– Act: The Income Tax Act ,1961 When there are no findings that a trust is established with a clear motive of earning profits, the assessee cannot be rejected for registration under Section 12AA

  • vide Decision of High Court of Madras in Commissioner of Income Tax, Salem v. Angels Educational Trust

Facts of the case:

1. The assessee is a Trust established for educational purposes and principle object of the Trust was to run an educational institution to provide education and award scholarships to poor and deserving students and to assist them in any manner of their study, research or apprenticeship.

2. In terms of clause 11 of the Deed of Trust, which deals with ‘application of income and trust fund’, the Trustees shall after provide for the payments mentioned in the Deed and its disbursements, apply and utilize the net income or the corpus of the Trust funds for the benefit of the citizens of India without any discrimination on the grounds of religion, sect, cast and creed.

3. In terms of clause 18, special power was given to the first Trustee to amend the covenants of the Trust except the objects of the Trust and all or any other provisions of the Trust Deed, which castes obligation on them to conform with the provisions of the Act as amended from time to time.

4. By Deed of Codicil dated 20-8-2009, on account of the death of the founder trustee and admission of additional trustees, amended clause 16 of the Deed of Trust by making the Trust as irrevocable.

5. The assessee-Trust filed an application in Form 10A dated 27-3-2009, before the appellant for registration under section 12AA of the Act. The said application was rejected by the appellant by order dated 25-8-2009 on the grounds that the trust was established to earn profits.

6. The Trustees were called upon to explain and they stated that the excess of income over expenditure from the school fell down considerably during the financial years 2007-08 and 2008-09, on account of competition by other educational institutions, which were established in the neighborhood.

7. Since the income over expenditure from the school considerably got reduced, the Trust established a Teacher Training College, which provided good returns and the profits of the Trust increased during the financial years 2007-08 and 2008-09.

8. According to the appellant, this was done with a clear motive for earning profits, which subsumes the charitable activity of the assessee-Trust.

9. The appellant stated that since the Trust is making profit year after year, the functioning of the Trust cannot be termed as ‘charitable’.

10. The appellant held that the net surplus made by the assessee-Trust, ever since its inception, clearly suggests that the educational institutions are being run on commercial lines with a view of earning profits. For such reason, the application filed for Registration under section 12AA of the Act was rejected.

11. Aggrieved by such order dated 25-8-2009, the assessee-Trust preferred appeal before the Tribunal. The appeal was allowed by order dated 9-6-2011.

12. The learned Senior Standing Counsel for the appellant would point out that for the financial years 2005-06 and 2006-07, the excess income from the Matriculation School is close to 20% and for the financial years 2007-08 and 2008-09, the excess income from the Teachers Training College is 50% and this will clearly show that the motive for establishing the Trust was only for the purpose of earning profit and not for a charitable activity.

13. The learned counsel for the assessee-Trust sought to sustain the order passed by the Tribunal and submitted that the Tribunal had elaborately considered the factual position, the various conditions contained in the Deed of Trust and the two Codicils and clearly held that the Trust was not established with an intention of making profits, but with a genuine intention of serving for the cause of education.

14. The Court opined that the appellant has not rendered any finding that the activities of the Trust were carried on only with the object of earning profit and whether such was the predominant object of the assessee-Trust, no such finding has been rendered by the appellant while rejecting the application.

Judgement: The High Court of Madras held the case as follows:

i. The high court of Madras held that the Tribunal was right in holding that the appellant has not brought down any material on record to show that the assessee-Trust was motivated by earning profit.

ii. Furthermore, the court added that the Tribunal was right in observing that if in any particular assessment year, if there was any error in the manner in which the funds of the Trust were administered, it would be open to the Assessing Officer to examine the case and decide as to whether the assessee-Trust was entitled to the benefit of Section 11 of the Act for a particular assessment year or not.

iii. There is no error in the order passed by the Tribunal by directing registration to be granted to the assessee-Trust under section 12AA of the Act.


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