While granting registration, objects of trust & not purported utilization of income to be considered

HIGH COURT OF PUNJAB AND HARYANA

Commissioner of Income-tax, Rohtak

Versus

B.K.K. Memorial Trust

IT APPEAL NO. 5 OF 2012

OCTOBER 16, 2012

ORDER

Gurmeet Singh Sandhawalia, J.

This order will dispose of an appeal filed under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 10.6.2011 passed by the Income Tax Appellate Tribunal, Delhi Bench ‘A’, New Delhi (hereinafter referred to as “the Tribunal”) in ITA No. 6088/Del/2010.

2. The revenue has claimed the following substantial questions of law:-

“(i)  Whether the Hon’ble ITAT is justified in law in holding that the CIT erred in refusing to register the assessee u/s 12A of the Income Tax Act.

(ii)  Whether the Hon’ble ITAT is justified in directing to grant registration when the Trust is an autocratic/private discretionary/family Trust as there is no provision for independent internal check on the discretionary functioning of the Trust as the control over the affairs of the Trust is in the hands of six Board of trustees, three of which belongs to Katyal family, who hold the key positions in the Trust?

(iii) Whether the Hon’ble ITAT is justified in directing to grant registration when the Trust has made huge investment in the form of FDR with banks with a view to earn interest without serving public in absence of any charitable activities performed as per section 2(15) of the Income Tax Act, 1961?

(iv) Whether the Hon’ble ITAT is justified in directing to grant registration when the Trust has failed to furnish any documentary evidence regarding identity and capacity to make initial investment in the Trust by the trustees?

(v)  Whether the Hon’ble ITAT is justified in directing to grant registration when the six settlers cum trustees have autocratic and discretionary power to remove any Trustee other than the settler one without giving any notice or reasons whatsoever?”

3. Record of the appeal shows that the respondent-Trust had moved an application under Section 12A(1) (aa) of the Act in form No.10A on 18.7.2010 accompanied by copy of the Trust deed dated 23.6.2010 and form No.10B. The said application was rejected by the Commissioner of Income Tax, Rohtak (hereinafter referred to as “the CIT, Rohtak”) vide order dated 26.11.2010. The conclusion arrived at by the CIT, Rohtak was that the Trust is susceptible to use for purposes other than charitable ones and Sh. Prikshit Katyal (son), his mother Smt. Sangeeta Katyal & his brother Sh. Gaurav Katyal were trustees in the previous Trust deed. The same had been rejected on 5.5.210 though in the supplementary deed Mrs. Shruti Bhagat, Mrs. Darshana Dhinghra and Mr. Sanjay Bhagat were added as new trustees. The Trust was having FDR of Rs. 2,18,30,042/- and had huge bank balance and thus it was clear that main motive of the Trust was to earn interest income. Reliance was also placed upon the judgment of Kerala High Court in Self Employers Service Society v. CIT [2001] 247 ITR 18. It was accordingly held that no activity had been carried out in relation to the aims and objects of the Trust during the financial year 2008-09. The terms and conditions enshrined in the Trust deed whereby the trustees had the power to convert the Trust property, acquire immovable property, sell, charge, rent out or otherwise alienate the assets including immovable property for personal/non-charitable purposes. The trustees had autocratic and discretionary powers to remove without any notice/reason a trustee except founder trustees and there was a provision for subsidised low rate of interest and the Trust had not disclosed regarding initial investment in the Trust by the trustees.

4. Feeling aggrieved, the respondent-Trust preferred an appeal before the Tribunal which vide impugned order dated 10.6.2011 allowed the appeal of the respondent-Trust and set aside the order of the CIT, Rohtak after taking into consideration the provisions of Section 12AA of the Act and the objects of the Trust. The Tribunal noticed that the properties were in the name of the Trust and not in the name of the trustees by referring to the conveyance deeds. It was noticed that the power of the Board of the trustees to remove the trustees except the founder trustees was also such, if the work of any trustee was not satisfactory or against public policy and interest of the Trust. The Tribunal held that the power to convert the Trust property was to be gone into at the time of assessment and was general power for facilitating the proper functioning of the Trust. The evidence regarding the identity and capacity of the trustees to make initial investment was also noticed and documents were referred to namely APB 148 to 153 which were copies of PAN cards of the trustees and also ABP 130 to 147 which were the confirmations of the investment made. The judgment of Self Employers Service Society’s case (supra) was distinguished on the ground that, in that case the society was set up only for the purpose of generating income for its members. The judgment in DIT v. Garden City Educational Trust [2011] 330 ITR 480was referred to in support.

5. Counsel for the revenue has contended that the Trust had not carried out charitable activities and, therefore, it was not entitled for the benefit of registration.

