Income Tax Appellate Tribunal - Chennai
Socio Economic Development ... vs Assessee on 28 September, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH, CHENNAI
[BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER
AND SHRI N.S. SAINI, ACCOUNTANT MEMBER]
I.T.A.No.1228/Mds/2011
Assessment year : N.A
Socio Economic Development vs The Income Tax Officer
Association Ward II(4)
No.6/139, Madurai
Thiruvananthapuram Road
Azhagiamandapam
Mulagumoodu 629 167
Kanyakumari District
[PAN - AACTS6294A]
(Appellant) (Respondent)
Appellant by : Shri S.Sridhar, Advocate
Respondent by : Shri K.E.B Rengarajan, Jr.
Standing Counsel
Date of Hearing : 28.09.2011
Date of Pronouncement : 13.10.2011
ORDER
PER HARI OM MARATHA, JUDICIAL MEMBER:
This appeal of the Assessee-Society, is directed against the order of the ld. CIT, Madurai, dated 16.5.2011, vide which he has refused to grant registration u/s 12AA of the Act.
:- 2 -: ITA 1228/11
2. The Assessee-Society had earlier been granted registration u/s 12AA by the then CIT, Madurai, vide his order in C.No.464/24/07- 08/CIT-I dated 12.10.2007, for the assessment year 2007-08 and onwards, but the application for recognition u/s 80G was rejected by the same CIT vide his order dated 24.12.2008. The Society filed appeal before the ITAT who reversed the CIT's order. The ld. CIT, while giving effect to Tribunal's order, granted approval u/s 80G of the Act to the Society for the period from 1.4.2008 to 31.3.2010. In the meantime, a show cause notice u/s 12AA(3) of the Act was issued to the Society on 6.1.2011 as the ld. CIT found that the Society was engaged in 'business activities'. The main objects for which the Society was established are as under:
"(1) To plan and work with the downtrodden community for their economic development and to create social conscience in them. (2) To create a sense of social awareness and thus make them aware of the need for liberation from oppression of any kinds. .
(3) To communicate new ideas and concepts about social transformation about the people.
12 (a) Charity : To perform works of charity for those in need, irrespective of race caste, community or creed
(b) Social Service.
(c) For the betterment of the Villagers and downtrodden poor people and unemployed youth society.
:- 3 -: ITA 1228/11
13. To recruit, train and employ workers for the running of the society.
14. To raise necessary funds by fees, subscriptions, acceptance of gifts from within and outside India and loans whether secured or unsecured or in such other manner as the society may think fit."
3. The case of the Society is that it is engaged only in charitable activities and no business activity whatsoever has been done on by it. A perusal of the statements of accounts for the years ending 31.3.2007, 31.3.2008, 31.3.2009 and 31.3.2010, reveales that the Society is engaged in micro finance activities. The case of the assessee is that in order to pursue its objects it has to work as an extended hand of Government in Projects and Schemes sponsored by various Departments and Ministries of Government, the Society joined hands with Ministry of Textiles (AHVY), NABARD, Rashtriya Mahila Kosh, Insurance for rural artisans, National Minorities Development Finance Corporation, Tsunami Relief, Mahalir Thittam, etc. It was further stated that the Society received grants from Government Departments and carried the projects as per their directions in uplifting the rural artisans, and the handicrafts manufactured by the rural artisans are being marketed by it. The statements of accounts for the years ending :- 4 -: ITA 1228/11 31.3.2007, 31.3.2008, 31.3.2009 and 31.3.2010 reveal the following position:
Sl. Contents Years ending
No.
31.3.2007 31.3.2008 31.3.2009 31.3.2010
1. Balance Sheet ` ` ` `
Assets:
Micro Finance 1459800 4118506 1769181 2091563
Loan to SHG
Liabilities
Micro Finance
Loan from Bank 1456870 4116560 1810905 2819158
4. It was found that the Society was receiving income from laces and embroidery articles, income from coconut shell, SHG contribution, own contribution, grants received, donations received, interest received etc. The surplus for these years were ` 64,618/-, ` 4,10,916/-, ` 2,78,148/- and ` 1,70,476/-, respectively. From these, the ld. CIT concluded that the Society is engaged in micro finance activities on commercial basis under the guise of charity by way of receipt of interest and service charges. After discussing the definition of the term 'charity' and 'charitable activities' and taxation of public charity, the ld. CIT has finally come to a conclusion that the income of :- 5 -: ITA 1228/11 the public charitable trust may comprise of the income from assets held by it and also include the following:
"(a) Voluntary contributions from the public (including the Founder or the Trustees) - Section 12(1)
(b) Capital Gain arising out of the sale of assets held by the trust - Section 11(1A), and
(c) Any profits of any business / commercial activity carried out by the trust which is incidental to the object of the trust and for which, separate books of account are maintained - Section 11 (4) / 11(4A) In other words, in the Income & Expenditure statement of the public charitable trust, the Income side shall include any or all these three sources of receipt. However Corpus Donation, which is Included in the definition of 'income' u/s,2(24), but excluded from the Income of the trust u/s, 12(1) will, however, be considered for the purpose of exemption u/s, 11(1)(d) of the I. T. Act subject to satisfaction of statutory conditions mentioned in Section 11,12 & 13 of the I.TAct On the Expenditure side, the minimum statutory requirement is Indicated In section 11(1)(a) of the I.T,Act i,e at least 85% of such income should be utilized for the purpose of 'charity'. Here 'income' is of course used In a commercial sense - Implying thereby the Net Income available for charity i,e, Gross Receipts less reasonable administrative expenses, Therefore at least 85% of such available surplus should be utilized for charitable activities as mentioned in section 2(15) of the I.TAct, And the bottom line is that such activity should be charitable i.e, provided free of cost, covering the specified objects mentioned in the Trust deed and as per section 2(15), and benefiting large section of the society without any discrimination.":- 6 -: ITA 1228/11
5. Under these circumstances, the ld. CIT has held that the basic element of charity is not existent in this case and carrying on genuine charitable activities is absent. Accordingly, he has withdrawn the registration already granted. Before us, following grounds have been raised:
"1. The order of The Commissioner of Income Tax I, Madurai dated 16.05.2011 in C.No.464/24/CIT-I/2007-:08 in withdrawing/canceling the registration granted earlier on 12.10.2007 in terms of Section 12AA of the Act is contrary to law, facts, and in the circumstances of the case.
