6. Civil
Appeal Nos. 5437-5438/2012, 4702/2014 and Civil Appeal No. 1727/2020 [arising
out of SLP (C) No. 25761/2015] Ananda
Social and Educational Trust vs. CIT Date
of order: 19th February, 2020
Registration of Charitable Trust – Section 12AA – The Commissioner is
bound to satisfy himself that the object of the trust is genuine and that its
activities are in furtherance of the objects of the trust, that is, equally
genuine – Section 12AA pertains to the registration of a trust and not to
assess what a trust has actually done – The term ‘activities’ in the provision
includes ‘proposed activities’
The Supreme Court
consolidated three matters wherein the common question of grant of registration
u/s 12AA of the Act was involved.
In Ananda Social and
Educational Trust vs. CIT (Civil Appeal Nos. 5437-5438/2012), the trust
was formed as a society and it applied for registration. No activities had been
undertaken by it before the application was made. The Commissioner rejected the
application on the sole ground that since no activities had been undertaken by
the trust, it was not possible to register it, presumably because it was not
possible to be satisfied about whether its activities were genuine. The Income
Tax Appellate Tribunal reversed the order of the Commissioner. The Revenue
Department approached the High Court by way of an appeal. The High Court upheld
the order of the Tribunal and came to the conclusion that in case of a
newly-registered trust even though there were no activities, it was possible to
consider whether it could be registered u/s 12AA of the Act.
The Supreme Court dismissed
the appeal holding that the reasons assigned by the High Court in passing the
impugned judgment(s) and order(s) needed no interference as the same were in
consonance with law.
In DIT(E) vs.
Foundation of Ophthalmic and Optometry Research Education Centre (Civil Appeal
No. 4702/2014), the appeal had been preferred by the appellant Director
of Income Tax against the impugned judgment and the order passed by the Delhi
High Court holding that a newly-registered trust is entitled for registration
u/s 12AA of the Act on the basis of its objects, without any activity having
been undertaken.
The Supreme Court, after
noting the provisions of section 12AA, observed that the said section provides
for registration of a trust. Such registration can be applied for by a trust
which has been in existence for some time and also by a newly-registered trust.
There is no stipulation that the trust should have already been in existence
and should have undertaken any activities before making the application for
registration.
The Court noted that section
12AA of the Act empowers the Principal Commissioner or the Commissioner of
Income Tax on receipt of an application for registration of a trust to call for
such documents as may be necessary to satisfy himself about the genuineness of
the activities of the trust or institution, and make inquiries in that behalf;
it empowers the Commissioner to thereupon register the trust if he is satisfied
about the objects of the trust or institution and the genuineness of its
activities.
The Supreme Court further
noted that in the present case, the trust was formed as a society on 30th
May, 2008 and it applied for registration on 10th July, 2008, i.e.
within a period of about two months.
No activities had been
undertaken by the respondent trust before the application was made. The
Commissioner rejected the application on the sole ground that since no
activities had been undertaken by the trust, it was not possible to register
it, presumably because it was not possible to be satisfied about whether its
activities were genuine. The Income Tax Appellate Tribunal, Delhi reversed the
order of the Commissioner. The Revenue Department approached the High Court by
way of an appeal. The High Court upheld the order of the Tribunal and came to
the conclusion that in case of a newly-registered trust even though there were no
activities, it was possible to consider whether the trust can be registered u/s
12AA of the Act.
The Supreme Court observed
that section 12AA undoubtedly requires the Commissioner to satisfy himself
about the objects of the trust or institution and the genuineness of its
activities and grant a registration only if he is so satisfied. The said
section requires the Commissioner to be so satisfied in order to ensure that
the object of the trust and its activities are charitable since the consequence
of such registration is that the trust is entitled to claim benefits under
sections 11 and 12. In other words, if it appears that the objects of the trust
and its activities are not genuine, that is to say not charitable, the
Commissioner is entitled to refuse and in fact bound to refuse such
registration.
It was argued before the
Supreme Court that the Commissioner is required to be satisfied about two
things – firstly that the objects of the trust and secondly that its activities
are genuine. If there have been no activities undertaken by the trust then the
Commissioner cannot assess whether such activities are genuine and, therefore,
the Commissioner is bound to refuse the registration of such a trust.
