2009 (7) TMI 832 - HC - Income Tax

Section 12A registration required for tax exemption but doesn't guarantee benefits automatically

Karnataka HC held that registration under section 12A of the Income Tax Act is a condition precedent for claiming exemption benefits under sections 11 and ... Nature and object of the Charitable trust - charitable purpose - trust running educational institutions and imparting education - availing of the facility of exemption in terms of clause (22) of section 10 - HELD THAT:- We are of the view that the applicant before the Commissioner did impart education in terms of section 12A, as it is not in dispute that one of the objects or even the main object of the trust is imparting education. It is also not in dispute that the trust is imparting education and it is not as though some other activity which is not in the nature of education is sought to be passed off in the name of education. So long as the trust has education as one of its objects which is one of the enumerated heads which qualify and come within the scope of charitable purpose as enumerated in clause (15) of section 2, it has to be accepted that the trust is having a charitable purpose as its object and may qualify for claiming exemptions in terms of sections 11 and 12 subject to fulfilling conditions enumerated therein and, if so, grant of registration, so long as the procedural requirements are complied is inevitable. It is not the finding of the Commissioner that the applicant-assessee had not complied with any of the procedural requirements. The Tribunal is fully justified in observing that the manner of application of funds and as to whether the applicant-assessee can claim the benefit of exemption in terms of sections 11 and 12 is a question which has to be examined by the Assessing Officer at the stage when it is urged and not by the Commissioner when such question is not before the Commissioner. It is hereby clarified and emphasized that while registration in accordance with the provisions of section 12A of the Act is a condition precedent for claiming the benefits under sections 11 and 12 of the Act, a registration as per section 12A by itself, will not automatically confer the benefits of sections 11 and 12 on a trust, but the trust will get the benefit only on complying with the requirements of sections 11 and 12 of the Act, which compliance can be examined by the assessing authority, while processing the return filed by the trust. Therefore, this appeal has to be dismissed. However, with regard to the other question sought to be agitated viz., the second question, we find it is academic, as it is submitted this question does not actually arise from the order of the Tribunal which is impugned in this appeal. However, we make it clear that it is open to the Revenue to agitate that question as and when it arises and if and when the matter is pursued by the Revenue. Without prejudice this appeal is dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:(a) Whether the Income-tax Appellate Tribunal was correct in holding that the assessee-trust was entitled to registration under section 12A of the Income-tax Act, 1961, on the basis that it carried on an activity of charitable purpose within the meaning of section 2(15) of the Act, despite the Director (Exemption) having concluded that the trust engaged in business activities for the trustees' family benefit, thus recording a perverse finding;(b) Whether the Tribunal was correct in allowing the appeal filed by the assessee without properly appreciating the issue regarding delay in filing the application seeking exemption under section 12A;2. ISSUE-WISE DETAILED ANALYSISIssue (a): Entitlement to Registration under Section 12A on Charitable PurposeRelevant Legal Framework and Precedents: Section 12A of the Income-tax Act mandates that an organisation seeking exemption under sections 11 and 12 must obtain registration by making an application to the Commissioner. The Commissioner examines whether the organisation has a charitable purpose as defined in section 2(15), which includes education as a charitable purpose. The Commissioner may grant registration either prospectively or retrospectively if delay is justified. The scrutiny of the manner of application of funds and genuineness of activities is generally undertaken by the Assessing Officer at the assessment stage, not at the registration stage. The Tribunal relied on authoritative decisions including CIT v. Red Rose School and Sanjee Vamma Hanumanthe Gowda Charitable Trust v. Director of Income-tax (Exemptions), which held that the Commissioner's role under section 12A is limited to examining the nature and objects of the trust and not the detailed manner of fund application or generation.Court's Interpretation and Reasoning: The Court noted that the trust's primary object was imparting education, which falls squarely within the definition of charitable purpose under section 2(15). Despite the Commissioner's findings regarding commercial activities such as starting industries, import-export business, charging tuition fees, and trustees drawing remuneration, the Court held that these factors alone do not negate the charitable character of the trust's objects. The Commissioner's rejection was based on the presence of some commercial activities and alleged misuse of funds, but the Court emphasized that the Commissioner's role is not to scrutinize the manner of fund application or to delve into the genuineness of activities beyond the object clause at the registration stage.Key Evidence and Findings: The trust deed showed education as one of the objects, and the trust was actively running educational institutions. The Commissioner's order noted commercial activities and fee collection but did not find procedural non-compliance. The Tribunal and Court accepted that the trust was indeed carrying on educational activities.Application of Law to Facts: The Court applied the principle that registration under section 12A is a condition precedent for claiming exemption but does not automatically confer exemption under sections 11 and 12. The manner in which funds are applied or generated is to be examined by the Assessing Officer during assessment, not by the Commissioner at registration. Hence, the presence of some commercial activities or fees charged does not disqualify the trust from registration if education is a charitable object.Treatment of Competing Arguments: The Revenue argued the Commissioner had rightly rejected the application based on detailed scrutiny of the trust's activities and found that the trust was not truly charitable. The Court rejected this, holding that such detailed scrutiny is beyond the Commissioner's mandate under section 12A. The assessee argued that the Tribunal rightly allowed the appeal based on settled legal principles limiting the Commissioner's role to examining objects and not activities or fund application, which the Court upheld.Conclusions: The Court concluded that the Tribunal was justified in holding that the trust was entitled to registration under section 12A because it carried on charitable activities, specifically education, as one of its objects. The Commissioner erred in rejecting the application based on commercial activities and fund application issues, which are matters for assessment proceedings.Issue (b): Delay in Filing Application for RegistrationRelevant Legal Framework: Section 12A allows the Commissioner to grant registration retrospectively if the delay in filing the application is properly explained and justified. The question of delay is a procedural matter that the Commissioner must consider.Court's Interpretation and Reasoning: The Court found this issue to be academic in the present appeal because the order of the Tribunal under challenge did not address or decide the question of delay in filing the application. The Tribunal had passed a subsequent order on this question, but that order was not under appeal before the Court. Therefore, the Court declined to examine this question.Treatment of Competing Arguments: The Revenue urged that the Tribunal erred in not appreciating the delay issue properly, but the Court held that since this question was not raised or decided in the impugned order, it was not ripe for adjudication.Conclusions: The Court dismissed the appeal on this ground as academic and clarified that the Revenue may raise this issue in appropriate proceedings in the future.3. SIGNIFICANT HOLDINGS'It is hereby clarified and emphasized that while registration in accordance with the provisions of section 12A of the Act is a condition precedent for claiming the benefits under sections 11 and 12 of the Act, a registration as per section 12A by itself, will not automatically confer the benefits of sections 11 and 12 on a trust, but the trust will get the benefit only on complying with the requirements of sections 11 and 12 of the Act, which compliance can be examined by the assessing authority, while processing the return filed by the trust.'Core principles established include:The Commissioner's role under section 12A is limited to examining the nature and objects of the trust and whether it has a charitable purpose within the meaning of section 2(15), not the manner of application or generation of funds.The presence of some commercial activities or charging of fees does not preclude registration if the trust's objects include charitable purposes such as education.Registration under section 12A is a prerequisite for claiming exemption but does not guarantee exemption under sections 11 and 12; compliance with substantive conditions is examined at the assessment stage.Issues concerning delay in filing the application for registration must be properly raised and decided before being adjudicated on appeal.Final determinations:The appeal was dismissed with respect to the entitlement to registration under section 12A, affirming the Tribunal's order granting registration to the trust on the ground that it carried on charitable activities, specifically education. The question of delay in filing the application was held to be academic and not decided in the present appeal.