Tribunal reinstates trust registration after finding funds used for educational infrastructure

Padanilam Welfare Trust Versus Deputy Commissioner of Income-tax

Padanilam Welfare Trust Versus Deputy Commissioner of Income-tax - [2011] 10 ITR 479 Issues Involved:
1. Collection of capitation fees by the assessee-trust.
2. Diversion of trust funds for personal benefits of trustees.
3. Legality of the cancellation of registration under section 12AA of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Collection of Capitation Fees:
The Commissioner of Income-tax cancelled the registration of the assessee-trust under section 12AA, citing that the trust collected capitation fees amounting to Rs. 36 crores from April 1, 2001, to March 31, 2007. This was supported by seized documents and depositions from parents of students. The Commissioner argued that this practice violated public policy as per the Supreme Court's ruling in T.M.A. Pai Foundation, which prohibits profiteering in education.

The assessee-trust contended that all collected funds, including alleged capitation fees, were used for constructing educational infrastructure, thus fulfilling the trust's charitable purpose. The trust argued that the Income-tax Act does not distinguish between legal and illegal income and that the funds were applied for the trust's declared objects.

The Tribunal referenced the Karnataka High Court's judgment in DIT v. Sri Belimatha Mahasamsthana Socio Cultural and Educational Trust, which held that violation of the Prohibition of Capitation Fees Act does not justify withdrawal of registration under section 12AA. The Tribunal concluded that the Commissioner's action based on capitation fees was not sustainable in law.

2. Diversion of Trust Funds:
The Commissioner also cited instances of fund diversion, including:
- Lease advances paid to a trustee for a hospital building.
- Repayment of an overdraft facility availed by an administrative officer using trust funds.
- Payment of capitation fees by a trustee for his daughter's admission.

The assessee-trust argued that these transactions were either legitimate operational expenses or personal payments by the trustees, not diversions of trust funds. The Tribunal found the explanations convincing, noting that the funds were used for educational purposes and infrastructure development. The Tribunal stated that holding cash at the registered office (also the trustees' residence) did not constitute fund diversion.

3. Legality of Cancellation of Registration:
The Tribunal cited decisions from the Karnataka High Court and the ITAT Pune Bench, emphasizing that the Commissioner should focus on whether the trust's activities align with its declared objects rather than investigating the sources of donations. The Tribunal noted that the trust had applied its entire income, including alleged capitation fees, for educational purposes, thus fulfilling its charitable objectives.

The Tribunal did not address the prospective application of the cancellation, as argued by the assessee based on the ITAT Lucknow Bench's decision in Kapoor Educational Society v. CIT.

Conclusion:
The Tribunal directed the Commissioner to vacate the order canceling the registration of the assessee-trust and restore the registration under section 12AA. The appeal filed by the assessee was allowed, with the order pronounced on December 24, 2010.