IT: Assessee would be entitled to enjoy benefit of registration under section 12AA so long as it is established that income of assessee-society has been applied for charitable purposes as per section 11
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[2013] 38 taxmann.com 211 (Hyderabad - Trib.)
IN THE ITAT HYDERABAD BENCH 'A'
Institute & Electronics Engineers Inc.
v.
Director of Income-tax (E), Hyderabad*
CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
IT APPEAL NO. 639 (HYD.) OF 2013
AUGUST 23, 2013
Section 12AA, read with sections 11 and 13, of the Income-tax Act, 1961 - Charitable or religious trust - Procedure for registration [Denial of registration] - Whether so long as it is established that income of assessee-society has been applied for charitable purposes in terms of section 11(2) and there is no violation of section 13, assessee would be entitled to enjoy benefit of registration under section 12AA; merely because some profit has been earned by an assessee-trust, registration under section 12AA cannot be denied - Held, yes - Assessee, an institution, applied for registration under section 12AA - On enquiry, Director (Exemption) found that activity of deriving income under 'programme revenue' undertaken on part of assessee-society, did not commensurate to objects of assessee - Accordingly, he denied registration to assessee - Whether since no infirmity was found in activities carried out by assessee, Director (Exemption) could not deny registration to assessee - Held, yes [Para 15] [In favour of assessee]
FACTS
| ■ | The assessee, an institution, applied for registration under section 12A. The Director (Exemptions) rejected said application. | |
| ■ | On appeal, the Tribunal noted that the Director (Exemption) had not made any enquiry about the objects and genuineness of the society and remitted matter back to Director (Exemption) for deciding same afresh. | |
| ■ | On enquiry, Director (Exemption) noticed that assessee had shown income under head 'programme revenue' and that there was no reference to said income in articles of assessee and held that since such activity of deriving income under 'programme revenue' on the part of the assessee society, was not as per its objects, it could not be granted registration under section 12AA and, hence, registration sought for under section 12AA was declined. | |
| ■ | On further appeal, the assessee submitted that scope of power of Director (Exemption) was limited to ascertaining whether objects were charitable in nature. |
HELD
| ■ | The DIT(E) is empowered to enquire about the activities of the assessee before passing the order. There may be cases where application is made after the commencement of activities by the assessee trust. In such cases the DIT(E) is justified to enquire about the activities. However, where no activity has commenced, the question of making any enquiry regarding any activity by the DIT(E) would not arise. The nature of enquiry would depend on the facts of each case. Hence, the contention of the assessee that scope of the DIT(E) is limited to ascertaining only whether the objects are charitable or not cannot be accepted. [Para 11] | |
| ■ | For the purpose of sections 11 and 12, the word "charitable purpose" has been defined in section 2(15). The object of the assessee is in the nature of charitable activities. [Paras 12 & 13] | |
| ■ | The above view that is also supported by the Legislative intent disclosed in section 10(22) wherein it has been clearly provided that income of any activities cannot be exempted unconditionally if such institution also exists for deriving profit. The reason is obvious because financial affairs of such institution are well-controlled by the provisions of sections 11 and 13. Section 11 clearly provides that in order to claim exemption, such institution must apply 75 per cent of its income for charitable purposes. The surplus, if any, has to be invested in specified bonds. Further, exemption can be denied if the provisions of section 13 are violated. Therefore, if there is any violation of either section 11or section 13, then, the profits of charitable institution would be taxable. Further, the fact that only 75 per cent of the income is to be applied for charitable purposes itself shows that element of profit is not excluded from the definition of 'charitable purpose' for the purpose of sections 11 and 12. Because some profit has been earned by an assessee trust registration under section 12AA cannot be denied so long as provisions of sections 11, 12 and 12AA are complied with. So long as it is established that income of the assessee society has been applied for the purpose of charitable activities in terms of section 11(2) and there is no violation of section 13, the assessee would be entitled to enjoy the benefit of registration under section 12AA. [Para 15] | |
| ■ | Being so, there was no infirmity in the activities carried out by the assessee and, accordingly, the DIT(E) was directed to grant the registration under section 12AA to the assessee. [Para 16] |
CASES REFERRED TO
Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1979] 2 Taxman 501 (SC) (para 13).
A.V. Raghuram for the Appellant. R. Lakshman for the Respondent.
ORDER
Chandra Poojari, Accountant Member - This appeal filed by the assessee is directed against the order passed by the DIT(E), Hyderabad dated 22/03/2013.
