2012 (6) TMI 35 - AT - Income Tax

Registration u/s 12AA - denial of registration by CIT(A) on ground that assessee trust has surplus more than 15% of total receipts, application of income and that in spite of various objects, the society is only carrying out educational activities and no expenses regarding other activities has been reflected in the Income and Expenditure account - Held that - To consider whether the said society would be entitled to the benefits u/s 11 and 12 would be pre-judging the issue before the grant of certificate. At the stage of grant of certificate u/s 12A/12AA, the only enquiry which is to make by the Commissioner would be about the objects of the trust or institution and the genuineness of its activities. Undoubtedly the objects of the Samiti are for education and charitable purposes. The CIT has not doubted about the genuineness of activities, therefore, CIT has wrongly rejected the application for registration on the basis of incorrect facts, regarding application of income which is not the part of examination by him at the stage of granting registration u/s 12A/12AA - CIT directed to grant registration.

Issues Involved:
1. Rejection of the assessee's application for registration under section 12AA of the Income Tax Act, 1961.
2. Accumulation of funds exceeding 15% of total receipts.
3. Examination of the genuineness of the activities of the Samiti.
4. Application of income in capital expenditure.
5. Interpretation of the objects of the Samiti.

Issue-wise Detailed Analysis:

1. Rejection of the assessee's application for registration under section 12AA of the Income Tax Act, 1961:
The appeal was filed by the assessee against the order dated 21.09.2011 by the CIT, Gwalior, which rejected the application for registration under section 12AA(1)(b)(ii) of the Income Tax Act, 1961. The CIT's primary reason for rejection was that the Samiti's activities were not solely for charitable purposes but included profit-making elements. The CIT observed that the surplus generated by the society could not be considered incidental and indicated a profit mechanism.

2. Accumulation of funds exceeding 15% of total receipts:
The CIT noted that the Samiti accumulated funds exceeding 15% of total receipts for FY 2007-08 and 2008-09, which was seen as a violation of section 11(1)(a) of the Act. The CIT interpreted this as evidence that the Samiti was not applying its income for charitable purposes as required by the Act.

3. Examination of the genuineness of the activities of the Samiti:
The CIT called for a report from the Assessing Officer and reviewed documents and information to assess the genuineness of the Samiti's activities. The CIT concluded that the Samiti's activities were not solely charitable, as it was generating significant surpluses without voluntary contributions toward the corpus fund. The CIT also noted that the Samiti was only carrying out educational activities and not engaging in other charitable activities as per its objects.

4. Application of income in capital expenditure:
The Ld. Authorised Representative argued that the CIT did not consider the application of income in capital expenditure. The Samiti had invested in capital expenditure, which should have been considered while assessing the application of income. The CIT's failure to appreciate this aspect was highlighted as a significant oversight.

5. Interpretation of the objects of the Samiti:
The CIT found inconsistencies in the Samiti's stated objectives, noting that at one place, the Samiti claimed its objects were of general public utility, while at another, it contended that its objects were solely educational. The Ld. Authorised Representative argued that the objects of the Samiti were clearly for education and charity, and the CIT's interpretation was incorrect. The objects included organizing educational institutions, libraries, education for illiterate persons, and various other educational and charitable activities.

Judicial Precedents and Legal Provisions:
The judgment referenced several judicial precedents, including decisions from the Allahabad High Court, Madras High Court, and the Supreme Court of India, which clarified the scope of the CIT's authority in granting registration under section 12AA. The courts consistently held that at the stage of registration, the CIT should only examine the genuineness of the activities and the objects of the trust or institution, not the application of income.

Conclusion:
The Tribunal concluded that the CIT erred in rejecting the application for registration under section 12AA. The CIT's focus on the application of income was misplaced at the registration stage. The Tribunal directed the CIT to grant registration to the Samiti under section 12A/12AA, emphasizing that the CIT should have followed the procedure laid down in section 12AA and should have been satisfied with the genuineness of the activities and objects of the Samiti. The appeal filed by the assessee was allowed.

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