Court Overturns Tribunal's Decision on Charitable Trust Registration

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Case Name:

Commissioner of Income Tax Vs Sri Guru Gorakh Nath Charitable Educational Society (High Court of Punjab & Haryana)

ITA No.336 of 2013 (O&M)

Date: 5th May 2015

Key Takeaways:

1. The Commissioner has the power to examine the genuineness of a trust's activities when considering registration under Section 12AA (of Income Tax Act, 1961).

2. The Tribunal should not have directed registration without a thorough examination of the trust's activities and objects.

3. The case highlights the importance of providing complete information when applying for charitable trust registration.

Issue: 

Was the Income Tax Appellate Tribunal correct in directing the Commissioner to grant registration to the Society under Section 12AA (of Income Tax Act, 1961), despite the Commissioner's initial refusal based on lack of information and doubts about the genuineness of the Society's charitable activities?

Facts:

1. Sri Guru Gorakh Nath Charitable Educational Society was registered with the Registrar of Societies on 19.04.2005.

2. The Society applied for registration under Section 12AA (of Income Tax Act, 1961) on 16.03.2012.

3. The Commissioner rejected the application on 28.09.2012, citing lack of evidence of charitable activities and incomplete information.

4. The Society appealed to the Income Tax Appellate Tribunal, which allowed the appeal and directed the Commissioner to grant registration.

5. The Commissioner of Income Tax then appealed to the High Court against the Tribunal's order.

Arguments:

Commissioner's Arguments:

1. The Society failed to provide relevant materials and information requested.

2. There was no proof of free or subsidized education for the poor.

3. The Society's arrangements with related parties raised concerns about its charitable nature.

4. The Society's income was likely to exceed ₹1 crore in the 2012-13 financial year.

Society's Arguments:

1. The Commissioner's order was arbitrary and unjustified.

2. The Society's activities qualified as charitable in nature.

3. The Commissioner's findings were based on suspicion and conjecture.

Key Legal Precedents:

1. M/s Queen's Educational Society Vs. Commissioner of Income Tax 2015 (3) TMI 619 - This case overturned an earlier judgment that was relied upon by the Commissioner.

2. Pinegrove International Charitable Trust Vs. Union of India & others [2010] 327 ITR 73 - This case was cited by the Tribunal but later distinguished by the High Court.

3. Commissioner of Income Tax Vs. Surya Educational & Charitable Trust [2013] 355 ITR 280 - This case held that principles for excluding income under Section 10(23C) (of Income Tax Act, 1961) are not applicable when considering registration under Section 12AA (of Income Tax Act, 1961).

Judgement:

1. The High Court set aside the Tribunal's order dated 19.02.2013.

2. The Court directed the Commissioner to decide the application under Section 12AA (of Income Tax Act, 1961) afresh.

3. The Court emphasized that the Commissioner has the power to examine the genuineness of the trust's activities and objects.

4. The Court instructed that the fresh decision should be made expeditiously, given that the original application was filed more than 3 years ago.

FAQs:

1. Q: What is Section 12AA (of Income Tax Act, 1961)?

  A: Section 12AA (of Income Tax Act, 1961) outlines the procedure for registering trusts or institutions for tax exemption purposes. It gives the Commissioner the power to examine the genuineness of the trust's activities and objects.

2. Q: Can the Commissioner refuse registration if information is not provided?

  A: Yes, the Commissioner can refuse registration if the trust fails to provide requested information necessary to assess the genuineness of its activities.

3. Q: What is the significance of this judgment for charitable trusts?

  A: This judgment emphasizes the importance of providing complete information when applying for registration and reaffirms the Commissioner's power to scrutinize the genuineness of a trust's charitable activities.

4. Q: Does this mean the Society won't get registered?

  A: Not necessarily. The case has been sent back to the Commissioner for a fresh decision, giving the Society another opportunity to present its case and provide the required information.

5. Q: What is the difference between Section 12AA (of Income Tax Act, 1961) and Section 10(23C) (of Income Tax Act, 1961)?

  A: Section 12AA (of Income Tax Act, 1961) deals with the registration of trusts, while Section 10(23C) (of Income Tax Act, 1961) relates to the exclusion of certain income from taxation. The principles for one are not necessarily applicable to the other.

