Registration of charitable trust - Powers of CIT- Scope of inquiry
August, 20th 2007
Dream Land Educational Trust vs CIT Citation 109 TTJ 850
Registration of charitable trust - Powers of CIT- Scope of inquiry While considering the application for grant of registration filed under s.12A of the Income Tax Act 1961, he only had to satisfy himself about applicants objectives and genuineness of its activities. The property of firm was settled in trust. There being no fault with objects of trust and genuineness of its activities, the registration could not be refused on the ground that transfer deed of properties was not executed and that no objection certificate was not obtained from bankers.
Dream Land Educational Trust vs CIT
ITA No. 481/Asr/2005
Joginder Pall, A.M and A.D. Jain, J.M
5 April 2007
Ashwani Taneja for the Appellant R.L. Chhinalia for the Respondent
ORDERA.D. Jain, J.M :
This is assessee's appeal against the order dt. 30th Sept., 2005 passed under s. 12A(a) of the IT Act, 1961 by the learned CIT, J and K, Jammu. The Mowing grounds have been taken :
"1. That having regard to the facts and circumstances of the case, learned CIT has erred in law and on facts in rejecting the application for registration filed by the appellant and that too without giving adequate opportunity of being heard and on the basis of such considerations which are not germane to the issue before him.
2. In any view of the matter and in any case, action of learned CIT in refusing the registration under s. 12A is bad in law and against the facts and circumstances of the case and is contrary to the principles of natural justice and the appellant ought to have been granted registration under that section."
2. The facts are that the assessee filed an application in Form No. 10A with the learned CIT, on 18th March, 2005, for registration under s. 12A(a) of the IT Act, 1961. The CIT called for an initial report from the ITO. After going through the said report and examining the various clauses of the trust deed, the CIT observed the following discrepancies :
"1. That the trust 'M/s Dream Land Educational Trust' Disco Road, Janipur, Jammu which has been created through trust deed dt. 1st April, 2004 is constituted of closely related trustees which includes husband, wife, daughter and brother-in-law; in fact, it is family trust :
2. That prior to the creation of the trust the following trustees viz., Smt. Usha Gupta W/o Shri Pawan Kumar Gupta and Smt. Gunjan Mahajan D/o Shri Pawan Kumar Gupta were running an educational institution under the name and style of Dream Land Public School in the status of firm constituted w.e.f. 28th day of May, 2002. The said firm has filed its return of income for the asst. yrs. 2003-04 and 2004-05. It has further been observed that the assessee firm has made huge investment in the construction of school building during these two years through introduction of capital by the two lady partners and mainly through unsecured loans from friends and relatives :
3. That the perusal of documents including trust deed and agreement dt. 31st . Dec., 2004 (copy placed on record) clearly shows that the firm constituted of the abovementioned two trustees was floated with the aim of introducing huge capital through its partners and subsequently, the firm with its assets and liabilities have been taken over by the trust through a unilateral action. No formal agreement of the takeover has been executed which would ensure the passing of the legal title of the building built on the trust land to the trust. In other words, the building taken over by the trust still continues to be the property of the firm i.e., M/s Dream Land Public School and any future action of the partners of this firm can jeopardize the functioning of the trust as these partners can claim their right over the property anytime. It has also been observed that the building taken over by the trust has been financed by the JandK Bank, Shalamar, and is hypothecated with the bank. However, the trust/firm has not obtained any NOC from the bank prior to or after the takeover of the assets and liabilities of the firm which again is against the rules and also any future action of the bank can again jeopardize the functioning of the trust :
