2022 (9) TMI 1603 - HC - Income Tax

Denial of exemption u/s 11 - Assessee has not carried on any charitable activities during the relevant period and as such violated Section 11(2) and 11(5) - Whether the AO is entitled to probe into the objects of the charitable trust which is already registered u/s.12A of the Act and hold that the objects are commercial in nature and consequently deny exemption u/s. 11? - HELD THAT - A reading of the Trust Deed which came to be registered under the provisions of the Act would clearly indicate that the activity of the Trust was to allot workers to the users as per their indent and for that purpose maintain Office or establishment employing necessary personnel. Further utilize the surplus arising out of the collections from the users and voluntary contributions obtained from the public to such charitable purposes as the Board of Trustees may deem it expedient from time to time. The objects of the Trust also clearly contemplate collection of money from the users of Private Workers Pool and distribute wages to the Private Workers; apart from collecting subscriptions from the Members of the Stevedor s Association and Clearing and Forwarding Agents Association of Visakhapatnam who intend to use private workers enrolled by the Trust. Therefore once registration is done u/s 12A of the Act it is a fait accompli and the Assessing Officer cannot thereafter probe into the objects of the Trust and hold that there was any charitable activity unless the material on record indicate that there was violation of conditions/ objects of the Trust Deed which does not appear to be the case on hand. AO as well as the Appellate Authority rejected the claims of the Assessee. Challenging the same appeals came to be preferred before the Income Tax Appellate Tribunal which were allowed as in this case. The issues before the High Court 2008 (4) TMI 16 - SUPREME COURT were as under - (A) Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was justified in law in holding that the objects of the Trust restricting benefit to the members of the Club would fall within the purview of the act of general public utility u/s 2(15) of the Income Tax Act constituting as a section of public and not a body of individuals? (B) Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was justified in law in holding that Registration u/s 12-A was a fait accompli to hold the Assessing Officer back from further probe into the objects of the Trust? High Court after considering the material on record dismissed the appeals in limine relying upon the decision of the same court in Hiralal Bhagwati 2000 (4) TMI 14 - GUJARAT HIGH COURT Being dissatisfied with the Order of the High Court the Revenue preferred Civil Appeals before the Hon ble Supreme Court. On 22.07.2022 the Court granted leave in respect of question No. B i.e. whether the Appellate Tribunal was justified in holding that registration u/s 12-A was a fait accompli to hold the Assessing Officer back from further probe into the objects of the Trust. Though the learned Counsel for the Appellant tried to contend that the Hon ble Supreme Court did not lay down any ratio in the judgment referred to above but a reading of the Order would indicate that the Hon ble Apex Court while referring to the case of Hiralal Bhagwati 2000 (4) TMI 14 - GUJARAT HIGH COURT wherein it was held that the registration of a Trust u/s 12A of the Act once done is a fait accompli and the Assessing Officer cannot thereafter make further probe into the objects of the Trust dismissed the appeals therein has attained finality as the Revenue did not challenge the decision in the said case. In view of the judgment of the Hon ble Supreme Court referred to above the issue in our view is no more res integra and that the Assessing Officer totally erred in probing into the objects of the Trust. Whether the activities of the assessee trust can be termed as business activity in terms of Section 11(4A) of the Act? - There was no profit motive in carrying on the objects by the Assessee Trust namely taking care of the welfare of labourers who were not enrolled by the Dock Labour Board. The so-called business activity when intrinsically woven into and is part of the charitable activity the business activity is not feeding charitable activities as they are integral to the charity / charitable activity. The wages and fees payable by the users and shipping companies are fixed by the Dock Labour Board and collected accordingly. The Trustees are not entitled for any remuneration/profit except reimbursement of expenses incurred by them on behalf of the Trust in terms of Clause 16 of the Trust Deed. Therefore all the above factors/activities of the Trust which are being carried out right from the inception would only indicate that the activities are for advancement of general public utility as ordained in Clause 3 of the Trust Deed. Further the Tribunal which is a fact finding body has categorically held that these activities of the Trust are charitable in nature which in our view cannot be overturned unless it is established that there is a grave error apparent on record in coming to such conclusion which is not so. Violation of Section 11(5) and Section 13(1)(c) read with Section 13(2) - The amounts advanced by the Trust cannot be treated as investments and as such there is no violation of Section 11(5) of the Act and accordingly the question of violation of Section 11(3) also does not arise. Whether there was any violation of Section 13(1)(c) read with Section 13(2) of the Act? - We reiterate that the principal amount was repaid on 26.02.2001 and interest on 15.05.2002 while other association repaid the principal amount of Rs.30, 00, 000/- with interest aggregating to Rs.46, 60, 000/- between October 2003 and March 2008. The interest liability in both the cases was recognized on accrual basis from the beginning i.e. from 03.11.1995 and the actual interest was accounted on cash basis as the Trust accounts for its receipts and payments on cash basis. Hence there is no violation of the Act. Accumulation of income u/s 11(2) of the Act - A perusal of Form No. 10 filed by the Assessee for the assessment year 1999-2000 would show the purpose for accumulation was (a) building construction (b) for payment of provident fund pension gratuity productivity bonus family security scheme time rate and piece rate wages and (c) to meet the expenditure for other welfare amenities provided by the pool. But the Assessing Officer held that the purpose of accumulation is general in nature and for welfare of the workers and not for any charitable activities. It is to be noted here and as observed earlier that the activities carried on by the Trust were in accordance with the objects for which it is formed and registered. Such activities or objects of the Trust has been approved as charitable by C.I.T. and registered the Trust under Section 12A of the Act. Therefore even on this aspect it cannot be said that there was any violation of Section 11(2) of the Act. Since all the substantial questions of law are answered against the Revenue and in favour the Assessee Trust the Appeal is liable to be rejected.