6. A perusal of the facts depicts that the Trust was created on 23.6.2010 and application under Section 12A(1) (aa) of the Act was moved on 19.7.2010 and the same was rejected on 26.11.2010. This Court in CIT v. Surya Educational & Charitable Trust [2011] 203 Taxman 53 has held that the application for registration is required to be made within one year of the creation of the Trust and there is no requirement that the Trust or the institution should have started all its envisaged activities in the first year itself. Under Section 12AA of the Act satisfaction regarding the genuineness of the activities of the Trust is to be seen and the stage for application of income is yet to arrive i.e. when such Trust or Institution files its return. Relevant portion of the judgment reads as under:-

“We have heard learned counsel for the appellant, but find no merit in the present appeals. As per Section 12AA of the Act, an application for registration of the Trust and Institution is required to be made within one year from the date of creation of the Trust or the Establishment of such Institution. The procedure for registration of the Trust or Institution is prescribed under Section 12AA of the Act. In terms of Clause (a) of Section 12AA of the Act, the Commissioner is to satisfy himself about the genuineness of the activities of the Trust on such inquiries as he may deem necessary. Sub-section (1A) and (2) of Section 12AA of the Act, are procedural in nature, whereas Sub-section (3) of Section 12AA of the Act, empowers the Commissioner to cancel the registration of the Trust or Institution, if he is satisfied that the activities of such Trust or Institution are not genuine or are not carried out in accordance with the objects of the Trust or Institution.

Section 11 of the Act contemplates that the income as specified therein shall not be included in the total income of the previous year of the person in receipt of the income derived from the property held under the Trust wholly for charitable or religious purposes, whereas Section 12 of the Act, deals with the contributions received by the Trust or an Institution, established for charitable and religious purposes, receiving contribution, shall not be an income in terms of Section 11 of the Act. The benefit of Sections 11 and 12 of the Act, are available only if such Trust or Institution is registered under Section 12AA of the Act.

On the other hand, Section 10(23C) of the Act are the provisions of the Act in substitution of the earlier provisions of Section 10(22) of the Act as to which income shall not be included in computing the total income of any person. Therefore, the provisions of Sections 11, 12 or Section 10(23C) of the Act, deal with the income of a Trust or of the Institution and the circumstances as to when such income is to be excluded for computing the total income, but the basis of such benefit is the registration under Section 12AA of the Act. Unless a Trust or Institution is registered under Section 12AA of the Act, such Trust or Institution shall not be entitled to exclude from its total income, deductions or contributions or from other sources. Therefore, the principles laid down for excluding the income from consideration under Section 10(22) now 10(23)(C) or Sections 11 and 12 are not applicable while considering the application for registration under Section 12AA of the Act. The application for registration is required to be made within one year of the creation of the Trust. Section 12AA of the Act, requires satisfaction in respect of the genuineness of the activities of the Trust, which includes the activities which the Trust is undertaking at present and also which it may contemplate to undertake. The insertion of sub-section (3) to Section 12AA of the Act, clarifies the said fact, when it empowers the Commissioner to cancel the registration if the activities of the Trust are not carried out in accordance with such objects.

Therefore, the object of Section 12AA of the Act, is to examine the genuineness of the objects of the Trust, but not the income of the Trust for charitable or religious purposes. The stage for application of income is yet to arrive i.e. when such Trust or Institution files its return. Therefore, we find that the judgments referred to by the learned counsel for the appellant are not applicable to the facts of the present case arising out of the question of registration of the Trust and not of assessment.

In view of the above, we do not find that any substantial question of law arises for consideration in the present appeals. Hence, the same are dismissed.”

7. The said view has been followed by this Court in CIT v. Baba Deep Singh Educational Society [2012] 206 Taxman 131 (Mag.) decided on 13.10.2011 wherein it was held as under:-

“In view of above facts and circumstances, it would be clear that respondent-society which was admittedly running a Polytechnic College and the activities were interwoven for furthering the projects and activities pertaining to education, the Tribunal rightly directed that registration should be granted to the respondent-society with the rider that the same could always be cancelled if it came to the notice of the CIT that the society was not carrying on the activities as per its objects. The Commissioner while processing the application under Section 12AA of the Act was not to act as an Assessing Authority and thus, the Tribunal has rightly allowed the appeal filed by the society in the facts and circumstances of the present case.”

8. Accordingly, in view of the aforesaid pronouncements of this Court which are fully applicable in the present case, the submission of the counsel for the revenue that the Trust was not set up for charitable purposes and it was utilizing its income not for the said purpose cannot be examined at this stage as only objects of the Trust had to be considered by the Commissioner. The Trust was in nascent stage and was yet to work towards its objects. No error could be pointed out in the order of the Tribunal warranting interference by this Court. Accordingly, no substantial question of law arises for determination by this Court and consequently, the appeal is dismissed.