In order to claim exemption under sec 10(23C) all clauses of the MOA should be proved

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI ‘C’ BENCH

BEFORE SHRI R.P. TOLANI , JM & SHRI A.N. PAHUJA, AM

ITA No.4694/Del/2011

Assessment year:2011-12

M/s Ganeshee Lal Education

Society, GL Public

School, Kosli Road, Kanina

District: Mahendergarh

(Appellant)

V/s.

Commissioner of Income- tax

Rohtak

(Respondent)

[PAN: AAAAG 4039 N]

Assessee by: Shri Rajesh Goel, AR.

Revenue by: Ms.Renuka Jain Gupta,DR

Date of hearing: 16-02-2012

Date of pronouncement: 24-02-2012

O R D E R

A.N.Pahuja:-

This appeal filed on 27th October, 2011 by the assessee against an order dated 23rd September, 2011 of the ld. CIT- Rohtak, raises the following grounds:-

1. “That on the facts and circumstances of the case, the learned CIT has gravely erred in law and on facts in rejecting the appellant’s application u/s 12A(1) without appreciating the fact that the appellant society was granted exemption from Income-tax right from the year 2003-04 on the basis of the constitution of the society after considering the aims and objects of the society. The order is based on surmises and conjectures. The order is against law and facts and the registration sought for may kindly be directed to be allowed.

2. That no valid or reasonable or even legal ground has been cited in the order of the learned CIT and the facts of the case fully proved the existence of and educational society devoted exclusively to educational charitable purposes. The registration sought for was wholly valid in law and on facts and ought to have been allowed.

3. That the learned CIT was not justified in holding the society as a private discretionary society on arbitrary grounds. The society was exclusively a charitable institution devoted only to educational purposes and none else throughout its existence since the year 2003 and was being treated by the department as such and granted exemption from Income-tax. The registration sought for was quite legal and valid and justified and may kindly be directed to be granted registration.”

2. Facts, in brief, as per relevant orders are that the aforesaid society filed an application in form no.10A on 15.03.2011 u/s 12A(1)(aa) of the Incometax Act, 1961 (hereinafter referred to as the ‘Act’), along with a copy of memorandum and articles of association as also income and expenditure account and balance sheet for the financial years 2007-08 to 2009-10. After having a report from the concerned Assessing Officer[AO in short], wherein it was mentioned, inter alia, that the books of accounts of the aforesaid society, were not produced before him, the ld. CIT allowed an opportunity to the assessee society. After having a further report dated 6.9.2011 from the concerned AO, the learned CIT concluded as under:-

“3. On 06.09.2011, books of accounts and vouchers produced and test checked. Two cash receipts, in token of cash payments made to one Shri Kartar Singh S/o Shri Mangtu Ram (Labour

Contractor) resident of village Dhanaunda, District Mahendergarh, on account of labour for building construction were perused and photocopies of which were taken and placed on record. As per these receipts ```1,70,000/- and ``1,00,000/- have been shown to be paid in cash on 07.04.2008 to Sh. Kartar Singh, Labour Contractor. These payments have not taken place in the regular books of accounts of the applicant society at appropriate place. No agreement, whatsoever, was produced showing any contract between the labour contractor and the applicant society. An amount of ```2,70,000/- was paid in cash on a single day instead of making the payment through crossed cheques or demand draft. Moreover, Income Tax provisions in respect of TDS u/s 194C on contractual payments have also not been complied with by the applicant society. From the foregoing, it is crystal clear that the financial affairs of the applicant society are not fair and genuine and not properly recorded in the books of accounts. In these circumstances, it cannot authentically be said that the receipts of the applicant society are utilized properly to attain its charitable aims and objects. Therefore, the application of the applicant society for registration u/s 12AA of the Income-tax Act, 1961 deserves to be rejected.

4. As per Rule 17A (a) of Income-tax Rules, 1962, the applicant was required to submit the original instrument of its establishment together with a copy thereof, but the applicant submitted only a photocopy of the instrument. The applicant did not turn up to produce the original copy of the instrument of its establishment in spite of communication from this office as well as from the office of the ACIT/Joint CIT concerned. The application was, therefore, incomplete and not competent for the consideration of registration u/s 12AA of Income-tax Act, 1961.

