2025 (7) TMI 529 - HC - Income Tax

Eligibility of approval of Section 80G - renewal request was rejected as assessee was collecting fees from students and hence was engaged in commercial activities not covered by Section 11(1)(a) - ITAT granted approval HELD THAT - ITAT was perfectly justified in allowing the appeal. Revenue s case was that assessee trust had made donations and assistance to other entities without adhering to the principles of charitable activities. The schools to which the donations were made perhaps did not have registration/benefit of exemption u/s 80G of the Act but Appellant/revenue was unable to show any rule or provision that contemplated that if a donation is given to any school unless donee had registration/benefit of exemption Section 80G of the Act donor institution will not be eligible for claiming the benefit of Section 80G of the Act. We must keep in mind that those schools were also carrying on educational activities which are in the nature of charitable activity. Some of the donations were given by assessee trust to temples and for that there was no objection. Another defect that Appellant/revenue pointed out from the order of Commissioner of Income Tax was that assessee incurred expenditures like bank interest vehicle maintenance building maintenance etc. and these were not in the nature of expenditure incurred for charitable activities. We would agree with the ITAT that every institution whether charitable or otherwise has to run its own establishment for its functioning and therefore incurring of such expenses cannot be pointed out as a defect to deny the benefit of Section 80G of the Act. We do not find anywhere as rightly observed by the ITAT that assessee did not carry out its objectives. Assessee has been enjoying the exemption in the past and only when it sought renewal these objections are raised without pointing out any difference in the activities carried on by assessee in the past and in the immediate previous three years which were considered by appellant to deny the exemption. The nature of activities of assessee has been the same since its incorporation. Appellant/revenue argued Assessee had donated Rs. 50, 000/- and another sum of Rs. 20, 000/- to the General Secretary DMK a political party and those funds could not be treated as given for charitable activities and there were no receipts also instead of denying the claim for benefit u/s 80G of the Act on this ground in our view AO should have reduced those amounts from the 85% required to be spent under Section 11(1) of the Act. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether the Income Tax Appellate Tribunal (ITAT) was correct in directing the Commissioner of Income-tax to grant approval under Section 80G of the Income Tax Act despite the Commissioner's rejection of renewal of exemption.

(b) Whether the assessee trust's activities, including collection of fees and expenditure incurred, fell within the ambit of charitable activities as contemplated under Sections 11 and 80G of the Income Tax Act.

(c) Whether donations made by the assessee trust to other educational institutions not registered under Section 80G affected the assessee's eligibility for exemption under Section 80G.

(d) Whether the donation of funds to a political party without receipts disqualified the assessee from claiming exemption under Section 80G.

(e) Whether expenditure such as bank interest, vehicle maintenance, and building maintenance could be considered non-charitable and justify denial of exemption.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) - Validity of ITAT's direction to grant Section 80G approval despite Commissioner's rejection

The relevant legal framework includes Section 80G of the Income Tax Act, which provides for exemption on donations made to certain charitable trusts, subject to compliance with prescribed conditions. Section 80G(5)(i) requires the trust to carry out charitable activities. The Commissioner rejected the renewal application on the ground that the assessee was engaged in commercial activities due to fee collection and related expenditures.

The Court noted that the ITAT allowed the appeal for Assessment Year 2007-2008, finding that the assessee trust's activities were charitable in nature. The Commissioner's reliance on the fee collection to characterize activities as commercial was not supported by any statutory bar or precedent that educational activities involving fee collection cannot be charitable.

The Court emphasized that the assessee's declared objects were educational and charitable, and there was no material to show deviation from such objects. The Court found the ITAT's reasoning justified and held that the Commissioner erred in rejecting the renewal.

Issue (b) - Whether collection of fees and expenditure incurred vitiate charitable status

The Commissioner contended that the collection of fees and expenditure on items such as bank interest, vehicle and building maintenance indicated commercial activity not covered under Section 11(1)(a) or Section 80G.

The Court agreed with the ITAT's view that all institutions, including charitable ones, must incur administrative and operational expenses. Such expenditure does not negate the charitable nature of the activities. The Court held that these expenses are incidental to carrying on charitable activities and cannot be grounds to deny exemption.

Issue (c) - Impact of donations to other institutions not registered under Section 80G

The Commissioner objected to donations made by the assessee trust to other educational institutions that did not enjoy Section 80G exemption, contending that this affected the assessee's eligibility.

The Court found no statutory provision or rule requiring the donee institution to be registered under Section 80G for the donor trust to claim exemption. Since the receiving institutions were engaged in educational activities, which are charitable, the donations did not affect the assessee's entitlement to exemption.

Issue (d) - Donations to political party without receipts

The Commissioner pointed out that the assessee trust had donated sums to a political party without receipts, which was not a charitable activity and thus should disqualify the trust from exemption.

The Court held that while such donations are not charitable, the correct approach would be to exclude those amounts from the 85% expenditure requirement under Section 11(1) rather than deny the entire exemption under Section 80G. The Court rejected the Commissioner's approach of outright denial on this ground.

Issue (e) - Treatment of expenditure not directly charitable

The Commissioner challenged expenditures such as bank interest and maintenance costs as not being charitable.

The Court concurred with the ITAT that such expenses are necessary for the functioning of any institution and do not detract from the charitable nature of the assessee's activities. Hence, these cannot justify denial of exemption.

3. SIGNIFICANT HOLDINGS

The Court upheld the ITAT's order allowing the assessee trust's appeal and directing the Commissioner to grant renewal of exemption under Section 80G. Key legal principles established include:

"We must keep in mind that those schools were also carrying on educational activities, which are in the nature of charitable activity."

"Every institution - whether charitable or otherwise - has to run its own establishment for its functioning and, therefore, incurring of such expenses cannot be pointed out as a defect to deny the benefit of Section 80G of the Act."

"Instead of denying the claim for benefit under Section 80G of the Act on this ground [donations to political party], in our view, Assessing Officer should have reduced those amounts from the 85% required to be spent under Section 11(1) of the Act."

The Court concluded that the assessee trust's activities remained charitable and educational since incorporation, and the objections raised by the Commissioner were unsustainable. The appeal was dismissed, affirming the ITAT's order and confirming the assessee's entitlement to exemption under Section 80G.