IT : Non-maintenance of accounts properly cannot be reason to deny registration under section 12A
IT If primary purpose and predominant object of trust are to promote welfare of general public, purpose would be charitable purpose, even if there is some profit in such activity
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[2013] 37 taxmann.com 193 (Allahabad)
HIGH COURT OF ALLAHABAD
Commissioner of Income-tax -I
v.
State Urban Development Agency (Suda)*
SIBGHAT ULLAH KHAN AND DR. SATISH CHANDRA, JJ.
JULY 19, 2013
I. Section 12A of the Income-tax Act, 1961 - Charitable or religious trust - Registration of [Non-maintenance of accounts] - Whether non-maintenance of accounts properly could be reason for denying registration under section 12A, particularly when accounts, management, control, etc., of assessee were fully controlled by State Government - Held, no - Whether non-utilization of fund and keeping in bank, would attract cancellation of registration of society - Held, no - Whether where a trust/institution fulfils all conditions mentioned in section 12A/12AA, registration cannot be denied on ground that some conditions of sections 11 and 12 are not fulfilled - Held, yes [Paras 9, 10 & 12] [In favour of assessee]
II. Section 2(15) of the Income-tax Act, 1961 - Charitable purpose [General public utility] - Whether after 1-4-1984, even if there is some profit in activity carried on by trust/institution, so long as dominant object is of general public utility, trust/institution would be considered as established for charitable purpose - Held, yes [Para 11][In favour of assessee]
Words and phrases : Expression 'any other object of general public utility' as occurring in section 2(15) of the Income-tax Act, 1961
Expression 'property' as occurring in section 11 of the Income-tax Act, 1961
FACTS
| ■ | The assessee was a co-operative society created with object of drawing up plans and formulating scheme for upliftment of the urban poor in the State. | |
| ■ | The assessee applied for registration as charitable institution but the Commissioner refused the same on the ground that the genuineness of the accounts was not proved as the accounts of the society were not fully utilized for its objectives and the Auditor General of India had also raised objections regarding utilization/application of funds for 'general public utility'. | |
| ■ | On appeal, the Tribunal restored the matter back to the Commissioner to examine the matter afresh, but the Commissioner again refused the registration. | |
| ■ | On further appeal, the Tribunal granted the registration on the ground that object of assessee in Memorandum of Association and Articles of Association were of general public utility. | |
| ■ | On revenue's appeal: |
HELD
| ■ | From the record, it appears that since 1990-91, i.e., when the assessee-society came into existence, it is engaged in the service of public utility. [Para 8] | |
| ■ | The registration was refused only on the basis of a report submitted by the Accountant General, where it was mentioned that the accounts were not properly maintained. But this defect is curable. The accounts, management, control, etc., of the assessee are fully controlled by the Government of U.P. Thus, the doctrine of instrumentality is applicable as per the ratio laid down in the case of Ajay Hasia v. Khalid MujibSehravardi [1981] 1 SCC 722. Moreover, in the instant case, no individual interest is involved. [Para 9] | |
| ■ | It is also alleged that the funds were not utilized and ideally kept in the bank. But, it is not the case of the department that funds were stiffed or misappropriated. For non-utilization of the fund and keeping in the bank, never attracts the cancellation of the registration of the society, however, it may amount non-functioning of the society. [Para 10] | |
| ■ | Needless to mention that the expression 'any other object of general public utility' in section 2(15) is of the widest connotation. That expression would prima facie include all objects which promote the welfare of the general public. It cannot be said that a purpose would cease to be charitable even if public welfare is intended to be served. If the primary purpose and the predominant object are to promote the welfare of the general public, the purpose would be a charitable purpose. [Para 11] | |
| ■ | Further, the words 'charitable purposes' defined in section 2(15) include the advancement of any other object of general public utility. Prior to 1-4-1984, the words used in the section were 'advancement of any other object of general public utility not involving the carrying on of any activity of profit'. The Finance Act, 1983 omitted the words 'not involving the carrying on of any activity for profit' from the section with effect from 1-4-1984. Thus, after 1-4-1984, even if there is some profit in the activity carried on by the trust/institution, so long as the dominant object is of general public utility, it cannot be said that the trust/institution is not established for charitable purposes. | |
| ■ | The expression 'property' used in section 11 is of wide amplitude and it includes the business undertaking itself. It includes immovable and movable property. Therefore, where a trust/institution fulfills all the conditions mentioned in section 12A/12AA, registration cannot be denied on the ground that some conditions of sections 11 and 12 are not fulfilled. | |
| ■ | In the first round of litigation, the issue relating to assessee's request for registration was remanded by the Tribunal to the Commissioner to examine the matter afresh and to decide the same as per law after considering the objects, which had been found by the Tribunal as of 'general public utility', and as per the decision of the Supreme Court in the case of CIT v. Gujarat Maritime Board [2007] 295 ITR 561/[2008] 166 Taxman 58. But the Commissioner, admittedly, neither considered the objects nor the decision of the Supreme Court. So, the Tribunal in the IInd round of the litigation has rightly granted the registration by passing impugned order. | |
| ■ | In the light of above discussion, there is no reason to interfere in the impugned order passed by the Tribunal. [Para 12] |
CASE REVIEW
CIT v. Gujarat Maritime Board [2007] 295 ITR 561/[2008] 166 Taxman 58 (SC) and CIT v. Krishi Utpadan Mandi Samiti [2011] 331 ITR 154/[2010] 186 Taxman 460 (All.) (para 12) followed.
