2011 (6) TMI 465 - AT - Income Tax

Profit motive in educational institutions disqualifies trust as charitable

The tribunal upheld the rejection of the registration application under Section 12AA, emphasizing the necessity of aligning trust activities with ... Registration u/s 12AA denied - Assessee trust to provide education with modern methods - motive Fee Collected to be used for future expansion - No Concession to the poor section of the public - 100 schools to be started before 2014 for which a major contribution would be fees - Held that:- The definition clearly shows that carrying on education activities by itself is not a charitable purpose. The concept of charitable purpose may be manifested in different forms like relief of the poor, education, medical relief, etc., but a charitable purpose should always take care of the welfare and interest of the public and especially the poor section of the public. Running schools by collecting huge amounts of fees with five star facilities cannot be treated as a charitable activity only on the ground that the business carried on by such institutions is the business of education. The object of the assessee-trust is to establish a number of educational institutions in a brand name and run it on commercial lines. This cannot be a charitable activity. Therefore,the Director of Income-tax (Exemptions) has rightly rejected the application filed by the assessee for registration under section 12AA. Against assessee. Issues:1. Rejection of registration under section 12AA of the Income-tax Act, 1961 based on profit motive in trust's activities.2. Interpretation of charitable purpose under section 2(15) for educational institutions.3. Consideration of fee structure and provision of free education or fee concessions for deserving students.Issue 1: Rejection of Registration under Section 12AA:The appeal was filed against the rejection of registration under section 12AA by the Director of Income-tax (Exemptions) based on the trust's profit motive. The trust aimed to establish educational institutions, but the Director observed that the fees structure included a profit component for future expansion, indicating a profit motive contrary to the trust's objectives. The trust's freedom to fix fees could be used for expansion rather than focusing on educational activities, leading to the rejection of the registration application.Issue 2: Interpretation of Charitable Purpose for Educational Institutions:The tribunal analyzed the definition of 'charitable purpose' under section 2(15) of the Income-tax Act, emphasizing that educational activities alone do not constitute a charitable purpose. Charitable activities should benefit the public, especially the poor, and must align with relief of the poor, education, or medical relief. The tribunal highlighted that running educational institutions solely for profit, without providing free education or concessions to deserving students, does not fulfill the criteria of charitable purpose. The judgment emphasized that true charity involves helping the needy and supporting the poor, and running institutions on commercial lines does not qualify as a charitable activity.Issue 3: Provision of Free Education or Fee Concessions:During the hearing, it was revealed that the trust did not provide free education or fee concessions to deserving students except for teachers' wards. The tribunal noted that providing concessions only to teachers' wards did not fulfill the charitable purpose requirement. The judgment highlighted that charging commercial fees without offering charity to the needy contradicts the essence of charitable activities. The tribunal concluded that the trust's objective to establish educational institutions on commercial lines did not align with charitable activities, leading to the dismissal of the appeal.In conclusion, the tribunal upheld the rejection of the registration application under section 12AA, emphasizing the importance of aligning trust activities with charitable purposes and providing genuine assistance to the needy for an institution to qualify as charitable.