Citation Codes

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Case Number

I.T.A No. 444.Mds/2010

Advocates

Appellant by: Shri G. Baskar
Respondent by: Shri Shaji P. Jacob

Judges

O.K Narayanan, V.P
Hari Om Maratha, J.M

Acts

provisions of the I.T. Act, 1961 viz. sections 11, 12 and 12A, ITA 444/10 :- 3 -: 12AA
Tamilnadu Prohibition of Capitation Fees Act. The income-tax Act
Maharashtra ITA 444/10 :- 18 -: Capitation Fees (Prohibition) Act
Maharashtra Capitation Fees (Prohibition) Act, 1987.
Prohibition of Capitation Fees Act, 1984.
Prohibition of Capitation Fee Act, 1984
INCOME TAX ACT 1961
sec.11(1)(d) of the I.T.Act, 1961.
Capitation Fees Act

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Smart Summary

Tribunal Opinion Summary — ITA No. 444/10 (Order dated 24 December 2010)

Factual and Procedural Background

The assessee is a trust registered under section 12AA of the Income-tax Act, 1961 as a charitable trust from the assessment year 1993-94 onwards and running medical, dental and nursing colleges. On this basis the trust had been claiming and the Revenue had allowed benefits under sections 11 and 12 of the Income-tax Act.

A search was carried out on 4 May 2007 at the premises of the assessee-trust and trustees. On the basis of seized materials the Commissioner of Income-tax (Central-II, Chennai) concluded there were violations of provisions of the Income-tax Act (sections 11, 12, 12A, 12AA and 13) and proposed withdrawal of the registration. A notice calling for objections was issued on 30 June 2008; objections were overruled and the Commissioner issued an order dated 16 March 2010 canceling the registration under section 12AA. The assessee appealed to the Tribunal. The Tribunal heard both parties and pronounced the order on 24 December 2010.

Legal Issues Presented

Whether acceptance/collection of alleged capitation fees by the assessee-trust (in violation of statutory prohibitions on capitation fees) is a valid ground to cancel registration granted under section 12AA of the Income-tax Act.
Whether there is diversion of trust funds to trustees or their relatives for purposes other than the objects of the trust, such diversion being a ground to withdraw registration under section 12AA.
Whether, in the circumstances disclosed by the seized materials and the assessee's explanations, the Commissioner was justified in cancelling registration (including whether the Commissioner may investigate sources of donors' funds when considering registration under section 12AA).

Arguments of the Parties

Appellant's (Assessee‑Trust) Arguments

The trust was established to run educational institutions in medicine, dentistry, pharmacy, nursing and related health subjects; all properties used for these institutions were acquired using trust funds and applied to those institutional purposes.
The institutions and courses have recognition from regulatory bodies (Indian Medical Council, Dr. M.G.R. Medical University) and admissions and fees comply with government guidelines; fees collected are as per Government of Tamilnadu rules.
The seized materials and cash do not demonstrate diversion of funds for trustees' personal benefit; large cash shown at time of search represented funds held across institutional accounts and buildings and not diversion.
Receipts (including alleged capitation fees/corpus donations) were applied to building and infrastructure: the trust spent significant sums (figures provided in the record) on construction and facilities for the educational institutions.
Any alleged violation of the Prohibition of Capitation Fees Act (or similar prohibitory laws) does not amount to a violation of the Income-tax Act; there is no distinction under the Income-tax Act between legal and illegal income for the purposes of the test relied upon by the Revenue, and the trust applied funds for its objects.
Specific allegations (for example, that a trustee paid capitation fee from trust funds) were countered by documentary bank evidence showing payments were made personally.
The trust contended that conditions specified in section 12AA(3) for cancellation (activities not genuine, funds diverted, activities opposed to objects/public policy) were not made out on the facts.

