THE COMMISSIONER OF INCOME TAX V. M/S INDIA HERITAGE TRUST

ITA/754/2007

AI Insights

The case revolves around the appeal by the Commissioner of Income-Tax and the Director of Income-Tax (Exemptions) against the decision of the Income Tax Appellate Tribunal, which allowed the registration of M/s. India Heritage Trust under Section 12AA of the Income Tax Act, 1961. The primary contention was whether the trust's engagement in business activities, specifically a residential apartment project, disqualified it from registration under Section 12AA. The Tribunal and the High Court both found that the trust's activities, although commercial in nature, were in furtherance of its charitable objectives and thus did not violate the provisions of the Act.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 733419 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 04-08-2014
• Assessment Year: misc
• Other Referred Cases: Sanjeevamma Hanumanthe Gowda Charitable Trust Vs. Director of Income-Tax (Exemptions) [2006] 285 ITR 327 (Karn), Assistant Commissioner of Income Tax Vs. Thanthi Trust (2001) ITR (S.C.) 785
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K P KUMAR
• Assessee Lawyers: K V ARAVIND
• Keywords: Business activity; Charitable purpose; Income tax appeal; Registration under section 12AA; Trust Deed
• Section: 12AA; 12A; 11(4A); 260-A

Judgement Text

" - 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 4TH DAY OF AUGUST, 2014 P R E S E N T THE HON’BLE MR. JUSTICE N. KUMAR A N D THE HON’BLE MRS. JUSTICE RATHNAKALA INCOME TAX APPEAL NO.754 OF 2007 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX, C.R. BUILDING QUEENS ROAD, BANGALORE. 2. THE DIRECTOR OF INCOME-TAX (EXEMPTIONS) BANGALORE. …APPELLANTS (BY SRI K.V. ARAVIND, ADV.) AND: M/S. INDIA HERITAGE TRUST, GOKULAM COMPLEX, DODDAKALLASANDRA, 8TH MILE, KANAKAPURA ROAD, BANGALORE – 560 062. ...RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SMT.VANI H., ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 11-05-2007 PASSED IN ITA NO.99/BANG/2006 PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO: - 2 - I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, PASSED IN ITA NO.99/BANG/2006, DATED 11-05-2007 AND CONFIRMING THE ORDER OF THE DIRECTOR OF INCOME TAX (EXEMPTIONS) BANGALORE. THIS APPEAL IS COMING ON FOR FINAL HEARING THIS DAY, N. KUMAR J., DELIVERED THE FOLLOWING: - JUDGMENT This appeal is preferred by the revenue challenging the order passed by the Tribunal, which has held that Clause 10 of the Trust Deed cannot be treated as a ground for refusal of registration. Accordingly, cancelled the order passed under Section 12AA by the Director of Income Tax (Exemption) and directed him to allow registration under Section 12AA of the Income Tax Act of 1961 (hereinafter referred to as ‘the Act’). 2. The assessee applied for the registration under Section 12A of the Act on 20.05.2005. A deficiency letter was issued on 14.10.2005 calling for certain particulars and also clarification regarding the proposed business activity of the Trust. The assessee submitted his submission on 19.10.2005. The assessee stated that they are in the process of obtaining permission from various government - 3 - organisations to have an Heritage Park constructed. To raise funds for the said project, they have also initiated a residential apartment project for which permission from the concerned authorities has been obtained. They are in the process of construction and marketing the same. On consideration of such documents / materials, a show cause letter on 18.11.2005 was issued to the assessee calling for the explanation regarding Clause 10 of the Trust Deed and Clause 4(o) of the proposed amendment. The Director of Income Tax (Exemptions) after consideration of the said submissions held that there is no doubt that the objects are charitable in nature and are covered under Section 2(15) of the Act. Clause 10 of the Trust Deed which is neither part of the objects nor incidental to the objects, vests power in the trustees authorizing them to carry on activities for profit. It is clear that its activities proposed to be carried out by the trust entirely falls out of the purview of its objects. Subsequently, through an amendment to the trust deed by delegating extraordinary power to trustees and also making more explicit intention to venture into such activities they have violated the objects clause. The business of construction and marketing flats is in no way connected with the objects. It is neither incidental nor has any remote - 4 - connection with the activities of the trust. Therefore, he was of the view that making provision by empowering the trustees for entering into any activities for profit has not only made its genuiness doubtful but has also an attempt to camouflage its business activities disguising itself as a trust. The activity of a business venture in the nature of residential project cannot be held as genuine, since it is not incidental to any of its objectives. Therefore, the assessee’s application for registration under Section 12AA of the Act was rejected. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. 3. The Tribunal on consideration of the several judgments on which reliance was placed by both the parties and also by looking into the objectives clause of the trust deed, after extracting the same and relying on the judgment of this Court in the case of Sanjeevamma Hanumanthe Gowda Charitable Trust Vs. Director of Income-Tax (Exemptions) reported in [2006] 285 ITR 327 (Karn) has held that the nature of the business is not the criteria to judge whether the provisions of Section 12A of the Act are complied with or not. The main test as held by the Hon’ble Apex Court is, that, the income of the business is utilised by the trust or institutions for the purpose of achieving the - 5 - object of trust. There is neither any finding by the Director of Income Tax (Exemptions) nor any material was brought on record to show that the income from the business of housing project would not be utilised by the trust for attainment of objectives of the trust. On the contrary, the Director of Income Tax (Exemptions) has already accepted the fact that the objectives of trust are genuine and charitable in nature. The trust is engaged in various charitable activities like feeding poor children in schools etc. There is no material on record to show that the income from business as provided in Clause 10 of the original deed dated 17.05.2004 cannot be utilised by the trust for the purpose of achieving objectives of trust. Therefore, it held that the Clause 10 of the trust deed cannot be treated as a ground for refusal of the registration. Therefore, the order of the Director of Income Tax (Exemptions) was cancelled and he was directed to allow registration under Section 12AA of the Act. Aggrieved by the said order, the revenue is in appeal. 4. This appeal came to be admitted on 19.08.2008, to consider the following substantial question of law. “Whether the assessee who is carrying on business activity or indulging in developing the - 6 - properties is entitled for registration under Section 12AA of the I.T.Act?” 5. Learned Counsel for the revenue assailing the impugned order contended, that, the assessee is in the business of acquiring land, constructing group housing, marketing the same and realising the profits. The said business cannot be treated as incidental to the objectives of the trust, namely the charitable purpose. Therefore, he submits that section 11 (4A) of the Act, which was brought on the statute book on 01.04.1992 is applicable only for the business carried on which is ancillary to the charitable purpose for which the trust is constituted. In the facts of this case, it is not an incidental business. It is the main business. Therefore, the tribunal was not justified in passing the impugned order. 6. Per contra, learned Senior Counsel for the assessee submitted that objectives of the trust is for charitable purpose. No where in the objectives of the trust, it is mentioned that the trust was carrying on the business of acquiring properties, constructing residential flats and selling them. But in Clause 10 of the trust deed, the trustees are permitted to carry on business activity insofar - 7 - as it is necessary, incidental and supporting to the attainment of the objectives of the trust. In that event, a separate books of accounts have to be maintained. It is in pursuance of this Clause, in order to raise funds for carrying on charitable activity, the assessee has taken up its construction activity and they have maintained separate books and therefore, he submits that the tribunal has rightly granted the benefit of Section 12 AA of the Act. The material on record discloses that the proposed amendment of trust is also duly registered and it is awaiting the approval from the Director of Income Tax. 7. This Court had an occasion to consider the scope of Sections 11, 12, 12A and 12AA of the Act in the case of Sanjeevamma Hanumanthe Gowda Charitable Trust Vs. Director of Income-Tax (Exemptions) reported in [2006] 285 ITR 327 (Karn), which has held is as under: “6. Section 11 of the Act deals 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 - 8 - 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 CIT 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 CIT 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 - 9 - 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. 7. 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 CIT 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.” 