2016 (4) TMI 578 - AT - Income Tax

Registration u/s.12AA - entitled for exemption claimed u/s 11 - Held that - We direct the Director of Income-tax (Exemption) to grant registration to the assessee trust for the assessment year under dispute subject to the following conditions namely; i) The registration U/S.12AA (1)(b)(i) of the Income Tax Act 1961 does not automatically exempt the income of the Trust/Institution. The question of taxability of the income of the Trust/Institution shall be examined and decided upon by the Assessing Officer at the time of assessment based on the conduct of the activities compliance with various statutory and other requirements etc. as referred to in Sections 2(15) 11 12 & 13 of the Income Tax Act 1961 without prejudice to the fact of granting merely in principle registration by DIT(E). ii) With effect from the Assessment Year 2009-10 the advancement of any object of general public utility other than relief of the poor education and medical relief as defined in section 2(15) of the Income Tax Act shall not be a charitable purpose 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. iii) Amendments to the Deed/Memorandum Rules and Regulations if any of the Trust / Institution shall be made only with the prior approval of the Commissioner of Income Tax(Exemptions) or any other prescribed authority under the Income Tax Act, 1961. iv) The registration may be withdrawn on violation of any of the stipulations laid down in the Income Tax Act 1961 v) The SOCIETY/TRUST shall regularly file its Income Tax Return. - Decided in favour of assessee

Summary

Issues Involved:
1. Retrospective application of the amendment to Section 12A by Finance Act No.2 of 2014.
2. Computation of taxable income of the trust.
3. Taxation of the charitable trust at the maximum marginal rate.
4. Applicability of the principle of mutuality to the trust's income.

Issue-wise Detailed Analysis:

1. Retrospective Application of the Amendment to Section 12A:
The primary issue was whether the amendment to Section 12A by Finance Act No.2 of 2014, which introduced provisos to Section 12A(2), should be applied retrospectively. The appellant argued that since the trust was granted registration under Section 12AA from 17.12.2013, the benefits should apply to the assessment year 2011-12 as well. The CIT(A) rejected this, stating the amendment is effective from 01.10.2014, as clearly deciphered by the legislature. However, the Tribunal analyzed the relevant provisions and explanatory notes, concluding that the first proviso to Section 12A(2) was intended to be retrospective to avoid genuine hardship to charitable organizations. The Tribunal cited the explanatory notes in CBDT Circular No.01/2015 and the order of the Kolkata Bench of ITAT in Sree Sree Ramkrishna Samity vs. DCIT, which supported the retrospective application. Consequently, the Tribunal held that the assessee trust was entitled to the benefits of registration under Section 12AA for the relevant assessment year.

2. Computation of Taxable Income of the Trust:
The AO computed the taxable income of the trust at Rs. 10,94,090/-, which was the gross receipt for the year. The CIT(A) allowed deductions for expenses of Rs. 2,98,763/- and corpus donation of Rs. 1,11,111/-, resulting in a taxable income of Rs. 6,84,216/-. The appellant contended that the taxable income should be Rs. 1,96,210/-. The Tribunal noted that the AO had verified the expenses during the assessment proceedings and directed the AO to verify the facts regarding the corpus donation and consider its allowability as per law.

3. Taxation of the Charitable Trust at the Maximum Marginal Rate:
The CIT(A) held that since the trust was not registered under Section 12AA during the relevant assessment year, its income should be assessed at the maximum marginal rate of tax. The Tribunal, however, concluded that the trust was entitled to the benefits of registration under Section 12AA for the relevant assessment year due to the retrospective application of the amendment. Therefore, the income should not be taxed at the maximum marginal rate.

4. Applicability of the Principle of Mutuality:
The appellant argued that the trust's surplus, being corpus donation collected and spent for the benefit of the Bhanushali community, should not be taxable on the ground of mutuality. The Tribunal did not explicitly address this issue in detail, focusing instead on the applicability of Section 12AA benefits. However, by allowing the appeal based on the retrospective application of the amendment to Section 12A, the Tribunal implicitly supported the appellant's contention that the surplus should not be taxable under the principle of mutuality.

Conclusion:
The Tribunal allowed the appeal, directing the Director of Income-tax (Exemption) to grant registration to the assessee trust for the assessment year under dispute, subject to specific conditions. The Tribunal emphasized a liberal interpretation of procedural provisions to avoid genuine hardship and ensure the legislative intent of providing relief to charitable trusts is fulfilled. The order was pronounced in the open court on 22nd February 2016.