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Grant of registration u/s. 12AA is a condition precedent for claiming exemption u/s. 11

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IN THE ITAT AGRA BENCH

Manas Sewa Samiti

v.

Additional Commissioner of Income-tax

IT APPEAL NO. 229 (AGRA) OF 2011

[ASSESSMENT YEAR 2007-08]

OCTOBER 23, 2012

ORDER

Bhavnesh Saini, Judicial Member – This appeal by the assessee is directed against the order of ld. CIT(A), Ghaziabad dated 15.03.2011 for the assessment year 2007-08, challenging the order of the ld. CIT(A) in not granting benefit u/s. 11 of the IT Act and in the alternate ground, it was submitted that the ld. CIT(A) should have held that the income of the assessee is exempt u/s. 10(23C)(iiiad) of the IT Act.

2. Briefly, the facts of the case are that the assessee filed return of income declaring nil income. The assessee claimed to have run educational institute under the above society and claimed that its main objects are to impart education and in addition to that its objects are to provide free medical aid and other charitable work etc. The assessee’s counsel submitted before the AO that the main object of the assessee is to impart education to poor and needy persons, particularly to the weaker section of the society. In addition to that, the objects of the assessee society are to provide free medical and other charitable work etc. and its income is exempt u/s. 10(23C)(iiiad) of the IT Act and its aggregate annual receipt does not exceed Rs. 1.00 crore. Shri Neeraj Kumar, Advocate appeared on behalf of the assessee and admitted before the AO that the assessee society is not registered u/s. 12AA of the IT Act and claimed exemption u/s. 10(23C)(iiiad) of the Act. The AO reproduced the aims and objects of the assessee society in the assessment order at page 2 and found that apart from educational objects, the assessee has other objects also, which are not connected with educational activities. Therefore, it was evident from the aims and objects of the assessee society that the assessee exists for non-educational purpose also. Therefore, the provisions of section 10(23C)(iiiad) would not apply in this case because it did not exist solely for educational purposes. The AO after considering the reply of the assessee and on the basis of material on record found that the assessee has received student fees in a sum of Rs.85,95,790/- and interest on FDR at Rs.86,121/- totalling to Rs.86,81,911/- and after deducting the expenditure, excess of income over expenditure come to Rs.38,54,310/- which has been taken to the income and expenditure account of assessee, Manav Sewa Samiti. It was further found from the income and expenditure account of the assessee that apart from the above income, the assessee also received donations/subscription of Rs.47,62,000/- and interest of Rs.18,151/- on FDR, totalling to Rs.47,80,151/-. Thus, the total receipts of the assessee come to Rs.1,34,62,060/-. Since the aggregate annual receipts were more than Rs.1.00 crore, therefore, the assessee was not eligible for exemption u/s. 10(23C)(iiiad) and further the assessee is also not eligible for exemption u/s. 10(23C)(vi), as there was no approval in favour of the assessee from the prescribed authority. In reply to show cause notice on the above issue, the ld. Counsel for the assessee stated before the AO that he has nothing to say on this issue. The AO relied upon the decision of Bombay High Court in the case of M. Visvesvaraya Industrial Research & Development Centre v. ITAT [2001] 251 ITR 852/116 Taxman 760 in which it was held that registration u/s. 12A is a condition precedent for exemption but that does not mean that mere registration will confer right to registration. The AO also relied upon the decision of Hon’ble Supreme Court in the case of U.P. Forest Corpn. v. Dy. CIT [2008] 297 ITR 1/[2007] 165 Taxman 533, in which it was held that registration u/s. 12A is a condition precedent for availing of benefit of section 11 & 12. Unless or until the institution is registered u/s. 12A of the Act, it cannot claim benefit of section 11(1)(a) of the IT Act. The AO, therefore, found that since the assessee did not solely exists for educational purposes and receipts are more than one crore and there is no registration u/s. 12A of the Act, therefore, the assessee is not entitled for benefit of section 11 of the IT Act as well as section 10(23C)(iiiad) or (vi) of the IT Act and accordingly, considering the surplus, income was computed at Rs.86,34,460/-.

