CIT not justified in rejecting registration u/s 12AA for the reason that trust is making systematic profits year after year

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CIT not justified in rejecting registration u/s 12AA for the reason that trust is making systematic profits year after year

 

  1. MARY’S CHRISTIAN CHARITABLE TRUST vs. INCOME TAX OFFICER

ITAT, ITAT, CHENNAI ‘B’ BENCH

Pradeep Parikh, Vice President & Hari Om Maratha, J.M.

ITA No. 1269/Mad/2009

19th March, 2010

(2010) 29 CCH 0221 ChenTribe

(2011) 11 ITR 0205

Legislation Referred to

Section 12A, 12AA,

Case pertains to

Asst. Year –

Decision in favour of:

Assessee

Charitable trust—Registration under s. 12A—Assessee-trust having charitable objects including education purposes—CIT rejected application for registration under s. 12AA mainly on the ground that there was surplus in the accounts and as such trust had been making systematic profits year after year—CIT not justified—Accumulation of surplus in the hands of an educational institution would not, ipso facto, lead to an irresistible conclusion that such an educational institute is existing for making profits and not solely for educational purposes—In the absence of other valid and independent evidence to support the said conclusion , the CIT is directed to grant registration to the assessee-trust under s. 12AA as it fulfils all the requisite conditions

Held:

Accumulation of surplus in the hands of an educational institution would not, ipso facto, lead to an irresistible conclusion that such an educational institute is existing for making profits and not solely for educational purposes. There is no other valid and independent evidence to support the above conclusion. Therefore, t the CIT is directed to grant registration to the assessee-trust under s. 12AA, as it fulfils all the requisite conditions.—Pinegrove International Charitable Trust vs. Union of India & Ors. (2010) 230 CTR (P&H) 477 : (2010) 37 DTR (P&H) 105 : (2010) 327 ITR 73 (P&H) followed.

(Para 11)

Conclusion:

CIT was not justified in refusing the registration under s. 12AA to the assessee-trust on the ground that there was surplus in the hands of the educational institution which lead to the conclusion that the trust was existing for making profits and not solely for educational purposes.

In favour of:

Assessee

Counsel appeared:

  1. Sridhar, for the Appellant : P.B. Sekaran, for the Respondent

ORDER

HARI OM MARATHA, J.M :

This appeal is directed against the order of the CIT dt. 24th July, 2009. The assessee-trust has challenged rejection of application in Form No. 10 dt. 22nd Jan., 2009 for registration under s. 12AA of the IT Act, 1961 (hereinafter referred to as “the Act” for short).

  1. The trust was created on August 4, 2003. The objects of the trust as incorporated in the appellate order, are as under :

(i) To promote the educational interests of the Indian community as a whole with special and particular interest for the development of education for Christian minority section by establishing kindergarten schools, primary schools, middle schools, high schools, higher secondary schools, matriculation schools, colleges, etc., as well as teachers training institutions, physical education colleges, engineering colleges and medical colleges including institutions connected with development of medical science and training institutes, towards instruction of industrial training, workshops, and connected establishments and management and supervision thereof;

(ii) to take over sick educational establishments and other educational institutions;

(iii) to give priority for the educational needs of all people irrespective of religion, regional and caste considerations and differences;

(iv) to strive for the uplift and betterment of all people especially the Christian minority in respect of education disseminating knowledge towards education, cultural, social service, discipline and moral upliftment including economic and intellectual advancement of the people;

(v) to provide facilities for library, reading rooms to generate interest and to open scope for play and other educational aspects, to distribute free or at subsidised rate books, stationery articles, writing materials, giving assistance for learning apart from arranging to secure financial aid for educational purposes, such as charts, materials pertaining to education and uniform.