CASES REFERRED TO
Hiralal Bhagwati v. CIT [2000] 246 ITR 188 (Guj.) (para 4), CIT v. Madras Stock Exchange Ltd. [1976] 105 ITR 546 (Mad.) (para 4), Delhi Stock Exchange Association Ltd. v. CIT [1980] 126 ITR 532/4 Taxman 180 (Delhi) (para 4), Delhi Stock Exchange Association Ltd. v. CIT[1997] 91 Taxman 273 (SC) (para 4), Ravi Iron Industries v. Director of Investigation [2003] 264 ITR 28/[2004] 134 Taxman 138 (All.) (para 5),Ajay Hasia v. Khalid Mujib Sehravardi [1981] 1 SCC 722 (para 5), CIT v. Gujarat Maritime Board [2007] 295 ITR 561/[2008] 166 Taxman 58 (SC) (para 5), CIT v. Lucknow Industrial Development Authority [IT Appeal Nos. 140. 156 of 2008] (para 5), CIT v. Krishi Utpadan Mandi Samiti [2011] 331 ITR 154/[2010] 186 Taxman 460 (All.) (para 5), CIT v. Improvement Trust [2009] 308 ITR 361 (Punj. & Har.) (para 5),Ahmedabad Urban Development Authority v. Dy. DIT (Exemption) [2011] 335 ITR 575 (Guj) (para 5), U.P. Forest Corpn. v. Dy. CIT [2008] 297 ITR 1/[2007] 165 Taxman 533 (SC) (para 5), CIT v. U.P. Forest Corpn. Ltd. [IT Appeal No. 70 of 2009] (para 5), CIT v. U.P. Forest Corpn. Ltd. (SLP (CC) No. 2590 of 2011] (para 5), Fifth Generation Education Society v. CIT [1990] 185 ITR 634/[1991] 54 Taxman 237 (All.) (para 5), CIT v. Red Rose School [2007] 163 Taxman 19 (All.) (para 5) and DIT v. Garden City Educational Trust [2011] 330 ITR 480/[2010] 191 Taxman 238 (Kar.) (para 5).
D.D. Chopra for the Appellant. S.K. Garg and Amit Shukla for the Respondent.
ORDER
Dr. Satish Chandra, J.- This is an appeal filed by the Department under Section 260A of the Income-tax Act, 1961 against the judgment and order dated 31-07-2009 passed by the Income-tax Appellate Tribunal, Lucknow in Appeal No. I.T.A. No. 228/Luc/2009.
2. The brief facts of the case are that assessee i.e. State Urban Development Agency (SUDA) was created on 20th November, 1990 and it was registered as Co-operative Society and became the State Autonomous Body as per the Article of Association. The SUDA i.e. the assessee had applied for the registration under Section 12A of the Income-tax Act, as charitable institution, but the CIT has refused registration vide order dated 22-05-2007. Being aggrieved, the SUDA i.e. assessee has assailed the same before the Tribunal, who vide order dated 08-02-2008 has restored the matter back to the file of the CIT with certain directions to examine the matter afresh. But, vide his order dated 25-03-2009, again CIT has endorsed his earlier order, where registration under Section 12A of the Act was rejected. Not being satisfied, the assessee again assailed the same before the Tribunal, who vide impugned order has granted the registration. Being aggrieved, the Department has filed the present appeal.
