2018 (10) TMI 377 - HC - Income Tax

Charitable activity u/s 2(15) - scope of the amendment - Cancellation of registration granted u/s 12A - concealed the actual mode of transaction and transferred the funds to the trustee by violating the provisions of section 13(1)(c) - land proposed to be acquired by the Trust is an agricultural land which was not yet controverted into non agricultural use and huge sum collected from students at the time of their admission - cognizance the latest amendment in the nature of proviso to section 2(15) of the I.T. Act inserted with effect from 01/04/2009 - Held that - The event of cancellation of registration of a Trust in exercise of powers under sub-section (3) of section 12AA of the Act would arise when the Commissioner is satisfied that the activities of such Trust or institution are not genuine or are not being carried out in accordance with the objects of the Trust or institution. Mere breach of the provisions contained in section 11(1)(d) or 13(1)(c) per se would not fall within the either of the two grounds available to the Commissioner to cancel the registration viz. the activity of the Trust not being genuine or not being carried out in accordance with the objects of the Trust. The Tribunal was thus perfectly justified in coming to such a conclusion. Our view that we expressed gets force from the decision of Uttranchal High Court in case of Welham Boy s School. Society vs. Central Board of Direct Taxes and anr 2005 (10) TMI 66 - UTTARANCHAL HIGH COURT . Tribunal had correctly examined the materials on record, agreed with the Trust s contentions that desire on part of the Trust was to acquire land which could be used for setting up educational institution. Agreement to purchase agriculture land was executed in name of the Managing trustee since obviously the Trust should not have even entered into an agreement to purchase agriculture land. Equally, merely because donations are received would not per say imply that the Trust was operating along commercial lines. Trust was running several self finance educational institutions. Collecting fees for such purpose would be part of the normal activities. Even for an educational institution, to retain a reasonable surplus out of its activities has never been frowned upon by judicial decisions. If at all this is getting more liberal. Prime requirement is that such surplus should not be diverted for any other purpose. It must be utilized for the objects of the Trust. Provisio to sub-section (15) to section 2 of the Act was added by the Finance Act, 2010 providing that the advancement of any other object of general public utility 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 cess or fee or any other consideration irrespective of the nature of use or application, or retention of the income from such activity. It applies to activity for the advancement of any other object of general public utility. Such activity would be excluded from the definition of charitable purpose if it involves carrying on any activity in the nature of trade, commerce or business or for cess or fee or any other consideration. Clearly, the legislature did not desire this condition or restriction to be attached to the remaining activities which were defined or categorized as charitable purpose under sub-section (15) which includes the education. - Decided against revenue

Issues Involved:
1. Whether the Appellate Tribunal erred in setting aside the order of DIT(E) under section 12AA(3) and restoring the registration under section 12A of the Income Tax Act.
2. Whether the Appellate Tribunal failed to consider the amendment to section 2(15) of the Income Tax Act effective from 01/04/2009.
3. Whether the Appellate Tribunal ignored the fact that the objects of the assessee association no longer remain charitable in view of the amended provisions of Section 2(15).

Detailed Analysis:

Issue 1: Setting Aside the Order of DIT(E) and Restoring Registration
The Director of Income Tax (Exemptions) issued a show cause notice proposing the cancellation of the Trust's registration based on three principal grounds:
1. Transfer of ?4.50 crores to trustees without reflecting the transaction in Form-10B, violating section 13(1)(c).
2. The purchase of agricultural land, which was not converted for non-agricultural use, diverging from the Trust's educational objectives.
3. Collection of ?1.90 crores from students as corpus donations without proper accounting.

The Tribunal found the Trust's activities genuine and aligned with its educational objectives. The Tribunal noted that the payment for land was accounted as an advance towards land purchase and not for investment purposes. The Tribunal concluded that the Trust's activities did not alter its objects and were not of a commercial nature. The Tribunal also held that violations of sections 11(1)(d) or 13(1)(c) do not justify cancellation under section 12AA(3).

Issue 2: Consideration of Amendment to Section 2(15)
The Tribunal opined that the amended proviso to section 2(15) applies only to the advancement of any other object of general public utility, not to educational activities. The Tribunal observed that the Trust's activities, including the acquisition of land for educational purposes, did not fall within the amended section 2(15). The accounts revealed a deficit and significant expenditure towards educational activities, indicating no commercial intent.

Issue 3: Charitable Status of the Trust Post-Amendment
The Tribunal held that the Trust's activities remained charitable despite the amendment to section 2(15). The Trust ran self-financed educational institutions and collected fees as part of its normal activities. The Tribunal emphasized that retaining a reasonable surplus for educational purposes is acceptable, provided it is not diverted for other purposes. The Tribunal referenced Supreme Court decisions affirming that making a profit does not necessarily imply a profit motive if the surplus is used for charitable objectives.

Conclusion:
The High Court upheld the Tribunal's decision, finding no error in restoring the Trust's registration. The Court agreed that the Trust's activities were genuine and aligned with its educational objectives. The Court noted that breaches of sections 11(1)(d) or 13(1)(c) do not warrant cancellation under section 12AA(3). The Court also affirmed that the amended section 2(15) did not apply to the Trust's educational activities. The appeal was dismissed, and the questions were answered against the Revenue.

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