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Commissioner Of Inco... v. National Institute O...
Structured Summary of the Opinion (Hon'ble Prafulla C. Pant, J.)
Factual and Procedural Background
This opinion begins with an application (MCC No. 502 of 2009) for review/recall of an ex parte order dated 12.06.2009 in the appeal. On the basis of an affidavit filed with the review/recall application, the court allowed the application and recalled the ex parte order dated 12.06.2009. After recalling that order, the court heard learned counsel for the parties on the merits.
The substantive appeal (ITA No. 40/2006) under Section 260A of the Income Tax Act, 1961, challenges an order dated 12.08.2005 of the Income Tax Appellate Tribunal (ITAT), Delhi Bench “D” in ITA No. 4278.Del/2004. The ITAT had allowed an appeal by the assessee/respondent, National Institute of Aeronautical Engineering Educational Society, against an order dated 14.09.2004 passed by the Commissioner of Income Tax (CIT), Dehradun, under Section 12AA of the Act which had refused registration under that provision.
Procedurally, the society had applied for registration under Section 12AA (form 10A) on 07.06.2004. The CIT examined documents, including income and expenditure for financial years 2000-01, 2001-02 and 2002-03, concluded the society was engaged in profit-making activities and rejected registration. The assessee succeeded before the ITAT, and the revenue filed the present appeal.
Legal Issues Presented
- Whether the ITAT erred in law in holding that the assessee carried on activity for a charitable purpose within the meaning of Section 2(15) of the Income Tax Act and in directing the CIT to grant registration under Section 12AA of the Act?
Arguments of the Parties
Appellant's Arguments (Revenue)
- The CIT is not bound to register a society under Section 12AA which is engaged in exclusively commercial activity.
- Registration should not be granted where the activity is essentially profit-making rather than charitable.
Respondent's Arguments (Assessee / Society)
- The word "education" in the statutory definition of "charitable purpose" (Section 2(15)) is unqualified and therefore any society whose object is imparting education can be said to have a charitable purpose.
- Relied upon case law (including Additional C.I.T. v. Surat Art Silk Cloth Manufacturers Association and Dharmadeepti, Alwaye) to contend that the qualification "not involving the carrying on of any activity for profit" applies only to the last head of Section 2(15) and not to "education".
- Also relied on Victoria Technical Institute v. Commissioner of Income-Tax (Addl.) and Commissioner of Income Tax v. Red Rose School to support the proposition that a trust/institution whose object is education may be registered even if an activity for profit is carried out in the course of achieving the primary charitable purpose, and that the Commissioner must be satisfied about genuineness but cannot refuse registration where objects are charitable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Additional C.I.T. Gujarat v. Surat Art Silk Cloth Manufacturers Association, ITR 1980, Vol.121, Pg.1 (citing Dharmadeepti, Alwaye v. CIT, 1978, Vol.114 ITR 454) | Authority for the principle that the words "not involving the carrying on of any activity for profit" qualify only the last head of Section 2(15) and not earlier heads such as "education". | The court accepted the cited proposition but held that this does not mean every commercial activity carried on in the name of education is thereby charitable or must be registered under Section 12AA. |
| Victoria Technical Institute v. Commissioner of Income-Tax (Addl.), 1991 ITR, Vol.188, Pg.57 (Apex Court) | Holds that if the primary purpose is relief of the poor, education or medical relief, the definition of "charitable purpose" is satisfied even if some profit-making activity is carried on to fund that primary purpose; for general public utility objects, the purpose (not its accomplishment by profit activities) must not involve profit-making. | The court considered this decision and concluded it does not entitle every institution engaged in commercial activity to registration under Section 12AA; nor does it prevent the CIT from examining genuineness under Section 12AA. |
| Commissioner of Income Tax v. Red Rose School, 2007 Taxman Vol.163, Pg.19 (Allahabad High Court) | Affirms that the Commissioner must be satisfied about the genuineness of activities and may call for documents or make enquiries before granting registration under Section 12AA; registration cannot be refused only where objects are clearly not charitable. | The court noted that this principle supports the discretionary/investigative role of the CIT and observed that it does not help the respondent because it underscores that the CIT must satisfy himself as to genuineness before registration. |
Court's Reasoning and Analysis
The court proceeded in the following steps based on the material in the record:
- The court allowed the review/recall application (MCC No. 502 of 2009) and recalled the ex parte order dated 12.06.2009; parties were then heard on the merits.
- The appeal under Section 260A challenges the ITAT order that had directed the CIT to grant registration under Section 12AA to the assessee-society which had applied for registration on 07.06.2004.
- The statutory definition of "charitable purpose" in Section 2(15) was set out. The court noted the legislative history that the phrase "not involving the carrying on of any activity for profit" was deleted in 1984 and restored by the Finance Act, 2008 with effect from 01.04.2009 (with a proviso).
