HIGH COURT OF ALLAHABAD
Hardayal Charitable & Educational Trust
Commissioner of Income Tax-II, Agra
SUNIL AMBWANI AND Bharat Bhushan, JJ.
IT Appeal No. 107 of 2012
Date of Pronouncement- 15.03.2013
1. We have heard Shri Rahul Agarwal for the appellant. Shri Govind Krishna appears for the Commissioner, Income Tax.
2. The appeal was admitted on 11.12.2012 on the following substantial questions of law.:-
“(a) Whether it is essential for a trust to commence charitable/educational activity before it can be considered eligible for registration under Section 12 AA of the Income Tax Act and the order of the Tribunal below is legally sustainable?
(b) Whether the findings of the Tribunal that the appellant had failed to provide any explanation regarding the use of logo of a family concern in its prospectus and rebut the finding of the Commissioner of Income Tax-II, Agra is perverse and liable to be set aside?
(c) Whether in any view of the matter, the order of the Tribunal below is legally not justifiable and the application for registration under Section 12 AA and for approval under Section 80 G move by the appellant deserves to be allowed?”
3. Briefly stated the facts giving rise to this appeal are that Hardayal Charitable & Educational Trust, 318, Shambhu Nagar, Shikohabad, was established by a Trust deed executed on 17.11.2008. It was registered with Sub-Registrar, Shikohabad on 26.11.2008. The objects of the trust include establishment and maintenance of the schools, colleges and institutions for imparting education in different fields/ subjects with the object of helping the poor and destitute. The trust deed also provides for medical benefits to the poor, needy and the aged.
4. The Trust applied for grant of registration under Section 12AA of the Income Tax Act, 1961 (in short the Act) along with application for registration on Form No.10A and for grant of approval under Section 80G (5) (iv) in Form No.10G, with certified copy of the Trust deed. The Commissioner of Income Tax-II, Agra directed the trust to furnish certain information, which was provided by the trustees with its letter dated 1.8.2011. The trustees disclosed the donations received as trust fund/ corpus fund from Shri Hardayal Singh Education Samiti, 318A, Shambhu Nagar, Shikohabad, and Chaudhary Hardayal Singh Shiksha Samiti, 318, Sambhu Nagar, Shikohabad, with the information that both the societies are filing regular income tax returns. The balance sheets of both the donor societies were enclosed. The counsel appearing for the Trust, also disclosed that its first Chairman Shri Praveendra Kumar, Secretary Shri Sachin Yadav and the Treasurer Shri Amol Yadav are regularly assessed to income tax enclosing the copy of income tax acknowledgments and it further stated in para 6 as follows:-
“6. That the objects of the trust are described in Sub Clause (a) to (k) of clause 5 of the Trust Deed. In furtherance of the educational objects, the applicant has started ‘Hardayal Technical Campus’ an engineering college at Farah, Distt. Mathura. The construction of university campus is towards completion and admission for various educational courses are in progress. Copy of the prospectus issued by the university is filed. The advertisement appearing in July 2011 issue of Out Look magazine is also enclosed.”
5. The Trust received a letter dated 1.8.2011 from the Income Tax Officer (Tech), for Commissioner, Income Tax-II, Agra requiring it to produce books of accounts for the F.Y.2010-11 and for the period from April 11 to July 11, copy of the sale deed in respect of purchase of land, the construction account in respect of the building and extent of construction done, details of advertisement-publication of brochure including prospectus, the rate at which prospectus is sold and the PAN of Choudhry Hardayal Singh Shiksha Samiti. The entire information was provided by the trust by the Chairman of the trust by its letter dated 16.8.2011.
6. By an order dated 17/23.8.2011, the Commissioner of Income Tax-II, Agra after providing an opportunity of hearing to the Trust, refused to grant registration under Section 12AA of the Act and the approval under Section 80G on the grounds that the trust is in the process of construction of colleges for medical, engineering and management studies. A lot of money has been spent on advertisement of the institution, out of which Rs.1,58,82,526/- has been spent only during the period 1.4.2011 to 2.8.2011. The Trust has published a very high quality prospectus of college. One full page of the prospectus is devoted to the Industry of the group in the name of Hardayal Milk Product (P) Ltd., complete with logo of the milk product company, which shows that the Trust intends to promote the business of its family concern and that the commercial motive is in no way subservient to, charity as the object of the Trust.
