By TIOL News Service

MUMBAI, JAN 28, 2016: THE issue is - Whether the mere purchase of the BMW car in the name of the trustee, can be considered as a sufficient ground for cancellation of registration under section 12AA(3). NO is the verdict.

Facts of the case

The assessee trust is registered as charitable organization with DIT (E), Mumbai u/s 12A and also registered with the Charity Commissioner, Mumbai. The assessee trust case was selected for scrutiny under the selective scrutiny norms and notices u/s 143(2) & 142(1) along with questionnaire were issued. It was observed by AO that the objects of the assessee trust was to provide monetary, medical and other assistance and help to the needy, deserving and poor people who are suffering from cancer in particular and other diseases in general and cannot afford the medical/surgical treatment recommended by the specialist and thereby help them, as far as possible, to lead a healthy and normal life. AO observed that the assessee trust had purchased BMW Car from the funds of the trust in the personal name of the trustee vide bill dated 20.3.2009 from M/s Navnit Motors for Rs. 32,20,000/- for which the payment has been made by the trust from the funds of the trust. Hence, as per AO, the funds of the trust to that extent had been diverted and used for the benefit of excluded persons as covered within the provisions of section 13(1)(c)(ii) and section 13(2)(g) read with section 13(3)(cc) for which notice dated 25th November 2011 was issued u/s 142(1) to the assessee trust asking to furnish a reply as to why it should not be concluded that funds of the trust amounting to Rs. 32,20,000/- have been diverted and used for the benefit of excluded persons as covered within the provisions of section 13(1)(c)(ii) and section 13(2)(g) read with section 13(3)(cc).

The assessee trust in reply to notice submitted that the purchase of the car was for the benefit and use of the assessee trust and for the use of the chairman, trustees and influential donors in their role and activities as office bearers/well wishers of the trust. The assessee trust submitted that Prof.(Retd.) A.A. Kazi was the chairman of the assessee trust and entitled to such facilities that were provided by the assessee trust to do the work for the trust. The chairman does not draw any salary from the assessee trust although he was devoting his full time to the activities of the trust. The chairman was entirely devoted to the activities of the assessee trust and the BMW car was used only for official activities including meeting doctors, donors, social personalities, organizing/attending events to raise awareness and meeting government officials for approvals required for the activities of the trust. The BMW car was purchased after a resolution approving the purchase was passed by the trustees in their Board meeting held on March, 07, 2009. The BMW car was financed by availing loan from the ICICI bank. The loan was approved as a purchase for the assessee trust and on the basis of the financial position of the assessee trust but the BMW car was erroneously registered in the name of Prof. A.A. Kazi due to gap in communication between the office staff of the assessee trust and the seller of the car and when it was discovered during the audit process, the error was immediately brought to the attention of Navnit Motors Pvt. Ltd, the sellers of the car and steps were taken to get the car transferred in the name of the trust. The auditors of the trust in the Notes to accounts for the financial year ended 31-3-2009 has clearly pointed out that the trust has purchased the motor car during the year for the object of the trust which is presently registered in the name of one of the trustee on account of mistake on the part of vendor and necessary steps has been initiated by the assessee trust to get the BMW car transferred in the name of trust. The purchase of car was capitalized and reflected in the financial accounts for the year 2008-09 and since the operating expenses of the car were very high, it was decided to sell the car. The sale proceeds were credited directly to the assessee trust bank accounts and corresponding changes were made in the assessee trust balance sheet. The car had a large logo of the assessee trust stuck on each side to indicate that it belonged to the trust. The car was driven by an official driver employed by the trust. It was also submitted by the assessee trust that the activities of the assessee trust were genuine and in accordance with its mission to fight cancer. The assessee trust submitted that it had played a pivotal role in the battle against the dreaded disease of cancer and the same was recognized by leading national and international agencies. The assessee trust also submitted that the ICICI bank loan account statements clearly mentioned that the assessee trust was the applicant and the asset was always intended to be the official property of the assessee trust and loan has been availed by the assessee trust.

As per AO, utilization of such huge funds for buying BMW car instead of using the same for charitable purposes for which said funds are raised and lying with the assessee trust refutes the basic concept of charity. Accordingly, the A.O. rejected the contentions of the asessee trust and held that the usage of BMW car, a luxurious car will create a doubt about the genuineness of the activities of the assessee trust. The A.O also held that no log book or any other evidence was produced to justify that the BMW car was used only for the work of the trust during the year and not for personal use by the trustee and hence the trust had diverted the funds and used for the benefit of excluded persons covered by provisions of section 13(1)(c)(ii), 13(2)(g) and 13(3)(cc) and in view of this, the exemption u/s 11 was denied to the assessee trust by the AO vide orders dated 28.12.2011 u/s 143(3) and accordingly additions were made to the income of the trust.

