ITAT restores registration u/s 12AA cancelled for money laundering through donation received in lieu of cash

ITAT restores registration u/s 12AA cancelled for money laundering through donation received in lieu of cash as the amount received was applied for its objects and the allegation was based solely on sworn statement during survey proceedings.

ABCAUS Case Law Citation:
ABCAUS 2211 (2018) (02) ITAT

Important Case Laws Cited/relied upon by the parties:
Kader Khan Sons, (2013) 352 ITR 480 (SC)
Andaman Timber Industries Vs. Commissioner of Central Excise 62 Taxman.com 3
CIT Vs. Uttaranchal Welfare Trust 42 taxman.com 361
S.R.M.M.C.T.M. Tiruppani Trust Vs. CIT 230 ITR 636

Brief Facts of the Case:
The assessee Trust was registered u/s 12AA of the Act. The main objects of the Trust were to establish, support, maintain and/or grant aid to schools, colleges, technical and/or other institutions, libraries, reading room etc., health for the poor and needy people, etc.

A survey operation u/s 133A took place at the premises of an Institution (the Institution) wherein the founder Director of the Institution on oath accepted taking donations in cash and returning back the same to the donor through cheque after retaining the commission of 5% approx. Thereafter, the Institutes issued certificate of exemption u/s 35(1)(2) of the Act to the donors enabling them to claim deduction 175% of the donated amount.

registration 12AA cancelled for money laundering charges

The CIT(E) noted that the assessee Trust had also received a donation from the Institute, therefore, he issued notice to the Trust to show cause as to why the registration granted u/s. 12A of the Act shall not be cancelled/withdrawn u/s. 12AA(3) of the Act for indulging in bogus activities.

The assessee Trust replied that the amount donated by the Institute was received and applied for the objects of the Trust and refused that it was a bogus donation. The assessee trust also filed a confirmation letter to this effect from the Institute. The CIT(E) after considering he submissions filed opined that the assessee trust was involved in money laundering. According to the CIT(E) assessee indulged in ingenuine activities which was not at par with the Trust Deed. After recording the said finding,  CIT(E) cancelled the registration granted.

Aggrieved by the cancellation of the certificate u/s 12AA by the CIT(E), the assessee Trust was in appeal before the Tribunal.

Observations made by the Tribunal:
The Tribunal noted that the statement of the founder director of the Institute was handed over to the assessee Trust. The assessee Trust had pointed out that the nowhere in the statement recorded the assessee Trust’s name surfaced or any allegation was made against the assessee Trust. The assessee Trust also pointed out that the sworn statement recorded during survey cannot be the sole basis for the impugned action.

It was noted that the CIT(E) cancelled the registration holding that the assessee has taken donation in lieu of cash and, therefore, had indulged in ingenuine activity of money laundering and, therefore, as per section 12AA(3) of the Act he was of the opinion that the activities of the assessee were not genuine and it was not being carried out in accordance with the objectives of the Trust.

It was observed that right from the issuance of show cause notice by the CIT(E), the assessee pleaded that it had utilized the amount donated by the Institute and applied for the objectives of the Trust and was not involved in money laundering or it had not given any cash in lieu of the donation it received. It was noted that the statement recorded did not specify as to whether the assessee Trust had indulged in receiving donation in lieu of cash. The statement was general in nature and which explained in respect to donations received and the modus operandi by which those were returned back but it did not say anything about the donations it had given to anyone including that of the assessee Trust. The only piece of material before the CIT(E) was the statement recorded on oath u/s. 133A.

The Tribunal observed the Hon’ble Supreme Court has clearly laid out that section 133A of the Act does not empower any Income-tax Authorities to examine any person on oath. Hence, any such statement does not have any evidentiary value and any admission made during survey cannot by itself be made the sole basis of addition. Therefore, the statement alone cannot be the basis for the cancellation of registration by the CIT(E).

It was noted that the assessee was not offered an opportunity to cross-examine the person whose statement was relied ipon by the CIT(E) which made the order fragile for violation of natural justice and, therefore, the sole basis for the impugned action was infirm and not legally sustainable. It was observed that the Hon’ble Supreme Court has categorically held that not allowing the assessee to cross examine the third party though the statement of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. Their Lordships noted that in that case the impugned order of the CIT(E) was based upon the statement given by two witnesses and even when the assessee disputed the correctness of the statement and wanted the cross examine, the adjudicating authority did not grant this opportunity to the assessee. In such a scenario, the Hon’ble Apex Court held that when the testimony of these two witnesses got discarded there was no material with the department on the basis of which it could justify this action and the additions were deleted.

The Tribunal observed that the donation received by the assessee trust from the Institute had been applied for the objects of the Trust, therefore, even if the receipt of donation had to be treated as unexplained receipt of the assessee as per section 68 of the Act, addition cannot be made because the assessee itself had applied the entire receipt for the objects of the assessee Trust. The Tribunal placed reliance on the decision of Hon’ble Allahabad High Court’s wherein their Lordships held that section 68 of the Act has no application where the assessee has disclosed donations as its income.

The ITAT noted that it was not the case of the revenue that donations received by the assessee were not applied for charitable purposes. The allegation of the revenue was that the assessee received donation in lieu of cash but in order to substantiate this allegation no material which was legally sustainable had been brought on record, therefore, the sole material which was a sworn statement recorded during survey cannot be the sole material as held by Hon’ble Supreme Court.

The Tribunal opined that as per the requirement of section 12AA(3) of the Act, the CIT(E) has to be satisfied that the activities of the trust or institution are ingenuine or are not being carried out in accordance with the object of the trust or institution. When the assessee was carrying out the object of the trust for which it was created and has applied the donation it received from the Institute for the objects for which it had been created, the assessee Trust cannot be termed to be ingenuine or cannot be held to be not carrying out its activity in accordance with the object of the trust.

Decision/ Conclusion/Held:
Order of the CIT(E) was set aside and the appeal of the assessee was allowed.

registration 12AA cancelled for money laundering charges

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