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Income Tax Appellate Tribunal - Chennai

Sri Aurobindo Annai Trust, Kovilpatti vs Assessee

                  IN THE INCOME TAX APPELLATE TRIBUNAL
                        CHENNAI BENCHE `A', CHENNAI
                BEFORE S/SHRI U.B.S.BEDI, JM and SANJAY ARORA, AM

                              I.T.A. Nos.1773&1774/Mds/2009

 Sri Aurobindo Annai Trust, 147, Vs.         The Commissioner of Income-tax-
 Arignar Anna Nagar, Ashok                   I, Madurai.
 Nagar, Kathiresan Koil Road,
 Kovilpatti - 628 502.
 [PAN: AAGTS 7529C]
  (Assessee -Appellant)                              (Revenue-Respondent)


                Assessee by        Shri Velautham Raghavan, CA-AR
                Revenue by         Shri Shaji P. Jacob, DR

                                        ORDER

Per Sanjay Arora, AM:

These are a set of two Appeals by Applicant-Trust contesting the denial of registration u/s. 12AA and approval u/s. 80G of the Income-tax Act, 1961 ('the Act' hereinafter).

2.1 The assessee-applicant is a public charitable Trust registered under the Indian Trust Act, 1882 vide a Trust Deed dated 31.5.2007 on 1.6.2007 with the appropriate authority, being the Office of Sub-Registrar, Kovilpatti. The same stood amended per a deed of amendment dated 12.3.2008 by Mrs. Bala Ramachandran, the author and founder of the Trust, duly registered on the same date. Copies of both the deeds are on record. It moved simultaneous applications u/s. 12AA and 80G of the Act with the competent authority, being the Office of the Commissioner of Income-tax-I, Madurai ('CIT' for short) on 19.2.2009, which stood denied per identical worded separate orders of even date, i.e., 31.8.2009. The reason(s) for same, as ascertained there-from, are as:-

(a) the only activity of the Trust, as found by the Assessing Officer (AO), is the running of a nursery-cum-primary school up to Class IV (which started functioning in October, 2007), with a present strength of 300 students;

(b) no information regarding the socio-economic background, educational qualifications or the professional competence of the Trustees, to be able to run the charitable Trust, stood supplied;

(c) there is no mention of beneficiaries whatsoever, i.e., the same are not identifiable, even as there was a separate clause (in the Trust Deed for providing assistance in cash and/or in kind to poor and destitute people;

(d) the amount settled in Trust is only 1000/- so that it is not understood as to how it was able to achieve its lofty objects with that meagre sum;

(e) the accounts for the year ending 31.3.2009 reflect a surplus of `3.62 lakhs on a gross receipt of `10.21 lakhs;

(f) no case of free or subsidized education or provision of scholarship, stands reported during the currency of the running of the school (even as affirmed by the ld. AR, i.e., during hearing)..

2.2 In view of the foregoing, the ld. CIT denied the said registration and approval, placing reliance on the decision by the apex court in the case Sole Trustee Lokashikshana Trust vs. CIT, 101 ITR 234 (SC); his finding being as under:

`The Trust was created on 31.5.2007 ...................... As per this judgment, the activities of the 'Trust' do not qualify to be a charitable. Therefore, the basic object of the 'Trust' is to earn profit by running a school on commercial basis. There is no element of charity in it. After consideration of all these facts, it is found that the application for registration as a charitable institution is without any merit."

