2012 (5) TMI 465 - HC - Income Tax

Charitable Institution - alleged violation of Section 13(1)(c)(ii) read with Section 13(3) on belief that society was for the private benefit of the members - Tribunal without referring to factual matrix held that assessee is charitable institution - Held that - Order of the tribunal in the AY 2005-06 is devoid of reasoning and does not refer to factual matrix and details which have to be examined and considered while deciding the question whether or not Section 13(1)(c)(ii) read with Section 13(3) is violated. The facts, figures mentioned in the income expenditure account and the activities undertaken etc. have not been mentioned or specifically examined. What was and whether any benefit or advantage was enjoyed by the person mentioned in Section 13(3) has not been adverted to and considered. General observations have been made. The order of the tribunal is cryptic and cannot be categorized as a reasoned and speaking order which is mandated and required to be passed by the final fact finding authority - Matter remitted back to Tribunal to examine and record finding on facts relevant and which are to be examined - Partly decided in favor of Revenue.

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was right in holding that the assessee is a charitable institution.
2. Whether the assessee violated Section 13(1)(c)(ii) read with Section 13(3) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Charitable Institution Status
The primary question is whether the assessee qualifies as a charitable institution under Section 2(15) of the Income Tax Act, 1961. The assessee was granted registration under Section 12AA of the Act, which was not revoked at the time of the decision. The tribunal and CIT (Appeals) had affirmed the charitable status of the assessee based on its aims and objectives as stated in its Memorandum of Association. These objectives included quality upgradation, productivity improvement, and training in quality management, among others.

The Supreme Court in ACIT v. Surat City Gymkhana [2008] 300 ITR 214 (S.C.) had held that once an institution is registered under Section 12A/12AA, the Assessing Officer cannot re-examine whether the institution's objects are charitable. This aspect is to be examined at the time of registration. Therefore, the tribunal's decision to uphold the charitable status of the assessee was based on the precedent that the registration under Section 12AA was valid and not subject to re-examination during assessment.

Issue 2: Violation of Section 13(1)(c)(ii) read with Section 13(3)
The core of the dispute lies in whether the assessee violated Section 13(1)(c)(ii) read with Section 13(3) by using its income or property for the benefit of persons specified in Section 13(3). The Assessing Officer had concluded that the assessee's activities were primarily for the mutual benefit of Maruti Udyog Limited and its vendors, thus violating the provisions.

Section 13(1)(c)(ii) states that no part of the income or property of a charitable institution should be used directly or indirectly for the benefit of any person referred to in Section 13(3). The tribunal's order for the assessment year 2005-06 was found to be devoid of detailed reasoning and factual analysis. It merely upheld the CIT (Appeals) decision without examining whether any benefit was enjoyed by persons mentioned in Section 13(3).

The tribunal's order lacked a detailed examination of the factual matrix, including the income and expenditure account and the activities undertaken by the assessee. The Assessing Officer had pointed out that the assessee received donations from vendors of Maruti Udyog Limited, who were the primary beneficiaries of the training and consultancy services provided by the assessee. This raised questions about whether the activities were genuinely for public benefit or primarily for the benefit of Maruti Udyog Limited and its vendors.

The court emphasized that the term "benefit" under Section 13(1)(c)(ii) includes both direct and indirect benefits, and reasonable payments for services rendered do not constitute a violation. However, if the primary purpose of the application of income or property is to benefit the members or vendors of Maruti Udyog Limited, it would violate the provisions.

The tribunal was directed to re-examine the factual matrix and determine whether the assessee's activities primarily benefited the persons specified in Section 13(3) and whether there was any indirect benefit to Maruti Udyog Limited or its vendors.

Conclusion:
The appeals were disposed of with a direction to the tribunal to re-examine the factual details and determine whether the assessee violated Section 13(1)(c)(ii) read with Section 13(3). The question of law was answered in the negative, partly in favor of the appellant Revenue, requiring a detailed factual analysis by the tribunal.

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