2025 (9) TMI 709 - AT - Income Tax

Registration under s.12AA to be granted; activities for ex-servicemen held charitable despite medicine sales and receipts not treated as trade

Kerala State Ex-Servicemen Development and Rehabilitation Corporation Versus The Commissioner of Income Tax (Exemption), Kochi.

ITAT set aside the denial of registration under s.12AA and directed the CIT(E) to grant registration, holding the company's activities supportive of ... Denial of Registration u/s. 12AA - genuineness and the activities of the trust as deemed to be not charitable - assessee is a section 25 company - HELD THAT:- The assessee, formed a company with the aid of the Government and tried to assist the Ex-Servicemen and their dependants who are in need and without receiving anything from the members. The mere incomes received by the assessee could not be treated as a profit and therefore their activities could be treated only as a charitable activity. Mere getting some income while executing the activities could not be treated as income obtained from trade/business and on that basis it could not be concluded that the assessee is not doing any charitable activities. Assessee had applied for registration u/s. 12AA of the Act and therefore at that time, CIT(E) could not go into the entire facts and arrive a conclusion that the assessee is not doing any charitable activities. At the best, the CIT(E) can verify the genuineness of the trust and considered the objects and not more than that while granting registration. Assuming that the order of the CIT(E) is correct, then the registration granted by the department and the exemption granted u/s. 11 from the year 2004 would be an incorrect one. All along the authorities had treated the assessee as doing charitable activities but all of a sudden, the Ld.CIT(E) had took a different view which in our opinion is not correct. Hon’ble Jurisdictional High Court in the case of Sree Anjaneya Medical Trust [2016 (3) TMI 30 - KERALA HIGH COURT] had held that the authorities could have examined the genuineness of the trust and its activities while considering the application for registration and nothing more than that. Therefore, from the above judgment, it is clear that the genuineness and the activities of the trust should alone be verified by the Ld.CIT(E) at the time of granting registration and therefore the order of the Ld.CIT(E) discussing the issues in length is not a correct one. Further the company was established for the economic upliftment of the ex servicemen and their families. By selling the medicines to the public through the medical stores is also a relief to the poor. Therefore the activities carried on by the assessee could not be termed as non charitable activities. We, therefore, set aside the order of the Ld.CIT(E) and direct theCIT(E) to grant the registration u/s. 12AA of the Act. ISSUES PRESENTED AND CONSIDERED 1. Whether an entity incorporated under Section 25 of the Companies Act and operating on a no-profit/no-loss basis for the welfare, development and rehabilitation of ex-servicemen and their dependants qualifies as 'charitable purpose' for registration under section 12A/12AA (and specifically under the proviso / clause invoked) of the Income-tax Act despite undertaking ancillary income-generating activities and providing employment to beneficiaries. 2. Whether provision of employment to beneficiaries or receipt of incidental revenue (medical shop, training projects, administrative charges) converts the assessee's activities into a business/commercial activity outside the ambit of section 2(15) and thereby disentitles it to registration under section 12A/12AA. 3. What is the permissible scope of inquiry by the registering authority (CIT(E)) while deciding an application for registration under section 12A/12AA - i.e., whether the authority may undertake an extensive inquiry into the correctness of previously granted registrations or limit itself to testing genuineness of objects and activities. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Eligibility of a Section 25 company engaged in welfare of ex-servicemen for registration under section 12A/12AA Legal framework: Registration under section 12A/12AA confers tax exemption to entities pursuing charitable purposes as defined in section 2(15). Companies licensed under Section 25 (now Section 8 equivalent) are formed to apply profits, if any, to objects and to prohibit dividend distribution; such status and licence from Central Government bear on the character of activity. Precedent treatment: The Tribunal relied on the prior treatment by tax authorities granting registration and exemptions since 2004 without any allegation of misuse; it further invoked the principle in the cited High Court decision that genuineness and objects are the core considerations at registration. Interpretation and reasoning: The Court examined the assessee's constitution as a Section 25 company, continuous history of registration and exemptions since 2004, statutory audit by C&AG-appointed auditors, and factual matrix showing over 85% revenue applied to objects. The Tribunal reasoned that the company's profits were applied to welfare activities and no dividends were distributed; incidental incomes arose only in execution of charitable objects (e.g., discounted medical store, training, placement services). The existence of incidental receipts did not alter the character of the predominant activity as charitable. Ratio vs. Obiter: Ratio - where an entity is a Section 25 company with licence, applies profits to objects, and consistently pursues welfare objectives with no evidence of diversion or profit motive, it qualifies as carrying out charitable activities for purposes of registration under section 12A/12AA despite incidental receipts. Obiter - appreciative language describing the activities as 'noble' is not binding law. Conclusion: The Tribunal concluded that the assessee's activities constitute 'charitable purpose' and directed grant of registration under section 12AA. Issue 2 - Effect of providing employment and incidental revenue on charitable character under section 2(15) Legal framework: Section 2(15) excludes activities of a commercial character from 'charitable purpose'; the test focuses on the nature and dominant object of activities rather than incidental commercial receipts. Precedent treatment: The Tribunal relied on the principle that incidental business or receipt of income in furtherance of primary charitable objects does not convert the purpose into a non-charitable/commercial activity; prior autoritatives had treated the assessee as charitable since 2004. Interpretation and reasoning: The Court found that employment provided to ex-servicemen was integral to the object of rehabilitation and upliftment and not an independent profit-oriented enterprise. Activities such as discounted medical sales, training and placement, and administrative charges were ancillary and aimed at facilitating welfare, not yielding distributable profits. The Tribunal emphasized that mere receipt of income in carrying out charitable objects cannot be equated with commercial activity; the presence or absence of profit motive and distribution of profits (none here) is material. Ratio vs. Obiter: Ratio - provision of employment and receipt of incidental revenue, where connected to and subordinate to the dominant charitable object and absent profit distribution, do not disqualify an entity under section 2(15). Obiter - comments characterizing the activities as socially beneficial are descriptive, not legal holdings. Conclusion: The Tribunal held that providing employment and incidental revenue did not take the assessee outside section 2(15) and supported registration. Issue 3 - Permissible scope of inquiry by the registering authority under section 12A/12AA Legal framework: At the stage of registration under section 12A/12AA, the authority's function is to verify the genuineness of the trust/company and its objects and activities; the opening of detailed adjudication on past grants/exemptions is generally not permissible. Precedent treatment: The Tribunal cited and followed the High Court's approach that the registering authority should confine itself to examining genuineness and activities for the stated objects while considering registration; it should not undertake exhaustive scrutiny that would amount to re-adjudication of earlier grant of exemption. Interpretation and reasoning: The Tribunal observed that the assessing/administrative authorities had previously treated the assessee as charitable and allowed exemptions continuously. The CIT(E)'s rejection was held to go beyond permissible verification because it re-examined matters already accepted over many years and ignored the assessee's Section 25 status, audited accounts, and lack of any departmental finding of misuse. The Tribunal held that the CIT(E) failed to consider the Section 25 license and continuous grant of exemptions and thus exceeded the limited scope of inquiry. Ratio vs. Obiter: Ratio - while deciding an application for registration the authority must verify genuineness of objects and activities but may not embark on an exhaustive re-examination of facts already accepted by authorities over a prolonged period without fresh material indicating misuse. Obiter - procedural observations regarding earlier treatment as a factor in credibility are descriptive. Conclusion: The Tribunal concluded that the CIT(E) erred in exceeding the proper scope of inquiry, set aside the rejection, and directed grant of registration under section 12AA. Cross-references 1. Issue 1 and Issue 2 are interrelated: the Section 25 status and application of profits (Issue 1) inform the assessment of whether employment/incidental receipts convert activities into commercial operations (Issue 2). 2. Issue 3 underpins the remedy: because the registering authority exceeded its limited scope of verifying genuineness, the Tribunal remitted the matter with a direction to grant registration (consistent with conclusions on Issues 1-2). Disposition The Tribunal set aside the registering authority's order rejecting registration and directed the grant of registration under section 12AA, allowing the appeal for statistical purposes.