Respondent's (Revenue) Arguments

The Commissioner contended that the assessee had collected capitation fees (seized materials indicated about ₹36 crores collected between 1.4.2001 and 31.3.2007) and that such charging of capitation fees is against public policy and amounts to profiteering in education, making the trust ineligible for charitable registration.
Revenue relied on depositions and letters from parents and statements by trustees as supporting evidence of capitation collection and non‑recordal of such receipts in books/returns.
The Commissioner alleged diversion of trust funds: (a) large lease advance payments (₹1.43 crores as on 31.3.2004) paid to a trustee from trust funds for leased premises, (b) repayment of an employee's bank overdraft using trust funds, and (c) payment by the trust for a trustee's daughter's capitation fee.
On these grounds — acceptance of capitation fees and diversion of funds — the Commissioner justified rescission of registration under section 12AA.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
TMA PAI Foundation & Others, Writ Petition (Civil) 317 of 1993 (dated 31.10.2002) — (Supreme Court)	Held that charging of capitation fee is against public policy and profiteering is not permissible in the field of education (as referenced by the Commissioner).	The decision was noted in the materials seized and relied upon by the Commissioner, but the Tribunal observed that while the Supreme Court condemned capitation fees as against public policy, that judgment did not lead to cancellation of registration under the Income-tax Act where the trust applies its receipts to charitable objects; the Tribunal distinguished the Revenue's use of this precedent for cancelling registration under section 12AA.
Director of Income-tax (Exemptions) & another vs. Sri Belimatha Mahasamsthana Socio Cultural & Educational Trust (46 DTR (Kar.) 290) — (Karnataka High Court)	Considered whether amounts collected (alleged capitation) could be treated as donations used for educational purposes and held that violation of the Prohibition of Capitation Fees Act does not automatically render the trust opposed to public policy for Income‑tax exemption purposes.	The Tribunal relied on this High Court decision to hold that accepting capitation fees (or donations alleged to be capitation) cannot, by itself, be a ground to withdraw registration under section 12AA when the receipts are applied for the purposes of education; the Tribunal found the Commissioner's proposition unsustainable in law in the light of this precedent.
Maharashtra Academy Of Engineering & Educational Research (MAEER) v. Commissioner of Income-tax — ITAT, Pune A Bench (ITA No.1669/Pn/07)	Held that the Commissioner should confine enquiries to genuineness and application of the trust's activities and should not prejudge the source of donations; if there is information of violations of capitation laws, such information should be forwarded to the appropriate authority rather than used to cancel registration under section 12AA.	The Tribunal followed the reasoning of the ITAT Pune Bench to conclude that the Commissioner was not entitled to investigate or penalize the assessee under the Income‑tax Act for alleged violations of capitation laws; the tribunal held that the Commissioner cannot cancel registration for that reason alone.
Kapoor Educational Society v. Commissioner of Income-tax (44 DTR (Lucknow) (Trib) 97) — (ITAT, Lucknow Bench)	Addressed the question whether withdrawal of exemption/registration could be only prospective.	The Tribunal noted the decision and specifically left open the contention that cancellation could only be prospective; the Tribunal did not comment on this point further in the present opinion.
Thanthi Trust (referenced alongside TMA PAI Foundation)	Referenced by the parties as part of authorities discussing that profit-making is not permitted in the field of education (ratio referenced in the opinion).	The assessee relied on the general proposition (profit-making not permitted) but the Tribunal treated the proposition as not determinative for withdrawal of registration under the Income‑tax Act where receipts are applied for charitable educational purposes; the Tribunal found these authorities did not support the Commissioner's action to cancel registration in the present facts.

Court's Reasoning and Analysis

The Tribunal conducted a focused analysis on the two central grounds relied upon by the Commissioner for cancellation: (1) acceptance of capitation fees and (2) diversion of trust funds.

On the capitation-fee ground the Tribunal reasoned as follows (in accordance with the cited authorities):

The decisions of the Karnataka High Court in Director of Income-tax (Exemptions) v. Sri Belimatha Mahasamsthana and the ITAT, Pune Bench in MAEER indicate that alleged violation of statutes prohibiting capitation fees does not, by itself, provide a valid basis to cancel registration under the Income-tax Act. The Commissioner is not to investigate the source or legality of donors' funds for the purpose of testing registration under section 12AA; enquiries as to the genesis and character of donors' money should be directed to appropriate authorities or to inquiries in the donors' hands.
The primary test for exemption and registration under the Income‑tax Act is the genuineness of the trust's activities and whether the income is applied to the objects of the trust. If the assessee applies its receipts (including contested receipts) to its declared charitable objects, the Revenue has no case to withdraw registration under section 12AA on the ground of alleged capitation collection alone.
The Tribunal therefore found the Commissioner's proposition that capitation-fee collection per se negates entitlement to 12AA registration to be unsustainable in law in light of the cited precedents.

