2021 (11) TMI 881 - HC - Income Tax

Exemption u/s 11 - cancel the registration granted under Section 12A - exemption under Section 11 of the Act is denied in the present case mainly alleging breach of Section 13(1)(c) - amendment of trust deed - HELD THAT - As per in the case of Karnataka Badminton AssociationIn 2015 (1) TMI 1202 - KARNATAKA HIGH COURT registration granted was cancelled in view of the amendment of first proviso to Section 2(15) of the Act, which is not a ground specified in the statute for cancellation of the registration. The Co-ordinate Bench of this Court considering Section 12AA(3) of the Act has held that a registration granted u/s 12A can be cancelled under two circumstances i.e., (i) if the activities of such trust or institution are not genuine, and ii) the activities of the trust or institution are not being carried out in accordance with the object of the trust or institution. Only on these two conditions/grounds found to be satisfied, the registration granted could be cancelled by the authorities under Section 12A. As further observed that notwithstanding the fact that the assessee is conferred registration under the provisions of 12A of the Act, unless the assessee falls within the provisions of Section 2 (15) of the Act, excluding the first proviso, it will not be entitled to the benefit of exemption of tax. If the case of the assessee falls in the first proviso, the benefit of registration which flows from Section 12A of the Act is not available. But on that ground, registration cannot be cancelled and accordingly, dismissed the appeal filed by the Revenue. Tribunal has made a threadbare examination of the amendment with the original Objects of the Act and has given a finding that it is in furtherance of the Objects and not contrary to the Objects. The exemption under Section 11 of the Act is denied in the present case mainly alleging breach of Section 13(1)(c) of the Act. The payment in the name of professional services fees/administrative services fees made to Sri. Suresh Nagpal and Smt. Geetha Nagpal, the Tribunal having analyzed the matter in depth has given a finding that the said fees is not disproportionate to the services rendered by the said trustees - payment made to the trustees towards the services rendered if found to be unreasonable, the same could not be construed as violation of Section 13(1)(c) to deny the exemption under Section 11 of the Act. The Hon ble Delhi High Court in the case of DIT (Exemption) vs. Agrim Charan Foundation 2001 (8) TMI 78 - DELHI HIGH COURT has held that the legislature has clearly contemplated that in a case, where the whole or part of the relevant income is not exempted under Section 11 by virtue of violation of Section 13(1)(d) of the Act, tax shall be levied on the relevant income or a part of the relevant income at the maximum marginal rate. The Co-ordinate bench of this Court concurring with these judgments has held that for violating Section 11(5) of the Act, the entire income of the assessee - trust cannot be assessed for the tax. The same analogy would be applicable even to Section 13(1)(c) of the Act also. Thus, the entire income of the respondent - trust cannot be assessed for tax even for violation of Section 13(1)(c) of the Act. As regards the amendment of trust deed, the Tribunal has returned the finding that the objects of the assessee - trust even after amendment of the trust being continued to be charitable; the amendment is a mere power conferred on the trust or other institution. There is no finding recorded by the authorities that the amendment to the object clause has resulted in the trust or institution becoming non-charitable in character. Thereby no reason is forthcoming to establish the removal of foundation of charitable in nature on which the registration was granted was removed. We have no reasons to interfere with the finding recorded by the Tribunal since the Revenue itself was satisfied that the objects of the assessee - trust was imparting education and was charitable in nature. If any violation of Section 13(1)(c) of the Act is noticed, it was open to the assessing officer to examine the same and to bring the said transaction into taxable income but that would not be suffice to cancel the registration under Section 12AA(iii) of the Act. Adequate safe-guards being provided in Sections 12 and 13 of the Act, cancellation of registration on the allegation that education is being imparted on commercial lines is not valid reason for the cancellation of registration. We find no exception with the order impugned. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of Tribunal's decision to quash the order under Section 12AA(3) of the Income Tax Act, 1961.
2. Impact of amendments to the Trust Deed without departmental consent on the trust's registration under Section 12A.
3. Authority of the revenue to review and cancel registration under Section 12AA(3).
4. Assessment of the genuineness of the Trust's activities and compliance with its objectives.
5. Consideration of hefty fees and commission payments in violation of the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984.
6. Alleged violations of Section 13 of the Act due to remuneration and luxury benefits to trustees.

Detailed Analysis:

1. Validity of Tribunal's Decision:
The Tribunal quashed the order under Section 12AA(3) of the Income Tax Act, 1961, which had canceled the trust's registration. The Tribunal found that the reasons given by the Director of Income Tax (Exemption) were not valid for such cancellation. The High Court upheld this decision, noting that the Tribunal had conducted a thorough examination and found no grounds to support the cancellation.

2. Impact of Amendments to the Trust Deed:
The Revenue argued that amendments to the Trust Deed without prior approval from the Department should invalidate the registration under Section 12A. However, the Tribunal found that the amendments were in furtherance of the original objectives and not contrary to them. The High Court agreed, stating that the amendments did not alter the charitable nature of the trust.

3. Authority to Review and Cancel Registration:
The Tribunal acknowledged that the Commissioner has the inherent power to review and cancel registration under Section 12AA(3). However, it emphasized that this power should be exercised only if the trust's activities are not genuine or not in accordance with its objectives. The High Court concurred, noting that these conditions were not met in the present case.

4. Assessment of Genuineness and Compliance:
The Revenue alleged that the trust was running educational institutions on a commercial basis, violating Sections 13(1)(c) and 13(3)(cc) of the Act. The Tribunal found no evidence to support these claims, noting that the trust's activities were genuine and aligned with its charitable objectives. The High Court upheld this finding, emphasizing that mere shortcomings in functioning do not equate to a lack of genuineness or deviation from the trust's objectives.

5. Hefty Fees and Commission Payments:
The Revenue contended that the trust's collection of hefty fees and payment of commissions violated the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984. The Tribunal found no evidence of such violations, noting that no proceedings had been initiated under the said Act. The High Court agreed, stating that the trust's expenditure to propagate its services did not contravene any legal provisions.

6. Violations Due to Remuneration and Luxury Benefits:
The Revenue argued that the trust's payment of remuneration and provision of luxury cars to trustees violated Section 13 of the Act. The Tribunal found that these payments were not disproportionate to the services rendered by the trustees. The High Court upheld this finding, noting that reasonable payments for services rendered do not constitute violations of Section 13(1)(c) and do not justify the cancellation of registration.

Conclusion:
The High Court dismissed the Revenue's appeal, upholding the Tribunal's decision to quash the cancellation of the trust's registration. The Court answered the substantial questions of law in favor of the assessee, except for the third question, which was deemed academic in the present case. The judgment emphasized that the trust's activities were genuine and in accordance with its charitable objectives, and that the alleged violations did not warrant the cancellation of its registration under Section 12AA(3).