2025 (7) TMI 975 - HC - Income Tax

Denial of registration u/s 12AA - applicant trust did not qualify as a Public Charitable Trust u/s 12A - Scope of charitable purpose is defined u/s 2(15) - applicant sought for first time registration under Section 12AA after twenty years of executing the trust deed HELD THAT - Section 11 of the Act deals with income from property held for charitable or religious purposes. Section 12 of the Act deals with income of trusts or institutions from contributions and particularly received by a trust created wholly for charitable or religious purposes. Section 12A of the Act provides for the conditions for applicability of Sections 11 and 12 of the Act and Section 12AA of the Act provides the procedure for registration. The advantage of getting registration under Section 11 or 12 of the Act is that the income of the trust derived from any property or received from any voluntary contributions shall not be included in the total income of the previous year. Therefore trust created for charitable purposes gets itself registered u/s 12A and while considering the application u/s 12A DIT (E) follows the procedure prescribed u/s 12AA of the Act. What is charitable purpose is defined u/s 2(15) of the Act. Therefore charitable purpose would include education. Admittedly assessee trust was formed for a charitable activity of education. Assessee was running a school. ORDER - (a) The fact that applicant sought for first time registration under Section 12AA of the Act after twenty years of executing the trust deed cannot be a bar for registration. There is no provision which has been cited to show that the registration should have been applied for within an earlier period. In fact it indicates for the first time assessee has thought of applying for tax exemption. (b) (i) Just because lineal descendants of the Founder Trustee shall ipso facto become life trustees and one among them shall be the Managing Trustee it cannot mean that assessee trust is not formed for the benefit of general public. (ii) In our view this clause has been inserted only because family members of the Founder Trustee would control and manage the trust more efficiently. If the beneficiaries were only the family members then perhaps appellant could have formed such an opinion though we do not subscribe to the view that in every case it has to be so. It will depend on facts and circumstances of each case. As in the case on hand the trustees/the creators of the trust themselves issued a Supplementary Trust Deed giving more powers to the trustees. Therefore the Supplementary Trust Deed should be read as part of the original Trust Deed. This finding of ours will answer Ms.Pushpa s submission that the original trust deed provided that any amendment to the trust deed shall be made only with the prior approval of the Commissioner of Income Tax. There was no such amendment of the original trust deed and hence his permission was also not required. Not spending even 50% of the income there is no provision in the Act that to get registration under Section 12A of the Act a trust should be spending over 50% of its income. In fact if a trust is created within a year and an application is filed this issue would not have arisen. Ms.Pushpa submitted that Section 11 of the Act requires spending atleast 85% of the income on charitable activities. That would come into effect only after a registration is granted while claiming exemption and not required for the purpose of applying for a registration. We do not find that it is DIT (E) s case that the surplus income generated by the trust is diverted to the benefit of the trustees. He has not doubted any of the charitable activities of the trust. Just because there is surplus in the hands of assessee trust it cannot be presumed that assessee trust is running on commercial lines. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether the delay of over twenty years in applying for registration under Section 12AA of the Income Tax Act, 1961, after execution of the Trust Deed, is a valid ground to reject the application for registration as a Public Charitable Trust.

(b) Whether a clause in the Trust Deed providing that lineal descendants of the Founder Trustee shall become life trustees and one among them shall be the Managing Trustee renders the trust non-charitable or repugnant to its claim as a Public Charitable Trust for the benefit of the general public.

(c) Whether the execution of a Supplementary Deed of Trust conferring additional powers on the trustees without Court approval violates the legal requirements under Section 92(3) of the Code of Civil Procedure and affects the validity of the trust deed for registration purposes.

(d) Whether the existence of surplus income (school fees exceeding expenditure) over two financial years, giving an impression of commercial operation, justifies denial of registration under Section 12AA of the Act.

(e) Whether the Income Tax Appellate Tribunal (ITAT) was justified in directing the Director of Income Tax (Exemptions) to grant registration under Section 12AA of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Delay in Application for Registration

Legal Framework and Precedents: The Income Tax Act does not prescribe any time limit within which an application for registration under Section 12AA must be filed after the creation of a trust. The registration procedure and conditions are governed by Sections 11, 12, 12A, and 12AA of the Act.

Court's Interpretation and Reasoning: The Court held that the mere fact that the trust applied for registration after more than twenty years of its creation cannot be a valid ground for rejection. No statutory provision mandates an earlier application. The delay indicates the trust's first intention to seek tax exemption benefits at that point in time.

Application of Law to Facts: The trust's application dated 31.05.2012 was valid despite the trust deed being executed in 1991. The Court rejected the Department's contention that delay alone could disqualify the trust.

Conclusion: Delay in applying for registration under Section 12AA is not a valid ground to deny registration.

