The Commissioner Of Income Tax - Ii,Madurai v. Shri Venkatachalapathy Education Andcharitable Trust

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 22.03.2022CORAM : THE HON'BLE MR.JUSTICE R.MAHADEVANAND THE HON'BLE MR.JUSTICE J.SATHYA NARAYANA PRASAD T.C.A.NO.16 OF 2012 The Commissioner of Income Tax - II,Madurai. ...Appellant Versus Shri Venkatachalapathy Education andCharitable Trust, 20, Muthusamy Iyer Street,Building Society, Chinnamanur, Theni District.(PAN ) ...Respondent Tax Case Appeal filed under Section 260 (A) of the IncomeTax Act, 1961 against the order of the Income Tax AppellateTribunal,“B”Bench,Chennaidated23.06.2011inI.T.A.No.210/Mds/2011, preferred against the order passed by theCommissioner of Income Tax – I, Madurai – 625 002 dated10.12.2010 made in C.No.464/52/CIT-I/2009-10. For Respondent :Mr.Subbaraya Aiyar JUDGEMENT (Judgement of the Court was delivered by R.MAHADEVAN, J.) The present Tax Case Appeal has been preferred by theappellant/Revenue, against the order dated 23.06.2011 passed bythe Income Tax Appellate Tribunal, 'B' Bench, Chennai inI.T.A.No.210/Mds/2011. https://hcservices.ecourts.gov.in/hcservices/ 2.According to the appellant/Revenue, originally, therespondent filed an application on 22.06.2009 for grant ofregistration under section 12AA of the Income Tax Act, 1961(hereinafter referred to as 'Act'), which was rejected by theCommissionerofIncome-tax,Madurai,byorderinC.No.464/53/CIT-1/2009-10 dated 01.12.2009. Challenging the saidorder, the respondent filed an appeal before the ITAT, Chennai,which by order dated 30.09.2010, set aside the said order andremanded the matter to the CIT for fresh consideration. Pursuantto the said order of the ITAT, the Commissioner of Income-tax,Madurai, reconsidered the application of the respondent seekingregistration under section 12AA of the Act and ultimately,rejected the same, on the ground that there was no satisfactorymaterials produced by the respondent. Aggrieved by the saidorder of the CIT, the respondent went on further appeal beforethe ITAT, Chennai. The Tribunal upon consideration of thesubmissions made on both sides, allowed the said appeal filed bythe respondent and thereby directed the appellant to grantregistration under section 12AA of the Act to the respondent, byorder dated 23.06.2011, which is impugned in this appeal. 3.On 27.08.2012, this court admitted this tax case appeal onthe following substantial questions of law: “(i)Whether on the facts and in the circumstancesof the case, the Tribunal was right in law in holdingthat the assessee trust is eligible to getregistration under section 12AA when the trust iscarrying educational activity with receipt ofsubstantial amount of fees? (ii)Whether on the facts and in the circumstanceof the case, the Tribunal was right in law in holdingthat the assessee trust is eligible to getregistration under section 12AA, when the trust isfailed to produce the name and address of person towhom the land rent of Rs.50,000/- was paid and notproved the credit worthiness of the loan creditors?” 4.The main contention of the learned senior standing counselappearingfortheappellant/Revenueisthattherespondent/assessee failed to produce the requisite documentsfor consideration of its application seeking registration undersection 12AA of the Act. According to the learned counsel, therespondent did not comply with the basic requirement for grantof registration to a public charitable trust; and they arecarrying on the educational activity with receipt of fees ofsubstantial amount, which is purely on commercial basis and theyfailed to produce the relevant details to the CIT for verification. However, the ITAT, merely placing reliance on theobjects of the respondent trust, allowed the appeal filed by therespondent and directed the appellant to grant registration tothem under section 12AA of the Act, by the order impugnedherein, which is arbitrary and illegal and hence, is liable tobe set aside. verification. However, the ITAT, merely placing reliance on theobjects of the respondent trust, allowed the appeal filed by therespondent and directed the appellant to grant registration tothem under section 12AA of the Act, by the order impugnedherein, which is arbitrary and illegal and hence, is liable tobe set aside. 5.On the other hand, the learned counsel for therespondent / assessee submitted that the objects of therespondent trust itself would speak for the activities carryingon by them and they have utilized its surplus funds only foreducational purposes and not for any profit. Thus, according tothe learned counsel, the Tribunal after analysing the entirefacts and circumstances of the case in the light of thematerials available before it, concluded that the respondent waseligible for registration under section 12AA of the Act andhence, the same need not be interfered with by this court. 6.Heard both sides and perused the materials available onrecord. 