TMI Blog2010 (3) TMI 1093X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is earning profit; CIT was not justified in refusing registration u/s. 12AA to assessee educational society and Tribunal was justified in granting the same. We are of the considered opinion that a bare perusal of the case law clearly supports the contentions of the assessee that the scope and nature of enquiries at the stage of grant of registration are prescribed u/s. 12AA. Thus, CIT has no jurisdiction to conduct enquiries which falls beyond the pale of such statutory prescription. It is settled legal position that the assessee-trust is entitled to claim exemption independently u/ss. 11 and 12 or u/s. 10(23)(iiiad), subject to satisfaction of relevant preconditions as laid down in the respective sections of the Act. There is no such scheme under the provisions of the Act, for automatic grant of exemption under such sections of the Act. Further, the deduction u/s.10(23)(iiiad) is available, as also the exemption u/ss. 11 and 12 subject to the satisfaction of the statutory conditions prescribed under the relevant sections of the Act. It is evident from the perusal of these sections that s. 11 is of wider amplitude regarding charitable institutions, whereas s. 10(23C) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitution are not being carried out in accordance with the objects of the trust. Therefore, it is evident that grant of registration u/s. 12AA is not absolute and is distinct and independent from grant of exemption u/ss. 11 and 12. We are of the considered opinion that the impugned orders of the CIT cannot be sustained. Consequently, we set aside these impugned orders passed by the CIT and direct that registration applied for by the applicants u/s. 12A be granted. Thus, these appeals are decided in favour of the assessees. - H. S. SIDHU J.M. AND MEHAR SINGH A.M. Sudhir Sehgal A. K. Periwal, for the Appellants. Y. K. Saxena, for the Respondent. ORDER MEHAR SINGH, A.M.: These two appeals filed by different assessees are directed against different orders of the CIT, Bathinda, dt. 24th and 25th Sept., 2009, passed under s. 12AA(1)(b)(ii) of the IT Act, 1961 (hereinafter referred to in short ' the Act' ). 2. In ITA No. 488/Asr/2009, the assessee has raised following grounds of appeal : 1. That the worthy CIT, Bathinda, has erred in not allowing registration under s. 12AA of the IT Act, 1961, which is totally unjustified and not accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the Act was referred to the Dy. CIT, Circle II, Bathinda, the jurisdictional AO, for his comments and report. The AO submitted detailed report on 13th July, 2009. The relevant paras of the same are reproduced hereunder for the purpose of proper appreciation : ' Survey under s. 133A was conducted on the business premises of the assessee, on 13th Dec., 2006. During the course of survey, books of account and other documents were impounded with previous approval of the Chief CIT, Amritsar, which are still in possession of the Department. The return of income for the asst. yr. 2007-08 was due on or before 31st July, 2007. The assessee did not care to file the return of income. Therefore, a notice under s. 142(1) was issued on 11th June, 2008. Assessee sought adjournment on one excuse or other. Consequently, a notice under s. 271F, dt. 23rd June, 2008 was issued to which the assessee did not bother to reply. Therefore, a penalty under s. 271F was imposed on 27th Aug., 2008. Even then the assessee was least concerned to file return of income. Again assessee was reminded that assessment proceedings will be taken ex parte as he is least concerned to file the return. Even then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members have given the address of Mukatsar, except Smt. Reet Singh, who is of Bangalore. Thus, the contention of the counsel that members are residing of Chandigarh/Kapurthala is totally devoid of facts. From the details of members given, it is clear that actually the society is being run by one family to promote its business in education sector. From the above facts narrated by the AO, it is clear that the applicant has not cared to honour its legal obligations, which is not a characteristic of a charitable society. The plea of the applicant that his income his exempt under s. 10(23)(iiiad) has no merit as its income exceeds the maximum amount which is not chargeable to income-tax in the previous years 2005-06 and 2006-07 and hence, it was required to get its accounts audited under proviso to s. 10(23C) and file its return of income as required under s. 139(4C) of the Act. Hence, the applicant has failed to fulfil the conditions specified under proviso to s. 10(23C) of the Act and hence, s. 10(23C)(iiiad) is not applicable in the case of the applicant. Similarly, s. 12A prescribes the conditions of applicability of ss. 11 and 12. As per cl. (b) of sub-s. (1) to this section, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charitable society. (B) Perusal of balance sheets for the asst. yr. 2006-07 onwards goes to reveal that the following loans have been raised by the society : 1. Shri Gurtej Singh Brar ₹ 20,27,605 2. Shri Amar Nath ₹ 2,50,000 3. Shri