On the alleged diversion of funds the Tribunal examined the factual materials and the assessee's explanations:

Seizure of cash from the registered office (which was also the residence of the trustees) reflected holdings of cash across the trust and its institutions; the Tribunal accepted the assessee's explanation that total cash as on the date of search exceeded the cash found at the registered office and therefore seizure of cash at the office did not demonstrate diversion — it indicated mere holding of funds.
Documentary bank evidence showed that the payment of capitation fee by Dr. C.K. Velayuthan Nair for his daughter was made from his personal accounts and not from trust funds; therefore the allegation that this payment was from trust funds was not established.
With respect to lease deposits paid to Dr. Velayuthan Nair (a trustee), the Tribunal noted the deposits were non‑refundable and the trust enjoyed use of the property for conducting educational activities. The Tribunal observed that the funds (including lease deposits) were, de facto, applied for improving infrastructure for educational purposes, and that the Revenue had not shown that the deposits were used for personal benefit of the trustee or relatives.
The Tribunal also observed overall that the assessee had spent substantial amounts on construction and infrastructure for educational institutions — figures placed on record showed large application of funds to institutional objects, undermining the claim of diversion for personal benefit.

On balance, considering the authorities which restrict the Commissioner's power to cancel registration on the basis of alleged capitation-fee collection alone, and given the record evidence and explanations accepted by the Tribunal regarding application of funds and absence of demonstrated diversion for personal benefit, the Tribunal concluded the Commissioner’s cancellation order was unsustainable.

The Tribunal expressly left open the specific question of prospective effect of withdrawal of registration (as raised in Kapoor Educational Society), choosing not to adjudicate that point in this order.

Holding and Implications

Holding: The Tribunal allowed the appeal and directed the Commissioner of Income-tax to vacate the cancellation order. The Tribunal ordered restoration of the registration granted under section 12AA.

Core Ruling: The appeal is ALLOWED — the order cancelling registration under section 12AA is set aside and the registration is restored.

Implications:

Direct effect: The assessee-trust's registration under section 12AA is to be restored; the Commissioner must vacate the cancellation order dated 16.3.2010.
Scope: The Tribunal's decision rests on the application of earlier authorities (Karnataka High Court and ITAT Pune) and on the facts showing application of funds to the trust's objects and lack of proved diversion for personal benefit. The Tribunal did not rule that statutory prohibition on capitation fees is irrelevant in all contexts; instead it held that such alleged violations do not automatically defeat registration under section 12AA where the trust's application of funds to charitable objects is established and the Commissioner has not demonstrated diversion or other statutory disqualifications under section 12AA(3).
Precedential effect: The opinion relies on existing authorities and does not purport to set a novel legal principle beyond applying those decisions to the facts; the Tribunal did not state that it was laying down a new precedent independent of the cited case law.

Order pronounced on 24 December 2010 by Dr. O.K. Narayanan (Vice-President) and Hari Om Maratha (Judicial Member). Copy recipients listed in the order include appellant, respondent, CIT(A), CIT and DR.

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Padanilam Welfare Trust v. Cit

PER DR.O.K.NARAYANAN, VICE PRESIDENT This is an appeal filed by the assessee. The appeal is filed against the order of the Commissioner of Income-tax, Central-II, Chennai dated 16.3.2010, under sec.12AA cancelling the ITA 444/10 :- 2 -: registration granted to the assessee-trust under sec.12AA of the

I.T. Act, 1961.