3. We have heard the parties, and perused the material on record as well as the case law cited.

3.1 The Revenue's principal objection is that the activities of the Trust, which are limited to running a School, is being run on commercial lines, so that there is no question of it being charitable. The word 'charitable' under the Act, defined in an inclusive manner; nevertheless, has to conform to the ordinary and plain understanding of the concept signified by the word 'charity'. The assessee's case, on the other hand, is that 'education' is per se charitable and does not require it being given either free or subsidized or without charging any consideration, etc. for it to qualify as being charitable, 3 ITA.Nos.1773 & 1774/Mds/2009 and for which reference is made to the decision in the case of Gaur Brahmin Vidya Pracharini Sabha vs. CIT (2010) 129 TTJ (Del.) 627. The decision in the case of Sole Trustee Lokashikshana Trust vs. CIT (supra), as its reading would show, yields the same conclusion; the apex court in that case being seized with the legal issue as to whether the words 'not involving the carrying on of any activity for a profit', following the words......... `advancement of any other object of general public utility' occurring in section 2(15) defining the expression `charitable purpose' under the Act (since amended by Finance Act, 1983, with effect from 1.4.1984) qualified only the activity qua the object of general public utility and not the other activities, viz. relief of the poor, education, and medical relief, with reference to which the word 'charitable purpose' stands inclusively defined there-under. It, after an exhaustive deliberation on the subject, held of it as qualifying only the residuary activity, i.e., relating to the advancement of any object of public general utility. This view stands further affirmed by it per its subsequent decisions, as in the case of Dharmadeepti v. CIT (1978) 114 ITR 454 (SC) and Dharmaposhanan Co. v. CIT (1978) 114 ITR 463 (SC). The matter, thus, stands judicially settled. In fact, the matter stands clarified by the statute itself, i.e., after insertion of the proviso to the provision w.e.f. 1.4.2009; the proviso excluding from the purview of the section `the advancement of any object of general public utility' where it involved carrying on of an activity in the nature of trade; commerce or business, etc. That being the legal position, i.e., in apparent contradiction to what the ld. CIT states to be the purport and import of the decision in the case of Sole Trustee, Lokashikshana Trust vs. CIT (supra), relied upon by him, with no rebuttal there-to by the assessee, the matter was posted for hearing the parties, on the same.

3.2 The ld. DR, in these proceedings, relied on the decision in the case of CIT vs. National Institute of Aeronautical Engineering Educational Society (2009) 315 ITR 428 (Uttarakhand). It stands clarified that where the profit making activity inflicts the activity of education, the same can no longer be considered as imbued with the character of charity; 'charity' being the soul of the expression 'charitable purpose'. The Revenue authorities are sufficiently empowered to look into the truth of the transactions and are not supposed to allow registration with blind eyes. Trade or commerce in the name of 4 ITA.Nos.1773 & 1774/Mds/2009 education could not be said to be a charitable purpose so as to satisfy the mandate of s. 12AA. The ld. AR, on the other hand, would submit that these being initial years of the Institution, the overhead expenses were relatively lower, resulting in a profit, which may not necessarily obtain, or at least to that extent, in future. Also, the profits stand invested in the specified investments or deployed in capital assets for the school; the capital requirement for which was immediate and pressing, i.e., utilized only for the object of providing education, a charitable purpose, through the medium of a School.

3.3 As clarified by the apex court in the case of, inter alia, Sole Trustee Lokashikshana Trust vs. CIT (supra), the embargo on the profit motive only impinges on the activity pertaining to any object of general public utility. In fact, the law, as is applicable from 1.4.2009 (i.e., previous year commencing 1.4.2008), makes this explicit by carving out a proviso in respect of this activity; which forms part of the expression 'charitable purpose', excluding the same where it involved the carrying on of any business activity. The apex court in the case of Aditanar Educational Institutions vs CIT (Addl.) (1997) 224 ITR 310 (SC) explained that the profit making would not by itself be considered as an anathema, and where incidental to an activity being carried on for the attainment of the primary object of the educational institution, it will not cease to be one existing solely for the purposes of education; the object being not one to make profit. No doubt, the apex court, in that case, was concerned with the scope of the words `existing solely for educational purposes and not for the purposes of profit' occurring in s. 10(22). Though the section stands omitted since, the said words/expression finds reflection in section 10(23C)( iiiab, iiiad, vi) of the Act in the context of exemption from tax of income of educational institutions, including a University, where approved by the Government, or by the prescribed authority, or otherwise have a turnover less than the prescribed limit, as the case may be. Surely, the same considerations should inform the exemption to the object of `education' being pursued by a charitable institution/trust as well. This is as different parameters could not possibly attend the same object, which as a matter of public policy has been considered by the Legislature as itself constituting charity; our country having the legacy where `education' has always been regarded as pious.