7.It is not in dispute that the respondent trust applied forregistration under section 12AA of the Act, for the purpose ofclaiming exemption from the payment of tax. After thoroughanalysis of the legal position and the materials placed, byorder dated 10.12.2010, the said application was rejected by theCIT, Madurai, based on the circular no.762 dated 18.02.1998issued by the CBDT, New Delhi, on the ground that the respondenttrust did not furnish the requisite satisfactory materials togrant such registration. The relevant findings of the CIT,Madurai are quoted below for ready reference: “3.8. In view of these facts and circumstances,it was clearly told to the ld.A/R that (i)The basic element of charity – as discussedabove is nowhere visible in any of these three years'accounts. That is, the vital question 'Where ischarity'? is not explained or answered. (ii)What is actually carried on is educationalactivity with receipt of fees of substantial amountwhich is purely on commercial basis. (iii)Although such commercial activity ispermitted under the Act u/s.11(4)/11(4A) – beingincidental to attainment of its charitable object –but the statutory requirement that separate books ofaccounts should be maintained has not been followed. (iv)The I/E Account of the trust which shouldreflect income of a trust as discussed in para 3.2above and expenditure clearly showing 'application' of such income towards charitable purpose – within thedefinition of section 2(15) and as per the objects ofthe trust deed – is also missing.(v)The surplus for the assessment year 2009-10 and2010-11 which are of Rs.2,89,145 and 16,98,122/-should have been utilised for genuine charitableactivities. But not a single item reflectingapplication of either this surplus or the Misc.interest income towards charitable purposes has beenshown. 3.9. It was, therefore, explained to the Ld.A/Rthat the basis pre-requisite for grant of registrationto a public charitable trust i.e. carrying genuinecharitable activities is absent in this case accordingto the statement of accounts filed along with theapplication. Besides, the claim of exemption of itsincome u/s.11(1)(a) of the I.T.Act will also beadversely affected in absence of utilization of atleast 85% of such income in India towards genuinecharitable purposes – i.e. helping the public ingeneral those who are needy, poor and destitutewithout expecting or receiving anything in return. Itwas therefore, told to the Ld.A/R that the trust hasmade itself ineligible for grant of registration interms of the provisions of section 12AA (1)(b)(ii)r.w. 12A(2) of the Income Tax Act, 1961.” 8.However, it could be seen from the order impugned hereinthat without properly examining the activities carrying on bythe respondent trust and utilisation of the surplus fundsreceived by them, in the light of the documents furnished, theITAT, Chennai, merely referring to the objects of the respondenttrust, opined that the purpose of the respondent trust wasnothing but education; construction of infrastructure forpursuing educational activity is also by its very nature anecessary expenditure for effectively pursuing the educationalobjects; and the Act itself contemplates exemption to income ofinstitution imparting education. Ultimately, it was concluded bythe Tribunal that the respondent trust was eligible forregistration under section 12AA. 9.This court is of the view that such reasoning of theTribunal without proper verification of the requisite materials,cannot be countenanced and on that score alone, the orderimpugned herein deserves to be set aside. 10.At this juncture, it is apt to refer to the decision ofthe Hon'ble Supreme Court in Queen's Educational Society Vs. https://hcservices.ecourts.gov.in/hcservices/ Commissioner of Income Tax [(2015) 372 ITR 0699 (SC)], in which,after having discussed several decisions of various High Courts,it was held that “the correct tests would apply to determinewhether an educational institution exists solely for educationalpurposes and not for purposes of profit; the assessingauthorities must continuously monitor from assessment year toassessment year whether such institutions continue to applytheir income and invest or deposit their funds in accordancewith the law laid down; the activities of such institutions belooked at carefully and if they are not genuine, or are notbeing carried out in accordance with all or any of theconditions subject to which approval has been given, suchapproval and exemption must forthwith be withdrawn”. For betterappreciation, paragraphs 19 and 25 of the said decision areusefully extracted below: “19. It is clear, therefore, that the UttarakhandHigh Court has erred by quoting a non existent passagefrom an applicable judgment, namely, Aditanar andquoting a portion of a property tax judgment whichexpressly stated that rulings arising out of the IncomeTax Actwould not be applicable. Quite apart from this,it also went on to further quote from a portion of thesaid property tax judgment which was rendered in thecontext of whether an educational society is supportedwholly or in part by voluntary contributions, somethingwhich is completely foreign to Section 10(23C) (iiiad).The final conclusion that if a surplus is made by aneducational society and ploughed back to construct