2. The assessee is a trust registered under sec.12AA of the

I.T. Act, 1961 as a charitable trust from the assessment year 1993-94 onwards. On the basis of the registration, the assessee has been claiming benefits of sections 11 and 12 provided in the

I.T. Act and those benefits claimed by the assessee have been accepted and allowed by the Revenue. The assessee is running Medical, Dental and Nursing colleges. As the activities carried on by the assessee related to its objects concerning education, the Revenue accepted its claim for registration as well as consequential benefits of the registration.

3. While the matter being so, a search action was carried out by the Department on 4.5.2007. 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 I.T. Act, 1961 viz. sections 11, 12 and 12A, ITA 444/10 :- 3 -: 12AA and 13. Accordingly, he proposed the registration already granted to the assessee-trust be withdrawn.

4. A notice was issued by the Commissioner of Income-tax to the assessee-trust on 30.6.2008 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 16.3.2010. The assessee is aggrieved and therefore, this appeal.

5. The grounds relied on by the Commissioner of Income-tax (Appeals) 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 students to the extent of ` 36 crores for the period from 1.4.2001 to 31.3.2007. The details of such capitation fees collected are reflected in the seized materials.

(ii) On the basis of summons issued, depositions were made by parents of 6 students and have admitted that capitation fees were paid to Dr. ITA 444/10 :- 4 -: C.K.Velayuthan Nair and Dr. Rema V. Nair who are the trustees of the assessee-trust for getting admission for their wards in the medical and dental colleges run by the trust. Parents of 5 students sent letters to the authorities confirming the payment of capitation fees.

(iii) As against the above, assessee-trust has admitted a donation of ` 1,10,450/- only for the assessment year 2003-04 and no donations have been recorded for the assessment years 2003-04, 2004-05 and 2005-06.

(iv) The trustees have recorded in their statements that the capitation fees collected for admission are not reflected in the returns of income but the fees collected from the students as prescribed by the Government alone reflected.

(v) The capitation fees collected by the assessee- trust have not been brought in the books of account or reflected in the returns filed and therefore, this is a clear violation of the provisions of granting registration under sec.12AA to the assessee-trust. ITA 444/10 :- 5 -:

(vi) The Honble Supreme Court in the case of TMA PAI Foundation & Others in Writ Petition (Civil) 317 of 1993 dated 31.10.2002 has held that charging of capitation fee is against public policy and profiteering is not permissible in the field of education.

(vii) It is found from the materials collected in the course of search that the funds of the assessee- trust were diverted as the deposits were made for acquiring assets for the trustees and relatives. Therefore, there is unlawful diversion of trust funds.

(viii) One of the trustees Dr. C.K.Velayuthan Nair, owned a hospital building and the said building was taken on lease by the assessee-trust for an annual rent of ` 3 lakhs. As against the above lease, the assessee-trust has paid a lease advance totalling ` 1.43 crores as on 31.3.2004. This is a case of diversion of funds for the benefit of the trustees.

(ix) One Shri J.S.Prasad, Administrative Office of the Trust has availed overdraft facilities from the Bank in his name and the said overdraft amount ITA 444/10 :- 6 -: was repaid by availing 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 ` 3 lakhs for getting an admission to medical course for his daughter and the amount has been diverted from the trust fund.

6. 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 benefits and for purposes other than the objects for which the trust has been formed and registered. ITA 444/10 :- 7 -:

7. In this context, it is necessary to outline in brief the explanations offered by the assessee before the Commissioner of Income-tax before passing the cancellation order. The points highlighted by the assessee-trust are as follows :

(i) The trust has been created for establishing institutions to improve education especially in the field of medicine, dentistry, pharmacy, nursing and other health related subjects.

(ii) All the properties owned by the assessee-trust for running the above institutions have been acquired by using the funds of the trust and the entire funds of the assessee-trust have been used only for the purpose of acquiring the above institutions and for meeting the expenses in running those institutions.

