J K Educational Samiti, Gohana vs Assessee

This is an appeal filed by assessee against the refusal for granting registration u/s 12A(1)(aa) of the I. T. Act, 1961. The assessee has taken six grounds of appeal however the crux of grievance of assessee is the refusal of CIT for granting registration u/s 12A(1)(aa).

2. The brief facts of the case are that the assessee is a society registered under the Societies Registration Act and the society was registered vide certificate dated 24.08.2000. The aims and objects as noted in the amended constitution of the society we..f. 15.06.2010 as placed in paper book page 3 onwards, is to run schools beside other allied objects. Ld. A.R. at the outset submitted that application for registration u/s 12A(1)(aa) was duly filed in 2 ITA No.6251/Del/2013

form 10A along with audited accounts for the past 3 years. However, Ld. CIT has refused to grant registration on the basis that objects were not charitable in nature and further holding that the assessee was charging hefty fees and therefore, was not making any charity and instead was earning huge profits. In this respect, Ld. A.R. took us to a copy of audited accounts for the years ended 2010-11 to 2012-13 placed in paper book pages 33-77 and invited our attention to the fact that assessee was not earning huge profits and CIT has considered gross receipts onlywhereas the net profits earned by the assessee were marginal at Rs.19479/-, Rs.4,15,579/- and Rs.5,43,905/- respectively in the year ending 31.03.2010, 31.03.2011 and 31.03.2012. He further submitted that such profits earned by the assessee were re-invested in the school in the form of additional fixed assets which itself was a charitable purpose. Ld. A.R. invited our attention to various replies filed by it during proceedings before CIT and highlighted that all the queries raised by the Commissioner were duly replied to and original certificate of registration of society was also produced for his verification. Ld. A.R. submitted that the issue is duly covered in favour of assessee as various Hon'ble High Courts has held that at the time of registration, the commissioner has to examine the objects of the society and if the objects of the society are found to be charitable in nature then he is bound to grant registration under the Act. In this respect, he invited our attention to various case laws as placed in paper book pages 1-83. Our specific attention was invited to Hon'ble Supreme Court order in the case of Queen's Educational Society vs CIT 275 CTR 449 placed at paper book page 4-15. Ld. A.R. submitted that Hon'ble Supreme Court has settled the issue regarding registration u/s 12AA reversing the order of Uttarakhand High Court. Ld. A.R. submitted that the 3 ITA No.6251/Del/2013

Commissioner had raised objection that unsecured loans were not confirmed whereas confirmation from all unsecured lenders were filed vide letter dated 29.04.2013 as placed in paper book page 20.

3. Ld. D.R. on the other hand submitted that the Commissioner is empowered to refuse registration where he finds that the activities were not genuine. In this respect, she submitted that observations of CIT are very important wherein he has raised certain important objection regarding charging of hefty fees and regarding the explanation and source of unsecured loans obtained by assessee. Moreover, she argued that assessee has placed amended constitution and original has not been filed and examination of original constitution is very important in this case. Ld. D.R. in this respect filed a copy of judgement of Hon'ble High Court of Uttarakhand in the case of National Institute of Aeronautical Engineering Educational Society reported in 181 Taxman 205 (Uttaranchal) and submitted that the facts in the above noted case as decided by Hon'ble High Court are peri-materia with the facts in the present case and therefore, following the above said decision of Hon'ble High Court, appeal filed by assessee needs to be dismissed.

4. Ld. A.R. immediately interrupted and invited our attention to the judgement of Hon'ble Supreme Court in the case of Queens' Educational Society 275 CTR 449placed at pages 4-15 of the paper book and submitted that the findings of Hon'ble High Court in the case law as relied upon by Ld. D.R. has been reversed by Hon'ble Supreme Court in this case. Ld. D.R. interrupted and argued that the said judgement of Hon'ble Supreme Court is with respect to exemption u/s 10(23C)(iiiad) of I. T. Act, 1961 whereas the present case is with respect to registration u/s 12AA which deals with exemption u/s 11 and therefore submitted that the case law cited by Ld. A.R. is not comparable. Ld. A.R. submitted that u/s 10(23C)(iiiad) the exemption 4 ITA No.6251/Del/2013

is allowed to institutions where the turnover is less than Rs.1 crores and where the turnover exceeds Rs. One crore, the exemption is available u/s 11 and 12 subject to registration u/s 12AA. He submitted that though the case law of Queens' Educational society is with respect to section 10(23C)(iiiad) but the Hon'ble Apex Court has held that it is difficult for an institution to carry out an activity in such a way that no profit accrues to the institution and has further held that mere earning of profits in the course of charitable activities cannot be a reason to deny registration. Therefore, he argued that the ratio of Hon'ble Supreme Court decision is squarely applicable to the facts of the present case.

