3 Important Income Tax Case laws on Charitable or Religious Trusts and Institutions

Relevant Case Law – Bharat Krishak Samaj v. Deputy Director of Income-tax (Exemption) (2008) 306 ITR 153 (Del)

Relevant Section – 11

• The assessee, a society registered under section 12A of the Income-tax Act, 1961, filled in Form No. 10 provided under the Income-tax Rules, 1962, and submitted it to the Assessing Officer along with its resolution, seeking permission to accumulate unspent funds under section 11(2) of the Act for the objects of the trust.

• The Assessing Officer was of the view that the objects for which accumulation was sought were not particularised inasmuch as they covered the entire range of objects of the trust. On this basis, the Assessing Officer denied the benefit of accumulation to the assessee. This was upheld by the Tribunal.

• The High Court held that it is not necessary for a charitable trust to particularise each and every object for which accumulation is sought. It is enough if the assessee seeks accumulation for the objects of the trust.

• Hence, the assessee had sought to accumulate the sum for purposes of the trust and had specified such objects. It was therefore, entitled to accumulate the sum under section

2. Whether repayment of borrowed funds utilised for construction of commercial complex augmenting income of trust and amounts to application of income for charitable purpose eligible for exemption under section 11?

Relevant Case Laws – Director of Income-tax (Exemption) v. Govindu Naicker Estate (2009) 315 ITR 237 (Mad.)

Relevant Section – 11

• During the assessment under section 143(3) of the Act, the Assessing Officer noted that, the trust had made part repayment of a loan taken from the bank for constructing a multi-storied building.

• The Assessing Officer opined that the multi-storied commercial complex was not one of the objects of the trust and the expenditure incurred for the construction of the building could not be treated as charitable in nature, that the repayment of loan could not be regarded as application of income towards the charitable objects of the trust and rejected the claim of the assessee.

• The Commissioner (Appeals) allowed the appeal on the ground that the property of the trust was in a dilapidated condition and fresh construction had to be undertaken by obtaining a loan.

• The subsequent letting out of the property was connected with the carrying out of the objects of the trust and hence, the repayment of loan ought to have been treated as eligible application. The finding of the Commissioner (Appeals) was confirmed by the Tribunal.

• The High Court held that the Tribunal was right in holding that the repayment of loan taken from the bank for construction of commercial complex was application of income for charitable purposes and the assessee-trust was eligible for exemption under section 11 of the Act.

• Even though the expenditure incurred is capital in nature, if the expenditure is incurred for the purpose of promoting the object of the trust, it could be considered as application of the income for the purpose of the trust.

• If the application of the income resulted in the maintenance of the property held under trust for charitable purpose, is for the purpose of augmenting income in order to pursue the objects of the trust that would amount to application of income for the purpose of the trust.

3. Whether the Tribunal has erred in law in holding that the assessee carried on activity for charitable purpose in terms of section 2(15) and directing the Commissioner of Income-tax to grant registration under section 12AA of the Act to the assessee society?

Relevant Case Law – CIT v National Institute of Aeronautical Engineering Educational Socieity (2009) 315 ITR 428 (Uttarakand)

Relevant Section – 12AA

• The assessee, a registered society, moved an application before the Commissioner for grant of registration under section 12AA(1)(b)(i) of the Act, in Form 10A. The Commissioner examined the papers including the income and expenditure of the assessee for the previous years and concluded that the assessee was not carrying on any charitable activity within the meaning of section 2(15) of the Act, as it was in a profit making business.
• Consequently, he rejected the application for registration under section 12AA of the Act. The assessee preferred an appeal before the Appellate Tribunal, which was allowed.

• The High Court held that section 12AA of the Act provides the procedure for registration. Clause (a) of sub-section (1) of section 12AA empowers the Commissioner to call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of the activities of the trust or institution and he may also make such inquiries, as he may deem necessary in this behalf.

• The Commissioner is not supposed to allow registration with blind eyes. The Commissioner had considered the relevant papers before him, which included the income and expenditure accounts of the previous years after the assessee society got registered with the Assistant Registrar of Firms, Societies and Chits.
• The Commissioner observed that the society was charging substantial fees from the students and making huge profits. Merely imparting education for the primary purpose of earning profits could not be said to be a charitable activity. In the expression “charitable purpose”, “charity” is the soul of the expression. Mere trade or commerce in the name of education cannot be said to be a charitable purpose and the Commissioner has to satisfy itself as provided under section 12AA of the Act before allowing the registration. The order of the Commissioner was justified.(For Queries Author can be reached at [email protected])

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