4. In order to ascertain the charitable nature of the activities of the trust, an enquiry was got conducted through office of the ITO, Ward 2(1), who, vide his report dt. 28th April, 2005, has reported that 'that as per the objectives of the trust there is no mention of any charitable activity by the fees structure collected from the office of the Principal Dream Land Public School, Disco Road, Janipur, Jammu (copy placed on record). The fee charged by the school is at par with any other private educational institution'. It has also been reported that "the perusal of income and expenditure account of the trust for the year ending 31st March, 2005 shows that huge amount of excess of income over expenditure has been transferred to the trust fund instead of spending the same in the fulfilment of any charitable objectives of the trust as laid down in the trust deed. The genuineness of the trust is questionable in view of the above facts and circumstances and may be considered accordingly :
5. That a perusal of irrevocability clause of the trust deed states that if the trust fails for any reasons, in the opinion of the trustees, the fate of the net assets of the trust, both movable and immovable, shall be decided by the trustees with majority vote. In this connection, you are informed that one of the main conditions for granting registration to a trust is that in case of its dissolution, its net assets after meeting, all liabilities, should not revert to its founders, members, directors, donors, or their relatives as provided in s. 13(3) of the Act, but should invariably be used for its objects. In view of the same, the above clause of the trust deed is objectionable due to the fact that by leaving the fate of net assets in the hands of the trustees without any rider or binding regarding the applicability of those assets on the objects similar to that of the trust means that the trustee can use/apply/transfer the net assets to any person/institution covered under s. 13(3) of the IT Act, 1961." 3. In response, the assessee filed the following reply :
"1. The IT Act, 1961 does not debar family trusts from undertaking charitable objects. The said provisions are eligible for registration under s. 12A(a) of the IT Act, 1961 at par with other trusts. The board of trustees of the trust has appointed managing committee for management and administration of Dream Land Public School in terms of para (i) of powers and duties of the board of trustees appearing on p. 6 of the trust deed. The said committee, a copy of which enclosed for your reference, comprises of nominees of staff members of the institution, parents of students and Education Department, JandK, besides trustees. The affairs of the institution are managed by the said committee. The institution is recognised/affiliated by JandK Board of School Education.
2. The assets and liabilities of Dream Land Public School, Disco Road, Janipur, Jammu (partnership firm), were transferred by the partners of the firm to Dream Land Educational Trust which included building under construction, on which a substantial investment was made by the firm. The said firm was acquired in terms of dissolution deed executed by the partners of the firm and trust deed, duly registered under Court of law, i.e. Sub-registrar, Jammu. The main objects forming part of the trust specify the takeover of the assets and liabilities of the firm which was dissolved on 31st March, 2004, besides other objects of charitable nature. It is further submitted that what the firm has done in earlier year, does not in anyway reflect on the nature of the trust.
3. A perusal of dissolution deed of the firm clearly explains that there is no unilateral action for transfer of assets and liabilities of the erstwhile firm. The trust deed was duly registered with judicial authorities i.e. Sub-registrar, Jammu. In the firm there were two partners, namely, Mrs. Usha Gupta and Miss Gunjan Mahajan. Both these partners are party to the trust deed and therefore it cannot be said that the action of the creating trust was unilateral. There is no question of jeopardizing the functioning of the trust and apprehension of the Department in this regard is misconceived and unrealistic. Jammu and Kashmir Bank Ltd. was duly informed about the constitution of the trust and dissolution of the firm. They were assured by the trustees about the repayment of loan. Moreover, JandK Bank Ltd. enjoys mortgage of plot of land on which the building structure has been erected along with the building constructed thereon. Your kind attention is invited to Sch. "A" forming part of the trust deed under which the settlers of the trust have transferred 4 kanals of land to the trust on which the building has been erected. The said land forms part of corpus of the trust. Building structure commands no value without land which is property of the trust. The property can be held in the name of the trustees.
