2022 (3) TMI 722 - AT - Income Tax

Exemption u/s 11 - not granting registration u/s 12A - whether the Objects are charitable or not? - only objection of the ld.Commissioner of Income Tax (Exemption) is that during festivals the premises were used for stalls and rent was earned - HELD THAT - There is hardly any income from other sources, i.e. rent from stalls. Main income of the appellant is school fee and main expenditure is also towards the running of the schools. The Surplus is maximum 15 % as mentioned by the Commissioner of Income Tax (Exemption) in the order. Hon ble Supreme Court in the case of Islamic Academy of Education Vs. State of Karnataka 2003 (8) TMI 469 - SUPREME COURT has observed, While this Court has not laid down any fixed guidelines as regard fee structure, in my opinion, reasonable surplus should ordinarily vary from 6% to 15%, as such surplus would be utilized for expansion of the system and development of. Education , Also the Hon ble Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association 1979 (11) TMI 1 - SUPREME COURT has held that the test of predominant object of the activity is to be seen whether it exists solely for education and not to earn profit . Thus, in the case of the appellant, the activity is running education which is a charitable activity as defined u/s 2(15) of the Act. The Surplus is in the range of 10-15% .The ld.Commissioner has not alleged that the surplus has been used for non charitable activities. It means surplus has been used for the objects mentioned in the trust deed. After analysing all these facts, we are of the opinion that the appellant trust is eligible for registration u/s 12AA of the Act. Accordingly, the ld.Commissioner of Income Tax (exemption) is directed to grant registration u/s 12AA of the Act, to the applicant. Appeal of assessee allowed.

Summary

Issues:
The rejection of the appellant's application for registration under section 12AA of the Income Tax Act by the Commissioner of Income Tax (Exemption) Pune.

Detailed Analysis:

1. Application for Registration: The appellant filed an application under section 12AA in form 10A, providing various documents such as the Memorandum of association, audited financial statements, details of expenditure, and a sample list of students admitted under the Right to Education.

2. Reasons for Rejection: The Commissioner rejected the application citing several grounds. Firstly, the appellant was engaged in business activities alongside educational activities, with a substantial component of fees including charges other than tuition fees. The Commissioner also noted a profit margin of 12% to 15% and questioned the fee structure designed to earn substantial profits.

3. Contentions of the Appellant: The appellant argued that the school's income from activities like renting out premises during festivals was utilized for educational purposes. The appellant emphasized that the trust's objects were charitable and disputed the Commissioner's authority to examine activities during the registration process.

4. Legal Precedents: The parties referred to legal precedents regarding the verification of charitable activities during registration under section 12AA, depending on the timing of the trust's application.

5. Judicial Analysis: Upon reviewing the case, the Tribunal found that the appellant was indeed running a CBSC school in Aurangabad, Maharashtra, without any objection to the educational activities. The Tribunal noted that the income primarily came from school fees, with minimal income from other sources like renting stalls during festivals.

6. Financial Analysis: The Tribunal examined the income and expenditure accounts submitted by the appellant, showing that the surplus was within the range of 10-15%, as acknowledged by the Commissioner in the order.

7. Legal Principles: Referring to legal principles, the Tribunal highlighted that a reasonable surplus for educational institutions typically ranges from 6% to 15%. The predominant object of the activity should be solely for education and not profit-making.

8. Conclusion: After considering all facts and legal principles, the Tribunal concluded that the appellant trust was eligible for registration under section 12AA of the Act. The Commissioner was directed to grant registration to the appellant trust.

In conclusion, the Tribunal allowed the appeal of the Assessee, emphasizing the charitable nature of the trust's activities and the appropriate utilization of surplus funds for educational purposes.