Registration and 80G Approval Directed as Eye Camp Activities and Facilities Were Verified Genuine

ORDER

Makarand Vasant Mahadeokar, Accountant Member.- These two appeals filed by the assessee are directed against two separate orders, both dated 28.08.2024, passed by the learned Commissioner of Income Tax (Exemption), Jaipur [“CIT(E)”], in the proceedings relating to registration under section 12AB and approval under section 80G of the Income Tax Act, 1961 [“the Act”]. Since the application for approval under section 80G was rejected as a consequence of rejection of the application for registration under section 12AB, both appeals involve connected facts and are, therefore, being dealt with together.

2. Both appeals are accompanied by separate applications dated 08.11.2024 seeking condonation of delay of 8 days in filing the appeals. The applications contain an identical explanation. It has been stated therein that the assessee encountered technical difficulties in accessing the ITAT e-filing portal, including difficulties in generating the OTP and logging into the portal, during the period from 22.10.2024 to 28.10.2024. It has further been stated that, after resolution of the technical difficulties, the consultant of the assessee was unavailable from 28.10.2024 on account of the Diwali holidays. According to the assessee, the delay was neither intentional nor attributable to negligence and the appeals were filed as soon as the stated impediments ceased to operate. The assessee has accordingly prayed that the delay be condoned and the appeals be admitted for adjudication on merits. The learned DR raised no objection to the condonation of delay.

3. We have considered the submissions of both sides and perused the applications filed by the assessee. Having regard to the explanation furnished therein and particularly considering that the learned DR has raised no objection, we are satisfied that the assessee was prevented by sufficient cause from filing the appeals within the prescribed period. Accordingly, the delay in filing both appeals is condoned and the appeals are admitted for adjudication on merits.

4. The grounds raised by the assessee in ITA No. 846/Jodh/2024 are:

4.1 The grounds raised by the assessee in ITA No. 847/Jodh/2024 are:

5. Briefly stated, the assessee filed an online application in Form No. 10AB on 15.02.2024 under section 12A(1)(ac)(iii) of the Act, seeking registration under section 12AB. During the course of the proceedings, the learned CIT(E) issued notices dated 23.04.2024, 16.05.2024, 08.06.2024 and 04.08.2024, calling upon the assessee to furnish the documents and explanations specified therein. The assessee filed replies on 02.05.2024, 13.06.2024 and 15.08.2024. The learned CIT(E) also caused a local verification to be conducted through the Income Tax Officer (Exemption), Jodhpur, regarding the activities, expenditure and functioning of the assessee.

6. Upon considering the replies furnished by the assessee and the local-verification report, the learned CIT(E) entertained doubts regarding the genuineness and independent functioning of the assessee. He was of the view that the assessee had not satisfactorily substantiated the expenditure incurred on rent and salary, the use of the medical equipment owned by it, the particulars of the beneficiaries of the eye camps and the donations received by it. The learned CIT(E) further inferred that the premises, operation theatre and medical equipment were being used in connection with Mathur Eye Hospital, a proprietary concern of one of the trustees, and that the funds of the assessee were being diverted for the benefit of persons connected with its management.

7. On the basis of the aforesaid observations, the learned CIT(E) concluded that the activities of the assessee were not genuine and that the funds of the institution were being siphoned off. Consequently, by order dated 28.08.2024 passed in Form No. 10AD, the application of the assessee for registration under section 12AB was rejected. The assessee is aggrieved by the said order and is in appeal before us in ITA No. 846/Jodh/2024.

8. The assessee had also filed a separate application in Form No. 10AB on 15.02.2024 seeking approval under section 80G of the Act. In those proceedings, the learned CIT(E) issued notices dated 23.04.2024, 16.05.2024 and 08.06.2024. The assessee filed replies on 02.05.2024 and 13.06.2024.

9. The learned CIT(E), referring to rule 11AA of the Income Tax Rules, 1962, held that registration under section 12A or section 12AB, or notification under section 10(23C), was a precondition for grant of approval under section 80G. Since the application of the assessee for registration under section 12AB had been rejected by the separate order dated 28.08.2024, the learned CIT(E) held that the assessee was not eligible for approval under section 80G. Accordingly, by order dated 28.08.2024 passed in Form No. 10AD, the application for approval under section 80G was rejected. The assessee has challenged the said order in ITA No. 847/Jodh/2024.