(iii) The assessee is conducting various medical and para-medical courses with the recognition of Indian Medical Council and other regulatory bodies. All these institutions are under the jurisdiction of Dr. M.G.R. Medical University, Government of Tamilnadu under the UGC Act. All the courses offered by the assessee-trust in its various institutions are recognized by Government, University and other authorities as required by law. The admissions are made on the basis of the guidelines and ITA 444/10 :- 8 -: rules framed by the Government of Tamilnadu for admitting the students to professional courses. The assessee-trust is collecting fees from the students as per the guidelines issued by the Government of Tamilnadu.

(iv) There is no violation of any rule or law in matters of running the educational institutions and conducting various courses offered by those institutions. The Department has no materials against this accepted position.

(v) The assessee-trust is mainly established for offering various medical and para-medical courses. Therefore, its operation is in the field of education. Charitable activities included education as well. Therefore, the assessee-trust is a trust established for charitable purposes for which reason the assessee has been enjoying the benefit of registration under sec.12AA.

(vi) While making adverse inferences against the assessee on matters like capitation fees, diversion of funds etc., the Commissioner of Income-tax has no case that the assessee-trust has not carried out the objects for which the trust has been established. The trust has been established for running educational institutions and the assessee-trust has been religiously running such medical institutions thereby carrying on the declared ITA 444/10 :- 9 -: objects 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 utilized for putting up infrastructures like building and other facilities. Those facilities are essential for running colleges and hospitals. ITA 444/10 :- 10 -:

(xi) In the previous year relevant to the assessment year 2008-09, the trust has spent more than ` 55 crores for constructing such buildings and facilities against an alleged receipt of capitation fees to the extent of ` 36 crores. The total construction cost incurred by the assessee-trust runs to the extent of ` 74 crores right from the financial year 2001-02 to the financial year 2007-08. As against the total expenditure of ` 74 crores incurred for constructing building, buildings worth ` 56 crores have already been completed and the balance is in different stages of completion. At the same time, the total of the building funds available in the hands of the assessee-trust is only ` 39 crores.

(xii) It is therefore, clear that even if it is a case of collection of capitation fees alleged against the assessee-trust, the entire such collections have been used for the purposes of the trust in establishing and running medical and other educational institutions.

(xiii) The reliance placed by the Commissioner of Income-tax on the decisions of the Honble Supreme Court in the cases of TMA PAI Foundation and Thanthi Trust are not applicable to the facts of the case. The ratio of those decisions is that profit making is not permitted in the filed of education. The assessee-trust has not made any profit in that matter. It is not possible ITA 444/10 :- 11 -: to hold that the alleged capitation fee is in the nature of illegal income. Collection of capitation fees might violate any other Law, but not the provisions of the Income-tax Act, 1961.

(xiv) There is no distinction under the provisions of the Income-tax Act, 1961 between legal and illegal income.

(xv) The duty cast on the assessee-trust under sec.12A is to utilize all the funds available with it for the purposes of declared objects of the trust and not for the purposes of profits or personal gains.

(xvi) The reasons pointed out by the Commissioner of Income-tax on the relevance of the seized materials are not applicable as he believed. The cash found in the residence of the trustee, does not mean that the funds of the trust have been diverted. There is nothing uncommon in trustees keeping funds of the trust. They are discharging the duties as custodians. On the date of search, a cash balance has been reflected in the books of account of the assessee-trust at ` 99,73,961/-. As against the above, an amount of ` 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 ` 10,50,000/- does not make out ITA 444/10 :- 12 -: 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 trustees 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 trustee. The assessee-trust has furnished the details of the payments made by Dr.C.K.Velayuthan Nair in this regard, through banks.

8. Further contention of the assessee-trust is that certain conditions are to be satisfied for attracting sec.12AA(3). That the activities of the trust are not genuine; the trust does not carry out its activities in accordance with the objects of the trust, funds are diverted to the trustees and relatives of the trustees for the ITA 444/10 :- 13 -: purposes other than trust activities etc. None of these conditions have been violated the assessee-trust. Therefore, there is no reason in invoking sec.12AA(3) to cancel the registration granted to the assessee-trust.

