Sec. 12AA Cancellation of Registration of society which collects huge fees although formed to run the dental college without any fees from students is justified

Bhim Rao Ambedkar Educational Society Vs. CIT (Exemption) (Allahabad High Court)

A categorical finding has been recorded that Society is not being run according to the objects, i.e., free health education and establishment of dental college without fee. He also pointed out that a Society if charging nominal fee to maintain its expenses etc., it may not have the effect of loosing its character of charitable trust but when specific object of Society is to establish and run a dental college without any charge and such a Society realize huge fee from students, it would be a case where Society is not running according to its objects and, therefore, section 12-AA(3) of Act, 1961 has rightly been applied by Commissioner-II in cancelling registration order.

FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS:-

Delivered by Honorable Sudhir Agarwal, J. under Chapter VII Rule 2 of Allahabad High Court Rules, 1952 )

This is Assessee’s appeal under section 260A of Income Tax Act, 1961 (hereinafter referred to as the “Act, 1961”) arising from judgment and order dated 31-3-2015 passed by Income Tax Appellate Tribunal, Lucknow (hereinafter referred to as the “Tribunal”) in ITA No. 548/LKW/2012 dismissing appeal and confirming order dated 3-9-2012 passed by Commissioner-II, Lucknow (hereinafter referred to as the “Commissioner-II”) cancelling registration granted under section 12AA(1)(b)(i) of Act, 1961 by exercising power under section 12AA(3) of Act, 1961.

2. The appeal was admitted on following two substantial questions of law :–

“1. Whether on the facts and in the circumstances of the case, Income Tax Appellate Tribunal was legally justified in upholding the order of Commissioner under section 12AA (3) of the Income Tax Act withdrawing registration granted under section 12AA(1)(b)(i) of Act by Commissioner to the appellant by order dated 1-5-2008 in compliance to the order of Tribunal dated 31-1-2008?

Whether on the facts and in the circumstances of the case, Income Tax Appellate Tribunal was justified in allowing Commissioner to travel beyond the grounds taken by him in the show cause notice dated 27-2-2012 de hors the interpretation of amended deed dated 21-9-2002?”

3. Brief facts giving rise to present appeal are as under.

4. Dr. Bhim Rao Ambedkar Educational Society, Village Dharsania, Post Asaini, District Barabanki was registered as a “Society” under Societies Registration Act, 1860 (hereinafter referred to as the “Act, 1860”) by Registrar of Societies, U.P. on 22-3-1994. Memorandum of Society was amended on 21-9-2002 with a view to establish a Dental College and a Dental Hospital for the benefit of local people in rural area. Aims and objectives contained in Items No. 10, 11, and 12 of amended Memorandum, read as under :–

“10. Free Establishment and Operation of the Dental College after the prior sanction of the state.

11. Making arrangements for the education and training related to Dental Education and providing all the information related to it and to do the work of free advertising by making the people aware.

12. Making arrangements for free Dental Treatment.” (English translation by Court)

5. Approval from Government was obtained in 2002 and thereafter a Dental College was set up in the name of Chandra Dental College and Hospital at Safedabad, Barabanki. It was duly recognized by Dental Council of India, New Delhi (hereinafter referred to as the “DCI”) which prescribes courses run by Dental Colleges and monitored by DCI. Dental College is affiliated with Avadh University, Faizabad for the purpose of conducting examination. It had 40 seats for first academic session in the year 2003-04. Fee to be charged by Medical and Dental Colleges is fixed by a Committee constituted by State Government in view of Supreme Court’s judgment in Islamic Academy of Education and another vs State of Karnataka and others, 2003(6) SCC 697. Pursuant thereto fee of students undergoing dental course in College, run by appellant, was fixed tentatively by said Committee, as communicated by State Government vide letter dated 7-9-2005, at Rs. 1,50,000 lacs per Session for 2004-05 and 2005-06. Subsequently it was finally determined at Rs. 1,72,000 for Session 2004-05, 2005-06 and 2006-07 vide Government’s letter dated 17-7-2006.

6. As per counsel’s advise, Assessee filed application in the office of Commissioner-II, under section 12A of Act, 1961, for registration. It was received in the office of Commissioner-II on 11-4-2007. Commissioner-II, however, vide order dated 19-10-2007 rejected application for registration by referring to section 12AA(1)(b)(i) of Act, 1961. There against Assessee preferred appeal and Tribunal allowed same vide judgment dated 31-1-2008, reported in 2008(114) TTJ 965 (Lucknow) (URO), and directed Commissioner-II to grant registration under section 12AA of Act, 1961. Consequently order was issued on Commissioner-II on 1-5-2008 granting registration to Assessee Society with effect from 1-4-2007.

