Issue for Consideration
Section 12A r.w.s. 12AA of the Income-tax Act, 1961 provides the procedure for grant of registration of a trust or institution (“trust”). According to this procedure, the trust has to make an application for registration in Form No. 10A prescribed under Rule 17A of the Income-tax Rules, 1962 within one year from the date of creation of the trust or the establishment of the institution. Upon receipt of the application, the Commissioner (SIT) shall call for documents and information and conduct inquiries to satisfy himself about the genuineness of the trust or institution.
After he is satisfied about the charitable or religious nature of the objects and genuineness of the activities of the trust, he will pass an order granting registration. If he is not satisfied, he will pass an order refusing registration. The order granting or refusing registration has to be passed within six months from the end of the month in which the application for registration is received by the Commissioner.
Section 12AA, inserted by the Finance (No. 2) Act, 1996 with effect from assessment year 1997-98, reads as under:
“12AA Procedure for registration.
(1) The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) of ss. (1) of section 12A, shall—
(a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about institution and may also make such inquiries as he may deem necessary in this behalf; and
(b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he—
(i) shall pass an order in writing registering the trust or institution;
(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant :
Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard……
(2) Every order granting or refusing registration under clause (b) of subsection (1) shall be passed before the expiry of six months from the end of the month in which the application was received under clause (a) or clause (aa) of sub-section (1) of section 12A.
(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996) and 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.”
Section 12AA therefore, details the provisions for registration of a trust for which an application has been filed u/s 12A. A reading of sub-clauses (a) and (b) of Section 12AA(1) makes it clear that the CIT has to satisfy himself about the genuineness of the activities of the trust and also about the objects of the trust.
As regards the objects of the trust, these can be determined from a perusal of the Memorandum or the deed of the trust, which is filed along with the registration application. If the objects of the trust are not for any charitable or religious purpose, registration may be refused by the CIT.
On the other hand, in order to determine the genuineness of the activities of the trust or the institution, the CIT has powers to make inquiries, call for documents or information. In cases where application is made after the activity is commenced, the CIT would exercise such powers of inquiry.
Given the time limit prescribed for making application for registration of a trust, in many cases, the application is made before the commencement of any activity by the applicant-trust. A controversy has arisen as to whether the CIT can reject the registration application of a trust, which has not commenced any activity, on the ground of non-determination of genuineness of activities of the trust. While the Delhi, Karnataka and Allahabad High Courts have taken a view that registration u/s. 12AA of the Act cannot be rejected by the CIT on the ground that it had not yet commenced any activity, the Kerala High Court has held that until the activity is commenced by the applicant trust/institution, registration should not be granted by the CIT.
Grant of Registration to a trust u/s. 12AA of the Act is important, since it is one of the conditions for grant of exemption u/s. 11 and 12 for the income of a trust.
Self Employers Service Society’s Case
The issue first came up before the Kerala High Court in the case of Self Employers Service Society v CIT 247 ITR 18.
The society was registered as a charitable society under the Travancore Cochin Literary Scientific and Charitable Societies Registration Act, 1955. The members of the society were mainly merchants. Though it had a large number of charitable objects, it had not commenced any of them during the first year of its functioning. It was accepting recurring deposits from its members and fixed deposits from the public. Loans were being given to its members at 21 % interest. The Commissioner found that in spite of the reference to a large number of charitable objects in its bye-laws, the activity carried on by the society was confined to its members, numbering about 150. Since such activities could not be regarded as charitable in nature, the Commissioner refused registration u/s.12AA.
The High Court noted that though several charitable activities were included in the objects of the society, it had not been able to do any of such charitable activities during the first year of its functioning. The proposal to start a technical educational institution itself was taken after the order of the CIT, rejecting the registration. The Court observed, that in the present case, the charitable society had not done any charitable work during the relevant period, but the activity which was undertaken during the said period was only for the generation of income for its members. It also noted that there were no materials before the Commissioner to be satisfied of the genuineness of the activities of the trust or institution. The Court therefore held that the rejection of the application could not be termed as illegal or arbitrary.
Foundation of Opthalmic and Optometry Research Education Centre’s Case
The issue under consideration again recently arose before the Delhi High Court in the case of DIT vs. Foundation of Ophthalmic and Optometry Research Education Centre 210 Taxman 36.
In this case, the assessee, a society registered under the Society Registration Act on 30th May 2008 with charitable objects of Optometry and Ophthalmic Education applied for registration before the Director of Income-tax (Exemption) [‘DIT(E)’] and filed other documents as sought by DIT(E)’s office from time to time. The DIT(E) refused to grant registration to the assessee by relying on the decision of Kerala High Court in the case of Self Employers Service Society vs CIT (supra), on the ground that no charitable activity was undertaken by the newly established assessee society.