Your kind attention is invited to main objects forming part of the trust deed under which it becomes amply clear that all the objects of the trust are of charitable nature. Moreover, the trust is a non-profit making organisation existing solely for educational purposes. The fact has been duly mentioned in the trust deed on p. 2 of trust deed. The notice under reference also confirms the charitable objectives of the trust as laid down in the trust deed. In his observation, the learned AO states that the trust has hot spent the excess of income over expenditure on charitable activities. The learned AO is not correct in stating that the trust has surplus income. During the year the receipts of the trust amounted to Rs. 100 lacs and has applied Rs. 118.62 lacs. The balance has been utilized out of loans. In any case, this is something which has to be considered for purposes of assessment and not for purposes of registration under s. 12A. The fee structure of the institution has been devised by the managing committee as per the fee structure of other educational institutions. There are other institutions charging higher fee and those have been recorded charitable institutions. The trust is running a separate wing under the name of "Anchal" meant for slum children providing free education, free books, free uniforms and free midday meals. The aim of the management is to help under privileged and deserving students at the cost of privileged ones. There is thus no reason to come to the conclusion that the trust is not performing charitable activities.
5. The trust is irrevocable and both the settlers are trustees for life. It is submitted that in terms of s. 12AA of the IT Act, your goodself has to satisfy as to the genuineness of the objects of the trust. At the time of registration of the trust for purposes of s. 12AA nothing more is required. The provisions contained in the deed are only enabling clauses and have to be read with earlier clause which states that the trust is for educational purposes and not for the purposes of profit. There is no such provision in the IT Act as stated in the notice. Sec. 13(3) is not hit by the said provisions (which) govern the assessment and not registration. It is further prayed that there are case law on this point for which further time may be allowed.
In view of the above submissions, it is stated that the trust has been created for charitable purposes of education and the trust has set up educational institution both paying and free. The trust also complies with all the conditions envisaged in s. 12A/12AA of the IT Act. It is therefore, prayed that registration may kindly be accorded."
4. The learned CIT rejected the application filed by the assessee, observing as follows :
"4. I have gone through the above written submissions of the assessee and found that there is no force in it. The assessee has Stated that the dissolution of the firm viz., M/s Dream Land Public School, Disco Road, Janipur, Jammu was duly registered with the Sub-registrar, Jammu. From the copy of the same filed by the assessee, it has been found to be totally incorrect. This deed is not at all registered but is simply attested by a notary which has no value in the terms of provisions of Transfer of Property Act governing property transfers. As has been discussed above, the trust took over the property consisting of building of the above named firm. This property by virtue of this takeover is shown to be a part of the trust. However, since no transfer deed in any Court of law, which was the correct procedure has been executed. Therefore, in the eyes of the law this takeover can any time be termed as illegal. Further, it is also stated that the partners of the above firm viz., Smt. Usha Mahajan and Miss Gunjan Mahajan are party to the trust deed and as such the action of takeover is not unilateral. On examination of this fact, it is observed that, although they are party to the trust deed, but in any case the transfer of the property to the trust was and should have been made through a duly executed transfer deed in the appropriate Court of law. Therefore, the above two partners though not objecting to the takeover of their firm at the present may at any time in the future claim their property from the trust and that action can jeopardize the functioning of the trust and its objects. Again, as regards the fact that there being no "NOC" from the bankers viz., JandK Bank, who financed the building of the above firm, the assessee has stated that they had informed the bankers about this takeover and that the bank had not objected to the takeover. This explanation is not based upon any evidence and is a mere statement which cannot be accepted. The assessee failed to file any NOC from the bank. Therefore, this statement in absence of any documentary evidence cannot be relied upon. Therefore, the apprehension, that any future action of the partners of the above firm or the financiers of the above firm is totally realistic and under these circumstances, the assets or income of the trust will get applied towards the objects which do not form the basic objects of the trust.