3. With this background, Sri D.D. Chopra, learned counsel for the Department has justified the order passed by the CIT. He states that the genuineness of the accounts were not proved as the accounts of the society were not fully utilized for its objectives and the Auditor General of India had also raised objections regarding utilization/ application of funds for "general public utility". The Accountant General (Government of India) while auditing the accounts of the society has specifically commented that the assessee has failed to attain their objectives. It was stated that the expenses were not incurred for the purpose of objects mentioned in the Article of Association. So, the funds were not utilized properly.
4. Learned counsel further submits that the registration under Section 12A of the Act cannot be claimed as a matter of right. It is also a submission of the learned counsel for the appellant that the funds were kept only in the Bank to meet the office expenses. The assessee also did not give any reply to the query raised by the CIT during the course of hearing for the mis-utilization of fund or not properly utilization of the funds. For this purpose, he has relied on the ratio laid down on the following cases:-
| (i) | Hiralal Bhagwati v. CIT [2000] 246 ITR 188 (Guj.); | |
| (ii) | CIT v. Madras Stock Exchange Ltd. [1976] 105 ITR 546 (Mad); and | |
| (iii) | Delhi Stock Exchange Association Ltd. v. CIT, [1980] 126 ITR 532/4 Taxman 180 (Delhi), affirmed by the Hon'ble Supreme Court,Delhi Stock Exchange Association Ltd. v. CIT [1997] 91 Taxman 273. |
Lastly, he made a request to restore the order of the CIT.
5. On the other hand, Sri K.R. Rastogi holding brief of Sri S.K. Garg, learned counsel for the assessee has justified the Tribunal's order. At the strength of written submission, learned counsel for the assessee has read out the main objectives of the society, which on reproduction reads as under:—
| "(a) | To identify the urban poor in the state. | |
| (b) | To draw up plans and formulate scheme for upliftment of the urban poor in the state. | |
| (c) | To implement scheme for the benefit of the urban poor either directly or through other urban local bodies incardination with agencies engaged in this direction, whether private, public or co-operative. | |
| (d) | To review the progress of the execution of those activities as well as effectiveness of the benefits directed towards the urban poor. | |
| (e) | To set up or establish any specific service such as training facilities, infrastructural support etc. in furtherance of the economic interest of the urban poor." |
Learned counsel further submits that the objectives of the assessee society are regarding upliftment of urban poor's development which clearly falls under the public utility. Thus, the objectives of the society are related to the public utility. The CIT has wrongly rejected the assessee's application without considering the main object of the society i.e. public utility. The CIT in the IInd round, has also not followed the direction of the Tribunal and rejected the application of the assessee in an arbitrary manner. For this purpose, he has relied on the ratio laid down in the following cases:-
| (a) | Ravi Iron Industries v. Director of Investigation [2003] 264 ITR 28/[2004] 134 Taxman 138 (All.); | |
| (b) | Ajay Hasia v. Khalid Mujib Sehravardi; [1981] 1 SCC 722; | |
| (c) | CIT v. Gujarat Maritime Board; [2007] 295 ITR 561/[2008] 166 Taxman 58 (SC) | |
| (d) | CIT v. Lucknow Industrial Development Authority, Lucknow, IT Appeal No. 156 of 2008; | |
| (e) | CIT v. Krishi Utpadan Mandi Samiti, [2011] 331 ITR 154/[2010] 186 Taxman 460 (All.) | |
| (f) | CIT v. Improvement Trust; [2009] 308 ITR 361 (Punj. & Har.) | |
| (g) | Ahmedabad Urban Development Authority v. Dy. DIT (Exemption) [2011] 335 ITR 575 (Guj.); | |
| (h) | U.P. Forest Corpn. v. Dy. CIT [2008] 297 ITR 1/[2007] 165 Taxman 533 (SC) | |
| (i) | CIT v. U.P. Forest Corpn. Ltd., IT Appeal No. 70 of 2009; | |
| (j) | CIT v. U.P. Forest Corpn. Ltd., SLP (CC) 2590 of 2011; | |
| (k) | Fifth Generation Education Society v. CIT [1990] 185 ITR 634/[1991] 54 Taxman 237 (All.); | |
| (l) | CIT v. Red Rose School [2007] 163 Taxman 19 (All.); and | |
| (m) | DIT v. Garden City Educational Trust [2011] 330 ITR 480/[2010] 191 Taxman 238 (Kar.) |
Lastly, he justified the impugned order.