  1. During hearing, it was found that the trust had filed return of income for the asst. yrs. 2006-07 to 2008-09 claiming exemption under s. 10(23C) and that the trust was running a teachers training institute, arts and science college and polytechnic. On 18th Nov., 2004, a deed for appointment of new trustee Shri M. Mani was executed by Smt. P. Swar-nalatha, the original trustee because other trustee Shri T.A. Palaniappa Devasagayam had expired. Subsequently, a codicil was executed on 25th Feb., 2005 to incorporate certain provisions which read as under :

(i) the trust will not carry out any activity with the intention of earning profit;

(ii) the activities of the trust confined only within Indian territories;

(iii) the trustees shall keep true and correct account of all the trust money and disbursement thereof and the accounts shall be closed on 31st March every year and audited by a chartered accountant duly appointed and approved by the trustees;

(iv) investments of the funds will be in accordance with s. 11(5) r/w s. 13(1)(d) of the IT Act;

(v) any amendment to this deed shall be carried out with the previous approval of the CIT;

(vi) in the event of dissolution of the trust, the trust properties and liabilities held by the trust shall be transferred to a trust or charitable institution having similar objects and the decision of the trustees, in this respects, shall be final;

(vii) the benefits of the trust are open to all irrespective of cast, religion, sex, etc.;

(viii) the provisions of the Indian Trusts Act shall apply to all matters not specifically mentioned in these presents;

(ix) the trust is irrecoverable.”

  1. The learned CIT did not treat the appointment of another trustee in order as per cls. 6, 7, 8, 9 and 10 of the trust deed, and so he has not treated the codicil dt. 25th Feb., 2005, as a legal document. He also noticed that the trust has been making systematic profits year after year, and to show this fact he has drawn a table at page 4 of his order which we are also extracting as under :
Assessment year Gross receipts Surplus income (excluding interest on bank deposit) Percentage
  (Rs. ) (Rs. ) (Rs. )
2006-07 21,30,000 4,04,799 19 per cent
2007-08 31,04,000 15,16,772 49 per cent
2008-9 30,00,000 14,51,132 48 per cent
2009-10 (provisional accounts) 42,42,000 34,37,840 81 per cent
  1. After elaborating the decisions discussed by the Uttaranchal High Court in the case of CIT vs. Queens’ Educational Society (2009) 223 CTR (Uttarkhand) 395 : (2009) 319 ITR 160 (Uttarkhand) to reach its conclusion that where a body is making systematic profits even though that profit is utilised only for charitable purposes yet it cannot be said it could claim exemption.
  2. After concluding that the change in the trust deed being illegal and the trust being run on commercial lines with a view to earn profit, the learned CIT has rejected the application of the trust seeking registration under s. 12AA of the Act and did not grant registration.
  3.  The assessee-trust is aggrieved and has raised following grounds of appeal :

“1. The order of the CIT, Salem dt. 24th July, 2009 in C. No. 9755/(113)/SLM/2008-09 in rejecting the application filed for grant of registration under s. 12AA of the Act is contrary to law, facts and in the circumstances of the case.

  1. The CIT erred in rejecting the application in Form No. 10A dt. 22nd Jan., 2009, filed for grant of registration under s. 12AA of the Act without assigning proper reasons and justification.
  2. The CIT failed to appreciate that the objects of the appellant trust being charitable in nature, rejection of the registration as sought for without any finding on the non-charitable nature of such objects was wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
  3. The CIT failed to appreciate that the provisions governing the powers for registration under s. 12AA of the Act were stretched on the facts of the case beyond its scope and such powers being narrow in scope, the rejection of registration as sought for was wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
  4. The CIT failed to appreciate that the findings recorded with regard to the appointment of the trustee in para 3.3 of the impugned order were wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
  5. The CIT failed to appreciate that having not disputed on the charitable nature of the objects of the appellant-trust and further not having disputed the genuineness of the activities, the rejection of the registration pointing out procedural/technical error in appointment of the trustee to reject the prayer for grant of registration was wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
  6. The CIT failed to appreciate that the findings based on the tabular statement in para 4.1 of the impugned order were wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
  7. The CIT failed to appreciate that the incidental surplus resulting in the implementation of the objects of the appellant-trust was wrongly taken as one of the main criteria for refusing and rejecting the prayer for grant of registration under s. 12AA of the Act.
  8. The CIT failed to appreciate that the findings recorded in this regard in paras 4.2, 4.3 and 4.4 of the impugned order were wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
  9. The CIT failed to appreciate that the decisions cited in this regard had no application to the facts of the case inasmuch as the principles laid down in the Hon’ble Supreme Court decisions referred to were understood wrongly and out of context in the process of rejecting the prayer for grant of registration.
  10. The CIT failed to appreciate that imparting education on the facts of the case, resulting in surplus as pointed out would not lead to the automatic conclusion on the profit motive and the aspect of profit motive in the running of the educational institution ought to have been examined in the assessment proceedings while such examination in the present proceedings would be outside the domain of powers vested in s. 12AA of the Act.
  11. The CIT failed to appreciate that the order under consideration was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.
  12. The CIT failed to appreciate that there was no proper opportunity given before passing the impugned order and any order passed in violation of the principles of natural justice is nullity in law.”
  13. The circumspection of rival submissions vis-à-vis the available records impels us to arrive at a finding that the reasons taken by the learned CIT are not legally correct for refusing to grant registration to the trust under s. 12AA of the Act. The change or replacement of the trustee after the death of one of the two trustees and the issue of codicil dt. 25th Feb., 2005 is not relevant for the purpose. The CIT has not rejected the trust itself. He has finally accepted the trust deed. The following submission dt. 22nd June, 2009 on behalf of the trust before the learned CIT are relevant :

