2011 (3) TMI 867 - AT - Income Tax

Registration u/s 12AA - Approval u/s 80G - The Revenue s principal objection is that the activities of the Trust, which are limited to running a School, is being run on commercial lines, so that there is no question of it being charitable - Trust is created with a paltry sum of rupees one thousand - Besides, it would also depend, to a large extent, on the quantum of funds involved. In the instant case, as it would be thus seen, the applicant has raised substantial loans on commercial basis - The same, improbable even for a business set-up, being granted only in case of reputed organizations, is inconceivable for a non-business, charitable organization, and a nascent one at that - It has also nowhere contended of having charged less from the students, i.e., vis-a-vis the normative fee charged by other public schools or that prescribed by the regulatory authorities - the information having apparently not been called for by the competent authority, though it may be relevant to state that the onus to prove its case, i.e., the genuineness of its activities, is only on the applicant - Decided against the assessee

Summary

Issues Involved:
1. Denial of registration under section 12AA of the Income-tax Act, 1961.
2. Denial of approval under section 80G of the Income-tax Act, 1961.

Detailed Analysis:

1. Denial of registration under section 12AA:

The applicant-trust, a public charitable trust registered under the Indian Trust Act, 1882, sought registration under section 12AA and approval under section 80G of the Income-tax Act, 1961. The Commissioner of Income-tax (CIT) denied these applications based on several observations:
- The trust's only activity was running a nursery-cum-primary school, which was perceived to be run on commercial lines.
- Lack of information regarding the socio-economic background, educational qualifications, or professional competence of the trustees.
- Absence of identifiable beneficiaries despite a clause in the Trust Deed for providing assistance to poor and destitute people.
- The trust was settled with a meager amount of Rs. 1000, raising questions about its capability to achieve its objectives.
- Financial records showed a surplus of Rs. 3.62 lakhs from gross receipts of Rs. 10.21 lakhs, with no instances of free or subsidized education or scholarships reported.

The CIT relied on the Supreme Court decision in Sole Trustee Lokashikshana Trust v. CIT, which emphasized that activities of a trust must qualify as charitable and not be profit-driven. The CIT concluded that the trust's primary objective was profit-making through running a school on a commercial basis, thus disqualifying it from being recognized as a charitable institution.

2. Denial of approval under section 80G:

The denial of approval under section 80G was consequential to the denial of registration under section 12AA. The tribunal examined the legal and factual aspects to determine whether the trust's activities were genuinely charitable or profit-driven.

The tribunal acknowledged that 'education' is per se a charitable purpose under the Act. However, it emphasized that the charitable purpose should not be submerged by a profit-making motive. The tribunal referred to several judicial precedents, including the Supreme Court decisions in Dharmadeepti v. CIT and Dharmaposhanam Co. v. CIT, which clarified that profit-making should not be the dominant objective of a charitable institution.

The tribunal noted that the trust was created with a paltry sum of Rs. 1000 and had raised substantial loans on a commercial basis. This indicated that the trust was intended to be run on commercial lines, as it needed to generate surplus to meet loan obligations. The tribunal also observed that the trust's rapid asset growth and lack of evidence of charging lower fees or providing free education further supported the conclusion that it was profit-driven.

The tribunal concluded that the trust's activities were inconsistent with its avowed charitable objects, as it was being run on a commercial basis. Consequently, the denial of registration under section 12AA and approval under section 80G was upheld.

Conclusion:

In light of the above analysis, the tribunal dismissed the assessee's appeals, affirming the denial of registration under section 12AA and approval under section 80G. The tribunal emphasized that the trust's activities were predominantly profit-driven and not genuinely charitable, thereby disqualifying it from the benefits conferred by the Income-tax Act.