Trust loses tax exemption after systematic fraud including bogus donations and cash withdrawals under sections 11 and 13

ITAT Ahmedabad denied exemption u/s 11 to a trust after finding systematic fraudulent activities including bogus corpus donations, cash withdrawals, and staff salary recoveries. The trust's participation in PMGKY scheme and declaration of undisclosed income was held as acknowledgment of deviation from charitable objects, violating sections 13(1)(c) and 13(1)(d). The tribunal rejected the trust's argument that PMGKY participation absolved wrongdoing, emphasizing that amnesty schemes cannot excuse fraudulent conduct. Revenue's appeals were allowed, exemptions u/s 11 and 12 denied, and AO directed to recompute income under section 164 at maximum marginal rate.

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Issues Involved:

1. Unaccounted Cash Receipts from Salary
2. Bogus Corpus Donations
3. Bogus Salary Expenses
4. Exemption under Sections 11 and 12 of the Income Tax Act
5. Violation of Section 13 of the Income Tax Act
6. Applicability of PMGKY Scheme

Issue-wise Detailed Analysis:

1. Unaccounted Cash Receipts from Salary:

The AO found that the trustees of Parul Arogya Seva Mandal Trust and Parul University were involved in the practice of receiving back a portion of the salary paid to staff in cash and cheque. This was corroborated by various incriminating documents, including MS Excel files and blank bearer cheques collected from employees. The AO calculated the total unaccounted cash receipts based on these documents and extrapolated the amounts for the financial years 2015-16 and 2016-17. The Ld.CIT(A) partially upheld the AO's findings but reduced the additions slightly.

2. Bogus Corpus Donations:

The AO observed that the trust recorded amounts received back from employees' salaries as corpus donations. This was confirmed by employee statements and documents found during the survey. The AO disallowed a significant portion of these corpus donations, treating them as bogus. The Ld.CIT(A) confirmed the AO's findings regarding bogus corpus donations for both financial years under consideration.

3. Bogus Salary Expenses:

The AO found that the trust was paying salaries to non-existing staff members and withdrawing the amounts using ATM cards and PINs. This was supported by documents and statements from the trustees and employees. The AO disallowed these bogus salary expenses, and the Ld.CIT(A) upheld the disallowances with minor adjustments.

4. Exemption under Sections 11 and 12 of the Income Tax Act:

The AO denied the exemptions under Sections 11 and 12, treating the income as normal business income due to violations of the trust's objectives. The Ld.CIT(A) concluded that the AO was not justified in denying the exemptions, as there was no apparent violation of Section 13. The Ld.CIT(A) found that the trust had not deviated from its objects and had applied the funds for its intended purposes.

5. Violation of Section 13 of the Income Tax Act:

The AO argued that the trust violated Section 13 by engaging in fraudulent activities and diverting funds for purposes other than its charitable objectives. The Ld.CIT(A) disagreed, stating that there was no evidence to suggest that the trust had misused the funds or deviated from its objects. However, the appellate tribunal found substantial evidence indicating violations of Sections 13(1)(c) and 13(1)(d), including the systematic recovery of staff salaries and misrepresentation of corpus donations.

6. Applicability of PMGKY Scheme:

The assessee argued that the undisclosed income declared under the PMGKY Scheme should not be included in the total income. The AO did not accept this submission, stating that the declaration under PMGKY did not cover all the undisclosed income for the relevant years. The Ld.CIT(A) partially accepted the assessee's argument but the appellate tribunal held that participation in the PMGKY Scheme does not absolve the assessee from the wrongdoing and that the trust's fraudulent activities disqualify it from exemptions under Sections 11 and 12.

Conclusion:

The appellate tribunal dismissed the appeals filed by the assessee and allowed the revenue's appeals. The exemptions under Sections 11 and 12 were denied, and the additions based on the AO's findings were confirmed. The AO was directed to recompute the income of the assessee in accordance with Section 164 of the Income Tax Act, taxing the income at the maximum marginal rate and excluding any benefits of exemptions previously claimed under Sections 11 and 12. The AO should also avoid duplication of addition and give due credit for income disclosed in PMGKY with taxes paid.

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