To
The Secretary,
Institute of Science and Management
ISM Campus, At: Pundag, P.O. Dhurwa,
P.S. Jagarnathpur,
Ranchi-834 004
Sir,
Sub: Cancellation of Registration u/s 12AA(3) of the Income Tax Act,1961 in the case of Institute of Science and Management ISM Campus, At: undag, P.O. Dhurwa, P.S. Jagarnathpur,Ranchi-834 004
Please refer to the above.
I am directed to inform that the Commissioner of Income-Tax (Central), Patna desires your appearance at 11.00 A.M. on 03.03.2011 itself either personally or through your authorized representative.
Yours faithfully,
Sd/-
(Indreshwar Dayal)
Income Tax Officer (Hqrs.) Admn. & Tech
For: Commissioner of Income-Tax
(Central), Patna”
16. We observe that assessee filed its reply dt. 3.5.2011 copy placed at pages 21 and 22 of Paper book. Thereafter Ld. CIT has passed impugned order dt. 29.6.2011 to cancel the registration of assessee society. Before we consider the issue as to whether the notice issued for cancellation of registration is valid or not. We consider it necessary to state Sec. 12AA(3) of I.T. Act which reads as under:
“12AA(3): Where a trust or an institution has been granted registration under clause (b) of sub-section (1) [or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No.2) Act, 1996 (33 of 1996)]] and subsequently the 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 canceling 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.]”
17. It is observed that power of cancellation of registration can be exercised by the Commissioner if he is satisfied that activities of such trust or institution are not genuine or not being carried out in accordance with the object of the trust or institution, as the case may be. The Ld. CIT before passing an order in writing canceling the registration of such trust or institution shall give a reasonable opportunity of being heard to such trust or institution. Now the question arises as to whether Ld. CIT has given reasonable opportunity to the assessee before exercising his power to cancel registration u/s 12AA(3) of the Income-Tax Act.
18. It is observed that in the notice issued dated 15.2.2011, the Ld. CIT has not given any reasons and/or indicated the basis on which cancellation of registration is proposed u/s 12AA(3) of the Income-Tax Act. We observe that when Ld. CIT assumes jurisdiction u/s 263 of the Income-Tax Act on the ground that the assessment order passed by the assessing officer is erroneous in so far as it is prejudicial to the interest of the revenue, he has to state basis in the notice as it was held by their Lordships of Hon’ble High Court of Gujarat in the case of Garden Silk Mills Ltd. (supra) that when the show cause notice issued u/s 263 of the Act do not indicate the basis on which Ld. CIT has assumed jurisdiction u/s 263 of the Act, the said notice is vague and is liable to be quashed. A similar question came before the Hon’ble Madhya Pradesh High Court in the case of Sattamdas Mohandas Sidhi (supra) where in it was held that when a notice issued u/s 263 is to be sent to the assessee, the notice should contain reasons as to how the order is prejudicial to the revenue. Their Lordships of Madhya Pradesh High Court held that if the Commissioner did not fairly indicate the grounds used by him for ordering cancellation of assessment made by the Income-Tax Officer, the Tribunal was justified in reversing the Commissioner’s order as the assessee was deprived of fair opportunity to show cause against proposed action. Further, ITAT Patna Bench in the case of Satish Kumar Keshri (supra) quashed the proceedings initiated u/s 263 of the Act as illegal and invalid on the ground that when show cause notice through which Ld. CIT assumed jurisdiction u/s 263 of the Act was not under his seal and signature and also that notice suffered from want of details on the basis of which Ld. CIT came to the conclusion that assessment order is erroneous and prejudicial to the interest of the revenue.