(b) Clause Regarding Lineal Descendants as Trustees

Legal Framework and Precedents: Section 2(15) of the Act defines "charitable purpose" to include education and objects of general public utility. The nature of beneficiaries and management structure are relevant to determine whether a trust is public charitable or private.

Court's Interpretation and Reasoning: The Court observed that the clause making lineal descendants life trustees and one Managing Trustee does not necessarily negate the public charitable character of the trust. The clause was inserted to ensure efficient management by family members. The Court emphasized that if the beneficiaries were limited to family members only, it might have been a different case, but here the trust benefits the general public through educational activities.

Application of Law to Facts: The trust runs a school providing education, a recognized charitable purpose. The management clause does not restrict the trust's benefit to family members exclusively.

Treatment of Competing Arguments: The Department argued that such a clause was repugnant to a public charitable trust status. The Court rejected this, stating that the facts and circumstances of each case are determinative.

Conclusion: The clause regarding trusteeship does not disqualify the trust from registration as a Public Charitable Trust.

(c) Validity of the Supplementary Deed of Trust

Legal Framework and Precedents: Section 92(3) of the Code of Civil Procedure requires Court approval for amendments to a trust deed. The Supreme Court judgment in Trustees of H.E.H. The Nizam's Pilgrimage Money Trust v. Commissioner of Income Tax was cited, where Court approval was necessary for amendment post-creation.

Court's Interpretation and Reasoning: The Court distinguished the present case from the Nizam's Trust case. Here, the Supplementary Deed was executed by the trustees/creators themselves, and it was to be read as part of the original deed. There was no amendment of the original deed requiring Court approval. The original deed's provision requiring Commissioner's approval for amendments was not triggered as no formal amendment was made.

Application of Law to Facts: The supplementary deed granting additional powers to trustees was valid and integral to the trust deed for registration purposes.

Conclusion: The supplementary deed did not invalidate the trust deed or preclude registration under Section 12AA.

(d) Surplus Income and Commercial Character

Legal Framework and Precedents: Section 11 requires that at least 85% of income be spent on charitable activities to claim exemption, but this applies post-registration. There is no statutory requirement that a trust must spend a minimum percentage of income before registration under Section 12AA.

Court's Interpretation and Reasoning: The Court held that the existence of surplus income (excess of school fees over expenditure) does not imply that the trust is run on commercial lines or that it should be denied registration. The Department did not allege diversion of funds to trustees or doubt the charitable activities.

Application of Law to Facts: The surplus was not shown to be misapplied or diverted. The trust's activities were bona fide charitable educational activities.

Conclusion: Surplus income alone is not a ground for refusal of registration under Section 12AA.

(e) Validity of ITAT's Direction to Grant Registration

Legal Framework: The ITAT has jurisdiction to decide appeals against orders of the DIT (Exemptions) under the Act.

Court's Interpretation and Reasoning: The Court found that ITAT's direction to grant registration was justified based on the absence of legal or factual grounds to refuse registration. The Court upheld ITAT's order and dismissed the Department's appeal.

Conclusion: The ITAT was correct in directing registration under Section 12AA.

3. SIGNIFICANT HOLDINGS

"The fact that applicant sought for first time registration under Section 12AA of the Act, after twenty years of executing the trust deed cannot be a bar for registration. There is no provision which has been cited to show that the registration should have been applied for within an earlier period."

"Just because lineal descendants of the Founder Trustee shall ipso facto become life trustees and one among them shall be the Managing Trustee, it cannot mean that assessee trust is not formed for the benefit of general public."

"The Supplementary Trust Deed should be read as part of the original Trust Deed. There was no such amendment of the original trust deed and hence, his permission was also not required."

"There is no provision in the Act that to get registration under Section 12A of the Act, a trust should be spending over 50% of its income. ... Just because there is surplus in the hands of assessee trust, it cannot be presumed that assessee trust is running on commercial lines."

Core principles established include:

- Delay in applying for registration under Section 12AA is not a ground for rejection.

- Management clauses favoring founder's descendants do not negate public charitable status if beneficiaries are general public.

- Supplementary deeds executed by trustees can be part of the original trust deed without requiring Court approval, absent formal amendment.

- Surplus income does not per se indicate commercial operation or disqualify a trust from registration.

- Registration under Section 12AA is a procedural step to enable exemption claims under Sections 11 and 12, and conditions for exemption apply post-registration.

Final determinations:

The Court dismissed the Department's appeal and upheld the ITAT's order directing registration under Section 12AA of the Income Tax Act, 1961, with effect from the date of application, subject to the outcome of the appeal. The trust was held to qualify as a Public Charitable Trust engaged in educational activities, entitled to registration and consequent tax exemption benefits under the Act.