Aswani Kumar ₹ 4,55,000 4. Shri Bahadur Singh ₹ 9,70,000 5. Shri Iqbal Singh ₹ 6,86,950 Out of the above list, Shri Gurtej Singh Brar is the chairman of the society, Shri Iqbal Singh, vice chairman, Shri Bahadur Singh is member and Shri Aswani Kumar former chairman of the society. Perusal of income and expenditure account for the last 3 years of the society goes to reveal that the members of the society have not contributed anything from their hard earned income for the charitable cause of the society. If the members/office bearers of the society were so interested in the charitable cause of the society, they should have donated the above amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12AA of the Act, is founded purely on surmises and conjectures, irrelevant material and consideration thereof. The learned counsel for the assessee argued that provisions of s. 12AA of the Act clearly prescribe preconditions essential for grant of such registration and the scope of enquiry, to be conducted at this stage by the CIT. It was contended that the CIT can call for such document or information from the trust or institution as he thinks necessary, in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries, as he may deem necessary, in this behalf; and after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he can decide the fate of such application. The learned CIT is not competent to make inquiries which are integral part of exemptions, as the same fall under the exclusive jurisdiction of the AO. He pointed out that the requisite documents prescribed under the Act, were filed along with the application as indicated by the CIT in the impugned order. It was further contended that applicant has been rendering educational services, since 18th March, 1992. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T vs. Red Rose School (2007) 212 CTR (All) 394: (2007) 163 Taxman 19(All). 6.2 It was argued by the learned counsel for the assessee that the facts and circumstances obtaining in the period prior to the period for which application for registration under s. 12AA of the Act, was made, are irrelevant consideration, while considering grant of such registration. The application for registration as discussed earlier was filed on 31st March, 2009. It was argued that the Department is competent to take permissible action under the Act, for the period prior to the application made on 31st March, 2009. It was also argued that the alleged non' co-operation on the part of the assessee cannot be made the basis for rejection of the application made for grant of registration under s. 12AA of the Act. He also referred to and discussed various paras of the impugned order of the CIT. 7. As regards ITA No. 493/Asr/2009 is concerned, the verbal submissions made by the assessee are duly incorporated in the written synopsis. In both the cases written submissions have been filed. Both the learned counsel for the assessee and the learned Departmental Representative, in the course of appellate p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s finding of the CIT is not relevant or correct. (b) The contention of the CIT that the application of society does not qualify as a charitable society within the meaning of s. 11 r/w s. 2(15) is also not correct because of the clarification made in Circular No. 11 of 2008, dt. 19th Dec., 2008, wherein it has been clearly laid down that the newly added proviso to s. 2(15) is not applicable to the education. (c) Therefore, the discussion of the CIT is not applicable at all and by virtue of this circular, the imparting of education is charitable in nature within the definition of s. 2(15) of the Act. Thus, the basis of rejection by the CIT is totally unjustified and not sustainable and the circular of the Board is binding upon him should have been followed. 9.2 The learned counsel of the assessee placed reliance on the following decisions to support his contention that CIT is not competent to make enquiries which fall beyond the purview of s. 12AA of the Act, specifying the nature and scope of enquiries contemplated under s. 12AA of the Act. (i) In the case of Acharya Sewa Niyas Uttaranchal vs. CIT (supra), it has been held that under s. 12AA the jurisdiction of the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rust, that the takeover action was unilateral, that no objection certificate was not obtained from bankers and that on dissolution of firm, it was left to the trustees to decide the fate of net assets' All these objections of CIT were irrelevant for purposes of grant of registration under s. 12A. (iv) In the case of CIT vs. Red Rose School (supra), it has been held as under : Charitable trust' Registration under s. 12A' Scope of enquiry by CIT' Sec. 12AA confers power on the CIT while considering the application for registration of a trust or institution made under cl. (a) of s. 12A to call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution, and also to make such inquiries as he may deem necessary in this behalf and after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he shall pass an order in writing registering the trust or institution and if he is not satisfied, he would refuse the