2025 (3) TMI 37 - AT - Income Tax

Rejection of application for grant of registration u/s 12AB - charitable purposes or not? - CIT(E) rejecting the application seeking permanent registration of the assessee on the ground that the assessee does not possess the registration for running charitable activities of hospital - HELD THAT - Advance made to The Central Park Hotel is for acquisition of new hospital. Accordingly we have no hesitation to hold that assessee had not diverted its funds for non-charitable activities by advancing to parties who are related either to the office bearers or to their concerns. Professional payments made by the assessee - Assessee from its side before us had filed an affidavit from the doctors and income tax returns of the doctors for FY 2021-22 (AY 2022-23) together with TDS certificates issued by the assessee. In any case non submission of supporting evidences if any for professional fees payment cannot be a ground for rejection of permanent registration u/s 12AB. If there is any infirmity in those professional fees payment the same could be looked into at the time of assessment proceedings. In any event the ld CIT(E) does not even whisper or even doubt that the said professional payments were made to the parties specified u/s 13(3) of the Act. Hence drawing adverse inference on this account and rejecting the permanent registration u/s 12AB in our considered opinion is not in order. Other receipts shown which was found to be excessive by the ld CIT(E) when compared to that in the earlier two years - Since the receipts were actually received during the FY 2022-23 in respect of services rendered earlier the same were accounted in FY 2022-23. There is absolutely no dispute to the fact that the assessee is following cash system of accounting. Hence adverse inference drawn by the ld CIT(E) for rejecting registration on this count in our considered opinion cannot be upheld. Payment of incentives expenses - Depending upon the number of treatments completed by him incentives would be paid to him. These facts are evident from the appointment letter of Dr. Sandeep Saraf itself. In any event both salary as well as incentive paid to Dr. Sandeep Saraf had been duly subjected to deduction of tax at source by the assessee. The finding given by us with regard to payment of professional charges supra shall apply to payment of incentive expenditure also. Accordingly adverse inference drawn by the ld CIT(E) on this account for rejecting the registration in our considered opinion cannot be upheld. Income from college fees - AR before us duly clarified that assessee still runs the hospital and affiliation has been cancelled only for running the nursing college. Nowhere the activities of running hospital was construed to be non charitable by the ld CIT(E). We find force in the said arguments advanced by the ld AR and accordingly we hold that cancellation of registration on this count cannot be held to be justified. The treatment of college fees received had to be looked into at the time of assessment proceedings and that does not stand as a hindrance while considering the recognition for registration u/s 12AB of the Act. Salary paid during the last three financial years by the assessee - The assessee had indeed furnished the complete details of employees and doctors together with their designations in a separate annexure before the ld CIT(E). In any event this can never be a relevant consideration for the purpose of grant of registration u/s 12AB of the Act. The activities of running a hospital is certainly charitable in nature and during the course of such charitable activity payment to doctors and employees had to be made. Hence adverse inference drawn by the ld CIT(E) on this count is hereby dismissed. Assessee has accumulated huge profit hence working for profit motive and not for charitable purpose - There is always a huge difference between the concept of public profit and private profit and grant of exemption u/s 11 of the Act would be in jeopardy only when there is private profit i.e. profit being distributed to the trustees as dividend or in any other form. Once there is public profit i.e. profit/ surplus earned by a trust which are being ploughed back into coffers of the trust for future charitable activities are certainly permitted. Even the provisions of section 11 to 13 permit earning of profit of 15% and in the event of any trust deriving profit in excess of 15% then the Income Tax Act itself permits for accumulation in terms of section 11(2) of the Act to be utilized in future. Hence in our considered opinion surplus earning is not a sinful activity and in any manner does not hinder the concept of charity or charitable activities. Accordingly the observations made by the ld CIT(E) in this regard are hereby dismissed as devoid of merit. Affiliation of nursing college has been cancelled and accordingly genuineness of the activity of the assessee is not established - The assessee society has been running the hospital with proper approvals from the competent authorities and cancellation of affiliation of nursing college would not in any way hamper the continuation of charitable activities of the assessee society in running the hospital. Hence the genuineness of the activities cannot be doubted at all qua the hospital. This issue has already been addressed by us while giving out findings with regard to yet another query raised by the ld CIT(E) supra. Assessee had paid monthly rent to Kantialal Saraf HUF who happened to be related person u/s 13(3) - CIT(A) had not even bothered to bring comparable instances to drive home the point that the monthy rent paid by the assessee to Kantilal Saraf HUF is excessive or unreasonable. CIT(E) had not brought any evidence on record to even state that the fair market value of the rent for the infrastructure taken on rent by the assessee was less than the amount paid by the assessee to the related person. Without this finding being brought on record there cannot be any allegation that could be leveled on the assessee. In any event this issue has got absolutely no relevance in any manner whatsoever for the purpose of grant of registration u/s 12AB of the Act. Hence the observation made by the ld CIT(E) is hereby dismissed as devoid of merit. Thus no hesitation to conclude that the assessee should be granted registration u/s 12AB of the Act. The grant of exemption u/s 80G of the Act would be consequential to the grant of registration. Accordingly grounds raised by the assessee are allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issue in this appeal was whether the Commissioner of Income Tax (Exemptions) [CIT(E)] was justified in rejecting the application for permanent registration under Section 12AB of the Income Tax Act by the appellant, a charitable society. The Tribunal considered various sub-issues raised by the CIT(E) regarding the genuineness of the society's activities and whether the society's funds were being used for charitable purposes.

ISSUE-WISE DETAILED ANALYSIS

1. Rejection of Permanent Registration under Section 12AB

Legal Framework and Precedents: The relevant legal provision is Section 12AB of the Income Tax Act, which pertains to the registration of charitable or religious trusts and institutions. The CIT(E) relied on a Supreme Court decision in a similar case to support the rejection of the application.

Court's Interpretation and Reasoning: The Tribunal examined the CIT(E)'s reasoning for rejecting the application, which included allegations of non-charitable use of funds and discrepancies in financial records. The Tribunal scrutinized each point raised by the CIT(E) and found them to be either irrelevant or unsupported by evidence.

Key Evidence and Findings: The Tribunal noted that the society had provided comprehensive financial records, including audited balance sheets and income statements, which demonstrated that funds were being used for charitable purposes. The Tribunal found that advances made to The Central Park Hotel were for acquiring land to construct a hospital, thus serving a charitable purpose.

Application of Law to Facts: The Tribunal applied the provisions of Section 12AB and relevant case law to the facts, concluding that the society's activities were indeed charitable and that the CIT(E) had misinterpreted the evidence.

Treatment of Competing Arguments: The Tribunal addressed each of the CIT(E)'s arguments, providing detailed counterpoints and evidence to refute claims of non-charitable activity.

Conclusions: The Tribunal concluded that the CIT(E)'s reasons for rejecting the registration were unfounded and directed the CIT(E) to grant the registration under Section 12AB.

2. Alleged Non-Charitable Activities

Professional Payments and Incentives: The CIT(E) questioned the legitimacy of professional payments and incentives paid to related parties. The Tribunal found that these payments were legitimate, duly accounted for, and subjected to tax deductions at source.

Excessive Receipts and Accounting Method: The CIT(E) alleged that excessive receipts indicated non-charitable intent. The Tribunal clarified that the society followed a cash basis of accounting, and receipts were accounted for as received, which was consistent with their accounting policy.

Income from College Fees: The Tribunal addressed the CIT(E)'s concerns about college fees, noting that the cancellation of the college's affiliation did not impact the charitable nature of the hospital's activities.

3. Financial and Operational Details

Profit Motive Allegation: The CIT(E) alleged that accumulated profits indicated a profit motive. The Tribunal clarified that generating a surplus is permissible as long as it is not distributed to private individuals and is reinvested in charitable activities.

Rent Payments to Related Parties: The CIT(E) questioned rent payments to related parties. The Tribunal found that the rent was reasonable and below market rates, benefiting the society rather than the related party.

SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning: "Earning surplus year on year is not a sinful or prohibited activity as long as such surplus is not distributed to the private individuals or persons connected with the assessee society."

Core Principles Established: The Tribunal emphasized that the primary consideration for granting registration under Section 12AB is whether the trust's objectives are charitable and whether its activities are genuine.

Final Determinations on Each Issue: The Tribunal determined that the CIT(E)'s reasons for rejecting the application were not substantiated by evidence and directed the CIT(E) to grant the registration under Section 12AB. The Tribunal also noted that the exemption under Section 80G would follow consequentially.

In conclusion, the Tribunal allowed the appeal, directing the CIT(E) to grant the registration under Section 12AB, thereby affirming the charitable nature of the society's activities and its compliance with the relevant legal provisions.