5. The applicant society is just like a private discretionary society controlled by the office bearers of the society having 5 members out of which three members are from the same family who are self (Sh. Rajender Singh), his wife (Smt. Dhanvanti) and his son (Sh. Hoshiyar Singh). This way the majority of office bearers have close family relations with each other. Complete and updated list of members as well as of office bearers were furnished. In the memorandum of applicant society there does not contain any internal check on the autocratic functioning of the office bearers who are all-powerful creating an impression of one family show in the society. Keeping in view the facts and circumstances of the case, this fact is abundantly clear that most of the members of the society belong to same family, thereby, closely related to each other. All the properties of the society as well as absolute financial control still remains in the hands of the three members and also the crucial powers to transfer the assets of the society to any or many members of the office bearers, thereby, clearly allows the members to get the property of the society in question transferred in their names. Keeping in view the aforesaid facts and circumstances, neither aims/objects and terms of memorandum are of charitable nature, nor are there any activities which may be put to a test of genuineness. Consequently, the request of the applicant society for registration u/s 12AA of the Income-tax Act cannot be acceded to and the application in form 10A is, therefore, rejected accordingly u/s 12AA(1)(b)(ii) of the Income-tax Act, 1961.”

3. The society is now in appeal before us against the aforesaid findings of the ld. CIT, Rohtak. The ld. AR on behalf of the assessee submitted that the society was established on 12th June, 2003 with the objects of running a school and the income returned by the assessee is exempt u/s 10(23C)(iiiad) of the Act, the receipts being below of ```1 crore. Since receipts of the society were likely to exceed ``1 crore, the society moved an application for registration u/s 12A of the Act. While carrying us through the impugned order, the ld. AR contended that even though the assessee sought to produce original instrument of its establishment, the ld. CIT did not examine the same and denied registration on the ground that the society was like a private discretionary society controlled by the family of Shri Rajinder Singh. The ld. CIT was not justified in denying

registration on the ground that TDS was not deducted from certain payments, particularly when the society was running a school and its aims & objects were charitable in nature. On the other hand, the ld. DR supported the findings of the ld. CIT.

4. We have heard both the parties and gone through the facts of the case. We find that the society was established on 12th June, 2003 with the following aims and objects:-

a) “To establish educational institution and to run a school for the attainment of the meaningful and quality education.

b) To develop the sense of patriotism towards nation and impart education by modern scientific method as well as ancient Indian culture with devotion to humanity and God.

c) To hire or take on lease the necessary building for institution or school run by the society and construct its own in the long run as and when the society is able to construct.

d) To arrange competitions debates or quiz and seminars for the advancement of intellectuals.

e) To education the students in Yoga, sports and physical activities and to conduct exhibition for the practical education.

f) To co-operate with other institutions having similar aims and objects and to get their co-operation also.

g) To setup well equipped library and reading room with all amenities and to publish magazines periodicals and journals for the advancement of general knowledge.

h) To make arrangement for free scholarship and stipends and free aid to brilliant and deserving students regardless of their caste and creed and issue appeal for donation, aid and gift for the advancement of society.

i) To purchase or take on lease any property convenient for the furtherance of the objects.

j) To construct maintain alter, improve or develop any building which is convenient for the society.

k) To do all such things and to perform all such activities which are necessary for the achievement of object of society.

l) To mortgage, lease of moveable or immovable property or any portion there for if it is necessary for the betterment of society.

m) To work hard of achievement of higher goals and objects of society.

n) To take loans in cash or kind either from individuals, banks, societies Govt. or Semi Govt. bodies for the advancement of the purpose of society.

o) To receive the financial aid from Govt. or Semi Govt. bodies or individual.

p) The management of the affairs of the society will be entrusted in accordance with the rules and regulations of the society.

q) The present signatories of the memorandum are the founder members of the society and election will be held according to rules.

4.1 It is further mentioned in the deed that the income and property of the society shall be applied solely towards the promotion of the objects of the society as set forth in the Memorandum of Association and no portion thereof shall be paid or transferred directly or indirectly to the members of society. Moreover, on the winding up or dissolution of the society, if there remains after satisfaction of all its debts and liabilities any property whatsoever, the same shall not be paid to or distributed among the members of the society but shall be given or transferred to some other institution having objects similar to the objects of the society and to be determined by the members of the society at or before the time of dissolution.

4.2 Before proceeding further, we may have a look at the relevant provisions of sec. 12A & 12AA of the Act, which read as under:

“12A. Conditions for applicability of sections 11 and 12.