1. The appeal, filed under Section 260A (of Income Tax Act, 1961) (for short, the 'Act') is directed against the order of the Income Tax Appellate Tribunal, Chandigarh (for short, the 'Tribunal'), passed in ITA No.1121/Chd/2012 dated 19.02.2013 (Annexure A-2). Vide the said order, the appeal of the respondent-Society has been allowed by the Tribunal and a direction has been issued to the Commissioner to grant registration to the Society under Section 12AA (of Income Tax Act, 1961).

2. The two questions of law, on which the appeal is admitted, read as

under:

“1. Whether on facts and in the circumstances of the case and in

law the learned ITAT was correct in allowing the appeal of the

assessee especially when the family run trust did not submit details

of assets and properties that they possessed as well as the

treatment given to the assets of an old school being taken over by

them.

2. Whether the ITAT was right in not upholding the findings of CIT

u/s 12AA(1)(b)(ii) (of Income Tax Act, 1961) considering that assessee had failed to comply

with provision u/s 12AA(1)(a) (of Income Tax Act, 1961) in as much as document and

information called for was not submitted.”

3. The factual matrix of the case in hand is that the respondent-Society

was registered with the Registrar of the Societies on 19.04.2005. It applied for registration under Section 12AA (of Income Tax Act, 1961), in form No.10A on 16.03.2012. The Commissioner, vide order dated 28.09.2012 (Annexure A-1), rejected the application by coming to the conclusion that the Society had not proved its case whether the activities were being run in a charitable manner and that the Society was not created wholly and exclusively for charitable purposes. The reasons which prevailed with the Commissioner was that fresh evidence had not been furnished to prove that there was any provision for free subsidized education for poor and whether there was any element of public benefit. It was further found that the land and building on lease had been taken from the daughter of the General Secretary of the Society and the power of attorney had been signed by the father, namely, Amarjeet Singh Saini who was also the husband of Mrs. Madhuri Saini, the General Secretary. The complete details of land and the extent of the building like the number and measurement of rooms constructed on the land etc., had not been furnished. The terms of the lease was also taken into

consideration pertaining to the annual lease and the fact that the Society had also taken name of another school namely, St. Carmel School, Giani Zail Singh Nagar, Ropar, along with students, furniture and fixtures. It was noticed that the building details were not furnished as such of the liability created and the expenditure incurred on the creation of such assets. The factum of the Society filing its returns since the year 2005-06 and claiming exemption under Section 10(23C) (of Income Tax Act, 1961) on the fact that the receipts were below `1 crore, was taken into consideration. It was further noticed that the amount of income is likely to exceed 1 crore in the financial year 2012-13 and the details of the office bearers and the members of the general body had not been furnished along with the identity of the office bearers. Accordingly, by holding that the Society was earning profits and had nothing to do with charity and had no visible plans and having not been satisfied with the objects and genuineness of the society and keeping in view the definition of charitable purpose under Section 2(15) (of Income Tax Act, 1961), registration was denied. As noticed, the Tribunal, vide the impugned order dated 19.02.2013, has allowed the appeal and directed that registration be granted to the

Society.

4. Counsel for the Revenue has, accordingly, contended that once

relevant materials have not been furnished, the Commissioner was well justified in denying the registration and the Tribunal was not justified in directing registration and even otherwise, the matter should have been remanded for a fresh enquiry on the basis of some directions laid down and it was not appropriate for the Tribunal, in such circumstances, to allow the appeal, in view the right of the Commissioner to go into the issue to satisfy itself of the objects and the genuineness of its activities.

5. Counsel for the assessee, on the other hand, vehemently assailed the

order of the Commissioner and submitted that the order was based on the

judgment of the Supreme Court in MCD Vs. Children Book Trust 1992 (3) SCC

390. In a later judgment of the Supreme Court in M/s Queen's Educational

Society Vs. Commissioner of Income Tax 2015 (3) TMI 619, it had been

specifically held that the earlier judgment of the Apex Court was dealing with the property tax provisions and therefore, could not have been relied upon and even the judgment of the Uttarakhand High Court had been reversed. Accordingly, the reasoning given by the Tribunal was projected to be correct.