3.4 At the same time, the Revenue's stand is not without merit. Where the profit making is incidental, it shall not exclude the business activity being carried on for the fulfilment of a primary object of charitable nature, as education, i.e. from being considered as toward a charitable purpose. However, where profit making becomes the dominant object, and education a means toward the same, could it be said that the enterprise is charitable or that charitable purpose informs and imbues it. Clearly, not. The principle or law involved stands explained by the apex court in the case of CIT (Addl.) vs. Surat Arts Silk Cloth Mfrs. Assocn. (1980) 121 ITR 1 (SC), with it stating that the charitable purpose should not be submerged by the profit making motive; the latter should not masquerade under the guise of the former, so that where profit making is the pre-dominant object of an activity, it would cease to be a charitable purpose. But where the pre-dominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. It goes on to say (at pg. 28):

`What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit making or carrying out a charitable purpose. If it is a former, the purpose would not be a charitable purpose, if it is latter, the charitable character of the purpose is not lost.' This, as explained by the hon'ble court, is for the reason that charity is something which is intrinsically altruistic in thought and in deed, involving the concept of selflessness, i.e., to be of some assistance for benefit to someone outside oneself. This is precisely the concern expressed by the hon'ble high court of Uttarakhand, being the raison de'tre and the leitmotif of its decisions in the case of National Aeronautical Engineering Educational Society (supra) and CIT vs. Queen's Educational Society, 319 ITR 160 (Utt.). It has in rendering these decisions elaborated and explained this aspect of the law. The whole purport of the activities of the institutions should be (charitable), as explained by the apex court in the case of Municipal Corporation of Delhi v. Children Book Trust (1992) 3 SCC 390; exhaustively dealing with the subject, emphasizing that charity must nevertheless prevade and inform the activities of the institution, i.e., should be its dominant object; the whole premise of the institution being only charitable. If not so considered every private institution (including schools and colleges) engaged in rendering education, though run on and guided by profit consideration, would answer the 6 ITA.Nos.1773 & 1774/Mds/2009 description of undertaking charitable activity, entitled to exemption of profit earned thus; it stating as:

`In other words, what we want to stress is, when a society or body is making systematic profit, even though that profit is utilized only for charitable purposes, yet it cannot be said that it could claim exemption. If, merely qualitative test is applied to section, even schools which are run on commercial basis making profit would go out of the purview of taxation and demand exemption.' We may conclude this discussion with the following observations by the apex court in the case of Aditanar Educational Institutions vs. CIT (Addl.) (supra): `....The decisive or acid test is whether on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction between the corpus, the objects and powers of the concerned entity.' 3.5 Having examined the law, and culled out the principles involved in applying it, we may now address the factual issue arising for determination, i.e., whether the applicant-

trust in the present case is existing for profit or for charitable purposes. In other words, whether the profit making is incidental to its activities of running a School, through which the charitable purpose of education is sought to be fulfilled, or a means or medium to earn profits. It is only on this factual inference, drawn on a consideration of the entirety of facts and circumstances, that the decision in the present case shall hinge upon; the law in the matter having been elucidated by the higher courts of law.

3.6 The Trust is created with a paltry sum of rupees one thousand. Clearly, the Settlor did not intend to bestow any endowment for education, which was, therefore, only contemplated for being pursued by either raising contributions from the public at large or the beneficiaries or through borrowings, which could again be either on commercial or on non-commercial basis; the former attracting more stringent terms as to interest and repayment. We find from the annual accounts that there has been an admixture of both; the Trust's capital (apart from the profit for the year) and loans as on 31.3.2009 standing at `21.49 lakhs and `45.56 lakhs respectively. This is also understandable, as it may not be possible to set up a project entirely on the basis of `voluntary contributions', which source, by its very nature, is uncertain, and cannot be predicated. Besides, it would also depend, to a large extent, on the quantum of funds involved. In the instant case, as it 7 ITA.Nos.1773 & 1774/Mds/2009 would be thus seen, the applicant has raised substantial loans on commercial basis. Now, when the project is set up by, and indeed contemplated for being so, i.e., to a substantial extent, by raising money through commercial borrowings, the inference could only be that it is to be run on a commercial basis. It cannot but be otherwise, and for the simple reason that, as afore-mentioned, the funds from voluntary sources cannot be predicated and are, at best, contingent, so that funds need to be generated, both for repayment of loans as well as for interest, essentially or primarily through internal accruals, necessitating it being run on commercial lines. No financial institution would extend loan/s on the premise that the borrower shall raise capital or funds through contributions to meet the obligations arising out of the loans. There could be exceptions, as of a bridge loan, which would require a firm arrangement for it being so granted. The same, improbable even for a business set-up, being granted only in case of reputed organizations, is inconceivable for a non-business, charitable organization, and a nascent one at that. The borrower has, thus, necessarily to satisfy the test of being a commercially viable enterprise, i.e., of it being able to generate surplus sufficient to meet the liability arising out of the loan(s), and which it must be therefore be regarded as having satisfied. No doubt, the last clause of the Trust Deed as made on 12.3.2008, reads as:-

