2009 (6) TMI 692 - AT - Income Tax

Summary

Issues Involved:
1. Rejection of the application for renewal of recognition under section 80G(5)(vi) of the Income-tax Act.
2. Determination of whether the activities of the trust constitute "charitable purpose" under section 2(15) of the Income-tax Act.
3. Examination of whether the payment of royalty to the founder chairman/trustee contravenes section 13(1)(c) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Rejection of the Application for Renewal of Recognition under Section 80G(5)(vi):
The Director of Income-tax (Exemptions) rejected the trust's application for renewal of recognition under section 80G(5)(vi) on the grounds that the activities of the trust involved commercial activities such as publishing and selling books, cassettes, and VCDs, and holding sessions for corporate sectors. The Director relied on the amendment to section 2(15) of the Income-tax Act, effective from 1-4-2009, which expanded the definition of "charitable purpose" to exclude activities involving trade, commerce, or business.

2. Determination of Whether the Activities of the Trust Constitute "Charitable Purpose":
The trust argued that its activities fell under "education" and "relief to the poor," which are recognized as charitable purposes under section 2(15). The trust emphasized its social services, including education for orphans and destitute girls, financial support for needy children, and training individuals in Vedanta and philosophy. The trust also cited the Supreme Court's decision in Sole Trustee, Loka Shikshana Trust v. CIT, which held that "education" in section 2(15) refers to systematic instruction and training, not merely the acquisition of knowledge. The trust's counsel argued that the activities of printing and publishing books, and selling cassettes and VCDs, were incidental to its educational purpose and did not constitute commercial activities.

The trust's counsel also referred to the Board's Circular No. 11/2008, which clarified that the proviso to section 2(15) does not apply to trusts engaged in education, medical relief, or relief to the poor, even if they carry on incidental commercial activities. The Tribunal found merit in this argument and held that the rejection of the application by the Director of Income-tax (Exemptions) was not justified.

3. Examination of Whether the Payment of Royalty Contravenes Section 13(1)(c):
The Director of Income-tax (Exemptions) also rejected the application on the grounds that the payment of royalty to Sri Swami Sukhbodhananda, the founder chairman and trustee of the trust, contravened section 13(1)(c) of the Income-tax Act. The trust argued that the royalty payments were reasonable and in line with industry standards, citing an agreement with Jaico Publishing House, which paid a higher royalty rate to the founder. The Tribunal agreed with the trust's argument, noting that the payment was made by a third party (Jaico Publishing House) and not directly by the trust. Therefore, the payment did not contravene section 13(1)(c).

Conclusion:
The Tribunal concluded that the rejection of the trust's application for renewal of recognition under section 80G was unjustified. The Tribunal directed the Director of Income-tax (Exemptions) to grant the renewal of recognition, as the trust's activities constituted "charitable purpose" under section 2(15), and the payment of royalty did not contravene section 13(1)(c). The appeal of the assessee was allowed.