2.1 The assessee challenged the order of the AO before the ld. CIT(A). The written submissions of the assessee is incorporated in the appellate order in which the assessee briefly explained that the assessee applied for registration u/s. 12A during the financial year 2005-06 on 06.09.2005, but no refusal of registration is made and the assessee had bonafide belief that the registration u/s. 12A has been granted. Since the assessee exists solely for educational purposes, therefore, the assessee is entitled for relief u/s. 12A as well as u/s. 10(23C)(iiiad) of the Act being the receipts less than Rs. one crore. The remand report from the AO was called for in which the AO reiterated the stand taken at the assessment stage and submitted that total receipts of the assessee are more than Rs. one crore and there is no approval by the prescribed authority. Therefore, no exemption could be granted to the assessee. Further, the grant of registration u/s. 12A is not appealable before the ld. CIT(A) as per provisions of section 246A of the IT Act and as such, the CIT(A) has no jurisdiction to entertain such a matter. The ld. CIT(A), considering the material on record and the submissions of both the parties, dismissed the appeal of the assessee. His findings in appellate order in paras 7 to 8 are reproduced as under :

“7. After having carefully considered appellant’s submission and also the facts brought out by the AO in the assessment order as well as in the remand report, my conclusions/observations are as under :

7.1. I would start with delineation of ‘Voluntary Contributors and when these are not ‘Income’.

It should be noted that section 11(1) discusses the exemptions available to charitable organizations and, therefore, when we discuss income under section 11(1) we discuss the incomes which are eligible for exemptions subject to the provisions of section 11, 12 & 13. Section 11(1)(d) excludes voluntary contributions received towards corpus from the scope of income under section 11(1). The exclusion of only voluntary contributions towards corpus creates an implicit openness towards other voluntary contributions, though section11 does not speak of voluntary contribution other than towards corpus. It is section 12(1), which provides that voluntary contributions would be deemed to be income derived from property for the purpose of section11. Voluntary contributions, by their inherent nature, do not fall in the category of ‘income’, unlike others incomes. Therefore, they have been deemed as income by virtue of section 12(1). As already discussed in chapter 1, for the purpose of section 11(1) income means the real income which has been received by the assessee. It shall be computed not in accordance with the provision of the Act but in accordance with the normal rule of accountancy, in a commercial sense without reference to the head of the incomes specified in section 14.

In the same circular it has been further clarified that, where the trust derives income from house property, interest from securities, capital gains and other sources, the word income should be understood in its commercial sense, i.e., book income. However, the principles of commercially determining income are not relevant as for as voluntary contributions are concerned because they are deemed incomes. Therefore, voluntary contributions have to be under stood in the light of section 12(1), along with the case laws which are available for our reference.

Can voluntary contributions be treated as income

According to section 12(1), any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes shall, for the purpose of section 11, be deemed to be income derived from property held under trust wholly for charitable or religious purposes. However, contribution received with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in income for the purpose of section11. In other words, voluntary contributions other than those towards corpus specific direction are deemed as income.

Therefore, it may be noted that insertion of section 2(24)(iia) along with section 12(1) has created a statutory assumption which deems voluntary contribution as an income. The aforesaid decision was cited by the Supreme Court in Padmaraje R. Kadambande v. CIT [1992] 195 ITR 877.

7.2 Thus, in case of present assessee, the donations received from several donors, without carrying any specific direction, i.e. Not being corpus donations, would fall under ‘Voluntary Contributions’ and, thus, are deemed income.

7.3 It is admitted fact on record that assessee has not been granted registration u/s. 12A. The assessee has argued that as Commissioner of Income Tax, Aligarh did not refuse its application made u/s. 12A, so registration should be deemed to be granted.

I am afraid, there is no such provision in the Act. The assessee is apparently referring to view taken by Special Bench, ITAT. But, as I have explained to the counsel, the appellant has to carry such grievance (no registration granted, nor refused) to ITAT. But, till that time, the registration u/s. 12A can NOT be assumed. And, as long as, by any reason, registration u/s 12A is not available to the assessee; the exemption u/s 11 & 12 is also not available.

7.4 That leaves the appellant only with the purview of Section 10(23C) (iiiad) which can be considered even if exemptions u/s 11 and 12 are not available.

But, for consideration and approval of exemption u/s 10(23C)(iiiad), the total receipts, including the contribution being received by the society as well as the fee receipts being received by the society from running the ‘Institute of Information Management and Technology’, have to be aggregated. But, that implies, as pointed by AO, a total receipt of more than Rs.1 Crore (86,81,911 + 47,62,000), which implies that assessee that assessee would be outside the purview of clause (iiiad). At the same time, having receipts more than Rs.1 Crore, it has not applied for and obtained, any approval from the Chief Commissioner of Income Tax.