“Respected Sir,

Ref : 9755(113)2008-09 – Registration under s. 12AA and under s. 80G filing of details as called for – regarding

The case relied on by the Hon’ble CIT vs. St. Pauls Sr. Secondary School and Queens Educational Society – was Nos. 103 and 104 of 2007 in the case of [(2009) 319 ITR 160 : 223 CTR (UTT) 395] The above judgment was made on 24th Sept., 2007.

The assessee-trust now put forth and relied upon the judgment of the same Uttarkhand High Court decision of CIT vs. Jyoti Prabha Society which was reported on 29th August, 2008 [(2009) 22 DTR (Uttarkhand) 53 : (2009) 310 ITR 162 (Uttarkhand)] a xerox copy of the judgment is enclosed.

The assessee-trust also relied upon all the following judgments made for claim under s. 10(23C)(iiia)

  1. American Hotel & Lodging Association Educational Institute vs. CBDT (2008) 216 CTR (SC) 377 : (2008) 7 DTR (SC) 83 : (2008) 301 ITR 86 (SC) : (2008) Taxation 306 (SC) xerox copy of the judgment enclosed-9th May, 2008.
  2. CIT vs. Sri Rao Baghadur ADK Dharmaraja Educational Charity Trust (2008) 300 ITR 365 (Mad) xerox copy enclosed.
  3. CIT vs. Satnyuktha Gowda Saraswatha Sabha (2000) 245 ITR 242 (Mad) : (2001) 112 Taxman 50 (Mad) xerox copy enclosed.
  4. Dy. CIT (Exemptions) vs. Willingdon Charitable Trust (2007) 106 TTJ (Chennai) 1121 : (2007) 107 ITD 493 (Chennai).
  5. CIT vs. Janakiammal Ayyandar Trust (2005) 277 ITR 274 (Mad).
  6. Thiagarajar Charities vs. Addl. CIT (1997) 140 CTR (SC) 295 : (1997) 225 ITR 1010 (SC) : (1997) 92 Taxman 152.

‘The assessee-trust, M/s St. Mary’s Christian Charitable Trust, most of the objects of the assessee-society pertained to imparting education to children, including spirit of brotherhood and love, giving academic, moral and physical education to develop children natural instincts and aptitude and to prepare children for higher education. The assessee-trust also relied on the followings.

  1. s. 10(22) and s. 10(23C)(iiiad) are similar with the sole exception that the condition of gross receipts finds place in the latter.
  2. Circular No. F. No. 194/16-17-IT(AI) in para reads as under :

‘The question for consideration whether an educational institution existing solely for educational purpose but which shows some surplus at the end of the year is eligible for this exemption. If the profit of the educational institution can be diverted for personal use of the proprietor thereof, then the income of the educational institution will be subject to tax. However, there may be cases where the provisions of s. 11 may be applicable. Where all the objects of the trust are educational, and the surplus, if any, from running the educational institution is used for educational purpose only, it can be held that the institution is existing for educational purpose and not for the purpose of profit. However, if the surplus can be used for non-educational purposes, it cannot be said that the institution is existing solely for educational purposes and such institutions will not be liable for exemption under s. 10(22). But, in such cases, the applicability of s. 11 can be examined and if the conditions laid down therein are satisfied, the income will be exempt under s. 11.’

