Gujarat High Court
Director Of Income Tax (Exemption) vs N H Kapadia Education Trust - Education ... on 1 October, 2018
Author: Akil Kureshi
Bench: Akil Kureshi, B.N. Karia
C/TAXAP/356/2012 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 356 of 2012
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE B.N. KARIA
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1 Whether Reporters of Local Papers may be allowed to
see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the
judgment ?
4 Whether this case involves a substantial question of law
as to the interpretation of the Constitution of India or any
order made thereunder ?
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DIRECTOR OF INCOME TAX (EXEMPTION)
Versus
N H KAPADIA EDUCATION TRUST - EDUCATION TRUST
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Appearance:
MRS MAUNA M BHATT(174) for the PETITIONER(s) No. 1
MR S N SOPARKAR FOR MR.PARTH CONTRACTOR(7150) for the
RESPONDENT(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE B.N. KARIA
Date : 28/09-01/10/2018
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. Tax Appeal was admitted for consideration of following substantial questions of law:
Page 1 of 14C/TAXAP/356/2012 JUDGMENT "[A] Whether the Appellate Tribunal has substantially erred in setting aside the order of DIT(E) u/s 12AA(3) of the act and further restoring the registration granted u/s12A of the I.T. Act?
[B] Whether the Appellate Tribunal has substantially erred in not taking cognizance the latest amendment in the nature of proviso to section 2(15) of the I.T. Act inserted with effect from 01/04/2009?
[C] Whether the Appellate Tribunal has substantially erred in ignoring the fact that in view of the amended provisions of Section 2(15) of the Act, the objects of the assessee association no more remain charitable?"
2. These questions arise in following factual background.
3. Respondent-assessee is a Trust registered under the Public Trusts Act and is engaged in educational activities. The Trust runs various schools. The Trust was also granted registration under section 12A of the Income Tax Act, 1961 ('the Act' for short) by an order dated 21.03.1990 by the Commissioner of Income Tax, Ahmedabad.
4. The Director of Income Tax (Exemptions), Ahmedabad, issued a show cause notice dated 10.02.2011 proposing cancellation of registration of the Trust on three principal grounds which can be summarized as under:
I. During the assessment proceedings for assessment year 2008-09, it was noticed that an amount of Rs.4.50 crores was Page 2 of 14 C/TAXAP/356/2012 JUDGMENT transferred by the Trust to one of its trustees and his sons who had in turn paid a sum of Rs.3.50 crores to one Sonalben Jaksania towards agreement to purchase land from her. It was averred that no sale deed was executed so far. The transaction with the trustee Muktak Kapadiya and his son was not reflected in the Form-10B. According to the Director of Income Tax, the Trust has thus concealed the actual mode of transaction and transferred the funds to the trustee by violating the provisions of section 13(1)(c) of the Act.
II. It was seen from the record that the land proposed to be acquired by the Trust is an agricultural land which was not yet controverted into non agricultural use. Objects of the Trust are educational and not for carrying out agricultural activities. The Trust therefore cannot divert its funds for the purpose of agriculture.
III. The Trust had collected a sum of Rs.1.90 crores (rounded off) from students at the time of their admission. This amount was directly credited to the balance and claimed as corpus donation instead of showing it in the income and expenditure account. The Trust had failed to establish that such amount was by way of corpus donations.
5. On the basis of these allegations, the Director of Income Tax wished to come to following conclusions:
Page 3 of 14C/TAXAP/356/2012 JUDGMENT "Thus, the trust has violated provisions of section 11(1)(d) and 13(1)(C)(ii) of the I.T. Act, 1961 and is not eligible for registration u/s 12A(i) of the I.T. Act, 1961. It clearly attracts the amended definition of "charitable purpose" in section 2(15) of the I.T. Act, 1961 by insertion of a proviso w.e.f. 1.4.2009 as the aforesaid activities show their commercial nature."
6. In response to such show cause notice, the assessee appeared before the Director and made written as well as oral submissions. The gist of opposition of the Trust is as under:
(I) The registration was granted to the Trust under section 12A of the Act which cannot be cancelled under section 12AA(3) of the Act unless the two grounds on which such cancellation is envisaged are established.
(II) In the present case, there is no allegation of the activities of the Trust not being genuine or that the same not being carried out in accordance with the object of the Trust. Powers under section 12AA(3) of the Act therefore cannot be exercised.
(III) With respect to the acquisition of land, it was contended that the payments made to Sonalben Jaksania towards the purchase of agricultural land which had correlation to the object of the Trust to impart education. The Trust wanted to expand and diversify its educational activities on the S.G.Road area which was a fast growing area in the outskirts of Page 4 of 14 C/TAXAP/356/2012 JUDGMENT Ahmedabad city. It was further contended that no money was retained by the trustees or their family members. The agreement to sell was executed in the capacity as a trustee.
The payment made was reflected in the books of the assessee Trust as advance towards land purchase. In fact, the trustees had advanced money to the Trust.