10. Before us the learned Authorised Representative (AR) submitted that the learned CIT(E) had issued a show-cause notice dated 04.08.2024, in response to which the assessee filed a detailed reply dated 15.08.2024. A copy of the said reply was placed on record. The learned AR pointed out that, although the learned CIT(E), in the opening portion of the annexure to the impugned order, recorded that the reply dated 15.08.2024 had been filed through the ITBA portal and examined, he subsequently observed that no submission had been furnished by the assessee in response to the show-cause notice. It was contended that the reply and the supporting material filed by the assessee had not been considered in their proper perspective and that the application was rejected without dealing with the explanations furnished therein.

11. Referring to the reply dated 15.08.2024, the learned AR submitted that the assessee had responded to each of the objections raised in the show-cause notice. As regards the financial statements for the financial year 2023-24, the assessee had sought further time on account of the non-availability of its accounts staff and professional consultant due to heavy rainfall in Jodhpur. In respect of the salary expenditure, it was explained that four employees were engaged as technical staff for approximately eight to ten days in a month, depending upon the requirement of the eye camps, and that their month-wise salary and work details had been furnished. The assessee had also stated that none of those employees was related to the management and had expressed its willingness to produce them before the learned CIT(E) whenever required.

12. The learned AR further submitted that the assessee had explained the payment of rent to Shri Vipul Mathur. According to the reply, the assessee was using a portion of Mathur Eye Hospital, including the operation theatre and other facilities, for conducting its free eye camps. It was stated that rent of Rs.15,000/- per month, aggregating to Rs.1,80,000/- per annum, was paid for the use of such facilities and that Shri Vipul Mathur had donated Rs.1,50,000/- out of the rent received by him back to the assessee. It was, therefore, contended that the rent payment could not be regarded as siphoning off the funds of the assessee for the benefit of a trustee.

13. As regards the Optical Biometer with Barrett Formula 220V Equipment costing Rs.23,82,831/-, the learned AR submitted that the assessee had explained the medical functions performed by the equipment and had specifically stated that it was installed at the registered office of the assessee and was used only during the eye camps organised by it. The assessee had denied that Mathur Eye Hospital was using any machinery owned by the assessee.

14. The learned AR also submitted that the assessee had explained that it was not independently running a hospital and was conducting free eye camps from the premises of Mathur Eye Hospital. It was stated that Mathur Eye Hospital was an independent proprietary concern of Dr. Vipul Mathur and that its operations, financial records, income and expenditure were maintained separately from those of the assessee. The allegation that the income, expenditure or machinery of the two entities was intermingled had been specifically denied in the reply.

15. The learned AR further referred to the explanation that provisional registration under section 12A and provisional approval under section 80G had been granted to the assessee on 22.06.2022, but the same were surrendered on 17.06.2024 due to a mistake on the part of an employee. The assessee had addressed an email dated 08.07.2024 requesting that the surrender be treated as an inadvertent mistake and that its application be considered as a continuation of the provisional registration and approval.

16. The learned AR specifically invited our attention to the explanation furnished against Query No. 3 in the reply dated 15.08.2024. It was submitted that the assessee had paid rent of Rs.15,000/- per month, aggregating to Rs.1,80,000/- per annum, to Dr. Vipul Mathur for the use of a portion of the hospital premises, operation theatre and other facilities for conducting its eye camps. Out of the rent so received, Dr. Vipul Mathur had donated Rs.1,50,000/- back to the assessee and had effectively retained only Rs.30,000/-. The learned AR contended that this material fact was not considered by the learned CIT(E) while alleging that the payment of rent amounted to siphoning off the funds of the assessee for the benefit of a person referred to in section 13(3) of the Act.

17. In view of the aforesaid material, the learned AR contended that the observation of the learned CIT(E) regarding non-compliance with the show-cause notice was contrary to the record. It was submitted that the impugned order had been passed without an effective and issuewise consideration of the reply dated 15.08.2024 and the documents stated to have been furnished therewith. Therefore, the conclusions regarding the non-genuineness of the activities and siphoning off of the funds were not sustainable.