5. We have heard rival parties and have gone through the material placed on record. We find that Section 12AA deals with the procedure for registration which inter alia provides that on an application filed by assessee, the Commissioner of Income Tax will make certain queries as he may deem necessary in this respect and after getting satisfied about the objects of the society/institution and the genuineness of activities, he shall pass an order in writing registering the institution or on non satisfaction, refusing the registration thereof as the case may be. However, before passing order for refusal of registration, the assessee will be provided reasonable opportunity of being heard. Therefore, from the above provision of law, we find that at the time of registration u/s 12AA, the Commissioner is only required to examine the objects of the society / institution as well as genuineness of activities of the assessee and if he finds that the objects of the society are charitable, and the activities as stated in the object clause of the society are being carried out, then he is bound to grant registration u/s 12AA of the Act. Hon'ble High Court of Uttarakhand as relied upon by Ld. D.R. in the case of CIT VS National Institute of Aeronautics and Education 181 Taxman 205 5 ITA No.6251/Del/2013

has held that where the assessee was earning profits by charging hefty fees, the assessee cannot be said to be engaged in charitable activities and was not eligible for registration u/s 12AA of the Act. However, the Hon'ble Supreme Court in the case of Queens' Educational Society Vs CIT 245 CTR 449 has held that mere earning of profit cannot be the reason for not allowing registration under the provisions of Section 12AA. The findings of Hon'ble Supreme Court as contained in para 19 are reproduced below:

"It is clear, therefore, that the Uttarakhand High Court has erred by quoting a non-existent passage from an applicable judgment, namely, Aditanar and quoting a portion of a property tax judgment which expressly stated at rulings arising out of the Income Tax Act would not be applicable. Quite apart from this, it also went on to further quote from a portion of the said property tax judgment which was rendered in the context of whether an educational society is supported wholly or in part by voluntary contributions, something which is completely foreign to Section 10(23C) (iiiad). The final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall foul of section 10(23C) is to ignore the language of the Sec 'on and to ignore the tests laid down in the Surat Art Silk Cloth case, Aditanar case and the American Hotel and Lodging case. It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit. In fact, in S.RM.M.CT.M. Tiruppani Trust v. Commissioner of Income Tax, (1998) 2 SCC 584, this Court in the context of benefit claimed under Section 11 of the Act held"

6. Though, the above findings of Hon'ble Supreme Court are with reference to Section 10(23C)(iiiad) and not in respect of Section 11 and 12 yet the ratio of decision is that mere earning of profit in the course of carrying out charitable activities cannot be a reason for not granting registration u/s 12AA of the Act.

6 ITA No.6251/Del/2013 7. Hon'ble Punjab & Haryana High Court in the case of CIT Bhatinda Vs Baba Deep Singh Educational Society vide order dated 13.10.2011 has held that the jurisdiction of the Commissioner at the stage of processing application u/s 12AA of the Act is to examine the genuineness of the objects of the Trust, whether they are genuine and in consonance with the objects of the trust or institution and where education is being imparted as per the rules and the factum of the establishment and running of schools is not disputed, the same was a genuine activity and the enquiry regarding genuineness of the activities cannot be stretched beyond this. The relevant findings of Punjab and Haryana High Court are reproduced as under:

"2. The respondent-society applied for registration under Section 12AA of the Income Tax Act, 1961 (hereinafter referred to as "the. Act") on 31.3.2009. The said application was declined by the Commissioner of Income Tax, Bathinda (for short "the CIT") vide order dated 25.9.2009. The CIT came to', the conclusion after examining the income and expenditure and the balance sheet for the period ending on 31.3.2006, 31.03.2007 and 31.3.2008 that the society had received donations and the capacity of donors and genuineness of transactions have not been explained. The CIT while noticing that society was running a Polytechnic College further took into consideration that the society was earning profits for the last two year and had claimed exemption under Section 10(23C) of the Act. The reasons to switch over to Section 11 of the Act remained unexplained for claiming exemption under Section 12AA of the Act and while taking into consideration Section 2 (15) of the Act the CIT came to the conclusion that since the society was charging building fund, development fund, sports fund and transportation costs etc., the same could not be termed as charitable activity by any definition.

3. The society preferred an appeal before the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (hereinafter referred to as "the Tribunal") which has allowed the appeal of the society and has set aside the order passed by the CIT and directed that registration applied for by the appellant under Section 12AA of the Act be granted. The present appeal is directed against the said order and the following questions of law have been formulated by the revenue:-

7 ITA No.6251/Del/2013 "1. Whether, in the facts and circumstances of the case, the Id. ITA T was right in law to restrict the powers of the CIT for making the enquiries u/s 12AA(a) of the Act despite the fact that the said section provides that the CIT can make such enquiries as he may deem necessary in this behalf.

2. Whether, in the facts and circumstances of the case the Id. ITA T was right in law in granting registration to the assessee Trust when no work of relief to the poor in the field of education was done as per definition of "Charitable Purposes" provided u/s 2(15) of the Act."

