2010 (12) TMI 1074 - AT - Income Tax

Tribunal reinstates trust registration after finding funds used for educational infrastructure

The Tribunal directed the Commissioner to vacate the order canceling the registration of the assessee-trust under section 12AA. The Tribunal found that ... Exemption u/s 11 - Cancellation of registration granted to the assessee-trust - acceptance of capitation fees for admitting students to medical, dental and nursing courses - HELD THAT:- In the light of the judgment of the DIRECTOR OF INCOME-TAX (EXEMPTIONS) VERSUS SRI BELIMATHA MAHASAMSTHANA SOCIO CULTURAL AND EDUCATIONAL TRUST [2010 (3) TMI 854 - KARNATAKA HIGH COURT] and the decision of the Income-tax Appellate Tribunal, Pune 'A' Bench in the case of MAHARASHTRA ACADEMY OF ENGINEERING & EDUCATIONAL RESEARCH (MAEER) VERSUS COMMISSIONER OF INCOME TAX [2009 (9) TMI 952 - ITAT PUNE], it is found that the first ground pointed out by the Commissioner of Income-tax to cancel the registration granted to the assessee under section 12A on the accepting capitation fees is not sustainable in law - As extensively discussed in the decision rendered by the Income-tax Appellate Tribunal, Pune Bench, the Commissioner of Income-tax is not to conduct investigation into the sources of donations received by it. Regarding the genesis and character of the money available in the hands of donors to pay capitation fees have to be examined in the hands of those donors. The assessee has nothing to do with the legality or illegality of the sources in the hands of those donors. The capitation fees could be unexplained in the hands of the persons making the donations - As far as, the assessee-trust is concerned, the violation is that of Anti Capitation Fees Act which is not a violation under the provisions of the Income-tax Act. Therefore enquiries should be made against the assessee through a process permitted under the Tamilnadu Prohibition of Capitation Fees Act. The Income-tax Act cannot be punitive against the assessee on that ground. Diversion of trust funds for own benefit and for purposes other than the objects for which the trust has been formed and registered - Application of funds - HELD THAT:- There is no case made out by the Revenue against the assessee. As per the details furnished by the assessee-trust, the assessee has spent its entire receipts for the purposes of creating infrastructure facilities to run its educational institutions. The assessee has almost spent its entire collection of donations to construct buildings and other facilities. Such expenditure incurred by the assessee-trust have exceeded the collections made by the assessee-trust by way of the alleged capitation fees, donations, corpus donations and also fees collected from the students. Therefore, there is no de facto case against the assessee that the income has not been applied for educational activities. Diversion of funds - seizure of cash in the course of search at the registered office of the assessee-trust - HELD THAT:- The reply furnished by the assessee-trust is convincing that the total cash as on the day of search was more than Rs. 90 lakhs ; Rs. 10 lakhs and above alone were found in the office of the registered trust. The registered office of the trust is the residence of the trustees. Therefore, it is very premature to hold that the cash found in the registered office/residential houses amounted to diversion of funds. It is only a holding of funds and not application or diversion of funds. All the balance cash remained with different educational institutions. Therefore, the cash found and seized in the course of search is not a ground to make an allegation that the trustees have diverted the funds of the assessee-trust for activities other than charitable activities - It is established that those funds have not been flown out of the funds of the assessee-trust. The payments were made by Dr. Velayuthan Nair personally. In such circumstances, there is no force in the argument of the Revenue that the amount of Rs. 3 lakhs paid by Dr. Velayuthan Nair for his daughter's medical seat, was from the funds of the trust. Diversion of funds - Payment of huge amount of deposits to Dr.Velayuthan Nair for taking out his hospital property on lease - HELD THAT:- Regarding the functional and legal character of the deposits, there is no case against the assessee. The case could only be in respect of quantum of deposits which according to the Commissioner of Income-tax is highly disproportionate, to the annual rent paid by the assessee-trust. In this context, it is to be seen that the total amount spent by the trust for constructing buildings and facility were about Rs. 90 crores much more than the donations and fees collected by it. It shows that even the lease deposits made by the assessee-trust in the hands of Dr. Velayuthan Nair have been de facto applied for improving the infrastructure facilities of the assessee-trust. Therefore, it becomes application of funds for educational purposes in the hands of the assessee-trust through the medium of the trustee. Thus, the Commissioner of Income-tax are directed to vacate his order cancelling the registration of the assessee-trust and restore the registration granted under section 12AA. This appeal filed by the assessee is allowed. 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.