18. Per contra, the learned DR relied upon the impugned order passed by the learned CIT(E). However, having regard to the contention of the assessee that its detailed reply dated 15.08.2024 and the supporting documents furnished therewith had not been duly considered, the learned DR submitted that the matter may be restored to the file of the learned CIT(E) for fresh consideration. He requested that the learned CIT(E) be directed to examine the explanations and supporting material furnished by the assessee and thereafter decide the application afresh in accordance with law.

19. We have considered the rival submissions and perused the material available on record, including the impugned orders, the localverification report and the detailed reply dated 15.08.2024 filed by the assessee in response to the show-cause notice dated 04.08.2024. The issue for our consideration is whether the material before the learned CIT(E) justified the conclusion that the activities of the assessee were not genuine and that its funds were being siphoned off for the benefit of a trustee.

20. Section 12AB(1)(b) empowers the learned CIT(E) to call for documents and information and to conduct such enquiries as may be considered necessary to satisfy himself about the objects and genuineness of the activities of a trust or institution. The learned CIT(E) is also empowered to examine compliance with the requirements of any other law which are material for achieving the objects of the institution. Thus, the enquiry at the registration stage is a meaningful enquiry and is not merely ministerial. However, such enquiry is directed towards the charitable nature of the objects, genuineness of the activities and relevant legal compliance. It is not an assessment of the income of the institution or a proceeding for determining the allowability and taxability of each item of receipt and expenditure.

21. The distinction between registration proceedings and assessment proceedings was explained by the Hon’ble Supreme Court in Ananda Social and Educational Trust v. CIT 426 ITR 340 (SC). The relevant observation reads as under:

22. The ratio emerging from the aforesaid decision is that the Commissioner must be satisfied that the objects of the institution are genuinely charitable and that its actual or proposed activities are in furtherance of those objects. Registration may be refused where the objects are not charitable or where the activities are found to be contrary to the stated objects. However, the registration proceedings cannot be converted into a full-fledged assessment of the sufficiency of charitable expenditure or the allowability and taxability of individual transactions.

23. The principles consistently applied in registration matters are that the enquiry under section 12AB is conducted on a prima facie basis. It does not contemplate a conclusive or exhaustive verification of every receipt, expense, beneficiary or activity. Deficiencies in certain invoices, beneficiary particulars or supporting records may justify further enquiry and an opportunity to cure such deficiencies. They do not, by themselves, establish that the activities are non-genuine. Similarly, individual transactions may be examined at the registration stage only to the extent that they have a direct bearing on the genuineness of the institution, disclose diversion of its funds, establish a colourable arrangement or demonstrate non-compliance with a law material for achieving its objects.

24. In the present case, it is not the finding of the learned CIT(E) that the stated objects of the assessee are not charitable. The assessee is engaged in activities relating to medical relief through eye camps. The application was rejected principally on the ground that the activities were not genuine and that the expenditure incurred on salary and rent and the use of medical equipment demonstrated siphoning off of the funds of the institution.

25. We find a material inconsistency in the impugned order regarding the compliance made by the assessee. In the opening portion of the annexure, the learned CIT(E) has specifically recorded that the assessee filed a reply through the ITBA portal on 15.08.2024 and that the said reply was examined but not found tenable. However, while discussing the issues raised in the show-cause notice, the learned CIT(E) subsequently observed that no submission had been furnished by the assessee till the date of the order. The impugned order does not contain an issue-wise consideration of the explanations contained in the reply dated 15.08.2024 or the supporting documents stated to have been enclosed therewith.

26. The local-verification report does not establish that the assessee had not carried out any charitable activity. On the contrary, the report records that the assessee had organised three outreach eye camps during the financial year 2022-23 and seven eye camps during the financial year 2023-24. Lists of patients were produced during verification. The assessee also produced newspaper cuttings containing information regarding the eye camps. The fact that the complete particulars of every OPD patient were not available at the registered office cannot, in the absence of any contrary material, obliterate the evidence demonstrating that the eye camps were actually conducted.

27. The assessee explained that the OPD particulars remained with the respective camp organisers, whereas lists of patients who had undergone eye operations were available. The learned CIT(E) has not brought any material on record to establish that the camps recorded in the local-verification report were fictitious or that the patients whose names were furnished had not received medical treatment. Therefore, the absence of exhaustive particulars of every OPD patient could justify further verification, but could not constitute sufficient ground to hold that the entire medical activity of the assessee was non-genuine.

