Charitable exemption and registration cannot be cancelled on suspicion alone; genuine scholarship and land investment records supported the assessee.
Charitable registration under section 12AA and exemption under section 10(23C)(vi) cannot be withdrawn on suspicion alone; the Tribunal noted that alleged diversion of funds must be supported by clear evidence of application for the benefit of a specified person under section 13(1)(c) read with section 13(3). Scholarship payments were treated as genuine because they were supported by cheques, bank entries, confirmations and student records, despite limited verification gaps. The land-acquisition payment was viewed as an investment in immovable property for educational use and not a prohibited transaction under section 11(5). On the record, the Tribunal restored the registration and exemption.
Issues: (i) Whether the registration granted under section 12AA could be cancelled on the allegation that the assessee society diverted its funds for personal benefit and carried on non-genuine activities; (ii) whether the scholarship payments claimed by the assessee society were non-genuine and constituted misuse of funds; and (iii) whether payment made towards acquisition of land through Rajasthan Housing Board was in violation of section 11(5) read with section 13(1)(c), so as to justify withdrawal of exemption under section 12AA and section 10(23C)(vi).
Issue (i): Whether the registration granted under section 12AA could be cancelled on the allegation that the assessee society diverted its funds for personal benefit and carried on non-genuine activities.
Analysis: The material on record showed that the cash found at the bank premises was consistently linked by the statements of the bank employees and the assessee's accountants to fees collected from students of the assessee's educational institutions. The fee receipts, student registers, daily collection sheets and related vouchers supported the recording of such receipts in the assessee's books. Mere suspicion arising from non-updated cash-book entries and the common involvement of one person in both entities was held insufficient. The related-person provisions under section 13(3) were not satisfied because no substantial interest in the bank by the trustees or members of the society was established, and there was no actual application of income for the benefit of any specified person under section 13(1)(c).
Conclusion: The allegation of diversion of funds was not proved, and cancellation of registration on that basis was unjustified in favour of the assessee.
Issue (ii): Whether the scholarship payments claimed by the assessee society were non-genuine and constituted misuse of funds.
Analysis: The scholarship amounts were paid through account payee cheques and were reflected in the assessee's bank account, except in the case of one cheque that was not presented and was reversed. The adverse inference drawn from non-response to notices under section 133(6) and non-production of some students was found inadequate, especially when confirmations, approval forms and supporting banking records were available. The Tribunal held that a limited verification lapse or the inability of a few students to respond could not justify a finding that the entire scholarship scheme was bogus or that the assessee had siphoned funds for personal use.
Conclusion: The scholarship expenses were held to be genuine, and the Revenue's objection was rejected in favour of the assessee.
Issue (iii): Whether payment made towards acquisition of land through Rajasthan Housing Board was in violation of section 11(5) read with section 13(1)(c), so as to justify withdrawal of exemption under section 12AA and section 10(23C)(vi).
Analysis: The agreement to sell, the subsequent communications with the Rajasthan Housing Board and the conveyance deed showed that the proposed transfer was contemplated subject to permission of the lessor, and that the assessee had made payment in consideration for an immovable property intended for educational use. The Tribunal held that common membership between the two societies did not by itself establish substantial interest within section 13(3). The payment was treated as an investment in immovable property, a permissible mode under section 11(5), and no direct or indirect benefit to any specified person was shown. Accordingly, the transaction could not be treated as a contravention warranting withdrawal of exemption.
Conclusion: The payment was not held to be hit by section 11(5) or section 13(1)(c), and the withdrawal of exemption was unsustainable in favour of the assessee.
Final Conclusion: The Tribunal found no credible evidence of non-genuine activities, diversion of income or misuse of funds, and directed restoration of both the registration under section 12AA and the exemption under section 10(23C)(vi).
Ratio Decidendi: Cancellation of charitable registration or withdrawal of exemption cannot rest on suspicion alone; there must be clear evidence that the society's income was actually diverted or applied for the benefit of a person specified under section 13(3), or that the impugned transaction was impermissible under section 11(5).
TaxTMI 
AI Drafter ✕
TaxTMI 