2. The CIT erred in withdrawing /canceling the registration granted earlier on 12.10.2007 in terms of Section 12AA of the Act on the facts and in the circumstances of the case without assigning proper reasons and justification.
3. The CIT failed to appreciate that the provisions of Section 12AA(3) of the Act had no application to the facts of the case inasmuch as the circumstances enumerated in the said sub section vesting such powers for withdrawal of registration granted earlier were not pointed out with reference to the facts of the case to justify passing of the impugned order.
4. The CIT failed to appreciate that the registration granted earlier was correct and proper on the scope of the provisions governing thereto and the order of withdrawal under consideration was erroneous and invalid.
5. The CIT failed to appreciate that the order of withdrawal/cancellation was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.
6. The CIT failed to appreciate that the micro finance activities :- 7 -: ITA 1228/11 should not be construed as commercial activities on the facts of the case and such activities were carried on to achieve the objectives of the Appellant within the scope of Section 2( 15) of the Act.
7. The CIT failed to appreciate that the findings recorded in this regard in para 7 to 9 of the impugned order were wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
8. The CIT failed to appreciate that going by the sequence of events with reference to the passing of the impugned order, the withdrawal/cancellation of the registration under consideration was erroneous and invalid.
9. The CIT failed to appreciate that the Written Submissions filed on 10.3.2011 were not taken into consideration in proper perspective.
10. The CIT failed to appreciate that there was no proper opportunity given before passing the impugned order and any order passed in violation of the principles of natural justice is nullity in law.
11. The Appellant craves leave to file additional grounds/arguments at the time of hearing. "
6. We have considered the rival submissions and have perused the entire material available on record. Originally, registration u/s 12AA of the Act was granted to the assessee on the basis of objects of the Society, as disclosed in its Memorandum of Association and its Bye- laws, before the Registrar of Societies under the Tamil Nadu Societies :- 8 -: ITA 1228/11 Registration Act, 1975, which were treated as charitable in nature solely by following the factum of its registration under the Societies Act. Later on, when it was found that the activities of the Society are not genuine and its objects are not being pursued for charitable activities, the CIT refused to renew approval u/s 80G(5). The Society appealed against that refusal order and the Hon'ble Tribunal directed the CIT to grant approval u/s 80G(5) on the premise that when the Society stands registered u/s 12AA, how its objects can now be disputed and christened as not charitable in nature. Taking a cue from this finding, the ld. CIT has initiated action u/s 12AA(3) and after according opportunity of being heard, has cancelled its registration vide the impugned order, against which the present appeal has been filed.
7. We have heard the rival submissions vis-à-vis the evidence on record. We have to examine the factual matrix of this appeal for the purpose of determining if the circumstances exist to withdraw the registration granted earlier or not. Before we examine the facts and figures let us read the relevant provision envisaged in this regard. Section 12AA(3) of the Act reads as under:
"[(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) and :- 9 -: ITA 1228/11 subsequently 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 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 opportunity of being heard.]"