4. The Tribunal while allowing the appeal has noticed at Memorandum of Association and the objects of the society was to do charitable work, projects and activities relating to education which have not been considered while declining the application under Section 12AA of the Act. It was further held that the CIT should have only seen the genuineness of the activities of the society and circular NO.11/2008 dated 19.12.2008 was also referred that the provisions of Section 2(15) of the Act are not applicable to a society. Accordingly, it was held that nature and scope at the stage of grant of registration under Section 12AA of the Act is to only regarding the objects of the society. The Tribunal also distinguished the provisions of Sections 10(23C) and 12AA of the Act and scope of the said sections and held that it was open to the revenue authorities while processing the return of the income of those assessees to examine their claim under Sections 11 and 13 of the Act and give such treatment to those societies as warranted by the facts of the case. The power of the revenue authorities to cancel registration under Section 12AA (3) of the Act was also taken into consideration on the ground that same can be resorted to if the Commissioner is satisfied that the activity of such society or institution are not genuine or are not being carried out in accordance with the objects of the society/institution.

5. The power of the CIT regarding the scope of Section 12AA of the Act has been considered by this Court in the order dated 5.10.2011 passed in CIT Vs. Surya Educational & Charitable Trust [2011] 203 Taxman 53/15 taxmann.com 123 (Punj. & Har.) and it has been held that Section 12AA of the Act, requires satisfaction in respect of the genuineness of the activities of the Trust, which includes the activities 8 ITA No.6251/Del/2013

which the Trust was undertaking at present and also which it may contemplate to undertake. The insertion of Sub Section 3 to section 12AA of the Act regarding the powers of the Commissioner to cancel the registration if the activities of the trust are not carried out in accordance with such objects was also noticed.

6. The Allahabad High Court in CIT Vs. Red Rose School [2007] 163 Taxman 19 has held that the jurisdiction of the Commissioner at the stage of processing application under Section 12AA of the Act is limited regarding whether the activities are genuine and in consonance with the objects of the trust or institution and where education is being imparted as per the rules and the factum of the establishment and running of schools is not disputed the same was a genuine activity and the enquiry regarding genuineness of the activities cannot be stretched beyond this.

7. In view of above facts and circumstances, it would be clear that respondent-society which was admittedly running a Polytechnic 90llege and the activities were interwoven for furthering the projects and activities pertaining to education, the Tribunal rightly directed that registration should be granted to the respondent- society with the rider that the same could always be cancelled if it came to the notice of the CIT that the society was not carrying on the activities as per its objects. The Commissioner while processing the application under Section' 12AA of the Act was not to act as an Assessing Authority and thus, the Tribunal has rightly allowed the appeal filed by the society In the facts and circumstances of the present case.

Accordingly, no substantial question of law as contended in the present appeal arises for determination by this Court and the order dated 31.3.2010 passed by the Tribunal is upheld. Consequently, the appeal is dismissed."

8. Similarly, Hon'ble Delhi High Court in the case of CIT Vs O.P.Jindal Global University, I.T.A. No. 190/2011 and 285/2012 dated 2.5.2013, under similar circumstances, has held as under:

"Therefore, the object of Section 12AA of the Act, is to examine the genuineness of the objects of the Trust, but not the income of the Trust for charitable or religious purposes. The stage for application of income is yet to arrive i.e. when such Trusts or institution files its return. Therefore, we find that the judgement referred to by the 9 ITA No.6251/Del/2013

Learned Counsel for the appellants are not applicable to the facts of the present case arising out of the question of registration of the Trust and not of assessment."

9. It is an undisputed fact that assessee is running educational institution as is apparent from the assessment order of earlier years placed at paper book pages 124-126 and moreover the object clause as placed in paper book pages 3-14 suggests that assessee is running school for educational purposes. The argument of Ld. D.R. that original constitution needs to be examined with respect to objects clause does not hold much force as A.O. in assessment orders of earlier years (as placed in paper book pages 124-126) has noted that society was running a school. In view of above facts and circumstances and in view of the judgements as noted above, we direct the Commissioner to allow registration u/s 12AA of the Act. The A.O. during assessment proceedings will however be entitled to examine the books of accounts of assessee with a view to examine any violation of the Act and can disallow exemption u/s 11 if anything adverse is found.

10. In view of above, appeal filed by assessee is allowed.

11. Order pronounced in the open court on 20th May, 2015.

Sd./- Sd./- ( G. C. GUPTA) (T.S. KAPOOR) VICE PRESIDENT ACCOUNTANT MEMBER th Date: 20 May, 2015 Sp Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi.

True copy. By Order (ITAT, New Delhi). 10 ITA No.6251/Del/2013

S.No. Details Date Initials Designation 1 Draft dictated on 13/5 Sr. PS/PS 2 Draft placed before author 14/5 Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS 20/5/15 Sr. PS/PS 6 Kept for pronouncement 20/5 Sr. PS/PS 7 File sent to Bench Clerk 20/5 Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order