Varkey Gems Foundation , Gurgaon vs Assessee

[Cites 21, Cited by 0]

Income Tax Appellate Tribunal - Delhi

Varkey Gems Foundation , Gurgaon vs Assessee

                IN THE INCOME TAX APPELLATE TRIBUNAL
                    (DELHI BENCH 'H' : NEW DELHI)
              BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND
                SHRI K.D. RANJAN, ACCOUNTANT MEMBER

                                  ITA No.5310 & 5311/Del./2010
                                     (Assessment Year : N.A.)

Varkey Gems Foundation,                Vs.         CIT, Faridabad.
DLF Gateway Tower,
5th Floor, DLF City, Phase-III,
Gurgaon.
(PAN/GIR No.AABTV1734D)

(Appellant)                                        (Respondent)

                      Assessee by : Shri Ved Jain,CA
                      Revenue by : Smt. Reena S. Puri, CIT(DR)

                                       ORDER

PER A.D. JAIN: JM These are assessee's appeals against the order dated 28.09.2010 passed by the CIT, Faridabad u/s 12AA(1)(b)(ii) of the I.T. Act, 1961, contending that the CIT has erred in rejecting grant of registration/exemption under sections 12AA and 80G, respectively, of the Act to the assessee.

2. The CIT rejected the claim of the assessee trust for registration and exemption. While doing so, it was observed that it was wrong to state that the absolute powers vested in the settler were not illegal, whereas, it was, in the same breath, being contended that it was incorrect to say that the settler had absolute and unrestricted power; that there was no force in the contention that the board of trustees was extremely powerful, since once the settler was vested with absolute power to appoint or remove any trustee and even to dissolve the trust at his sole discretion, it was the settler only who would actually dictate the affairs of the trust; that if the stipulations in the I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) trust deed were capable of being interpreted in many ways, it would, in fact, negate the claim for registration u/s 12A of the Act, since such stipulations could be used by a person to suit his own interest; that the amendment proposed to the trust deed was insufficient, since the process of law had not been followed, due to which, the supplementary deed lacked legal sanctity; that to the query regarding the expenditure of `4,75,000 on account of public relations services and logistic services it had been contended that the details and evidences with regard thereto had been filed during the proceedings and had been found in order; that on the other hand, it was on record that in spite of specific query, even in the reply dated 28.9.2010, the assessee had not furnished any details of the nature of the expenses, other than filing copies of two single page bills; that also, the assessee had not been able to justify as to how the public relations expenses paid to some concern at Mumbai, or the logistic services expenses paid to some concern at Thane, had resulted in pursuit of any charitable purpose; that it had been noticed that during the entire financial year 2009-10, no contribution had been received, other than initial corpus settlement of only `1001/-; that apropos the apparent donation of `50,000, stated to have been incurred on a poor person for medical relief, the assessee had submitted that the process of identifying such person for medical relief was not transparent; that even in its reply dated 28.9.2010, the assessee had not mentioned anything about the process of identification and it had only been mentioned that the relevant documents stood already filed; that with regard to the issue of the objects of the assessee trust being void and non specific, the assessee had contended that the objects in clause 6.3 were to be read in conjunction with clause 6.2, as per which, without in any way limiting the generality of the objects in clause 6.2, the objects in clause 6.3 will be pursued; that however, this explanation was not acceptable, because once clause 6.2 itself was admittedly general in nature, the 2 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) wide and non-specific objects in clause 6.3 would not make anything specific; that as such, the objects of the trust deed, as mentioned in clause 6.3, were wide and non specific; that it had not been made clear that the objects would be for the benefit of the general public; that further, since its inception on 19.8.2009, the trust had not carried out any charitable activity; that rather, the trust fund had been expended on activities which did not involve any charity; that the payment of `2,50,000 on account of public relations services and of `2,25,000 on account of logistic services did not serve any charitable purpose; that it was only after specific query on expenses towards charity, that the trust had expended `50,000, claimed to be a donation to a person requiring medial help; that in this case also, the process of identifying the individual requiring medical help was not transparent and there was no evidence of charity for the general public; that the various clauses of the trust deed made it clear that the trust was meant to be run as a one man show, rather than as a public charity; that all the powers were exclusively vested in the settler, to be used at his sole discretion; that on these clauses having been pointed out, the assessee had filed a supplementary trust deed, wherein all such objectionable clauses in the original trust deed had been modified; that this supplementary trust deed was, however, not legally tenable, because the due process of law had not been followed, since no public notice had been issued before the execution of the supplementary trust deed; that the assessee had contended, in this regard, that the trust had not amended its objects and only the administrative part of the provisions of the trust had been amended; that this was also not acceptable, because the administrative part of the trust deed also had a vital bearing on the conduct of the affairs of the trust and had conveyed a clear intention of the settler to keep all powers with him; that suo motu amendment of the trust deed was, as such, not in 3 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) accordance with law; and that the assessee trust looked more like the private affairs of an individual rather than a public charity.

3. Challenging the impugned order before us, the Ld.Counsel for the assessee has contended that the CIT erred in not granting registration to the assessee trust, even though all the conditions necessary to claim the registration had been fully met. Reliance has been placed on the Delhi Bench Tribunal decision dated 11.2.2011, passed in I.T.A. No.5308/Del./10, in the case of 'Gems Education Society vs. CIT, Faridabad' (copy placed on record). In the said decision, according to the Ld.Counsel for the assessee, the Tribunal, under similar circumstances, has directed the Commissioner to grant registration u/s 52 of the Act.

4. The Ld.DR, on the other hand, defending the order under appeal, has placed strong reliance thereon. It has been contended that the detailed findings recorded by the CIT while refusing grant of registration to the assessee trust, have gone totally unrebutted. It has been contended that it has nowhere been denied that, as noted by the CIT, the assessee trust proposed to give absolute and unrestricted powers to the settler, due to which, it was a private affair of an individual and not a public charity; that it also remains unchallenged that the objects of the trust were wide and non specific; that undeniably, no charitable activity had been carried out by the trust since its inception; that further, it is also undeniable that the attempt to rectify the defects in the original trust deed by execution of a supplementary trust deed, was an incomplete attempt which was not in accordance with law; and that pertinently, no public notice was issued before execution of the said supplementary trust deed. The Ld.DR has submitted that in these facts, there being no merit therein, the appeal of the assessee be dismissed while maintaining and upholding the well reasoned order passed by the CIT.

I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.)

5. We have heard the parties and have perused the material on record. At the outset, it would be appropriate to reproduce hereunder (the relevant portion), the provisions of section 12AA(1)(b)(ii) of the Act, under which provision, the impugned order has been passed:

"Procedure for Registration.

12AA. (1) The Commissioner, on receipt of an application for registration of a trust...............made under clause

(a) of section 12A, shall -

(a)..............................

(b)after satisfying himself about the objects of the trust ...............and the genuineness of its activities, he -

(i)..........................

(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution............

6. Therefore, as per section 12AA(1)(b)(ii) of the Act, request for registration of a trust can be refused, if the Commissioner is not satisfied about the objects of the trust and the genuineness of its activities.

7. In the present case, the Commissioner sought a report form the AO through the Addl. CIT. It is noted in para.3 of the impugned order, inter alia, that both the AO as well as Addl.CIT recommended against the grant of registration on the ground that the objects of the trust were against the provisions of section 2(15) of the Act and that the trust was not carrying on any activity.

8. The CIT asked the assessee to give clarification on the following issues.

"1. The AO and the Addl.CIT have not recommended the grant of registration u/s 12A in your case, stating that the objects are against the provisions of S.2(15) of I.T.Act, 5 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) 1961 & the applicant institution is not carrying out any activities.

As such, the A.R. is requested to explain as to how each of the objects of the Trust are 'charitable purposes' within the meaning of S.2(15) of I.T.Act, 1961.

2. The A.R. is asked to furnish documentary evidence regarding unsecured loans of Rs. 7 lacs as on 31-03-2010 as well as details and evidence regarding expenses claimed at Rs. 4.75 lacs during FY 2009-10.

