Punjab & Haryana High Court has held in the following case that while granting registration u/s 12AA to Charitable Trusts, Commissioner should examine genuinness of the objectives of the trust so as to grant registration u/s 12AA, rather than the manner of application of funds by the trust. The application of funds by the Trust has to be seen after the return is filed by the trust. It is also held that the quantum of activities undertaken by the trust after its creation cannot be a basis for examining registration application under section 12AA.
Facts of the case: In this case the assessee-society, established with the object of establishing educational institutions, applied for registration under section 12A. The Commissioner declined registration on the ground that the assessee's claim for registration under section 12A with respect to its dominant objective of establishing educational institutes was premature as it was still in the process of purchase of land for that purpose; construction of building of educational institutes had still not started and no action had been taken for raising infrastructure and no permission from AITEC had been received. On appeal, the Tribunal held that the application for registration of the trust/institution has to be made within a period of one year from the date of creation of the trust, but there is no requirement that the trust or the institution should have started all its envisaged activities in the first year itself. The quantum of activities undertaken by the Trust after its creation cannot be the basis for examining registration application under section 12AA. On that basis, the Tribunal set aside the order passed by the Commissioner and the ordered granting of registration to the assessee.
On the revenue's appeal the High court dismissed the appeal and held as under:
As per section 12AA an application for registration of the trust and institution is required to be made within one year from the date of creation of the trust or the establishment of such institution. The procedure for registration of the trust or institution is prescribed under section 12AA. In terms of clause (a) of section 12AA, the Commissioner is to satisfy himself about the genuineness of the activities of the trust on such inquiries as he may deem necessary. Sub-section (1A) and (2) of section 12AA are procedural in nature, whereas sub-section (3) of section 12AA empowers the Commissioner to cancel the registration of the trust or institution, if he is satisfied that the activities of such trust or Institution are not genuine or are not carried out in accordance with the objects of the trust or institution. [Para 8]
Section 11 contemplates that the income as specified therein shall not be included in the total income of the previous year of the person in receipt of the income derived from the property held under the trust wholly for charitable or religious purposes, whereas section 12 deals with the contributions received by the trust or an institution, established for charitable and religious purposes, receiving contribution, shall not be an income in terms of section 11. The benefit of sections 11 and 12 is available only if such trust or institution is registered under section 12AA. [Para 9]
On the other hand, the provisions of section 10(23C) are the provisions of the Act in substitution of the earlier provisions of section 10(22) 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) 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. Unless a trust or institution is registered under section 12AA, 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) now 10(23)(C) or sections 11 and 12 are not applicable while considering the application for registration under section 12AA. The application for registration is required to be made within one year of the creation of the trust. Section 12AA 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 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. [Para 10]
Therefore, the object of section 12AA 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. [Para 11]
Learnings from the case: While granting the registration to a charitable trust u/s 12AA, the Commissioner of Income Tax should see and satisfy himself about the genuineness of the objectives of the trust rather than objecting or examining the manner in which the income is applied by the trust. Whether income has been applied towards charitable purpose or not is a question to be decided after the trust files its return of income. At the time of registration CIT should not reject application for registration by objecting the manner of application of income by the trust. If charitable trust is found to be applying its funds and income towards non-charitable motive from its return or assessment, the revenue has every right to cancel registration certificate of such trust granted u/s 12AA.
At the time of registration CIT should satisfy himself about the genuineness of the charitable motives only and not about the manner of application of funds by the trust. The quantum of activities at the time of registration can also not be a ground for rejecting the application u/s 12AA.
Full Judgement is as follows:
HIGH COURT OF PUNJAB AND HARYANA
Commissioner of Income-tax-II, Chandigarh
v.
Surya Educational & Charitable Trust*
HEMANT GUPTA AND G. S. SANDHAWALIA, JJ.
IT APPEAL NOS. 701 OF 2010 AND 189 OF 2011 (O & M)
OCTOBER 5, 2011
Ms. Urvashi Dugga for the Appellant.
JUDGMENT
Hemant Gupta, J - This order shall dispose of ITA No. 701 of 2010 and ITA No. 189 of 2011, wherein the learned Income Tax Appellate Tribunal, Chandigarh (for short 'the Tribunal'), granting registration to the respondent under Section 12AA of the Income Tax Act, 1961 (for short 'the Act'), for carrying on its object of establishing educational Institutions.
2. The question raised in both the appeals is identical, but for the facility of reference, the facts are taken from ITA No. 701 of 2010.
3. The respondent-assessee applied for registration under Section 12A of the Act on 19.8.2008, after registration of the Society on 12.8.2008. The learned Commissioner of Income Tax, the competent authority to grant of registration, sought explanation from the respondent, as to why registration has been sought when it is still in the process of acquiring land; construction of building of educational Institution is yet to start; various other steps for raising the appropriate infrastructure have yet not been taken and that the approval of the All India Council for Technical Education has yet not been received.
