Case Law Details

Case Name : Krupanidhi Educational Trust Vs Director of Income-tax, (Exmp.), Circle-1(1), Bangalore (ITAT Bangalore)
Appeal Number : IT Appeal No. 86 (Bang.) of 2012
Date of Judgement/Order : 14/09/2012
Related Assessment Year :
Courts : All ITAT (5189) ITAT Bangalore (251)

IN THE ITAT BANGALORE BENCH ‘B’

Krupanidhi Educational Trust

versus

Director of Income-tax, (Exmp.), Circle-1(1), Bangalore

IT Appeal No. 86 (Bang.) of 2012

SEPTEMBER 14, 2012

ORDER

N.V. Vasudevan, Judicial Member 

This is an appeal by the assessee against the order dated 23-11- 2011of DIT(E), Bangalore, passed u/s 12AA(3) of the IT Act, 1961, whereby the registration granted to the assessee u/s 12A of the Act was cancelled by the DIT(E), Bangalore, with effect from assessment year 2009-10.

2. The assessee is a charitable Trust. It was granted registration u/s 12A of the Act on 02-06-1986. There was a survey conducted in the premises of the assessee on 16-09-2011. According to the DIT(E) the survey revealed that the assessee was running the educational institution on commercial basis and also violated provisions of sec.13(1)(c) of the IT Act, 1961. Further, the DIT(E) noticed that the assessee had carried out amendment to the Trust Deed without prior approval of the department. For the above reasons, the DIT(E) wanted to cancel the registration already granted to the assessee u/s 12A of the Act. Accordingly, the DIT(E) issued a show cause notice.

3. One of the complaints in the show cause notice was that the Assessee was paying commission to persons who solicit students to join the Assessee’s institution for studies. In reply to the above allegation in the show cause notice, the assessee submitted that the assessee paid commission to several persons who brought students from across the country for studying in the assessee’s institution. The assessee submitted that the payment of such consideration will not in any way affect the charitable objective of education, which the assessee was pursuing. The assessee also pointed out that the payment in question which is being called commission was in fact reimbursement of expenses incurred by the recipient for traveling different part of the country and educate people the benefits of getting education from the assessee’s institution which has good infrastructure facilities.

4. Another complaint in the show cause notice was that the assessee was generating surplus funds. With those funds the assessee was purchasing properties to establish international school. The assessee had also purchased a BMW Car. The assessee submitted that the above activities reinforce the fact that the assessee was pursuing education which was a charitable purpose. On the purchase of a BMW Car the assessee submitted that the Car was used by the trustees for receiving important dignitaries and was a necessary status symbol to convince parents, students of the abilities and achievements of the assessee.

5. Another allegation in the show cause notice was that the assessee was availing loans in cash (from Sindhi Financers) and was repaying loans in cash. The assessee submitted that it did not avail any loan from Sindhi Financiers and that whatever were the borrowings by the Assessee, were made by persons duly authorized by the trust deed and after proper documentation. The assessee explained to the DIT(E.) that cancelled cheques that were found during the course of survey cannot be a basis to take any adverse conclusion against the assessee. The assessee also gave details of the cancelled cheques and the reasons for the cancellation.

6. One of the complaints in the show cause notice was that the accounts of the assessee were not maintained on a regular basis. On this allegation, the assessee submitted that the assessee was migrating from a particular software to another software namely tally accounting and because of this migration the accounts were not up to date. The assessee submitted that after migration the accounts were being maintained regularly.

7. Another complaint in the show cause notice was that there was violation of sec. 13(1)(c) of the IT Act. On such allegation, the assessee submitted that the trustees were properly remunerated for the services rendered and there was no violation of provisions of sec. 13(1)(c) of the IT Act.

8. Yet another complaint in the show cause notice was that the original trust deed dated 10-01-1985 was amended by a deed dated 07-03-2005. The assessee submitted that the said amendment does not in any way dilute the charitable nature of the assessee. The Assessee pointed out that certain objects which were not secular in character in the original trust deed were deleted. The assessee thus, submitted that this aspect will have no impact whatsoever on the charitable nature of the assessee.

9. The assessee further submitted that it was originally granted registration after due satisfaction that the assessee trust was established for charitable purpose and that there was no change whatsoever. The assesseee also pointed out u/s 12AA(3) of the Act, 1961, registration already granted can be cancelled only if activities of the assessee are shown to be not genuine or are not being carried out in accordance with the objects of the trust. The assessee pointed out that neither of the above conditions existed in the case of the assessee warranting invocation of provisions of sec.12AA(3) of the IT Act. The assessee submitted that generating surplus does not in any way make the assessee non-charitable. The assessee also pointed out that the eleemosynary element is not essential element of charity. It was submitted that it is not a necessary element in a charitable purpose that it should provide something for nothing or for less than it costs or for less than the ordinary price. It was submitted that surplus generated, if it is held for charitable purpose and applied for charitable purpose of the assesse, and then the Assessee has to be considered as existing for a charitable purpose. The assessee also pointed out that it is not possible to review the charitable nature of a organization in a proceeding u/s 12AA(3) of the Act for cancellation of registration already granted. In this regard, the Assessee drew attention to the decisions of the Lucknow Bench of the Tribunal in the case of Bharat Jyoti v. CIT [2012] 23 taxmann.com 366 and Maulana Mohammad Ali Jauhar Trust v. CIT [2012] 23 taxmann.com 310 (Luck.). Further, reliance was also placed on the decision of the Hon’ble Madras High Court in the case of DIT (Exemptions) v. Vallal MD Seshadri Trust [2012] 206 Taxman 21, wherein it was held that the cancellation of registration u/s 12AA(3) can be done only after a finding that the trust was not genuine.