5. Further, as regards the fact that as per the trust deed, on dissolution, it has been left to the trustees to decide the fate of the net assets, the explanation provided by the assessee and reproduced above cannot be accepted. When a trust is to be registered, a safeguard regarding the fate of assets at the time of dissolution is to be considered very minutely. It can in no way be accepted that such things are to be seen at the time of assessment. No registration can be granted on sham and objectionable clauses. As has been stated above, the trustees of the trust are close knit relatives. There is always an apprehension that after enjoying tax exemption the trustees can dissolve the trust and, as per the irrevocability clause of the trust deed, the trustee can transfer the net assets to any of the persons mentioned in s. 13(3) of the Act. Interest of Revenue has to be protected from the inception and if there is a scope of any future violation that has to be taken care of. I am unable to understand as to why the assesses trust has objection in putting in black and white that no assets on dissolution can be transferred to any persons mentioned in s. 13(3) of the Act. Had the intention of the founders/trustees been honest they would never have put such a clause which gives them blanket power to transfer the assets/income to any person or towards any object which is not in conformity with the basic objects of the trust. No trust can be registered in which application of its assets or income other than the objects is possible by virtue of its trust deed.
6. Therefore keeping in view the above facts, the application filed by the assessee trust for registration is hereby rejected."
5. Aggrieved, the assessee has filed the present appeal.
6. Before us, challenging the impugned order, the learned counsel for the assessee has argued that the learned CIT has made no adverse observation regarding the genuineness of the assessee's activities; that the objects of the assessee trust are covered under s. 2(15) of the Act; that the assessee trust is not existing for making profit; that the CIT while passing the impugned order has transgressed his powers under s. 12A r/w s. 12AA of the Act; that the factum of the trust deed being registered has not been disputed; that all the income earned by the trust is being invested in the trust only; and that the observations made by the learned CIT are not germane to the dispute before him.
7. The learned Departmental Representative, on the other hand, has strongly relied on the impugned order.
8. We have heard the parties and have perused the material on record. The question which has arisen in the present case is as to whether registration has rightly been refused to the assessee by the learned CIT. Sec. 12AA of the Act, prescribes the procedure for registration of a trust. As per this section, the CIT, on receipt of an application for registration, shall call for such documents or information from the trust as he thinks necessary in order to satisfy himself about the genuineness of the trust and may also make such enquiry as he may deem necessary in this behalf; and that after satisfying himself about the objects of the trust and the genuineness of its activities, he shall pass an order in writing, registering the trust. Therefore, in accordance with s. 12AA of the Act, the learned CIT was required to satisfy himself about the objects of the trust and the genuineness of its activities. A perusal of the above extracted portion of the impugned order would show that the learned CIT has not recorded any dissatisfaction on either of these two aspects. The first issue raised by the learned CIT is with regard to the registration of the dissolution deed of the firm. The erstwhile firm, having two partners, which are the trustees of the present assessee trust, was dissolved vide a dissolution deed. The learned CIT has objected that this dissolution deed was not registered but was simply attested by a notary, having no value under the provisions of the Transfer of Property Act. Such observation, it is seen, has no relation whatsoever with either the objects of the trust or its activities. Moreover, the dissolution deed has not been shown to be required to be registered for the purposes of granting of registration to the assessee trust. The observations of the learned CIT in this regard are, therefore, not in any way detrimental to the assessee's claim of registration.
9. The learned CIT has further observed that no transfer deed stood executed regarding the property taken over by the trust from the erstwhile firm on its dissolution. In this regard, again, this has no bearing on the satisfaction of the CIT with regard to the objects of the trust or its activities. Further, it has been argued and not rebutted that the trustees of the trust are the erstwhile partners of the dissolved firm and, therefore, no transfer deed was thought required to be executed on the takeover of the property of the erstwhile firm by the present assessee trust. Also, Sch. 'A' forming part of the trust deed (copy at p. 19 of the assessee's paper book, "APB" for short) reflects the properties and assets transferred to the trust by its settlors who were the partners of the erstwhile firm. As per this schedule, the settlors have only given the properties to the trust and nothing has been taken. Anyhow, the observations of the learned CIT in this regard are, again, not observations adverse to the satisfaction of the CIT either regarding the objects of the trust or the genuineness of its activities.
