Misappropriation of fund cannot be ground for cancellation of Trust registration

Whether the assessee has violated the rules and regulations of the government of Andhra Pradesh framed for the purpose of prohibiting the collection of Capitation fees? One of the grounds on which the revenue has relied is that the assessee has violated the provisions of the Andhra Pradesh Educational Institutions (Regulation of Admission and Prohibition of Capitation Fee) Act, 1983 which prohibited collection of any fee other than the fee fixed by the Govt. The ld DR has placed before us the copy of the G.O.Ms. 33, date 11-06-2003 issued by the government of Andhra Pradesh to implement the judgement of the apex court in the case of T.M.A. Pai Foundation (supra) by framing the rules and regulations for admission of students into professional colleges. As per these rules, the fee prescribed per student admitted to an engineering college under the management quota was up to a sum of Rs. 75,000/ per annum. There is no allegation that assessee has collected any fee in excess of such prescribed amount. In addition to the above fee notified, the assessee has also collected the donations not only from some parents/ relatives bit also from members of Society. Whether such collection of donation is prohibited by the Andhra Pradesh Educational Institutions (Regulation of Admission and Prohibition of Capitation Fee) Act, 1983 is to be examined. The reliance of the Revenue has been only on the rules framed vide G.O.Ms. 33 (supra) in which there is no mention of donations and contributions to the educational institutions. The rules have prescribed only the fee to be collected from the students and have prohibited the collection of the fee of any kind other than those mentioned in the rules. But Sec.6 of the Andhra Pradesh Educational Institutions (Regulation of Admission and Prohibition of Capitation Fee) Act, 1983 permits the receipt of voluntary donations. For the sake of easy reference the relevant provision is reproduced here under:

Sec.6. (1) Any donation of money to any educational institution, shall be made only in such manner as may be prescribed and not otherwise.

(2) All moneys received by any educational institution by way of voluntary donations shall be deposited in the account of the institution, in any scheduled Bank and shall be applied and expended for the improvement of the institution and the development of the educational facilities and for such other related purposes as may be prescribed.

Thus, it can be seen that the Andhra Pradesh Educational Institutions (Regulation of Admission and Prohibition of Capitation Fee) Act, 1983 does not prohibit the receipt of voluntary donations or contributions, but the limitation placed is on the manner of payment of such donation and the purpose of the donation to be for the improvement and development of the institution. In the case before us, the assessee has received the donations by way of D.Ds/ cheques which are duly accounted for in its books of account and has also been applied for the purposes of the education only. Therefore, in our opinion, there is no violation of the provisions of Andhra Pradesh Educational Institutions (Regulation of Admission and Prohibition of Capitation Fee) Act, 1983.

2. Thus, it can be seen that the contentions of the Revenue cannot be supported fully on the parameters set- out above. However, these issues will arise in an assessment completed in a trust case under the provisions of Section 11 and 13 of the Act. In the present case, it is not the issue of assessment but issue of cancellation of registration already granted. Most of the issues discussed above are academic in nature but those are to be discussed as Ld. DIT(E) has relied on the findings on the assessment order, to resort to cancellation of registration. The provisions of Section 12AA(3) which empowers the Ld. DIT(E) to cancel the registration are 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 [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, 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.]”

Thus, the provision envisages that the Principal CIT or CIT 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 Ld.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 is no allegation also that any of the trust funds are being mis-used/ diverted for any purpose other than for the objects of the trust. In view of the above, we are of the opinion that the provisions of section 12AA(3) are not satisfied so as to cancel the registration.

3.1. The Co-ordinate Bench in the case of Maharashtra Academy of Engineering & Educational Research Vs. CIT [133 TTJ 706] [36 DTR 321] has analysed the same issue and held

“Charitable trust–Registration under section 12A–Cancellation of registration under section 12AA(3)– The Investigation Wing of the IT Department after the search and survey was of the opinion that the trust was taking the donation and capitation fees for admission though prohibited under Maharashtra Educational Institutions (Prohibition of Capitation Fees) Act, 1987. The impugned order of cancellation of registration was passed under section 12AA(3) by CIT(Central). An institution may be doing charitable activities as prescribed but in the absence of registration it 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. 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 granted in subsection (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 AO.

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 or the income is being spent by the trust. Various related provisions, the power of enquiry, in respect of sources of receipts and the utilisation 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 dis entitlement 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 mis utilisation of funds or to judge the tax ability 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 utilisation 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 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 sightless 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 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 herein above 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 de registration 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 mis utilized by the trustees for their personal benefit i.e., not in fulfilment 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 utilised 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 fulfil 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 mis utilisation 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”. [EMPHASIS SUPPLIED]

No contrary decision was brought to our notice.