3. Please also produce original documents (Trust Deed) and a/c books and vouchers till date."

9. The assessee, in response to the above queries, filed its reply dated 18.8.10, contending as follows:

"We would bring to your kind attention that the main object of the Varkey Gems Foundation is having no commercial or profit motives. Kindly refer to clause 6.2 of objects which read as under:

Clause 6.2:

The Trust shall be a public charitable trust having no commercial or profit motives. The objects of the Trust shall be to promote education, charitable purposes, cultural activities, medical relief and general welfare of the people in India and to help prepare the next generation for the challenges of the future.

The objects in clause 6.3 should be read keeping in view the intention as spelled out in clause 6.2 which is like a preamble and objects narrated in clause 6.3 are subsidiary to it. The applicant has been confronted as to how the objects in clause 6.3 are charitable in nature as defined in Sec2 (15) of the Income Tax Act, 1961. Such clauses are explained in this respect as under:

(A) Clause 6.3(a):

One of the objects of the Trust is "Giving awards, prizes and honoring teachers and professors in recognition for their 6 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) contributing to the education and teaching sector". Teachers and professors in our Society play a very vital role in nurturing the generation and developing good human kind for our Society at large. With these initiatives of the Trust, the competitive spirit to perform better will be developed among teachers and professors. In our Trust, we have taken this as an object to distribute awards, prizes and honors/ recognized the teachers and professors for their outstanding contribution in the field of the education, the trust will promote excellence in education. Such initiatives are supportive in achieving the main object of the Trust. If teachers are motivated, students will get better education.

Clause 6.3(b):

One of the objects of the Trust is "Giving donations to and helping to any educational or medical or other charitable institutions or trusts registered under Section 12A of the Income Tax Act, 1961" Trust will give donations and aids to institutions like educational, medical or other charitable institutions carrying out the similar activities which promote education, charitable purposes, cultural activities, medical relief and general welfare of the people in India. Such initiatives will give opportunity to open more trust(s) and serve in bigger fields as well as contributing in different charitable activities, not directly taken up by the foundation at any point of time.

Clause 6.3(c):

One of the objects of the Trust is "Training, developing and honoring excellence in the field of teaching and education" Training, developing and honoring excellence in the field of teaching and education play a very vital role in nurturing the generation and developing good human kind for our Society at large, the trust will promote excellence in training and development in improvement in the field of teaching and education. Such initiatives are supportive in achieving the main object of the Trust. This clause is for promoting education.

Clause 6.3(d):

One of the objects of the Trust is "Giving scholarships, prizes or awards for deserving student(s) for study and to give all other assistance for advancement of education". With these initiatives the competitive spirit to perform better will be developed among students, teachers, and professors. This will enable us to develop a good mankind for our society at large. The aim behind the 7 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) clause is to induce motivation & dedication amongst students to perform better and also to help needy and poor students to continue the education and to support them.

Clause 6.3(e):

One of the objects of the Trust is "Establishing educational institutions and/or aiding schools, colleges, libraries or other institutions for imparting any type of education". This clause is clearly for promoting education.

Clause 6.3(f):

One of the objects of the Trust is "Organising citizen awareness programs in relation to the objects contained in this Clause 6 (including conservation of environment)" The trust intends to create awareness about education, charities, cultural activities, medical relief and general welfare of people and preparing next generation to face future challenges. Each and every part of this clause is charitable in nature.

Clause 6.3(g):

One of the objects of the Trust is "Establishing and/or adding any institution for carrying on any activities towards advancement of arts like music, dance, drama and literature" Music, dance, drama and literature are various dimensions of education and cultures of the country. Such initiative provides the suitable platform for career advancement of young generation to excel their skills and arts in the areas of their interest. Such initiatives will supports in creating the self reliant Society at large.

Clause 6.3(h):

One of the objects of the Trust is "Rendering assistance to indigent and other less privileged members of society for their subsistence, shelter, education and medical care and to establish and/or aid social welfare institutions engaged in promoting these specific objectives" Trust offers to provide various kinds of relief to the poor like educational support , medical care or shelter, providing such assistance improves the living standard of poor class which create a healthy Society for common people. This clause is for helping poor.

Clause6.3(i):

One of the objects of the Trust is "Acquiring, Purchase, sale or disposal of any movable or immovable property and/ or other 8 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) assets, as may be required for the purposes of the trust". The trust will need these properties as infrastructure to carry its charitable activities. These properties many times had to be sold for shifting in larger premises, shifting centre of activities etc. In carrying some organization such activity is normal and natural.

Clause 6.3(j):

One of the objects of the Trust is "Carrying out all ancillary and incidental acts and deed required to achieve any of the objectives set forth above, and otherwise helping and assisting such other charitable purposes or purpose of public utility as the Board of Trustees may think fit." Trust would like to carry out the ancillary and incidental acts after approval from its Board of Trustees. This clause is required to keep pace with the changing world. With the passage of time the kind of charity and also areas of activities may have to be changed e.g. propagating against Sati custom may no longer be required and now activities like awareness regarding H1N1 may be the need of the hour. So this clause will provide flexibility.

(B) Activities undertaken:

Medical aid of Rs50000 to a poor person provided. It was a kidney failure case. Copy of prescription and other details enclosed.

(C) Evidence of Rs 71acs & Rs 4.75 lacs:

Letter of confirmation for loan of Rs 71acs enclosed. In proof of expenses of Rs 4.751acs, copy of bills enclosed.

(D) Original documents and books are produced.

(E) Certificate u/s 13(l)(c) & Income tax details:

Few certificates u/s 13(l)(c) have been filed. Rest now filed (enclosed). Income tax details of trustees enclosed.

It is stated and declared that the Trust property shall always be applied for the purposes of the trust irrespective of sex, caste, colour, creed, race or religion without any discrimination whatsoever."

I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.)

10. The Commissioner forwarded the assessee's above reply to the AO. The AO submitted his comments, which are as follows:

"...the various provisions given in the Trust Deed which are against the spirit of the charitable trust are reproduced below :-

"1.5 The Secretary of the Trust shall be appointed by the settler and can be changed by him. at any point of time at his discretion and Mr. Ajey Kumar of Flat No. 102, Dheeraj Valley Tower-I, New Ciba Geigy Factory, Goregaon (East), Mumbai, Maharashtra is appointed as the first Secretary of the trust.

10. Termination "The Trust created by these presents shall be irrevocable provided that in the event of the Trust failing to function for any reason, or in the event of the settler being of the opinion that this Trust should be dissolved, the Settler may take appropriate steps in compliance with applicable laws to dissolve the Trust. In event of dissolution of the trust, procedure in accordance with Clause 3 mentioned hereinabove shall he followed."

Para 1.1 of First Schedule of Byelaws There shall be a minimum of 2 (two) Trustees and a maximum of 7 (seven) Trustees of the said Trust (with the Trustees from time to time being collectively referred to as the "Board of Trustees"

or the "Board") all of whom shall be nominated by the Settler, (with each such trustee being referred to individually as a "Nominee Trustee" and collectively as "Nominee Trustees") Functioning of the Trust 3.1 The Board of Trustees shall hold at least two meetings each year, being at least one meeting in each half of the year, or as more often as may be necessary for the efficient conduct of the affairs of the Trust. The Chairman for each meeting shall be elected from amongst the trustees present at the meeting. The Chairman shall not have a casting vote. The Secretary shall be appointed by Settler and Mr. Ajey Kumar is hereby appointed as the first Secretary of the trust. The Settler at his discretion can change the Sectary at any point of time.

I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) Trust is created when the author (Settler) of the trust reposes or declares the confidence in the trustees. But, in the case of the applicant society, mere plain reading of the above quoted provisions/paras of the Trust Deed shows that the trust is a one man army of Mr. Jay Varkey, the Settler. Whereas in case of charitable trust requiring registration u/s 12A of the l.T.Act, 1961, the Trustees should have all the say in the decisions of the Trust.

When a charity has been founded and trusts have been declared, the founder has no power to revoke, vary or add to the trusts. This is so irrespective of whether the trusts have been declared by any individual, or by a body of subscribers, or by the Trustees. Moreover, in the event of the Trust not being able to function in fulfillment of its objects, the trustees shall, after discharging all liabilities, transfer the entire assets of the trust to any other public charitable institution/institutions having similar objects.

In view of the facts and the circumstances mentioned above, the application of the trust for registration u/s 12A of the i.T. Act, 1961is not recommended."

