2024 (2) TMI 1545 - HC - Income Tax

Denial of Registration u/s 12A - whether the CIT had rightly declined registration u/s 12AA by holding that the objects of the assessee were not of education and thus charitable in nature? - as urged that all the objects mentioned by the assessee in the trust deed were not of charitable nature - HELD THAT - The objects mentioned by the assessee were thoroughly examined by the Tribunal and it came to the conclusion that the same were genuine i.e of providing education. It was also noticed that the assessee was running Dental College and activities were by way of constructing the building for establishing the Dental College. The said findings have not been shown to be perverse or erroneous in any manner. The CIT was thus not right in declining registration u/s 12AA of the Act to the assessee. No substantial question of law arises.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(i) Whether the Income Tax Appellate Tribunal (the Tribunal) was justified in granting registration under Section 12A of the Income Tax Act, 1961 ("the Act") to the assessee when all the objects except the primary object fell under other objects of public utility rather than charitable objects;

(ii) Whether the Tribunal was justified in granting registration under Section 12A despite the observation by the Commissioner of Income Tax (CIT), Ludhiana, that some objects of the applicant society were distributive in nature and not charitable;

(iii) Whether the Tribunal was justified in holding that the dissolution clause of the trust was compliant, given that the clause did not specify that after meeting liabilities, the remaining property would be transferred to a charitable institution pursuing similar objects.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i) and (ii): Legitimacy of Registration Under Section 12A Despite Objects Being Partly Non-Charitable or Distributive

The relevant legal framework includes Section 12AA of the Income Tax Act, which empowers the Commissioner to grant registration to trusts or institutions established for charitable purposes, including education, as defined under Section 2(15) of the Act. The provision requires that the objects of the trust be charitable and the activities genuine.

The Tribunal's reasoning, as extracted from the order, was grounded on an examination of the trust deed, the Memorandum and Articles of Association, and the activities undertaken by the assessee. The Tribunal noted that the primary object of the trust was to promote dental education and establish educational institutions, which are recognized charitable purposes under Section 2(15). Ancillary objects (clauses 4(c) to 4(r)) were considered supportive of the main educational objective.

Key evidence included the certificate of registration of the society, the trust deed, and the balance sheet showing investment in land and building for establishing the dental college. The Tribunal emphasized that the assessee had commenced activities towards the educational objectives by constructing the college building.

The Tribunal applied the precedent set by the Punjab and Haryana High Court in the case involving an educational society, which held that the Commissioner's power under Section 12AA is to satisfy himself regarding the genuineness of the trust's objects and activities. The Tribunal found no merit in the CIT's rejection based on the presence of distributive objects, observing that no evidence was presented that such objects were actually carried out by the assessee.

The Court's application of law to facts was that the genuine pursuit of educational objectives, as evidenced by the establishment of the dental college and related activities, entitled the assessee to registration under Section 12AA. The Tribunal treated the Revenue's argument about distributive nature of some objects as premature and unsubstantiated.

Competing arguments were thus resolved in favor of the assessee, with the Tribunal holding that the primary charitable purpose prevailed and that ancillary or distributive objects did not negate the overall charitable character.

The conclusion was that the CIT erred in refusing registration on the basis that objects other than the primary one were not charitable, and the Tribunal's grant of registration was justified.

Issue (iii): Compliance with the Dissolution Clause Requirements

The legal framework requires that the dissolution clause of a charitable trust specify that upon dissolution, after meeting liabilities, the remaining assets must be transferred to another charitable institution with similar objects, to ensure continued charitable use.

The CIT had observed that the dissolution clause did not explicitly provide for such transfer, which was a ground for refusal of registration.

The Tribunal examined this objection and found that the assessee had met the requirements of the dissolution clause. Though the exact wording of the clause was not detailed in the judgment, the Tribunal's finding indicates satisfaction that the clause was compliant with the statutory mandate.

The Court did not find any error in the Tribunal's conclusion on this point, implicitly endorsing the view that the dissolution clause was adequate.

3. SIGNIFICANT HOLDINGS

The Court upheld the Tribunal's order allowing registration under Section 12AA of the Act to the assessee trust. The key principles established include:

"The power of the Commissioner of Income tax while granting registration is to look into the object of the society and come to a satisfaction in respect of the genuineness of the activities of the trust."

"Where the objects of the trust were genuine i.e. of providing education and the activities undertaken by it were also genuine as it had started constructing the building in which such dental college has to be established, the claim of the assessee for grant of registration under Section 12AA of the Act for carrying on the objects of running the educational institute is thus allowed."

The Court concluded that the CIT's refusal to grant registration was erroneous and that no substantial question of law arose from the appeal, leading to its dismissal.