registration' Sec. 12AA does not speak anywhere that the CIT, while considering the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th March, 1992. Memorandum of association of the trust spells out the main aims and objects. It is affiliated to the Punjab State Board of Technical Education and Industrial Training, Chandigarh, for the purpose of imparting education at Fazilka. The land was acquired in the years 1992 and 1999, as per evidences filed before the CIT and since then the trust has been imparting education to various students, in all walks of life. The learned CIT has not doubted the genuineness of the activities of the trust and objects of the trust. The contention of the learned counsel for the assessee that the finding of the CIT that the society is not charitable institution within the meaning of s. 11 r/w s. 2(15) of the Act is not legally correct, having regard to the clarification issued by the CBDT vide Circular No. 11 of 2008, dt. 19th Dec., 2008. The CIT, Bhatinda, marked the application dt. 31st March, 2009 filed by the assessee society for registration under s. 12AA of the Act to the AO for making necessary enquiries. The AO submitted detailed report on 13th July, 2009, which was relied upon by the CIT, in drawing inferences, to support his conclusions. Para A of the order of the CIT, dt. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ety is being run by one family to promote its business in education sector. From the above facts narrated by the AO, it is clear that the applicant has not cared to honour its legal obligations, which is not a characteristic of a charitable society; The plea of the applicant that its income is exempt under s. 10(23C)(iiiad) has no merit as its income exceeds the maximum amount which is not chargeable to income-tax in the previous years 2005-06 and 2006-07 and hence, it was required to get its accounts audited as required under proviso to s. 10(23C) and file its return of income as required under s. 139(4C) of the IT Act, 1961. Hence, the applicant has failed to fulfil the conditions specified under proviso to s. 10(23C)(iiiad) is not applicable in the case of the applicant. Similarly, s. 12A prescribes the conditions for applicability of ss. 11 and 12. As per cl. (b) of sub-s. (1) to this section, the applicant was required to get its accounts audited and file its return of income as required under s. 139(4C) of the IT Act, 1961. These conditions are also not fulfilled by the applicant and hence, it is not entitled to get registration under s. 12AA of the IT Act, 1961. 9.5 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Yours faithfully, Sd/ (B.R. Madaan) Dy. CIT, Circle-II, Bathinda. 9.6 Necessary compliance was made by the assessee-trust vide letter dt. 27th Aug., 2009. After examination of the aforesaid details, as contained in the said letter, the CIT failed to detect any misappropriation of funds by the office bearers or the trustees, as no such findings are recorded by the CIT in the said order. The learned CIT relied upon the addresses, as contained in the list of members, annexed to the memorandum of association. The assessee-trust also filed latest addresses of the members along with submissions. Further, the learned CIT made such addresses as the foundation of his conclusion, in the matter. It would be pertinent to mention here that in para B of the impugned order, it is observed that income of the assessee-trust exceeds the maximum limit, for the previous years 2005-06 and 2006-07, whereby it was required to get its accounts audited. Hence, the assessee has failed to fulfil the conditions specified under proviso to s. 10(23C) of the Act. Consequently, the learned CIT observed that s. 10(23)(iiiad) is not applicable to the case of the trust. In this context, it is pertinent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of questions which were before the Court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a later case Courts must carefully try to ascertain the true principle laid down by the decision. 9.9 To have comprehensive and correct view, it is relevant and essential to reproduce the relevant part of the decision of Hon' ble Supreme Court in the case of CIT vs. Bar Council of Maharashtra (supra) : At the outset, it may be stated that we were not inclined to permit counsel for the Revenue to urge his first contention as, in our view, the Revenue must be deemed to have given up the same. We may point out that precisely this very contention was raised by the Revenue before the Tribunal and was negatived by it. The Tribunal on a detailed analysis of the concerned provisions took ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act is available, as also the exemption under ss. 11 and 12 subject to the satisfaction of the statutory conditions prescribed under the relevant sections of the Act. It is evident from the perusal of these sections that s. 11 is of wider amplitude regarding charitable institutions, whereas s. 10(23C)(iiiad) is specifically made for educational institutions, existing solely for educational purposes. So there is no bar under the scheme of the relevant provisions which prohibit the assessee to avail benefits under these two sections on alternative basis, as both these sections have different statutory preconditions to be satisfied. 