2021 (8) TMI 883 - HC - Income Tax

Exemption u/s 11 - Registration u/s 12AA denied - proof of charitable activity u/s 2(15) - ITAT allowed the exemption - HELD THAT - The undisputed facts are that the assessee-Trust was established and is administering Matriculation School offering education both in Tamil and English medium. It has also established a Teachers Training College during the financial year 2007-08. The income for four financial years was taken into consideration by the appellant and noting the figures, the appellant opined that the income is in excess of expenditure for both the educational institutions and came to the conclusion that the Trust has been established with a clear motive of earning profits. As appreciated the assessee-Trust for establishing the school with medium of instruction in Tamil and that itself was held to be a charitable activity carried on by the assessee-Trust and by providing free bus service, it would motivate the students to attend the school and get themselves educated in Tamil medium and merely because, bus services were provided free of cost cannot be treated to be an activity for making profit. The assessee's institution was rightly regarded as an institution carrying on educational activity and in the absence of any material available with the appellant, the Tribunal was right in itself observing that there was nothing on record to show that the Teachers Training College has been established solely for making profit. Furthermore, the Tribunal was right in its observation that excess of income over expenditure by itself is not a reason to hold that the assessee-Trust is not engaged in charitable activities. There was no finding that the Trustees had applied the monies of the Trust for their personal benefit or for any other purpose other than education. The infrastructure facilities, which were provided by the assessee-Trust were also rightly taken note of by the Tribunal. The observation of the appellant that only two of the Trustees were authorized to administer the Trust, the same was held to be not a reason to reject the case of the assessee-Trust and it is common that the day-to-day activities of a Trust cannot be entrusted to all 14 Trustees and therefore, the President and Secretary of the Trust have to administer the Trust and there is nothing wrong in such an arrangement made by the assessee - Tribunal was right in observing that if in any particular assessment year, if there was any error in the manner in which the funds of the Trust were administered, it would be open to the Assessing Officer to examine the case and decide as to whether the assessee-Trust was entitled to the benefit of Section 11 of the Act for a particular assessment year or not. Thus, the Tribunal rightly held that the assessee-Trust was entitled to registration under Section 12AA of the Act. For the above reasons, we find that there is no error in the order passed by the Tribunal by directing registration to be granted to the assessee-Trust under Section 12AA of the Act - Decided in favour of assessee.

Issues Involved:
1. Whether the Tribunal was right in setting aside the order of the Commissioner of Income Tax (CIT) under Section 12AA of the Income Tax Act and directing the CIT to grant registration to the assessee Trust.
2. Whether the Trust’s activities were genuinely charitable or profit-oriented.
3. Whether the Tribunal failed to appreciate the issues raised by the CIT regarding the defects in the Trust deed and the systematic earning of substantial surplus income.
4. Whether the Tribunal erred in ignoring the self-contradictory covenants and conditions in the Deed of Trust and the two Codicils.

Issue-wise Detailed Analysis:

1. Tribunal's Decision to Grant Registration under Section 12AA:
The Tribunal directed the CIT to grant registration under Section 12AA of the Income Tax Act to the assessee Trust. The Tribunal held that the Trust was not established with an intention of making profits but with a genuine intention of serving the cause of education, particularly for students from rural backgrounds opting for Tamil medium instruction. The Tribunal found no material on record to show that the Trust was motivated by earning profit. The Tribunal observed that excess income over expenditure does not necessarily indicate a profit motive.

2. Charitable vs. Profit-Oriented Activities:
The CIT rejected the Trust’s application for registration under Section 12AA, stating that the Trust was making profits year after year, indicating a profit motive. The CIT noted that the income of the Trust was in excess of expenditure for four financial years. However, the Tribunal, relying on the Supreme Court's decisions, held that the mere fact that an educational institution makes a surplus does not lead to the conclusion that it exists for profit. The Tribunal emphasized that the predominant object must be to serve a charitable purpose, and incidental surplus does not negate the charitable nature of the Trust.

3. Defects in the Trust Deed and Systematic Earning of Surplus Income:
The CIT pointed out defects in the Trust deed and the systematic earning of substantial surplus income. The Tribunal, however, found that the CIT did not provide any material evidence to show that the Trust’s activities were profit-oriented. The Tribunal noted that the Trust provided free bus services to students opting for Tamil medium education, which was in line with its charitable objectives. The Tribunal held that the provision of free bus services could not be treated as a profit-making activity.

4. Self-Contradictory Covenants and Conditions in the Deed of Trust:
The CIT argued that the covenants and conditions in the Deed of Trust and the two Codicils were self-contradictory. The Tribunal, however, did not find this to be a valid reason to reject the Trust’s application for registration. The Tribunal observed that the day-to-day activities of a Trust cannot be managed by all Trustees and that the President and Secretary administering the Trust was a common and acceptable practice. The Tribunal further stated that if there were any errors in the administration of funds in a particular assessment year, it would be open to the Assessing Officer to examine and decide on the Trust’s entitlement to benefits under Section 11 of the Act for that year.

Conclusion:
The Tribunal’s decision to grant registration to the assessee Trust under Section 12AA was upheld. The Tribunal found that the Trust’s activities were genuinely charitable and not profit-oriented. The Tribunal dismissed the CIT's concerns regarding the defects in the Trust deed and the systematic earning of surplus income, as well as the self-contradictory covenants and conditions in the Deed of Trust. The appeal filed by the Revenue was dismissed, and the substantial question of law was answered against the Revenue.

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