7. The Commissioner of Income Tax-II, Agra further recorded in her order that she is not satisfied that the objects of the Trust are charitable in nature and that since Trust deed is not registered as reported by JCIT on enquiry, the trust is not liable for approval under Section 80G also.
8. The Trust filed ITA No.443/444/Agra/2011, which was heard on 2.3.2012 and dismissed on 7th March, 2012. The Tribunal discussed the provisions of Section 12AA of the Act and judgment of Kerala High Court in the case of Self-Employers Service Society v. CIT  247 ITR 18; judgment of Delhi High Court in All India J.D. Educational Society v. DGIT (Exemptions)  338 ITR 218, judgment of Allahabad High Court in CIT v. Red Rose School  163 Taxman 19, the judgment of Karnataka high court in DIT v. Garden City Educational Trust  191 Taxman 238 (Kar.) and one other judgment of Karnataka High Court in DIT (Exemption) v. Meenakshi Amma Endowment Trust  50 DTR 243 and held that though apparently on consideration of the objects of the trust, the same is for educational or charitable in nature, but the findings of fact given by the learned Commissioner about the commercial activities of the group concern have not been refuted by the assessee by producing any material on record. The ITAT found that the assessee has spent considerable amount on advertisement of the institution, which has not started its activities as yet. The prospectus of the assessee Trust has devoted substantially on carrying out business activities of the group concern showing logo of milk product. The CIT thus rightly rejected both the applications of the assessee particularly, when no educational or charitable activities have been actually carried out and the assessee in initial stage, itself has tried to promote business of group concern. The Tribunal held:- “considering the totality of the facts and circumstances, we are of the view that the assessee failed to establish that it has carried out genuine activities towards the objects of the assessee trust. Whatever other activities were carried out were found for promoting commercial activities of the group concern. Therefore, the assessee has failed to satisfy the requirements u/s. 12AA of the Act and as such, the ld. Commissioner was justified in refusing to grant registration and approval under the above provisions of the IT Act. We are, therefore, of the view that there is no irregularity or illegality in the impugned order”.
9. The Tribunal, thereafter, observed that considering the facts of the case that the assessee Trust is still at the stage of raising construction for schools and colleges and yet to start educational and charitable activities, it is given an opportunity to file fresh application before the ld. Commissioner for grant of registration and approval, when it would actually start educational and charitable activities and in that event, the led. Commissioner shall consider fresh applications of the assessee in accordance with law.
10. It is admitted that in the subsequent assessment year the Commissioner of Income Tax-II by his order dated 24.9.2012 has granted registration to the appellant on its application dated 26.3.2012 under Section 12AA of the Act, as also approval under Section 80G of the Act, on 24.9.2012, with the conditions that the exemption certificate will be effective from assessment year 2012-13, the number and date of the order should be mentioned on each and every receipt issued to the donor and that the exemption under Section 11 (2) will be granted on merits after proper investigation. The conditions further provide that information on any change in the constitution of the trust / society should be intimated immediately to CIT-II and concerned Assessing Officer and that the income and expenditure accounts statement of the trust/ society should be furnished for each financial year regularly before the concerned Assessing Officer.
11. Shri Rahul Agrawal appearing for the appellant trust submits that there was no material with the Commissioner of Income Tax-II and the Income Tax Appellate Tribunal, Agra to record its conclusions against the Trust. The object of the trust is not to carry out commercial activity and promote the business of family concerned. As a new entity the appellant had to necessarily spend money on advertising and rely upon the established brand equity enjoyed by the other concern, to attract the students to its courses. The Commissioner never questioned the appellant on the lack of registration of the Trust deed. The Tribunal did not advert to the issue of registration and lack thereof. The trust deed was registered with the Sub-Registrar, Shikohabad on 26.11.2008. He further submits that the objects of the Trust are charitable in nature. There was no doubts expressed on the objects set out in the Trust deed. The genuineness of the activities of the Trust, in the year in question, when the construction of the college building was in progress, and the charitable activity had not yet commenced, was not required to be assessed until the commencement of the activity. He submits that the test of the genuineness of the activity of the Trust can be applied only after its activities actually commence. The use of the logo of one of the brand equities of the other concern, the heavy expenditure incurred on advertising and publishing the high quality prospectus, could not be a ground on which the registration could be denied.