19. We are of the considered view that the notices to be issued u/s 12AA(3) of the Act by Commissioner of Income-Tax to proceed to cancel registration granted u/s 12A/12AA of the Act is akin to the notice to be issued by Ld. CIT u/s 263 of the Income-Tax Act, because notice to be issued u/s 263 of the Act also requires fair opportunity to be given to the assessee before Ld. CIT pass an order in respect of the assessment order passed by the assessing officer to form an opinion that the assessment order is erroneous in so far as it is prejudicial to the interest of the revenue. Similarly, Ld. CIT before passing an order u/s 12AA(3) of the Act has to satisfy himself that 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 and to proceed to cancel the registration of such trust or institution has to give a reasonable opportunity of being heard to such trust or institution and for which he has to give a notice to such trust or institution. Therefore, such notice to be issued, should contain specific reasons and/or material to be used against the assessee, so that the assessee could reply and be given a fair and reasonable opportunity before any order is passed. The Hon’ble Patna High Court has also held in the case of Ramanand Prasad (supra) that adherence to the principle of natural justice is a fundamental obligation more particularly where people are affected by the acts of authority. It was stated by their Lordships of Patna High Court that right to be heard before an adverse order is passed, which entails civil consequences, is, by implication, a duty to act fairly. It was stated that even where the order is administrative in character, an administrative order which involves civil consequences must be made consistently with the rules of natural justice after informing the aggrieved party of the case against them.
20. We observe that in the case before us, it is a fact that in the notice issued dated 15.2.2011, reproduced herein above, is not under the seal and signature of the Commissioner and it is also a fact that it does not state the reasons/materials so that the assessee could be confronted with the materials/evidences used against it before Ld. CIT assumed jurisdiction u/s 12AA(3) of the Act to cancel the registration of the assessee society. Therefore, we find merits in the contention of the Ld. A.R. that notice issued u/s 12AA(3) of the Act is not valid and accordingly the order of Ld. CIT to cancel registration of the assessee society is not valid and is liable to be quashed.
21. Not only that the notice issued u/s. 12AA(3) is not valid, we also observe that the reasons as stated by Ld. CIT on the basis of which he has cancelled the registration are not sustainable in law.
22. We observe that Ld. CIT has stated that assessee has paid salary to Shri Verma, Chairman of ISM and to Smt. Jyoti Verma, wife of Shri RAK Verma in contravention of Sec. 13(3) of I.T. Act. The department has not disputed the fact that Shri Verma is the Chairman and is engaged in the activities of assessee society on a full time basis. Further his wife Smt. Jyoti Verma is also involved in the affairs of assessee’s institute as Counsellor for admission. Ld. AR submitted that she is devoting 10-12 hours a day. The relevant clause is clause (c) of sub-section (2) of Sec. 13 which deals with payment of salary and we consider it necessary to reproduce it, which reads as under:
“If any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institutions for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services.”
23. On perusal of it, it is observed that an amount paid by way of salary in excess of reasonable, sum can only be deemed to have been used or applied for the benefit of person referred to in sub-section(3). Therefore, payment of salary to the extent it is reasonable, is not hit by Sec. 13 of the Act. We observe that department has not , as mentioned hereinabove, disputed that Mr.Verma and Mrs. Jyoti Verma are looking after day today affairs of institute. Therefore, even if there is any excess payment of salary, same is to be disallowed and the benefit of Sec. 11/12 will not be allowed to that extent. However, it is not mentioned in the impugned order of CIT and/or any material is placed on record by department to state as to whether the salary paid by assessee society to Shri Verma or Mrs. Verma are unreasonable. Therefore, ground taken by Ld. CIT in the impugned order that there is violation of Sec. 13(3) of the Act is devoid of any merit.
24. Further we observe that another ground taken by CIT in the impugned order is that huge amount had been withdrawn by Shri Verma and other office bearers/employees in the name of administrative expenses. However, Ld. AR has made his submission that various amounts under the head administrative expenses are petty expenses incurred in achieving aims and objects of assessee society. Ld. AR submitted that in the seized documents which is marked S-5, there is only one amount of Rs. 3,734/- for incurring of expenses on private tour of Mr. Verma and his family. Ld. AR during the course of hearing has made his submission that Shri Verma and Mrs. Verma had undertaken travelling to various cities including Kolkata for admission and placement of students. It was submitted that while returning, one of the daughter of Shri Verma jointed from Kolkata to Ranchi and at the most that fair could be said to have not been incurred for aims and objects of assessee society. Ld. AR submitted that AO made disallowance of travelling expenses on an adhoc basis of 25%. We observe that besides above, no details had been given as to how much amount withdrawn in the name of administrative expenses was not spent for the purpose of society. Further, we are of the considered view that if any amount has been withdrawn and not spent for the aims and objects of assessee society, the benefit of Sec.11 to that extent could not be allowed but in the absence of any such details in the impugned order, one cannot go to the conclusion that the activities of assessee society are not run as per its aims and objects i.e. education.
