2025 (7) TMI 435 - AT - Income Tax

Rejection of application for registration u/s 12AA and approval u/s 80G - CIT(E) has denied grant of registration stating that the rental activity of the assessee shows that it is commercial in nature and the assessee is engaged in commercial activities - Assessee argued is a public charitable trust duly registered under the Indian Trusts Act 1882 and object of the trust was to promote environmental sustainability by encouraging the use of electric vehicles reducing carbon emissions and supporting scalable and climate resilient transportation solutions as part of the CSR vision - HELD THAT - The scope of MOU includes provision for providing access to 2 wheelers to empower youths to engage in income generating activities enhancing their financial independence and promoting economic resilience in the targeted community. MoU assigns the role to the assessee to identify the EV provider for the project and design the pay-per-use. On the basis of these MOU the assessee identified various beneficiaries and entered into an agreement with them to lease the electric vehicle to the assignees for a period of 3 years for the purpose of transportation of goods/people at a monthly fees of Rs 5000/-. We find that post the 3-year term ownership of vehicles is transferred to beneficiaries. Considering the MoU and agreements with assignees we are of the considered view that the projects undertaken by the assessee is of charitable nature and aligns with CSR objectives under Companies Act 2013. We find that there are no profit motive involved in the projects undertaken by the assessee and activity undertaken by the assessee aligns with the object of the Trust at No. 17 of the Trust Deed which is to ensure empowerment of marginalised sections of society as woman over tribal schedule caste persons etc. We are not inclined to accept the Revenue contention that the assessee s activities are commercial in nature. Activities of the assessee trust is charitable in nature and has been undertaken in a professional manner where each activity is governed by agreements entered into with various parties including the beneficiaries to ensure that the desired activities is performed and accomplished right from raising funds to deployment of funds. Furthermore at this juncture of grant of registration the Revenue is only required to examine the genuineness of activities of the Trust and its compliance of any other law. We find that in the case of Surat Art Silk Cloth Manufacturers Association Surat 1979 (11) TMI 1 - SUPREME COURT has held that dominant object of the Trust is charitable and mere existence of profit cannot negate charitable status as long as the profits are applied solely for the purpose of the charitable object and not distributed among members. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the assessee trust's activities qualify as charitable under the Income Tax Act, 1961, thereby entitling it to registration under Section 12AA.

- Whether the assessee is eligible for approval under Section 80G of the Income Tax Act, 1961, given the nature of its activities and incidental income.

- Whether the rental activity involving electric vehicles constitutes a commercial activity that disqualifies the trust from charitable status.

- Whether incidental income generated from user fees amounts to business income or vitiates the charitable nature of the trust's activities.

- Whether the dominant intent of the trust is charitable despite any incidental surplus or profit generated from its activities.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Charitable Nature of the Trust's Activities and Eligibility for Registration under Section 12AA

Relevant Legal Framework and Precedents: Section 12AA of the Income Tax Act, 1961, governs registration of trusts for charitable purposes. The Supreme Court's ruling in Additional Commissioner of Income Tax, Gujarat, Ahmedabad Vs. Surat Art Silk Cloth Manufacturers Association Surat (1980) 2 SCC 31 is pivotal, establishing that the dominant intent of the trust determines its charitable status, not the mere existence of profit.

Court's Interpretation and Reasoning: The Tribunal examined the trust deed, specifically object no. 17, which emphasizes empowerment of marginalized sections and environmental sustainability through promotion of electric vehicles and climate-resilient transportation solutions. The Tribunal found that the activities undertaken align with the stated charitable objectives and CSR vision.

Key Evidence and Findings: The trust received substantial CSR funds from various companies, which were utilized to procure and assign electric vehicles to beneficiaries under a pay-per-use model. The agreements and MOUs with CSR funders and beneficiaries were scrutinized, revealing a structured, professional approach to achieving charitable aims without profit motive.

