2015 (5) TMI 748 - AT - Income Tax

Tribunal overturns denial of registration to educational trust, emphasizing charitable nature.

The tribunal held that the CIT's denial of registration to the appellant trust based on assumptions of profit motive from a franchise agreement was ... Registration to appellant trust u/s 12AA(1)(b) denied - CIT(A) held the appellant trust has entered into the franchise agreements with Mount Litra Zee School, whereby the applicant trust has given franchisee fee to Zee Learn Ltd thus under the agreement, the school will be run under the guidelines and specification from franchisor and therefore there is no scope with the assessee to get into any charitable activity and this venture in education is purely commercial - Held that:- As relying on case of CIT Vs. Highlanders Educational Academy [2012 (12) TMI 497 - UTTARAKHAND HIGH COURT] wherein held the Assessing Officer held that the assessee is not existing solely for educational purposes, but, at the same time, it clearly and in no uncertain terms recorded a finding that the assessee is running a school with Nursery and Kindergarten classes. No other existence of the assessee was noticed. Therefore, the conclusion would be that the assessee was existing for the purpose of running the said school with Nursery with Kindergarten classes and, accordingly, was existing solely for educational purposes and not for purposes of profit. If the existence of the assessee was not for the purposes of profit, but solely for educational purpose, then the receipts of the assessee, if the same did not exceed ₹ 1 crore per annum, will be outside the purview of total income as is the mandate contained in Section 10(23C)(iiiad) of the Act. That having not been held by the Assessing Officer was reversed by the Commissioner of Appeals and the same having been affirmed by the Tribunal, there is no scope of interference. Thus the basis adopted by the CIT to decline registration was not in accordance with law and in view thereof, CIT is directed to grant the registration to appellant trust u/s 12AA(1)(b) of the Act. - Decided in favour of assessee. Issues Involved:1. Whether the appellant trust's educational activities qualify as charitable under Section 2(15) of the Income Tax Act, 1961.2. Whether the CIT was justified in rejecting the trust's application for registration under Section 12A(a) based on the franchise agreement with Zee Learn Ltd.Issue-wise Detailed Analysis:1. Charitable Nature of Educational Activities:The appellant trust, formed under a deed of trust dated 11.06.2012, primarily aims to pursue educational activities. The CIT rejected the trust's registration application, arguing that the franchise agreement with Mount Litra Zee School made the venture commercial rather than charitable. The CIT concluded that the main motive appeared to be profit, thus questioning the genuineness of the trust's activities.The appellant argued that education is inherently charitable under Section 2(15) of the Act, citing multiple judgments, including Aryan Educational Society Vs. CIT and CIT Vs. Red Rose School, which support the view that educational activities are charitable. The appellant contended that entering into a franchise agreement does not inherently imply that the trust's primary motive is profit. The appellant further emphasized that the CIT's role at the registration stage is to assess the trust's objectives and the genuineness of its activities, not to speculate on future profit motives.The tribunal noted that the trust deed explicitly states that the trust's properties and funds are to be used solely for its objectives, and no income or property benefits the trustees. The tribunal also referenced Section 2(15) of the Act, which includes education as a charitable purpose without imposing restrictions on the manner of education. The tribunal highlighted that the proviso to Section 2(15) concerning commercial activities does not apply to educational activities.The tribunal cited Circular No.11 of 2008, which clarifies that the proviso to Section 2(15) does not apply to educational activities even if they involve commercial elements. The tribunal also referenced the Supreme Court ruling in American Hotel and Lodging Association Education Vs. CBDT, which stated that incidental surplus from educational activities does not negate their charitable nature.2. Justification for Rejection of Registration:The tribunal held that the CIT's rejection of the trust's registration based on presumptions about future income utilization was inappropriate. The CIT's reliance on the franchise agreement to assume non-charitable intent was deemed speculative. The tribunal emphasized that the CIT's role at the registration stage is limited to verifying the trust's objectives and the genuineness of its activities, not to assess income application under Sections 11 and 12 of the Act.The tribunal cited the Allahabad High Court's judgment in CIT Vs. Red Rose, which stated that registration under Section 12AA does not guarantee income exclusion from tax but allows the trust to claim exemption. The tribunal also referenced the Uttarakhand High Court's ruling in CIT Vs. Highlanders Educational Academy, which supported the view that educational activities do not lose their charitable status due to incidental profits.Conclusion:The tribunal concluded that the CIT's decision to deny registration was incorrect and directed the CIT to grant registration to the appellant trust under Section 12AA(1)(b) of the Act. The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 27.02.2015.