9.11 The definition of charitable purpose has been amended by the Finance Act, 2008, w.e.f. 1st April, 2009, and the same reads as under : 2(15) ' Charitable purpose' includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility : Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity or business, for a cess o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irculars issued by the CBDT, are intended to be utilised to understand the scope and meaning of the provisions, to which they relate. These circulars contain interpretation in respect of the amended provisions of the Act, are in the nature of contemporaneous exposition furnishing legitimate aid in the construction of the provisions. 9.14 Further, the scope of enquiry to be conducted by the CIT has been explained by the Board' s Circular No. 762, dt. 18th Feb., 1998 [(1998) 230 ITR (St) 12], which reads as under : Under the existing provisions of the IT Act, exemption from income-tax in respect of the income of a charitable or religious trust or institution is available only if certain conditions are satisfied. One of these conditions is that the person in receipt of the income shall make an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Chief CIT or CIT within the specified time However, there is no provision in the IT Act for processing of such an application and granting or refusal of registration to the concerned trust or institution. Hence, the Act now provides for a procedure to be followed for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under s. 10(22). But in such cases the applicability of s. 11 can be examined and if the conditions laid down therein are satisfied, the income will be exempt under s. 11. 9.16 Further, the jurisdictional High Court of Punjab Haryana has decided the issue of charity, in the case of Pinegrove International Charitable Trust vs. Union of India Ors. in CWP No. 6031 of 2009, dt. 29th Jan., 2010 [reported at (2010) 230 CTR (P ;H) 477 : (2010) 37 DTR (P H) 105' Ed.], in favour of the assessee. The question of law raised before the Hon' ble High Court, is reproduced hereunder : (A) Whether an educational institution would cease to exist ' solely' for educational purposes and not for purposes of profit merely because it has generated surplus income over a period of 4/5 years after meeting expenditure ? The Hon' ble High Court has given following findings on the said question of law : 7.1. In the preceding paras it has already been noticed, by referring to the views of Hon' ble the Supreme Court in the cases of Aditanar Eductional Institution' s case (supra) and American Hotel Lodging Association (supra) that the character of the recipien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wered before giving approval to call for such documents including annual accounts or information from the applicant to check the genuineness of the activities of the applicant institution. Earlier that power was not there with the prescribed authority. Under the third proviso, the prescribed authority has to ascertain while judging the genuineness of the activities of the applicant institution as to whether the applicant applies its income wholly and exclusively to the objects for which it is constituted/established. Under the twelfth proviso, the prescribed authority is required to examine cases where an applicant does not apply its income during the year of receipt and accumulates it but makes payment therefrom to any trust or institution registered under s. 12AA or to any fund or trust or institution or university or other educational institution and to that extent the proviso states that such payment shall not be treated as application of income to the objects for which such trust or fund or educational institution is established. The idea underlying the twelfth proviso is to provide guidance to the prescribed authority as to the meaning of the words ' application of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tandardized form in terms of the first proviso has to be given by every applicant. If the prerequisite condition of actual existence of the educational institution is fulfilled then the question of compliance with the requirements contemplated by various provisos would arise. Hon' ble the Supreme Court has approved the contention that the unnumbered third proviso contains monitoring conditions/requirements like application, accumulation, deployment of income in specified assets whose compliance depends on events that have not taken place on the date of the application for initial approval. It follows that firstly the application is filed in the standardized form in accordance with the unnumbered first proviso and then approval is granted. If the educational institution actually exists for education purposes alone then the educational institution is permitted to operate subject to monitoring conditions. A workable solution has been provided by Hon' ble Supreme Court in para 33 by observing as under : ' 33. To make the section with the proviso workable we are of the view that the monitoring conditions in the third proviso