itsown premises would fall foul of Section 10(23C)is toignore the language of the Section and to ignore thetests laid down in the Surat Art Silk Cloth case,Aditanar case and the American Hotel and Lodging case.It is clear that when a surplus is ploughed back foreducational purposes, the educational institutionexists solely for educational purposes and not forpurposes of profit. In fact, in S.RM.M.CT.M. TiruppaniTrust v. Commissioner of Income Tax, (1998) 2 SCC 584,this Court in the context of benefit claimed underSection 11of the Act held: “9. In the present case, the assesseeis not claiming any benefit under Section 11(2)as it cannot; because in respect of thisassessment year, the assessee has notcomplied with the conditions laid down inSection 11(2). The assessee, however, isentitled to claim the benefit of Section 11(1)(a). In the present case, the assessee https://hcservices.ecourts.gov.in/hcservices/ “9. In the present case, the assesseeis not claiming any benefit under Section 11(2)as it cannot; because in respect of thisassessment year, the assessee has notcomplied with the conditions laid down inSection 11(2). The assessee, however, isentitled to claim the benefit of Section 11(1)(a). In the present case, the assessee https://hcservices.ecourts.gov.in/hcservices/ has applied Rs 8 lakhs for charitablepurposes in India by purchasing a buildingwhich is to be utilised as a hospital. Thisincome, therefore, is entitled to anexemption under Section 11(1). In addition,under Section 11(1)(a), the assessee canaccumulate 25% of its total incomepertaining to the relevant assessment yearand claim exemption in respect thereof.Section 11(1)(a)does not require investmentof this limited accumulation in governmentsecurities.ThebalanceincomeofRs.1,64,210.03 constitutes less than 25% ofthe income for Assessment Year 1970-71. Therefore, the assessee is entitled toaccumulate this income and claim exemptionfrom income tax under Section 11(1)(a).” We set aside the judgment of the Uttarakhand HighCourt dated 24th September, 2007. The reasoning of theITAT (set aside by the High Court) is more inconsonance with the law laid down by this Court, andwe approve its decision.” “25. We approve the judgments of the Punjab andHaryana, Delhi and Bombay High Courts. Since we haveset aside the judgment of the Uttarakhand High Courtand since the Chief CIT's orders cancelling exemptionwhich were set aside by the Punjab and Haryana HighCourt were passed almost solely upon the law declaredby the Uttarakhand High Court, it is clear that theseorders cannot stand. Consequently, Revenue's appealsfrom the Punjab and Haryana High Court's judgment dated29.1.2010 and the judgments following it are dismissed.We reiterate that the correct tests which have beenculled out in the three Supreme Court judgments statedabove, namely, Surat Art Silk Cloth, Aditanar, andAmerican Hotel and Lodging, would all apply todetermine whether an educational institution existssolely for educational purposes and not for purposes ofprofit. In addition, we hasten to add that the 13thproviso to Section 10(23C)is of great importance inthat assessing authorities must continuously monitorfrom assessment year to assessment year whether suchinstitutions continue to apply their income and investor deposit their funds in accordance with the law laiddown. Further, it is of great importance that theactivities of such institutions be looked at carefully. If they are not genuine, or are not being carried outin accordance with all or any of the conditions subjectto which approval has been given, such approval andexemption must forthwith be withdrawn. All these casesare disposed of making it clear that revenue is atliberty to pass fresh orders if such necessity is feltafter taking into consideration the various provisionsof law contained in Section 10(23C)read with Section11of the Income Tax Act.” 11.In the light of the discussions held above, we set asidethe order of the Tribunal and remand the matter to it for freshconsideration. The respondent trust is at liberty to submit allthe requisite documentary evidence available to them tosubstantiate its claim for registration under Section 12AA ofthe Act, to the Tribunal, within a period of two weeks from thedate of receipt of a copy of this judgment. Thereafter, theTribunal shall consider the matter in the light of the documentsfurnished by the respondent trust and pass orders afresh, onmerits and in accordance with law, after affording dueopportunity of hearing to the respondent trust, within a periodof six weeks. 12.Accordingly, this Tax Case Appeal is disposed of. Nocosts. Sd/- Assistant Registrar(CS-VIII) //True Copy// Sub Assistant Registrar mrr To 1. The Income Tax Appellate Tribunal, Madras “B” Bench, Chennai. 12.Accordingly, this Tax Case Appeal is disposed of. Nocosts. Sd/- Assistant Registrar(CS-VIII) //True Copy// Sub Assistant Registrar mrr To 1. The Income Tax Appellate Tribunal, Madras “B” Bench, Chennai. 2. The Commissioner of Income Tax-II, Madurai. Madurai. +1cc to M/s.Subbaraya Aiyar Padmanabhan, Advocate, S.R.No.19652 PM(CO)RLP(19/04/2022)