GURU TEG BAHADUR EDUATIONAL TRUST,JALANDHAR vs. COMMISSIONER OF INCOME TAX (EXEMPTION), CHANDIGARH

Per Dr. M. L. Meena, AM:

This appeal of the assessee trust is directed against the order dated

26.03.2018 passed by the CIT(E), Chandigarh challenging rejection of its application for registration under section 12AA of Income Tax Act 1961.

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Grounds of appeal: “1. That the order passed u/s 12AA(1)(b)(ii) by the Commissioner of Income Tax (Exemptions) is against the law and facts of the case.

ii. That the CIT (Exemptions) has wrongly mentioned in para 7 of its order that the applicant has claimed exemptions u/s 10(23C) (iiiad).

iii. That the CIT (Exemptions) has drawn wrong inference regarding amendment made in the provisions of the Income Tax Act, in regard to applicability of substantial grants prior to the amendment, i.e amendment is effective from retrospective effect He has wrongly held that the provisions of rule 2BBB regarding receipt of financial grant are applicable to the preceding year also, while the amendment has been made by the (IT Thirteenth amdt.) Rules 2014 w.e.f 12.12.2014.

iv. That the CIT (Exemptions) has drawn wrong inference from the decision of the Apex Court in the case of Islamic Academy of Education & another vs. State of Karnataka and others (2003) 6 SSC 697, as facts of the applicant case are distinguishable

v. That the CIT (Exemptions) has wrongly mentioned at para 8 of its order that the net surplus of the school run by the Trust is 20%, 27.5% and 27.7% during the financial year 2014-

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15, 2015-16 and 2016-17 respectively, while the net surplus is 13.53%, 6.67% and 15.79% for above financial years.

vi. That the CIT(Exemptions) has wrongly mentioned that the consolidated income & expenditure account of the trust reveals net surplus of 43.9%, 69.3% and 73.7% during the financial year 2014-15, 2015-16 and 2016-17 respectively in para 8 of its order, while actual surplus is -8.33%, -1.08% and -0.27% respectively.

vii. That the CIT(Exemptions) has wrongly inferred in para 9 of its order that the application u/s 12(A) of Income Tax Act can’t be filed by the applicant and in para 10 of its order that the financial statements do not show the true affairs of its total income as he has drawn wrong conclusions as mentioned above.

viii. That the CIT(Exemptions) has not taken into consideration the investment made in fixed assets by the applicant trust. The investment in fixed assets of the applicant trust are to the extent of Rs. 2569004/-,Rs.3066891/- arid Rs.3348027/- for financial year 2014-15, 2015-16 and 2016-17 respectively and sale of fixed assets is of Rs. 5 lac and 1.50 lac for the financial year 2014-15 and 2015-16 respectively. The net surplus after investment / sale of fixed assets is Rs.(-991451), Rs.(-152825) and Rs.(-42955) respectively.

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ix. That the assessee craves to add or amend the grounds of appeal before the same is heard or disposed off.

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that the assessee has been deliberately making claims in its returns without necessary approvals or registration. These are clearly illegal actions that have a direct bearing on the genuineness of activities. 8. It is further clear that the reply of the applicant is vague and not based on the facts of the case as the application for grant of approval u/s 10(23C)(vi) of the Act was rejected vide order dated 31.03.2016 which has been remanded back by the ITAT, Amritsar vide order dated 30.12.2017 for statistical purpose. The claims of the assessee without a valid 10(23C)(vi) approval in the past shall be examined by the A.O. separately. The applicant instead of pursuing its earlier application u/s 10(23C)(vi) of the Act, has now chosen to seek registration u/s 12AA of the Act which in sync with the meaning of the term ‘registration’ should have been pursued in the initial year or incipient stage and not after a gap of twenty years. The trust has created a huge asset worth Rs. 1,89,44,685/- as on 31.03.2017 after its inception. There are no grounds for seeking registration under a different code even when the applicant has claimed for exemption u/s 10(23C)(vi) and the earlier applicant is still pending for adjudication. Moreover, in light of the fact that permissible reasonableness has clearly been defined in the order of the Apex Court in the case of Islamic Academy of Education & another vs. State of Karnataka and others (2003) 6 SSC 697 wherein reasonable surplus has been pegged at 6 to 16 % and further reiterated in the case of Viswesvaraya Technological Universities Vs. ACIT in civil appeal Nos. 4361-4366 of 2016 the applicant has been held earlier as existing for profits since Income & Expenditure account of the school run by the trust shows a net surplus of 20%, 27.5% and 27.7% during the F.Y. 2014-15, 2015-16 and F.Y. 2016-17 respectively. Applicant has also submitted copy of consolidated Income & Expenditure account of the Trust, which reveals that the net surplus of the applicant trust is at 43.9%, 69.3% and 73.7% during the F.Y. 2014-15, 2015-16 and F.Y. 2016-17