The appellant’s arguments that receipts (by way of voluntary contribution) of the assessee society and receipts (by way of fees & other) of the ‘Institute’ run by it, should be treated separately; is not acceptable because the society and the only ‘Institute’ being run by it can be treated as one and same. The Madras High Court in CIT v. A.M.M. Arunachalam Educational Society 243 ITR 229 held that the assessee, which had the object of running an educational institution and also ran a School, was eligible for exemption under section 10(22) (now Section 10(23C)) on the ground that a society which runs a school could be treated as an educational institution by itself following the decision in Aditanar Educational Institution 224 ITR 310 (SC)

Further, appellant has itself submitted that surplus of the Institute has been taken to the accounts of the society.

Therefore, the AO is correct in adding the gross fee receipts of the institute to the receipts, by way, of voluntary contributions, of the assessee society, for determining the aggregate receipts. While goes beyond the limit of Rs.1 crore as prescribed for exemption u/s 10(23C)(iiiad)

Thus, I hold that aggregate receipts being more than the prescribed limit, appellant is not eligible for exemption u/s 10(23C)(iiiad).

7.5 in view of above, all the grounds of appeal are rejected. AO’s action of assessing appellant’s income at Rs.86,34,460/- is upheld.

8. In the result, the appeal is dismissed.”

3. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and submitted that when the CIT has not refused to grant registration within time, it amounts to deemed registration u/s. 12AA of the IT Act and the assessee is entitled for exemption u/s. 11 of the IT Act. He has further furnished information received in this regard under RTI Act and also relied upon the decision of Hon’ble Allahabad High Court in the case of Society for the Promotion of Education Adventure Sport & Conservation of Environment v. CIT [2008] 171 Taxman 113 in which it was held that “Effect of non-consideration of the application for registration under s. 12A within the time fixed by s. 12AA(2) would be a deemed grant of registration.” He has also relied upon the order of ITAT Delhi, Special Bench in the case of Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust v. CIT [2008] 111 ITD 175, in which following question was referred to the Special Bench :

“Whether in a case where the CIT does not pass the order granting or refusing registration of trust within the period laid down in s. 12AA(2) registration would be deemed to have been granted to the trust or institution automatically on expiry of the period specified in s. 12AA(2) of the Act ?”

The Special Bench concluded as under :

“CIT has to mandatorily pass an order within 6 months from the end of the month in which the application for registration under s. 12AA is filed; CIT must be deemed to have allowed the registration if he does not pass any order within the prescribed time.”

3.1 The ld. Counsel for the assessee also submitted that since the receipts of the assessee are less than Rs. one crore and donation do not form part of the annual receipts, therefore, the assessee is entitled for exemption u/s. 10(23C)(iiiad) of the IT Act. On the other hand, the ld. DR relied upon the orders of the authorities below.