(IV) With respect to the donations received from the students or the parents, it was conveyed that the contributions were made with specific purpose; such as for construction of buildings, staff welfare fund, students' welfare fund etc. It was contended that the accounting treatment given by the Trust to such receipts was consistently followed by the Trust and was a recognized accounting method. In any case, this cannot be the ground for cancellation of the registration of the Trust.
(V) It was also contended that the amended definition of the term "charitable purpose" contained in section 2(15) of the Act with effect from 01.04.2009 would have no application in the present case. None of the activities of the Trust are in the nature of commercial activities. The educational institute in question run by the Trust is a self-financed institution and does not depend on Government grant.
7. The Director of Income Tax however was unmoved. He passed an order dated 17.03.2011 canceling registration of the Trust from inception. He referred to the objects of the Trust contained in Trust deed which were all in the nature of Page 5 of 14 C/TAXAP/356/2012 JUDGMENT carrying out and promoting educational activities and observed that these objects do not envisage involvement of the Trust in transactions of commercial nature permitting the Trust to transfer its funds to the trustees or his sons who could in turn pay part of it towards agreement to sell of the land to the land owner. He observed that the sale deed had still not been executed. He therefore concluded that the Trust was engaged in activities of commercial nature. He then referred to section 2(15) of the Act defining the term 'charitable purpose' which was amended with effect from 01.04.2009.
01.10.2018
8. In the context of amended section 2(15) of the Act, he observed that the activities of the Trust were not genuine and were not being conducted in accordance with the objects of the Trust and therefore, the Trust had lost the status of a charitable organization. Its activities were being carried on along commercial lines.
9. The assessee challenged this decision of the Commissioner before the Tribunal. The Tribunal took note of the documents on record and the rival contentions. Tribunal allowed the assessee's appeal by the impugned judgement. The summary of the Tribunal's consideration and conclusions is as under:
Page 6 of 14C/TAXAP/356/2012 JUDGMENT (i) The Tribunal recorded that the assessee-Trust is running
educational institution since decades. The activities of the Trust cannot be stated to be non-genuine.
(ii) It was noted that purpose of acquiring land was for expanding educational activities of the Trust. The payment was made to the land holder. It was accounted in the Trust account under the head "advance towards land". Such payment was not reflected in the accounts of the Managing trustee or his family members. The land was purchased not for investment but to set-up educational institution. There was thus no case of altering the objects of the Trust.
(iii) In relation to the amended section 2(15) of the Act, the Tribunal was of the opinion that the amended proviso would apply only in case of advancement of any other object of general public utility and in such a case it shall not be a charitable purpose. Case of the assessee therefore would not fall within the amended section 2(15) of the Act. It was also noticed that the accounts of the assessee-Trust reveal deficit of Rs. 75.18 lacs and expenditure of Rs. 5.80 crores was made towards the educational activities.
(iv) Commenting on section 12AA inserted in the Act w.e.f. 01.04.1997, the Tribunal was of the opinion that for the alleged violations of section 11(1)(d) or section 13(1)(c) of the Page 7 of 14 C/TAXAP/356/2012 JUDGMENT Act, registration of the Trust cannot be cancelled in exercise of powers under section 12AA(3) of the Act.
10. Appearing for the Revenue, learned counsel Mrs. Bhatt vehemently contended that the Tribunal has committed an error in disturbing order of the Commissioner. Sizeable funds from the corpus of the Trust were transferred to the Managing trustee and his sons ostensibly to purchase agriculture land. Sale was not completed for years later on. The objects of the Trust did not permit the Trust to engage in agriculture activities. Donations were received from students in the nature of capitation fees. It was thus clear that the Trust was engaged in profiteering. The Commissioner was therefore perfectly justified in cancelling the registration.
11. On the other hand, learned counsel Mr Soparkar opposed the appeal contending that the Tribunal has correctly examined the relevant aspects emerging from the record. The Trust desired to purchase land in newly developing area in the outskirts of the city of Ahmedabad where educational institution could be set up. The decision to purchase agriculture land and then to apply for conversion arose out of commercial expediency. The Trust probably hoped to acquire agriculture land in the name of the trustee who enjoyed agriculture status at a cost lesser than the non-agriculture land would be available. The expenditure was debited in the accounts of the Trust. The trustee has never claimed any title Page 8 of 14 C/TAXAP/356/2012 JUDGMENT or interest in the land. Merely because of some legal complications, the sale deed could not be completed would not imply that the funds of the Trust were diverted for unauthorized use.
12. Counsel further submitted that there is no prohibition against collecting funds from the students particularly, in self- finance institutions. Even educational institutions enjoying registration under the Act are allowed to retain a portion of the profit out of such activity as long as the same is utilized for the purpose of its educational activities.
13. Counsel lastly contended that, in any case, section 12AA(3) of the Act did not permit cancellation of registration on the ground of violation of section 11(1)(d) or 13(1)(c) of the Act.
