2020 (1) TMI 1045 - AT - Income Tax

Exemption u/s 11 - denial of registration to the assessee-trust u/s 12A - main plea taken by CIT (Exemptions) is that the said company is an arm of another company for the purpose of carrying out their corporate social responsibility liability - HELD THAT - There is no allegation or observation by the learned Commissioner of Income-tax (Exemptions) about the charitable nature of its objects and activities thereof. So far as the grant of registration to a company who is deemed to be under the control of another company and who has formed such company for complying their corporate social responsibility required under the Companies Act, the issue has been settled in NANAK CHAND JAIN CHARITABLE TRUST VERSUS CIT (E) , CHANDIGARH 2018 (2) TMI 874 - ITAT DELHI wherein, it has been held that merely because the assessee-trust/company has been formed by another company for complying with the corporate social responsibility requirements, it cannot be denied registration under section 12AA unless the genuineness of the activities of assessee-trust or its charitable objects is doubtful. Direction to grant exemption under section 12A of the Act to the assessee-company. - Decided in favour of assessee.

Issues Involved:
1. Denial of registration under section 12A of the Income-tax Act, 1961.
2. Requirement to produce a provisional balance-sheet for the financial year 2018-19.
3. Allegation of non-submission of appropriate replies to queries.
4. Presumption regarding the purpose of creating the appellant-company.
5. Conclusion about the appellant-company's formation for corporate social responsibility (CSR) purposes.
6. Conclusion about the composition of the appellant-company not being amenable to public charity.
7. Conclusion that the appellant-company does not benefit the general public.
8. Overall denial of approval under section 12A.

Detailed Analysis:

1. Denial of Registration under Section 12A:
The appellant, an assessee-trust, challenged the order dated January 30, 2019, by the Commissioner of Income-tax (Exemptions) [CIT(E)], which denied registration under section 12A of the Income-tax Act, 1961, as a charitable institution. The CIT(E) argued that the appellant-company was primarily an arm of M/s. Round Glass Wellbeing Private Limited, created to fulfill CSR obligations, and thus, not eligible for tax exemption under section 12A.

2. Requirement to Produce a Provisional Balance-Sheet:
The appellant contended that the CIT(E) erred in requiring a provisional balance-sheet for the financial year 2018-19 before the end of the period, which was an impossibility. The CIT(E) had insisted on this to verify the genuineness of the activities of the appellant-company.

3. Allegation of Non-Submission of Appropriate Replies to Queries:
The CIT(E) alleged that the appellant did not submit appropriate replies to the queries raised, as noted in the order. However, the appellant argued that sufficient information and records were provided to demonstrate the genuineness of its activities.

4. Presumption Regarding the Purpose of Creating the Appellant-Company:
The CIT(E) presumed that the appellant-company was created to meet the CSR objectives of its parent company, M/s. Round Glass Wellbeing Private Limited. This presumption was a key factor in the denial of registration under section 12A.

5. Conclusion about the Appellant-Company's Formation for CSR Purposes:
The CIT(E) concluded that the appellant-company was formed to serve as an in-house entity for fulfilling the CSR activities of the parent company, thereby retaining control over the funds spent on CSR. This was seen as contrary to the requirements for a public charitable institution.

6. Conclusion about the Composition of the Appellant-Company Not Being Amenable to Public Charity:
The CIT(E) found that the composition of the appellant-company was restrictive and not amenable to public charity. The primary control and funding were from the parent company, which did not align with the principles of a public charitable organization.

7. Conclusion that the Appellant-Company Does Not Benefit the General Public:
The CIT(E) concluded that the appellant-company did not ensure benefits to the general public and was primarily an instrument for the parent company's CSR activities. This conclusion was based on the restrictive composition and control of the appellant-company.

8. Overall Denial of Approval under Section 12A:
The CIT(E) rejected the application for registration under section 12A, stating that the appellant-company's main aim was to comply with the CSR requirements of the parent company, and its activities did not align with public charity principles.

Tribunal's Decision:
The Tribunal noted that the CIT(E) did not allege that the appellant-company's activities were not genuine or that its objects were not charitable. It referenced the Delhi Bench's decision in Nanak Chand Jain Charitable Trust v. CIT (E), which held that registration under section 12AA cannot be denied merely because a company was formed to comply with CSR requirements. The Tribunal found that the CIT(E)'s reasons for denial were not in conformity with the provisions of the Income-tax Act. The Tribunal set aside the CIT(E)'s order and directed the CIT(E) to grant exemption under section 12A to the appellant-company, following the principles established in similar cases.

Conclusion:
The appeal of the assessee was allowed, and the Tribunal directed the CIT(E) to grant the registration under section 12A of the Income-tax Act, 1961. The Tribunal emphasized that the genuineness of activities and charitable nature of the objects were the primary considerations for granting registration, and the appellant-company met these criteria.

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