25. The other ground which has been taken by Ld. CIT in the impunged order is in respect of debiting a sum of Rs. 3,07,175/- under the head student activities and welfare. It is stated by Ld. CIT that said amount was spent on various officials and management personal for their entertainment, wine and food under the head ‘guest entertainment expense. During the course of hearing, Ld. AR made his submission as mentioned herein above, and we observe that AO, in assessment years 2003-04 to 2007-08 and 2009-10 disallowed 25% of the expenses on the ground that amount charged from the students under the head placement charge, was spent on various officials and management personal for their entertainment, wine and food and this kind of activity of serving wine is not allowable under the I.T. Act. We find substance in the submission of Ld. AR that AO’s allowing 75% of such expenditure proves that expenditure had been incurred for the purposes of the assessee society which is running of an educational institution. Further, Ld. AR submitted that only a sum of Rs. 2,490/- of the total amount debited under the head guest entertainment expenses, was the expenses towards serving wine to the guest who were semi Government employees/ non Govt. employees. The food was served when they visited the campus for selection of students and the food served was normal courtesy and customary in nature. We agree with Ld. AR that when the outside guests visit the campus for selection of students, food etc. have to be served and the said amount cannot be said to have been spent not for the purpose of assessee society. At the most, the amount which was spent for serving wine/ hard liquor can be said not to have been spent for the purpose of activities of institute i.e. running an educational institution and benefit to that extent could be denied while considering exemption u/s. 11/12 of I.T. Act but we are of the considered view that it could not be a ground for cancellation of registration.
26. In respect of the ground taken by Ld. CIT for giving advance of Rs. 11,32,000/- and Rs. 38,240/- to Shri B.K. Singh, we observe that Ld. CIT himself has mentioned in the said order that the said amount was given to Shri B.K. Singh for construction of girl’s hostel. We observe that already there is a girl’s hostel in the premises belonging to Mrs. Verma, wife of Mr Verma, Chairman of the Institute of assessee society and she has by way of agreement dt. 10.1.2005, copy placed at page 55 to 57 of Paper book, allowed construction of hostel on upper open space of the said premises. Therefore, the said amount was given as advance to Shri B.K. Singh for the construction of girl’s hostel and accordingly it could not be said that the said amount was paid/spent in contravention of Sec. 13(3) of I.T. Act.
27. Lastly we observe that Ld. CIT has stated that there was surplus fund to the assessee society and the surplus fund was not invested and deposited as per Sec. 11(5) of the Act. In this regard, Ld. AR has submitted that Ld. CIT while considering the surplus fund has not considered the application of fund for capital outlay. Further Ld. AR submitted that if the capital outlay is considered as application of fund, the available fund is below 15% in most of the assessment year. The Ld. AR referred page-10 of Paper book at the time of hearing of appeal which contain written submission filed and submitted that the percentage of surplus fund in assessment years 2004-05, 2006-07, 2007-08 and 2008-09 were negative and only in the assessment year 2005-06, there was a surplus of 10.06%. Ld. DR at the time of hearing did not dispute the said details which are given at page-10 of the Paper book. We agree with Ld. AR that Hon’ble Apex Court has held in the case of S.RM.M.CT.M. Tiruppani Trust (supra) that amount spent for construction of building which is to be utilized for the purpose of aims and objects of assessee society is the application of fund. On perusal of said details given at page-10 of the Paper Book, we observe that if the capital outlay is reduced from the total receipt, there is a negative surplus with the assessee society from assessment years 2004-05 to 2008-09 except in assessment year 2005-06 and that too is 10.06% which is below 15%. We agree with Ld. AR that surplus to the extent of 15% is not required to be deposited as per Sec. 11(5) of I.T. Act. The surplus covered u/s. 11(2) are over and above 15% surplus which are required to be invested in terms of Sec. 11(5) of the I.T. Act. In this respect, we refer CBDT Circular No. 8/2002 dt. 27th August, 2002, which reads as under:
“Through the Finance Act, 2002, clause 23(c) of Sec. 10 has been amended to provide that where more than 15% (25% under per-substituted Clause (a) of the income is accumulated on or after the first day of April 2002, the period of accumulation of the amount exceeding 15%(25% under per-substituted clause(a) of its income shall, in no case, exceed 5 years (10 years under per-substituted Clause (a). Thus, only 15% of the income can now be accumulated for an unlimited period and without any condition.”