On appeal by the assessee, the Tribunal, following the decision of the Allahabad High Court in the case of Fifth Generation Education Society (185 ITR 634), held that non-commencement of charitable activity cannot be a ground for rejection of application of registration filed by the assessee u/s. 12AA of the Act and thereby upheld the contention of the assessee.
Aggrieved with the judgement of the Tribunal, the Revenue filed an appeal before the High Court reiterating its arguments as placed before the Tribunal. The assessee-applicant on the other hand, relied on the decision of the Karnataka High Court in the case of DIT(E) v. Meenakshi Amma Endowment Trust (2011) (50 DTR 243) , wherein the High Court while considering similar facts of the assessee applicant held that when no activities are undertaken by the newly established trust/institution, then in such a scenario, the objects of the trust have to been taken into consideration by the CIT for determination of question of registration.
The High Court, after hearing the arguments of both the parties, upheld the contention of the assessee. The Court distinguished the judgements of Self Employers Service Society (supra) and Aman Shiv Mandir Trust (Regd.) v. CIT (296 ITR 415)(P&H) relied on by the Revenue on the ground that reasons for refusal of registration in the aforesaid decisions were not that the Trusts were newly registered, but that the activities of the Trusts under consideration were not charitable.
The High Court, after referring to the provisions of section 12AA, further held that the provision did not prohibit or enjoin the CIT from registering a trust solely based on its objects, without any activity, in the case of a newly registered trust. It also observed that the statute did not prescribe a waiting period for a trust to qualify itself for registration. Based on the said observations and following the decision of the Karnataka High Court of Meenakshi Amma Endowment Trust (supra), the appeal of the Revenue was rejected.
The Karnataka High Court in the case of Meenakshi Amma Endowment Trust (supra ) had earlier interpreted the provisions of section 12A r.w.s. 12AA of the Act and opined in context of registration of a newly established trust without undertaking any activity, as under:
“….When the trust itself was formed in January 2008 with the money available with the trust, one cannot expect them to do activity of charity immediately…. In such a situation, the objects of the trust could be read from the trust deed itself. In the subsequent returns by the trust, if the Revenue comes across that factually trust has not conducted any charitable activities, it is always open to the authorities concerned to withdraw the registration already granted or cancel the said registration u/s. 12AA of the Act.
A trust can be formed today and within a week registration u/s. 12A could be sought as there is no prohibition under the Act seeking such registration…..… the objects of the trust for which it was formed will have to be examined to be satisfied about its genuineness and activities of the trust cannot be the criterion, since it is yet to commence its activities.”
In other words, the High Court held that where a trust has not commenced its activities, then the CIT is required to examine the objects of the trust in order to ascertain the genuineness of its activities.
The Allahabad High Court in the case of Fifth Generation Education Society (supra) also had opined on the issue. The Court, while considering the provisions of registration of trust/institution u/s. 12A of the Act relating to assessment years prior to Finance (No. 2) Act, 1996, held that at the time of considering the application for grant of registration u/s. 12A, the CIT was not required to examine the application of income or carrying on of any activity by the trust. The Court further held that the CIT may at this stage examine whether the application was made in accordance with the requirements of section 12A r.w. Rule 17A, Form 10A was properly filled, along with determination of whether the objects of the trust were charitable or not.
Observations
On perusal of the decisions as discussed above, one may find that the Delhi, Karnataka and Allahabad High Courts have rightly interpreted the procedural provisions of section 12AA of the Act and rejected the contention of the Revenue to read in the condition of actual conduct of charitable activities for grant of registration of trusts, who have not commenced their charitable activities. Instead, in such situations, where trusts are yet to commence their activities, the Courts have sought to ascertain the genuineness of the activities of the trust by relying on their objects.
The Courts have also acknowledged that, injecting such subjectivity of satisfaction of conduct of charitable activities may be susceptible to varied interpretations by the relevant authorities, wherein some may be satisfied with activities of a month or few months, while others may wish to examine the activities of the applicant for a longer time.
The plain and simple procedures laid down in section 12AA do not empower the CIT to reject the grant of registration to trust, until the actual charitable activities are undertaken by the trust. On the contrary, in case of any abuse of procedures of section 12AA by any non-genuine trust, the Act provides for a safeguard by empowering the CIT u/s. 12AA(3) of the Act to cancel the registration of such trusts.
Further, the decision of the Kerala High Court was rightly distinguished by the Delhi High Court, wherein the refusal of registration of trust was not on account of non-commencement of activities of the newly constituted trust, but was for undertaking non-charitable activities. So, the view taken by the Kerala High Court that there had to be some material before the CIT showing the genuineness of activities actually carried on by the trust does not seem to be justified, and the view taken by the other high courts, that carrying on of activity is not a prerequisite for grant of registration u/s.12AA, seems to be the better view of the matter.