like application/ utilization of income, patter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in-charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would only be difficult for practical realisation but would also reflect unsound principle of management. We. therefore, agree with Beg, J. when he said in Sole Trustee, Loka Shikshana Trust vs. CIT 1975 CTR (SC) 281 : (1975) 101 ITR 234 (SC) that : ' If the profits must necessarily feed a charitable purpose under the terms of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here are certain limits imposed on the accumulations which of course have to be met. A Division Bench of Delhi High Court in the case of Director of IT (Exemptions) vs. Eternal Science of Man' s Society (2006) 205 CTR (Del) 381 : (2007) 290 ITR 535 (Del), has held as under : ' It may also be mentioned that for seeking the exemption under s. 10(23C), the assessee will have to follow the guidelines mentioned in Form No. 56D (r. 2CA). One of the conditions in Form 56D is that assessee will have to submit the audited accounts and balance sheets for the last three years along with a note on the examination of accounts and on the activities as reflected in the accounts and in the annual report with special reference to the appropriation of income towards objects of the university or other educational institution. From the audited accounts, one can easily see whether the funds were utilised for the expansion of educational institution/activity or for personal profits. In the present case, the opposite parties have not brought any material on record to prove that the surplus earned by the assessee petitioner was utilised for personal profit/gain on any including the founder mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kar). On perusal of the same, we are of the considered opinion that the ratio of the said decision is not applicable to the fact situation of the present case, being factually different and distinguished. The learned CIT, in last para, p. 5, which is reproduced hereunder narrates about the eligibility of society or trust under s. 10(23)(iiiad) and (vi) of the Act and on the next page i.e., p. 6 supports his view by citing the decision of the Cochin Bench in the case of Al-Farook Educational Centre vs. ITO (2009) 26 DTR (Coch)(Trib) 151 : If a society or trust wants to run any kind of educational institution exclusively, then the activity is covered under s. 10(23C)(iiiad) and (vi) of the IT Act, 1961, separately whereby it has been clearly mentioned that income received by any person on behalf of any university or other educational institution existing solely for education purposes and not for purposes of profit if the aggregate annual receipts as may be prescribed will not be included in the income of such person. It has been further provided that all the income so earned has to be applied within a year exclusively on the objects for which such trust or institution has been es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and (b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he' (i) shall pass an order in writing registering the trust or institution; (ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant. 9.20 Thus, s. 12AA of the Act contemplates enquiries about the objects of the trust or institution and genuineness of its activities. This section does not prescribe that enquiry under s. 12AA of the Act will be the forum or stage for adjudication on the eligibility of exemption under ss. 11 and 12 of the Act. The proceedings before the CIT, under s. 12AA of the Act pertain to the initial stage, intended to conduct prescribed statutory enquiries about the genuineness of the activities of the assessee, for the purpose of granting registration. The learned CIT is not statutorily competent to convert such proceedings for grant of registration und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tration under s. 12A r/w s. 12AA of the Act. The CIT failed to adhere to such prescribed statutory limit. 9.23 The learned CIT has not pointed out any defect in the application made by the assessee, in Form No. 10 read with r. 17A of the IT Rules, 1962. Similarly, as discussed earlier, the learned CIT has not doubted the genuineness of the activities of the trust carried out in accordance with the objects of the trust. It is further pertinent to point out here that the provisions of s. 12AA(3) were introduced by Finance (No. 2) Act, 2004 w.e.f. 1st Oct., 2004, providing for cancellation of registration of trust or institution by the CIT granted under s. 12AA(1)(b) of the Act, subsequently, if the activities of such trust or institution are not being carried out in accordance with the objects of the trust. Therefore, it is evident that grant of registration under s. 12AA of the Act is not absolute and is distinct and independent from grant of exemption under ss. 11 and 12 of the Act. 10. In the light of above legal and factual discussions including the case law, circulars and relevant statutory provisions of the Act, we are of the considered opinion that the impugned orders of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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