9. The assessee is running a number of educational institutions where about 2000 students are studying; number of persons are employed and all activities are carried on in a transparent manner and in observance of relevant laws. In such circumstances, only on the ground of alleged nature of the receipts obtained by the assessee-trust, it is not sustainable in law for the Commissioner of Income-tax to withdraw the exemption granted to the assessee-trust under sec.12AA.

10. We heard Shri G. Baskar, the learned Counsel appearing for the assessee and Shri Shaji P. Jacob, the learned Commissioner appearing for the Revenue.

11. Shri G. Baskar, the learned Counsel relied on the judgment delivered by the Honble Karnataka High Court in the case of Director of Income-tax (Exemptions) & another vs. Sri Belimatha Mahasamsthana Socio Cultural & Educational Trust (46 DTR ITA 444/10 :- 14 -: (Kar.) 290. In that case, the assessee is running a professional institution and claimed receipts of corpus donations to the extent of ` 28,30,094/-. The case of the Revenue was that the above amount was collected by the assessee-trust in violation of the Prohibition of Capitation Fees Act, 1984. It was the case of the Revenue that the amount was collected by the assessee in the nature of capitation fee. The Tribunal did not accept the contention of the assessee that the amount represented corpus donation. But the Tribunal found that the assessee has applied the said amount for the purposes of educational institutions run by the trust. The Tribunal held therefore, that the donations were utilized by the assessee-trust for the purposes of its objects and therefore, the assessee-trust was entitled for the relief under sec.11(1)(d) of the I.T.Act, 1961. While the matter was taken up by the Revenue before the Honble 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 ITA 444/10 :- 15 -: 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 AO 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 the counsel for the Revenue that the donations received to an extent of ` 28,30,094 during the said period is in violation of the Prohibition of Capitation Fee Act, 1984 and therefore, the trust had acted opposed to public policy, consequently, was not entitled to be treated as a charitable organization, is not sustainable. The Tribunal was hence justified in reversing the findings of the and the first appellate authority on this aspect of the matter and granting relief to the assessee, which is just and proper. ITA 444/10 :- 16 -:

12. One of the grounds raised by the Commissioner of Income- tax to withdraw exemption to the assessee-trust is that the assessee-trust has accepted capitation fees in violation of the law prohibiting the payment of capitation fee for allotment of seats. It is the case of the Commissioner of Income-tax that on the ground that the assessee has committed an act opposed to public policy and therefore, not entitled to enjoy the registration under sec.12AA. This particular proposition advanced by the Commissioner of Income-tax that capitation fees vis--vis exemption under sec.12AA has been disapproved by the Honble High Court as found in the above judgment. The Court has specifically held that the violation of prohibition of Capitation Fees Act cannot be a ground to take away the registration of a charitable organization. The High Court, on the other hand, accepted the decision of the Tribunal on the ground that the donations received by the trust and applied for educational purposes which were in the nature of charitable purposes. Therefore, in the light of the above judgment of the Honble Karnataka High Court, the proposition of the Commissioner of Income-tax on the nexus between the public policy and capitation fee is not sustainable in law. ITA 444/10 :- 17 -:

13. Another decision relied on by the learned Counsel appearing for the assessee is the one rendered by the I.T.A.T., Pune A Bench in the case of Maharashtra Academy Of Engineering & Educational Research (Maeer) v. CIT in ITA No.1669/Pn/07. In that case also, the registration was withdrawn by the Commissioner of Income-tax on the ground that the assessee-trust had accepted capitation fees for allotment of seats in violation of Maharashtra Capitation Fees (Prohibition) Act, 1987. The Tribunal held that the Revenue should confine its enquiries about the activities of the trust and its genuineness which means that the trust was carrying on such activities in consonance with the objects for which it is created. The Tribunal held that the Commissioner of Income-tax is not supposed to enter into an area of investigation of source of income and application of income, so that the amount of correct exempt income be not prejudged. If the Commissioner of Income-tax 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 ITA 444/10 :- 18 -: 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.

14. The 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 I.T.A.T., Lucknow B Bench rendered in the case of Kapoor Educational Society v. Commissioner of Income- tax (44DTR (Lucknow) (Trib) 97).