11. The AO's comments were put to the assessee by the Commissioner. The assessee replied on 7.9.10, as under:

"The applicant is in receipt of copy of letter dt.31.08.2010 sent by the Income Tax Officer, Ward 6, Gurgaon to your good self on the abovementioned subject. In this matter it is submitted as under:

1. During the previous hearing dt. 09.08.2010 your office raised certain queries and further confronted that the ITO, Ward 6, Gurgaon has raised objections that the foundation was not carrying any activities and the objects of it were not charitable in nature as provided u/s 2(15) of the Income Tax Act, 1961. The applicant vide reply dt. 18.08.2010 provided information sought by your good self, filed the evidence of donation of Rs. 50000 made to a kidney patient as medical aid and also each and every object of the foundation as contained in clause 6.3(a)-6.3(j) were specifically explained as how an object was charitable in nature. As such the evidence of charitable activity undertaken by 11 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) the foundation was put on record and the character of the objects contained in the object clause were duly explained to be of charitable nature. On going through the letter of the Ld. ITO to your good self, copy of which has been confronted with the applicant, and the letter of the applicant to you good self dt. 18.08.2010 it may kindly be noted as under:

a) The Ld. Assessing Officer has not made any adverse comment on the functioning of the foundation. He has not rebutted the applicant's claim of making charity of Rs 50000. He has accepted that the foundation is working and doing charity.

b) The applicant is engaged only in lawful activities.

c) The Ld. Assessing Officer has accepted that the objects of the foundation are charitable in nature as he has not rebutted the applicant's detailed discussion and explanation of each object clause explaining to be of charitable nature.

2. Now the Ld. Assessing Officer has commented on the administration part of the foundation and has raised objections. In his view the settler is having all the powers. In this matter the applicant submits as under:

a) While granting registration u/s 12A(a) and 80G of the Act, what is required to be examined is the character of the trust as to activities undertaken are of charitable nature. How the administration of the trust is carried is not important and the Income Tax Act, 1961 only stipulates for the charitable activities carried by the institution and it is silent on the administration part. The Ld. Assessing Officer has accepted that the activities of the foundation are charitable in nature but he is objecting on the administration part. The objections raised by the Ld. Assessing Officer are not supported by any provisions of the Income Tax Act, 1961.

b) The Ld. Assessing Officer has objected to clause 1.5 of the Trust Deed on the ground that the settlor has blanket power to appoint and remove the secretary. There is no harm in this clause because it is aimed to avoid mismanagement in the trust which is so much common in charitable institutions. This clause safeguards the compliance of the charitable objects which are 12 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) dominantly important. It may be noted that the settlor is the member of Board of Trustees.

c) The Ld. Assessing Officer has objected to clause 10 of the Trust Deed regarding the termination of the trust. On close reading of this clause it will be found that there is nothing unlawful because it has been mentioned that "the settlor may take appropriate steps in compliance with applicable laws to dissolve the trust. In the event of dissolution of trust procedure in accordance with clause 3 mentioned hereinabove shall be followed". It may be noted that in clause 3 it has been provided that "in the event of dissolution of the trust the assets remaining after the satisfying all debts and liabilities of the trust as on the date of dissolution shall under no circumstances be distributed among the trustees/ settlor, but the same shall be transferred to another charitable trust whose objects are similar to those of the trust and which enjoys the recognition u/s 12A(a) and Sec 80G of the Income Tax Act, 1961 as amended from time to time". As such the clause is fair enough and needs no adverse inference.

d) The Ld. Assessing Officer had objected to para 1.1 of the Bye Laws. The settlor has the power to appoint a new trustee and as such the settlor has the blanket power in the matter of appointment of the trustees. Here again it may be noted that the settlor is a trustee also and this clause has been incorporated to maintain the sanctity of the trust because many a times some undesirable and bad elements get entry in the board and they destroy the basic character of the trust.

e) The para 3.1 of the Bye Laws has been objected by the Ld. Assessing Officer on the ground that the secretary shall be appointed and removed by the settlor. This issue has been discussed in the foregoing paras.

f) The Ld. Assessing Officer has observed that the trustees should have all the say in the decisions of the trust whereas in the case of this foundation all the powers are vested with the settlor Mr. Jay Varkey and the trust is his one man army. Here it is submitted that nowhere in the Trust Deed and the Bye Laws it has been provided that any decision of the settlor will be binding on the Board of Trustees. In fact all the decisions are to be taken by the Board of Trustees and in the decision making the settlor has no say other than an ordinary trustee. Further on close reading of the provisions of the Trust Deed, it may be 13 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) appreciated that there is no provision of veto power to the settlor and on any issue whatsoever decision the board will take will attain finality and settlor can do nothing. Further as per para

3.1 of the Bye laws chairman of each meeting of the board will be elected from amongst the trustees present at the meeting and settlor has not been compulsorily made the chairman of the meeting. Further in this para 3.1 it is provided that the chairman will not have a casting vote. Hence in day to day working the settlor has no special power regarding running of the trust and this way his power is pari passu to the power of the other trustees. As such the observation of the Id AO is unfounded and incorrect.

g) In the last but one para, the Ld. Assessing Officer observed that "When a charity has been founded and trust has been declared, the founder has no power to revoke, vary or add to the trust."

The trust is irrevocable as it is clearly mentioned in clause 3 appearing on Pg No.2 of the trust deed.

h) In the last but one para the Ld. Assessing Officer has observed "Moreover, in event of the trust not being able to function in fulfillment of its objects the trustees shall after discharging all liabilities, transfer the entire assets of the trust to any other public charitable institution/ institutions having similar objects". It may kindly be noted that the clause 3 of the trust deed is absolutely at an agreement with this observation of the Ld. Assessing Officer. Hence there should be no grievance.

3. As discussed in para 1 and 2 above it is submitted that the Assessing Officer is not correct in not recommending the registration of the foundation u/s 12A(a). However, the rejection of the application will lead to litigation which will delay the working of the foundation and curtail its activities till litigation is finished. Hence in order to avoid the litigation and saving valuable time the foundation is ready to amend its trust deed and bye laws in case in the present form of clauses and bye laws the foundation's application u/s 12A(a) is going to be rejected, as per draft enclosed. It is believed that your good self will appreciate the offer of the foundation and will advise suitably. Trustees will need two weeks time to do the needful."

I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.)

12. Thereafter, the assessee filed written submissions dated 22.9.10 before the CIT, contending that the assessee trust had amended the trust deed and had removed all such clauses from the original trust deed, as were found to be objectionable. A copy of the amended trust deed was also filed.

13. Thereupon, the assessee was confronted as follows:

"Kindly refer to the proceedings in respect of your application for registration u/s 12AA filed on 31-03-2010.

2. In this regard, I am directed to request you to please clarify on the following issues :-

(i) The initial Trust Deed vested absolute and unrestricted powers in the hands of settler. The Trust in substance was constituted to run as a one man show, like private affair managed by an individual, with absolute powers in the hands of the settler Sh. Jay Varkey. It does not inspire confidence that it will be run as a public charity in letter and spirit. In the light of this, please justify your claim for registration u/s 12AA.

(ii) Perusal of accounts for FY 2009-10 shows that the Society has expended Rs. 4,75,000/- in all - Rs. 2,50,000/- on account of Public Relation Services and Rs. 2,25,000/- on account of Logistic Services. No charitable purpose appears to have been served by these expenses.

The only apparent act of charity so far is donation of Rs. 50,000/-, claimed to be for medical expenses of a person, and this donation was also made after the Department had made a specific query on expenses towards charity. The process of identifying such individuals, who require medical help, is not transparent.

(iii) The objects of the Trust as detailed in clause 6.3 are vague and non-specific. In clause 6.3 (a), 6.3 (c), 6.3 (d), etc., the objects mentioned in the Trust Deed do not specify that these are for public at large. There is nothing to hinder the Trust from restricting these benefits to a particular section of people.

(iv)    Trust once created cannot be amended




                                      15
                                               I.T.A. Nos.5310,5311/Del./2010
                                                               (A. Y. : N.A.)

