Sanskar Nirman Shiksha Samiti vs ITO, Exemption

PER S.RIFAUR RAHMAN,AM:

This appeal is filed by the assessee against the order passed by the ld. Commissioner of Income-tax (Exemptions), Chandigarh [for short ‘ld. CIT (E)] dated 23.02.2026 under section 12A of the Income-tax Act, 1961 (for short ‘the Act’) raising following grounds of appeal :-

Brief facts of the case are, an application for registration u/s 12A(1)(ac)(ii) of the Act was filed by the assessee on 30.09.2025 seeking registration u/s 12AB of the Act. In order to verify the genuineness of activities and application of funds, a notice dated 08.01.2026 was issued calling upon the assessee to justify the loans and advances given to various parties, especially in view of the fact that the assessee had also availed interest-bearing loans from banks. The assessee was specifically required to substantiate how advancing such loans was in furtherance of its charitable objects and to furnish complete documentary evidence in support thereof. In response, the assessee submitted reply stating that advances had been given for capital purposes and that such advances were recovered in FY 2025-26 and also submitted copies of certain cheques and screenshots of UPI transactions to substantiate recovery of advances. The relevant part of the reply is reproduced by the ld. CIT(E) at pages 5 & 6 of his order.

Ld. CIT (E) observed that substantial advances were outstanding as on 31.03.2025 and the assessee has recovered these advances only after issuance of the hearing notice by this office. He further observed that the timing of such recovery indicates that the same was carried out after initiation of proceedings under section 12AB and not in the ordinary course of charitable activities.

Further, ld. CIT (E) observed that although copies of certain cheques were submitted, but the applicant has not furnished bank statements confirming encashment of such cheques. In absence of bank confirmation, the mere submission of cheque copies does not conclusively establish recovery of advances. He further observed that more importantly, the applicant has failed to provide any justification demonstrating how advancing loans to various parties was necessary or incidental to the attainment of its charitable objects. No agreements, resolutions, or supporting documentary evidence have been furnished establishing that such advances were made for charitable purposes.

He further observed that advancing funds to various parties, and recovering the same only after initiation of proceedings, raises serious doubts regarding genuineness of activities and proper application of funds and such conduct is not consistent with the functioning expected of a charitable institution and reflects adversely on the genuineness of activities of the assessee society. He further relied on the decision of Hon’ble Supreme Court in the case of CIT (Exemptions) Vs Jagannath Gupta Family Trust dated 01.02.2019 [2019] 411 ITR 235 (SC), noted that the Hon’ble High Court had allowed the writ petition mainly on one ground i.e. one bogus donation would not establish that the activities of the trust are not genuine and held that such a reason assigned by the High Court is erroneous and runs contrary to the plain language of section 12AA(3) of the Act. This shows that the Hon’ble Supreme Court noted that even a single non-genuine entry/event is sufficient to hold that the activities of the trust are not genuine.

In view of the above, ld. CIT (E) held that the case has not been found to be a fit case for registration as charitable institution and the assessee has failed to establish that its activities are genuine and carried out in accordance with its charitable objects and accordingly, the application of the assessee is rejected and registration is cancelled.

Aggrieved against the aforesaid order, the assessee is in appeal before us.

At the time of hearing, ld. AR of the assessee submitted that the society has taken interest bearing loans from banks and advance to various parties and these advances were initially given for some capital expenditure work. He submitted that we have received also interest free advances also from such parties and recovered some amounts during the years and that amount is applied for said charitable purpose only. He further submitted that however, when calculating the application of funds for charitable activities the amount received from borrowed funds has been excluded and amount received from borrowed funds had not considered for application of funds, therefore, such loans taken do not affect the application of funds for charitable purpose and the application is only calculated for the amounts received other than borrowed funds. He submitted that some advances outstanding as on 31.3.25 has been recovered during the FY 2526 and the details of the advances recovered and expenses booked during the said year are reproduced by the ld. CIT (E) at pages 5 and 6 of his order. He submitted that various activities carried on by the assessee to impart education which is charitable activity as per section 2(15)of the Act. All the loans and advances given by the assessee is closely linked to the imparting of above charitable activities. He further submitted that he placed the audited financials and loan & advance ledger at pages 27 to 43 of the paper book.

On the other hand, ld. DR of the Revenue relied on the order of the ld. CIT (E). He also relied on the decision of Hon’ble Supreme Court in Yogiraj Charity Trust vs. CIT (1976) 103 ITR 777 (SC) and Hon’ble High Court of Kerala in Self Employers Service Society vs. CIT (2001) 237 ITR 18 (Kerala).

Considered the rival submissions and material placed on record. We observed that the ld. CIT(E) before giving registration u/s 12AB verified the financial statement submitted by the assessee, while verifying the same, he observed that assessee has obtained interest bearing loans from banks and against that the assessee has given loans/advances to various parties which are directly or indirectly not connected with the charitable purposes of the assessee and other capital expenditure advances are also not spent for charitable purposes. However, ld. AR submitted that all those advances were given directly connected to the activities carried on by the assessee. All the advances are given one way or other connected to the activities carried on by the assessee. Nowhere in the order passed u/s 12AB, ld. CIT(E) has found all the advances which are not meant for charitable activities merely on the basis of suspicion, he has rejected the application. Further, we also observed the documents, viz., audited financials and loan & advance ledger, filed by the ld. AR.

Further, we observed that the Hon’ble Punjab & Haryana High Court in the case of CIT v. Yadvindra Public School Association reported in 488 ITR 327 had relied on the decision of Hon’ble Supreme Court in the case of Ananda Social & Educational Trust case. We observed that the similar view was expressed by the various courts that at the time of granting registration, ld. CIT(E) has to satisfy himself on the objects of the trust and genuineness of the activities, he cannot extend himself to the shoes of the Assessing Officer. At this stage if any activities carried on by an institution which is charitable in nature and its activities are genuine, unless there is any deviation which are not considered to be charitable, the relevant expenditure to the extent of non-charitable activities, the same can be disallowed at assessment stage. In the present case, looking at the substantial activities carried on by the assessee to impart the education merely on certain deviation of funds to other institution which are interest bearing funds, that itself cannot be the reason to reject the registration. The competent authority has to verify only charitable objects and its activities in terms of case objects to grant registration and should not indulge in finding reasons to reject the applications for grant of registration. Therefore, in our considered view the assessee has been granted registration over the years and it deserves to be granted registration therefore, we direct the ld. CIT(E) to grant registration and if there is any deviation, the Assessing Officer may be directed to do the needful at the assessment stage. Therefore, we are inclined to direct accordingly.

We have gone through the orders relied upon by the ld. DR of the Revenue and observed that the facts in those cases are distinguishable, hence not applicable in the present case.

In the result, the appeal filed by the assessee is allowed.