2012 (6) TMI 656 - AT - Income Tax

Whether a preference given to lineal descendants over the general Parsis is sufficient enough to mar the registration of a trust whose objects are otherwise charitable Held that - if the income does not enure for the benefit of the public or under clause (c) of section 13(1) where any part of such income is applied directly or indirectly for the benefit of persons referred to in sub-section (3) of section 13, that is, the author of the trust or any person who has made a substantial contribution to the trust or where author of trust is a HUF, then a member of the family or any relative of such author or any trustee of the trust or any relative of any such author, founder or any concern in which any of the above persons has a substantial interest. final amount of income exempt is the one which is determined by adding the income under section 11 with that under section 12 as reduced by the income or its such part as is covered under section 13. Registration cannot be denied. Exemption charitable trust - in order to claim exemption of income under sections 11 and 12 as reduced by that under section 13, it is sina qua non that, inter alia, the trust must be registered under section 12AA. The sequence of events is thus, evident that the person claiming exemption must firstly apply for and get the trust or institution registered under section 12AA, then return is filed for the relevant previous year and on the basis of such registration and other relevant factors, the Assessing Officer considers the applicability or otherwise of sections 11, 12 and 13. Registration under section 12AA - after the death of the settlor, the income from the trust property is to be used for charitable purposes, which are covered under section 2(15) of the Act - It was specifically claimed that not even a single paisa was applied for the benefit of any lineal descendants of the father of the settler Held that - Commissioner, despite the availability of audited accounts before him for the last three years, failed to point out any single instance in which the income of the trust was not utilized for the charitable purposes set out in the trust deed or the money was applied for the lineal descendants of the father of the settlor. Even if any amount is actually spent on the relatives of the settlors, then there is section 13(3) enabling the Assessing Officer to refuse exemption under section 11 read with section 13 to that extent and that too in the year in which such amount is spent. It cannot be a reason to refuse registration under section 12AA. Commissioner was not justified in refusing the registration. Decided in favor of assessee.

Issues Involved:
1. Validity of the trust due to the alleged lack of divesting of ownership in the assets by the author of the trust.
2. Classification of the trust as non-charitable due to preferential benefits to the settlor's relatives.
3. Whether the trust should be registered under section 12AA of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Validity of the Trust
The Commissioner rejected the application for registration of the trust on the grounds that a valid trust did not come into existence because there was no divesting of ownership in the assets by the author of the trust. The learned Sr. Counsel for the assessee argued that the trust was formed in 1928 and registered with the Charity Commissioner. He referred to the trust deed, which indicated that the Government of India stock was transferred into the joint names of the trustees. The counsel cited section 9 of the Indian Trust Act, 1882, and the commentary on the Law of Trust by Austin Wakeman Scott to support the argument that the settlor can be one of the beneficiaries of the trust. The Tribunal found that the trust deed fulfilled all the necessary conditions for the creation of a valid trust as per section 6 of the Indian Trust Act, 1882. The Tribunal concluded that the Commissioner's reasoning was not substantiated.

Issue 2: Classification of the Trust as Non-Charitable
The Commissioner also rejected the registration on the grounds that the trust was a private or family trust because the relatives of the settlor could obtain benefits by way of preference. The learned Sr. Counsel argued that the preference to the settlor's family members did not make the trust non-charitable. He cited several judgments, including the Hon'ble Supreme Court's decision in Trustees of the Charity Fund v. CIT and the Hon'ble Bombay High Court's decision in CIT v. Trustees of Seth Meghji Mathuradas Charity Trust, which held that mere preference to the settlor's family does not affect the public charitable nature of the trust. The Tribunal agreed with this argument, stating that the dominant object of the trust was charitable, and the preference to the settlor's family members did not detract from this.

Issue 3: Registration under Section 12AA
The Tribunal emphasized that the Commissioner's role under section 12AA is to satisfy himself about the objects of the trust and the genuineness of its activities. The Tribunal found that the Commissioner had erred in his assessment by focusing on the application of funds rather than the objects and activities of the trust. The Tribunal noted that the trust had been carrying out charitable activities since the death of the settlor in 1935 and had been registered with the Charity Commissioner since 1952. The Tribunal concluded that the Commissioner was not justified in rejecting the application for registration and directed the Commissioner to register the trust under section 12AA from the date of filing the application.

Separate Judgments:
The initial judgment by the Accountant Member (S. V. Mehrotra) favored the assessee, directing the Commissioner to grant registration. The Judicial Member (Vijay Pal Rao) dissented, supporting the Commissioner's decision to reject the registration. The matter was referred to a Third Member (R. S. Syal), who concurred with the Accountant Member, leading to the final decision to allow the assessee's appeal and direct the Commissioner to register the trust.

Conclusion:
The Tribunal allowed the appeal, directing the Commissioner to register the trust under section 12AA, as the objections raised by the Commissioner were found to be unsubstantiated. The dominant charitable object of the trust and the genuineness of its activities were affirmed, and the preference to the settlor's family members was deemed not to affect the charitable nature of the trust.

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