2024 (1) TMI 407 - AT - Income Tax

Exemption u/s 11 - rejection of application for registration u/s 12AA - as per CIT(E) assessee is not engaged in any charitable activities, the assessee is indeed engaged in advancement of any other object of general public utility, which are far exceeds the allowed limit of 20% - as per assessee activity of running a Dharmashala for public at large can not be treated as an activity in the nature of trade, commerce or business, specially when the objects of trust are for No profit motive - HELD THAT - In view of the aforesaid decision in the case of Ananda 2020 (2) TMI 1293 - SUPREME COURT since the actual activities of the trust cannot be the deciding factor while granting the registration u/s 12A but the object of the trust should have been looked into, the activities have to be looked into by the Assessing Officer at the time of assessment proceedings. It is also a fact that the trust was formed with charitable objects eligible for approval u/s. 12AA of the Act, which is substantiated by the department itself by granting registration u/s 12AA. In such circumstances, we are of the considered opinion that the rejection of application for registration u/s 12AA of the Act by Ld CIT(E) was an erroneous application of law, thus, cannot sustain, accordingly we quash the same and direct to grant registration to the assessee as per law. Decided in favour of assessee.

Summary

Issues:
The issues in this case involve the rejection of the application for registration of the Appellant under section 12AA of the Income Tax Act, 1961, and the contention regarding the nature of activities conducted by the assessee trust.

Issue 1: Registration under Section 12AA:
The appeal was filed against the CIT(E)'s rejection of the application for registration of the Appellant trust under Section 12AA of the Income Tax Act, 1961. The CIT(E) contended that the trust was not engaged in charitable activities within the allowed limit of 20%. The Assessee argued that the trust was formed for charitable purposes without any profit motive. The rejection was based on the perception that the trust's activities were in the nature of trade, commerce, or business, which the Assessee disputed. The Assessee relied on the judgment in the case of Ananda Social & Educational Trust v. CIT to support their argument that the focus should be on the objects of the trust rather than its activities.

Issue 2: Nature of Activities:
The second issue revolved around the nature of activities conducted by the trust. The Assessee primarily generated income from interest on FDR, with a significant portion of the surplus coming from this source. The CIT(E) raised concerns about the lack of a dissolution clause in the trust deed, which the Assessee addressed by submitting an undertaking. The Assessee argued that running a Dharmashala charging nominal fees should not be considered a commercial activity. Additionally, the Assessee highlighted a subsequent successful application for registration under Section 12AA in 2020, which contradicted the earlier rejection, indicating an inconsistency in the department's stance.

Judgment:
The Tribunal, considering the principles outlined in the Ananda case, held that the rejection of the registration application by the CIT(E) was erroneous. The Tribunal emphasized that the focus should be on the charitable objects of the trust rather than its specific activities when granting registration under Section 12AA. Given that the trust was formed with charitable objectives and was subsequently granted registration under Section 12AA in a later application, the Tribunal quashed the earlier rejection and directed the grant of registration to the Assessee.

This judgment highlights the importance of aligning registration decisions with the charitable objectives of trusts, emphasizing that activities should not be the sole determining factor.