4. We have considered the rival submissions and the material available on record. The first issue is with regard to claim of deduction u/s. 11 of the IT Act. Hon’ble Supreme Court in the case of U.P. Forest Corpn. (supra) held that registration u/s. 12A is a condition precedent for availing of benefit of section 11 & 12 of the IT Act. Unless and until institution is registered u/s. 12A of the Act, it cannot claim benefit u/s. 11 of the IT Act. The ld. Counsel for the assessee, Shri Neeraj Kumar, Advocate admitted before the AO at the assessment stage that the assessee society is not registered u/s. 12AA of the Act. Therefore, the assessee would not be entitled for any deduction u/s. 11 of the IT Act. Even during the course of arguments, the ld. Counsel for the assessee admitted that the assessee is not registered u/s. 12AA of the IT Act. The main contention is that since the assessee applied for registration before the ld. CIT on 06.09.2005 and the ld. CIT has neither refused to grant registration nor granted registration, therefore, it would amount to deemed registration and the assessee should be granted benefit of deduction provided u/s. 11 of the IT Act. We do not agree with such a contention of the ld. Counsel for the assessee. In the decision in the case of Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust (supra) of Special Bench, the issue was with regard to grant of registration u/s. 12AA of the IT Act. The matter in issue before the Special Bench was not connected with the computation of income on the basis of regular assessment. Similarly, the issue before the Hon’ble Allahabad High Court in the case of Society for the Promotion of Education Adventure Sport & Conservation of Environment (supra) was in writ petition with regard to the delay on the part of the IT authorities in not deciding the application for registration. Whether the ld. CIT has granted registration or did not refuse to grant registration is an independent and distinct matter from the computation of income on the basis of regular assessment passed by the AO. In section 246A several provisions have been mentioned in which if any order is passed by the Assessing Authority, it would be appealable order before the Commissioner (appeals). No remedy is provided if the CIT did not pass any order u/s. 12AA for filing the appeal before the ld. CIT(A). According to section 253(1)(c), the order passed by the Commissioner u/s. 12AA is appealable before the Appellate Tribunal if the assessee was aggrieved against the order of the CIT u/s. 12AA of the IT Act. It would mean that no remedy lies for grant of registration or refusal to grant registration before the CIT(A). If any order is passed by the Commissioner u/s. 12AA and the assessee is aggrieved, the appeal directly lies to the Appellate Tribunal. Therefore, such an issue of deemed registration could not have been agitated before the ld. CIT(A) and rightly so, the ld. CIT(A) did not take cognizance of the same. The ld. Counsel for the assessee did not cite any decision if on the basis of deemed registration, any court has directed to grant exemption of income u/s. 11 of the Act. Since grant of registration is a condition precedent for grant of exemption u/s. 11 of the IT Act and in this case, there is no registration granted u/s. 12AA of the Act in favour of the assessee, no relief or exemption can be granted to the assessee u/s. 11 of the Act. The registration issue is thus, independent and distinct matter from the computation of income in the regular assessment and as such, the separate and distinct matter cannot be clubbed in the quantum appeals. The quantum assessment orders are available before the ld. CIT(A) and against the order of the ld. CIT(A) u/s. 250 of the IT Act on merit. Separate appeal lies to the Tribunal u/s. 253(1)(a) of the IT Act. Further, non-action by the CIT u/s. 12AA could not have been examined by the CIT(A) or the Tribunal in the quantum proceedings. The remedy lies somewhere else, but it appears that the assessee has not availed to any such alternate remedy provided under the law. Considering the above discussion in the light of decision of Hon’ble Supreme Court in the case of U.P. Forest Corpn. (supra), we do not find any infirmity in the order of the ld. CIT(A) in rejecting the claim of assessee for exemption u/s. 11 of the IT Act in the absence of any registration in favour of the assessee. The decision cited by the ld. Counsel for the assessee thus, would not support the case of the assessee in the quantum proceedings. Thus, the contention of the ld. Counsel for the assessee is accordingly rejected.

5. Now, we consider the alternate contention of the ld. Counsel for the assessee with regard to the claim raised u/s. 10(23C)(iiiad) of the IT Act. Section 10(23C)(iiiad) provides as under :

(iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed; or

5.1 Section 10(23C)(vi) of the IT Act provides as under :

[(vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority; or

5.2 Section 2(24)(iia) of the IT Act provides the definition of income, which includes -

(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via)] of clause (23C) of section 10 [or by an electoral trust.

6. Considering the facts of the case in the light of above provisions of law, it is clear that the assessee is also not entitled for deduction in the above provisions. The AO found from the ‘Smriti Patra’ of the assessee that the assessee did not exist solely for educational purpose and it has other objects also. When the annual receipts exceed Rs. one crore, the approval of prescribed authority is required in the above provisions. In the case of assessee, aggregate annual receipts of the assessee were found exceeding Rs.1,00,00,000/-. The assessee claimed that donation is not part of the total receipts, but the voluntary contributions provided u/s. 2(24)(iia) clearly includes the voluntary contributions received by the trust of different nature including the educational institution would be included in the definition of income. Thus, the total receipts of the assessee were more than Rs. one crore and if benefit of section 11(1)(d) could be granted, then voluntary contribution made with a specific direction that they shall form part of corpus of trust could be granted exemption and for that purpose also, the institution should be registered u/s. 12AA of the IT Act and there should be evidence on record that such an income in the form of voluntary contribution was received for the specific purpose to form part of the corpus of the trust/institution. As noted above, in the case of assessee, there is neither any registration u/s. 12AA nor is there any evidence to support the case of the assessee that the donations were received with specific direction that it will form part of corpus of the assessee Institution. Therefore, such a benefit could also not be given to the assessee. The ld. CIT(A) on proper appreciation of facts and applying correct law rightly held that the donations were part of the annual receipts of the assessee and shall be treated as income of the assessee. This view also finds support from the provisions of section 12(1) of the IT Act as is considered by the ld. CIT(A) also. The ld. CIT(A), therefore, correctly analyzed the above provision for the purpose of deciding the issue before him. Considering the above discussion in the light of findings of ld. CIT(A), we are of the view that the ld. CIT(A) rightly declined benefit of exemption u/s. 10(23C)(iiiad) of the IT Act. The contention of the ld. Counsel for the assessee is, therefore, rejected.

7. No other point is argued or pressed.

8. In the result, the appeal of the assessee is dismissed.


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