COMMISSIONER OF INCOME TAX ROHTAK vs. B.K.K. MEMORIAL TRUST H.NO. 59, SECTOR-14, ROHTAK

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ITA/5/2012HC Punjab & HaryanaPHHC01099414201216 October 2012Author: MR. JUSTICE AJAY KUMAR MITTAL,MR. JUSTICE GURMEET SINGH SANDHAWALIA8 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the ITAT was justified in allowing the registration. The Court referred to its own pronouncements in ITA No.710 of 2010 (Commissioner of Income Tax-II, Chandigarh Vs. M/s Surya Educational & Charitable Trust) and ITA No.881 of 2010 (The Commissioner of Income-tax, Bathinda Vs. M/s Baba Deep Singh Educational Society). These judgments established that an application for registration under Section 12A(1)(aa) is required to be made within one year of the Trust's creation, and there is no requirement for the Trust to have commenced all its envisaged activities in the first year. The primary consideration for registration under Section 12AA is the genuineness of the Trust's activities, not the application of its income, which is assessed at a later stage when the Trust files its return. The Court reiterated that the Commissioner, while processing the application under Section 12AA, should not act as an Assessing Authority. Therefore, the revenue's submissions regarding the Trust not being set up for charitable purposes or utilizing its income for such purposes could not be examined at the stage of registration. The Trust was in its nascent stage and yet to work towards its objects. No error was found in the ITAT's order, and consequently, no substantial question of law arose for determination. The appeal was dismissed.

What were the facts?

The Commissioner of Income Tax (CIT), Rohtak, rejected the application of B.K.K. Memorial Trust for registration under Section 12A(1)(aa) of the Income Tax Act, 1961. The CIT's reasons included the Trust being potentially used for non-charitable purposes, the trustees having autocratic control, significant investments in Fixed Deposits (FDRs) suggesting a motive to earn interest rather than serve the public, lack of charitable activities as per Section 2(15), and failure to provide documentary evidence for initial investment. The Trust appealed to the Income Tax Appellate Tribunal (ITAT), which set aside the CIT's order and allowed registration, considering the provisions of Section 12AA and the Trust's objects. The ITAT noted that properties were in the Trust's name, trustee removal powers were conditional, and investment evidence was provided. The revenue then filed an appeal before the High Court.

What were the issues?

1. Whether the Hon'ble ITAT was justified in law in holding that the CIT erred in refusing to register the assessee under Section 12A of the Income Tax Act? 2. Whether the Hon'ble ITAT was justified in directing to grant registration when the Trust is an autocratic/private discretionary/family Trust, lacking independent internal checks on its functioning, with control vested in six trustees, three of whom belong to the Katyal family holding key positions? 3. Whether the Hon'ble ITAT was justified in directing to grant registration when the Trust made huge investments in FDRs to earn interest without serving the public, in the absence of any charitable activities as per Section 2(15) of the Income Tax Act, 1961? 4. Whether the Hon'ble ITAT was justified in directing to grant registration when the Trust failed to furnish documentary evidence regarding the identity and capacity of trustees to make initial investments? 5. Whether the Hon'ble ITAT was justified in directing to grant registration when the six settlers cum trustees have autocratic and discretionary power to remove any trustee (other than a settler) without notice or reasons? Assessee's contentions: Not explicitly recorded, but the ITAT allowed the appeal, implying acceptance of the Trust's arguments against the CIT's order. Revenue's contentions: The Trust had not carried out charitable activities and was therefore not entitled to registration. The Trust was autocratic, discretionary, and family-controlled, with no provision for independent internal checks. The Trust's primary motive was to earn interest income through FDRs, without performing charitable activities. The Trust failed to provide evidence of the identity and capacity of trustees for initial investment. The trustees possessed autocratic powers to remove other trustees. Reliance was placed on the judgment in Self Employee Service Society Vs. CIT (2001) 247 ITR 18.

Which sections of the Income-tax Act were involved?

Section 260A,Section 12A,Section 12A(1)(aa),Section 12AA,Section 2(15),Section 11,Section 12,Section 10(23C),Section 10(22)

AI-generated summary — verify with the full judgment below

-1- **** IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of decision: 16.10.2012 The Commissioner of Income Tax, Rohtak ….Appellant Vs. B.K.K.Memorial Trust

….Respondent CORAM: HON’BLE MR.JUSTICE AJAY KUMAR MITTAL

HON’BLE MR.JUSTICE GURMEET SINGH SANDHAWALIA *****

1.

Whether Reporters of local papers may be allowed to see the judgment?

2.

Whether to be referred to the Reporters or not?

3.

Whether the judgment should be reported in the Digest? ***** Present: Mr. Inderpreet Singh, Advocate for the appellant. ***** G.S.SANDHAWALIA, J.