The Supreme Court held that
the purpose of section 12AA is to enable registration only of such trust or
institution whose objects and activities are genuine. In other words, the
Commissioner is bound to satisfy himself that the objects of the trust are
genuine and that its activities are in furtherance of the objects of the trust,
that is, equally genuine. Since section 12AA pertains to the registration of a
trust and not to assess what a trust has actually done, the Supreme Court was
of the view that the term ‘activities’ in the provision includes ‘proposed activities’.
That is to say, a Commissioner is bound to consider whether the objects of the
Trust are genuinely charitable in nature and 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 where
the 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, been found to have undertaken activities contrary to
the objects of the trust.
The Supreme Court therefore
found that the view of the Delhi High Court in the impugned judgment was
correct and liable to be upheld.
Further, the Court noted that
the Allahabad High Court in IT Appeal No. 36 of 2013, titled ‘Commissioner
of Income Tax-II vs. R.S. Bajaj Society’ had taken the same view as
that of the Delhi High Court in the impugned judgment. The Allahabad High Court
had also referred to a similar view taken by the High Courts of Karnataka and Punjab
& Haryana. However, a contrary view was taken by the Kerala High Court in
the case of Self Employers Service Society vs. Commissioner of Income Tax
(2001) Vol. 247 ITR 18. According to the Supreme Court that view,
however, did not commend itself as the facts in Self Employers Service
Society (Supra) suggested that the Commissioner of Income Tax had
observed that the applicant for registration as a trust had undertaken
activities which were contrary to the objects of the trust.
According to the Supreme
Court, therefore, there was no reason to interfere with the impugned judgment
of the High Court of Delhi. The appeal was, accordingly, dismissed.
In
CIT(E) vs. Sai Ashish Charitable Trust (Civil Appeal No. 1727/2020 [@SLP(C) No.
25761/2015], the Trust which applied for registration u/s 12AA of the
Income Tax Act, 1961 was found not to have spent any part of its income on
charitable activities. The Commissioner of Income Tax, therefore, refused the
registration of the Trust.
The Income Tax Appellate Tribunal
reversed the decision of the Commissioner of Income Tax on the basis of the
judgment of the Delhi High Court in the matters referred to above.
The Supreme Court, for the
reasons stated earlier, was of the view that the object of the provision in question
is to ensure that the activities undertaken by the trust are not contrary to
its objects and that a Commissioner is entitled to refuse registration if the
activities are found contrary to the objects of the trust.
According to the Supreme
Court, in the present case, what had been found was that the trust had not
spent any amount of its income for charitable purposes. This was a case of not
carrying out the objects of the trust and not of carrying on activities
contrary to its objects. These circumstances may arise for many reasons,
including not finding suitable circumstances for carrying on activities.
Undoubtedly, the inaction in carrying out charitable purposes might also become
actionable depending on other circumstances; but it was not concerned with such
a case here.
In these circumstances, the
Supreme Court felt that it was for the Commissioner of Income Tax to consider
the issue by exercising his powers under sub-section (3) of section 12AA, if
the facts justify such actions.
The appeal was, however,
dismissed.
7. Connectwell Industries Pvt. Ltd. vs. Union of India Civil
Appeal No. 1919 of 2010 Date
of order: 6th March, 2020
Recovery of
tax – Unless there is preference given to the Crown debt by a statute, the dues
of a secured creditor have preference over Crown debts – Though the sale was
conducted after the issuance of the notice as well as the attachment order
passed by the Tax Recovery Officer in 2003, the fact remained that a charge
over the property was created much prior to the notice issued by the Tax
Recovery Officer – Hence the rigours of Rule 2 and Rule 16 of Schedule II were
not applicable
Biowin Pharma India Ltd.
(‘BPIL’) obtained a loan from the Union Bank of India. Property situated at
Plot No. D-11 admeasuring 1,000 sq. metres situated at Phase-III, Dombivli
Industrial Area, MIDC, Kalyan along with plant, machinery and building was
mortgaged as security to the bank. Union Bank of India filed OA No. 1836 of
2000 before the Debt Recovery Tribunal III, Mumbai (hereinafter referred as
‘the DRT’) for recovery of the loan advanced to BPIL. The DRT allowed the OA
filed by Union Bank of India and directed BPIL to pay a sum of Rs.
4,76,14,943.20 along with interest at the rate of 17.34% per annum from the
date of the application till the date of payment and / or realisation. A
recovery certificate in terms of the order passed by the DRT was issued and
recovery proceedings were initiated against BPIL.