The Trust once created can be ended but never amended. In Sakthi Charities vs CIT (1984) 149 ITR 624, the Hon'ble Madras High Court has held as under :-

"...once a trust has been founded with certain objects, those objects could not be deleted even by the founder of the trust though it was possible to add some other charitable objects without any detriment to the original objects and thus the deed of rectification dated January 31, 1969, deleting the objectionable objects could not be said to be valid in law. The Division Bench further held that though the court under section 92, Civil Procedure Code, can give a direction which is necessary for the administration of any trust, it cannot in exercise of that power alter the objects of the trust."

In the case of Thanthi Trust vs ITO (1973) 91 ITR 261, the Hon'ble Madras High Court has held that if the trust had been really and validly created, any deviation by the founder of the trust or the trustees from the declared purposes would amount only to a breach of trust and would not detract from the declaration of trust.

The Hon'ble Supreme Court in the case of Sri Agasthyar Trust vs CIT (1999) 236 ITR 23 have expressed their full agreement with the principle staged in the above passage of the Madras High Court as under :-

"When a charity has been founded and trusts have been declared, the founder has no power to revoke, vary or add to the trusts. This is so irrespective of whether the trusts have been declared by an individual, or by a body of subscribers, or by the Trustees."

3. In view of the above, you are requested to show cause as to why your application for registration u/s 12A may not be rejected. Your reply should reach this office on 24-09-2010 at 03:30 P.M., which is fixed as the next date of hearing."

14. On this, the assessee filed the following reply dated 28.9.2010:

"The applicant is in receipt of your letter no. CIT/Fbd/ Tech/12A/2010-11/156 dt 22.09.2010 requiring certain clarifications on various issues. The pointwise replies are as under:

I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.)

i) It has been observed that the trust gives absolute powers to the settlor hence it does not inspire confidence that it will be run as a public charity. In this matter it is submitted as under:

a) The legality of absolute and unrestricted powers to the settlor has not been challenged. As such if there is any such power vested with the settlor it is not illegal.

b) It is not correct that the settlor has absolute and unrestricted powers. On careful reading of the Trust Deed it may kindly be noted that Board of Trustees is extremely powerful, to mention few clauses in this reference kindly refer to clauses 6.1,6.4, entire clause 7 with sub clauses, clause 8, clause 9, entire clause 3 of bye laws etc. In fact the settlor has been vested power by and large in appointment and removal of the trustees, secretaries and in the event of dissolution of the trust. This has been done with a view that the trust is not run in any illegal manner or in contravention of the objects because sometimes bad elements enter into the trust as trustees to grab the trust and its properties which are so much common and your good self must be aware of it. This clause infact ensures that the trust will remain pure and fully dedicated towards its objects. However board has been given ample powers to run the trust and carry day to day activities and settlor has no special power to interfere in this. It is not correct to observe that if the settlor has absolute and unrestricted powers in appointment and removal of trustees, secretaries and in a matter to decide the manner in which trust properties be transferred to another charitable trust in the case of dissolution of trust will create doubt in the charitable purpose of the trust. The trust will enjoy the benefit of Sec 12AA and 80G till it is run for charitable purpose. If there is any infringement the status will be lost. Nevertheless if the settler is responsible for it or the Board of trustees. This is not correct that the trust would be run as one man show because the board has all the powers in day to day working. The settlor has the power to appoint and remove trustees and secretaries so that bad people doing do not survive. This spirit of the clause should be viewed with a positive attitude rather than with negativity. Over and above, during assessment the 17 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) working of the trust is always thoroughly scrutinized and it is the conduct of the trust and not any apprehension and suspicion which determine its character.

However, keeping in view the observations of your good self the Trust Deed has been suitably amended by a registered supplementary deed copy of which has been filed in your office on 21.09.2010 and the original was produced for verification purposes.

ii) It has been communicated that no charitable purpose appeared in spending Rs 250000 on account of public relation services and Rs 225000 on account of logistic services. In this matter it is submitted that during 12A/80G proceedings the details and evidences of the expenses were filed and the same were found in order. These expenses were incurred in establishing public relations with various people in India and abroad for mobilizing donations and for this purpose the services of an agency were hired. They carried the public relation process and billed the same for amount of Rs 250000. The sum of Rs 225000 was given to another agency for meeting the traveling expenses etc of the employees of the public relation agency. Every trust is run on the basis of rits public relations and this process incurs cost. All big charitable institutions like CRY, UNICEF etc always incur huge costs on public relations. Public relations in long term provide funds for running the institution. However these funds would come in the institution only after getting 12A & 80G registration because in its absence the trust has no credentials in the eyes of the public. The necessity of this expenditure may be gazed from the fact that the expenses were incurred out of borrowed money.

Adverse observations have been made on donation of Rs 50000 made to a poor person having kidney failure. It may kindly be noted that vide letter dt 18.08.2010 all the medical reports right from 28.08.2009 to 16.03.2010 have been put on record. The photocopy of the cheque, covering letter and evidence of speed post along with the address of the donee has been put on record. The application of the poor person with recommendation has been put on record. This is not a case of the department that the donee was not poor. Hence the donation is charity. The material on record itself proves the care exercised by the trust in identifying the needy. It may further be noted that despite practically no contributions received since the trust did not enjoy 18 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) 12A & 80G benefits, the charity has been carried out. Its timing is immaterial.

iii) The applicant vide letter dt 18.08.2010 explained the charitable character of each and every object clause. With special reference to clause 6.2 which is declaration that the trust has been founded for public charity and it was requested that the trust has been founded for public charity and it was further requested that the other objects mentioned in clause 6.3 should be read in the background, reference and intention mentioned in clause 6.2. On careful reading of clause 6.3 of the object clause it may be noted that this clause opens with the following provision:

"Without in any way limiting the generality of the objects set forth in clause 6.2 above, the objects of the trust shall interalia include:"

It may kindly be appreciated that clause 6.2 is the absolute and main clause spelling the objects and main domains of the activities and clause 6.3 is categorically declaring that it is not limiting the scope of clause 6.2 and it is only an inclusive clause to interalia explain its objects in particular in an explanatory and inclusive way. However, in terms of clause 6.2 all the activities in clause 6.3 would remain in larger domains of clause 6.2. Your good self has also doubted the charitable character of the object clause mentioned in clause 6.3(a) to 6.3(j). The only objection at your end is that there is nothing to hinder the trust from restricting these benefits to a particular section of people.

In this matter it is submitted that the clauses as discussed above may kindly be read with a positive construction rather than negativity. When in clause 6.2 it is specifically mentioned that the trust shall be a charitable trust, all the readings of the subsequent object clause should be read in the background of this clause only. All the object clauses have been carefully worded to maintain the charitable character. Your good self is only apprehensive and suspicious. Only facts determine the character of a trust and not the apprehension and suppositions. Let us discuss this way:

A trust is having only one object clause that it will serve poor. No doubt such trust will get 12A/80G registration. Suppose later trustees spend the trust money only for the benefit of poor 19 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) family members of the settlor/trustees, certainly the charitable character will go. However this aspect will be identified only when facts are examined. Same ratio applies in the case of the applicant. The question whether objects of the trust are carried for charitable purpose or not may be determined on the basis of facts rather than apprehensions, suppositions, conjectures and surmises.

iv) It has been communicated that trust once created cannot be amended and in this connection, the following cases have been cited:

Sakti Charities vs CIT (1984) 149 ITR 624 Thanthi Trust vs ITO (1973) 91 ITR 261 Sri Agasthyar Trust vs CIT (1999) 236 ITR 23 In this matter, it is submitted that the citations do not apply to the applicant and these cases do not nullify and derecognized the amended trust deed filed in your office on 21.09.2010 because in all these cases, the object clause were amended while in the applicants case, no object clause has been amended and it is only the clauses pertaining to administrative part of the trust deed which have been amended. As the object clause goes to the root of the purpose to create the trust, any amendment to it is difficult because the rights of the beneficiaries are affected. However, the procedure of administration, if hanged does not affect the right of the beneficiaries and the intention of the settler to create a trust e.g.:- If there is a clause in a trust deed that the trust will provide medical facilities to general public and this clause is deleted, the understanding between the settlor and the trustee will be broken and similarly, the right of the beneficiaries are affected. Definitely, it will be difficult to change such an object. However, if trust deed provides that it will have two trustees and later it is found that two trustees are short in numbers and the clause is amended that the trust will have minimum two trustees and maximum 7 trustees, it will have no effect on intent of the trust and right of the beneficiaries and such amendment may be carried. On the same argument, the amendment deed which dilutes the power of the settlor and transfers his rights to the board of the trustees is a matter of administration of the trust and it is well within the powers as enunciated in the trust deed.