- The respondent's textual argument — that "education" is an unqualified head within Section 2(15) and therefore any society imparting education is charitable — and authorities supporting the narrow textual reading were considered. The court accepted that the non‑qualification phrase cannot be read as qualifying "education", but emphasised that this textual feature does not automatically convert every commercial education activity into a charitable one.
- The court reviewed Victoria Technical Institute and explained that while that authority recognises that trusts for education may carry on profit-making activities in the course of achieving charitable purposes, it does not confer on every commercially active institution an automatic right to registration under Section 12AA, nor does it prevent the CIT from scrutinising genuineness.
- The Red Rose School decision was examined and the court observed it reiterates the duty of the Commissioner to be satisfied about genuineness and that he can call for documents and make enquiries; the court treated this as supporting the CIT's investigative role under Section 12AA rather than as an automatic grant of registration.
- Turning to Section 12AA itself, the court highlighted clause (a) of sub-section (1) which empowers the CIT to call for documents and make enquiries to satisfy himself about genuineness. The court read this provision to mean the CIT must not grant registration blindly but must examine the records before him.
- On the facts before the CIT (income and expenditure accounts for FY 2000-01 to 2002-03), the CIT found that the society charged substantial fees and was making significant profits. The court relied on this factual finding to conclude that mere imparting education with primary purpose of earning profits cannot be treated as a charitable activity.
- The court emphasised that "charity" is the core of the expression "charitable purpose" and that trade or commerce carried on in the guise of education cannot be equated with a charitable purpose without inquiry into genuineness.
Holding and Implications
APPEAL ALLOWED.
The court set aside the impugned ITAT order dated 12.08.2005 in ITA No. 4278.Del/2004 and restored the order dated 14.09.2004 passed by the Commissioner of Income Tax, Dehradun, which had refused registration under Section 12AA.
Implications:
- Direct effect on the parties: The assessee's succeeded ITAT order is overturned; the CIT's refusal to register the society under Section 12AA is restored.
- The court emphasised that the Commissioner must examine the genuineness of activities (calling for documents and making inquiries) under Section 12AA before granting registration, and that merely describing an activity as "education" does not automatically convert profit‑oriented activities into charitable ones.
- The opinion does not announce a novel doctrine or broad new precedent beyond the application of established principles to the facts; it primarily reaffirms the CIT's investigative duty and the requirement that "charity" be the soul of a charitable purpose when considering registration under Section 12AA.
Note: This summary is confined to information explicitly contained in the provided opinion and does not add or infer facts beyond the text.
[Hon'ble Prafulla C. Pant, J. (Oral)]
An application (MCC) No. 502 of 2009 has been moved for review/recall of ex parte order dated 12.06.2009 passed in this appeal on the ground that the respondent had no knowledge of the restoration of appeal, after it was dismissed on 03.12.2008 for non-prosecution.
2 Considering the affidavit filed with the Review/Recall Application No. 502 of 2009, the application is allowed and order dated 12.06.2009 passed ex parte in this appeal is hereby recalled.
3. Heard learned counsel for the parties at length, on the merits of the appeal, after the ex parte order dated 12.06.2009 is recalled.
4. This appeal (ITA No. 40/2006), preferred under Section 260A of Income Tax Act, 1961 (hereinafter referred as the Act), is directed against the order dated 12.08.2005, passed by the Income Tax Appellate Tribunal (for short ITAT), Delhi Bench “D” New Delhi, whereby Income Tax Appeal No. 4278.Del/2004, preferred by the assessee/respondent - National Institute of Aeronautical Engineering Educational Society, was allowed by the Tribunal against the order dated 14.09.2004, passed by Commissioner of Income Tax (for short CIT), Dehradun, under Section 12AA(1)(b)(ii) of the Act.
5. The question of law involved in this appeal is as under:-
Whether the ITAT has erred in law in holding that assessee carried on activity for charitable purpose in terms in terms of Section 2(15) and directing CIT to grant registration under Section 12AA of the Act to the assessee society?
6. Brief facts, giving rise to this appeal are that, assessee is a registered society with Assistant Registrar, Firms, Societies and Chits, Dehradun. Said society moved an application under Section 12AA of the Act before CIT, Dehradun for grant of registration under Section 12AA(1)(b)(i) of Income Tax Act, 1961, in the prescribed form 10A on 07.06.2004 The CIT examined the papers including income and expenditure of the assessee for the Financial Years 2000-2001, 2001-2002 and 2002-2003 and concluded that the assessee is not carrying any charitable activity within the meaning of Section 2(15) of the Act, as it was in a profit making business. Consequently, an application for registration under Section 12AA of the Act was rejected. Aggrieved by said order, the assessee preferred ITA No. 4278.Del/2004, before ITAT, which was allowed, vide impugned order dated 12.08.2005 Hence this appeal by the revenue.
7. Before further discussions, we think it proper to mention the relevant provisions of law applicable to this case. Section 2(15) of the Act reads as under:-
“Charitable purpose” includes relief of the poor, education, medical relief and advancement of any other object of general public utility.