Summary

Issues Involved:
1. Whether the Assessing Officer can probe into the objects of a charitable trust registered under Section 12A of the Income Tax Act and deny exemption under Section 11.
2. Whether the activities carried on by the assessee can be termed as business activity in terms of Section 11(4A) of the Income Tax Act.
3. Whether the amounts given to two settler associations can be treated as investments in terms of Section 11(5) of the Income Tax Act.
4. Whether the advances given to the settler associations violate Section 13(1)(c) read with Section 13(2) of the Income Tax Act.
5. Whether the objects for which accumulation was made under Section 11(2) were for charitable purposes.

Detailed Analysis:

1. Probing into the Objects of the Charitable Trust:
The court held that once a trust is registered under Section 12A of the Income Tax Act, it is presumed to be carrying on charitable activities. The Assessing Officer cannot probe into the objects of the trust unless there is material evidence indicating a violation of the trust deed's conditions. The Tribunal relied on the Supreme Court judgment in Assistant Commissioner of Income Tax V. Surat City Gymkhana, which established that registration under Section 12A is a fait accompli, preventing the Assessing Officer from further probing into the trust's objects.

2. Business Activity in Terms of Section 11(4A):
The court observed that the trust's activities, such as identifying, enrolling, and allotting work to workers, and using surplus funds for charitable purposes, do not indicate any profit motive. The trust's activities were deemed to be for the advancement of general public utility, as per Clause 3 of the Trust Deed. The court referred to the Supreme Court's judgment in Sole Trustee, Loka Shikshana Trust V. Commissioner of Income-Tax, which clarified that charitable purposes do not exclude activities yielding profit, provided the profits are used for charitable purposes.

3. Treatment of Advances as Investments:
The amounts advanced to the settler associations were not considered investments under Section 11(5) of the Act. The court referred to the Andhra Pradesh High Court judgment in C.I.T. V. Polisetty Somadundaram Charities, which distinguished between lending and investing, noting that lending involves assured returns and minimal risk, unlike investments. The advances were treated as loans with adequate interest and security, not violating Section 11(5).

4. Violation of Section 13(1)(c) Read with Section 13(2):
The court found no violation of Section 13(1)(c) read with Section 13(2) as the advances were given with adequate interest and security. The Tribunal's findings that the amounts were repaid with interest and were adequately secured were upheld. The court reiterated the principles from Polisetty Somadundaram Charities, emphasizing that lending with adequate interest and security does not violate the provisions of the Act.

5. Accumulation for Charitable Purposes under Section 11(2):
The court noted that the trust's accumulation of income was for purposes specified in Form No. 10, such as building construction and welfare amenities for workers. These purposes were in line with the trust's objects, which were approved as charitable by the Commissioner of Income Tax. The court concluded that there was no violation of Section 11(2).

Conclusion:
The court dismissed the Revenue's appeal, affirming the Tribunal's decision that the trust's activities were charitable and that there were no violations of Sections 11 and 13 of the Income Tax Act. The trust was entitled to exemption under Section 11, and the Assessing Officer's actions were deemed unjustified.