10. The DIT(E) however, did not agree with the submissions made on behalf of the assessee. He referred to the decision of the ITAT Chennai Bench in the case of Rajah Sir Annamalai Chettiar Foundation v. DIT (Exemptions) [2011] 48 SOT 502 wherein the Chennai Bench of the Tribunal upheld the order of DIT(E) rejecting an application for registration u/s 12AA of the IT Act, 1961 on the ground that the educational institution did not give free, concession education to the downtrodden of the society or any other deserving sections of the society. The Tribunal held that running of educational institution by itself is not a charitable purpose. Relying on the aforesaid decision, the DIT(E) held that the assessee did not exists for a charitable purpose.

11. The DIT(E) thereafter held that the assessee was paying commission for developing the brand name of the assessee and for bringing students to study in the assessee’s institution. The DIT(E) therefore, concluded that the assessee was commercially exploiting education. The DIT(E) thereafter, referred to the decision of the Uttarakhand High Court in the case of CIT v. National Institute of Aeronautical Engg. Educational Society [2009] 315 ITR 428 wherein it was held that any trade or commerce in the name of education cannot be said to be for charitable purpose. It may be mentioned that the aforesaid decision is again is in the context of grant of registration u/s 12A of the IT Act. The DIT(E) was of the view that the fact that the surplus used for establishing educational institution will not be sufficient to hold that the assessee was engaged in the charitable activities, because the assessee was running the educational institution on commercial basis. The DIT(E) also expressed his opinion that the purchase of BMW Car was not warranted and that every paise collected should be of best use and not for individual comforts. The DIT(E) also gave findings with regard to violation of sec.13(1) (c ) of the Act, because the salary paid to Smt.Geetha Nagpal and Shri Suresh Nagpal of the trust were excessive and unreasonable.

12. With regard to the amendment of trust deed, the DIT(E) was of the view that the assessee ought to have informed the department and ought to have got their permission, before carrying out amendment to the trust deed. In this regard, the learned DIT(E) referred o the decision of the Hon’ble Allahabad High Court in the case of Allahabad Agricultural Institute v. Union of India [2007] 163 Taxman 67 wherein it was held where the objectives of the trust on the basis of which the registration was originally granted or acted after such grant of registration whereby the very nature of institution changes its character, the revocation of registration granted by invoking sec. 12AA(3) of the Act was valid. Following the aforesaid decision, the DIT(E) was of the view that the assessee had altered its objectives without intimation to the department and even on this ground the registration was liable to be cancelled. For all the above reasons, the DIT(E) cancelled the registration already granted to the assessee. Aggrieved by the order of the DIT(E), the assessee has preferred the present appeal before the Tribunal.

13. We have heard the rival submissions. The learned counsel for the assessee reiterated the stand of the assessee as reflected in the submissions made before the DIT(E). The learned DR reiterated the stand of the revenue as reflected in the order of the DIT(E).

14. We have considered the rival submissions. The power to cancel registration already granted u/s.12AA of the Act is contained in Sec. 12AA(3) of the Act and it reads as follows:

“(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.”

15. A perusal of the above provisions shows that the power to cancel registration already granted can be done in two situations;

(a)  satisfaction of the Commissioner that the activities of the trust or institution are not genuine

(b)  satisfaction of the Commissioner that the activities of the trust or institution are not being carried out in accordance with the objects of the trust or institution.

16. In the impugned order there is no finding on the satisfaction of any of the above two conditions. The objects of the appellant are charitable and on this aspect there is no dispute or doubt. There is no finding that the objects of the trust after the amendment of the trust deed are not charitable. We have perused the amendment to the trust deed and are of the view that the charitable nature of the trust remains intact. A mere finding that the objects of the appellant have been altered without the consent of the department would not be sufficient to exercise the power u/s. 12AA(3) of the Act without giving a finding that the appellant’s objects are no longer charitable. On this score the impugned order is liable to set aside.

17. Apart from the above, we also agree with the submission on behalf of the Appellant that the objects of the appellant even after the amendment of the trust deed continue to be charitable. The amendment is a mere power conferred on the Trust or other institution. It has to be shown on facts that any amendment to the objects clause has resulted in the trust or institution becoming non charitable in character. There is no such finding in the impugned order and even on this ground the impugned order is liable to be set aside. The decision of the Hon’ble Allahabad High Court in our view is not applicable to the facts of the present case. As rightly contended on behalf of the Appellant in that case there was a drastic change of objects. The Hon’ble High Court has specifically noted the failure of the assessee in that case to show that the altered objects and the original objects were the same and that they were charitable. The ratio laid down in the said case has to be read in the context of the above facts of the said case. In the case of the Appellant the objects continue to be the same even after amendment of the trust deed and therefore the very foundation on which the registration was granted to the appellant is not removed.