(1) The provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely:-

(a) the person in receipt of the income has made an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Commissioner before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution, whichever is later and such trust or institution is registered under section 12AA:

Provided that where an application for registration of the trust or institution is made after the expiry of the period aforesaid, the provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution, -

(i) from the date of the creation of the trust or the establishment of the institution if the Commissioner is, for reasons to be recorded in writing, satisfied that the person in receipt of the income was prevented from making the application before the expiry of the period aforesaid for sufficient reasons;

(ii) from the 1st day of the financial year in which the application is made, if the Commissioner is not so satisfied:

Provided further that the provisions of this clause shall not apply in relation to any application made on or after the 1st day of June, 2007; (aa) the person in receipt of the income has made an application for registration of the trust or institution on or after the 1st day of June, 2007 in the prescribed form and manner to the Commissioner and such trust or institution is registered under section 12AA;

(b) where the total income of the trust or institution as computed under this Act without giving effect to the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year , the accounts of the trust or institution for that year have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the person in receipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.

(2) Where an application has been made on or after the 1st day of June, 2007, the provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution from the assessment year immediately following the financial year in which such application is made.

12AA. Procedure for registration

(1) The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) of section (1) of section 12A, shall--

(a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also such inquiries as he make may deem necessary in this behalf; and

(b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he—

(i) shall pass an order in writing registering the trust or institution;

(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant: Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard. (1A) All applications, pending before the Chief Commissioner on which no order has been passed under clause (b) of sub-section (1) before the 1st day of June, 1999, shall stand transferred on that day to the Commissioner and the Commissioner may proceed with such applications under that sub-section from the stage at which they were on that day.

(2) Every order granting or refusing registration under clause (b) of sub-section (1) shall be passed before the expiry of six months from the end of the month in which the application was received under clause (a) or clause (aa) of sub-section (1) of section 12A.

(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution:

Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.

5. A mere glance at the aforesaid provisions reveals that before considering registeration in terms of the aforesaid provisions, the ld. CIT has to satisfy himself about the objects of the trust or institution and the genuineness of its activities, after making such inquiries as he make may deem necessary in this behalf. In the instant case, indisputably the society is running a school since 2003 and has been continuously allowed exemption u/s 10(23C)(iiiad) of the Act. Ignoring these aspects, the ld. CIT in the impugned order rejected the request for registration while observing that the society did not place before him or the Addl. CIT, original instrument of its establishment and that it was controlled by family members of Shri Rajinder Singh while cash payments had been made without deduction of TDS. Thereafter, the ld. CIT concluded that ‘neither aims/objects and terms of memorandum are of the charitable nature nor are there any activities which may be put to a test of genuineness.’ The ld. CIT did not elaborate in his order u/s 12AA(1)(b)(ii) of the Act as to which specific aim/object or activity was not of charitable nature. The ld AR now contends  before us that the society is running a school since inception and its claim for exemption u/s 10(23C)(iiiad) of the Act has been accepted by the AO. As already observed ,the ld. CIT did not examine this aspect of the activities nor elaborated as to which specific clause in the memorandum of the society is not of charitable nature . Merely because wife and son of Shri Rajinder Singh are also members of the society or tax has not been deducted at source from certain payments does not ipso facto mean that objects or activities of running the school are not genuine or are not of charitable nature. The ld. CIT has all the powers under the Act to enquire in to genuineness of activities of the society. In any case, there is nothing to suggest as to whether or not the ld. CIT conducted any independent enquiries to ascertain the genuineness of activities of the society before rejecting the application for registration. In these circumstances, especially when the applicant society did not place the original instrument of its establishment before  the ld. CIT, we consider it fair and appropriate to vacate the findings of the ld. CIT and restore the matter to his file with the directions to allow a final opportunity to the assessee for establishing genuineness of the activities of the society in the light of aims and objects stipulated in the Memorandum of the society and thereafter, pass a speaking order in accordance with law .Inter alia, the society shall place before the ld. CIT ,the original instrument of its establishment .We may clarify that the ld. CIT is free to undertake any independent enquiries, necessary to ascertain the genuineness of activities of the society. With these directions ground nos.1 to 3 in the appeal are disposed of.

6. In result, appeal is allowed but for statistical purposes.

Order pronounced in open Court

                                                            Sd/-                         Sd/-

                                                  (R.P. TOLANI)      (A.N. PAHUJA)

                                                (Judicial Member) (Accountant Member)

NS

Copy of the Order forwarded to:-

1. M/s Ganeshee Lal Education Society, c/o GL Public School, Kosli Road, Kanina, District :Mahendergarh

2. Asstt. CIT, Rewari Circle, Rewari.

3. CIT Rohtak.

4. DR, ITAT,’C’ Bench, New Delhi

5. Guard File.

                                                                                                                          BY ORDER,

Deputy/Asstt.Registrar

                                                                                                                           ITAT, Delhi