2018 (8) TMI 518 - HC - Income Tax

Cancellation of registration u/s 12AA - Exemption u/s 11 - supply of midday meals - whether preparation of food and making available the same by the assessee sub contractor to the contractor is a charitable activity? - Held that - when a particular institution, as in the above case, is involved in implementation of welfare schemes of the Government, we cannot find any charity in that. The mere assertion that there is no profit motive will not suffice especially when for implementing the schemes the assessee takes money from the State Government or the intermediary. The Commissioner, initially, had granted registration clearly specifying the exemption to be available only on the satisfaction of the AO. The instant proceedings were on the report of the AO that the objects of the Trust are deviated from. We do not find a mere change of opinion, and the Commissioner has dealt with the transactions of the assessee and also examined the accounts for the two years, which squarely fall under the exercise as provided for under sub- Section (3) of Section 12AA. The Commissioner was satisfied that the activities of the Trust are not being carried out in accordance with the objects of the Trust. The assessee, as rightly found, is engaged in a business and there can be no registration as a charitable institution. - Decided against the assessee

Summary

Issues:
1. Eligibility for registration under Section 12AA of the Income Tax Act based on charitable activities.
2. Entitlement to registration under Section 12AA in the context of obtaining a contract for supply of midday meals from another trust.
3. Validity of cancellation of registration under Section 12AA(3) by the Commissioner of Income Tax.

Issue 1:
The respondent-assessee, a Trust registered for public charity, applied for registration under Section 12AA of the Income Tax Act. The Commissioner initially granted registration but later canceled it based on the assessee's transactions for the years 2008-09 and 2009-10. The assessee contended that its work involved participating in Social Welfare Schemes of various State Governments, including distributing food in schools. The Tribunal found that the Trust's participation in such schemes qualified as charitable activities as long as there was no profit motive. The Tribunal set aside the cancellation, but the High Court disagreed. The High Court noted that the Trust did not establish a fund from contributions, donations, or endowments as per its object. The Court held that implementing welfare schemes of the Government, funded by the State, did not constitute charitable activities, especially when surplus funds were accumulated without evidence of charitable activities beyond feeding the poor.

Issue 2:
The Tribunal considered the Trust's involvement in aiding food distribution to be charitable, even if the Trust did not prepare the food itself. However, the High Court found that the Trust's role as a subcontractor for implementing welfare schemes using State funds did not qualify as charitable activity. The Court emphasized that reliance on State funds for such activities did not align with the essence of charitable work, especially when the Trust accumulated profits without demonstrating genuine charitable endeavors. The Court held that the Trust's engagement in business activities through sub-contracts did not warrant registration as a charitable institution under Section 12AA.

Issue 3:
The Commissioner canceled the Trust's registration under Section 12AA(3) after finding that the Trust's activities deviated from its stated objectives. The Commissioner's decision was based on the Trust's involvement as a subcontractor for welfare schemes, receiving payments from the State Government. The High Court upheld the cancellation, emphasizing that the Trust failed to prove its charitable nature beyond assertions of feeding the poor. The Court noted that the Trust's reliance on State funds for implementing welfare schemes did not constitute charitable work, leading to the conclusion that the Trust was engaged in business activities rather than charitable endeavors. Consequently, the High Court ruled against the Trust, setting aside the Tribunal's order and upholding the cancellation of registration under Section 12AA.

The High Court's judgment in this case focused on the Trust's eligibility for registration under Section 12AA of the Income Tax Act based on its charitable activities, particularly in the context of implementing welfare schemes using State funds. The Court emphasized the absence of a genuine charitable motive in the Trust's activities, leading to the cancellation of its registration.