1.

This order will dispose of an appeal filed under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 10.6.2011 passed by the Income Tax Appellate Tribunal, Delhi Bench 'A', New Delhi (hereinafter referred to as “the Tribunal”) in ITA No. 6088/Del/2010. 2. The revenue has claimed the following substantial questions of law:- “i) Whether the Hon'ble ITAT is justified in law in holding that the CIT erred in refusing to register the assessee u/s 12A of the Income Tax Act. ii) Whether the Hon'ble ITAT is justified in directing to grant registration when the Trust is an autocratic/private -2- **** discretionary/family Trust as there is no provision for independent internal check on the discretionary functioning of the Trust as the control over the affairs of the Trust is in the hands of six Board of trustees, three of which belongs to Katyal family, who hold the key positions in the Trust? iii) Whether the Hon'ble ITAT is justified in directing to grant registration when the Trust has made huge investment in the form of FDR with banks with a view to earn interest without serving public in absence of any charitable activities performed as per section 2(15) of the Income Tax Act, 1961? iv) Whether the Hon'ble ITAT is justified in directing to grant registration when the Trust has failed to furnish any documentary evidence regarding identity and capacity to make initial investment in the Trust by the trustees? v) Whether the Hon'ble ITAT is justified in directing to grant registration when the six settlers cum trustees have autocratic and discretionary power to remove any Trustee other than the settler one without giving any notice or reasons whatsoever?”

3.

Record of the appeal shows that the respondent-Trust had moved an application under Section 12A(1) (aa) of the Act in form No.10A on 18.7.2010 accompanied by copy of the Trust deed dated 23.6.2010 and form No.10B. The said application was rejected by the Commissioner of Income Tax, Rohtak (hereinafter referred to as “the CIT, Rohtak”) vide order dated 26.11.2010. The conclusion arrived at by the CIT, Rohtak was that the Trust is susceptible to use for purposes other than charitable ones and Sh. Prikshit Katyal (son), his mother Smt. Sangeeta Katyal & his brother Sh. Gaurav Katyal were trustees in the previous Trust deed. The -3- **** same had been rejected on 5.5.210 though in the supplementary deed Mrs. Shruti Bhagat, Mrs. Darshana Dhinghra and Mr. Sanjay Bhagat were added as new trustees. The Trust was having FDR of ` 2,18,30,042/- and relation to the aims and objects of the Trust during the financial year 2008-

09.

The terms and conditions enshrined in the Trust deed whereby the trustees had the power to convert the Trust property , acquire immovable property, sell, charge, rent out or otherwise alienate the assets including immovable property for personal/non-charitable purposes. The trustees had autocratic and discretionary powers to remove without any notice/reason a trustee except founder trustees and there was a provision for subsidised low rate of interest and the Trust had not disclosed regarding initial investment in the Trust by the trustees.

4.

Feeling aggrieved, the respondent-Trust preferred an appeal before the Tribunal which vide impugned order dated 10.6.2011 allowed

the appeal of the respondent-Trust and set aside the order of the CIT, Rohtak after taking into consideration the provisions of Section 12AA of the Act and the objects of the Trust. The Tribunal noticed that the properties were in the name of the Trust and not in the name of the trustees by referring to the conveyance deeds. It was noticed that the power of the Board of the trustees to remove the trustees except the founder trustees was also such, if the work of any trustee was not satisfactory or against public policy and interest of the Trust. The Tribunal held that the power to convert the Trust property was to be gone into at the time of assessment and was general power for facilitating the proper functioning of the Trust.

-4- **** The evidence regarding the identity and capacity of the trustees to make initial investment was also noticed and documents were referred to namely APB 148 to 153 which were copies of PAN cards of the trustees and also ABP 130 to 147 which were the confirmations of the investment made. The judgment of Self Employee Service Society's case (supra) was distinguished on the ground that, in that case the society was set up only for the purpose of generating income for its members. The judgment in Director of Income-tax Vs. Garden City Educational Trust (2011) 330 ITR 480 (Karn.) was referred to in support.

5.

Counsel for the revenue has contended that the Trust had not carried out charitable activities and, therefore, it was not entitled for the benefit of registration.

6.