6. After hearing counsel for the parties, we are of the opinion that the

Tribunal was not justified in allowing the appeal and issuing necessary direction and should have sent the matter back to the Commissioner for fresh enquiry. Admittedly, the factum of the additional information being asked for was never denied by the respondent-Society. In appeal, the assessee had only raised the issue as to whether the order of the Commissioner is arbitrary and unjustified and whether the activities of the Society did not qualify in the nature of charity and the finding had been based on suspicion and conjectures. The additional information being asked for, as such, was never controverted. It was not contended that the information had been supplied but was not taken into consideration. Under Section 12AA (of Income Tax Act, 1961), the procedure for registration is prescribed, which reads as under:

“Procedure for registration.

12AA. (1) The [Principal Commissioner] or Commissioner, on

receipt of an application for registration of a trust or institution

made under clause (a)[or clause (aa) of sub-section (1)] of section

12A, shall—

(a) call for such documents or information from the trust or

institution as he thinks necessary in order to satisfy himself about

the genuineness of activities of the trust or institution and may also

make such inquiries as he may deem necessary in this behalf; and

(b) after satisfying himself about the objects of the trust or

institution and the genuineness of its activities, he—

(i) shall pass an order in writing registering the trust or institution;

(ii) shall, if he is not so satisfied, pass an order in writing refusing to

register the trust or institution, and a copy of such order shall be sent to the applicant :

Provided that no order under sub-clause (ii) shall be passed unless

the applicant has been given a reasonable opportunity of being

heard.

[(1A) All applications, pending before the [Principal Chief

Commissioner or] Chief Commissioner on which no order has been

passed under clause (b) of sub-section (1) before the 1st day of

June, 1999, shall stand transferred on that day to the [Principal

Commissioner or] Commissioner and the [Principal Commissioner

or] Commissioner may proceed with such applications under that

sub-section from the stage at which they were on that day.]

(2) Every order granting or refusing registration under clause (b) of

sub-section (1) shall be passed before the expiry of six months

from the end of the month in which the application was received

under clause (a) [or clause (aa) of sub-section (1)] of section 12A (of Income Tax Act, 1961).]

[(3) Where a trust or an institution has been granted registration

under clause (b) of sub-section (1) [or has obtained registration at

any time under section 12A (of Income Tax Act, 1961) [as it stood before its amendment by

the Finance (No. 2) Act, 1996 (33 of 1996)]] and subsequently the

[Principal Commissioner or] Commissioner is satisfied that the

activities of such trust or institution are not genuine or are not being

carried out in accordance with the objects of the trust or institution,

as the case may be, he shall pass an order in writing cancelling the

registration of such trust or institution:

Provided that no order under this sub-section shall be passed

unless such trust or institution has been given a reasonable

opportunity of being heard.]”

7. A perusal of the above section would go on to show that the

Commissioner has to satisfy himself of the objects of the trust and the

genuineness of the activities and after giving an opportunity of being heard to the trust or the institution, a refusal can be made to register the trust. Thus, the section gives power to the Commissioner to look into the genuineness of the activities of the trust and to satisfy himself about its activities. Under Section 12A (of Income Tax Act, 1961), the provisions of Sections 11 & 12 shall not apply in relation to the income of any trust or institution unless various conditions are fulfilled. The said sections provide that income from property held for charitable purposes shall not be included in the total income of the previous year of the person in receipt of the income.

8. The provisions of Section 12AA (of Income Tax Act, 1961), thus, also give the power under

sub-section(3) to cancel the registration of the activities of the trust if it is not carried out in accordance with the objects but the Commissioner has to keep in mind that it is not to act as an Assessing Authority while deciding the application under Section 12AA (of Income Tax Act, 1961) and the enquiry regarding the genuineness of the activities of imparting education with a charitable purpose is to be kept in mind. The objects of the trust, thus, have to be taken into consideration. Section 2(15) (of Income Tax Act, 1961) defines charitable purpose and the same includes relief in education and advancement of any other object of general public utility. In case the utility is carried out in the nature of trade, commerce, business, the proviso provides that the same will not be a charitable purpose. Sub-section 2(15) (of Income Tax Act, 1961) reads as under:

“Sub-section 2(15) (of Income Tax Act, 1961) - "charitable purpose" includes relief of the

poor, education, medical relief, [preservation of environment

(including watersheds, forests and wildlife) and preservation of

monuments or places or objects of artistic or historic interest,] and

the advancement of any other object of general public utility:

Provided that the advancement of any other object of general

public utility shall not be a charitable purpose, if it involves the

carrying on of any activity in the nature of trade, commerce or

business, or any activity of rendering any service in relation to any

trade, commerce or business, for a cess or fee or any other

consideration, irrespective of the nature of use or application, or

retention, of the income from such activity:]

[Provided further that the first proviso shall not apply if the

aggregate value of the receipts from the activities referred to

therein is [twenty-five lakh rupees] or less in the previous year;]”

9. These aspects have not been taken into consideration by the Tribunal

which has placed heavy reliance upon the judgment of this Court in Pinegrove

International Charitable Trust Vs. Union of India & others [2010] 327 ITR 73,which has now been upheld by the Apex Court in the case of M/s Queen's

Educational Society (supra). However, it is also to be noted that a Division

Bench of this Court in Commissioner of Income Tax Vs. Surya Educational &

Charitable Trust [2013] 355 ITR 280, subsequently, held that the principles laid down for excluding income under Section 10(23C) (of Income Tax Act, 1961) are not applicable while considering the application for registration under Section 12AA (of Income Tax Act, 1961). It was also further held that the genuineness of the objects of the trust are to be taken into consideration. Relevant observations read as under:

“On the other hand, Section 10(23C) (of Income Tax Act, 1961) are the

provisions of the Act in substitution of the earlier provisions of

Section 10(22) (of Income Tax Act, 1961) as to which income shall not be included

in computing the total income of any person. Therefore, the

provisions of Sections 11, 12 or Section 10(23C) (of Income Tax Act, 1961), deal

with the income of a Trust or of the Institution and the

circumstances as to when such income is to be excluded for

computing the total income, but the basis of such benefit is the

registration under Section 12AA (of Income Tax Act, 1961). Unless a Trust or

Institution is registered under Section 12AA (of Income Tax Act, 1961), such Trust

or Institution shall not be entitled to exclude from its total income,

deductions or contributions or from other sources. Therefore, the

principles laid down for excluding the income from consideration

under Section 10(22) (of Income Tax Act, 1961) now 10(23)(C) or Sections 11 and 12 are not

applicable while considering the application for registration under

Section 12AA (of Income Tax Act, 1961). The application for registration is required

to be made within one year of the creation of the Trust. Section

12AA of the Act, requires satisfaction in respect of the genuineness

of the activities of the Trust, which includes the activities which the

Trust is undertaking at present and also which it may contemplate

to undertake. The insertion of sub-section (3) to Section 12AA (of Income Tax Act, 1961) of

the Act, clarifies the said fact, when it empowers the Commissioner

to cancel the registration if the activities of the Trust are not carried

out in accordance with such objects.

Therefore, the object of Section 12AA (of Income Tax Act, 1961), is to

examine the genuineness of the objects of the Trust, but not the

income of the Trust for charitable or religious purposes. The stage

for application of income is yet to arrive i.e. when such Trust or

Institution files its return. Therefore, we find that the judgments

referred to by the learned counsel for the appellant are not

applicable to the facts of the present case arising out of the

question of registration of the Trust and not of assessment.”

10. In such circumstances, the heavy reliance by the counsel for the

assessee upon the judgment of the Division Bench in the case of Pinegrove

International Charitable Trust (supra), as has been done by the Tribunal, also, would be without any basis. The power of the Commissioner to look into the objects of the Society and the genuineness of the same cannot be doubted when the basis is of non-supply of information. In such circumstances, it would be appropriate that the Commissioner undertakes the exercise afresh, on the basis of the application which has already been filed, keeping in view the material which can be produced by the respondent-assessee.

11. Accordingly, the order of the Tribunal dated 19.02.2013 is set aside

with a direction to the Commissioner to decide the application, filed under

Section 12AA (of Income Tax Act, 1961), afresh. Since the application was filed more than 3 years ago, it would be appropriate that the same is decided expeditiously.

With the above observations, the present appeal stands allowed.

(S.J.Vazifdar) (G.S.Sandhawalia)

Acting Chief Justice Judge

05.05.2015