12. Shri Rahul Agrawal relies on Meenakshi Amma Endowment Trust (supra), DIT v. Foundation of Ophthalmic & Optometry Research Education Centre  25 taxmann.com 376, and the opinion of the Punjab and Haryana High Court in Commissioner of Income-tax-II, Chandigarh v. Surya Educational & Charitable Trust decided on October 5th, 2011. In these judgments the High Court of Karnataka, Delhi and Punjab & Haryana have held that the object of Section 12AA of the Act is to examine the genuineness of the object of the Trust and not its activities, which may not have begun at the time, when the application is made for registration. At such stage, the Commissioner (Enquiries) should address his enquiries on the application of the income of the trust for charitable or religious purposes. The stage for allocation of income arrives, when the trust or the institution files its return.
13. Shri Govind Krishna on the other hand submits that the application for registration of the trust under Section 12AA should be moved within one year under Section 12A. The trust deed was executed on 7.11.2008 and the application for registration under Section 12AA was presented on 11.3.2011. The Trust has received heavy donations from the Societies of the same concern. A highly disproportionate amount of money was spent on advertisement of the institution to the extent of Rs.1,58,82,526 between 1.4.2011 to 2.8.2011. The construction of the college for medical, engineering and management studies was in progress. The Commissioner has not made any observations with regard to objects of the trust. He found that the prospectus was actually used for advertisement of the other industries of the group namely Hardayal Milk Product (Pvt.) Ltd. and carried the logo of the milk product company. The object was to promote the business of the family concern, and had commercial motive, which was subservient to the stated charitable motive. The Commissioner was not satisfied that the objects of the trust is charitable in nature and thus she refused to grant registration. Shri Govind Krishna has relied upon the same judgment, which have been cited by learned counsel appearing for the appellant and submits that so far as the substantial question of law no. (b) is concerned, the findings recorded by the Commissioner of Income Tax-II, Agra and the Tribunal are findings of fact, which cannot be treated as perverse. The appellant has not denied that while the construction of the college was in progress, a heavy amount was invested in publishing the prospectus, which carried one full page advertising the products of the group company and carried its logo. Shri Govind Krishna submits that the registration in the subsequent year cannot be a ground on which the orders passed by the Commissioner and Tribunal can be questioned. In the absence of registration for the year 2010-11, the donations made by the societies would not qualify for exemption.
14. We have considered the respective submission, perused the orders and the judgments of High Courts of Karnataka, Delhi and Punjab & Haryana. Section 11, 12A and 13 of the Act, fall in Chapter-III- on Incomes, which do not form part of total income. Section 12 (1) provides for exemption of voluntary contribution received by a Trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes not being contribution made with a specific direction that they shall form part of corpus of the trust or the institution. These contributions shall for the purposes of Section 11 be deemed to be income derived from property held under the Trust wholly for charitable or religious purposes and the provisions of that Section and Section 13 shall, apply to such income.
15. Section 11 (1) (a) exempts the income derived from property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in India, and where any such income is accumulated or set apart for application for such purposes to the extent to which the income was accumulated or set apart is not in excess of 15% of the income from such property, subject to condition and percentage of income set out in the Section.
16. Section 12A (1) provides that the provisions of Section 11 and Section 12 shall not apply in relation to the income of any trust or institution unless the conditions in Clause (a), (aa), (b) are satisfied. One of the condition is that the application is made before the expiry of the period of one year from the date of the creation of the trust or the establishment of the institution, whichever is later and such trust or institution is registered under Section 12AA provided where an application for registration of the trust or institution is made after the expiry of the period aforesaid the provisions of Section 11 and 12 shall apply in relation to the income of such trust or institution- (i) from the date of the creation of the post or the establishment of the institution. If the Commissioner is for the reasons to be recorded in writing satisfied that the person in respect of income was prevented from making the application before the expiry of the period for sufficient reasons, and (ii) from the first date of the financial year in which application is made, if the Commissioner is not so satisfied.
17. Section 12AA provides for procedure for registration and is quoted as below:-
“Section 12AA. Procedure for registration. – (1) The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) of section 12A, shall – (a) Call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such a inquiries as he may deem necessary in this behalf; and
(b) After satisfying himself about the objects of the trust or institution genuineness of its activities, he – (i) shall pass an order in writing registering the trust or institution;
(ii) Shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant :
Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.
(1A) All applications, pending before the Chief Commissioner on which no order has been passed under clause (b) of sub-section (1) before the 1st day of June, 1999, shall stand transferred on that day to the Commissioner and the Commissioner may proceed with such applications under that sub-section from the stage at which they were on that day.
(2) Every order granting or refusing registration under clause (b) of sub-section (1) shall be passed before the expiry of six months from the end of the month in which the application was received under clause (a) of section 12A.
