EXTENSION SYSTEMS FOUNDATION INTERNATIONAL,MUMBAI vs. CIT(EXEMPTIONS), MUMBAI

The present appeal has been filed by the assessee challenging the order dated 26th June 2018, passed by the learned Commissioner of Income Tax (Exemp.), Mumbai, for the assessment year 2018–19.

2 Extension Systems Foundation with the ROC, Mumbai on 11.7.2017. Notice was issue to assessee to collect the basic documents relating to the company and in response assessee filed the relevant information as called for. The Commissioner of Income Tax (Exemption) noticed that some of the principal objects of the company are prima facie commercial in nature, they are reproduced below:–

“vii. To render consultancy service in Extension Systems activities of Business House, Government, Public & Private Enterprises, NGOs / NPOs, Farmers and Farmers Organizations. viii. To carry out research projects in the field of Extension Education, Transfer of Technology, Marketing of Farm Production inputs, Social Science & Humanities. ix. To manage any professional ventures, events, hospitality, group meetings rural camps, exhibition and shows.”

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4. Learned CIT (E) further observed that if the assessee is indulging in any of the activities in accordance to the object, that prima facie would be in the nature of providing consultancy or professional services to the corporate, irrespective of what purpose or object such services would cater to, the assessee would be getting charges for the services provided by it on commercial basis. According to him, even if such activities of the corporate fall within the definition of charitable purpose then also the activity of assessee providing professional services to the corporate houses for such charitable objects will in itself not become a charitable activity. Further he distinguished the various case laws relied on by the assessee. Accordingly he rejected the application filed by the assessee seeking registration under section 12A of the Act.

5. Aggrieved with the above Order, the assessee is in appeal before us raising following grounds of appeal:– “1. On the facts, in the circumstances of the case & in law the Learned Commissioner of Income Tax(Exemption) Mumbai has erred in passing an order under section 12AA read with section 12A rejecting appellant's application for grant of registration.

2. On the facts, in the circumstances of the case & in law the Learned CIT-(Exemption) has further erred in denying the registration u/s 12A of the Income Tax Act, 1961 for the reason that clause no. 07, 08 and 09 of the Memorandum of Association are prima facie commercial in nature.

3. The appellant submits that it had filed full details and explanation before the CIT (E) in support of its application for grant of registration including the charitable nature of its objects

5 Extension Systems Foundation and the CIT (E) erred in rejecting its application. 4 The appellant submits that it had submitted legal position as per Proviso to Section 2(15) allowing commercial activities if the receipts from such activities do not exceeds twenty percent of total receipts and relevant explanations before the CIT (E) in support of its application for grant of registration and the CIT (E) erred in not appreciating the legal position and rejecting its application. .

5. The appellant submits that it had submitted various judicial pronouncement that the obligation to verify the nature of activities is on the shoulders of the Assessing Officer at the time of assessment and the same is outside the preview of Learned CIT (E) and relevant explanations before the CIT (E) in support of its application for grant of registration and the CIT (E) erred in not appreciating the jurisdictional pronouncement and rejecting its application.

6. Each of the above grounds of appeal

are independent and without prejudice to each other.

7. The appellant prays your honour to crave leave to add, amend, alter, delete, modify and/or change any of the grounds of appeal, which are independent, & without prejudice to each other.”

6. Before us, Ld AR submitted written submission which is reproduced below:

3. At the inception it IS submitted that Respondent contention IS misconceived and prejudicial mind having apprehension that appellant will carry objective of trust by commercialising it.

7 Extension Systems Foundation  07112/2017 - the Appellant company applied for 12A certificate under the Form No. lOA.  27/12/2017 - the Respondent asked to furnish various documents and the certified copies of MOM and AOA of the Appellant Company from ROC.  11105/2018 - The show cause notice was issued by the respondent thereby demanding the explanation as to various facts and activities mentioned in MOU in the object clause.  05/06/2018 - reply to the show cause notice was submitted thereby explaining the brief facts about the questions asked and w.r.t. the activities mentioned in MOU in the object clause.  26/06/2018 - the impugned and erroneous order was by passed by respondent. If we carefully take into consideration the date and the events which are chronologically stated above. it is seen that the Appellant has hardly got any time to enter into any such agreements with corporate or to deal with the organisations or to execute projects which are proposed.

