2020 (9) TMI 424 - HC - Income Tax

Exemption u/s 11 - Whether the appellant is entitled to a registration u/s 12AA - rejected the application on the ground that the assessee's activity of imparting 'financial education/awareness' is a service for price, to the investor in the field of investments; the assessee's activity is designed in such a way that what it receives in the form of fee from the client for imparting financial education/awareness is always higher than what is spent for imparting such education/awareness to the said clients - assessee has generated surplus - HELD THAT - Tribunal erred in holding that the word education should be given a restrictive meaning and we respectfully agree with the decision in the case of Gujarat State Cooperative Union 1992 (2) TMI 74 - GUJARAT HIGH COURT and Ahmedabad Management Association 2014 (8) TMI 638 - GUJARAT HIGH COURT What is important to note is that the surplus cannot be distributed, which is clearly spelt out in the Memorandum of Association, which states that the income and profit of the company, whatsoever derived shall be applied solely for the promotion of its objects as set forth in the memorandum; no portion of the income or property aforesaid shall be paid or transferred, directly or indirectly, by way of dividend, bonus, otherwise by way of profit to persons who, at any time are, or have been member of the company or to any one or more of them or to any person claiming through any one or more of them. It is stated that except with the previous approval of the Central Government, no remuneration or other benefit in money or money's worth shall be given by the company to any of its members whether, officers or servants of the company; in case of winding up or dissolution of the company, after satisfaction of all the debts and liabilities, any property whatsoever, the same shall not be submitted amongst the members of the company, but shall be given or transferred to such other company having objects similar to the objects of the assessee company. The relevant portions of the Memorandum of Association, which we have referred to, also find place in the licence issued under Section 25 of the Companies Act by the Regional Director of Company Affair. Rejection of the application filed by the assessee for registration under Section 12AA is erroneous on account of misreading of the scope of the decision of the Hon'ble Supreme Court in Loka Shikshana Trust 1975 (8) TMI 1 - SUPREME COURT . - Decided in favour of the assessee

Issues Involved:
1. Entitlement for registration under Section 12AA of the Income Tax Act, 1961.
2. Entitlement to exemption under Section 2(15) of the Income Tax Act, 1961, considering the activities as charitable in nature.

Detailed Analysis:

1. Entitlement for registration under Section 12AA of the Income Tax Act, 1961:

The assessee applied for registration under Section 12AA of the Income Tax Act, 1961, which was rejected by the Commissioner of Income Tax (Exemptions) (CIT) on the grounds that the assessee’s activity of imparting 'financial education/awareness' was a service for a price, designed to generate surplus/profit, and was thus a commercial activity without any element of charity. The CIT held that the activity amounted to rendering services in relation to trade/commerce/business for a fee/consideration, which is excluded from the definition of 'Charitable Purpose' under Proviso to Section 2(15) of the Act.

The Tribunal upheld the CIT’s decision, referencing the Supreme Court’s decision in Sole Trustee, Loka Shikshana Trust vs. CIT, which defined 'education' narrowly. The Tribunal concluded that the assessee's activities did not fall within the meaning of 'education' or 'charitable purpose,' primarily because the assessee collected substantial sponsorship fees from private sector sponsors and generated a surplus.

However, the High Court observed that the Income Tax Department had consistently granted registration under Section 12AA to several companies with similar objects as the assessee. The Court cited the Delhi High Court’s decision in ICAI Accounting Research Foundation vs. DGIT (Exemptions), which emphasized that registration under Section 25 of the Companies Act (now Section 8 of the Companies Act, 2013) is a recognition of the non-profit nature of the company’s objectives. The Court noted that while not every company registered under Section 25 is automatically entitled to Section 12AA registration, such registration is a relevant factor for consideration.

The High Court also referenced the Gujarat High Court’s decision in DIT (Exemption) vs. Ahmedabad Management Association, which clarified that the term 'education' in Section 2(15) should not be given an unduly restrictive meaning. The Court emphasized that systematic dissemination of knowledge and training in specialized subjects constitutes 'education.'

2. Entitlement to exemption under Section 2(15) of the Income Tax Act, 1961:

The High Court addressed whether the assessee’s activities could be considered for 'charitable purpose' under Section 2(15). The Tribunal had disqualified the assessee based on the surplus generated, viewing it as contrary to charitable activity. However, the High Court highlighted that the surplus was retained by the company and not distributed, aligning with the non-profit nature of Section 25 companies.

The Court referenced the Supreme Court’s decision in Queen’s Educational Society vs. CIT, which held that the existence of surplus does not disqualify an institution from being considered as existing solely for educational purposes if the predominant object is education and not profit-making. The Court also cited Chief Commissioner of Income Tax vs. St. Peter’s Educational Society and P.A. Inamdar & Ors. vs. State of Maharashtra & Ors., which supported the view that reasonable surplus for future sustenance and expansion is permissible.

The High Court concluded that the assessee’s surplus, around 5.9%, was reasonable and did not disqualify it from registration under Section 12AA. The Memorandum of Association explicitly stated that the income and profits would be applied solely for the promotion of its objects and not distributed among members, further supporting the non-profit nature.

Conclusion:

The High Court held that the rejection of the assessee’s application for registration under Section 12AA was erroneous, based on a misreading of the Supreme Court’s decision in Loka Shikshana Trust. The appeal was allowed, and the substantial questions of law were answered in favor of the assessee. The Court emphasized that systematic dissemination of knowledge and training in specialized subjects constitutes 'education' and that reasonable surplus does not disqualify an institution from being considered charitable.

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