2. Briefly the facts, as noted by the DIT(E) are that the above institution has earlier filed an application in Form NO.10A on 13/04/2011 seeking registration u/s.12AA of the Income Tax Act, 1961 ('the Act' in short). However, after pointing out that the "activities conducted by the assessee are basically aimed at improving the knowledge and competence of its members and that the society is not engaged in any charitable activity and further pointing out that, it is also hit by the amended provisions of Section 2(15) of the Act, the said application was rejected by the then Director of Income Tax(Exemptions), vide his order in F No.DIT(E)/Hyd/12A/25(04)/1l-12 dated 31.10.2011.
3. Being aggrieved by the said order of the DIT(E), the assessee has filed an appeal before the' Hon'ble Income Tax Appellate Tribunal (ITAT in short), Hyderabad. After considering the assessee's submissions, the Hon'ble ITAT, while stating that the DIT(E) has not made any enquiry about the objects and genuineness of the society, vide their order in ITA NO.1967/Hyd/2011 dated 24.08.2012, have set-aside the said order of the DIT(E) and remitted such matter back to the file of the DIT(E), Hyderabad, for deciding the same afresh, after examining the documents and giving opportunity to the assessee. The relevant observations made by the Hon'ble Tribunal, in this regard, in para-5 at page 3 of their said order, are reproduced as under:
"As it appears the DIT(E) has not made any enquiry to satisfy himself about the object and genuineness of the trust. We therefore set aside the order passed by the 'DIT(E) with a direction to re-examine the issue afresh after considering the documents produced before him by the assessee and after making such enquiry as may be deemed necessary. The assessee shall be given a reasonable opportunity of being heard before proceeding is , completed".
4. Following the said order of the Hon'ble ITAT, proceedings were taken afresh by DIT(E) for deciding the said matter. In response to notice dated 25.02.2013, issued to the assessee by DIT(E), the assessee appeared and filed written submission other details during the proceedings before the DIT(E) as under:
5. The assessee-society has three objects. Such objects, as mentioned under the head 'objectives" in the memorandum of Association of the assessee-society are reproduced as under:
| "1. | Advancement of the theory and practice of IEEE designated fields Electrical and Electronics Engineering and the maintenance of his professional standards among its members | |
| 2. | Holding technical and professional lectures, seminars, conference discussions and such programmes as are necessary for exchange knowledge and continuing education and thereby to contribute and promote long- term professional development of members | |
| 3. | To endeavor to promote understanding of the influence of technology and work for welfare of public at large by organizing special technical programmes." |
6. From the aforementioned objects, it may be noticed that though in the object clause-3, there is reference to make endeavour to promote understanding of the influence of technology for welfare of public at large by organizing technical programs, various activities to be done as per the first two objects, are primarily meant for the benefit of only the members of the society. Further, as may be noticed, there is no reference to generating any income from such activities as referred to in those objects. However, as seen from the copies of accounts of the assessee society, furnished for different accounting years, it has shown income under the head 'programme revenue' in each such year. This income comprises receipts under different heads and clarifying about the nature of such programme revenue, and also filed written submissions as under:
"2. Programme revenue: Receipts from various programs conducted by the section and following chapters during the year. The program details are as follows:
| 1. | MTT/AP/EMC Chapter: Microwave Theory and Techniques Society/Antennas and Propagation/Electromagnetic Compatibility Chanter. | |
| 2. | PES/IAS/PELS Chapter: Power Engineering/industry Application/Power Electronics Chapter | |
| 3. | Section activities | |
| 4. | Student Section Congress | |
| 5. | WIE: Women in Engineering | |
| 6. | Gold affinity group : Graduates of last decades | |
| 7. | Com/SP Chapter: Communication/Signal Processing Chapter." |
7. According to the DIT(E), the total amount under 'programme revenue' for the accounting year ended on 31.03.2009, 31.03.2010 and 31.03.2011 are shown at Rs.21,53,995/-,Rs. 4,06,027/- and Rs. 4,32,911, respectively. Further, while clarifying about funds, in the case of the society, under Articles of Association, it is stated that, the funds of the society shall consist of Membership fee, Grants and Donations from various sources. Thus, there is no reference to any programme revenue in that clarification given in the articles of association of the assessee-society. He observed that income from programme revenue derived by the society during each year, is not as per the objects of the society, he also mentioned that, under section 12AA(3) of the Act, it says that registration granted to a trust or institution can be withdrawn, when the CIT finds that the activities of that trust or institution are not genuine or are not being carried out in accordance with the objects of such trust or association. From the same, thus, it follows that when a trust or an institution carries on activity which is not in accordance with its objects, then, it would not be eligible for registration u/s 12AA of the Act.