(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution;
Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.”
18. In Red Rose School (supra) it was held that to ascertain the genuineness of the activities of the trust or the institution whose object do not run contrary to public policy and are infact related to charitable purpose, the CIT is empowered to make enquiries as he think fit. In case the activities are not genuine and they are not being carried out in accordance with object of the trust/society or the institution, registration can again be refused but on mere presumption and on surmise that the income is being misused or that there is some apprehension that same would not be used in the proper manner, and for the purposes relating to any charitable purposes, rejection is not justified. It was further held that the registration under Section 12AA does not necessarily entitle the assessee to get the income excluded from the income of the previous year for the purposes of determining the tax liability; it only entitles the assessee to claim such exemption, which otherwise can not be claimed in the absence of registration. The enquiry by CIT is restricted at the time of registration to the activities, which are genuine. Genuineness of the activities of the trust or the institution has to be seen keeping in mind the object thereof, which means the Commissioner shall satisfy himself to the fact that the activities are genuine and in consonance with the object of the trust or the institution. In other words it was held that after establishing and running a school set out as object of the society, given in the bylaws, he has to be satisfied that the Society has established the school, where education is being imparted as per rules and the factum of establishment and running school is genuine activity. The enquiry regarding genuineness of the activity cannot be stretched beyond this.
19. In Meenakshi Amma Endowment Trust (supra), the Karnataka High Court held that where a trust is formed and within a week registration under Section 12A is sought, there is no prohibition under the Act seeking such registration. The activities of the trust have to be considered, after the formation of trust or after expiry of the period of registration granted in favor of the Trust. In a case where the Trust has approached the authority for registration, under Section 12A, within a few months of its formation (in that case it was eight months) the criteria namely the object of trust will have to be examined to record satisfaction to its genuineness. The activities of the trust cannot be the criteria at that stage since it is yet to commence its activities. In Foundation of Ophthalmic & Optometry Research Education Center (supra) the Delhi High Court similarly ruled that the statute does not prohibit or enjoin the Commissioner from registering a trust solely on its objects, without any activity, in the case of a newly registered trust, the statute does not prohibit a waiting period, to qualify for registration.
20. The Punjab and Haryana High Court in CIT v. Surya Educational & Charitable Trust  203 Taxman 53 also held that the object of Section12AA of the Act to examine the genuineness of the objects of the trust and not the income of the trust for charitable or religious purposes. The stage for allocation of income will arrive, when the trust or institution files its return.
21. The preponderance of the judicial opinion of all the High Court including this Court is that at the time of registration under Section 12AA of the Income Tax Act, which is necessary for claiming exemption under Section 11 and 12 of the Act, the Commissioner of Income Tax is not required to look into the activities, where such activities have not or are in the process of its initiation. Where a trust, set up to achieve its objects of establishing educational institution, is in the process of establishing such institutions, and receives donations, the registration under Section 12AA cannot be refused, on the ground that the Trust has not yet commenced the charitable or religious activity. Any enquiry of the nature would amount to putting the cart before the horse. At this stage only the genuineness of the objects has to be tasted and not the activities, which have not commenced. The inquiry of the Commissioner of Income Tax at such preliminary stage should be restricted to genuineness of the objects and not the activities unless such activities have commenced. The Trust or society cannot claim exemption, unless it is registered under Section 12AA of the Act and thus at that such initial stage the test of the genuineness of the activity cannot be a ground on which the registration may be refused.
22. It is not denied that for subsequent year the appellant has been granted exemption under Section 12AA and has also been approved under Section 80G of the Act, subject to certain conditions. If the Commissioner of Income Tax was satisfied with the genuineness of the objects of the trust for the subsequent assessment year, the refusal of the registration for the previous assessment year 2011-12 was not justified.
23. The question of the exemption of the application of income received by way of donation, is a separate issue and which may be required to be considered, when the return is filed by the Trust and is examined by the Income Tax Officer. The question as to whether the donations by the societies was the expenditure of the Trust for charitable and religious purposes will be examined at the time of examining the return.
24. In the result the income tax appeal is allowed. All the three substantial questions of law formulated as above are decided in favor of the assessee, and against the revenue with a clarification that the registration under Section 12AA and approval under Section 80G would not by itself entitle the Trust for exemption of the income of its donors or of the Trust for the assessment year 2011-12. For claiming such exemption the returns of the donor and the Trust will be examined, for orders to be made in accordance with law.