28. As regards the salary expenditure, the assessee explained in its reply dated 15.08.2024 that four persons were engaged as technical staff according to the requirements of the eye camps and worked approximately eight to ten days in a month. It was stated that their salaries ranged from Rs.4,500/- to Rs.9,000/- per month and that the aggregate salary expenditure of Rs.3,10,500/- was substantially lower than the cost of employing full-time trained medical staff. The assessee further stated that month-wise salary particulars and details of work performed by the employees were enclosed with the reply, that none of the employees was related to the management and that all four persons could be produced before the learned CIT(E) whenever required.

29. The adverse conclusion regarding salary expenditure was based substantially on the fact that none of the employees was present at the time of local verification and that no attendance register was found at the office. However, the explanation of the assessee was that the employees worked during the eye camps according to requirement and did not attend the office on a regular basis. The absence of part-time employees at the time of a single inspection does not establish that they were non-existent or that the salary expenditure was bogus. The employees were neither called for verification nor was the assessee’s offer to produce them acted upon. In these circumstances, the salary expenditure could not reasonably be treated as siphoning off of the funds of the assessee.

30. The assessee had also explained that the expenditure of Rs.1,50,617/- shown under the head “Eye Aid Expenses” represented medicines and other consumables used during operations and medical check-ups. It was stated that Dr. Vipul Mathur was providing operation and consultation services without charging professional fees and, therefore, the assessee did not incur any expenditure towards doctors’ professional fees. This explanation had a direct bearing on the comparison made by the learned CIT(E) between the expenditure on medical activities and salary expenditure. The impugned order does not deal with this explanation.

31. In respect of rent, the assessee explained that it did not have its own hospital and was using a portion of Mathur Eye Hospital, including the operation theatre and other facilities, for conducting its free eye camps. According to the reply, rent of Rs.15,000/- per month, aggregating to Rs.1,80,000/- per annum, was paid to Dr. Vipul Mathur. It was further stated that Dr. Vipul Mathur had donated Rs.1,50,000/-out of the rent received by him back to the assessee and had effectively retained only Rs.30,000/-.

32. The local-verification report itself records that the operation theatre was being used for patients of Mathur Eye Hospital as well as patients of the assessee. Thus, the use of the premises and operation theatre by the assessee was not found to be fictitious. The difference between the rent of Rs.15,000/- per month stated in the reply and the rent of Rs.18,000/- per month referred to in the local-verification report may require reconciliation from the books of account and the rent agreement. However, this difference, by itself, does not establish that the activities of the assessee were non-genuine or that the entire rent payment represented diversion of funds.

33. The explanation regarding the donation of Rs.1,50,000/- by Dr. Vipul Mathur out of the rent received by him was material to the allegation of siphoning off of funds. The learned CIT(E) neither dealt with this explanation nor recorded any finding that the donation was not reflected in the books or bank account of the assessee. In the absence of such examination, the conclusion that the rent payment was intended to confer an undue benefit upon the trustee was not supported by adequate material.

34. We may clarify that payment of rent to a trustee or a person referred to in section 13(3) is not, by that fact alone, sufficient to hold that the institution itself is non-genuine. The reasonableness and allowability of such expenditure and the consequences, if any, under section 13 are ordinarily matters to be examined during assessment proceedings. At the registration stage, the payment may be relevant if it establishes that the institution is merely a facade or that its funds are being diverted for private benefit. Such a conclusion must be supported by cogent evidence and cannot rest solely upon the relationship between the recipient and the institution.

35. As regards the Optical Biometer with Barrett Formula 220V Equipment costing Rs.23,82,831/-, the local-verification report records that the equipment was physically found at the office of the assessee. Dr. Vipul Mathur explained during verification that the equipment was used only for the patients of the assessee and that a separate PacScan 300A machine was available for patients of Mathur Eye Hospital. The assessee also explained the medical functions performed by the Optical Biometer and stated that it was used during the eye camps for examining and treating needy patients.