7. A survey was conducted under section 133A of Act, 1961 on 24-2-2009 in which Assessee disclosed and surrendered an amount of Rs. 1.10 crores of anonymous donations towards construction cost of building for assessment years 2007-08 and 2008-09. The surrendered amount included amount invested in construction of building and also under miscellaneous heads. It also admitted and paid tax on said amount under section 115BBC of Act, 1961. In consequence to survey, assessing officer made assessment order dated 31-12-2010 making addition of Rs. 4,14,19,828, apropose estimated higher cost of construction in Assessment year 2008-09. Assessing officer further denied benefit of section 11 of Act, 1961 for assessment year 2008-09 on the ground that anonymous donations are merely camouflaged capitation fee showing profit making activity hence Society is not running as a charitable institution and not eligible for exemption under section 11 of Act, 1961.

8. In appeal preferred by Assessee, Commissioner (Appeals) vide order dated 5-9-2011, not only deleted aforesaid addition but also held that it was a charitable institution under section 2(15) and eligible for exemption under section 11 of Act, 1961 and issued directions accordingly. Revenue preferred appeal but Tribunal dismissed same vide order dated 28-5-2013 inITA No. 658/LKW/2011.

9. Further on the basis of survey report dated 24-2-2009 conducted under section 133A, Assistant Commissioner Income Tax (hereinafter referred to as the “A Commissioner”) sent a proposal dated 27-12-2011 for withdrawal of registration under section 12AA. Said recommendation was endorsed by Joint Commissioner (hereinafter referred to as the “J Commissioner”) vide letter dated 27-1-2012. Consequently a show cause notice dated 27-2-2012 was issued under section 12AA(3) proposing cancellation of registration on following grounds :–

“(i) The society’s funds are not being utilized solely for charitable purposes. It is seen that an imprest account in the name of Shri C. P. Chaudhary, President is being maintained in the books of society and various incoming & outgoing entries were found therein. However, the purpose of utilization thereof for charitable purposes could not be established as the Assessee could not satisfactorily explain the same before AO at the time of assessment proceedings.

(ii) The funds of the society are stated to be used for payments for purchase of land but the society doesn’t have documentary evidences showing registry of land. The society also does not have proof to substantiate the utilization of alleged advance to various parties which shows that the amount of Rs. 53,10,070 has been used for other than charitable purposes.

(iii) During the course of survey operations on 24-2-2009, a sum of Rs. 1.10 crores was surrendered by Society and the amount was bifurcated in F.Y.s 207-08 & 2008-09 (relevant to assessment years 2008-09 & 2009-10) and surrendered amount includes the amounts invested in construction of building and also under Miscellaneous heads. This implies that the society is also getting income from unknown sources which are not recorded in the books of accounts.

(iv) The funds of the society are being used for the benefit of the members of the society instead for the objects of the society.

(v) The society is being run as a commercial venture and is earning profits which implies that it is not being run as a charitable organization.”

10. Assessee submitted explanation and after considering same, Commissioner-II, passed order dated 3-9-2012 canceling registration. On ground no. 2, Commissioner-II accepted explanation tendered by Assessee but on other grounds explanation was not found satisfactory, hence registration was cancelled. Assessee then preferred appeal before Tribunal, who has rejected same vide order dated 31-3-2015.

