TaxTMI 
TaxTMI 
2010 (12) TMI 1074
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.... as consequential benefits of the registration. While the matter being so, a search action was carried out by the Department on May 4, 2007. The search was carried out in the premises of the assessee-trust as well as in the premises of the trustees. On the basis of the documents and materials found and seized in the course of search, the Commissioner of Income-tax came to a conclusion that the assessee-trust has violated the provisions of the Income-tax Act, 1961, viz., sections 11, 12 and 12A, 12AA and 13. Accordingly, he proposed the registration already granted to the assessee-trust be withdrawn. A notice was issued by the Commissioner of Income-tax to the assesseetrust on June 30, 2008 calling for objections, if any. The objections filed by the assessee were overruled and the registration has been ultimately withdrawn by the Commissioner of Income-tax through his order dated March 16, 2010. The assessee is aggrieved and therefore, this appeal. The grounds relied on by the Commissioner of Income-tax to pass the cancellation order are based on the following particulars collected in the course of search: (i) The assessee-trust had collected capitation fees from the stu....
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....aid by availing of funds of the assessee-trust. This is another instance of diversion from funds. (x) Dr. C. K. Velayuthan Nair, one of the trustees of the assessee-trust has paid a capitation fee of Rs. 3 lakhs for getting an admission to medical course for his daughter and the amount has been diverted from the trust fund. The cancellation order passed by the Commissioner of Income-tax runs to 28 pages. He has discussed the nature of materials collected in the course of search ; the propositions made by him and noticed by the assessee ; the replies and explanations furnished by the assessee-trust and the conclusions arrived at by him. But ultimately speaking the Commissioner of Income-tax has zeroed down two grounds to rescind the registration granted to the assessee. The first ground is that the assessee-trust has accepted capitation fees for admitting students to medical, dental and nursing courses. The second is that the trustees of the assessee have diverted trust funds for their benefit and for purposes other than the objects for which the trust has been formed and registered. In this context, it is necessary to outline in brief the explanations offered by the assess....
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....s of the assessee-trust. The Revenue has no case against the above. (vii) The assessee-trust has not carried out any other activities other than its declared objects. There is no case to allege that the assessee-trust has diverted its funds for purposes other than the objects for which the trust has been established. (viii) Subject to the allegation of the Commissioner of Income-tax that there is a case of diversion of funds, there is nothing to show in the accounts or in the seized materials that the assessee had made any profit out of the activities carried on by it and any portion of that profit has been enjoyed by any of the trustees or the relatives. The surplus funds of the assessee-trust year to year have been used only for the purposes of furthering the objects of the assessee-trust. There is no distribution of profit or such other benefits to the trustees or relatives of the assessee-trust. (ix) The Revenue has no case that the objects or the activities of the assessee-trust are not genuine or opposed to public policy. (x) All sorts of receipts of the assessee-trust have been utilised for putting up infrastructures like building and other facilities. Those faci....
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....d in the books of account of the assessee-trust at Rs. 99,73,961. As against the above, an amount of Rs. 10,84,730 alone was kept as registered office of the trust which is also the residence of the trustees. The balance amounts were in the possession of various institutions run by the trust. Therefore, the seizure of cash from the registered office to the extent of Rs. 10,50,000 does not make out any case that the funds of the trust were diverted by the trustee. (xvii) The allegation that unaccounted deposits were made in Tamilnadu Mercantile Bank at Arumanai is not correct. No deposits were made in that bank either in the name of the trust or in the name of the trustees, unaccounted in nature. (xviii) There is no truth in the allegation that the funds were given to the trustees for their personal benefits whereas funds were handled by the trustees for applying funds for the purposes the trust itself. (xix) The capitation fee paid by the trustee's daughter was made from their own resources and not by the trust. It is not known how the Department has come to the conclusion that the assessee-trust has paid its own money as capitation fee in favour of the daughter of the tru....
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....was taken up by the Revenue before the hon'ble High Court, the High Court held as follows : "It is not in dispute that the assessee is a social, cultural and educational trust, running educational institutions having various professional courses. However, the contention of the counsel for the Revenue, that the amounts were collected for the purpose of allotment of seats to students for the relevant assessment year is not found on any materials and the same is not apparent from the record. Merely because the assessee is an institution which is running professional courses, it could not have been presumed by the Assessing Officer that the said amounts which were received as donations were attributable to the allotment of seats in the relevant assessment years. In the absence of there being any foundation for such a contention, the contention of counsel for the Revenue that the donations received to an extent of Rs. 28,30,094 during the said period is in violation of the Prohibition of Capitation Fees Act, 1984 and therefore, the trust had acted opposed to public policy, consequently, was not entitled to be treated as a charitable organisation, is not sustainable. The Tribunal was ....
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....exempt income be not prejudged. If the Commissioner of Incometax had an information of some wrongful deploy by the trust by collecting fees or donations in violation of prohibition of capitation fees, the Commissioner of Income-tax should pass on such information to the authorities concerned administering the Maharashtra Capitation Fees (Prohibition) Act and for that reason he cannot cancel the registration of an institution for the reason that the main test of exemption is the nature of application of funds. Learned counsel appearing for the assessee has also raised another condition that the cancellation of registration could be only prospective and not retrospective for which he has relied on the decision of the Income-tax Appellate Tribunal, Lucknow "B" Bench rendered in the case of Kapoor Educational Society v. CIT 44 DTR (Lucknow) (Trib) 97. The learned Commissioner appearing for the Revenue, on the other hand, contended that a trust violating a prohibitory law and thereby carrying on activities opposed to public policy cannot enjoy an exemption provided under section 12AA of the Income-tax Act, 1961. Unlawful activities are not in the nature of charitable activities. T....
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.... collected even in violation of the Prohibition Act for the purposes for which the trust was established, there is a case for the Revenue. If the assessee has applied its entire income including capitation fees exclusively for the purposes for which it is established, the Revenue has no case. This is the sum and substance of the above two decisions relied on by learned counsel appearing for the assessee. As far as application of funds is concerned, 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. Now the case is that of diversion of funds.....