7. That while passing impugned, respondent failed to conceive that appellant got commencement certificate only on 11/07/2017 and applied for 12A certificate. That is gap of just two months. The respondent has not applied his mind before contending that within 2 months and before completing formalities of getting status as "Trust" and "Charitable Activities" in accordance with the w i.e. Under Income Tax Act, 1961 appellant will not be position to present itself. Hence contention that appellant can't be granted status of Trust as per section 12A, since appellant has not commenced activities is erroneous and based on prejudicial state of mind and apprehension that appellant will conduct commercial activity in future Moreover, basis considered by respondent for rejecting application of appellant is on wrong footing, non- commencement of activities cannot be basis of rejecting application filed u/s. lOA of the Income Tax Act, 1961.

8 Extension Systems Foundation c. Research: - conducting research on various issues relating to agriculture and farming in any manner help the farmers in their daily business. d. Consultation: - Providing consultation services to commercial houses as what should be manufactured and how, which can result in good quality and quantity of yield and to the farmers as to how are they suppose to use the same, for maximisation of their produce.

9 Extension Systems Foundation religion, charity, protection of the environment, or any such other object. b. Licensed by government These types of companies are licensed by the central government under section 8 of the companies act 2013 and these companies work for society and receive a donation from other general public for the welfare work. c. No dividend distribution This form of companies doesn't issue a dividend to its members, because it is restricted from the law. They cannot distribute their earned profit as dividends to its member; they can use their profit in promoting their business objectives.

the respondent at very mature stage where appellant company has not been even allowed to cannot out any activities. 15.The appellant companies there tried to explain as how its objects mentioned in MOU i.e. Point No. VII, VIII, IX comes under "General Public Utility". However, the Respondent failed to understand the aforesaid reply and passed the erroneous order which is completely based on assumptions and apprehension that appellant will be indulged in the commercial activities in future. Kindly refer page No.76 to 83 of Paper Book. Upon plane reading of said project details the motive of appellant company can be judged without any second guess. 16.Kind attention of this Hon'ble bench is invited towards circular No. 21 of 2016 issued by Ld. CBDT with regard to clarification of cancellation of registration u/s. 12Aa of the Income Tax Act 1961 when trust was engaged in commercial activities. The said circular is on Page No.100 of paper book. For the sake of convenience, relevant para and so is reproduced here under. "Sec 2(15) of the act provides definition of charitable purpose. It includes "advancement of any other object of "General Public Utility" provided it does not involve carrying 017 of any activity in the nature of trade, commerce or business etc. for financial consideration. The 2nd proviso to said section, introduced w.e.f 01-04-2009 vide finance Act 2010" provides that in case where the activities of any trust or institution is of the nature of advancement of any other object of general commerce or business; but the aggregate value of receipts from such commercial activities does not exceed Rs.25,00,000/- in the previous year, the purpose of such trust/institution shall be deemed as "charitable" despite it deriving consideration from such activities. However, If the aggregate value of these receipts exceeds the specified cut off, the activity would not be eligible for tax exemption in that year. Thus an entity, pursuing advancement of object of general public utihty; could be treated as a charitable institution in one year and not a charitable institution in the other year depending 017 the aggregate value of receipts from commercial activities. The position remains similar when the first and second provisos of section 2(15) get substituted by the new proviso introduced w.e.f. 01-04-2016 vide Finance Act, 2015, changing the cut off benchmark as 20% of the total receipts instead of the fixed limit of Rs.25,00,000/- C!S it existed earlier. CONCLUSION PARA OF ARGUMENT 17.That the respondent firstly failed to conceive and fair understanding about noble objective of the appellant company and based on prejudicial mind and apprehension that in future