11. Sri R.P. Shukla, Advocate holding brief of Sri A.R. Shukla, learned counsel appearing for appellant, has advanced submissions orally and also submitted written submissions. His contention is that Tribunal though found explanation of Assessee in respect of four issues which were not accepted by Commissioner-II still it has found a new ground for affirming order passed by Commissioner-II in respect whereto no opportunity was afforded to Assessee and, therefore, judgment of Tribunal is erroneous, illegal and in violation of principle of natural justice. He contended that Assessee did not get any opportunity to meet the new ground make out by Tribunal. It has also ignored the fact that on similar ground, earlier registration itself was cancelled and that judgment of Commissioner (Appeals) was set aside by Tribunal. He stressed upon that Revenue authorities could not have traveled beyond show cause notice and reliance is placed on judgments in Commissioner of Customs, Mumbai v. Toyo Engineering India Limited, 2006(7) SCC 592 (SC) and The Commissioner-XIII v. Shri Ashish Rajpal, 2010(320) ITR 674 (Delhi). He further urged that Tribunal has upheld order of Commissioner-II cancelling registration on interpretation of Clauses 8, 10, 11 and 12 of Memorandum of Society. This was a ground taken by Commissioner-II earlier when application for registration was rejected vide order dated 19-10-2007. Commissioner-II mentioned in the order, “In the objectives of Society the fact of free treatment of patients and free imparting of Health Education has been emphasized even though in the accounts OPD receipts have been shown. This gives the impression that real objective has been camouflaged.” This order of Commissioner-II dated 19-10-2007 was set aside by Tribunal vide judgment and order dated 31-8-2008 in ITA No. 670/Luc/2007 relying on a judgment of this Court in CIT v. Red Rose School (2007) 163 Taxman 19 observing that Government Agencies have full control and check over the college. Society set up the College for educational purposes without any profit motive. The fee being charged by College is just sufficient for maintaining and running College. It is in terms of fee prescribed by CPMT for its affiliated Colleges. In addition, College has set up a dental 100 chair OPD clinic with full qualified doctors and surgeons providing free treatment to villagers at nominal registration fee of Rs. 5 only. College daily attends to about 75-100 patients and provide dental treatment. The said order of Tribunal attained finality. Thereupon Commissioner granted registration and that being so it was not open for Tribunal while passing impugned judgment and order to take a different view. In fact Tribunal this time has upheld the view taken by Tribunal earlier which has been set at naught by Tribunal’s earlier judgment and this was not permissible for Tribunal since earlier order has attained finality and that was binding and no revivable by Tribunal while passing impugned judgment. An inter parties judgment binds parties when a Court of Competent Jurisdiction has decided lis and that issue could not have been re-agitated at a subsequent stage. Reliance is placed on Parashuram Pottery Works Co. Ltd. v. Income Tax Officer, Circle I, Ward A, Rajkot, 1977 (106) ITR 1 (SC); Commissioner, Central v. L.G. Ramamurthi and Ors., 1977(110) ITR 453 (Mad); Sirpur Paper Mills Ltd. v. Income Tax Officer, “A” Ward and Anr., 1978(114) ITR 404 (AP); Seshasayee Paper and Boards Ltd. v. Inspecting Assistant Commissioner, 1986(157) ITR 342 (Mad.); CIT v. Kamla Town Trust, 1992(198) ITR 191 (All.); Gorie Gouri Naidu (Minor) and another v. Thandrothu Bodemma and others, AIR 1997 SC 808; S.I. Rooplal and Anr. v. Lt. Governor and others, 2000(1) SCC 644; Sayaji Iron and Engg. Co. v. CIT, 2002(253) ITR 749 (Guj.); Agrawal Warehousing and Leasing Ltd. (now Admanum Finance Ltd.) v. CIT, 2002(257) ITR 235 (MP); and, CIT v. Excel Industries Ltd., 2013(358) ITR 295 (SC).

12. Sri Alok Mathur, learned counsel appearing for Revenue submitted that order passed by Tribunal earlier, when application for registration was to be considered, based on different facts which order of cancellation has been passed looking into the facts which have actually been revealed in subsequent assessment proceedings as also survey conducted at the premises of Assessee, hence it is not based on mere objectives disclosed by Assessee in its Memorandum. He drew our attention to the order of Commissioner-II wherein it has referred to the amount shown by Assessee in his account and received from students which is to the tune of Rs. 2,17,15,050 for assessment year 2006-07, and reached to Rs. 6,54,92,104 in assessment year 2011-12. He stated that a categorical finding has been recorded that Society is not being run according to the objects, i.e., free health education and establishment of dental college without fee. He also pointed out that a Society if charging nominal fee to maintain its expenses etc., it may not have the effect of loosing its character of charitable trust but when specific object of Society is to establish and run a dental college without any charge and such a Society realize huge fee from students, it would be a case where Society is not running according to its objects and, therefore, section 12-AA(3) of Act, 1961 has rightly been applied by Commissioner-II in cancelling registration order. He stated that Tribunal has not reviewed its earlier order or made out a new case inasmuch as Tribunal earlier considered the law that at the time of registration which was to be seen at that time, i.e., whether objects laid down in bye-laws are charitable or not but for the purpose of attracting section 12-AA(3) it is to be examined whether objectives of trust are actually carried out or not which is based on the actual activities undertaken by Assessee.

13. We have head learned counsel for parties at length and perused the record.

14. We have gone through the entire order of Tribunal and do not find that it has reversed findings of Commissioner-II recorded in the order dated 3-9-2012 on any of the grounds on which notice was issued to Assessee proposing cancellation of registration under section 12-AA(3). It has clearly recorded a finding that Commissioner-II was satisfied that activities of trust or institution are not genuine, nor being carried out according to the objectives of institution and thereafter has further proceeded to refer to the amended Memorandum of Society to observe that Society is not being run as per its objectives set out in Memorandum of Association. Tribunal has not confirmed order on any new ground but upholding entire order of Commissioner-II it in its own wisdom, it has stressed on the factum that Society is not run as per the objective set out in Memorandum.