On appeal, CIT(A) allowed the appeal of the assessee trust by holding there was no contravention of Section13 and the assessee trust was entitled to exemption u/s11 by observing that as regards the objection that the AO cannot deny exemption u/s 11 for violation of section 13 without the DIT(E) cancelling the registration, there was no substance in this objection. Section 13 starts with a non obstante clause which stipulates that where there was any violation of section 13 then the benefit of section 11 will not be available. As regards the other objections however, I find substance in them. AO had not given any finding that the car was used for non-trust purposes. In view of the Bombay High Court decision in CIT v. Dilip Singh Sardarsingh Bagga (1993) 201 ITR 995 wherein it was held that registration under the Motor Vehicles Act is not an essential pre-requisite for the acquisition of ownership of the motor vehicles and in view of the fact that the loan for purchasing the car was taken in the name of the trust and not in the name of the trustee, CIT(A) held that there is no contravention of provisions of section 13.

Having heard the matter, the Tribunal held that,

++ we have also observed that the registration of the assessee trust u/s 12AA was cancelled by the Revenue and one of the grounds for cancellation of registration of the assessee trust was the registration of the afore-stated BMW car in the name of the trustee and the Mumbai Tribunal in ITA No. 1782/Mum/2014 vide orders dated 16-07-2014 has restored the registration of the trust u/s 12AA by holding that the second objection of the DIT(E) is that the assessee had purchased BMW 325i car in personal name of the trustee Mr. A.A. Kazi, vide bill dated 20th March 2009. The car was purchased out of the funds of the trust. The DIT(E) held that nothing has been brought on record to show the need of buying such a luxury car. As brought on record, this issue was subject matter of scrutiny in the The Cancer Aid & Research Foundation AY 2009-10, wherein the AO has invoked the provisions of section 13 to deny the exemption to the assessee trust. The matter had travelled up to the stage of first appellate proceedings, wherein the CIT(A) has reversed the findings and the conclusion of AO by holding that the car was used for the purpose of the trust only and after recording detail reasons, he decided the issue in favour of the assessee trust by holding that there is no violation of section 13. It has also been brought on record that the said car was sold in the next year. Such an objection of DIT(E) in the present case, cannot be the subject matter of cancellation of registration u/s 12AA(3), firstly, it is still a dabatable matter which is subjudice, whether there is any violation of section 13 or any misuse of trust fund; secondly, even if the car has been purchased in the name of the trustee, then at the most, it needs to be examined within the scope of section 13, and if at all there is any violation, then the income of the previous year in which such a violation took place, gets excluded from the exemption provided under section 11 i.e., surplus income becomes taxable for that year;

++ if there is any kind of misuse of trust funds by the trustee or a related person of the trustee, then the statute provides enough power to the AO to forfeit the exemption and tax the surplus. However, in such a situation, it cannot be held that the entire activities of the trust have been rendered non-genuine or its activities are not carried out in accordance with the objects of the trust. Similar issue had also come up for consideration before the Bangalore Bench of the Tribunal in Krupanidhi Educational Trust, wherein on similar purchase of the BMW car purchased in the name of the trustee, the Tribunal held that it cannot be the basis for cancellation of registration under section 12AA(3), at The Cancer Aid & Research Foundation the most, it can be a violation of provisions of section 13. Thus, this objection of the DIT(E) cannot be held to be sufficient ground for cancellation of the registration. In view of the aforesaid discussion, we find that none of the objections and the grounds which have been taken by the DIT(E) in the impugned order for cancelling the registration can be held to be sustainable either on facts or in law, so as to hold that the activities of the trust are either not genuine or they are not being carried out in accordance with the objects within the scope of section 12AA(3). Moreover, nothing has been brought on record to show that the application of the income of the trust from year-to-year has not been made towards attainment of the objects i.e., for the charitable purposes. If no discrepancy has been found in the income and expenditure account and there is a proper application of income towards the objects in accordance with the provisions of section 11, then neither the charitable nature of the trust should be doubted nor it can be held that its activities are not genuine or are not in accordance The Cancer Aid & Research Foundation with the objects for which registration was granted. Accordingly, we reverse the findings of the DIT(E) and hold that the registration granted to the assessee cannot be cancelled u/s 12AA(3) on the ground stated by the DIT(E) in the impugned order. The grounds thus raised by the assessee are allowed. In the result, assessee's appeal is allowed. Nothing contrary has been brought to our notice by Revenue to controvert the contentions of the assessee trust. In our considered view based on our above findings, the CIT(A) has rightly allowed the exemption u/s 11 to the assessee trust by passing a well reasoned order. We find no infirmity in the orders of the CIT(A) and accordingly we uphold the same and hold that the assessee trust is entitled for exemption u/s 11 of the Act. We order accordingly. In the result, the appeal filed by the Revenue is dismissed.

(See 2016-TIOL-171-ITAT-MUM)