11 Extension Systems Foundation appellant may indulge itself in commercial activities rejects the application for granting 12A certificate. This is not only against the principle of natural justice but great injustice towards the appellant company and its trustees. 18.Hon'ble bench's kind attention is invited towards the resume of the Managing name Dr.O.S. Verma, Trustee having age of around 78 years submitted during the argument on the date of hearing. He is very vast experience in field of framing and agricultural. He intended to devote his remaining life and use his vast experience in help builders of nations i.e. farmers. 19.That to covers the apprehension respondent have that appellant company will carry on commercial activities in future, it is submitted that Income Tax Authorities are vested with the powers to revoke the status of Trust from appellant company in time in future, if it is found the conditions precedent for maintaining status of appellant company as charitable Organisation is breach. Moreover, apprehension that commercial activities will be carried on can be scrutinised during assessment proceedings and benefits of trust can be taken back from appellant in accordance with section 11 of the Income Tax Act, 1961. 20.That it is humbly prayed that upon considering the above, appellant company kindly be granted status of "Charitable Trust" by issuing prescribe certificate. For this purpose, AO may kindly be issued direction as this Hon'ble bench deems fit.

Para no. 10 (Page No. 107) We find that the Circular No.21 of 2016 when read as a whole, specifically lists out in paragraphs 4 and 5 reproduced herein above that the Registration granted under Section DIT (Exemption) v/s M/s. 12AA could not be cancelled, only when the Khar Gymkhana ITA receipts on account of business exceeded the no.2349 of 2013 Hon'ble cutoff, specified in the proviso to section 2(15) Bombay High Court of the Act. The jurisdiction to cancel the Registration only arises if there is change in the nature of activities of the institution or the activities of the institution, are not genuine. The aforesaid Circular by placing reliance upon 13(8) of the Act inter alia provides that the 12 Extension Systems Foundation

Registration granted to the Trust would continue even when the receipts on account of business is in excess of RS.25 lakhs. In such case, the Assessing Officer while framing the Assessment for the subject Assessment Year would be entitled to deny the benefit of exemp-tion to such a Trust for that year. Para no. 12 (Page No. 109) In view of the issue being covered by the CBDT Circular No.21 of 2016, no grievance against the impugned order can be made by the Revenue. Therefore, the question as framed becomes academic and does not give rise to any substantial question of law. Para 14, 15, 16, 17, 18 and 19 For the sake of Kapurthala Improvement brevity paras are not reproduced. Trust v/s CIT, (Asr) of 2013 Hon’ble A copy of referred judgment is already annexed Amritsar Tribunal at page no. 102 of paper book. Para 28 28. The denial of registration under section 12A of the Act by way of order passed under section 12AA(3) of the Act was on similar grounds as in the case of exemption denied under section 80G(S) of the Act. In view of our finding in the paras hereinabove, we direct the CIT to grant registration under section 12AA of the Act, as at the time of grant of registration, the CIT was only empowered to look into the nature of activities carried on by the assessee and whether the same were charitable in nature and Ashoka Education not to look into the applicability of the provisions Foundation v/s CIT, ITA of section 13(1) of the Act. The Assessing Officer no.549 & 1294/Pn./2009 while granting the deduction under section 11 (order under section 80G and 12 of the Act is to look into the violation of & 12AA) Hon’ble Pune the provisions of section 13(1) of the Act, if any. ITAT The Commissioner at the time of grant of registration under section 12A of the Act was not empowered in considering the violation, if any, under section 13(1) of the Act. Further, in the paras hereinabove, we have already given a finding that the agreement entered into by the assessee with M/s. ABL was for the benefit of the society and the same cannot be the ground for denial of registration to the assessee trust under section 12A of the Act. The CIT is thus, directed to allow the registration under section 12AA of the Act. The grounds of appeal raised by the assessee in both the appeals are allowed.

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whether the activities which the Trust proposed to carry on are genuine in the sense that they are in line with the objects of the Trust. In contrast, the position would be different Commissioner proposes to cancel the registration of a Trust under sub-section (3) of section 12AA of the Act. There the Commissioner would be bound to record the finding that an activity or activities actually carried on by the Trust are not genuine being not in accordance with the objects of the Trust. Similarly, the situation would be different where the trust has before applying for registration found to have undertaken activities contrary to the objects of the Trust.