14. Before adverting to the rival contentions, we may take brief note of this statutory provisions. Section 11 of the Act pertains to income from property held for charitable or religious purposes. Sub-section (1) of section 11 provides that subject to the provisions of sections 60 to 63, the income referred to in clauses (a) to (d) shall not be included in the total income of the previous year of the person in receipt of the income. Clause-(d) of sub-section (1) of section 11 pertains to income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the Page 9 of 14 C/TAXAP/356/2012 JUDGMENT trust or institution. Section 12 of the Act pertains to income of trusts or institutions from contributions. Sub-section (1) of section 12 provides that any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that it shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property holding under Trust wholly for charitable or religious purpose and the provisions of that section and section 13 shall apply accordingly. Section 12A prescribes the conditions for applicability of section 11 and 12. Under sub-section (1) of section 12A, one of the conditions is requirement of such trust or the educational institution being registered under section 12AA of the Act. Section 12AA of the Act in turn, prescribes the procedure for registration. Sub-section (3) which was added to section 12AA w.e.f. 01.10.2004 reads as under:
"(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) [or has obtained registration at any time under section 12A [ as it stood before its amendment by the Finance (No.2) Act, 1996 (33 of 1996)] and subsequently the [Principal Commissioner or] Commissioner 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:
Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable Page 10 of 14 C/TAXAP/356/2012 JUDGMENT opportunity of being heard.]
15. In terms of sub-section (3) of section 12AA thus, the registration can be cancelled in case of a trust or institution if the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the object of the Trust or institution, thereupon, he would pass an order in writing canceling the registration of trust or new.
16. Section 13 carries a title "Section 11 not to apply in certain cases". Sub-section (1) of section 13 inter alia provides that nothing contained in section 11 or 12 shall operate so as to to exclude from the total income of the previous year of the person in receipt thereof in case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof if any part of such income or property of the trust or institution is during the previous year unused or applied directly or indirectly for the benefit of any person referred to in sub-section (3).
17. From the above provisions, it can be immediately seen that the event of cancellation of registration of a Trust in exercise of powers under sub-section (3) of section 12AA of the Act would arise when the Commissioner 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 Page 11 of 14 C/TAXAP/356/2012 JUDGMENT Trust or institution. Mere breach of the provisions contained in section 11(1)(d) or 13(1)(c) per se would not fall within the either of the two grounds available to the Commissioner to cancel the registration viz. the activity of the Trust not being genuine or not being carried out in accordance with the objects of the Trust. The Tribunal was thus perfectly justified in coming to such a conclusion. Our view that we expressed gets force from the decision of Uttranchal High Court in case of Welham Boy's School. Society vs. Central Board of Direct Taxes and anr reported in 285 ITR 74
19. The Commissioner in order to bring his conclusions within the the fold of sub-section (3) of section 12AA of the Act extrapolated his findings that the Trust had diverted its funds for the objects other than for which the Trust was created and the Trust had received donations from the students and the activities of the Trust thus carried on along commercial lines. Both the conclusions, in our opinion, are completely incorrect. The Tribunal had examined the materials on record, agreed with the Trust's contentions that desire on part of the Trust was to acquire land which could be used for setting up educational institution. Agreement to purchase agriculture land was executed in name of the Managing trustee since obviously the Trust should not have even entered into an agreement to purchase agriculture land. Equally, merely because donations are received would not per say imply that the Trust was operating along commercial lines. The Tribunal Page 12 of 14 C/TAXAP/356/2012 JUDGMENT noted that the Trust was running several self finance educational institutions. Collecting fees for such purpose would be part of the normal activities. Even for an educational institution, to retain a reasonable surplus out of its activities has never been frowned upon by judicial decisions. If at all this is getting more liberal. Prime requirement is that such surplus should not be diverted for any other purpose. It must be utilized for the objects of the Trust. Reference in this respect can be made to decision of Supreme Court in case of Queen's Educational Society vs. Commissioner of Income Tax reported in 372 ITR 699. In the said decision, the Supreme Court considered the parameters for judging whether an institution exist solely for educational purpose and not for profit. It was observed that the fact, that the institution makes profit, does not necessarily mean it exists for profit. Similar view was expressed by the Supreme Court in case of Visvesvaraya Technological University vs. Assistant Commissioner of Income Tax reported in 384 ITR 37.
20. The Revenue's reliance on the amended section 2(15) is also of no avail. Section 2(15) of the Act defines charitable purpose as to include any relief for the poor, education, yoga, medical relief, preservation of environment including water sheds, forests and wildlife and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility. Provisio to sub-section (15) to section 2 of the Act was added Page 13 of 14 C/TAXAP/356/2012 JUDGMENT by the Finance Act, 2010 providing that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for cess or fee or any other consideration irrespective of the nature of use or application, or retention of the income from such activity. This proviso therefore applies to activity for the advancement of any other object of general public utility. Such activity would be excluded from the definition of charitable purpose if it involves carrying on any activity in the nature of trade, commerce or business or for cess or fee or any other consideration. Clearly, the legislature did not desire this condition or restriction to be attached to the remaining activities which were defined or categorized as charitable purpose under sub-section (15) which includes the education.
21. In the result, the questions are answered against the Revenue. Tax Appeal is dismissed.
(AKIL KURESHI, J) (B.N. KARIA, J) ANKIT/JYOTI V. JANI Page 14 of 14