2015 (5) TMI 814 - AT - Income Tax

Refusal for granting registration u/s 12A(1)(aa) - Held that - It is an undisputed fact that assessee is running educational institution as is apparent from the assessment order of earlier years and moreover the object clause as suggests that assessee is running school for educational purposes. The argument of Ld. D.R. that original constitution needs to be examined with respect to objects clause does not hold much force as A.O. in assessment orders of earlier years has noted that society was running a school. In view of above facts and circumstances and in view of the judgements as noted above we direct the Commissioner to allow registration u/s 12AA of the Act. The A.O. during assessment proceedings will however be entitled to examine the books of accounts of assessee with a view to examine any violation of the Act and can disallow exemption u/s 11 if anything adverse is found. - Decided in favour of assessee

Issues Involved:
1. Refusal of registration under Section 12A(1)(aa) of the Income Tax Act, 1961.
2. Examination of the charitable nature of the society's objectives.
3. Assessment of the society's financial activities and their alignment with charitable purposes.
4. Consideration of case laws and judicial precedents relevant to the registration under Section 12AA.

Detailed Analysis:

1. Refusal of Registration under Section 12A(1)(aa) of the Income Tax Act, 1961:
The primary issue in this case is the refusal by the Commissioner of Income Tax (CIT) to grant registration to the assessee under Section 12A(1)(aa) of the Income Tax Act, 1961. The assessee, a society registered under the Societies Registration Act, applied for registration under Section 12A(1)(aa) along with audited accounts for the past three years. However, the CIT refused the registration on the grounds that the society's objects were not charitable in nature and that it was charging hefty fees, indicating profit-making rather than charitable activities.

2. Examination of the Charitable Nature of the Society's Objectives:
The CIT's refusal was based on the observation that the society's objects were not charitable and that it was earning significant profits. The assessee countered this by presenting audited accounts showing marginal net profits, which were reinvested in the school for additional fixed assets, thus serving a charitable purpose. The assessee also provided various case laws to support the argument that the mere earning of profits does not disqualify an institution from being considered charitable if the profits are used for charitable purposes.

3. Assessment of the Society's Financial Activities and Their Alignment with Charitable Purposes:
The CIT raised concerns about the hefty fees charged by the society and the unsecured loans obtained, questioning the genuineness of these activities. The assessee provided confirmations from unsecured lenders and highlighted that all queries raised by the CIT were duly addressed. The assessee argued that the profits were marginal and were reinvested in the school, which aligns with charitable objectives. The CIT's focus on gross receipts rather than net profits was challenged by the assessee, who emphasized that the net profits were minimal.

4. Consideration of Case Laws and Judicial Precedents Relevant to the Registration under Section 12AA:
The assessee cited the Hon'ble Supreme Court's decision in Queen's Educational Society vs CIT, which held that mere earning of profits in the course of charitable activities cannot be a reason to deny registration under Section 12AA. The CIT's reliance on the Uttarakhand High Court's decision in National Institute of Aeronautical Engineering Educational Society was countered by the assessee, stating that the Supreme Court had reversed this decision. The Tribunal noted that the CIT's role at the registration stage is to examine the objects and genuineness of activities, not to act as an assessing authority.

The Tribunal also referred to the Punjab & Haryana High Court's decision in CIT Bhatinda vs Baba Deep Singh Educational Society, which held that the CIT should only examine the genuineness of the objects and activities at the registration stage. Similarly, the Delhi High Court in CIT vs O.P. Jindal Global University emphasized that the object of Section 12AA is to examine the genuineness of the objects, not the income of the trust.

Conclusion:
The Tribunal concluded that the CIT's refusal to grant registration under Section 12AA was not justified. The Tribunal directed the CIT to grant registration, noting that the Assessing Officer could examine the books of accounts during assessment proceedings to ensure compliance with the Act. The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 20th May 2015.

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