I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) On going through the full text of the orders stated by your goodself, it may kindly be noted as under:

a. In Sakti Charities Case, the trust had many objects, few of which were not of charitable nature. In order to make all the object clauses of charitable nature, trustees deleted those clauses. However, the provisions of trust deed although empowered trustees in clause XXX to amend paragraph IV-XXIX, it had not given any power to the board to amend Clause III which dealt with the object clause. However, trustees infringed the provisions of Clause XXX by amending Clause III which was ultra vires. Hence, the court held the amendment illegal and in this context, this order was passed and the observation quoted by your good self in your letter was made by the court.

In Para III of the Sakti Charities order, the hon'ble Court has observed as under:

"That the subsequent rectification deed was not valid because only the authority conferred under the terms of the trust in Clause XXX thereof was to modify the trust by making an addition and that provision will not enable the trustees to make a deletion of the objects."

Hence, the Court first of all dealt with the Object Clause and it may kindly be noted that Court held that the trustees could add to the objects but could not delete any object clause. Hence, the observation that the trust once created cannot be amended is not supported by Sakti Charities Case. In fact, in Para XIII of the order of Sakti Charities Case, the hon'ble Court has held that:

"it is possible to add some other charitable objects without detriment to the objects"

b. In Thanthi Trust Case, the ultra vires payment was the subject matter. In this case, the supplementary deed was executed on 28.06.1961 to the original deed dated 01.03.1954 has not been held to be invalid. The case says that settlor/ trustees cannot use the trust property for any purpose other than mentioned in Object Clause. While not holding the amendment in the trust deed illegal, the court observed that the application of the property to purposes other than object clause was illegal and the trustees could not do so and in such eventuality, such mind will be test. However, trust would remain genuine.

I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) c. In Agasthyar Trust Case, there was the partnership in which there was the provision to apply the income of the partnership for charitable purposes and for this purpose, a trustee was appointed. This trustee later on executed a trust deed to deal with the trust property and this deed did not embody charitable purposes. In such case, the Court observed as mentioned in P.No.32 of the ITR 236 as under:

"The powers of the trust in respect of the said trust continue to remain the same as setout in Clause 8 of the partnership deed which has been extracted hereinabove. The said trust was only required to carry out the objects of the trust and spend the trust funds for charitable purposes in the manner indicated therein. No power was given to the trustee to amend, alter, vary or change in any manner. The objects of the trust as created in 1949, the result of this is that neither the trustee nor the founders could bring any change in the objects of the trust as set out in their partnership deed dated Nov 28, 1941. This being so, the document dated July 1, 1944 executed by the trust deed was clearly without any authority and was nonest."

As such, the partnership deed through which the trust came into existence did not provide any change in objects of the trust, such act was illegal. However, in the applicant's case, such amendment is provided and through this power, the amendment deed has been created and notably objects clauses are not changed at all. Hence, this citation does not make the amendment deed illegal.

v) Keeping in view, the above discussion, your goodself is requested to kindly grant registration u/s 12(A) and 80G of the Act. It may kindly be appreciated that in the absence of these registrations, the trust will not get funds to function."

15. It was thereafter, that the CIT passed the order under appeal.

16. The above copious communication between the assessee and the department has been reported for facility of ready reference. It is being discussed at length, infra.

I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.)

17. From the above very detailed communication between the assessee and the department, it is seen that the assessee was, first of all, required to explain as to how each of its objects were for charitable purpose within the meaning of section 2(15) of the Act. The assessee was also asked to furnish documentary evidence relating to unsecured loans of `7 lakhs as on 31.3.10, and also details and evidence regarding expenses claimed at `4,75,000 during financial year 2009-10 The assessee was also asked to produce the original trust deed and books of account and vouchers till then. In response, referring to clauses 6.2 and 6.3 of the trust deed, the assessee submitted that the main object of the trust was not having any commercial or profit motives. Apropos the activities undertaken by the trust, it was submitted that medical aid of `50,000 had been provided to a poor person, involving kidney failure. A copy of the prescription and other details were filed. So far as regards unsecured loans of `7 lakhs and expenses claimed at `4,75,000, a letter of confirmation for loan of `7 lakhs and copies of bills of expenses of `4,75,000 were filed. Original documents and books were produced. Certificates u/s 13(1)(c) of the Act were filed. Income-tax details of the trust wre also furnished. It was stated that the trust, property shall always be offered for the purposes of the trust irrespective of sex, caste, colour, creed, race or religion, without any discrimination whatsoever.

18. On being confronted with this reply of the assessee, the AO submitted before the CIT that the trust was a one man show of Mr. Jay Varkey, the settler, as evident from the provisions contained in the trust deed, i.e., para.1.5 (providing that the Secretary of the trust could be appointed by the settler and could be changed at any time, at his discretion), para.10 (providing that the trust could be dissolved in the event of, inter alia, the settler being of the opinion that it should be dissolved) and para.1.1 of the First Schedule of the Bye laws, (as per which, all the trustees would be nominated by the settler and the 23 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) Secretary of the Board of Trustees of the trust would be appointed by the settler and could be changed at any point of time at the discretion of the settler).

19. The AO commented that as such, the application of the trust for registration was not being recommended, observing that when a trust is declared, the founder has no power to revoke, vary or add to it and that in the event of the trust not being able to function in fulfillment of its objects, the entire assets of the trust are to be transferred to any other public charitable institution having similar objects, which was not the case with the assessee trust.

20. To the AO's above comments, the response of the assessee was, inter alia, that each and every object of the trust, as contained in clauses 6.3(a) to 6.3(j) had been specifically explained and it was detailed as to how each object was charitable in nature; that the AO had not made any adverse comment on the functioning of the trust; that the assessee's claim of charity of `50,000 had not been rebutted and it had been accepted that the trust was working and doing charity; that the AO had accepted that the objects of the trust were charitable, since he had not rebutted the assessee's detailed discussion and explanations of each object clause of the trust; that the AO had commented upon the administrative part of the assessee trust; that the AO had observed that in his view, the settler of the assessee trust was having all the powers; that this was not the purview for grant of registration u/s 12A(a) of the Act; that the AO's objection regarding the settler having blanket power to appoint and remove the Secretary did not carry force, since this action was aimed to avoid mismanagement in the trust and to safeguard the compliance of the charitable objects of the trust; that pertinently, the settler was a member of the Board of the trustees of the assessee trust; that there was nothing unusual 24 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) about the cause regarding the termination of the trust since clause 3 provided that in the event of dissolution of the trust, the assets of the trust remaining after satisfying of debts and liabilities shall be transferred to another charitable trust whose objects are similar to those of the assessee trust; that para.1.1 of the bye laws of the trust, containing the power of the settler to appoint a new trustee, had been incorporated to maintain the sanctity of the trust and to preempt entry of undesirable elements in the Board, which was also true about the para.3.1 of the bye laws providing for the appointment and removal of Secretary of the settler; that the trust deed did not contain any mention of any decision of the settler being binding on the Board of trustees; that in fact, all decisions were to be taken by the Board of trustees and the settler had no say more than that of an ordinary trustee; that there was no provision of any veto power vesting with the settler; that as per para.3.1 of the bye laws, the chairman of each meeting of the Board would be elected from amongst the trustees present; that the trustee had not compulsorily made the chairman of the meeting; that further, the chairman was not to have a casting vote; and that as such, the Board of the settler was pari passu with the power of the other trustee and he had no special power concerning the running of the trust, that according to clause 3 of the trust deed, the trust was irrevocable.

21. Agreeing with the AO, the CIT did not find force in the aforesaid stand taken by the assessee.

22. The assessee, on the other hand, besides maintaining its aforesaid, detailed stand before the CIT, amended its original trust deed by removing all such clauses therefrom, as were found to be objectionable.

I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.)