3.2. The issue in Voditala Educational Society Vs. Asst. Director (Exem), Hyd [20 SOT 353] (ITAT, Hyd order in ITA No. 1138/H/06 dt. 31-10-2007) and other cases of coordinate benches at Hyderabad was with reference to exemption u/s 11 and not cancellation of registration for which provisions are different. A reference to Special Bench was made on the reason that while deciding the above cases, coordinate benches have not considered the views expressed by the jurisdictional High Court in the case of Governing Body of Rangaraya Medical College vs. ITO reported in 117 ITR 284(AP) and also the decision of the Honourable Andhra Pradesh High Court in the case of Chairman, Andhra Pradesh Welfare Fund vs. CIT reported in 143 ITR 82 wherein the Honourable High Court has held that “the mere fact that the rice millers paid contributions with an oblique motive would not affect the character of the contribution as voluntary contributions”. It was also considered that even in the case of TMA Pai Foundation, the Honourable Supreme Court has analysed the constitutional validity of establishing professional colleges charging donations/ capitation fee. In a subsequent judgement in the case of Action Committee, Un- Aided Pvt. Schools & others vs. Director of Education (decided on 7- 8-2009) the Honourable Apex Court has analysed these decisions and has held that private and unaided institutions not depending upon any funds from the Government are competent to decide on the fees to be charged. It was also considered the provisions of AP Educational Institution (Regulation of Admissions and prohibition of capitation fee) Act, 1983 to come to the conclusion that the educational institution is not prohibited in collecting donations but that the same has to be collected in the manner prescribed. That the decision of the ITAT in the case of M/s. Vodithala Education Society and Vasavi Academy of Education, Hyderabad (supra) was rendered without examining the provisions of the AP Educational Institution (Regulation of Admissions and prohibition of capitation fee) Act, 1983 and many other decisions of High Courts and coordinate Benches of the Tribunal at other places and that it has the effect of determining the legal position of tax ability of educational institutions in the State of AP at variance with the following decisions in the rest of the country:

i. Director of Income-tax (Exemption) & another vs Shri Belimatha MahaSamsthana Socio Cultural & Educational Trust (46 DTR (Kar) 290

ii. Maharashtra Academy of Engineering & Educational Research vs. CIT (133 TTJ 706)(Pune)

iii. Karandhai Tamil Sangam, Thanjavur, Vs. CIT (ITA 960/Mds/2011 date 9-8-2011)

iv. DCIT vs. Vellore Institute of Technology (46 SOT 224) (ITAT, Chennai).

However, the reference and constitution of special Bench in Matrusri educational Society case was rejected as the matter was pending before the Honourable jurisdictional high Court. However as stated earlier the issue is one of violation of provisions of Section 11 and 13 of the Act and not cancellation of Registration. Most of the case law relied on by the CIT-DR is with reference to the violation of provisions of Section 11 & 13 or granting registration u/s.12A / 12AA. Thus, those decisions may not directly apply to the issue under consideration.

4. Further, Honourable Karnataka High Court in IT Appeal No. 805 of 2008 in the case of CIT Vs. Islamic Academy of Education [54 taxmann.com 255] (Karnataka) has held as under:

“Section 12A, read with section 80G, of the Income-tax Act, 1961-  Charitable or religious trust- Registration of (Cancellation of registration)- Whether, where assessee-trust was fulfilling its main object of imparting education by establishing educational institution and taking admission of students every year, only on basis that trustees were misappropriating funds of said trust, registration of trust could not be cancelled – Held, yes [Para 8] [In favour of assessee]

Circulars and Notifications: Circular No. 5 of 2005, dated 15-7-2005

FACTS

• Registration of the assessee trust under section 12A and recognition under section 80G were withdrawn on ground that three of the trustees of the assessee were also the Directors/ Chairman in YIMSRPL a private limited company. The assessee had invested Rs. 20 lakhs in ordinary shares of YIMSRPL. The assessee was paying huge rent to YIMSRPL and had also given huge deposit of Rs. 225 lakhs which was claimed as rent deposit and cash of Rs. 74 lakhs was found in the residential premises of one of trustees and the same was offered to tax. Fees for admission reported to have been collected much higher than what was recorded in the books and that the actual amount of fees collected had been suppressed.
• The Tribunal held that at the time of considering cancellation of registration of trust already granted, what was mainly to be seen was, whether the activities of the trust or institution were not genuine or were not being carried out in accordance with the objects of the trust or institution. There was nothing on record to show that the activities were not being carried out in accordance with the objects of the trust i.e., imparting education. Admittedly, the trust was carrying on the object of the trust namely imparting of education. The trust was not sham or bogus. Therefore, the Tribunal had set aside the order passed by the Commissioner and restored the registration.
• On appeal:

HELD

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 recognised 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”.

5. The principles laid down by the Honourable Karnataka High Court in the above said case will equally apply to the facts of the case. 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 u/s.11 but this cannot be a ground for cancellation of registration. Respectfully following the principles laid down by the Honourable Karnataka High Court in the aforesaid cases i.e., CIT Vs. Islamic Academy of Education [54 taxmann.com 255] (Karnataka) and Coordinate Bench decision in the case of Maharashtra Academy of  Engineering & Educational Research Vs. CIT [133 TTJ 706] [36 DTR 321], we have no hesitation to hold that Ld.DIT(E) erred in cancellation of the registration already granted to the assessee. Therefore, we hereby set aside the impugned order of the DIT(E) and restore the registration already granted to the assessee by the then Commissioner of Income Tax, Andhra Pradesh-II, Hyderabad, vide order in F.No. H.Qrs.II/12A & 80G/95/90-91 dated 09-05- 1991. The grounds of assessee are accordingly considered allowed.