7. We have heard both the parties at length and gone through the material available on record.
8. From the record, it appears that since 1990-91 i.e. when the assessee-society came into existence, it is engaged in the service of public utility.
9. In the instant case, it appears that the registration was refused only on the basis of a report submitted by the Accountant General, where it was mentioned that the accounts were not properly maintained. But this defect is curable. The accounts, management, control etc. of the assessee are fully controlled by the Government of U.P. Thus, doctrine of instrumentality is applicable as per the ratio laid down in the case of Ajai Hasia (supra). Moreover, in the instant case no individual interest is involved.
10. It is also alleged that the funds were not utilized and ideally kept in the Bank. But, it is not the case of the Department that funds were stiffed or misappropriated. For not utilization of the fund and keeping in the Bank, never attracts the cancellation of the registration of the society, however, it may amounts non-functioning of the Society.
11. Needless to mention that the expression "any other object of general public utility" in Section 2(15) of the Income-tax Act, 1961, is of the widest connotation. That expression would prima facie include all objects which promote the welfare of the general public. It cannot be said that a purpose would cease to be charitable even if pubic welfare is intended to be served. If the primary purpose and the predominant object are to promote the welfare of the general public the purpose would be a charitable purpose, as observed by the Hon'ble Apex Court in the case of Gujarat Maritime Board [2007] 295 ITR 561 (supra).
Further, the words "charitable purposes" defined in Section 2(15) of the Income-tax Act, 1961, include the advancement of any other object of general public utility.
Prior to April 1, 1984, the words used in the section were "advancement of any other object of general public utility not involving the carrying on of any activity for profit". The Finance Act, 1983, omitted the words "not involving the carrying on of any activity for profit" from the section with effect from April 1, 1984. Thus, after April 1, 1984, even if there is some profit in the activity carried on by the trust/institution, so long as the dominant object is of general public utility, it cannot be said that the trust/institution is not established for charitable purposes.
12. The expression "property" used in Section 11 of the Act is of wide amplitude and it includes the business undertaking itself. It includes immovable and movable property. Therefore, where a trust/institution fulfills all the conditions mentioned in Section 12A/12AA, registration cannot be denied on the ground that some conditions of Sections 11 and 12 are not fulfilled, as observed by this Hon'ble High Court in the case of Krishi Utpadan Mandi Samiti (supra).
Section 12AA(3) provides the cancellation of the registration. On reproduction, it reads as under:-
"Section 12AA(3)-Where a trust or an institution has been granted registration under clause (b) of sub-section (1) [or has obtained registration at any time under Section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)]] and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution:
Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard."
In the instant case, the Tribunal has given a categorically finding that the objects of the assessee as mentioned in the Memorandum of Association and Article of Association are of General Public utility. The Tribunal observed that "it is undisputed fact that the objects of the assessee as mentioned in Memorandum of Association and Articles of Association dated 12th November, 1990, are of General Public Utility." In the first round of litigation, the issue relating to assessee's request for registration was remanded back by the Tribunal to the CIT to examine the matter afresh and to decide the same as per law after considering the objects, which had been found by the Tribunal as of "General Public Utility", and as per the decision of Hon'ble Supreme Court in the case of Gujarat Maritime Board (supra).But the CIT while passing order dated 25th March, 2009 admittedly, neither considered the objects nor the decision of Hon'ble Supreme Court (supra). So, the Tribunal in the IInd round of the litigation has rightly granted the registration by passing impugned order.
In the light of above discussion and by considering the totality of the facts and circumstances of the case, we find no reason to interfere in the impugned order passed by the Tribunal. The same is sustained along with the reasons mentioned therein.
In the result, the appeal filed by the Department is hereby dismissed at the admission stage.
Regards
Prarthana Jalan
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