2019 (5) TMI 7 - AT - Income Tax

Registration u/s 12AA rejected - as per CIT activity of the assessee cannot be termed as charitable as it has been systematic generating surplus from year to year and the amount has not been applied for its objectives - accounts are not audited and higher interest income has been earned from the surplus so generated, etc. - whether application was rightly rejected seeking registration u/s 12AA of the Act on the basis of the reasons stated herein above? - HELD THAT - In CIT Vs. Surya Educational Charitable Trust, 2011 (10) TMI 47 - PUNJAB AND HARYANA HIGH COURT wherein held that the object of section 12AA of the Act, is to examine the genuineness of the objects of the Trust, but not the income of the Trust for charitable or religious purposes. The stage of application of income is when such Trust or Institution files its return. At the stage of granting registration, the Ld. CIT has to restrict himself to the objects of the assessee and Genuineness of the activities. The CIT has not to examine whether the funds have been applied or not. In the case in hand, the Ld. CIT rejected the application substantially on the basis that the assessee has accumulated funds which are not been ploughed back for charitable purposes. The profits earned are invested in ever increasing FDRs to earn interest income instead of utilizing for charitable purposes. The explanation of the assessee for accumulating the funds is that it planned for future expansion of technical education in state. The assessee has also applied funds for constructing the hotels for boys and girls, auditorium with the sitting capacity of 3000, campus development to establish green campus. The assessee has also established UITs at Jhabua Shadol for which the capital expenditure will be approximately ₹ 100 crores. In our considered view, the Ld. CIT has not considered the explanation in the light of the binding precedents. Set aside the order of the Ld. CIT(E) and restore the issue of granting of registration to his file to re-consider the same - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Declining registration under section 12AA of the Income Tax Act, 1961.
2. Consideration of facts not relevant for deciding an application under section 12AA.
3. Examination of the objects of the society/trust at the stage of grant of registration under section 12AA.
4. Definition of "charitable purpose" under section 2(15) of the Income Tax Act.
5. Examination of incidental objects in relation to the primary charitable purpose.
6. Determination of whether the primary object is charitable or ancillary/incidental.

Issue-Wise Detailed Analysis:

1. Declining Registration under Section 12AA:
The primary issue was the rejection of the assessee's application for registration under section 12AA of the Income Tax Act by the CIT(Exemption). The CIT(E) based the rejection on several grounds, including the systematic generation of surplus, non-application of income for charitable purposes, and improper maintenance and auditing of accounts.

2. Consideration of Facts Not Relevant for Deciding an Application under Section 12AA:
The assessee argued that the CIT(E) considered irrelevant facts such as the generation and application of surplus funds, which should not be a criterion at the stage of registration. The Tribunal referred to various judgments, including CIT Vs. DPR Charitable Trust (2011) and Fifth Generation Education Society Vs. CIT (1990), which clarified that at the stage of registration, the CIT(E) should only examine the genuineness of the trust's activities and its objects, rather than the application of income.

3. Examination of the Objects of the Society/Trust at the Stage of Grant of Registration under Section 12AA:
The Tribunal emphasized that the CIT(E) should focus on the objects of the trust and the genuineness of its activities. The CIT(E) had not provided any findings on the objectives of the assessee, which the Tribunal found to be a significant oversight. The Tribunal cited the judgment in CIT Vs. Red Rose School, which supports this approach.

4. Definition of "Charitable Purpose" under Section 2(15) of the Income Tax Act:
The assessee contended that its primary object was education, which is explicitly defined as a charitable purpose under section 2(15) of the Act. The Tribunal supported this view, referencing the inclusive definition of "charitable purpose" which encompasses education, relief of the poor, medical relief, and other objects of general public utility.

5. Examination of Incidental Objects in Relation to the Primary Charitable Purpose:
The CIT(E) had focused on incidental objects listed in the trust's objectives to conclude that the trust was not charitable. The Tribunal referred to the Supreme Court's decision in Surat Art Silk, which held that if the primary purpose is charitable, incidental objects do not negate the charitable nature of the trust. The Tribunal found that the CIT(E)'s emphasis on incidental objects was misplaced.

6. Determination of Whether the Primary Object is Charitable or Ancillary/Incidental:
The Tribunal reiterated that the primary object of the assessee was education, a recognized charitable purpose. The CIT(E)'s focus on the generation of surplus and its investment in fixed deposits was deemed irrelevant for determining the charitable nature of the trust at the registration stage. The Tribunal cited the Kerala High Court's decision in Anjaneya Medical Trust Vs. CIT, which supports the view that the application of funds should be examined at the assessment stage, not during registration.

Conclusion:
The Tribunal set aside the order of the CIT(E) and directed a reconsideration of the application for registration under section 12AA. The CIT(E) was instructed to focus on the objects and the genuineness of the activities of the trust, in line with the binding precedents. The appeal was allowed for statistical purposes, and the issue was restored to the CIT(E) for fresh consideration.

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