8. The macroscopic analysis of the above provision, it is clear that the ld. CIT has been empowered to either continue registration, once granted u/s 12A(a) or else, he can cancel the same if the requisite conditions are no longer found to be fulfilled. Admittedly, before taking action under clause (3) , the ld. CIT has gave opportunity of being heard to the Society in relation to the proposed cancellation of registration granted earlier. What is to be now seen, whether the 'satisfaction' of the Commissioner that the activities of the Society are not genuine or are not , or are not being carried out in accordance with its objects is justified in the given facts and the circumstances of this case or not. There is no doubt about the power vested in ld. CIT to satisfy himself about the activities of the Trust/Society as has been envisaged in section 12AA of the Act. It is the satisfaction of the ld. CIT that matters, but his satisfaction cannot be merely subjective, but :- 10 -: ITA 1228/11 it has to be tested with respect to objective material/proof on the basis of which any ordinary prudent man come to this only conclusion. Admittedly, in this case, the CIT called for the statements of accounts for the years ending 31.3.2007, 31.3.2008, 21.3.2009 and 31.3.2010, the results of which have been incorporated in the earlier part of this order. From the Income and Expenditure Account of these years, it is clearly seen that the Society was receiving income from laces and embroidery articles, income from coconut shell, SHGs contribution, own contribution, grants received, donations received, interest received, etc. The financing activities undertaken by the Society is clearly evidenced from these facts. The receipt of SGHs contribution is towards financing activity of the Society. So, definitely, the Society is engaged in micro financing activities on commercial basis under the guise of 'charity' by way of receipt of interest and service charges. Although the provisions of sections 11 to 13 are a complete code in itself which deal with the concept of income and concept of exemption when certain conditions are satisfied, a 'Charitable activity' which is defined in section 2(15) of the Act has an inclusive definition and it includes relief to poor, education, medical relief and advancement of any other object of the general public utility, inter alia. The word 'charity' signifies voluntary giving of money or help to needy persons. :- 11 -: ITA 1228/11 The element of commerciality for personal benefit has no place in such charitable activities. It is true that certain amount of commercial activity is permitted under the provisions of the Act, but this has to be only a by-product of 'charitable activities' with a certitude that surplus so generated out of commercial activity are utilized for the charitable objects of the Trust/Society and not for personal use of settlers/beneficiaries. The income of the public charitable trust can be from assets held by the Trust and can also include voluntary contributions from public including the founders of the Trust/Society or the Trustees; capital gain arising out of the sale of assets held by the Trust and any profits of any business/commercial activity carried out by the Trust which is incidental to the objects of the Trust/Society and for which separate books of account are maintained. Nevertheless, such activities of giving micro-finance and earning interest can be okayed in the case of Companies registered u/s 25 of the Companies Act, 1956, because in that case, the company intends to apply its profit in promoting charity. This analogy cannot be extended to such Societies. Thus, in the Income and Expenditure Statement of the public charitable trust, the income shall include any or all those three sources of receipt. But corpus donation which is included in the definition of income u/s 2(24), but excluded from the income of the :- 12 -: ITA 1228/11 Trust u/s 12(1) will, however, be considered for the purpose of exemption u/s 11(1)(d) of the Act subject to satisfaction of the statutory conditions mentioned in sections 11,12 and 13 of the Act. On expenditure side, minimum statutory requirement is indicated in section 11(1)(a) of the Act as atleast 85% of such income should be utilized for the purpose of 'charity'. So, 'income' is of-course used in the commercial sense, implying thereby the net income available for charity i.e gross receipts minus reasonable administrative expenses. Hence, atleast 85% of such available surplus has to be utilized for 'charitable activities' as stated above. The activities should be solely 'charitable' which should further up the objects of the Trust and should benefit large section of Society without any discrimination. Any public charitable trust carrying on any commercial/business activity, generates profits, has to utilize the same for 'charitable purposes' only. For that purpose, separate books of account u/s 11(4)/11(4A) has to be maintained and profits thereof have to be calculated in accordance with the provisions of sections 28 to 44 of the Act. Such profits should be reflected in the credit side in the 'Income and Expenditure Account' of the Trust/Society as one of the sources of income to be utilized for charitable purposes. In short, commercial activity in such cases is permissible as per the requirement of section 11(4)/11(4A) and not as :- 13 -: ITA 1228/11 per the provisions of section 11(1)(a) of the Act. The commercial activity should aim at achieving end of the trust which is furtherance of its objects and it should not be the motive of the Trust to work for profit. A 'Charitable Trust' carrying on commercial activities should satisfy the provisions of section 11(1)(a) and for that matter, its Income and Expenditure Statement showing the receipts consisting of income from assets as held by the Trust/Society and the application of this income for 'charitable purposes' should both be reflected. But still further, the entire income can be exempted only if atleast 85% of the available surplus is utilized for 'charity' and its accounts are audited u/s 12A(1)(b) of the Act and no violation of sections 13(1)(c) or 13(1)(d) is done. From the available facts, we have found that activities are carried out mainly for commercial purposes. The Income and Expenditure Account does not reflect income and expenditure as stated above and the surplus has not been utilized for genuine charitable activities. The micro finance activities of the assessee, particularly in this case, are found to be on commercial basis. Under these circumstances, we are also satisfied that the Society has ceased to be a genuine Society to be eligible for registration u/s 12AA of the Act. Accordingly, the Society has acted in violation of the provisions of section 12AA(3) and in our considered opinion, the ld. CIT has rightly :- 14 -: ITA 1228/11 cancelled its registration. The order of the ld. CIT is quite judicial based on valid reasons and deserves to be upheld. Accordingly, we cannot allow this appeal of the assessee and dismiss the same.
9. In the result, the appeal of the assessee stands dismissed.
The order pronounced in the open court on 13-10-2011.
Sd/- Sd/-
(N.S. SAINI) ( HARI OM MARATHA )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 13th October, 2011
RD
Copy to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR