2016 (9) TMI 846 - AT - Income Tax

Grant of registration u/s 12AA refused - determination of object of a trust - Held that - If the predominant object of a trust or institution is charitable and in the process of achieving that object some activity of commercial nature generating income is carried out, which again is utilised for the advancement of its charitable objects, it cannot be inferred that the trust or institution is not established for charitable purposes. Moreover, the issue of applicability of the proviso to section 2(15) has to be examined at the stage of assessment while adjudicating the assessee s claim of exemption u/s 11 of the Income Tax Act, 1961 and hence it is not germane at the time of considering the issue of granting registration u/s 12AA. Though the first proviso to sec. 2(15) of the Act excludes any activity of the nature of trade, commerce or business from being considered to be a charitable purpose but, the second proviso to section 2(15) restricts the application of first proviso only to such trusts and institutions having receipts from commercial activity exceeding a prescribed limit in a particular previous year. Therefore, the application of the proviso to section 2(15) has to be looked into in every assessment year. In our considered view, the first proviso to section 2(15) will have no role to play in the matter of granting registration and the role of the Ld. DIT (E) is restricted to him being satisfied that the objects are genuine and charitable. In absence of any such finding by the Ld. DIT (E) in this instant appeal, we hold that the benefit of grant of registration has been denied to the assessee without any cogent reason and hence while allowing the assessee s appeal we direct the Ld. DIT (E) to grant registration to the assessee u/s 12AA of the Act. - Decided in favour of assessee

Issues Involved:
1. Refusal to grant registration under section 12AA of the Income Tax Act.
2. Determination of whether the activities of the assessee society are charitable in nature.
3. Application of the proviso to section 2(15) of the Income Tax Act.

Detailed Analysis:

Issue 1: Refusal to grant registration under section 12AA of the Income Tax Act
The assessee filed an application for registration under section 12AA on 18/07/2013, which was refused by the Director of Income Tax (Exemptions) [DIT(E)] on 29/01/2014. The DIT(E) noted that the assessee's activities, which involved training farmers for scientific horticulture and receiving fees from government departments, were commercial and not charitable. Consequently, the application for registration was rejected.

Issue 2: Determination of whether the activities of the assessee society are charitable in nature
The assessee contended that the activities should be considered charitable as per section 2(15) of the Income Tax Act. The Memorandum of the society listed several objectives aimed at improving the rural economy, literacy, aesthetic value, employment, and technology transfer among others. The Tribunal observed that the primary object of the society was improving the rural economy through afforestation and reforestation, which are charitable in nature. The Tribunal noted that the DIT(E) did not dispute the genuineness of these objectives.

Issue 3: Application of the proviso to section 2(15) of the Income Tax Act
The assessee argued that the proviso to section 2(15) should not affect the registration under section 12AA, as it applies on a year-to-year basis and not in absolute terms. The Tribunal agreed, stating that the proviso restricts only the last limb of section 2(15) related to the advancement of any other object of general public utility. The Tribunal emphasized that the primary or dominant purpose of the assessee should be charitable, and any incidental income from fees does not negate the charitable nature if it is used to further the charitable objectives.

The Tribunal referred to the Supreme Court's ruling in Addl. CIT v. Surat Art Silk Cloth Manufacturers’ Association, which held that the predominant object must be charitable, and incidental profit does not disqualify the entity from being charitable. The Tribunal also cited the Delhi High Court's interpretation in Institute of Chartered Accountants Of India v. DGIT (Exemptions), stating that an activity is considered business if undertaken with a profit motive, which was not the case here.

The Tribunal concluded that the DIT(E)'s role is limited to verifying the genuineness of the objectives and activities, not assessing the applicability of the proviso to section 2(15) at the registration stage. The Tribunal found that the DIT(E) denied registration without cogent reasons and directed the DIT(E) to grant registration under section 12AA.

Conclusion:
The appeal of the assessee was allowed, and the Tribunal directed the DIT(E) to grant registration under section 12AA, emphasizing that the primary objectives were charitable, and incidental income did not disqualify the society from being considered charitable. The Tribunal highlighted that the proviso to section 2(15) should be examined during assessment, not at the registration stage.

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