10. The next observation of the learned CIT is with regard to the takeover action being unilateral. In the view of the learned CIT, since the transfer of the property of the trust was not through a duly executed transfer deed, even if the two partners of the erstwhile firm did not object to the takeover of the firm, they could, at any future point of time, claim their property from the trust, thereby jeopardizing the functioning of the trust and its objects. This observation, it is seen, besides having no connection with the satisfaction of the CIT with regard to the objects of the trust and its activities, is an observation based on pure conjecture. This observation, as such, has no effect adverse to the registration of the trust.
11. The learned CIT has further observed that since no objection certificate was not obtained from the bankers, the apprehension of any future action by the partners of the erstwhile firm or the financiers thereof, regarding claiming back the property from the trust, was entirely realistic. Again, it is seen that this observation has no bearing on the registration of the assessee trust. As noted above, under s. 12AA of the Act, the CIT was only required to satisfy himself with regard to the objects and genuineness of the activities of the trust. The observation under consideration does not at all impinge upon either of these aspects. Again, this observation is the result of merely surmises and conjectures. Nothing turns on it against the assessee qua registration.
12. Lastly, the learned CIT has observed that as per the trust deed, on dissolution of the firm, it has been left to the trustees to decide the fate of the net assets. It has been observed that while registering a trust, safeguards regarding the fate of the trust are to be considered very minutely; that no trust, the application of whose assets and income is possible to objects other than those envisaged, can be registered; and that whereas, in the present case, the trustees have been left to decide the fate of the learned CIT, are irrelevant. The settlors of the trust, it is seen, are trustees for life. The trust is irrevocable. The provisions of the trust deed are only enabling clauses. Moreover, the observations of the learned CIT are with regard to only some hypothetical impending assumed revocation of the trust. These observations lie entirely in the realm of conjecture and registration has wrongly been refused on the basis thereof.
13. This apart, the objects of the trust, as defined in the trust deed, were laid bare before the learned CIT, who did not find anything offensive therein. These objects are as follows :
"1. To acquire and takeover the management, administration and control of Dream Land Public School, Disco Road, Janipur, Jammu, along with its assets and liabilities and run the institution under its existing banner for and on behalf of the trust.
2. The trust shall be liable to repay the secured term loan borrowed from the JandK Bank Ltd. for construction of building and purchase of fixed assets and shall also repay other liabilities of 'Dream Land Public School', Disco Road, Janipur, Jammu, including unsecured loans and capital contribution made by Ms. Gunjan Mahajan.
3. To engage teachers, professors, instructors and experts of good moral character and conduct, able to impart efficiently and economically upto date instructions to pupils and students in model education, modern sciences, research work, intellectual and other useful pursuits.
4. To promote, advance and encourage and/or aid in helping, promoting, advancing and encouraging primary, secondary and higher education including technical and medical education, also physical training, training of handicrafts, fine art and other useful arts, crafts among the public.
5. To set up, establish, maintain, boost and carry on educational and. technical educational institutions and medical institution (of all branches), for the purpose of teaching in the subjects of arts, nursing, sciences, accountancy, medical (including Ayurvedic), engineering (all branches) law besides M.B.A., B.Ed, and management and computer courses.
6. To grant stipend, scholarship, loans and other financial assistance to the deserving candidates for education, vocational training and to other pursuit with a view to upright the poor and needy persons.
7. To accept donations, grants, presents and other offerings and to deal with the same for the purpose of the trust.
8. To charge moderate tuition fees and otherwise recoup themselves for the outlay and expenses incurred in the upkeep and maintenance of institutions established or about to be established under the deed.
9. To train and equip the pupils so as to be self-supporting in an honourable and decent way of life so as to develop into good, healthy and progressive citizens.
10. To encourage sportsman and 'adventurous spirit in the pupils and those connected with the institution and coming in contract with them and to participate in games of skill and prowess.
11. To bring out, encourage and develop the incentive and research faculties of the pupils and teachers and to afford opportunity to research work in art, science and various other fields of education.
12. To develop a healthy as well as critical attitude towards the development of mental, physical and moral uplift of the students and all those connected with the institution so as to make them good citizens.
13. To establish, maintain and run a boarding house and residential institution for the students and those connected with the institution.