36. Despite the aforesaid explanation and the physical presence of the equipment at the office of the assessee, the learned CIT(E) observed that it was “possible” that the equipment was being used by Dr. Vipul Mathur for Mathur Eye Hospital. Such a possibility, without any supporting usage record, patient record or other corroborative material, cannot be elevated into a finding that the machinery of the assessee was being used for the personal business of the trustee. The local-verification report, in fact, records the explanation that a separate machine was available for Mathur Eye Hospital. There was, therefore, no positive evidence to support the conclusion that the equipment of the assessee was being diverted for private use.

37. The assessee had further explained that Mathur Eye Hospital was an independent proprietary concern of Dr. Vipul Mathur and that its operations, financial records, income, expenditure and equipment were maintained separately. The assessee clarified that it was not itself running a hospital and was using the facilities of Mathur Eye Hospital only for conducting its eye camps and operations. The mere use of the hospital facilities for carrying out charitable medical activities does not establish an intermingling of the accounts or non-genuineness of the assessee. No specific instance of common accounting, diversion of receipts or booking of the personal expenditure of Mathur Eye Hospital in the books of the assessee was identified in the impugned order.

38. The learned CIT(E) also referred to the absence of complete particulars of certain donors and inferred that the eye-camp receipts had been shown as donations and were in the nature of business receipts. However, no material was brought on record to establish that the assessee had charged any fee from the beneficiaries of the eye camps or that any identified donation represented consideration for medical services. The tax character of a particular receipt and the applicability of the provisions governing anonymous donations are matters that may be examined during the relevant assessment proceedings. At the registration stage, such receipts could be relevant only if they demonstrated that the stated charitable activities were a sham or that the institution was carrying on business under the guise of charity. No such material has been identified in the present case.

39. On an overall consideration of the material, we find that the local verification corroborates the existence of the assessee, the conduct of eye camps, the treatment of patients, the availability of medical equipment and the use of hospital facilities for carrying out medical activities. The deficiencies pointed out by the learned CIT(E) concern the completeness of the supporting records and individual items of salary, rent and donations. The assessee furnished a detailed explanation dated 15.08.2024 dealing with these issues and expressed its willingness to produce the employees and furnish the supporting particulars. The explanations were not rejected by reference to any contrary evidence. They were, in substance, left unaddressed.

40. The conclusion that the activities were not genuine and that the funds were being siphoned off was, therefore, founded primarily upon suspicion and inference. The material found during local verification did not demonstrate that the eye camps were fictitious, that the medical equipment had been diverted to Mathur Eye Hospital, that the employees were non-existent, that the rent payment was a colourable transaction or that the accounts of the assessee and Mathur Eye Hospital were intermingled. The statutory threshold for rejecting registration under section 12AB was consequently not satisfied.

41. We have also considered the request of the learned DR that the matter may be restored to the learned CIT(E) for examination of the reply dated 15.08.2024. Ordinarily, where material evidence requires factual verification, restoration may be warranted. In the present case, however, the learned CIT(E) had issued several notices, obtained a localverification report and had the reply dated 15.08.2024 available before him. The local-verification report itself corroborates the carrying out of charitable medical activities, and the impugned order does not identify any positive material demonstrating non-genuineness or diversion of funds. In these circumstances, another remand would merely prolong the registration proceedings without serving any substantive purpose.

42. We accordingly set aside the order dated 28.08.2024. The learned CIT(E) is directed to grant registration to the assessee under section 12AB for the period and with effect from the date applicable to the application filed by the assessee in Form No. 10AB, in accordance with law. The observations made herein are confined to the registration proceedings and shall not prevent the Assessing Officer from examining the allowability or taxability of any receipt or expenditure in the appropriate assessment proceedings in accordance with law.

43. Coming to the application under section 80G, the order dated 28.08.2024 records only one reason for rejection, namely, that approval under section 80G could not be granted without registration under section 12AB. No independent violation of any condition prescribed under section 80G(5) or rule 11AA was recorded in the impugned order.

44. Since we have directed the learned CIT(E) to grant registration under section 12AB and the sole basis for rejection of the application under section 80G no longer survives, we set aside the order rejecting the application under section 80G. The learned CIT(E) is directed to grant approval to the assessee under section 80G(5) for the period and with effect from the date applicable to the application filed by the assessee, in accordance with law.

45. Accordingly, the grounds raised by the assessee in ITA No. 846/Jodh/2024 and ITA No. 847/Jodh/2024 are allowed.

46. In the result, both appeals filed by the assessee are allowed.