Application of Law to Facts: The Tribunal applied the principle from Surat Art Silk Cloth Manufacturers Association that the presence of incidental profits does not negate charitable status if profits are reinvested in the charitable objects and not distributed. The trust's activities were found to be consistent with this principle, as surplus from user fees was reinvested as per Rule 7(2) of the Companies (CSR Policy) Rules, 2014.

Treatment of Competing Arguments: The Revenue contended that the rental activity was commercial, citing the charging of monthly fees and absence of clarity on beneficiary selection. The Tribunal rejected this, noting the absence of profit motive and emphasizing the compliance with CSR objectives and statutory provisions. The Tribunal also observed that the Revenue's concerns about commercial nature could be addressed by cancellation of registration if misuse was detected later.

Conclusions: The Tribunal concluded that the trust's activities are charitable in nature and meet the requirements for registration under Section 12AA.

Issue 2: Eligibility for Approval under Section 80G

Relevant Legal Framework and Precedents: Section 80G provides tax deductions for donations to entities registered under Section 12AA. Approval under Section 80G is contingent upon the entity's registration and genuine charitable activities.

Court's Interpretation and Reasoning: Since the Tribunal found the trust's activities charitable and eligible for registration under Section 12AA, approval under Section 80G logically follows. The Tribunal noted that the incidental income does not constitute business income and is reinvested, maintaining the charitable character.

Key Evidence and Findings: The trust's compliance with the Companies (CSR Policy) Rules, 2014, and the reinvestment of surplus generated from user fees were key factors supporting approval.

Application of Law to Facts: The Tribunal applied the statutory framework, confirming that the trust's activities and financial handling satisfy the conditions for Section 80G approval.

Treatment of Competing Arguments: The Revenue's argument that the scheme is profit-oriented was dismissed on the basis that no profit motive existed and the surplus was used to sustain charitable activities.

Conclusions: The Tribunal directed grant of approval under Section 80G.

Issue 3: Nature of Rental Activity and Incidental Income

Relevant Legal Framework and Precedents: The distinction between charitable and commercial activities hinges on dominant intent and application of income. The Supreme Court's ruling in Surat Art Silk Cloth Manufacturers Association is instructive.

Court's Interpretation and Reasoning: The Tribunal observed that the rental of electric vehicles at a nominal fee was designed to cover maintenance costs and ensure accountability, not to generate profit. The ownership transfer to beneficiaries after the lease term further indicated a charitable intent.

Key Evidence and Findings: The MOUs and agreements showed a structured plan to empower semi-urban youth through access to electric vehicles, facilitating income generation and financial independence.

Application of Law to Facts: The Tribunal held that incidental income from user fees does not amount to commercial business income as it is reinvested in the charitable project and is aligned with CSR rules.

Treatment of Competing Arguments: The Revenue's contention that charging rent indicates commercial activity was rejected because the fees were nominal and used solely for sustainability of the project.

Conclusions: The rental activity was held to be incidental and supportive of the charitable objectives, not commercial in nature.

3. SIGNIFICANT HOLDINGS

"It is not the activity per se, but the dominant intent that determines whether the trust is charitable. If the dominant object of the trust is charitable then mere existence of profit does not necessarily negate charitable status as long as the profits are applied solely for the charitable object, and not distributed among members."

"The projects undertaken by the assessee is of charitable nature and aligns with CSR objectives under Companies Act, 2013. There are no profit motives involved in the projects undertaken by the assessee and activity undertaken aligns with the object of the Trust at No. 17 of the Trust Deed which is to ensure empowerment of marginalised sections of society."

"At this juncture of grant of registration, the Revenue is only required to examine the genuineness of activities of the Trust and its compliance of any other law."

"The incidental income generated in the form of user fees is reinvested as per Rule 7(2) of the Companies (CSR Policy) Rules, 2014, and does not vitiate the charitable nature of the activities carried out, nor does it attract any disqualification under Section 12A(1)(ac)(iii) of the Income Tax Act, 1961."

The Tribunal allowed both appeals, setting aside the orders of the CIT(E), and directed grant of registration under Section 12AA and approval under Section 80G, affirming the charitable status of the trust and the legitimacy of its activities.