REGISTRATION OF CHARITIES TRUST/INSTITUTIONS UNDER INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Charitable purpose

Section 2(15) of the Income Tax Act, 1961 (‘Act’ for short) defines the term ‘charitable purpose’. This section does not define the term ‘charitable purpose’ exclusively.   It has inclusive clause.   The said section provides that ‘charitable purpose’ includes-

• Relief of the poor;
• Education;
• Medical relief;
• Preservation of environment including watersheds , forests and wildlife;
• Preservation of monuments or places or objects of artistic or historic interest; and
• The advancement of any other object of general public utility.

The first proviso to this section indicates which would not amount as ‘the advancement of any other object of general public utility’. If it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, the same shall not be considered as charitable purpose.

The second proviso to this section provides that the first proviso shall not apply if the aggregate value of the receipts from the activities is Rs.25 lakhs or less in the previous year.

In ‘Shavak Shiksha Samiti V. Commissioner of Income Tax’ – 2006 (8) TMI 240 - ITAT DELHI-B it was held that education per se is a charitable purpose.

In ‘Commissioner of Income Tax V. Gujarat Maritime Board’ – 2006 (7) TMI 102 - HIGH COURT, GUJARAT  it was held that if an assessee was an institution whose objectives are charitable as defined under Section 2(15) the trust/institution would be entitled to registration.  Although the assessee earned income from its activities of profit, infrastructure facilities and also from other ancillary activities such as rental income from letting out of the property, sale of goods, etc., which may not be exempted the Tribunal held that whether part of the income was exempt or not was  irrelevant for registration of the institution for which the Commissioner has to satisfy himself about the object of the institution and genuineness of the activities of the institution and not about the nature of the income.

In ‘Director of Income tax (Exemption) V. Moti Bagh Mutual Aid Education’ – 2007 (1) TMI 92 - DELHI HIGH COURT  it was held that even if there were minor contractions or deviations in the accounts of the assessee, that by itself did not substantiate the allegation that the assessee did not exist solely for educational purposes or that is existed partly for a profit motive.

In ‘American Hotel and Lodging Association Educational Institute V. CBDT’ – 2008 (5) TMI 17 - SUPREME COURT OF INDIA it was held that once an applicant institution came within the phrase exists solely for educational purposes and not for profit, no other condition like application of income were required to be complied with. The prescribed authority was required to examine the nature, activities and genuineness of the institution.  The mere existence of profit/surplus did not disqualify the institution.

Registration

The Commissioner on receipt of application for registration of trust or institution shall-

• call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and
• after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he—

• shall pass an order in writing registering the trust or institution;
• shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution,and a copy of such order shall be sent to the applicant.  No order shall be passed unless the applicant has been given a reasonable opportunity of being heard.

In ‘Commissioner of Income Tax V. Red Rose School’ – 2007 (2) TMI 575 - ALLAHABAD HIGH COURT it was held that whether while considering application of a trust or institution for registration under Section 12AA Commissioner is required only to see that activities of said trust/institution are genuine and in consonance with its objects.   Section 12AA does not speak anywhere that the Commissioner while considering application for registration, shall also see that the income derived by trust or institution is either not being spent for charitable purpose or such institution is earning profit.                 

In ‘Fifth Generation Education Society V. Commissioner of Income Tax’ – 1990 (5) TMI 38 - ALLAHABAD High Court it was held that at the time of considering application for grant of registration the Commissioner of Income tax is not required to examine the application of income or carrying on of any activity by the assessee trust or institution.

In ‘Dream Land Educational Trust V. Commissioner of Income Tax’ – 2007 (4) TMI 661 - ITAT AMRITSAR it was held that the Commissioner of Income Tax having found no fault with objects of the trust and genuineness of its activities, was not justified in refusing registration on extraneous considerations.

