2014 (4) TMI 519 - AT - Income Tax

Withdrawal of registration u/s 12AA of the Act Applicability of section 2(15) of the Act Premises let out occasionally Held that - The main object of the trust was to promote educational activities and in that process the entire premises was let out to others who are running educational institutions - The claim of the assessee that it was let out on nominal rent, is not refuted by the Director of Income-tax (Exemption) or the Departmental representative - Even the sixth and seventh floors were let out to enable them to run the educational activity, i. e., running a management institute. The auditorium was meant to be utilized by the educational institutions free-of-cost and was not let out whenever the educational institutions needed it - the auditorium was utilized for other activities even on occasions when the educational institutions required it the letting out of auditorium is not the dominant object of the trust - Once it is shown that the object of the trust was advancement of education, merely because the auditorium was incidentally let out to outsiders for commercial purpose, the case would not fall in the category of advancement of any other object of general public utility thus, the withdrawal of registration is not in accordance with law the order of the DIT(E) set aside Decided in favour of Assessee.

Summary

Issues:
Challenge to withdrawal of registration by Director of Income-tax under section 12AA of the Income-tax Act based on interpretation of section 2(15) - Whether trust's activities qualify as charitable under section 2(15) - Whether letting out premises for educational institutions constitutes commercial activity affecting registration status.

Analysis:
The appeal was filed by the assessee-trust against the withdrawal of registration by the Director of Income-tax (Exemptions) under section 12AA of the Income-tax Act. The challenge was primarily based on the contention that the trust did not contravene the provisions of section 2(15) of the Act, and the Director wrongly applied the proviso to section 2(15) which was deemed inapplicable to the case. The trust's main object was to promote education, and it owned a building in Mumbai which was let out to educational institutions. The Director contended that the trust's activities were commercial in nature, citing service charges received for letting out premises and auditorium. The Director invoked the proviso to section 2(15) applicable from the assessment year 2009-10, leading to the show-cause notice for registration withdrawal under section 12AA(3).

The assessee argued that the trust's activities aligned with the promotion of education, emphasizing that letting out premises was incidental to the main objective. The trust provided evidence that the auditorium was mainly used by educational institutions and let out only when not in use by them. The assessee relied on Circular No. 11 of 2008 to support its position that the trust's primary object was not commercial. The Director, however, viewed the trust's actions as property exploitation for commercial purposes, citing a Supreme Court decision to support the commercial activity interpretation. Consequently, the Director cancelled the registration granted earlier under section 12A, effective from the assessment year 2009-10.

In the appeal, the assessee presented the trust deed to demonstrate the primary objective of promoting education and argued that letting out premises did not change the trust's core purpose. The assessee referenced the Circular dated December 19, 2008 to assert that the proviso to section 2(15) should not apply if the primary object was not general public utility advancement. Various case laws were cited in support of the appeal. The Departmental representative contended that income quantum should not dictate the dominant object of the trust, supporting the Director's decision.

Upon review, the Tribunal found that the trust's main objective was education promotion, with letting out premises as a means to facilitate educational activities. The Tribunal noted that the auditorium was primarily used by educational institutions and let out only when not in use by them. The incidental letting out for commercial purposes did not alter the trust's primary objective. The Tribunal concluded that the withdrawal of registration was not in accordance with the law and set aside the Director's order, thereby allowing the appeal filed by the assessee.