15. Now it leads us to go to the order passed by Commissioner-II. The first ground is regarding imprest account in the name of Sri C.P. Chaudhary, President of Society, showing advancement of certain funds to him without any satisfactory explanation about use of such funds for the purpose of Society. One of such illustration given by Commissioner-II is advancement of Rs. 5,50,000 to Dr. C.P. Chaudhary on 28-8-2008. It was sought to be explained by Assessee as an advance made to one Sri Ram Naresh Koli, Member of Society, who possess certain piece of land. Assessee explained that funds were advanced to Dr. C.P. Chaudhary for further advancement of Sri Koli since he was Dalit and there is restriction of transfer of land possess by Dalit to a non-Dalit. This explanation and manner of advancement of such fund to Sri Koli has not been accepted by Commissioner-II. It has clearly recorded finding that books of Society do not show Sri Koli as Debtor to the extent of Rs. 4,50,000, who is said to have the funds advanced for purchase of land. Commissioner-II has held that said money was withdrawn by Dr. Chaudhary for some other purposes. Commissioner-II has further examined genuineness of explanation given by Assessee and has recorded its finding as under:

“Another feature of the land purchased by Sri Koli is that the sale deed puts the price of the land at Rs. 4,50,000 only while the price of the land for stamp duty purposes is taken at Rs. 38,09,000. In order to determine the genuineness of the sale price the Jt. Commissioner, Range-5, was asked to get inquiries conducted at Barabanki to find out the price prevailing in the area around this time. The Income tax Officer, Barabanki could obtain the sale deed of property No. 193 which was purchased by the asessee society itself on 15-5-2008 for Rs. 43,00,000 whereas the price for stamp duty purposes was Rs. 62,86,000. The first land measures 0.303 hectares and the area of the second is 0.513 hectares. What is important is that the official rate of the 1st land is Rs. 6,00,000 per Bigha, while that of the 2nd land is Rs. 5,00,000 per bigha. This establishes the fact that the correct purchase price of the first price of land has been deliberately suppressed by the buyer and the seller has been paid in some undeclared manner.

To sum up, as per the evidence available the amount of Rs. 5,50,000 withdrawn by Dr. C.P. Chaudhary from the Society on 28-8-2008 could not have been utilized for purchasing the land standing in the name of Sri Ram Naresh Koli and has been utilized by him for some unspecified personal purpose. This goes to show that all the activities of the society are neither genuine nor are being carried out in accordance with the objects of the society, thereby contravening the provisions of section 12AA(3) of the Income Tax Act.”

16. The second ground was use of Rs. 53,10,070 which Society sought to explain as advancement of money for purchase of land. Regarding this ground explanation of Assessee has been accepted and, therefore, order of cancellation is not founded on this ground.

17. Third ground was surrender of Rs. 1.10 crore in survey dated 24-2-2009. The amount surrendered by Assessee in survey was bifurcated in assessment year 2008-09 and 2009-10 in following manner and different heads, as under:

18. Commissioner-II has noted that there was no entry in accounts book of Assessee. Neither it was recorded in books of account nor list of donors was made available. Commissioner-II, therefore, did not accept Assessee’s version that said amount was generated by Assessee in the course of pursuing objects of trust. It has also noticed that as a result of surrender of aforesaid amount of Rs. 1.10 crore, tax has also been paid by Assessee which means that it was not an exempted income under section 11 of Act, 1961. Commissioner-II has taken this aspect showing activities of Society, which are neither genuine nor in accordance with objects of Society.

19. Next ground which has found favor against Assessee is that funds are used for the benefit of Members of Society and lastly that Society is not being run as a charitable organization but as a commercial organization.

20. Therefore, out of five grounds in respect of ground no. 2 only Assessee’s explanation has been accepted by Commissioner-II but rest four grounds have been upheld for passing order of cancellation of registration. No part of findings of Commissioner-II has been reversed by Tribunal. It has affirmed view taken by Commissioner-II but for the purpose of discussion has relied more on the findings of Commissioner-II with respect to ground no. 5. It is not a new ground as it is already part of ground no. 5 mentioned in show cause notice. The contention of learned counsel for appellant that Tribunal has made out a new case, we find unacceptable and contrary to record, hence it is rejected.

21. So far as proposition of law that no new ground can be taken before Tribunal which is not part of show cause notice, in our view, is not at all applicable in the present case. Appellant has tried to make out a case which is not evident from record and in fact the ground which has been stressed by Tribunal in confirming order passed by Commissioner is part of ground no. 5 which is one of the four grounds on which registration was cancelled by Commissioner-II, hence neither the judgments relied by appellant, in our view, are applicable in the case in hand nor the same help appellant in any manner.

22. So far as argument regarding observations made by Tribunal when application for registration was considered, we find has rightly been distinguished by Tribunal. When an order is to be passed on the basis of activities of Assessee having already taken and borne out from record, same have to be examined not on mere averments contained in Memorandum of Society but in the light of actual activities carried out by Society which was not the position when issue of grant of registration was to be considered.

23. In the result, we answer both the questions formulated above against Assessee, i.e., appellant and confirm the order passed by Tribunal.

24. The appeal lacks merit. Dismissed with costs throughout.