23. Still not satisfied, the CIT again asked the assessee to justify its claim for registration, observing that the original trust deed vested absolute powers in the hands of the settler and that it did not inspire confidence that the trust would be run as a public charitable trust in letter and spirit. The assessee was also asked to explain the expenditure of `4,75,000 on account of public relations services and logistic services, since this expenditure did not appear to the CIT to have served any charitable purpose. It was observed that addition of only `50,000 had been claimed to have been made for medical expenses, which donation had also been made after a specific query had been put, regarding expenses towards charity; and that the process of identification of such individuals as received donation, was not transparent. It was also observed that the objects of the trust, as contained in clause 6.3 of the trust deed, were vague and non- specific. The CIT further objected that a trust deed, once created, cannot be amended.

24. The assessee filed a detailed reply dated 28.9.10. It was contended that the legality of the powers of the settler remained unchallenged; that in fact, the settler did not have absolute or unrestricted power and it was the Board of Trustees which was all powerful; that still, the trust deed had been suitably amended in view of the CIT's observations; that the details and evidence regarding the expenses on account of public relations services and logistic services had not been found to be incorrect; that these expenses had been incurred for establishing public relations in India and abroad for mobilizing donation; that the services of an agency had been hired for this purpose, for which, public relations expenses had been incurred, though payment of `2,25,000 was made to another agency for meeting the traveling expenses, etc., of the employees of the public relation agency; that these expenses had been incurred out of borrowed 26 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) money; that apropos the donation of `50,000 the medical reports had been filed; that the photocopies of cheque, covering letter and evidence of speed post along with the addresses of the donee had been put on record; that the application of the poor person with recommendation had also been put on record; that it was not the case of the department that the donee was not poor; that hence, the donation was charity; that the material on record proved the care exercised by the trust in identifying the needy; that further, despite practically no contribution received since the trust did not enjoy benefits u/s 12AA and 80G of the Act, the charity had been carried out; that the timing thereof was immaterial; that the assessee, vide letter dated 18.8.10, had explained the charitable character of each and every object clause, with special reference to clause 6.2, which was a declaration that the trust had been founded for public charity; that it had been stated that the trust had been founded for public charity and that the other objects mentioned in clause 6.3 should be read in the background, reference and intention mentioned in clause 6.2; that clause 6.2 was the absolute and main clause, spelling out the objects and main domain of the activities of the trust, whereas in clause 6.3, it was categorically declared that it was not limiting the scope of clause 6.2 and it was only an inclusive clause to, inter alia, explain its object; that, however, in terms of clause 6.2, all the activities in clause 6.3 would remain in the larger domain of clause 6.2; that the CIT himself had not doubted the charitable character of the objects mentioned in clauses 6.3(a) to 6.3(j); that the only objection had been that there was nothing to hinder the trust from restricting the benefits to a particular section of people; that in this regard, in clause 6.2, it had been specifically mentioned that the trust shall be a charitable trust and all the subsequent object clauses ought to be read in the background of the said clause only; that all the object clauses had been carefully worded to maintain the charitable character of the trust; that the case 27 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) laws sought to be applied against the assessee, i.e., 'Sakti Charities vs. CIT', 149 I.T.R. 624, 'Tanthi Trust vs. ITO', 91 I.T.R.261 and 'Sri Agasthyar Trust vs. CIT', 236 I.T.R.23, were not applicable to the assessee; that the said cases did not nullify and de-recognize the amended trust deed, filed with the CIT on 21.9.10, as in all the said cases, the object clauses had been amended, whereas in the case of the assessee, no object clause had been amended and it was only the clauses pertaining to the administrative part of the trust deed which had been amended; that since the object clause went to the root of the purpose to create the trust, any amendment to it was difficult, because the rights of the beneficiaries would be affected; that however, amendment to the procedure of administration did not affect the rights of the beneficiaries, or the intention of the settler to create the trust; and that the amended deed, which diluted the power of the settler and transferred his right to the board of trustees, was a matter of administration of the trust, well within the powers, as enunciated in the trust deed. The assessee thus requested the CIT to grant registration u/s 12AA and 80G of the Act, as in the absence of such registration, the trust would not get any funds to function.

25. The CIT, vide the impugned order dated 28.9.10, rejected the assessee's claim for registration u/s 12AA(1)(b)(ii) of the Act.

26. The issue is as to whether the aforesaid action of the CIT is valid or not.

27. The assessee made its claim u/s 12A of the Act. The CIT rejected this claim u/s 12A(1)(b)(ii) of the Act. Section 12AA(1)(b)(ii) reads as follows:

"12AA The Commissioner on a receipt of an application for registration of at rust or institutor made u/s 12A under clause (a) or clause (b) of sub-section (1) of section 12A, shall -

(a)..................

(b) After satisfying himself about the objects of the trust or institution and the genuineness of its activities, he -

(i).........................

I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.)

(ii) shall, if he is not so satisfied pass an order in writing refusing to register the trust or institution."

28. The question is as to whether in the present case, the CIT was rightly not satisfied about the objects of the assessee trust and the genuineness of its activities.

29. The first objection of the CIT is that whereas on the one hand, the assessee contends that the absolute and unrestricted power vested in the settler are not illegal, on the other hand, it maintains that it is incorrect to say that the settler has absolute and unrestricted powers. It has been observed that the contention of the assessee that in fact the Board of Trustees is extremely powerful, is without force, because when the settler is vested with absolute powers to appoint or remove any trustee and even to dissolve the trust at his whole discretion, it is the settler and not the Board of Trustees, who would actually dictate the affairs of the trust.

30. In this regard, it remains undisputed that the initial trust deed vested absolute and unrestricted powers in the hands of the settlor, i.e., Shri Jai Varkey, it would be appropriate to reproduce hereunder, as done hereinbefore, clauses 6.2 and 6.3 of the trust deed:

"6.2 The Trust shall be a public charitable trust having no commercial or profit motives. The objects of the Trust shall be to promote education, charitable purposes, cultural activities, medical relief and general welfare of the people in India and to help prepare the next generation for the challenges of the future.

6.3 Without in any way limiting the generality of the objects set forth in clause 6.2 above, the objects of the Trust shall inter alia include:

(a) Giving awards, prizes and honoring teachers and professors in recognition for their contributing to the education and teaching sector;

(b) Giving donations to and helping to any educational or medical or other charitable institutions or trusts registered under section 12A of the I.T. Act, 1961.

(c) Training, developing and honoring excellence in the field of teaching and education.

I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.)

(d) Giving scholarships, prizes or awards for deserving student(s) for study and to give all other assistance for advancement of education;

(e) Establishing educational institutions and/or aiding schools, colleges, libraries of other institutions for imparting any type of education.

(f) Organizing citizen awareness programs in relation to the objects contained in this clause 6 (including conservation of environment).

(g) Establishing and/or aiding any institution for carrying on any activities towards advancement of acts like music, dance, drama and literature.

(h) Rendering assistance to indigent and other less privileged members of society for their subsistence, shelter, education and medical care and to establish and/or aid social welfare institutions engaged in promoting these specific objectives.

(i) Acquiring purchase, sale or disposal of any moveable or immovable property and/or other assets, as may be required for he purposes of the trust.

(j) Carrying out all ancillary and incidental acts and deed required to achieve any of the objectives set forth above, and otherwise helping and assisting such other charitable purposes or purpose of public utility as the Board of Trustees may think fit."

30. It is seen that clause 6.2(supra) of the trust deed contains a declaration that the trust had been founded for public charity. Clause 6.3 contains the objects of the trust in specific. Clause 6.2 is general, whereas clause 6.3 contains the inclusive particular objects of the trust. Admittedly, the powers of the settler of the assessee trust have remained unchallenged. As such, such powers of the settler cannot be said to be illegal. The settler has been vested power of appointment and removal of trustees and Secretaries and to decide the manner in which the trust properties are to be transferred to another charitable trust in the case of dissolution of the existing trust. The power of trustees, on the other hand, has been vested with all powers to run the trust and to carry on its day-to-day activities. These powers cannot be interfered by the settler. The powers of the settler cannot be said to have any adverse effect on the charitable purpose of the trust. It is only if the charitable purpose cease to exists, that the trust would be ceased to be a charitable trust.

31. Therefore, the objection of the CIT in this regard is misconceived.

I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.)