8. Reliance is placed by the revenue on the judgment of the Apex Court in the case of Assistant Commissioner of Income Tax Vs. Thanthi Trust reported in (2001) ITR (S.C.) 785, interpreting Sub-section 4 of Section 11 which has held as under: - 10 - “One S.K.Adityan founded a daily newspaper called the ‘Dina Thanthi’ in 1942. On March 1, 1954, he created a trust called the ‘Thanthi Trust’. The property that he settled upon trust was the business of the said newspaper as a going concern. The objects of the trust were to establish the said newspaper as an organ of educated public opinion for the Tamil reading public and to disseminate news and to ventilate opinion upon all matters of public interest through it. On July 9, 1957, Adityan executed a supplementary deed of trust that declared that the trust was irrevocable. On July 28, 1961, Adityan executed another supplementary deed of trust. Thereby, he directed that the surplus income of the trust, after defraying all expenses, should be devoted to the following purposes. In that context, the Supreme Court interpreting Section 11(4) of the Act has laid down the said law. 9. In the instant case, the trust is constituted for the following purposes: a. Education b. Medical business c. Relief to the poor d. Other objectives of general public utility. - 11 - 10. Clause 10 of the trust deed on which the revenue relies upon is as under: “10. To carry on business activity in so far as it is necessary and incidental and supportive to the attainments of the objects of the trust and in that event separate books will be maintained.” 11. After going through the trust deed, the Commissioner in para No.10 of its order has categorically stated that there is no doubt that the objectives are charitable in nature and are covered under Section 2(15) of the Act. The tribunal also on going through the trust deed has categorically held that the trust is engaged in various charitable activities like feeding poor children in schools etc. and about 5,00,000 children are provided midday meals and food by the trust. They are also running Ayurveda Wellness Center and similar institutions affording treatment, cure, rest, recuperation and other medical relief to the public and therefore, there is no doubt that the trust is charitable in nature and covered by Section 2(15) of the Act and the activities of the trust are genuine. The trust is already engaged in various charitable activities for attainment of various objectives. There is no material on record to show that the income from business as provided in Clause 10 of - 12 - the original deed dated 17.05.2004 would not be utilised by the trust for the purpose of achieving objectives of the trust. There is a concurrent finding of fact by two authorities, to the effect that the trust is engaged in various charitable activities in terms of the objectives of the trust. It is clear from the material on record that in terms of Clause 10 of the trust deed, when particulars were sought for, the assessee has specifically stated that they would take up Group Housing Scheme to earn profits which would be the source of income for carrying on the charitable activities. In the absence of any material on record, the finding recorded by the Commissioner, that because of such activities, the trust is not genuine and it is a camouflage to suppress its business activities and the said business is not incidental to any of its objectives is contrary to the material on record and cannot be accepted. As held by this Court in Sanjeevamma Hanumanthe Gowda Charitable Trust’s Case, what the Commissioner has to look into is not the source of income of the Trust but whether such income is applied for charitable or religious purpose. 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 - 13 - 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 the enquiry should be to find out how the said income has been expended. If no income has been received on the day of the application is filed, the question of going into the question whether the income generated in future would be applied for charitable purpose would not arise. As and when such income arises, if the income is not utilised for charitable purpose, then he has the power to cancel the registration after hearing the assessee. He cannot assume things without any basis as was done in this case by the Commissioner. Once the trust deed produced in the case shows the objectives of the Trust is charitable and the material on record, shows that the Trust is carrying on charitable activities, merely because they proposed to carry on the business in future to augment the income to support charitable purposes, the registration cannot be declined. Therefore, the tribunal was justified in passing the impugned order and directing the Commissioner to grant the certificate. Hence, the substantial question of law is answered in favour of the assessee and against the revenue. - 14 - We do not see any merit in the appeal. Accordingly, the appeal is dismissed. Sd/- JUDGE Sd/- JUDGE nvj "