The above circular has been reproduced from the decision reported in Birla Vidya Vihar Trust vs. CIT (1981) 24 CTR (Cal) 307 : (1982) 136 ITR 445 (Cal).

  1. Excepts from the Departments Circular No. 772, dt. 23rd Dec., 1998 [(1999) 235 ITR (St) 35] are given below (p. 45) :

Para 8.2. The Finance (No. 2) Act 1998 omits cls. (22) and (22A) of s. 10 from the statute. The exemption would, however, continue in respect of any university or other educational institution, hospital or other medical institution which is wholly or substantially financed by the Government, under the new sub-cls. (iiiab) and (iiiac) inserted in s. 10(23C) of the IT Act, by the Finance (No. 2) Act, 1998.

Para 8.3. Further, under sub-cls. (iiiad) and (iiiae) in s. 10(23(1), the income of the other educational and medical institutions would also be exempt if their annual receipts are below a limit to be prescribed. The limit has since been prescribed at Rs. 1 crore, vide Notification No. S.O. 897 (E), dt. 12th Oct., 1998 [(1998) 234 ITR (St) 11].

Para 8.4. The income of remaining educational and medical institutions would be exempt if they are approved by the prescribed authority on application made by them under sub-cls. (vi) and (via) of s. 10(23C) . . .

Para 8.5. These amendments will take effect from April 1, 1999 and will accordingly, apply in relation to the asst. yr. 1999-2000 and subsequent year.

  1. Hence, whenever the gross receipts of an educational institution is less that Rs. 1 crore, the provisions of s. 10(23C)(iiiad) applies for and from the asst. yr. 1999-2000, if the said educational institutional is not already accorded registration under s. 12AA of the IT Act.
  2. Hence, the provisions of s. 10(23C)(iiiad) will apply.
  3. The Bombay High Court a decision reported in Trustees of Vanita Vishram vs. CIT (2005) 198 CTR (Bom) 521 : (2006) 280 ITR 345 (Bom) : 148 Taxman 546 (Bom) at p. 554 and (2005) 198 CTR (Bom) 521 : (2006) 280 ITR 345 (Bom) : 148 Taxman 546 (Bom) (supra) (copy enclosed) in para 22, observed that (p. 35) “the school is not merely a building in which it is housed or the equipment that is contained in it but something more. It is an institution. . . It is not income from the educational institution that is exempt but any income of the educational institution. If the word had been ‘from’, the position would have been that the income should have been derived from the actual running of the school itself”.
  4. The Supreme Court in American Hotel & Lodging Association Educational Institute vs. CBDT (2008) 216 CTR (SC) 377 : (2008) 7 DTR (SC) 183 : (2008) 301 ITR 86 (SC) observed as under (headnote) :

‘Once an applicant-institution came within the phrase ‘exists solely for educational purposes and not for profit’ no other condition like application of income was required to be complied with. The prescribed authority was only required to examine the nature, activities and genuineness of the institution. The mere existence of profit/surplus did not disqualify the institution. Therefore, when exemption was given to an institution, there was no assessment or demand. Sec. 10(22) had an automatic effect. Under s. 10(22), the test was restricted to the character of the receipt of the income, viz., whether it had the character of an educational institution in India.’

  1. The Uttarakhand High Court in a decision reported in CIT vs. Jyoti Prabha Society (2009) 22 DTR (Uttarkhand) 53 : (2009) 310 ITR 162 (Uttarkhand) held as under on 29th August, 2008 (headnote) :

‘The assessee-trust filed its return for the asst. yr. 2002-03. The AO found that though the assessee was registered under s. 12A of the IT Act, 1961, as a charitable society its activity of letting out the building to another society to run the educational institution did not constitute a charitable purpose. After scrutiny, the AO assessed tax to the tune of Rs. 4,83,064. The CIT(A) and the Tribunal held that the assessee was entitled to exemption. On appeal to the High Court: Held, dismissing the appeal, that a perusal of the trust deed made it abundantly clear that the society existed for charitable purposes. It was true that the activities of the respondent-society included letting out of the properties to educational institutions. There was a concurrent finding of fact on the part of the Commissioner (A) and the Tribunal that the rental income earned by the respondent-society was being utilised for the purposes of imparting education by maintaining the buildings and construction of new buildings for the same purpose. The assessee was entitled to exemption under s. 11.’