28. In view of above, Sec. 11(2) will operate qua the balance 85% of total income. Hence, we are of the considered view that there is no violation of Sec. 11(5) of the Act owing to cash in hand and demand draft which have not been disputed to be duly recorded in the books of account.
29. Now coming to the question as to whether surplus fund could be a ground for coming to the conclusion that assessee is not running an institute for educational purposes and the registration could be cancelled u/s. 12AA(3) of the I.T. Act. Before we consider the cases cited before us, we consider it necessary to refer CBDT Circular No. 1112 dt29th October, 1977 wherein CBDT has stated that even if there is a surplus at the end of the year and the said surplus is utilized for educational institutions and is not diverted for personal use of the proprietor thereof, then the income of educational institution will not be subject to tax. In this context, it is also relevant to refer the decision of Hon’ble Allahabad High court in the case of Oxford Academy for Career Development v. Chief CIT [2009] 315 ITR 382, wherein on the basis of the information it was felt by the department that the society was being run for the purpose of profit and that the President and its family members were also obtaining benefit from it and accordingly a notice was issued to cancel the registration granted u/s 12A of the Act. It was also contended on behalf of the department that there was unusual huge margin and the assessee was engaged in the commercial activities rather than charitable. That as per balance sheet, huge amount from the students was charged. The profit margin embodied in the charges taken from the students was huge and it proves the profit motive of the assessee. Their Lordships of the Hon’ble Allahabad High Court after considering the decision of the Hon’ble apex court in the case of American Hotel and Lodging Association, Educational Institute (supra) held that once the applicant institution came within the phrase “exist solely for educational purpose and not for profit”, no other condition like application of income was required to be complied with. The prescribed authority was only required to examine the nature, activities and genuineness of the institution. The mere existence of profit/surplus did not disqualify the institution. It was further stated that for grant of approval section 11 & 13 did not apply. Their Lordships of the Hon’ble Allahabad High Court has also considered the decision of the Hon’ble apex court in the case of Asstt. CIT v. Surat City Gymkhana [2008] 300 ITR 214/170 Taxman 612 wherein it was observed that “after registration, further probe into object is not permissible”.
30. In the case before us there is no dispute to the fact that the assessee is engaged in education. Education is perse a charitable purpose as defined in section 2(15) of the Act. Moreover, CBDT vide its circular no.11/2008 dated 9.12.2008 has also while considering the implication that has arisen from the amendment made by Finance Act, 2008 by adding a proviso to section 2(15) of the Act has stated as under:
“Definition of Charitable purpose’ under section 2(15) of the Income-Tax Act, 1961 Section 2(15) of the Income Tax Act, 1961 (‘Act’) defines “charitable purpose” to include the following:-
(i) Relief of the poor
(ii) Education
(iii) Medical relief, and
(iv) The advancement of any other object of general public utility.
