2012 (8) TMI 634 - AT - Income Tax

Cancellation of registration u/s 12AA alleged that activity of the society relating to investment in purchase of commercial property does not fall within the meaning of Charitable activity Held that - Assessee s charitable objects include spreading education and opening of schools; investment even in commercial property assets remains charitable purposes so long as the income generated by it is applied to charitable objects. It has not been demonstrated that the assessee applied rent received from these properties to any non-charitable purposes. Besides, it has not been demonstrated that the assessee s intention was to enter in business of purchase and sale of commercial property inasmuch as we are in year 2012, the property was purchased in FY 2004-05 and the Trust still retains this property - assessee s investment charitable in nature - assessee s registration u/s 12A should not have been cancelled, the same is restored - assessee s appeal is allowed

Summary

Issues:
Cancellation of registration u/s 12AA vide order u/s 12AA(3) - Justification and legality of cancellation - Observations and findings of DIT(E) - Investment in commercial property - Application of income for charitable purposes - Interpretation of provisions of sec. 11 & 12 - Investment in immovable property for charitable purposes - Withdrawal of registration based on assessment for AY 2005-06.

Analysis:

The Appellate Tribunal ITAT DELHI heard an appeal against the cancellation of registration u/s 12A granted to an assessee society by the Director of Income-tax (E) under sec. 12AA(3) r.w.s. 12 of the I.T. Act, 1961. The society aimed to promote education for Indian Muslims and minorities. The cancellation was based on the society's purchase of a commercial property in Bangalore for Rs. 7,34,62,970, which the Assessing Officer (AO) deemed as not applied for charitable purposes, leading to the addition of the amount to the income. The DIT(E) issued a show cause notice regarding the withdrawal of registration u/s 12A due to the non-charitable application of income for the property purchase.

The society argued that the purchase was in line with its bylaws and aimed at generating income for the trust's objectives. However, the DIT(E) contended that the property was commercial and not used for educational purposes, indicating non-charitable intent. The Tribunal noted that the society earned rental income and profits from the property, which were not aligned with its charitable objects of education. The DIT(E) withdrew the registration u/s 12A based on these observations.

During the appeal, the Tribunal analyzed the provisions of sec. 11 & 12, emphasizing that surplus income can be invested in immovable property for charitable purposes, including educational activities. The Tribunal held that investing in a commercial property could still serve charitable objectives if the income generated was applied to such purposes. It rejected the argument that non-educational use of the property rendered the investment non-charitable, as long as the income was utilized for charitable activities. The Tribunal also clarified that an AO's disallowance of income application does not automatically warrant registration withdrawal.

Ultimately, the Tribunal reversed the DIT(E)'s order, reinstating the society's registration u/s 12A. It concluded that the society's investment in the commercial property, though not directly related to education, was permissible as long as the income generated was used for charitable purposes. The Tribunal highlighted that the society's intent was not to engage in a commercial business but to support its educational objectives through income-generating investments.