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respectively. In the instant case, the applicant has been charging various fee for earning profits and creation of assets on commercial principles and has opted for registration under this section. It is further held that the scheme of the Act doesn’t allow 9. change of code midway after availing the benefits of a particular code for years together. Even though the judicial authorities have been holding that an applicant is free to adopt any of the alternatives available to it the issue that the assessee can switch mid way from one alternative to another as per its convenience is not the legislative intent and also not the intent when the judicial precedents allow for alternatives to be exercised. This exercise is to be undertaken at the beginning and the applicant has already exercised the action. The existence of different codes in the same chapter of Income Tax Act clearly means that different codes are pertinent to different categories of assessee. This view further assumes importance that the income envisaged to be exempt u/s 11& 12 of the Act are clearly distinguishable from the income envisaged u/s 10(23C). Income from voluntary & corpus donation and income from property held under the trust wholly for charitable purposes are significantly different from income arising to a person on behalf of a university or other educational institution. In light of the same income that has been claimed as exempt under section 10(23C) cant partake the character of income envisaged u/s 11 & 12 just because of the amendment in the Act. Income & Expenditure account of “Guru Teg Bahadur Public 10. School” reveals that the total income received by the school during F.Y. 2014-15 F.Y. 2015-16 & F.Y. 2016-17 are Rs. 1,18,14,851/-, Rs. 1,39,70,278/-, and Rs. 1,60,19,787/- respectively. Further, perusal of the Income & Expenditure account trust reveals that the net surplus obtained from the school is reflected as the income of the trust, showing the total income of the applicant trust at Rs. 24,51,278/-, Rs.

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39,83,709/- and Rs. 44,82,863/- during F.Y. 2014-15, F.Y. 2015-16 and F.Y. 2016-17 respectively. Clearly, the financial statements of the applicant trust do not show true affairs of its total income. The trust is required to reveal consolidated receipts and income in its account in order to enable examination of income that has been utilized for charitable purposes. 11. In view of the above the activities of the applicant trust cannot be termed to fall under the category of “charitable purposes” but purely on commercial principles having profit motives [ net surplus of the applicant trust is at 43.9%, 69.3% and 73.7% during the F.Y. 2014- 15,2015-16 and F.Y. 2016-17respectively]. The applicant has been claiming exemptions under section 10(23C)(vi) and section 11 of the Act wrongly, even without having approval of the prescribed authorities for claiming such exemptions under these sections. Such blatant infraction of the Income Tax Act clearly impinges on the genuineness of activities claimed by the applicant. Moreover the financial statements as discussed above also do not reveal the actual state of affairs of the applicant trust. Also there are no grounds for a fresh application under a different code when the applicants case is still pending u/s 10(23C) of the act for adjudication (proceedings of which are underway). The application for grant of registration u/s 12AA is accordingly rejected. The Ld. Counsel for the assesse submitted that the CIT(E )’s order passed 3.

u/s 12AA(1)(b)(ii) by the Commissioner of Income Tax (Exemptions) is against the

law and facts of the case in rejecting assessee trust application for registration u/s

