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October 23, 2021

Section 12A registration cannot be denied to an educational society when no adverse inference drawn on prescribed issues

Section 12A registration cannot be denied to an educational society when no adverse inference drawn on prescribed issues

Fact and Issue of the case

The assessee has raised the following grounds:

“1.  That the Ld. PR.CIT (Exemptions), Chandigarh has erred in not granting registration u/s 12AA of the Income Tax Act, 1961 vide order, dated 23.10.2020.

2. That the denial of exemption u/s 12AA on the issue that the assessee is a “franchisees of Zee Learn Ltd.”, is not valid, since the Hon’ble ITAT, Amritsar bench, Amritsar in ITA No. 605/Asr/2017, vide order, dated 10.09.2018 has already considered this issue and decided the issue in favour of assessee and that finding has attained finality and, therefore, non-granting of registration u/s 12AA on the issue of being a frenchisees of Zee Learn Ltd., is bad in law and, as such, this finding deserves to be quashed.

3. That the Ld.Pr.CIT(Exemptions) having not drawn any adverse inference on account of the issues which have been set aside by the Hon’ble ITAT, Amritsar Bench, Amritsar in ITA No. 605/Asr/2017 and, therefore, the refusal of registration u/s 12AA on the issue of Zee Learn Ltd. only, which has already attained finality is bad in law.

4. That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.”

Briefly, the facts are that an application in Form No.10A was filed by the appellant society on 28.02.2017 in the office of PCIT(Exp), Chandigarh seeking registration u/s 12A of the Income Tax Act, 1961. The application revealed that the society is an ongoing entity that has been in operation since 30.01.2013.

This is a second round of the appeal before the Bench as in this case, the ITAT had earlier partly set aside the issue to the Ld. Commissioner of Income Tax (Exemptions), vide its order, dated 10.09.2018. Earlier an order u/s 12AA of the Income Tax Act was passed by the Commissioner of Income Tax (E), Chandigarh in this case on 30.08.2017 rejecting the application for grant of registration u/s 12AA. The applicant trust preferred an appeal before the Hon’ble Income Tax Appellate Tribunal, Amritsar against the order of the Commissioner of Income Tax (E), Chandigarh.

Consequently, after receiving the order passed by the Hon’ble ITAT, the case of the applicant was fixed on 22.04.2019 to give appeal effect to the Hon’ble ITAT’s order dated 10.09.2018 and in compliance, the applicant has submitted its reply. On the basis of reply submitted by the applicant, the additional queries were sent to applicant on 21.05.2019 to submit the clarifications/submissions on or before 27.05.2019. The applicant has submitted the response to the additional queries raised on 21.05.2019. The applicant has further submitted the written response on 17.07.2020.

Observation of the court

The Tribunal has heard the rival contentions, perused the impugned order, ITAT Amritsar Bench Order, written submissions and case law citations filed by both the parties during the hearing. In compliance to the directions of the Tribunal, the applicant was granted opportunity vide department’s queries dated 22.04.2019 and 21.05.2019 which were duly complied with by the applicant by its written submissions dated 07.05.2019;.27.05.2019 and 17.07.2020. These submissions have been examined and placed on record. The assessee, in respect of the franchise agreement of the society with Zee Learn Ltd., has submitted that the franchise agreement with Zee Learn Ltd. was entered only to achieve the object of providing quality education to all the sections of the society and there was no profit earning motive by the franchisee.

The Coordinate Bench while remanding the matter back to the competent Authority for limited purpose observing in para 5.3 that to allow the assessee an opportunity to exhibit its’ activities as being undertaken toward and in satisfaction of its stated object/s, which no doubt constitute a charitable purpose under the Act and that before parting, we may also add, and even as clarified by us during hearing, that in view of the assessee’s objects, the reliance on the decisions by the tribunal in the context of other schools run as franchisees of Zee Learn Ltd., is rendered of little moment; we ourselves holding that profit-making per se cannot be regarded as detrimental as long as it feeds a charitable purpose (of education). For the same reason/s, and to the same effect, the Tribunal had perused the Hon’ble jurisdictional High Court, placed in the assessee’s compilation, to find the bench as in agreement therewith in principle.

The Ld. PCIT(Exp), Chandigarh has states that the Hon’ble ITAT has not given any clear direction for considering the franchise agreement as charitable in nature is factually wrong. The ITAT, has held that the payment of franchisee fee to“Zee Learn Ltd.” is justified,  because the same have been paid for achieving the objects of the  society by observing in the order at pg. 8, as under:

“Our decision in this regard is thus consistent with the decisions by the Tribunal cited before us in respect of similar schools run as franchisee units of Zee Learn Ltd. ”.