18. We are also of the view that none of the reasons given by the DIT(E) in the order u/s 12AA(3) can be the basis to cancel the registration already granted to the assessee. In this regard, we are of the view that the assessee was already granted registration u/s 12A of the Act, 1961. It only goes to show that the revenue was satisfied that the objects of the assessee trust were charitable. The question is whether the amendment of the trust deed in any way makes the assessee non-charitable. We have perused the deed of amendment of the trust dated 07-03-2005. The amendment talks about substitution of sub-clause-a of clause-3 of original deed. The substituted clause refers to imparting education including technical and medical among the masses in all the fields, subjects, culture and literature, irrespective of religion, caste or creed. Similarly, sub-clause-d, of Clause-3 was substituted whereby scholarship to the poor and needy and meritorious students have to be awarded. Similarly, sub-clause (e) of clause-3 of original deed was amended to make the benefits of the trust open to all caste, creed and religion. We fail to see how the above amendment will make the assessee not existing for the purpose of education or not existing for charitable purposes. As already mentioned in the decision of the Hon’ble Allahabad High Court in the case of in the case of Allahabad Agricultural Institute Vs Union of India, 163 Taxman 67(Alhd.) supra there was a total change of the objectives of the charitable institutions, it was in those circumstances, that the Hon’ble Allahabad High Court held that it was not in a position to interfere in exercise of discretionary jurisdiction under article 226 of the Constitution of India for quashing the order u/s 12AA(3) of the IT Act, 1961. In the present case, as we have already observed that there was no wholesome change in the objective of the assessee. We are also of the view that the decision of the Chennai Bench of the Tribunal and the Hon’ble Uttarakhand High Court are the cases where the challenge was to refusal to grant registration u/s 12A of the Act. In the present case, as we have already seen, the revenue was fully satisfied with the objects of the assessee was charitable and registration u/s 12A of the Act was already granted. In proceedings u/s 12AA(3) it was not open to the revenue to review its earlier registration granted u/s 12A of the Act. We are also of the view that the complaint with regard to violation of sec. 13(1)(c) of the Act are not relevant for the purpose of the proceedings u/s 12AA(3) of the Act and as rightly submitted by the learned counsel for the Assessee before us, it was open to the AO to examine any such violation in the assessment proceedings for the relevant assessment year of the assessee.

19. We are also of the view that the other reasons given by the DIT(E) in the order u/s 12AA(3) of the Act, do not make out any case, which can show the activities of the assessee are not genuine or that the activities of the assessee are not being carried out in accordance with the objects of the trust or institution. The fact that the Assessee was paying commission to persons who solicit students for studying in the Assessee’s institution cannot lead to the conclusion that the Assessee is not imparting education. Similarly purchase of a BMW car, borrowing of loans from Sindhi Financiers, non maintenance of regular books of accounts, violations of provisions of Sec.13(1)( c) of the Act in as much as the trustees were paid enormous salary are all by way of passing reference having no relevance to whether or not the Assessee was pursuing education as its main object. There are no facts brought out in the impugned order regarding the genuineness of the activities of the trust or as to whether the object of education was not pursued by the Assessee as its main and predominant activity. In fact, the order of the DIT(E) does not anywhere show that the assessee is not imparting education. The complaint of the revenue seems to be that education is being imparted but on commercial lines. The definition of Charitable Purpose is given in Sec.2(15) of the Act. The same refers to “relief to poor, medical relief, education and the advancement of any other object of general public utility”. The proviso to Sec.2(15) of the Act introduced by the Finance Act, 2008 w.e.f. 1.4.2008 regarding excluding organizations where there is profit motive from the definition of charitable purpose applies only to the category of trusts which has as its object, the object of “advancement of any other object of general public utility”. It does not apply to the other categories of charitable purpose viz., “relief to poor, education and medical relief”. As rightly pointed out by the learned counsel for the assessee, eleemosynary element is not essential element of charity. It is also not a necessary element in a charitable purpose that it should provide something for nothing or for less than it costs or for less than the ordinary price. The surplus generated, if it is held for charitable purpose and applied for charitable purpose of the assesse, and then the Assessee has to be considered as existing for a charitable purpose. There are enough safeguards provided in Sec.12 and 13 of the Act to ensure that personal benefits of the persons in control of the trusts are not treated as having applied for charitable purpose and for being brought to tax like provisions of Sec.13(1)(c) of the Act which restricts unreasonable and excessive payments to certain category of persons connected with a trust or other institution. In such circumstances, we are of the view, that the order u/s 12AA(3) of the Act, cannot be sustained.

20. For the reasons given above, we quash the impugned order u/s 12AA(3) of the Act and allow the appeal.

21. In the result, the appeal of the assessee is allowed.

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0 responses to “Trust Registration can’t be cancelled for amendments in trust deed, if its objects remain charitable”

  1. r.balakrishnan says:

    object clause change in a trust -ways and means

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