Friday, 29 September 2017

Deemed tax exemption & surplus from charitable activities

Income Tax Appellate Tribunal (ITAT) Pune in the case of ‘Yashaswi Education Society Vs CIT (ITAT Pune)’, Appeal Number: ITA No. 250/PUN/2014, Order dated: 13th April 2017 has maintained that:

1. Generation of surplus while carrying out charitable activities would not dis-entitle the assessee for registration under section 12AA of the Income Tax Act.

It is a well-settled principle of law that the test to determine as to what would be a charitable purpose within the meaning of section 2 (15) of the Act, is to ascertain what is the dominant object of the activity; whether it is to carry out a charitable purpose or to earn profit. If the pre-dominant object is to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because the some profit arises from the activity. (Reference: CIT Andhra Pradesh v. APSRTC Hyderabad (1986) 2 SCC 391).

2. As per the provisions of section 12AA(2) of the Income tax Act, the order granting or refusing registration should be passed before the expiry of six months from the end of the month in which the application was received.

It is again a well settled law that if the application for grant of registration under section 12A is not disposed of within the stipulated time, it shall be deemed that the registration is granted to the assessee. The Supreme Court of India, in the case of Commissioner of Income Tax & Ors. v. Society for the Promotion of Education (supra) has reiterated this position.

Earlier judgments upholding the same view:

The Supreme Court of India in the case of Commissioner of Income Tax v. Society for the Promotion of Education 382 ITR 6 had held that if the assessee has not been granted registration within the period of 6 months from the date of making application, it shall be presumed that deemed registration has been granted to the assessee.

The Karnataka High Court in the case of Sanjeevamma Hanumanthe Gowda Charitable Trust v. Director of Income Tax (Exemptions) 285 ITR 327 has maintained: 
“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 by the trust.”