8. After discussing the case as above, the DIT(E) held that since in the instant case, such activity of deriving income under 'programme revenue' on the part of the assessee society, is not as per its objects, as stated in the Memorandum of Association, it cannot be granted registration u/s 12AA of the Act and hence, registration sought u/s 12AA of the Act is refused to the above society.
9. Aggrieved, the assessee is in appeal before us.
10. The assessee has raised as many as 9 grounds of appeal, the sum and substance of which is against the action of the DIT(E) in rejecting the application filed by the assessee seeking registration u/s 12AA of the IT Act.
11. We have heard both the parties and perused the material on record. The first question arising for our consideration in this appeal relates to the scope of enquiry by the DIT(E) u/s. 12AA of the Act. We are in agreement with the DR that after insertion of section 12AA w.e.f. 1.4.1997, the DIT(E) is empowered to enquire about the activities of the assessee before passing the order. There may be cases where application is made after the commencement of activities by the assessee trust. In such cases the DIT(E) is justified to enquire about the activities. However, where no activity is commenced, the question of making any enquiry regarding any activity by the DIT(E) would not arise. The nature of enquiry would depend on the facts of each case. Hence the contention of the AR that scope of the DIT(E) is limited to ascertaining only whether the objects are charitable or not cannot be accepted.
12. The next question for our consideration is whether on the facts and in law, the registration u/s. 12AA of the Act can be refused to the assessee. For the purpose of sections 11 and 12, the word "charitable purpose" has been defined in section 2(15) of the Act which reads as follows:
'"Charitable purpose" includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, 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 of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity:
Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is twenty-five lakh rupees or less in the previous year;'
13. So, the object of the assessee is in the nature of charitable activities. It was held by the Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1979] 2 Taxman 501 as under:
"It is now well settled as a result of the decision of this Court in Dharmadeepti v. CIT 1978 CTR (SC) 120 : (1978) 114 ITR 454 (SC), that the words 'not involving the carrying on of any activity for profit' qualify or govern only the last head of charitable purpose and not the earlier three heads. Where, therefore, the purpose of a trust or institution is relief of the poor, education or medical relief, the requirement of the definition of 'charitable purpose' would be fully satisfied, even if an activity for profit is carried on in the course of the actual carrying out of the primary purpose of the trust or institution."
14. At this stage it is also pertinent to note that the clause "not involving carrying any activities of profit" were omitted from this definition by the Legislature by Finance Act, 1983 w.e.f. 1st April, 1983. Therefore, after such omission, the element of profit cannot be excluded from the definition "charitable purposes". u/s. 2(15) of the Act.
15. The above view is also supported by the Legislative intent disclosed in section 10(22) wherein it has been clearly provided that income of any activities cannot be exempted unconditionally if such institution also exists for deriving of profit. According to this provision, if any activity is running on commercial basis then income of such activity cannot be exempted from taxation. However, such institution can claim exemption u/ss. 11 and 12 as element of profit is not excluded by the Legislature. The reason is obvious because of financial affairs of such institution are well controlled by the provisions of sections 11 and 13 of the Act. Section 11 clearly provides that in order to claim exemption such institution must apply 75% of its income for charitable purposes. The surplus if any has to be invested in specified bonds. Further, exemption can be denied if the provisions of section 13 are violated. Therefore, if there is any violation of either section 11 or section 13, then, the profits of such institution would be taxable. Further the fact that, only 75% of the income is to be applied for charitable purposes itself shows that element of profit is not excluded from the definition of charitable purpose for the purpose of sections 11 and 12. Because some profit has been earned by an assessee trust registration u/s. 12AA cannot be denied so long as provisions of sections 11, 12 and 12AA are complied with. So long as it is established that income of the assessee society has been applied for the purpose of charitable activities in terms of section 11(2) and there is no violation of section 13, the assessee would be entitled to enjoy the benefit of registration u/s. 12AA of the Act.
16. Being so, we find no infirmity in the activities carried out by the assessee and accordingly we direct the DIT(E) to grant the registration u/s 12AA of the Act, to the assessee.
17. In the result, appeal of the assessee is allowed.
Regards
Prarthana Jalan
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