The sub-contract of the assessee cannot be considered to be a charitable activity, especially since the supply of food is with the funds of the State Government, received by the assessee as contract amounts. The activity of the assessee confined to such sub-contracts cannot be deemed to be a charitable activity and hence the Trust is not entitled to registration under Section 12AA. The Commissioner looked at the activities of the assessee and cancelled the registration for reason of the assessee being unable to substantiate the contention of charity in the two assessment years. The assessee, as rightly found, is engaged in a business and there can be no registration as a charitable institution.
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
The Revenue is before this Court challenging the order of the Income Tax Appellate Tribunal raising the following questions of law :-
“(1) Whether, on the facts and in the circumstances of the case, the preparation of food and making available the same by the assesee sub contractor to the contractor is a charitable activity entitling registration under section 12AA of the Income Tax Act?
(1) Whether, on the facts and in the circumstances of the case where the assessee trust obtained a contract for supply of mid-day meals from another trust, the assessee is entitled to registration under Sec.12AA of the Income Tax Act and is not the cancellation of registration under 12AA (3) in accordance with law?
(2) Whether, on the facts and in the circumstances of the case where the assessee trust obtained a contract for supply of midday meals from another trust, the assessee is entitled to registration under Sec. 12AA of the Income Tax Act and is not the cancellation of registration under Sec.12AA (3) in accordance with law?
(3) Whether on the facts and in the circumstances of the case, is not the Commissioner of Income Tax right in law in cancelling registration under Section 12AA (3) of the Income Tax Act?”
2. The straight facts are that the respondent- assessee is a Trust registered on 4.1.2003, which deed of registration is produced as Annexure-D. The object of the Trust was to establish a fund for carrying out public charity and to that end, accept contributions, donations and endowments from time to time made by the Public, Government Bodies, Institutions at both National and International level. The funds were also to be used for implementation of the objects and the purposes of the Trust. The assessee on the basis of the deed registered on 4.1.2003, applied for registration under Section 12AA of the Income Tax Act, 1961 (‘Act’ for short) on 15.10.2004 by way of an application. The same was allowed by the Commissioner on 11.3.2005 as per Annexure-A. Annexure-A specifically provided that the question of eligibility for exemption under Section 11 will be decided by the Assessing Officer at the time of assessment. The rider was insofar as any business income generated by the assessee other than from donations, contributions and endowments. By Annexure-B, the Commissioner cancelled the registration, looking at the transactions of the assessee for the years 2008-09 and 2009-10.
3. The assessee challenged the same before the Income Tax Appellate Tribunal. Even before the Tribunal, the assessee had contended that the assessee participates in Social Welfare Schemes of various State Governments and thus carries on work of distribution of food in various Schools. The assessee’s work is also involved in other States and not in the State of Kerala. The assessee contended that such State Governments identify charitable institutions for the purpose of implementing Welfare Schemes. Admittedly, the State Government spends the money for the Scheme of distribution of food to various schools. The assessee is said to have carried out the work on such entrustment made by another charitable institution, one M/s. Naandi Foundation. The amounts paid by M/s. Naandi Foundation to the assessee were also subjected to tax deduction at source. The assessee also submitted before the Tribunal that in certain projects, there would be surplus which would be set off against the deficit in other projects. The assessee does not carry on implementation of such projects with a profit motive. In such circumstances, there cannot be a cancellation. The entire facts and circumstances were considered by the Commissioner at the time when the registration was granted. The Commissioner had also provided a rider insofar as any business income generated from the activities of the assessee being eligible for exemption only on the assessing officer finding it so eligible. That would suffice insofar as taxing any surplus, if at all, and there could be no cancellation of registration, is the submission of the learned counsel for the assessee.
4. The Tribunal extracted clause 3(i) of the object clause in which there was a specific object insofar as aiding and supporting distribution of food to students or poor people or the down trodden. There was no requirement that the assessee itself should prepare and supply food out of its own resources. Participation of the assessee-Trust in the Social Welfare Schemes of the State Government would also fall under the category of charitable activities; so long as the profit motive is absent, was the finding of the Tribunal. The Tribunal, hence, set aside the cancellation as effected by the Commissioner.
5. We are unable to agree with the order of the Tribunal and the findings rendered therein. The specific object as we noticed is for carrying on charitable activities for which the assessee intended establishment of a fund for public charitable objects. There is no such fund established nor is there a claim of contributions, donations and endowments having been received from the Public, Government Bodies or Institutions. The specific case of the assessee is that it implements welfare schemes of other State Governments, with the funds supplied by the State Governments through another Trust, as per a contract awarded for the implementation.
6. Definitely, there cannot be any requirement that charitable activities should be from self generated funds because charitable institutions relies on donations, endowments and other contributions from philanthropic people and institutions to carry out such work. However, when a particular institution, as in the above case, is involved in implementation of welfare schemes of the Government, we cannot find any charity in that. The mere assertion that there is no profit motive will not suffice especially when for implementing the schemes the assessee takes money from the State Government or the intermediary. The further contention that surplus is applied in the deficit of other program is a perfect ground for claiming business expenditure, but not to get a registration as a charitable institution.
7. In deciding the issue, it is very pertinent that the intermediary institution, has paid money for the implementation of the Schemes. The implementation of such Schemes would not lead to any charitable activity by the respondent-assessee entitling registration under Section 12AA. The transaction as admitted by the assessee is not one which would enable registration under Section 12AA. The proceedings were initiated for cancellation, on the report of the AO that the objectives of the Trust has been departed from and the assessee is carrying on business as sub- contractor, implementing the welfare schemes of various State Governments, supplying food to the poor school children. It was also reported that there was net profit earned from the sub-contract; which funds were accumulated to the Trust fund, without any charitable activity being carried on. The assessee also did not proffer any evidence as to a charitable activity carried on other than asserting that from its inception the activity of the assessee was of feeding the poor. However this activity was, as an implementing agency of the State Governments, on funds earmarked and disbursed by the State Government. There is no charity in implementation of welfare schemes of the Government, with the funds of the State. Charity of the right hand, it is said, shall not be disclosed to the left hand. Here, the welfare measure of the State implemented with State funds is claimed as charity by the implementing agency, who receives consideration for such implementation.
8. The Commissioner, initially, had granted registration clearly specifying the exemption to be available only on the satisfaction of the AO. The instant proceedings were on the report of the AO that the objects of the Trust are deviated from. We do not find a mere change of opinion, and the Commissioner has dealt with the transactions of the assessee and also examined the accounts for the two years, which squarely fall under the exercise as provided for under sub- Section (3) of Section 12AA. The Commissioner was satisfied that the activities of the Trust are not being carried out in accordance with the objects of the Trust.
The sub-contract of the assessee cannot be considered to be a charitable activity, especially since the supply of food is with the funds of the State Government, received by the assessee as contract amounts. The activity of the assessee confined to such sub-contracts cannot be deemed to be a charitable activity and hence the Trust is not entitled to registration under Section 12AA. The Commissioner looked at the activities of the assessee and cancelled the registration for reason of the assessee being unable to substantiate the contention of charity in the two assessment years. The assessee, as rightly found, is engaged in a business and there can be no registration as a charitable institution. We, hence, answer the questions of law framed, against the assessee and in favour of the Revenue. We set aside the order of the Tribunal. No order as to costs.