In ‘Aditanar Educational Institution V. Additional Commissioner of Income Tax’ – 1997 (2) TMI 3 - SUPREME Court it was held that it would be unreal and hyper technical to hold that the assessee society was only a financing body and would not come within the scope of ‘other educational institution’ as specified in Section 10(23) of the Act.   The object of the society was to establish, run, manage or assist colleges or schools or other educational institutions solely for educational purposes and in that regard to raise or collect funds, donations, gifts etc.,  Colleges and schools were the media through which the assessee imparted education and effectuated its objects.   In substance and reality, the sole purpose for which the assessee had come into existence was to impart education at the levels of colleges and schools and as such an educational society should be regarded as an ‘educational institution’ coming with Section 10(22) of the Act.                 

In ‘Society for Advance Health Education V. Commissioner of Income Tax’ – 2014 (4) TMI 511 - ITAT AGRA the assessee filed an application for grant of registered under Section 12AA of the Income Tax in the prescribed form before the Commissioner of Income Tax.  The Commissioner in order to verify the activities and objects of the assessee directed the Assessing Officer to give report.   The AO reported that the assessee is running general nursing and midwifery institution imparting G.N.M. in nursing and different post graduation courses in pediatrics, cardiology, ophthalmology, oncology etc., The report highlighted that fee for the course is very high.  The report further revealed that the society is not performing the charitable activity.   The Commissioner was unable to satisfy himself about the genuineness of the objectives and activities of the assessee for the benefit of general public which were necessary for grant of registration. The Commissioner rejected the application for registration.

The assessee submitted the following:

• the assessee is registered with the Registrar of Societies of Uttar Pradesh;
• the objects of the assessee are charitable in nature and of imparting education;
• the assessee is running the institution, Raghavendra Hospital and Nursing Training Institute, Jhansi and is registered with the Indian Nursing Council, New Delhi;
• the assessee is also affiliated to UP State Medical Facility, Government of UP, Lucknow for nursing training center;
• the assessee is organizing various free health check up camps in rural area of Bundelkhand;
• the fee raised by the assessee is not very high;
• the surplus amount after expenditure is very meager;
• the building used by the assessee has been given free of rent for fulfillment of the objects of the society by one of the members of the society;
• therefore the objects are charitable in nature and registration may be granted to the assessee.

The High Court held that it is clear that at the time of consideration of the application for registration under Section 12AA the Commissioner is only required to satisfy himself about the objects of the assessee and genuineness of the activities.  The Commissioner on irrelevant and extraneous consideration wrongly rejected the application of the assessee for grant of registration.  Considering the totality of the facts and circumstances, the High Court held that the assessee fulfilled all the conditions necessary for grant of registration under Section 12AA of the Act.  Therefore the rejection is clearly unjustified.   The High Court directed to grant registration certificate to the assessee within one month from the date of receipt of the order.

Deemed registration

In ‘Pravat V. Commissioner of Income Tax’ – 2013 (6) TMI 221 - ITAT KOLKATA  the assessee filed an application for registration under Section 12AA of the Act to the Commissioner.   The Income Tax Officer informed the assessee that the Commissioner has not granted registration.   On appeal the Tribunal held that an application made to a statutory authority for exercise of powers vested in him by the statute has to be disposed of by him and not by any other person to whom he may delegate such powers.   Powers can be delegated only if there is a specific enabling provision in the statute itself.   The Tribunal further held that since the Commissioner has not passed orders within six months registration should be deemed to have been granted.

On the contrary to the above order the High Court, Madras in ‘Director of Income Tax (Exemption) V. Anjuman e-khyrkhah-e-Aam’ – 2010 (12) TMI 957 - Madras High Court held that there is no automatic or deemed registration, if the application filed under Section 12AA of the Act is not disposed of within the stipulated period of six months.   The time frame under the provision is directory and not mandatory.

In ‘A.C. Bhakti Vedanta Swami Charitable Trust V. Additional Commissioner of Income Tax’ – (2006) (11) OLR 75 it was held by Orissa High Court that the better solution for the Tribunal to allow the appeals and direct registration rather than deemed registration because of time limit.

Cancellation of Registration

The registration granted can be cancelled as per the provisions of Section 12AA (3) of the Act.  The registering authority is having power to cancel the registration when the object of the trust or institution is contrary to the objects or fictitious or fraudulent or not genuine or not within the scope of the object clause, the registering authority is vested with the power of cancellation.    However where the objects of the trust or institution, which were the basis of grant of registration are altered or not adhered or the very foundation of registration collapses and in that even the registering authority cannot allow to continue such activity of the assessee and to cancel the registration.

