2016 (3) TMI 30 - HC - Income Tax

Eligibility for registration in terms of Section 12A - Held that - The amount allegedly collected as capitation fee from four prospective students was actually collected as tuition fee on the basis of the valid agreements entered into by the Trust undertaking to return the same in case admission under the NRI quota could not be made available to the concerned students. The amount so collected represented only a portion of the tuition fees which the Government had permitted the recognized medical colleges to collect during the relevant academic year and the agreement specified that the amounts could be adjusted towards the tuition fees payable by the students under the NRI quota. It is further stated that even with regard to amounts collected from employees, the same were voluntary deposits made by employees and no action had been taken by any authority against the Trust, since there was no compulsion or illegality in the matter. Going by the provisions of Sections 12A and 12AA of the Income Tax Act, we hold that the grounds raised by the registering authority and upheld by the appellate authority for rejection of registration to the appellant Trust cannot be sustained. The authorities could have examined only the genuineness of the Trust and its activities. They did not have material to hold that the Trust was either not genuine or its activities were not what was professed in the deed of Trust. Resultantly, in the light of the above findings, the impugned order is set aside. The respondent Commissioner of Income Tax is directed to grant registration as requested by the appellant Trust in terms of Section 12A of the Act. - Decided in favour of assessee

Issues Involved:
1. Rejection of registration of a Trust under Section 12AA of the Income Tax Act.
2. Examination of the genuineness and activities of the Trust.
3. Interpretation of 'charitable purpose' under Section 2(15) of the Act.
4. The relevance of profit motive in granting registration.
5. Authority of the Commissioner to refuse registration based on the Trust's activities.

Detailed Analysis:

1. Rejection of Registration of a Trust under Section 12AA of the Income Tax Act:
The primary issue in this appeal is the challenge against the order of the Income Tax Appellate Tribunal which upheld the Commissioner of Income Tax's refusal to register a Trust under Section 12AA. The Trust, established with the principal objects of education and relief of the poor, had its application for registration rejected based on a survey revealing unverified expenditures and contributions received prior to registration. The Commissioner found continuous violations of the Income Tax Act, including late filing of returns and non-payment of taxes, and noted the Trust deed lacked a provision stating the Trust was not for profit.

2. Examination of the Genuineness and Activities of the Trust:
The Tribunal remanded the case back to the Commissioner to re-examine the Trust's application, emphasizing that the reasons for refusal were not relevant for registration purposes. The Tribunal stated that the presence of profit alone would not disqualify the Trust from registration, as "there is no question of exemption if there is no scope of income." The Commissioner, upon re-examination, reiterated that the Trust's activities were commercial in nature, citing unethical fund collection methods from prospective students and employees, and concluded that the Trust did not carry out charitable activities.

3. Interpretation of 'Charitable Purpose' under Section 2(15) of the Act:
The court discussed the definition of 'charitable purpose' under Section 2(15), which includes relief of the poor, education, medical relief, and advancement of any other object of general public utility. It was highlighted that if a Trust's purpose falls under the first three categories, the profit motive does not need examination. The court referenced several precedents, including Aditanar Educational Institution v. Addl.C.I.T and Additional Commissioner of Income-Tax, Gujarat v. Surat Art Silk Cloth Manufacturers Association, which clarified that charitable purposes include activities that may incidentally involve profit.

4. The Relevance of Profit Motive in Granting Registration:
The court noted that while the Trust's activities might involve profit, this does not automatically preclude registration. The court cited several judgments, including Dharmadeepti v. Commissioner of Income Tax, Kerala, which held that the profit motive is irrelevant if the Trust's primary purpose is charitable. The court emphasized that the Commissioner should only assess the genuineness of the Trust and its activities at the registration stage, not the profit motive.

5. Authority of the Commissioner to Refuse Registration Based on the Trust's Activities:
The court concluded that the Commissioner had overstepped by refusing registration based on the Trust's activities and potential profit motive. The proper stage to examine the nature of activities and application of income is during the assessment of contributions and income, not at registration. The court held that the authorities did not have sufficient material to deem the Trust non-genuine or its activities contrary to its professed objectives.

Conclusion:
The court set aside the impugned order, directing the Commissioner to grant registration to the Trust under Section 12A of the Act. It clarified that the Revenue could scrutinize the Trust's activities and income during the assessment phase in accordance with Sections 10, 11, and 12 of the Act. The appeal was thus allowed, emphasizing the need for a strict interpretation of taxing statutes and the limited scope of inquiry at the registration stage.

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