An entity with a charitable object of the above nature was eligible for exemption from tax under section 11 or alternatively under section 10(23C)of the Act, However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of ‘charitable purpose’. Therefore, section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states that the ‘advancement of any other object of general public utility’ shall not be a charitable purpose if it involves the carrying on of –
(a) any activity in the nature of trade, commerce or business; or
(b) any activity of rendering any service in relation to any trade, commerce or business;
for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention of the income from such activity.
2. The following implications arise from this amendment –
2.1 The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute charitable purpose’ even if it incidentally involves the carrying on of commercial activities.
2.2 ‘Relief of the poor’ encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that
(i) the business should be incidental to the attainment of the objectives of the entity, and
(ii) separate books of account should be maintained in respect of such business.
Similarly, entities whose object is ‘education’ or ‘medical relief’ would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above.
…
…”
31. Their Lordships of Punjab & Haryana High Court in the case of Pinegrove International Charitable Trust (supra) has observed that an educational institution would not cease to exist for educational purposes merely because it has generated surplus income after meeting its expenditure. In the case of T.M.A. Pai Foundation v. State of Karnataka [2002] 8 SCC 481 their Lordships of Hon’ble Apex court has held that private educational institutions are bound to generate funds for betterment and growth of the institution and for which there may be a surplus for furtherance of education. Therefore, it is not only permissible but an important requirement to run the institutions of such a strain. Their Lordships of the apex court has also stated in the case of Aditanar Educational Institution vs Addl.Commissioner of Income Tax [1997] 224 ITR 310/90 Taxman 528 that when surplus is utilized for educational purpose, i.e. for infrastructure development, it cannot be said that the institution was having the object to make profit. It was observed that the surplus is used for management and betterment of the institution could not be termed as profit. Not only this ITAT Ahmedabad Bench in the case of Ajit Education Trust v. CIT [2010] 42 SOT 415 has held that merely by granting a registration u/s 12A/12AA to a trust ipso-facto is not entitled for the exemptions prescribed u/s 11 & 12. A Trust can get exemption u/s 11 & 12 only if it fulfils the requisite conditions laid down therein. There is no materials before us that the assessee is not carrying on its activities as per its objects nor there is any material on record that it is not a genuine society.
32. During the course of hearing, Ld. AR submitted that assessee filed returns on due date for assessment year 2010-11 and 2011-12 claiming exemption u/s. 11 and till date the assessment(s) has not been disturbed. Ld. DR during the course of hearing has not disputed and/or controverted the said contention of Ld. AR. Moreover, Ld. DR has not disputed the fact that about 450 students are studying in the institute and the course run by the assessee institute are MBA, Hotel Management and Food Technology. It has also been not disputed that assessee institute is recognized by AICTE and the said recognition has not been withdrawn till date.
33. Considering the above facts, we are of the considered view that the condition precedent to cancellation of registration u/s. 12AA(3) of the Act are not satisfied because once registration is granted, Ld. CIT can cancel registration only if he satisfies that the activities of such Trust or institution are not genuine or are not been carried out in accordance with the objects of the Trust or institution. However the facts, as mentioned herein above, prima facie establish that assessee is running the institute of education and the said institution is set up as per its aims and objects for which assessee society is formed and the registration u/s. 12AA was granted to it vide Registration Certificate dt. 27.9.2001, copy placed at page-23 of Paper Book. Merely because some amount has been spent by assessee society which is not in accordance with its aims and objects, at the time of giving exemption u/s. 11 & 12 of the Act, benefit of exemption could be denied to assessee for the said claim but it could not be the basis for cancellation of registration of assessee society. Hence, the reasons given by Ld. CIT in the impugned order for cancellation of registration is not in accordance with law. Hence cancellation of registration to assessee by Ld. CIT is not legal. Therefore, order of Ld. CIT for cancellation of registration of assessee even on the grounds given by him is liable to be set aside.
34. In the result, we hold that order of the Ld. CIT for cancellation of registration of the assessee is not valid. Hence, the order of cancellation of registration of assessee society passed by Ld. CIT dated 29th June, 2011 is quashed.
35. In the result, appeal of the assessee is allowed.