4. The Commissioner declined registration on the ground that expenditure to the extent of Rs.17.25 crores has been incurred by the respondents for purchase of the land, whereas substantial expenditure is still to be incurred on construction of the building and other infrastructure and that the expenditure on the charitable activities, is only Rs.1500/-.
The Commissioner, inter-alia, held as under:-
"Every detail and facts on the file point out that the intention of the applicant society is to start and run educational Institutions and all time, energy and expenditure is geared towards meeting this objective."
5. After considering various judgments and considering the fact that that the amendment in the aims and objects of the Society in respect of Clause (5), is doubtful having been carried out in one day i.e. on 19.1.2009, the Commissioner found that when the Society is paying reasonable salary/wages to its workers than to have the objective of arranging help and aid for the family of the workers can be good activity, but it cannot be considered as charitable activity for public at large. The Commissioner concluded as under:-
"From the above, it is appropriate to conclude that all the money, time and energy of the society is geared towards establishing educational institutes. It seems that a meager amount of Rs.1500/- has been spent towards donation in an attempt to strengthen its claim for registration under Section 12A of the IT Act. If all the facts are analysed in a dispassionate manner, it really points to realization on the part of the society itself that its claim of registration under Section 12A with respect of its dominant objective of establishing educational institutes is premature as it is still in the process of purchase of land for this purpose; construction of building of educational institutes have still not started and no action has been taken for raising infrastructure and no permission from AITEC has been received."
6. In appeal, the learned Income Tax Appellate Tribunal, found that the Commissioner of Income Tax/Director of Exemption is empowered to satisfy himself about the objects of the Trust or genuineness of the activities of the Trust or Institution, before granting the registration under Section 12A of the Act. The power of the Commissioner of Income Tax under Section 12AA of the Act, does not extend to examining the other conditions of exemption of income under Sections 11 and 12 of the Act, which are to be seen in the assessment proceedings. The application for registration of the Trust/Institution has to be made within a period of one year from the date of creation of the Trust, but there is no requirement that the Trust or the Institution should have started all its envisaged activities in the first year itself. The quantum of activities undertaken by the Trust after its creation, cannot be the basis for examining registration application under Section 12AA of the Act. The Tribunal also considered sub-section (3) of Section 12AA of the Act, inserted vide Finance Act, 2004, which contemplated that where registration had been granted to a Trust or Institution and subsequently the 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, the Commissioner is empowered to cancel the registration to such Trust or Institution. On such basis, the learned Tribunal set aside the order passed by the Commissioner and the ordered granting of registration to the respondent.
7. Learned counsel for the appellant has relied upon a judgment of the Madras High Court reported asCIT v. Devi Educational Institution [1984] 18 Taxman 221 (Mad.)/[1985] 153 ITR 571 , to contend that before an educational Institution claims exemption, the existence of educational Institution, is a must and, therefore, till such time, the educational Institution starts functioning, i.e. raising of construction and necessary infrastructures and approvals from AIETC, the respondents cannot be granted registration under Section 12A of the Act. Reliance is also placed upon the judgment of the Supreme Court in Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310 / 90 Taxman 528 .
8. We have heard learned counsel for the appellant, but find no merit in the present appeals. As per Section 12AA of the Act, an application for registration of the Trust and Institution is required to be made within one year from the date of creation of the Trust or the Establishment of such Institution. The procedure for registration of the Trust or Institution is prescribed under Section 12AA of the Act. In terms of Clause (a) of Section 12AA of the Act, the Commissioner is to satisfy himself about the genuineness of the activities of the Trust on such inquiries as he may deem necessary. Sub-section (1A) and (2) of Section 12AA of the Act, are procedural in nature, whereas Sub-section (3) of Section 12AA of the Act, empowers the Commissioner to cancel the registration of the Trust or Institution, if he is satisfied that the activities of such Trust or Institution are not genuine or are not carried out in accordance with the objects of the Trust or Institution.
9. Section 11 of the Act contemplates that the income as specified therein shall not be included in the total income of the previous year of the person in receipt of the income derived from the property held under the Trust wholly for charitable or religious purposes, whereas Section 12 of the Act, deals with the contributions received by the Trust or an Institution, established for charitable and religious purposes, receiving contribution, shall not be an income in terms of Section 11 of the Act. The benefit of Sections 11 and 12 of the Act, are available only if such Trust or Institution is registered under Section 12AA of the Act.
10. On the other hand, Section 10(23C) of the Act are the provisions of the Act in substitution of the earlier provisions of Section 10(22) of the Act 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 the Act, 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 the Act. Unless a Trust or Institution is registered under Section 12AA of the Act, 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) now 10(23)(C) or Sections 11 and 12 are not applicable while considering the application for registration under Section 12AA of the Act. 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 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.
11. Therefore, the object of Section 12AA of the Act, 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.
12. In view of the above, we do not find that any substantial question of law arises for consideration in the present appeals. Hence, the same are dismissed.
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