2013 (10) TMI 824 - AT - Income Tax

Scope of enquiry made by DIT(E) u/s 12AA regarding the activities of charitable trust Held that - After insertion of section 12AA w.e.f. 1.4.1997 the DIT(E) is empowered to enquire about the activities of the assessee before passing the order. There may be cases where application is made after the commencement of activities by the assessee trust. In such cases the DIT(E) is justified to enquire about the activities. However where no activity is commenced the question of making any enquiry regarding any activity by the DIT(E) would not arise. The nature of enquiry would depend on the facts of each case Contention that scope of the DIT(E) is limited to ascertaining only whether the objects are charitable or not is not acceptable Decided against the Assessee. Exemption u/s 10(22) of the Income Tax Act for educational institution Held that - Legislative intent disclosed in section 10(22) wherein it has been clearly provided that income of any educational institute cannot be exempted unconditionally if such institution also exists for deriving of profit. According to this provision if any educational institution is running on commercial basis then income of such educational institution cannot be exempted from taxation. However such institution can claim exemption u/ss. 11 and 12 as element of profit is not excluded by the Legislature - 75% of the income is to be applied for charitable purposes itself shows that element of profit is not excluded from the definition of charitable purpose for the purpose of sections 11 and 12. Because some profit has been earned by an educational institution registration u/s. 12AA cannot be denied so long as provisions of sections 11 12 and 12AA are complied with. Whether on the facts and in law the registration u/s. 12AA of the Act can be refused to the assessee Held that - When societies/trusts are created with the sole object to advance the cause of education but if such objects coupled with the motive to earn profits then such institution will not be entitled to exemption under section 10(22) since in such cases cannot be said to exist solely for the purpose of education. Therefore registration under section 12A/12AA would not be relevant by itself for claiming exemption under section 10(22) though the same would be relevant for claiming exemption under sections 11 and 12. Therefore where education is imparted by an institution with the purpose of profit i.e. by running the schools/colleges purely on commercial basis the assessee would not be entitled to exemption under section 10(22) but such case may be considered for exemption under section 11 if the conditions imposed by the Legislature are satisfied Decided in favor of Assessee.

Summary

Issues:
1. Non-granting of registration u/s. 12AA of the Income-tax Act, 1961.

Detailed Analysis:
The appeal concerned the non-granting of registration u/s. 12AA of the Income-tax Act, 1961 to the assessee. The Director of Income-tax (Exemptions) had called for information regarding the activities carried out by the assessee and directed the production of financial documents. The assessee had discrepancies in fee collections and had debited a sum towards Loss on Chit, indicating business activity. The society was found to be collecting more fees than prescribed by university authorities. The contention was made that the excess fees were used for educational purposes, but the DIT(E) found the financial statements unreliable and denied registration u/s. 12AA.

The primary issue was the scope of inquiry by the DIT(E) under section 12AA of the Act. It was established that the DIT(E) has the authority to inquire about the activities of the assessee before granting registration. The nature and extent of the inquiry would vary based on individual cases. The contention that the DIT(E) should only assess the charitable nature of the objects was rejected.

Another crucial issue was whether registration u/s. 12AA could be refused to the assessee. The definition of "charitable purpose" under section 2(15) of the Act was discussed, emphasizing that educational purposes are considered charitable. The legislative intent, including the omission of profit exclusion from charitable purposes, was highlighted. It was clarified that even if some profit is earned, registration u/s. 12AA cannot be denied as long as income is applied for educational purposes in compliance with relevant sections.

The judgment also addressed the distinction between institutions operating solely for education and those with profit motives. It was clarified that registration under section 12AA is not sufficient for exemption under section 10(22) if the institution operates purely for profit. The importance of reasonable fees and discouraging profit-driven institutions was emphasized. The DIT(E) was directed to reconsider the application in light of these observations, and the appeal was allowed for statistical purposes.

In conclusion, the judgment delved into the scope of inquiry by the DIT(E), the charitable nature of educational activities, the impact of profit motives on registration and exemptions, and the legislative intent behind tax benefits for educational institutions.