The CIT (E) has referred to the order of ITAT, Chandigarh Bench in the case of ‘Jiwan Dass Kartar Singh Charitable Trust’ with regard to the payment of Franchisee fee to the “Zee Learn Ltd.” and held that the case is squarely covered by the judgment of Chandigarh Bench of the ITAT by observing vide 8 of the impugned order, as under:-

Para 8

“In view of the above discussion and the fact that no clear direction has been given by the Hon’ble ITAT, Amritsar for granting registration u/s 12AA in the case, I am inclined to respectfully follow the order passed by the Hon’ble ITAT, Chandigarh in the case of ‘M/s Jiwan Dass Kartar Singh Charitable Trust, Karnal v. The CIT (E),Chandigarh’ in ITA No. 426/Chd/2018, dated 01.05.2019, wherein clear findings have been given upholding the order passed by the department. The present case is squarely covered by the said judgment passed by the Hon’ble ITAT, Chandigarh. Accordingly, keeping in view all the above, the present application for grant of registration under section 12AA of the I.T.Act is, hereby, rejected.”

From the above, it is very clear that the only objection of the CIT(E) for the denial of registration had been made on the basis of fact that the society is paying franchisee fee to “Zee Learn Ltd.”. The Ld.AR has vehemently contended that the coordinate Bench in his order, dated 10.09.2018 in ITA No.605/Asr/2017 has clearly held that no adverse view is drawn in respect of franchisee fee paid to “Zee Learn Ltd.” and the decision of the Hon’ble Bench is in consonance that the decision cited, before the Bench during the course of hearing and in para 5 of the order of ITAT, as above we do not find any adverssity in the observation of the coordinate Bench decision on account of franchise fee paid to “Zee Learn Ltd.”

From the above, it is very clear that the only objection of the CIT(E) for the denial of registration had been made on the basis of fact that the society is paying franchisee fee to “Zee Learn Ltd.”. The Ld.AR has vehemently contended that the coordinate Bench in his order, dated 10.09.2018 in ITA No.605/Asr/2017 has clearly held that no adverse view is drawn in respect of franchisee fee paid to “Zee Learn Ltd.” and the decision of the Hon’ble Bench is in consonance that the decision cited, before the Bench during the course of hearing and in para 5 of the order of ITAT, as above we do not find any adverssity in the observation of the coordinate Bench decision on account of franchise fee paid to “Zee Learn Ltd.”

Since, the issue being set aside with specific findings and hence, the PCIT (E) cannot over ride the finding of the Coordinate Bench and was required only to look into those aspects for which, the case had been set aside and, since, the issue of “Zee Learn Ltd.” having already been decided in favour of assessee, no adverse view can be drawn against the assessee on such issue, as the department had not carried the matter to the Hon’ble High Court. Thus, nothing has been doubted and for the purpose of 12A only two conditions are to be required to be satisfied that one with regard to the activities of the trust and the second with regard to the aims & objects of the society as per the decided case laws on this issue which have been addressed in favor of the assessee by the earlier order of the Coordinate Bench as placed in the paper book at page no. 1 to 10.

As regards to the issue of profit motive, it had clearly been held that profit motive should not be predominant and for that various decisions have been cited at page 6, para 2.4 of the order of the Hon’ble Bench and the Ld. CIT (E) in para-8 of the order has held that the denial of registration is being made following the order of the Hon’ble ITAT, Chandigarh Bench on the issue of the franchise fee paid to ‘M/s. Zee Learn Ltd.’ and ignoring the finding is already in favor of the assessee in the earlier order of ITAT in ITA No. 605/Asr/2017 and, therefore, the CIT (E) not following the order of the Hon’ble ITAT is against judicial discipline and rejecting the application for registration u/s 12AA, which issue had already attained finality is bad in law and, thus, the PCIT (E) was required to grant registration to the assessee u/s 12AA. In view of the above facts, we are of the considered view, that the jurisdiction of the PCIT(E) was being limited to verification of two issues, one with regard to the ‘lease hold land’ and the second about the fee concession and on both accounts, and since, the CIT (E) has not drawn any adverse inference and, therefore, in our view, the order of CIT(E) denying the registration u/s 12AA is bad in law. In the above view, we are of the considered opinion that the assessee is entitled to registration under section12AA of the Income Tax Act 1961. Accordingly, we direct the PCIT(E), Chandigarh to grant registration to the assessee society from the date of its application.

Conclusion

The court ruled in favour of the petitioner and disposed off the appeal.

Read the full order from below

Section-12A-registration-cannot-be-denied-to-an-educational-society-when-no-adverse-inference-drawn-on-prescribed-issues

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