2008 (7) TMI 621 - AT - Income Tax

Trusts Engaged in Charitable and Religious Activities Qualify for Tax Exemption u/s 11, ITAT Rules.

The ITAT ruled that the assessees, trusts engaged in both charitable and religious activities, were entitled to exemption under section 11 of the ... Interpretation of Statutes - denial of Exemption u/s 11(1)(a) - trust engaged in both Religious and Charitable activities - Mixed Society - Word ‘OR’ / ‘AND’ - Society registered u/s 12A - Conclusion arrived at by the CIT(A) that if the word ‘or’ is taken in its disjunctive sense and read as ‘or’ itself would mean that ‘wholly charitable’ or ‘wholly religious’ is not at all correct - HELD THAT:- It is not the case of the AO or the CIT(A) that both the assessees are either not fully or partly engaged in the non-religious or the non-charitable activities. In fact, from the assessment order, we find that the AO has undisputedly accepted the fact that, more particularly in the case of Calicut Islamic Cultural Society (supra), the assessee is not constituted only for the benefits of the backward community alone but for the benefit of the entire public as such. Moreover, in the institutions run by the assessee, more particularly the educational institutions, the members of the other community are also admitted. The assessee is also giving support to the poor - In the same way, in the case of another assessee, it is not the case of the AO that the activities of the assessee are not otherwise than religious and charitable activities. It is interpreted that as per the words used in section 11(1)(a) of the Act, for any institution or trust it must have either wholly charitable or wholly religious activities. The entire controversy is revolving around the interpretation of section 11(1)(a) of the Act. In both these appeals, it is not the case of the Department either that any of the bars provided u/s 13 of the Act are applicable to both these assessees as per the interpretation given by the AO as well by the CIT(A). As per the provisions of section 11(1)(a) of the Act, it requires that there should be nexus between the property held under the trust wholly for charitable or religious purposes and the income under consideration. The interpretation given by the AO as well as by the CIT(A) is that the purpose should be wholly charitable or wholly religious. We are afraid, whether such interpretation can be accepted. In our opinion, said interpretation given by both the authorities is only academic. When the Legislature has categorically defined the purposes like religious and charitable and if the assessee is engaged as per their objects in mixed activities, which are partly charitable and partly religious, it cannot be said that section 11(1)(a) of the Act does not contemplate such situation. Another aspect to be considered here in both these cases is that both these assessees have been granted Registration u/s 12A. The argument of the ld DR is that prior to insertion of section 12AA of the Act, no much more investigation was done by the CIT and it was just an empty formality to grant Registration in the old section 12A of the Act. We are unable to accept the said argument for the reason that in section 12A of the Act also the application of the mind by the CIT was involved. During the course of argument it was brought to our notice that though the exemption is refused to both the assessees, Registration granted u/s 12A stand as it is. In our opinion, once the Registration is granted to the assessee by the CIT, AO cannot go into probing the objects and the purposes of the trust or institution and that is within the exclusive domain and jurisdiction of the CIT. What AO can do that he can at the most investigate the matter within the four corners of section 13 of the Act. In this case the AO has gone with investigating and probing the basic objects of the trust by entering into shoes of the CIT and such exercise is not permissible. It is well-settled principle of the binding force of the precedent that it is applicable as far as the facts of that particular case are concerned. Even if there are general observations then the same are to be interpreted in the context in which they are made. The learned DR tried to argue that prior to introduction of section 12AA of the Act, i.e., prior to 1-4-1997 section 12A was a mere formality under which the CIT has granted the registration to both these assessees. If we examine the scheme of section 12A of the Act, which was applicable prior to introduction of section 12AA, it cannot be said that it was a mere formality. Getting a registration is one of the conditions for claiming the benefits of sections 11 and 12 of the Act. From the language used by the Legislature and scheme of the section 12A, it will not be wrong to say that proceedings contemplated u/s 12A of the Act are in the nature of quasi-judicial proceedings and CIT has to decide whether the applicant trust or institution are eligible to get the benefits of section 11 or 12 and for deciding the eligibility CIT has to examine the byelaws and objects of the trust. In our opinion, even u/s 12A, granting registration was not merely empty formality and our view is supported by the decision of the Hon’ble High Court in Hiralal Bhagwati v. CIT [2000 (4) TMI 14 - GUJARAT HIGH COURT], which is approved by the Hon’ble Supreme Court in CIT v. Surat City Gymkhana[2008 (4) TMI 16 - SUPREME COURT]. Therefore, we are of the opinion that both these assessees are eligible to claim the exemption u/s 11 of the Act. We therefore cancel the order of the CIT(A) and direct the AO to give benefits of section 11 to both these assessees by treating their income as exempt. In the result, both the appeals of the assessees are allowed. Issues Involved:1. Denial of exemption under section 11(1)(a) of the Income-tax Act, 1961.2. Interpretation of section 11(1)(a) regarding mixed charitable and religious activities.3. Validity of Assessing Officer's examination of trust's objects post-registration under section 12A.4. Applicability of the Jammu & Kashmir High Court decision in Ghulam Mohidin Trust v. CIT.Issue-wise Detailed Analysis:1. Denial of Exemption under Section 11(1)(a):The primary issue was whether the assessee trusts, engaged in both charitable and religious activities, were entitled to exemption under section 11(1)(a) of the Income-tax Act, 1961. The Assessing Officer denied the exemption on the grounds that the trusts were involved in mixed activities, both charitable and religious, and thus did not qualify for exemption under section 11(1)(a).2. Interpretation of Section 11(1)(a):The Assessing Officer and CIT(A) interpreted section 11(1)(a) to mean that exemption could only be granted to trusts wholly engaged in either charitable or religious activities, not both. The CIT(A) supported this interpretation by emphasizing the disjunctive use of the word 'or' in the section, arguing that reading 'or' as 'and' would render section 11(1)(b) meaningless, which provides exemption for trusts created before 1-4-1962 with mixed activities.3. Validity of Assessing Officer's Examination Post-Registration:The assessee argued that once registration under section 12A was granted, the Assessing Officer could not re-examine the objects of the trust. The ITAT agreed, stating that the Assessing Officer's role was limited to ensuring compliance with section 13 of the Act and could not probe the objects of the trust, which was within the exclusive jurisdiction of the CIT during the registration process.4. Applicability of Ghulam Mohidin Trust Decision:The Assessing Officer relied on the Jammu & Kashmir High Court decision in Ghulam Mohidin Trust v. CIT, which held that a trust with mixed charitable and religious objects could not claim exemption under section 11(1)(a). However, the ITAT found this precedent inapplicable to the present cases. In Ghulam Mohidin Trust, the discretion to apply income to non-charitable purposes was a key factor, whereas in the present cases, the trusts' activities were for the general public benefit and did not include non-charitable purposes.Conclusion:The ITAT concluded that both assessees were eligible for exemption under section 11 of the Act. The interpretation that trusts must be wholly charitable or wholly religious was rejected. The ITAT emphasized that the primary or dominant purpose of the trust should be considered, and incidental religious activities did not disqualify the trusts from exemption. The orders of the CIT(A) were set aside, and the Assessing Officer was directed to grant the exemption under section 11 to both assessees.