32. The next objection of the CIT is that the assessee has given its own interpretation of the various clauses of the trust deed and the intention of the settlor, which is not tenable. In this regard, it is seen that firstly, the legality of the absolute and un-restricted powers of the settlor has nowhere been challenged. Therefore, such powers, if any, cannot be said to be illegal. Besides, on the other hand, perusal of the trust deed shows that the settlor has not been bestowed absolute and unrestricted powers, rather is Board of Trustees which is all powerful. The settlor has power of appointment and removal of the trustees and Secretary and with regard to the course to be adopted in the event of dissolution of trust. Now, obviously, this is ensure the proper functioning of the trust. It is the board of trustees, however, which has been empowered to run the trust and carry on its day-to-day activities, in which, the settlor has no power to interfere. It cannot at be said that all the powers of the settlor create a doubt in the charitable purpose of the trust. It is only if the trust is run for the charitable purpose and that the benefits u/ss 12AA and 80G of the Act shall subsists or else, the status of the trust shall be taken away. Moreover, the proper stage to go into the conduct of the trust is that of assessment and not the stage of grant of registration.

33. Besides, clause 6.2 of the trust deed makes declaration that the trust has been founded for public charity. The other objects contained in clauses 6.3(a) to 6.3(j) of the trust deed are subsidiary to the preamble contained in clause 6.2. Clause 6.3(a) provides for giving awards and prizes and honoring teachers and professors in recognition of their contribution to the sector of education and teaching. As per clause 6.3(b), donations and help are to be given in educational or medical or other charitable institutions or trust registered u/s 12AA of the Act. According to clause 6.3(c), the trust is to train, develop and honour excellence in the field of teaching and education. Clause 6.3(d) states that the trust is to give scholarships, prizes or awards to deserving students for study and to give all other assistance for advancement of education. It is provided in clause 6.3(e) that the trust is to establish educational institutions and/or aid schools, colleges libraries or other institutions for imparting any type of education. As per clause 6.3(f), the trust is to organize citizen awareness programme in relation to the objects 31 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) contained in clause 6, including conservation of environment. According to clause 6.3(g), the trust is to establish and/or add any institution for carrying on any activity towards advancement of arts like music, dance, drama and literature. Clause 6.3(h) states that the trust is to render assistance to indigent and other less privileged members of the society for their subsistence, shelter, education and medical care and to establish and/or aid social welfare institutions engaged in promoting the said specific objectives. Clause 6.3(e) provides that the trust is to acquire purchase, sale or dispose of any moveable or immoveable property and/or other asses, as may be required for the purposes of the trust. Lastly, according to the clause 6.3(j), the trust is to carry out all ancillary and incidental acts and deeds required to achieve any of the objectives contained in the rest of the clauses and to otherwise help and assist such the charitable purposes or purposes of public utility as the Board of Trustees of the trust may think fit.

34. A perusal of the above clauses of the trust deed shows that these are clear clauses. There is no scope of any 'interpretation' thereof being given by the assessee, segregated form what has been stated in these clauses. It has not been sown as to how the objects mentioned in these clauses are not charitable in nature. Giving of awards and prizes and honoring teachers and professors is, but an incentive to teachers and professors and such act is definitely charitable, in recognition of their contributions in the field of education. Giving of donation and helping educational or medical or other charitable institutions or trust which stand registered under the Act is also charitable. It promotes the opening of more trusts like the assessee trust. Imparting training and development in the field of education also cannot be said to be of a non-charitable character. Such action would promote excellence in the field of teaching and education. Giving scholarships, prizes awards to deserving students acts as an incentive for such students in further studies. Likewise, proving assistance for advancement of education furthers such cause. Here also, charity is evidently involved. Establishing educational institutions and aiding schools, colleges and libraries promotes the cause of education and is clearly charitable in nature. Organizing citizen awareness programmes regarding the objects contained in clause 6 of the 32 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) trust deed, including conservation environment goes to create widespread awareness about education charities, cultural activities, medical relief and general welfare of the people. Such action cannot be said to be devoid of element of charity. Establishing institutions for advancement of the arts goes to advance education and culture of the country. Here also, the charity is at play. Providing assistance to indigent persons and less privileged members the society for their subsistence, shelter, education and medical care, establishing of and aiding existing social welfare institutions is also an object of charity. Thereby, requisite relief is granted to the poor and needy. Acquisition and disposal of properties required for the purposes of the trust is the sine qua non for the functioning of the trust to carry out its charitable activities. Lastly, all acts which are ancillary and incidental to achieve any of the aforesaid objectives also cannot be said to be not of a charitable nature.

35. So, evidently the assessee cannot, in any manner interpret the clause of the trust deed otherwise than what has been stated in these clauses. The objection of the CIT in this regard is, therefore ill founded.

36. Further, the intention of the settlor is also not found to have been misinterpreted by the assessee. The CIT has raised this objection merely going by the powers of the settlor. These powers, as noted here also, are powers with regard to appointment and removal of the trustees and secretaries and concerning disposal of the trust properties in the vent of the dissolution of the trust. It has also not been made out as to how the said powers of the settlor override the powers of the board of trustees of the trust. Obviously, these powers of the board of trustees are the powers regarding the day-to-day running of the trust and the settlor has no say therein. This objection of the CIT, thus, is also not sustainable.

37. The next objection of the CIT is that the amendment of the trust deed is insufficient, as the due process of law has not been followed, due to which, the supplementary trust deed lacks legal sanctity and that since no public notice was issued notifying such proposed amendment by a competent civil court, the supplementary trust deed was not maintainable. Besides, the CIT 33 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) has also objected that the contention of the assessee that only the administrative part of the original trust deed has been amended, is not acceptable, since in the case of the trust, the administrative part of the trust deed also has a vital bearing on the conduct of the affairs of the trust and it conveys a clear intention of the settlor to keep all the powers with him.

38. In this regard, undisputedly, the trust deed was amended only in consonance with the observations of the CIT himself. Moreover, though the CIT has commented so, it has not been made out as to how the administrative part of the trust deed has any bearing, much less a vital bearing on the conduct of the affairs of the trust, or that such administrative powers part of the trust deed conveys the settlor intention to keep all powers with him. As noted above, the powers of the settlor are of appointment and removal of the trustees and secretaries. This power in no way interferes with the power of the board of the trustees of the trust to run the day-to-day activities of the trust. The two are segreable and segregated. Both these powers are confirmed to their specific realms, without impinging upon each other. The power of the settlor regarding deposal of the trust properties in the event of disposal of the trust can also not said to be having any effect on the power of the board of trustees. Such power, obviously, would come into operation only in the event of the trust being dissolved and not otherwise.

39. The CIT has further objected that the assessee has not furnished any details or evidence about the nature of the expenditure of `4,75,000/- on account of Public Relations Services and Logistic Services, other than copies of two single page bills and that it has not been justified as to how the public relations expenses paid to some concern at Mumbai or the logistic services expenses paid to some concern at Thane resulted in the pursuit to of any charitable purpose.

40. In this regard, it has not been disputed that such expenditure was incurred for establishing public relations with different people in India and abroad for mobilizing donation. It was for this purpose that the assessee engaged the services of an agency. It was this agency, who carried out the 34 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) public relations exercise. The payment of `2,50,000/- was made for this purpose. `2,25,000/- was paid by the trust to another agency for meeting the traveling and other expenses of the employees of the public relations agency. It is, however, noteworthy that these payments would come in the institution only upon grant of registration and otherwise. It has been contended by the assessee that these expenses were incurred out of borrowed money. Apropos the details of the expenses, the CIT admits the trust to have filed copies of two bills. However, though these bills have not been questioned, the CIT has gone on to disbelieve the assessee in this regard, sense any adverse material.

41. It is the further objection of the CIT that the process of identifying persons for giving donation for medial relief, was not transparent. However, it remains undisputed that donation of `50,000/- was made to a person suffering from kidney failure. Photocopies of the donee's medical reports from 28.8.09 to 16.3.10, cheque, covering letter and evidence of speed post along with address of the donee had been filed on record by the trust. These documents are nowhere disputed. Further, the application of the donee along with recommendation was also furnished. These documents have also not been questioned. As such, the objection that the process of identification of such needy persons was not transparent, as against he material documentary evidence brought on record by the trust. Obviously, the application of the donee along with recommendation was what prompted the trust to make donation to a person suffering from kidney failure. Moreover the assessee had provided the address of such persons. No enquiry from such person was, however, carried out by the CIT.

42. The next question raised by the CIT is that clause 6.2 of the trust deed being admittedly general in nature, the wide and non-specific objects contained in clause 6.3 would not make non-specific.