`Whereas the Trust will not run any business and the Trust will not function for the purpose of profit.' ... However, it would be of no avail when the financing and the running of the Trust is patently on commercial basis. Rather, if at all, it leads to another disability for the grant of registration inasmuch as the activities of the Trust, as being carried out, are inconsistent with its avowed objects. In fact, the appellant nowhere disputes the same; its only contention is that the business and the concomitant profit making is no bar for registration as a public charitable trust, i.e., under the Act. Here it may also be pertinent to state that section 20(e) of the Indian Trust Act, 1882, i.e., the law under which the Trust is formed and is governed by, precludes any Trust to raise money on first mortgage of property, where in relation to any building, in excess of 50% of the value of the building. In the instant case, as the accounts would show, this provision stands clearly violated. A trust/entity acting in violation of the law as well as its bye laws, would loose 8 ITA.Nos.1773 & 1774/Mds/2009 its claim for exemption or the benefits conferred by law, which inure to one acting lawfully. Reference in this context be drawn to the decision in the case of Sind Cooperative Housing Society v. ITO, 317 ITR 47 (Bom.) and Walkeshwar Triveni Cooperative Housing Society Ltd. v. ITO, 88 ITD 159 (Mum.)(SB).

Further, the applicant-trust has grown to an asset base of 77.81 lacs inside a period of less than 18 months of its formation, i.e., up to 31/3/2009. The fact that the profits could not be withdrawn and stand utilized in creation of assets of the School, would not come to the rescue of the applicant, as explained by the hon'ble court in the case of National Aeronautical Engineering Educational Society (supra) and CIT vs. Queen's Educational Society (supra). It has also nowhere contended of having charged less from the students, i.e., vis-à-vis the normative fee charged by other public schools or that prescribed by the regulatory authorities. That is, has not made out any case in its respect; only stating of it being inconsequential in view of the object pursued, i.e., education, being per se charitable. From whom the voluntary contributions stand raised is also not known. Though, therefore, this should normally be taken as a neutral factor, having no adverse implication, it would be relevant to state that the hon'ble court in the case of Municipal Corporation of Delhi v. Children Book Trust (supra) has held that absence of such information would only lead to the presumption of it having been obtained from the beneficiaries, i.e., the parents of the students/beneficiaries, vitiating its application for registration and recognition in law as a public charitable institution. We do not venture to make any further comment; the information having apparently not been called for by the competent authority, though it may be relevant to state that the onus to prove its case, i.e., the genuineness of its activities, is only on the applicant. This aspect stands highlighted in the context of the foregoing observation that the beneficiaries could also be a source of the capital raised.

4. In view of the foregoing, in our considered view, the registration u/s. 12A stands rightly denied to the appellant in the present case. The denial of approval u/s. 80G would follow consequentially. We decide accordingly, upholding the impugned orders.

5. In the result, the assessee's appeals are dismissed.

             Sd/-                                              Sd/-  .
         (U.B.S.BEDI)                                     (SANJAY ARORA)
      JUDICIAL MEMBER                                  ACCOUNTANT MEMBER

Place: Chennai
Dated: March 18, 2011
GJ
Copy to:

1. Sri Aurobindo Annai Trust, 147, Arignar Anna Nagar, Ashok Nagar, Kathiresan Koil Road, Kovilpatti-628502.

2. The Commissioner of Income-tax-I, Madurai.

3. The Income-tax Officer (HQrs.)-1, Madurai.

4. D.R., I.T.A.T., Chennai Bench, Chennai.

5. Guard File.

// True Copy // 10 ITA.Nos.1773 & 1774/Mds/2009