15. The learned Commissioner appearing for the Revenue, on the other hand, continued that a trust violating a prohibitory law and thereby carrying on activities opposed to public policy cannot enjoy an exemption provided under sec.12AA of the I.T. Act, 1961. Unlawful activities are not in the nature of charitable activities. Therefore, the fact that the assessee-trust has accepted capitation fees for allotment of seats is a sufficient reason to cancel the registration of the assessee-trust.

16. The learned Commissioner further argued that in addition to the above reason, the assessee-trust diverted its funds for the ITA 444/10 :- 19 -: personal benefits of the trustees and on that ground also, there is no case for the assessee to plead restoration of registration before the Tribunal.

17. We heard both sides in details and considered the issue.

18. In the light of the judgment of the Capitation Fees Act which is not a violation under the provisions of the I.T. Act. Therefore enquiries should be made against the assessee through a process permitted under Tamilnadu Prohibition of Capitation Fees Act. The income-tax Act cannot be punitive against the assessee on that ground.

19. As argued by the assessee-trust, there is no apparent distinction between legal and illegal income under the provisions of the I.T. Act. If the income is taxable, it should be taxed. If the assessee has not applied the capitation fees collected even in violation of the Prohibition Act for the purposes for which the trust was established, there is a case for 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 ITA 444/10 :- 21 -: case. This is the sum and substance of the above two decisions relied on by the learned Counsel appearing for the assessee.

20. 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.

21. Now the case is that of diversion of funds. Regarding seizure of cash in the course of search at the registered office of the assessee-trust, we find the reply furnished by the assessee- trust is convincing that the total cash as on the day of search was more than ` 90 lakhs; ` 10 lakhs and above alone were found in the office of the registered trust. The registered office of the trust ITA 444/10 :- 22 -: 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.

22. The assessee has furnished the details of payments made by Dr. C.K.Velayuthan Nair towards capitation fee for obtaining a medical seat for his daughter as reflected in the account maintained with Tamilnadu Mercantile Bank. 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 ` 30 lakhs paid by Dr.Velayuthan Nair for his daughters medical seat, was from the funds of the trust.

23. The Third point regarding diversion of funds raise by the Commissioner of Income-tax is that the trust has paid huge ITA 444/10 :- 23 -: amount of deposits to Dr. Velayuthan Nair for taking out his hospital property on lease. It is to be seen that the assessee-trust enjoyed such properties for conducting its educational activities and the deposits not non-refundable. Therefore, 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 facilities were about ` 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 has 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. Anyhow, there is no illegality in these matters. All these transactions are reflected in the books of account. The case of the Commissioner of Income-tax would have been better if there is nothing on record to show that huge amount on lease deposits received by Dr. Velayuthan Nair were used for the ITA 444/10 :- 24 -: personal benefit of Dr. Velayuthan Nair or his family members or relatives. Revenue has also no case that Mr. Prasad had used money for his personal purposes.

24. In the facts and circumstances of the case and in the light of the decision of the Honble Karnataka High Court in the case of 25. Regarding the other contention of the learned Counsel appearing for the assessee in the light of the decision of the

I.T.A.T., Lucknow Bench in the case of Kapoor Educational Society v. Commissioner of Income-tax that the withdrawal of exemption could be only prospective, we do not comment anything. That contention is left open as such. ITA 444/10 :- 25 -:

26. Accordingly, we direct the Commissioner of Income-tax to vacate his order canceling the registration of the assessee-trust and restore the registration granted under sec.12AA.

27. In result, this appeal filed by the assessee is allowed. Order pronounced on Friday, the 24th of December, 2010. Sd/- Sd/- (HARI OM MARATHA) Judicial Member ( DR.O.K.NARAYANAN) Vice-President Chennai : 24th Dec.,2010 mpo* Copy to:

1. Appellant

2. Respondent

3. CIT(A)

4. CIT

5. DR

Padanilam Welfare Trust v. Cit

Tribunal Opinion Summary — ITA No. 444/10 (Order dated 24 December 2010)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Assessee‑Trust) Arguments

Respondent's (Revenue) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Padanilam Welfare Trust v. Cit

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