The Recovery Officer, DRT III
attached the property on 29th November, 2002. The Recovery Officer,
DRT III then issued a proclamation of sale of the said property on 19th
August, 2004. A public auction was held on 28th September, 2004. The
DRT was informed that there were no bidders except Connectwell Industries Pvt.
Ltd. (the auction purchaser). The offer made by the auction purchaser to
purchase the property for an amount of Rs. 23,00,000 was accepted by the
Recovery Officer, DRT III. On 14th January, 2005 a certificate of
sale was issued by the Recovery Officer, DRT III in favour of the auction
purchaser. The possession of the disputed property was handed over to the
auction purchaser on 25th January, 2005 by the Recovery Officer, DRT
III and a certificate of sale was registered on 10th January, 2006.
The Maharashtra Industrial
Development Corporation (hereinafter referred to as ‘the MIDC’) informed the
Recovery Officer, DRT III that it received a letter dated 23rd
March, 2006 from the Tax Recovery Officer, Range 1, Kalyan stating that the
property in dispute was attached by him on 17th June, 2003. The
auction purchaser requested the Regional Officer, MIDC by a letter dated 10th
April, 2006 to transfer the property in dispute in its favour in light of the
sale certificate issued by the DRT on 25th January, 2005. As the
MIDC failed to transfer the plot in the name of the auction purchaser, the
auction purchaser filed a writ petition before the High Court seeking a
direction for issuance of ‘No Objection’ certificate in respect of the plot and
to restrain the Tax Recovery Officer, Range 1, Kalyan from enforcing the
attachment of the said plot, which was performed on 11th February,
2003.
The question posed before the
High Court was whether the auction purchaser who had made a bona fide
purchase of the property in the auction sale as per the order of the DRT is
entitled to have the property transferred in its name in spite of the
attachment of the said property by the Income Tax Department. Relying upon Rule
16 of Schedule II to the Act, the High Court came to the conclusion that there
can be no transfer of a property which is the subject matter of a notice. The
High Court was also of the view that after an order of attachment is made under
Rule 16(2), no transfer or delivery of the property or any interest in the
property can be made, contrary to such attachment. The High Court held that
notice under Rule 2 of Schedule II to the Act was issued on 11th
February, 2003 and the property in dispute was attached under Rule 48 on 17th
June, 2003, whereas the sale in favour of the auction purchaser took place on 9th
December, 2004 and the sale certificate was issued on 14th January,
2005. Therefore, the transfer of the property made subsequent to the issuance
of the notice under Rule 2 and the attachment under Rule 48 was void. The
submission made on behalf of the auction purchaser, that the sale in favour of
the appellant was at the behest of the DRT and not the defaulter, i.e. BPIL,
was not accepted by the High Court. In view of the above findings, the High
Court dismissed the writ petition.
Being aggrieved, the auction
purchaser filed an appeal before the Supreme Court.
At the outset, the Supreme
Court observed that it is trite law that unless there is preference given to
the Crown debt by a statute, the dues of a secured creditor have preference
over Crown debts. [Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co.
and Ors. (2000) 5 SCC 694; Union of India and Ors. vs. Sicom Ltd. and Anr. (2009)
2 SCC 121; Bombay Stock Exchange vs. V.S. Kandalgaonkar and Ors. (2015) 2 SCC
1; Principal Commissioner of Income Tax vs. Monnet Ispat and Energy Ltd. (2018)
18 SCC 786].
The Supreme Court noted that
Rule 2 of Schedule II to the Act provides for a notice to be issued to the
defaulter requiring him to pay the amount specified in the certificate, in
default of which steps would be taken to realise the amount. The crucial
provision for adjudication of the dispute in this case is Rule 16. According to
Rule 16(1), a defaulter or his representative cannot mortgage, charge, lease or
otherwise deal with any property which is subject matter of a notice under Rule
2. Rule 16(1) also stipulates that no civil court can issue any process against
such property in execution of a decree for the payment of money. However, the
property can be transferred with the permission of the Tax Recovery Officer.
According to Rule 16(2), if an attachment has been made under Schedule II to
the Act, any private transfer or delivery of the property shall be void as
against all claims enforceable under the attachment.