A perusal of the facts depicts that the Trust was created on 23.6.2010 and application under Section 12A(1) (aa) of the Act was moved on 19.7.2010 and the same was rejected on 26.11.2010. This Court in ITA No.710 of 2010-Commissioner of Income Tax-II, Chandigarh Vs. M/s Surya Educational & Charitable Trust, decided on 5.10.2011 has held that the application for registration is required to be made within one year of the creation of the Trust and there is no requirement that the Trust or the institution should have started all its envisaged activities in the first year itself. Under Section 12AA of the Act satisfaction regarding the genuineness of the activities of the Trust is to be seen and the stage for application of income is yet to arrive i.e. when such Trust or Institution files its return. Relevant portion of the judgment reads as under:- “We have heard learned counsel for the appellant, but find no merit in the present appeals. As per Section 12AA of the Act, an application for registration of the Trust and Institution is required to be made within one year from the date -5- **** of creation of the Trust or the Establishment of such Institution. The procedure for registration of the Trust or Institution is prescribed under Section 12AA of the Act. In terms of Clause (a) of Section 12AA of the Act, the Commissioner is to satisfy himself about the genuineness of the activities of the Trust on such inquiries as he may deem necessary. Sub-section (1A) and (2) of Section 12AA of the Act, are procedural in nature, whereas Sub-section (3) of Section 12AA of the Act, empowers the Commissioner to cancel the registration of the Trust or Institution, if he is satisfied that the activities of such Trust or Institution are not genuine or are not carried out in accordance with the objects of the Trust or Institution. Section 11 of the Act contemplates that the income as specified therein shall not be included in the total income of the previous year of the person in receipt of the income derived from the property held under the Trust wholly for charitable or religious purposes, whereas Section 12 of the Act, deals with the contributions received by the Trust or an Institution, established for charitable and religious purposes, receiving contribution, shall not be an income in terms of Section 11 of the Act. The benefit of Sections 11 and 12 of the Act, are available only if such Trust or Institution is registered under Section 12AA of the Act. On the other hand, Section 10(23C) of the Act are the provisions of the Act in substitution of the earlier provisions of Section 10(22) of the Act as to which income shall not be included in computing the total income of any person. Therefore, the provisions of Sections 11, 12 or Section -6- **** 10(23C) of the Act, deal with the income of a Trust or of the Institution and the circumstances as to when such income is to be excluded for computing the total income, but the basis of such benefit is the registration under Section 12AA of the Act. Unless a Trust or Institution is registered under Section 12AA of the Act, such Trust or Institution shall not be entitled to exclude from its total income, deductions or contributions or from other sources. Therefore, the principles laid down for excluding the income from consideration under Section 10(22) now 10(23)(C) or Sections 11 and 12 are not applicable while considering the application for registration under Section 12AA of the Act. The application for registration is required to be made within one year of the creation of the Trust. Section 12AA of the Act, requires satisfaction in respect of the genuineness of the activities of the Trust, which includes the activities which the Trust is undertaking at present and also which it may contemplate to undertake. The insertion of sub- section (3) to Section 12AA of the Act, clarifies the said fact, when it empowers the Commissioner to cancel the registration if the activities of the Trust are not carried out in accordance with such objects. Therefore, the object of Section 12AA of the Act, is to examine the genuineness of the objects of the Trust, but not the income of the Trust for charitable or religious purposes. The stage for application of income is yet to arrive i.e. when such Trust or Institution files its return. Therefore, we find that the judgments referred to by the learned counsel for the appellant are not applicable to the facts of the present case -7- **** arising out of the question of registration of the Trust and not of assessment. In view of the above, we do not find that any substantial question of law arises for consideration in the present appeals. Hence, the same are dismissed.”

7.

The said view has been followed by this Court in ITA No.881 of 2010 The Commissioner of Income-tax, Bathinda Vs. M/s Baba Deep Singh Educational Society, SCF 23, Bharat Nagar, Bathinda decided on 13.10.2011 wherein it was held as under:- “In view of above facts and circumstances, it would be clear that respondent-society which was admittedly running a Polytechnic College and the activities were interwoven for furthering the projects and activities pertaining to education, the Tribunal rightly directed that registration should be granted to the respondent-society with the rider that the same could always be cancelled if it came to the notice of the CIT that the society was not carrying on the activities as per its objects. The Commissioner while processing the application under Section 12AA of the Act was not to act as an Assessing Authority and thus, the Tribunal has rightly allowed the appeal filed by the society in the facts and circumstances of the present case. “

8.

Accordingly, in view of the aforesaid pronouncements of this Court which are fully applicable in the present case, the submission of the counsel for the revenue that the Trust was not set up for charitable purposes and it was utilizing its income not for the said purpose cannot be examined at this stage as only objects of the Trust had to be considered by the Commissioner. The Trust was in nascent stage and was yet to work -8- **** towards its objects. No error could be pointed out in the order of the Tribunal warranting interference by this Court. Accordingly, no substantial question of law arises for determination by this Court and consequently, the appeal is dismissed. (G.S.SANDHAWALIA) JUDGE 16.10.2012 (AJAY KUMAR MITTAL) Pka JUDGE

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