2018 (9) TMI 954 - AT - Income Tax

Denial of registration u/s. 12AA - assessee, a franchisee of a corporate entity, is running an educational institution in pursuance to object clause 4(a) of it s MOA - Revenue s prime objection is that the assessee is running its school (educational institution) on commercial lines with a view/object to earn profit, and its activities cannot therefore be regarded as driven by the purpose of providing education - Held that - We are conscious that education is a charitable purpose per se, so that the assessee s activities, to be regarded as in satisfaction thereof, do not necessarily have to be targeted to serve or educate the poor. However, we have to necessarily read the objects as they are, being the premise with which the society has been established, exhibiting the intention of its founder/promoter/s, the stated purpose of its existence. In view of the foregoing, only consider it proper to restore the matter back to the file of the competent authority to allow the assessee an opportunity to exhibit its activities as being undertaken toward and in satisfaction of its stated object/s, which no doubt constitute a charitable purpose under the Act. Assessee s appeal is allowed for statistical purposes.

Issues Involved:
1. Denial of registration under section 12AA of the Income Tax Act, 1961.
2. Assessment of the charitable nature of the society's activities.
3. Examination of the society's compliance with its stated objectives.
4. Consideration of the impact of operating on commercial lines.
5. Evaluation of the society's asset security and leasehold land issue.

Detailed Analysis:

1. Denial of Registration under Section 12AA:
The primary issue is the denial of registration under section 12AA of the Income Tax Act, 1961 by the Commissioner of Income Tax (Exemptions) [CIT(E)], based on the order dated 30.08.2017. The CIT(E) rejected the application on the grounds that the society's activities, particularly running a school under a franchise agreement with Zee Learn Limited, were commercial in nature and not charitable. The CIT(E) emphasized that the society paid a non-refundable deposit and a yearly royalty, indicating a business model rather than a charitable endeavor.

2. Assessment of Charitable Nature:
The assessee argued that the CIT(E) did not question the objects or the genuineness of its activities, which are the primary criteria for granting registration under section 12AA. The society's purpose is to impart education, particularly to the poor or weaker sections of society, as stated in its Memorandum of Association. The assessee highlighted that it was granted exemption under section 10(23C)(iiiad) for the assessment year 2015-16, proving its charitable nature.

3. Compliance with Stated Objectives:
The Tribunal examined whether the society's activities aligned with its stated objective of promoting education for the poor or weaker sections. The CIT-DR argued that there was no evidence to show that the school catered to the poor or weaker sections. The Tribunal noted that merely offering concessions or scholarships to a few students did not fulfill the society's stated objective. The Tribunal emphasized that the society's activities must genuinely align with its objects to be considered charitable.

4. Operating on Commercial Lines:
The Tribunal addressed the CIT(E)'s concern about the society operating on commercial lines. The Tribunal clarified that running an educational institution on business principles does not disqualify it from being a charitable organization, as long as profit-making is not the predominant objective. The Tribunal cited various Supreme Court decisions to support this view, stating that profit generated should feed the charitable purpose of education.

5. Asset Security and Leasehold Land Issue:
The Tribunal also considered the issue of the society's principal asset, the school building, being on leasehold land. The CIT(E) raised concerns about the security of this asset and the potential for increased lease rent in the future. The Tribunal suggested that this issue might need to be addressed within a legal framework to ensure the genuineness of the society's activities.

Conclusion:
The Tribunal decided to restore the matter to the competent authority to allow the assessee an opportunity to demonstrate that its activities align with its stated charitable objectives. The Tribunal emphasized that profit-making per se does not undermine the charitable nature of the society as long as it supports the charitable purpose of education. The Tribunal also suggested addressing the leasehold land issue within a legal framework to ensure the genuineness of the society's activities. Consequently, the assessee's appeal was allowed for statistical purposes.

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