According to the Supreme
Court, there was no dispute regarding the facts of this case. The property in
dispute was mortgaged by BPIL to the Union Bank of India in 2000 and the DRT
passed an order of recovery against BPIL in 2002. The recovery certificate was
issued immediately, pursuant to which an attachment order was passed prior to
the date on which notice was issued by the Tax Recovery Officer under Rule 2 of
Schedule II to the Act. The Supreme Court observed that though the sale was
conducted after the issuance of the notice as well as the attachment order
passed by the Tax Recovery Officer in 2003, but the fact remained that a charge
over the property was created much prior to the notice issued by the Tax
Recovery Officer on 16th November, 2003. The High Court had held
that Rule 16(2) was applicable to this case on the ground that the actual sale
took place after the order of attachment was passed by the Tax Recovery Officer.
According to the Supreme Court, the High Court failed to take into account the
fact that the sale of the property was pursuant to the order passed by the DRT
with regard to the property over which a charge was already created prior to
the issuance of notice on 11th February, 2003. The Supreme Court
held that as the charge over the property was created much prior to the
issuance of notice under Rule 2 of Schedule II to the Act by the Tax Recovery
Officer, the auction purchaser was right in its submissions that the rigours of
Rule 2 and Rule 16 of Schedule II were not applicable to the instant case.
The Supreme Court set aside
the judgment of the High Court and allowed the appeal. The MIDC was directed to
issue a ‘No Objection’ certificate to the auction purchaser. The Tax Recovery
Officer was restrained from enforcing the attachment order dated 17th
June, 2003.
8. Commissioner of Income Tax, Udaipur vs.
Chetak Enterprises Pvt. Ltd. Civil Appeal No. 1764 of 2010 Date of order: 5th March, 2020
Special
deduction – Section 80-IA – Carrying on business of (i) developing, (ii)
maintaining and operating, or (iii) developing, maintaining and operating any
infrastructure facility – The agreement was initially executed between the
erstwhile partnership firm and the State Government, but with clear
understanding that as and when the partnership firm is converted into a
company, the name of the company in the agreement so executed be recorded
recognising the change – The assessee company qualified for the deduction u/s
80-IA
Effect of
conversion of partnership firm into a company under Part IX of the Companies
Act – All properties, movable and immovable (including actionable claims),
belonging to or vested in a company at the date of its registration would vest
in the company as incorporated under the Act
The erstwhile partnership
firm, M/s Chetak Enterprises, entered into an agreement with the Government of
Rajasthan for construction of a road and collection of road / toll tax. The
construction of the road was completed by the said firm on 27th
March, 2000 and the same was inaugurated on 1st April, 2000. The
firm was converted into a private limited company on 28th March,
2000 and named as M/s Chetak Enterprises (P) Ltd. (for short, ‘the assessee
company’) under Part IX of the Companies Act, 1956. On conversion of the firm
into a company, an intimation was sent to the Chief Engineer (Roads), P.W.D.,
Rajasthan, Jaipur. The said authority noted the change and cancelled the
registration of the firm and granted a fresh registration code to the assessee
company. As aforesaid, the road was inaugurated on 1st April, 2000
and the assessee company started collecting toll tax. For the assessment year 2002-2003,
the assessee company claimed deduction u/s 80-IA of the Income-tax Act, 1961.
The A.O. declined that claim of the assessee company which decision was
reversed by the Commissioner of Income Tax (Appeals), Udaipur. The Income Tax
Appellate Tribunal confirmed the decision of the first appellate authority,
following its decision in the case of the assessee company for the A.Y.
2001-2002. As a result, the Department preferred an appeal before the High
Court which came to be dismissed.
Being aggrieved, the
Department filed two separate special leave petitions before the Supreme Court
pertaining to A.Ys. 2001-02 and 2002-2003. As regards the Civil Appeal
pertaining to A.Y. 2001-2002, the same was disposed of due to low tax effect,
leaving the question of law open.
According to the Supreme
Court, it was not in dispute that an agreement was executed between the
erstwhile partnership firm and the State Government for construction of the
road and collection of toll tax. Before the commencement of the assessment year
in question, i.e. 2002-2003, the construction of the road was completed (on 27th
March, 2000) and it was inaugurated on 1st April, 2000. Before the
date of inauguration, the partnership firm was converted into a company on 28th
March, 2000 under Part IX of the Companies Act.
The Supreme Court noted that
the Memorandum of Association of the assessee company revealed the main object
as follows:
‘On conversion of the
partnership firm into a company limited by shares under these presents to
acquire by operation of law under Part IX of the Companies Act, 1956 as going
concern and continue the partnership business now being carried on under the
name and style of M/s Chetak Enterprises including all its assets, movables and
immovables, rights, debts and liabilities in connection therewith.’