Page 7 last para In the result, we find that there is no reason to interfere with the impugned judgment of the High Court of Delhi. The appeal is, accordingly, dismissed. A copy of referred judgment is already annexed at page no. 86 of paper book. Para no. 3 /////// The preponderance of the judicial opinion of all the High Courts including this court is that at the time of registration under section 12AA of the Income Tax Act, which is necessary for claiming exemption under sections 11 and 12 of the Act, the Commissioner of Income tax is not required to look into the activities, where such activities have not or are in the process of its initiation. Where a trust, set up to achieve its objects of establishing educational institution, is in the CIT v/s M/s. Shreedhar process of establishing such institutions, and Sewa Trust, of receives donations, the registration under section 2017, Hon’ble Allahabad 12AA cannot be refused, on the ground that the High Court trust has not yet commenced the charitable or religious activity. Any enquiry of the nature would amount to putting the cart before the horse. At this stage, only the genuineness of the objects has to be tested and not the activities, which have not commenced. The enquiry of the Commissioner of Income tax at such preliminary stage should be restricted to the genuineness of the objects and not the activities unless such activities have commenced. The trust or society cannot claim exemption, unless it is registered under section 12AA of the Act and thus at that such initial stage the test of the genuineness of 15 Extension Systems Foundation the activity cannot be a ground on which the registration may be refused. A copy of referred judgment is already annexed at Page-97 of paper book.

16 Extension Systems Foundation However the Commissioner noticed and having objections mainly relating to consultancy charges which assessee will be charging to the farmers and other commercial houses who will be utilising the services of the assessee. The objection expressed by the learned Commissioner in particular to the main objects relating to the consultancy charges i.e., objects No. vii, viii and ix of the Memorandum of Association. The learned Commissioner opined that in order to grant registration under section 12 A, two conditions are to be satisfied that is objects of the trust or institution should be charitable and the genuineness of the activities as carried on by the trust or institution pursuance of its object. We notice that the assessee has just incorporated and has not carried on any activities considering the fact that assessee can start the activities only after receiving AIDS or grants from other institution. The assessee can receive grants only when assessee is properly registered under Various Acts to demonstrate that it is actually doing charitable activities. One of them is obtaining 12A registration. We understand the significance of approaching the income tax authorities by the assessee. Since assessee has not carried on any activities and merely seeking registration under section 12A and assessee could not substantiate by submitting any proper documentation before the Commissioner (Exemp.). We are in agreement with the learned Commissioner (E) that assessee has to satisfactorily demonstrate the charitable objects and activities to be carried on by it. We notice that 17 Extension Systems Foundation learned Commissioner (E) had satisfied with regard to other aspects of the main objects that is education, developing advanced technology, research activities on agriculture and however expressed objections only relating to consultation charges on such services which the assessee will provide to commercial houses and the farmers. No doubt the 3 objects clauses on which learned Commissioner expressed apprehension that it connotes prima facie commercial in nature. In our considered view, the intention of the assessee is to provide charitable activities by providing education to the farmers and the commercial house, developing technology and by doing research on agriculture, they intend to claim fees or certain charges as compensation for providing such charitable activities. By mere reading the objects clauses on consultancy charges, we cannot form an opinion that it will be only on commercial terms. The assessee may be merely charging the compensation in order to cover its administration expenses and relevant cost on such research activities. It is not possible to evaluate the activities of the assessee and the fees which assessee will be collecting from the service receivers without giving any opportunity to them. The various courts have held that it is important to consider and verify the objects of the institution and as long as the objects of the institution are charitable in nature, the activities carried on by the assessee may be evaluated at the time of assessments. In our considered view the assessee should be granted registration under 18 Extension Systems Foundation section 12A of the Act. Therefore, we are directing learned Commissioner to grant the registration under section 12A of the Act to the assessee.