43. Apropos this issue, as already seen, clause 6.2 of the trust deed declares that the trust has been founded for public charity. Clause 6.3, on the other hand, contained the affairs discussed specific objects of the trust, 35 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) none of which can be said to be of a non charitable character. Therefore, this objection of the CIT is also an objection merely in the air.

44. So far as regards the CIT's objection that the trust did not carry out any charitable activity since its inception, it is seen that the trust, as considered earlier made a donation to a person suffering from kidney failure. Now, since the CIT has observed that he process of identification of such needy person was not transparent, this donation was not considered. We have observed hereinabove that the identification of the donee was transparent enough in view of his application and the recommendation thereon, besides his particulars having been filed by the trust. Such donation, evidently was a charitable act.

45. Further, it is seen that as per clause 3 of the original Trust Deed, in the event of dissolution of the trust, the assets remaining after satisfying all the debts and liabilities of the trust as on the date of dissolution shall not be distributed among the trustees/settlor, but the same shall be transferred to another charitable trust, whose objects are similar to those of the assessee trust and which enjoys recognition under section 12A of the I.T. Act, 1961 and exemption under section 80G thereof. This position has remained unchanged in the Supplementary Trust Deed. This clause makes it clear that the settlor cannot usurp the trust properties in the event of its dissolution. The said clause 3 reads as follows:

"In the event of dissolution of the Trust, the assets remaining after satisfying all debts and liabilities of the Trust as on the date of dissolution shall under no circumstances be distributed among the trustees/settlor, but the same shall be transferred to another charitable trust, whose objects are similar to those of the Trust and which enjoys the recognition under section 12A and Section 80G of the I.T. Act, 1961, as amended from time to time."

46. Concerning the case laws relied on by the CIT regarding his objection of legal procedure not having been followed for amending the Trust Deed, it is seen that of the said case laws, i.e., 'Sakti Charities vs. CIT'; 149 ITR 624 (Mad.), 'Thanti Trust vs. ITO', 91 ITR 261 (Mad.) and 'Sri Agasthyar Trust vs. CIT', 236 ITR 23 (SC) deal with situations where the objects of the trusts were sought to be amended. This is not the case herein. Since here, only the 36 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) administrative part of the Deed was amended (which remains undisputed) and not the objects, no rights of the general public were adversely affected thereby and hence, no public notice was required to bring about such amendment.

47. Thus, none of the objections raised by the CIT is found to be proper. It is these objections which has formed the basis of the non grant of registration to the assessee trust. Since all these objections have been ill founded, the very basis for non-grant of registration to the assessee trust goes. Furthermore, in 'Gems Education Society'(supra), under exactly similar circumstances, the very same CIT who passed the order impugned herein, had refused registration u/s 12AA and exemption u/s 80G of the Act. The Tribunal, however, while directing the CIT to grant registration u/s 12AA and exemption u/s 80G of the Act, observed as follows:

9.We have duly considered the rival contention and gone through the record carefully. On perusal of memorandum of association along with aims and objects, one thing is clear that the assessee society came into existence for the purpose of imparting education. The clauses incorporated in the aims and objects do indicate that its activity is for the purpose of education for public at large. Thus this activity do come in the ambit of section 2 (15) of the Income Tax Act. According to the authoritative pronouncement of Hon'ble Karnataka High Court in the case of Garden City Educational Trust as well as in the case of Sanjeevamma Hanumanthe Gowda Charitable Trust. The registration u/s 12A is one of the procedural aspect for claiming benefit u/s 11 and 12 of the Income Tax Act. The issues whether assessee would earn income, it will apply its income for the purpose of its activity or not are relevant while assessing the income of the assessee. For granting registration u/s 12A. Ld. Commissioner is required to look into prima facie about the genuineness of the activities of the assessee. The activities incorporated in the aims and objects should be in accordance with the law. They should not for the purpose of carrying out any illegal activities etc. Meaning thereby that registration u/s 12A may not be given to an assessee for certain activities which are not in consonance with the expression 'charitable purpose' provided in section 2 (15) but in the name of education assessee is trying to demonstrate that such activities are also for charitable purpose.

10.Adverting to the facts of the present case, let us see main objections of the Ld. Commissioner for denying a registration to the assessee u/s 12A of the Act. The first objection he has expressed about sub clause IX of clause 5. We have extracted sub clause IX as well as 37 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) assessee's reply. The apprehension of the Ld. Commissioner is that this power will be misused by the assessee by restricting these awards to the benefit of assessee's employee. This apprehension of the Ld. Commissioner is totally misplaced. Section 13(3) can take care of this aspect when assessment will be framed. If the assessee has granted undue benefit to any person covered by that section then that amount can be disallowed. During the assessment proceeding, if it came to the notice of AO that undue benefit has been extended by the society to any entity or individual, who has an influence in the decision making process of the society, then he can examine that aspect and disallow the claim of assessee. The next objection pointed out by the Ld. Commissioner is in respect of printing and publishing activity of the assessee. He is of the opinion that it is akin to trade and commerce. In our opinion that an educational institution will always be required to print material for its internal consumption i.e. newsletters for the students, other study material etc. For this purpose assessee has to make a provision in its memorandum of association. What is the evidence with the Ld. Commissioner that it will be misused and this rule will be used for carrying out trade and commerce at a large scale.

The next objection pointed out by the Commissioner relates the activity of advertisement etc. These clauses have not been taken by the assessee to carry out advertisement business. According to it, in order to establish the school as a brand and invite the public's attention for the facilities provided in the school, it has to incur expenses on advertisement. We fail to understand how this issue is violative of any public policy and repugnant to the rules. The assessee in its written submissions, has invited the attention of Ld. CIT about the advertisement given by some of universities, who are enjoying 12A registration but Ld. Commissioner did not comment on that aspect in the order. Taking into consideration all these aspects, we are of the opinion that Ld. Commissioner has rejected the claim of assessee on the basis of unsound reasoning. He has pointed out superficial objections which are merely suspicions. All those suspicions can be considered by the AO at the time of assessment proceeding.

11. In view of the above discussion, we direct the Ld. Commissioner to grant registration u/s 12A. We allow the appeal No. 5309/Del/10 also and direct the Ld. Commissioner to grant the exemption u/s 80G also. The certificate be issued for the period permissible in the provisions."

48. In 'Gems Education Society'(supra), as in the present case, the society was incorporated for the purpose of imparting education, though the objects of the present trust also include various other charitable objects like promotion of charitable purposes, cultural activities, medical relief and general welfare of the people in India. Here also, as in that case, as discussed hereinabove, the aims and objects include education for the public at large. Therein, it was observed that the issue regarding earning of income 38 I.T.A. Nos.5310,5311/Del./2010 (A. Y. : N.A.) and application thereof for the purpose of its activities are relevant while assessing the income of the assessee, whereas for grant of registration, the genuineness of the activities are prima facie to be looked into. In that case, objections similar to the ones taken herein, were raised by the CIT. Dealing with each such objections, the Tribunal concluded that he claim of the assessee had been rejected on unsound reasoning and superficial objections, which were merely suspicions. In the discussion on the objections raised by the CIT in the present case, we have also come to the conclusion that the CIT's objections are ill founded. No decision contrary to 'Gems Education Society' (supra) was placed before us.

49. In view of the above, we find substance in the grievance of the assessee. Such grievance is hereby accepted. Accordingly, the order passed by the CIT is cancelled and the CIT is directed to grant to the assessee registration u/s 12AA and exemption u/s 80G of the Act.

50. In the result, both the appeals filed by the assessee are allowed.

Order pronounced in open court on 30.06.2011.

           Sd/-                                           Sd/-
       (K.D. RANJAN)                                      (A.D.JAIN)
       ACCOUNTANT MEMBER                            JUDICIAL MEMBER
Delhi, Dated :      30.06. 2011
SKB
Copy forwarded to:
       1.Appellant
       2.Respondent
       3.CIT,
       4.CIT(A), Karnal.
       5.CIT(ITAT), New Delhi.
                                                                 AR/ITAT




                                      39

Legal Document View

Unlock Advanced Research with PRISMAI

Income Tax Appellate Tribunal - Delhi

Varkey Gems Foundation , Gurgaon vs Assessee