2016 (9) TMI 920 - HC - Income Tax

Eligibility for registration u/s 12AA - Charitable purpose - objects of trust - Held that - The Tribunal rightly held that the registration granted under section 25 of the Companies Act is a recognition of the fact that the respondent is essentially established for the purpose of education. It was further held that the status granted by the Government by virtue of licence under section 25 itself recognises the fact that the respondent was essentially established inter-alia for the purpose of education. Even assuming that the licence is not conducive of the matter under the Income Tax Act, it is certainly an important factor in favour of the applicant for registration. There can be no doubt that the main objects read by themselves entitle the respondent to registration under section 12AA of the Act. It was rightly not even contended otherwise. It was, however, contended that in view of the objects incidental or ancillary to the attainment of the main objects, the respondent is not entitled to registration under section 12AA of the Act. There are 28 incidental or ancillary objects. To allay Mr. Goel s objections and apprehensions, Mr. Rohit Jain, learned counsel appearing on behalf of the respondent stated that all the ancillary and incidental clauses are those that are merely ancillary and incidental to the main objects and for no other purpose. He further stated that powers conferred by every clause in part-B would be subject to and solely for the purpose of, in connection with and in relation to the main objects of the respondent. We accept the statement and it is so ordered. The clauses also must be read as a part of the entire memorandum of objects and not in isolation. We are satisfied that they confer powers only for the purpose of attaining the main objects and for no other reasons whatsoever. We, however, do not wish to leave anything to chance and provide two safeguards - firstly by accepting the statement made by Mr. Rohit Jain as aforesaid and secondly by permitting the appellant to obtain such clarifications and to impose such conditions as they desire upon the respondent to ensure that there is no misuse of any of the incidental and ancillary objects. A perusal of the order of the Commissioner shows that he declined to register the Company by reading its ancillary objects as its main objects as also on the basis that in the future the Company may, under its ancillary/incidental objects, indulge in activities, which would be of noncharitable character. As of today, there is nothing on the record that the Company is indulging in any activity which is not in the nature of charity. Thus, at this stage, the order of the Commissioner can only be termed as presumptuous. There is also nothing on record to show that the Company does not meet any of the conditions prescribed under the Act for the grant of registration to make it eligible for the grant of exemption under Section 11 and consequently under Section 80-G of the Act. Thus, we find that the order of the Commissioner was rightly set aside by the Tribunal in the order impugned before us. In view of the above, we order dismissal of the appeal. However, while granting registration, it would be open to the Registering Authority to grant the same by imposing any condition, which would bind the Company to indulge in only charitable activities. It will also be subject to an affidavit or undertaking to be filed by the Company that it would not breach any of the imposed conditions and further that surplus funds would be utilized only for educational purposes and would not be diverted to any other non-educational objectives. - Decided against revenue

Issues Involved:
1. Eligibility for registration under Section 12-AA of the Income Tax Act.
2. Eligibility for exemption under Section 80-G of the Income Tax Act.
3. Interpretation of ancillary and main objects of the company.
4. Compliance with Section 25 of the Companies Act, 1956.
5. Application of the predominant test for charitable purposes.

Issue-wise Detailed Analysis:

1. Eligibility for Registration under Section 12-AA of the Income Tax Act:
The Revenue challenged the Tribunal's decision that granted the assessee registration under Section 12-AA. The Commissioner had initially rejected the application, arguing that the ancillary objects allowed members to utilize funds in ways that could be non-charitable and commercial, contrary to the main objective of imparting education. However, the Tribunal applied the predominant test, determining that the main objects were non-commercial and educational, with ancillary objects being incidental to these main purposes. The Tribunal's decision was upheld, emphasizing that at the registration stage, the primary focus should be on whether the main objects are charitable or religious.

2. Eligibility for Exemption under Section 80-G of the Income Tax Act:
The Tribunal also granted the assessee exemption under Section 80-G, which was a consequence of the registration under Section 12-AA. The Revenue's contention was that the ancillary objects permitted non-charitable activities. The Tribunal differentiated between primary and enabling objects, asserting that the ancillary objects were incidental to the main educational purpose, thus justifying the exemption.

3. Interpretation of Ancillary and Main Objects of the Company:
The Commissioner had viewed the ancillary objects as independent and potentially non-charitable, which could overshadow the main educational objective. The Tribunal, however, held that the ancillary objects were incidental to the main educational purpose. The High Court agreed with this interpretation, emphasizing that the ancillary objects should not be considered distinct from the main objects if they support the primary charitable purpose.

4. Compliance with Section 25 of the Companies Act, 1956:
The company was incorporated under Section 25 of the Companies Act, 1956, which requires that profits be applied solely for promoting its objects without distributing dividends to members. The Tribunal and the High Court noted that the registration under Section 25 itself indicated that the company was established for educational purposes. The High Court highlighted that the conditions of the Section 25 license supported the company's charitable objectives.

5. Application of the Predominant Test for Charitable Purposes:
The High Court referenced several precedents, including the Supreme Court's judgment in Additional Commissioner of Income Tax, Gujarat vs. Surat Art Silk Cloth Manufacturers Association, which established that if the primary purpose is charitable, ancillary objects that are incidental do not negate the charitable nature. The Court reiterated that the predominant test should be applied, focusing on whether the main purpose is charitable, and any ancillary objects should be seen as supporting this primary purpose.

Conclusion:
The High Court dismissed the appeal, affirming the Tribunal's decision to grant registration under Section 12-AA and exemption under Section 80-G. The Court allowed the Registering Authority to impose conditions to ensure the company engages only in charitable activities and to monitor compliance. The judgment emphasized that at the registration stage, the primary objects should be charitable, and ancillary objects should be incidental to these main purposes.

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