The objects of the assessee-society in the above decision, found in pp. 165 and 166 of ITR 310 agree with the objects of the society by name ‘Jyoti Prabha Society’ whose objects are found in 87 ITO 123, 128 and 129 (Delhi), dt. 29th Aug., 2008 xerox copy enclosed.

The decision by the Uttarakhand High Court reported in was rendered on 24th Sept., 2007, while the decision reported in CIT vs. Jyoti Prabha Society (supra) was rendered on 29th August, 2008 by the same High Court now relied on by the assessee-trust.

While the High Court has held in the later decision that rental income was being utilised for the purpose of imparting education by maintaining buildings and construction new building for the same purpose and that the assessee was entitled to exemption under s. 11, in the said earlier decision, it was held that educational societies earning net surplus to the extent of 27 to 30 per cent, are not entitled to exemption under s. 10(23C)(iiiad) irrespective of the investments made by them in fixed assets out of the income of the relevant year.

  1. The assessee-trust is running only educational institution and no other activities are carried on by the trust except education to all, there is no business or profit motive by the trust and surplus earned all and again reinvested for educational activities and to provide education to all people irrespective of caste, religion, sex, etc., and relied upon the following decisions and circulars.
  2. On the other hand, the principle laid down by the Uttarkhand High Court in the decision reported in CIT vs. Jyoti Prabha Society (supra) on 29th August, 2008 can be applied with the support and strength of the Board circulars and decisions referred above.

Hence the provisions of s. 10(23C)(iiiad) is applicable to the assessee-trust based on the above decisions and circulars.

Yours faithfully,

(Sd.) R. Rathnakumar,

Salem

22nd June,2009

(Authorised Representative).”

  1. We have considered the above submissions. In a recent decision of the Hon’ble Punjab & Haryana High Court in the case of Pinegrove International Charitable Trust vs. Union of India & Ors. (2010) 230 CTR (P&H) 477 : (2010) 37 DTR (P&H) 105 : (2010) 327 ITR 73 (P&H) C.W.P. No. 6031 of 2009 judgment dt. 29th Jan., 2010, 1 Taxman.com <http://Taxman.com> 81 (a copy of which has been filed), it has been held thus (p. 114 of 327 ITR) :

“Merely because there are surpluses in the hands of the educational institution would not ipso facto lead to an inevitable conclusion that such an educational institution is existing for making profits and not solely for educational purposes. Therefore the interpretation put forth by the Chief CIT that there has to be reasonable profit only and then only an institution can be said to be not existing solely for the purposes of profit, is totally a misconception of law.”

  1. To arrive at the above conclusion, the decision of the Hon’ble Delhi High Court in the case of American Hotel & Lodging Association Educational Institute vs. CBDT (2008) 216 CTR (SC) 377 : (2008) 7 DTR (SC) 183 : (2008) 301 ITR 86 (SC) against which special leave petition has been dismissed by the hon’ble apex Court has been discussed and relied. In this decision, further decision of CIT vs. Jyoti Prabha Society (2009) 22 DTR (Uttarkhand) 53 : (2009) 310 ITR 162 (Uttarkhand) has been discussed threadbare including that of Birla Vidya Vihar Trust vs. CIT (1981) 24 CTR 307 : (1982) 136 ITR 445 (Cal) : (1981) 7 Taxman 391 (Cal) and also other decisions including the cases of—

(i) Mohinder Singh Gill vs. Chief Election CIT, AIR 1978 SC 851.

(ii) Aditanar Educational Institution vs. Addl. CIT (1997) 139 CTR (SC) 7 : (1997) 224 ITR 310 (SC).

  1. Therefore, in view of the submissions and our above noted observation, we are of the considered opinion that accumulation of surplus in the hands of an educational institution would not, ipso facto, lead to an irresistible conclusion that such an educational institute is existing for making profits and not solely for educational purposes. There is no other valid and independent evidence to support the above conclusion. Therefore, we direct the CIT to grant registration to the assessee-trust under s. 12AA of the Act, as it fulfils all the requisite conditions.
  2. In the result, the appeal of the assessee is allowed.

 

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