12AA of the Act owing to the reasons that the applicant has claimed exemptions

u/s 10(23C) (iiiad) that the CIT (Exemptions) has drawn wrong inference regarding

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amendment made in the provisions of the Income Tax Act, in regard to

applicability of substantial grants prior to the amendment, i.e amendment is

effective from retrospective effect and he has wrongly held that the provisions of

rule 2BBB regarding receipt of financial grant are applicable to the preceding year

also, while the amendment has been made by the (IT Thirteenth amdt.) Rules

2014 w.e.f 12.12.2014; that the CIT (Exemptions) has drawn wrong inference

from the decision of the Apex Court in the case of Islamic Academy of Education

& another vs. State of Karnataka and others (2003) 6 SSC 697, as facts of the

applicant case are distinguishable; that the CIT (Exemptions) has wrongly

mentioned at para 8 of its order that the net surplus of the school run by the

Trust is 20%, 27.5% and 27.7% during the financial year 2014-15, 2015-16 and

2016-17 respectively, while the net surplus is 13.53%, 6.67% and 15.79% for

above financial years that the CIT(E) had wrongly mentioned that the

consolidated income & expenditure account of the trust reveals net surplus of

43.9%, 69.3% and 73.7% during the financial year 2014-15, 2015-16 and 2016-17

respectively in para 8 of its order, while actual surplus is -8.33%, -1.08% and -

0.27% respectively, that the CIT(Exemptions) had wrongly inferred in para 9 of its order that the application u/s 12(A) of Income Tax Act can’t be filed by the

applicant and in para 10 of its order that the financial statements do not show the

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true affairs of its total income as he has drawn wrong conclusions; that the CIT(E)

has not taken into consideration the investment made in fixed assets by the

applicant trust. The investment in fixed assets of the applicant trust are to the

extent of Rs. 2569004/-,Rs.3066891/- arid Rs.3348027/- for financial year 2014-

15, 2015-16 and 2016-17 respectively and sale of fixed assets is of Rs. 5 lac and

1.50 lac for the financial year 2014-15 and 2015-16 respectively. The net surplus

after investment / sale of fixed assets is Rs.(-991451), Rs.(-152825) and Rs.(-

42955) respectively. He requested that suitable direction be issued to the CIT(E)

to grant 12AA to the applicant Trust. In support, the ld. Counsel for the assessee

has submitted PB containing pages 1 to 22 and CLPB of 116 pg. tabulated as

under:

Sr. No Description Page No. Memorandum of Aims and Objects of the Trust 1-12 1. 13-14 Consolidated Balance Sheet and Income and Expenditure account of the 2. Trust for the financial year 2014-15 15-16 3. Income and Expenditure account of Guru Teg Bahadur Public School for the financial year 2014-15 4. 17-18 Consolidated Balance Sheet and Income and Expenditure account of the Trust for the financial year 2015-16 19 5. Income and Expenditure account of Guru Teg Bahadur Public School for the financial year 2015-16 Consolidated Balance Sheet and Income and Expenditure account of the 6. 20-21 Trust for the financial year 2016-17

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The counsel for the assessee has further submitted CPB pages 1 to 116 and he relied in the case of CIT(E) vs. Sh. Mahavir Jain Society ITA No.231 of 2016 order dated 11th September, 2017 ( P & H ) and others as under : Sr. No Description Page No. 1. Pinegrove International Charitable Trust & Ors. Vs. Union of India & Ors. (2010) 327 ITR 73 (P&H) 1-24

involved in the present appeal is grant of registration under section 12AA of the

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Act. The learned A.R. contended that all the details required by the learned CIT,

has been furnished before him but same was not taken on record. The Ld. CIT(E)’s observation regarding the activities of the applicant trust 6. not to fall under the category of “charitable purposes” but purely on commercial principles being run on profit motives [net surplus of the applicant trust is at