It is pertinent to mention here that earlier expression “not involving the carrying on of any activity for profit” was deleted from the tail of aforequoted provision with effect from 01.04.1984, vide Finance Act, 1983. (Again the expression is restored vide Finance Act 2008 w.e.f 01.04.2009 with a proviso to it.) It is argued on behalf of the respondent that expression “education” is not qualified in the definition of expression “charitable purpose.” It is contended that therefore, any society having its object to impart education can be said to have a charitable purpose. In support of its argument, learned counsel for the respondent referred to Additional C.I.T Gujarat v. Surat Art Silk Cloth Manufacturers Association, Income Tax Reports 1980, Vol.121, Page 1. In the said case, the Apex Court observed as under:-
“It is now well settled as a result of the decision of this court in Dharmadeepti, Alwaye, Kerala v. Commissioner Of Income Tax, Kerala [1978] Vol.114 ITR Page 454, that the words “not involving the carrying on of any activity for profit” qualify or govern only the last head of charitable purpose and not the earlier three heads”.
In our opinion, though expression “not involving the carrying on of any activity for profit” can not be read with the expression “education” but that does not make every kind of pure commercial activity in the name of education a charitable one and is necessarily be required to be registered under Section 12AA of the Act.
8. On behalf of learned counsel for the appellant it is argued that it is not necessary for the Commissioner of Income Tax to register a society under Section 12AA, which is doing exclusively commercial activity. In reply to this, on behalf of learned counsel for the respondent, attention of this Court is drawn to Victoria Technical Institute v. Commissioner of Income-Tax (Addl.), 1991 Income Tax Reports, Vol.188, Page 57, in which the Apex Court has held as under:
“Where, therefore, the purpose of a trust or institution is relief of the poor, education or medical relief, the requirement of the definition of “charitable purpose” would be fully satisfied, even if an activity for profit is carried on in the course of the actual carrying out of the primary purpose of the trust or institution. When the purpose of a trust or institution is the advancement of an object of general public utility, it is that object of general public utility and not its accomplishment or carrying out which must not involve the carrying of any activity for profit. So long as the purpose does not involve the carrying on of any activity for profit, the requirement of the definition would be met and it is immaterial how the monies for achieving or implementing such purpose are found, whether by carrying on an activity for profit or not.”
Having gone through the aforesaid case law, we do not find that it gives a right to every institution engaged in commercial activity, to get registered under Section 12AA of the Act, or bars the Commissioner of Income Tax to examine the genuineness as required under Section 12 AA of the Act before registration as a charitable society.
9. Next case relied on behalf of the respondent is Commissioner of Income Tax v. Red Rose School, 2007 Taxman Vol.163, Page 19, in which the Division Bench of the Allahabad High Court has observed as under:
“On being satisfied about the genuineness of the activities of the trust or the instruction and also about its objects, the Commissioner would either grant the certificate or would reject the prayer. In order to satisfy himself about the genuineness of the activities of the trust or the institution, he can call for such documents or information from the trust or the institution, as he thinks necessary and he is also empowered to make such enquiries as he may deem necessary in this behalf. The objects of the trust can be had from the bye-laws or the deed of trust, as the case may be and unless, of course, the objects of the trust apparently make out that they were not in consonance with the public policy or that they were not the objects of any charitable purpose, registration cannot be refused accordingly on this ground”.
The above case also does not help the respondent in the present case, as it does say that the Commissioner of Income Tax has to satisfy itself as to the genuineness of the activities of the trust or the society who has sought its registration under Section 12 AA of the Act.
10. Section 12AA of the Act provides the procedure for registration. Clause (a) of sub Section (1) of Section 12AA empowers the CIT to call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of the activities of the trust or institution and may also make such inquiries, as he may deem necessary in this behalf. Said provision in Section 12AA makes it clear that CIT is not supposed to allow registration with blind eyes. In the present case, CIT has considered the relevant papers before him, which included the income and expenditure accounts of the previous years after the society got registered with the Assistant Registrar Firms, Societies and Chits. The CIT, after considering the record before him, has observed that the society (present respondent) is charging substantial fees from the students and making huge profits.
11. After considering the submissions of the learned counsel for the parties, we are of the view that mere imparting education for primary purpose of earning profits cannot be said to be a charitable activity. We are of the firm view that, in the expression “charitable purpose”‘charity’ is the soul of the expression. Mere trade or commerce in the name of education cannot be said to be a charitable purpose. And Commissioner Income Tax has to satisfy itself as provided under Section 12AA of the Act before allowing the registration. Question of law stands answered.
12. For the reasons as discussed above, the appeal is allowed. Impugned order dated 12.08.2005 passed by ITAT, Delhi Bench “D” New Delhi in ITA No. 4278.Del/2004, is hereby set aside. The order dated 14.09.2004 passed by CIT, Dehradun is restored.
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