Tuesday, May 05, 2015

FAQs WITHCASE LAWS FROM CHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS:-

v  FAQs WITHCASE LAWS FROMCHARITABLE OR RELIGIOUS TRUSTS AND INSTITUTIONS:-

1. Whether the Tribunal was right in negating the assessee’s claim for accumulation of unspent income?

Relevant Case Law - Bharat Krishak Samaj v. Deputy Director of Income-tax (Exemption) (2008) 306 ITR 153 (Del)

Relevant Section - 11

·         The assessee, a society registered under section 12A of the Income-tax Act, 1961, filled inForm No. 10 provided under the Income-tax Rules, 1962, and submitted it to the AssessingOfficer along with its resolution, seeking permission to accumulate unspent funds undersection 11(2) of the Act for the objects of the trust.

·         The Assessing Officer was of the view thatthe objects for which accumulation was sought were not particularised inasmuch as theycovered the entire range of objects of the trust. On this basis, the Assessing Officer deniedthe benefit of accumulation to the assessee. This was upheld by the Tribunal.

·         The High Court held that it is not necessary for a charitable trust to particularise each andevery object for which accumulation is sought. It is enough if the assessee seeksaccumulation for the objects of the trust.

·         Hence, the assessee had sought to accumulate thesum for purposes of the trust and had specified such objects. It was therefore, entitled toaccumulate the sum under section 11.


2. Whether repayment of borrowed funds utilised for construction of commercial complex augmenting income of trust and amounts to application of income for charitable purpose eligible for exemption under section 11?

Relevant Case Laws - Director of Income-tax (Exemption) v. Govindu Naicker Estate (2009) 315 ITR 237 (Mad.)

Relevant Section - 11

·         During the assessment under section 143(3) of the Act, the Assessing Officer noted that, thetrust had made part repayment of a loan taken from the bank for constructing a multi-storiedbuilding.

·         The Assessing Officer opined that the multi-storied commercial complex was not oneof the objects of the trust and the expenditure incurred for the construction of the buildingcould not be treated as charitable in nature, that the repayment of loan could not be regardedas application of income towards the charitable objects of the trust and rejected the claim ofthe assessee.

·         The Commissioner (Appeals) allowed the appeal on the ground that theproperty of the trust was in a dilapidated condition and fresh construction had to beundertaken by obtaining a loan.

·         The subsequent letting out of the property was connectedwith the carrying out of the objects of the trust and hence, the repayment of loan ought tohave been treated as eligible application. The finding of the Commissioner (Appeals) wasconfirmed by the Tribunal.

·         The High Court held that the Tribunal was right in holding that the repayment of loan takenfrom the bank for construction of commercial complex was application of income forcharitable purposes and the assessee-trust was eligible for exemption under section 11 of theAct.

·         Even though the expenditure incurred is capital in nature, if the expenditure is incurredfor the purpose of promoting the object of the trust, it could be considered as application ofthe income for the purpose of the trust.

·         If the application of the income resulted in themaintenance of the property held under trust for charitable purpose, is for the purpose ofaugmenting income in order to pursue the objects of the trust that would amount toapplication of income for the purpose of the trust.

3. Whether the Tribunal has erred in law in holding that the assessee carried on activity for charitable purpose in terms of section 2(15) and directing the Commissioner of Income-tax to grant registration under section 12AA of the Act to the assesseesociety?

Relevant Case Law - CIT v National Institute of Aeronautical Engineering Educational Socieity (2009) 315 ITR 428 (Uttarakand)

Relevant Section - 12AA

·         The assessee, a registered society, moved an application before the Commissioner for grantof registration under section 12AA(1)(b)(i) of the Act, in Form 10A. The Commissionerexamined the papers including the income and expenditure of the assessee for the previousyears and concluded that the assessee was not carrying on any charitable activity within themeaning of section 2(15) of the Act, as it was in a profit making business.

·         Consequently, herejected the application for registration under section 12AA of the Act. The assesseepreferred an appeal before the Appellate Tribunal, which was allowed.

·         The High Court held that section 12AA of the Act provides the procedure for registration.Clause (a) of sub-section (1) of section 12AA empowers the Commissioner to call for suchdocuments or information from the trust or institution as he thinks necessary in order to satisfyhimself about the genuineness of the activities of the trust or institution and he may also makesuch inquiries, as he may deem necessary in this behalf.

·         The Commissioner is not supposedto allow registration with blind eyes. The Commissioner had considered the relevant papersbefore him, which included the income and expenditure accounts of the previous years afterthe assessee society got registered with the Assistant Registrar of Firms, Societies and Chits.
·         The Commissioner observed that the society was charging substantial fees from the studentsand making huge profits. Merely imparting education for the primary purpose of earningprofits could not be said to be a charitable activity. In the expression "charitable purpose","charity" is the soul of the expression. Mere trade or commerce in the name of educationcannot be said to be a charitable purpose and the Commissioner has to satisfy itself asprovided under section 12AA of the Act before allowing the registration. The order of theCommissioner was justified.

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