The Supreme Court also noted
that before the agreement was executed with the erstwhile partnership firm, it
was clearly understood that the partnership firm would in due course be
converted into a registered limited company. This was evident from the
communication addressed to the Chief Engineer on 23rd October, 1998
at the time of replying to the notice inviting bids. An explicit request was
made to allow the partnership firm to change its constitution and consequently
a change of name in the agreement after converting the firm into a company with
the existing partners as its Directors. The Chief Engineer being the
appropriate authority of the State, vide letter dated 27th
August, 1999, took note of the request made by the erstwhile partnership firm
and informed the said firm that its offer was accepted subject to terms and
conditions specified in that regard. It is only after this interaction that an
agreement was entered into between the Government of Rajasthan and the
erstwhile partnership firm, and the communication sent by the Chief Engineer,
dated 27th August, 1999, was made part of the agreement. After the conversion
of the partnership firm into a company under Part IX of the Companies Act, the
State authorities had noted the change and provided a fresh registration code
to the assessee company.
The Supreme Court further
noted the effect of conversion of the partnership firm into a company under
Part IX of the Companies Act. According to the Supreme Court, all properties,
movable and immovable (including actionable claims), belonging to or vested in
a firm at the date of its registration would vest in the company as
incorporated under the Act. In other words, the property acquired by a promoter
can be claimed by the company after its incorporation without any need for
conveyance on account of statutory vesting. On such statutory vesting, all the
properties of the firm, in law, vest in the company and the firm is succeeded
by the company. The firm ceases to exist and assumes the status of a company
after its registration as a company. A priori, it must follow
that the business is carried on by the enterprise owned by a company registered
in India and the agreement entered into between the erstwhile partnership firm
and the State Government, by legal implication, assumes the character of an
agreement between the company registered in India and the State Government for
(i) developing, (ii) maintaining and operating, or (iii) developing,
maintaining and operating a new infrastructure facility.
The
Supreme Court observed that for the purpose of considering compliance of clause
(a) of section 80-IA(4)(i), the assessee must be an enterprise carrying on
business of (i) developing, (ii) maintaining and operating, or (iii)
developing, maintaining and operating any infrastructure facility, which
enterprise is owned by a company registered in India. According to the Supreme
Court, that stipulation was fulfilled in the present case as the registered
firm was converted into a company under Part IX of the Companies Act on 28th
March, 2000, which was before the commencement of assessment year 2002-2003.
For the assessment year under consideration, the activity undertaken by the
assessee was only maintaining and operating or developing, maintaining and
operating the infrastructure facility, inasmuch as, the construction of the
road was completed on 27th March, 2000 and the same was inaugurated
on 1st April, 2000, whereafter toll tax was being collected by the
assessee company.
Further, as regards clause
(b) of section 80-IA(4)(i), the requirement predicated was that the assessee
must have entered into an agreement with the Central Government or a State
Government or a local authority or any other statutory body for (i) developing,
(ii) maintaining and operating, or (iii) developing, maintaining and operating
a new infrastructure facility. According to the Supreme Court, in the present
case the agreement was initially executed between the erstwhile partnership
firm and the State Government, but with a clear understanding that as and when
the partnership firm is converted into a company, the name of the company in
the agreement so executed be recorded recognising the change. Notably, the
agreement itself mentioned that M/s Chetak Enterprises as party to the agreement
was meant to include its successors and assignee. Further, the State Government
had granted sanction to the company and the original agreement entered into
with the firm automatically stood converted in favour of the assessee company
which came into existence on 28th March, 2000 being the successor of
the erstwhile partnership firm. Thus understood, even the stipulation in clause
(b) of section 80-IA(4)(i) was fulfilled by the assessee company.
The Supreme Court held that
since these were the only two issues which weighed with the A.O. to deny
deduction to the assessee company as claimed u/s 80-IA of the Income-tax Act,
the first appellate authority was justified in reversing the view taken by the
A.O. For the same reason, the ITAT, as well as the High Court had justly
affirmed the view taken by the first appellate authority, holding that the
respondent / assessee company qualified for the deduction u/s 80-IA being an
enterprise carrying on the stated business pertaining to infrastructure
facility and owned by a company registered in India on the basis of the
agreement executed with the State Government to which the respondent / assessee
company has succeeded in law after conversion of the partnership firm into a
company.
In view of the above, the Supreme
Court dismissed the appeal.
