2019 (3) TMI 580 - HC - Income Tax

Cancellation u/s 12AA - Charitable activity - no satisfaction entered into as to the objects of the assessee being not genuine or the assessee having not carried on the activities as declared in the Memorandum of Association (MoA) - appellant-trust obviously was engaged in executing contracts as awarded by the Indian Railways for cleaning train coaches and railway station - whether taking a contract from the Indian Railways and carrying out the contract work by employing poor people as claimed by the assessee would amount to a charitable purpose or not? - HELD THAT - Mere employment of people from the weaker sections of Society would not absolve the contractor from the labour legislations and such work is one carried out with a clear intention at making profit. The assessee having bid in a competitive tender had been awarded the work for a consideration agreed upon between the parties and carrying on of such work cannot be categorised as a charitable work merely because the poor or persons from marginsalised sections are given employment. The execution of the work awarded by the Railways, is not a public utility service carried on by the assessee and the mere fact that the poor are employed in such execution of contract awarded, would not make it a charitable purpose. Further though the assessee is said to have provided employment to various people who are engaged in the actual cleaning work carried out in pursuance of the contract, there is absolutely no material placed as to the categories from which such employees were sourced. But for the mere assertion that the nature of the work would itself indicate that only poor people would come for the same, the assessee has not indicated anything about the source from which the assessee had employed such people. The Tribunal correctly found that for cancellation of registration, there are two conditions to be satisfied; one that there is a registration granted earlier and the other the satisfaction of the Commissioner that the trust or the institution is not genuine or the activity of the trust is not being carried on in accordance with the objects of the trust. The activity specifically carried on by the assessee is execution of contract awarded by the Indian Railways. This does not come within any of the objects as professed by the assessee in its MoA. The provision of employment is an incidental and necessary corollary to the execution of the contract awarded by the Indian Railways to the assessee. Various High Court judgments as proffered before the Tribunal were discussed by the Tribunal to distinguish them on facts. We would not further labour on the same, since the only argument was on the basis of the aforesaid judgment of the Division Bench of this Court itself. The Commissioner, according to us, has rightly found that the activities carried on by the assessee being in the nature of execution of a contract work as obtained from the Indian Railways, would not be a charitable purpose coming under the definition under the Act

Summary

Issues:
1. Whether the Commissioner's order of cancellation of registration under Section 12AA(3) was justified due to the nature of activities carried out by the assessee?
2. Whether the Tribunal's decision to confirm the Commissioner's order was erroneous, amounting to perversity?

Issue 1 Analysis:
The case involved an appeal against the Income Tax Appellate Tribunal's Annexure-A8 order of cancellation of registration under Section 12AA(3). The Commissioner invoked sub-Section (3) of Section 12AA, alleging that the activities of the assessee did not qualify as charitable under the Act. The Tribunal found that the execution of contracts for cleaning train coaches and railway stations, even if employing individuals from marginalized sections, did not constitute a charitable purpose. The Tribunal concluded that the activities were commercial in nature, aimed at making a profit, and not in line with the objects professed by the assessee in its Memorandum of Association. The Tribunal upheld the cancellation of registration, emphasizing that the mere provision of employment to the poor did not transform the activities into charitable purposes.

Issue 2 Analysis:
The Tribunal's decision was challenged through various appeals and applications. The assessee contended that providing employment to the poor aligned with its charitable purpose of helping the needy, as stated in its Memorandum of Association. The Tribunal withdrew its initial order based on the assessee's submissions but later reaffirmed the cancellation of registration under Section 12AA(3). The High Court rejected the Income Tax Appeal, upholding the Tribunal's decision. It clarified that the activities of executing contracts for cleaning services, even if employing individuals from disadvantaged backgrounds, did not meet the criteria for charitable purposes under the Act. The Court found no error in the Tribunal's assessment and dismissed the appeal, emphasizing that the execution of contract work for profit did not qualify as charitable activities.

In conclusion, the High Court upheld the Tribunal's decision to cancel the registration of the assessee under Section 12AA(3) due to the commercial nature of the activities carried out, despite employing individuals from marginalized sections. The Court found no legal errors in the Tribunal's assessment and dismissed the Income Tax Appeal.