43.9%, 69.3% and 73.7% during the F.Y. 2014-15,2015-16 and F.Y. 2016- 17respectively] cannot be approved as this is required to be substantiated with the

cogent documentary evidences and in the light of the statement of account

furnished by the assessee trust reflecting gross receipt, expenditure and purpose of

utilization of surplus receipt if any. Further, the CIT was factually wrong in

observing that the applicant has been claiming exemptions under section 10(23C)(vi) and section 11 of the Act, even without having approval of the

prescribed authorities for claiming such exemptions under these sections and

genuineness of activities claimed by the applicant. Moreover,

do not reveal the actual state of affairs of the applicant trust but he has not crystalized that it was not revealed with reference to charitable nature of objects

and genuineness of activities. We understand that there are no grounds for a fresh

application under a different code when the applicants case is still pending u/s

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10(23C) of the act for adjudication (proceedings of which are underway), but at the

same time, there is no bar on the applicant to avail benefit of exemption u/s 12AA

and 10(23c) of the Act. Thus, disposal of the applicants case if any, pending u/s

10(23C) of the act for adjudication cannot be a prerequisite condition for grant of

registration u/s 12AA and such a reasoning for rejection of 12AA cannot be

approved.

CIT(E) had wrongly mentioned that the consolidated income & expenditure

account of the trust reveals net surplus of 43.9%, 69.3% and 73.7% during the

financial year 2014-15, 2015-16 and 2016-17 respectively in para 8 of its order,

while actual surplus is -8.33%, -1.08% and -0.27% respectively, that the

CIT(Exemptions) had wrongly inferred in para 9 of its order that the application u/s 12(A) of Income Tax Act can’t be filed by the applicant and in para 10 of its order that the financial statements do not show the true affairs of its total income as

he has drawn wrong conclusions; that the CIT(E) has not taken into consideration

the investment made in fixed assets by the applicant trust. The investment in fixed

assets of the applicant trust are to the extent of Rs. 2569004/-,Rs.3066891/- arid

Rs.3348027/- for financial year 2014-15, 2015-16 and 2016-17 respectively and

sale of fixed assets is of Rs. 5 lac and 1.50 lac for the financial year 2014-15 and

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2015-16 respectively. The net surplus after investment / sale of fixed assets is Rs.(-

991451), Rs.(-152825) and Rs.(-42955) respectively.

made by the ld. CIT(Exemption) in the impugned order is contrary to record as the

documents and evidences were made available with the CIT(E), shows engagement

of the assessee trust in all the charitable activities.

to be remand back to the ld. CIT(E) who is empowered under the Act to examine

the documents (already on record) mentioned hereinabove and other new facts

brought before us with supporting documents in order to justify that whether the

assessee was involved in its own capacity of doing the charitable activity? To

arrive at his satisfaction, the CIT(E) would be examining the activities of the

appellant Trust afresh and see that the assessee was involved in carried out of any

charitable activities. In view of principles of natural justice, the ld. CIT(E) shall

grant a reasonable opportunity of being heard to the assessee and an opportunity to

file any other documents which are necessary in support of its claim. We note that

the observation made herein above said paragraph shall not be treated as an

expression on the merits of the case or facts. The ld. CIT(E) shall decide the matter

afresh that without being influence of the observation made by us while remanding

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the matter back to his file/desk. Accordingly, the case is restored to the CIT, for

afresh consideration and examination of the application of assessee under section 12AA, with the following observation:

I. Consider the veracity of evidence claimed to be submitted before the then CIT and the documentary evidences submitted by the assessee (PB and CLPB, as above). II. Verify the charitable nature of the objectives of the assessee society/trust in the light of evidences prima facie relevant, for the year under consideration for the purpose of grant of registration u/s 12AA of the Act. III. Aassessee shall cooperate in the proceedings, before the CIT. IV. All pleas available under the law shall remain so available to the assessee in the fresh proceedings before the Ld. CIT.

Order pronounced in the open court on 16 .08.2021 Sd/- Sd/-

(Laliet Kumar) (Dr. M. L. Meena) Judicial Member Accountant Member doc

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Copy of the order forwarded to: (1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T.