In ‘Commissioner of Income Tax V. Sarvodaya Ilakkiya Pannai’ – 2012 (2) TMI 160 - Madras High Court the High Court took a view that once a certificate of registration under the Act is granted, the same can be cancelled only on satisfaction of two conditions laid down in Section 12AA (3) of the Act-

• that the activities of the trust or institution are not genuine; and
• that the activities of the trust or institution are not being carried out in accordance with the objects of the trust or institution.

There must be specific findings to the aforesaid two conditions.

In ‘Kodava Samaja V. Director of Income Tax (Exemptions)’ – 2013 (11) TMI 1280 - ITAT BANGALORE the objects of the trust were to preserve, protect and maintain the traditional customs, culture, heritage and language of the Kodava.   Besides imparting education, it was letting out a kalayana mandap owned by it and running a recreation club.   In view of the retrospective amendment made to Section 2(15) the Director (Exemption) cancelled the registration on the ground that the trust was carrying on commercial activity invoking Section 12AA (3) of the Act.   On appeal the Tribunal held that the reasons set out by Director for canceling registration did not satisfy the conditions laid down in the provisos of Section 2(15) of the Act by introducing the second proviso thereto by the Finance Act, 2010 with effect from 01.04.2009 the department could not seek to revoke the registration already granted to a trust by invoking Section 12AA (3) of the Act.   Even if the receipts were from commercial activities, they would be considered charitable, if they were below Rs.25 lakhs.   Moreover the rental income from letting out the kalayana mandap could not be regarded as business income.   The Tribunal quashed the order passed by the Director (Exemption).

In ‘Bharat Jyoti V. Commissioner of Income Tax’ – (2011) 63 DTR (AT) 409 (Lucknow) it was held that an action under Section 12AA (3), the objects of the Charitable trust cannot be re-examined by the Director of Income Tax.   The two conditions laid out in Section 12AA (3) should be satisfied before registration granted can be cancelled.

In ‘Lala Lajapatrai Memorial Trust V. Director of Income Tax (Exemptions)’ – 2014 (4) TMI 519 - ITAT MUMBAI  the assessee trust let out auditorium on nominal rent which was not refuted by the authority.   The auditorium was meant to be utilized by the educational institutions free of cost and was not let out for other activities when the education institutions required it.   It was let out only for 80 days out of 365 days and for 209 days it was used by the colleges and 76 days it was vacant. Therefore letting gout of auditorium was not the dominant object.   Once it was shown that the object of the trust was advancement of education, merely because the auditorium was incidentally let out to outsiders for commercial purpose, the case would not fall in the category of ‘advancement of any other object of general public utility’.   Thus the withdrawal of registration was not in accordance with law.

Refusal of registration

In ‘Babu Ram Education Society V. Commissioner of Income Tax’ – 2014 (1) TMI 673 - ITAT AGRA it was held for want of registration under Section 12AA of the Act the Commissioner is not required to look into the activities where such activities have not commenced or in the process of its institution.   The objects of the institution shall have to be seen.   The issue of receipt of donation is not relevant.   The registration cannot be refused on the ground that the trust has not yet commenced charitable or religious activities.

Appeal

Section 253(C) of the Act provides that any assessee aggrieved by an order passed by a Commissioner under Section 12AA of the Act may appeal to the Appellate Tribunal against such order. Such appeal shall be filed within sixty days of the date on which the order sought to be appealed against is communicated to the assessee or to the Commissioner as the case may be.  The Assessing Officer or the assessee on receipt of notice of appeal, may file cross objections, verified in the prescribed manner, against any part of the order of the lower authority within thirty days of the receipt of the notice.  Such memorandum of objection shall be disposed of by the Appellate Tribunal as if it were an appeal presented within the time stipulated. 

The Appellate Tribunal may admit an appeal or permit the filing of a memorandum of cross objections after the expiry of the relevant period, if it is satisfied that there was sufficient cause for not presenting it within that period.  The fee payable is Rs.500/-.