Sanjeevariima Hanumanthe Gowda Charitable Trust v. Director Of Income-Tax

Kumar, J.:—

The appeal is admitted to consider the following substantial question of law:

“Whether the authorities were justified in denying registration to the petitioner under Section 12AA of the Income Tax Act, 1961 on the ground that the activities of the assessee are purely commercial in nature?”

Heard the Learned Counsel for the parties.

2. The appellant claims to be a charitable trust established by a Deed of Trust dated 1st March 1997. The said Deed of Trust sets out the purpose and object for which the Trust was created. The appellant-Trust constructed a building which was completed in the year 2001. Thereafter, it applied for registration under Section 12A of the Income Tax Act, 1961 (for short hereinafter referred to as ‘the Act’) to the Income-tax authorities for registration as Charitable Trust to enable it to claim exemptions under the Act.

3. In the impugned order dated 24th June 2002, the Director of Income-tax (Exemptions) rejected the request of the appellant on the ground that it is carrying on its activity by letting out the marriage hall on hire. Aggrieved by the said order the appellant preferred an appeal before the Income Tax Appellate Tribunal. The Tribunal was also of the view that the hiring of the Choultry was not for attainment of other objects, but seems to be the main object so far pursued by the appellant and therefore the assessee was not established wholly for charitable purposes, declined to entertain the appeal and dismissed the same by its order dated 2nd August 2005. Aggrieved by these two orders, the appellant is before us.

4. The Learned Counsel for the appellant contend that the mode of generating the income from the trust property is immaterial and it is the purpose of which the said income is utilised, should be the criteria to accord exemption on registration of the trust, and the authorities have completely misdirected their enquiry and therefore, the impugned orders are liable to be set aside.

5. Section 11 of the Act deal with exemptions available to income from property held for charitable or religious purposes. Exemption from tax will be allowed only in respect of the income actually applied to the purposes of the trust. Income derived for trust property must be determined on commercial principles. In order to be eligible for the aforesaid exemption the assessee has to get the trust registered under Section 12A of the Act. The assessee has to make an application in the prescribed form and comply with the other legal requirements mentioned in the aforesaid section. On receipt of such application for registration the Commissioner is under an obligation to follow the procedure prescribed under Section 12AA before he grants or refuses registration. What he is expected to do on receipt of such an application is, he shall call for such documents or information from the trust in order to satisfy himself about the genuineness of the activities of the trust or institution. In addition to securing information in the aforesaid manner, it is open to the Commissioner to make such enquiries as he deems necessary in this behalf. Having regard to the scheme of Sections 11, 12 and 13 ultimately what the Commissioner has to look into is not the source of income to the trust but whether such income is applied for charitable or religious purposes. The satisfaction of the Commissioner should be regarding the application of the income of the trust for the aforesaid purposes which only entitles the assessee to claim exemption. For arriving at such satisfaction primarily he has to look at the object of the trust, when the same is reduced into writing in the form of trust deed. If on the date of the application the trust has received income from its property, then find out how the said income has been expended, and whether it can be said that the income is utilized towards charitable and religious purposes, i.e, towards the object of the trust. Therefore, for the purpose of Registration under Section 12AA of the Act, what the authorities have to satisfy is the genuineness of the activities of the Trust or institution and how the income derived from the trust property is applied to charitable or religious purpose and not the nature of the activity by which the income was derived to the trust.

6. Sub Section (3) of Section 12AA of the Act provides that where a Trust or an Institution has been granted registration under clause (b) of sub-section (1) and subsequently the Commissioner is satisfied that the activities of such Trust or institution are not genuine or are not being carried out in accordance with the objects of the Trust or Institution, as the case may be, he shall pass an order in writing cancelling the registration of such Trust or institution. Therefore, sufficient safeguard is provided under the Act for cancellation of registration obtained by the assessee, in the event of its misusing those provisions.

7. In the instant case the authorities have not kept in mind these mandatory provisions. They have not applied their mind in the way they are expected to, before passing the impugned orders. Therefore, both the orders cannot be sustained.

8. Hence, we pass the following:

i) The appeal is allowed.

ii) Order dated 24th June 2002 passed by the Director of Income-tax (Exemptions) and the Order dated 2 August 2005 passed by the Tribunal are hereby set aside and the matter is remanded back to the Director of Income-tax (Exemptions) for fresh consideration in accordance with law and in the light of the observation made above after giving an opportunity to appellant to substantiate its claim.