14. To invest, dispose of, transfer and otherwise deal with the subject-matter of the trust in such manner as the trustees should deem fit so as to enable the trust to carry on the objects effectively.
15. To construct, operate Orphanages, Child Welfare Centers, S.O.S. Home Old age Homes. Working Women Hostels.
16. To grant medical help to the poor and deserving persons during epidemics, famine, earthquake or any other unforseen calamity or war."
14. The above objects are to be found at APB, pp. 12 to 14. The learned CIT has not observed any of these objects to be not to his. satisfaction. None of these objects has been stated to be outside the purview of s. 2(15) of the Act, which holds "charitable purposes" to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility. Then, APB, pp. 6 to 8 is a copy of the balance sheet of the assessee trust, as on 31st March, 2005. It shows that all the income earned by the trust has been invested in the trust only. Further, the learned CIT has not anywhere in the impugned order doubted either the genuineness of the activities of the trust or its objects. It has not been stated that any object of the trust is not that of charity or that the income of the trust has been used for the purpose of the trustees or their families and has not been utilised for charity.
15. In these circumstances, in the absence of any dissatisfaction of the learned CIT with regard to either the objects or the genuineness of the activities of the trust, registration has been refused to the trust in violation of the provisions of s. 12AA of the Act. The reasons recorded for such rejection of registration are entirely extraneous to the requirement of the said section.
16. In Sanjeevamma Hanumanthe Gowda Charitable Trust vs. Director of IT (Exemption) (2006) 203 CTR (Kar) 533 : (2006) 285 ITR 327 (Kar), it has been held that for the purposes of registration under s. 12A, what the authorities have to satisfy is the genuineness of the activities of the trust and how the income derived from the trust property is applied to charitable or religious purposes; and that there are sufficient safeguards under the Act for cancellation of registration if the provisions are misused,
17. In St. Don Bosco Educational Society vs. CIT (2004) 84 TTJ (Luck) 805 : (2004) 90 ITD 477 (Luck), it has been held that under s. 12AA, the CIT is empowered to satisfy himself about the objects of the trust and the genuineness of its activities; and that once the CIT has not doubted the genuineness of the activities of the assessee, nor doubted its charitable object, his powers under s. 12AA end.
18. In Smt. Mansukhi Devi Bihani Jan Hitkari Trust vs. CIT (2004) 83 TTJ (Jd) 763 : (2005) 94 ITD 1 (Jd), it has been, inter alia, held that where the CIT, while refusing registration under s. 12AA, did not state that the object of the trust was not charity or the income of trust was used for the benefit of the trustees or their families and had not been utilised for charity, refusal to grant registration was not justified.
19. In People Education and Economic Development Society (Peeds) vs. ITO (2006) 104 TTJ (Chennai)(TM) 467 : (2006) 100 ITD 87 (Chennai)(TM), it was held that while considering the application for registration under s. 12A, the CIT cannot examine the application aspect of the income and that he may examine whether the application under s. 12A is properly made and whether the objects of the trust are charitable.
20. In Acharya Sewa Niyas Uttaranchal vs. CIT (2006) 105 TTJ (Del) 761, it was held that under s. 12AA, the jurisdiction of the CIT is confined to satisfying himself about the objects of the trust and the genuineness of its activities; that where the CIT had not taken any objection to the charitable nature of the trust, the reasons given by the CIT for refusal to grant registration were extraneous to s. 12AA; and that therefore, the registration was to be allowed to the assessee trust.
21. All of the above case law propound that for grant of registration under s. 12AA of the Act, the only relevant consideration is the satisfaction of the CIT regarding the objects of the trust and the genuineness of its activities. No case law to the contrary has been cited before us. Rather, the provisions of the statute, as discussed, are unequivocal in this regard and they cannot be overridden, as has illegally been done by the CIT.
22. In view of the above, the grievance of the assessee is entirely justified and is accepted as such.
23. In the result, the appeal of the assessee is allowed.