Can there be deemed grant of registration to Trust under section 12AA?
According to Section 13(1)(c) of the Income Tax Act, the provisions of Section 11 shall not apply in the case of a trust for charitable or religious purposes if any part of such income or any property of the trust or the institution is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3). Can there be deemed grant of registration under section 12AA?. We will see an interesting case of Commissioner of Income Tax, (Exemptions) [CIT(E)] Vs Gettwell Health and Education Samiti so that we can get clarity under what circumstances there can be a deemed grant of registration under Section 12AA .
Persons covered under Section 13(3) are:-
- the author of the trust or the founder of the institution
- any person who has made a substantial contribution to the trust or institution (any person whose total contribution up to the end of the relevant previous year exceeds Rs 50,000)
- where such author, founder or person is a HUF, a member of the family
- any trustee of the trust or manager of the institution
- any relative of any such author, founder, person, member, trustee or manager as aforesaid
- any concern in which any of the persons referred to above has a substantial interest.
Will the registration be deemed to have been granted In case where the CIT(E) has rejected registration under the provisions of Section 13, but the Tribunal had dismissed the order and 6 months have passed from the order of the Tribunal.
Let us refer to the case of Commissioner of Income Tax, (Exemptions) [CIT(E)] Vs Gettwell Health and Education Samiti to understand the same.
Facts of the Case
- The assessee (respondent) is a society registered under the Rajasthan Societies Registration Act, 1958.
- Its main object is to provide medical facilities in Rajasthan and is running a hospital in the name of Gettwell Hospital & Research Centre.
- The assessee filed an application in Form 10A of the Act seeking registration under Section 12AA of the Act. The CIT(E) rejected that application.
- The assessee challenged that order by filing appeal before the Tribunal which remanded the matter back to the CIT(E) on the premise that it had not communicated the assessing officer’s report to the assessee and therefore restored the issue of registration back on the file of the CIT(E) with direction that the assessee should be given an opportunity before deciding the issue of registration and should be confronted with all the materials which are considered adverse to him.
- After remand of the matter, the CIT(E) passed fresh order and rejected application of the assessee holding that the assessee was running the hospital for the benefit of family members and there was no charity in it. Being aggrieved, the assessee again filed an appeal before the Tribunal, which was allowed. Hence, this appeal.
Proceedings at High Court
- While examining the nature of charitable activity, it is important to look into the application of funds. If the funds of the society are being diverted for the benefit of the specified person covered under Section 13(3), the activities cannot be held as genuine charitable activity.
- It submitted that once the Act has empowered the authority to cancel the registration with reference to section 13(1), it fundamentally indicates that if at the time of registration any of the conditions mentioned in under Section 13(1) of the Act is noticed then registration may not be granted.
- The High Court considering on the merits of the case, relied on the observations of the Tribunal which were as follows:-
Pertaining to rent paid for the hospital
- In this case, the assessee has paid the rent to the persons specified under section 13(3) on account of the hospital building in which the assessee is running its activities of providing medical facility being hospital.
- The CIT (E) has not disputed if the rent paid by the assessee is unreasonable or excessive by comparing the fair market rent.
- Such excess rent paid by the assessee would then constitute the income of the assessee society as applied or deemed to have been applied for the benefit of the persons referred under section 13(3) of the Act.
- However, the CIT (E) without ascertaining or getting any report of the AO on this point has assumed that the rent paid by the assessee is the income deemed to have been used or applied for the benefit of the persons specified under section 13(3) of the Act.
- Hence the mere payment of rent itself would not amount to violation of provisions of 13(3) of the Act or section 13(1)(c) of the Act.
- What section 13(1) provides is that to the extent of income which is not applied for the charitable purposes of the Institution or Society the same would not get the benefit of section 11 of the Act.
- Therefore, to arrive at the conclusion whether an Institution or Trust has applied any part or any property of the Trust of Institution directly or indirectly of the benefit of the persons referred in section 13(3) of the Act, a proper investigation and enquiry is required when it is not a mere case of diversion of income but the payment is against the consideration or against the services.
- Therefore, without conducting a proper enquiry about the fair market rent of the building in question it is not possible to come to the conclusion that the payment of rent by the assessee society in respect of the hospital building is in violation of the provisions of section 13 of the Act.
- The High Court did not approve the approach applied by the CIT (E) in respect of the issue of payment of rent in question.
- Also the AO while passing the scrutiny assessment in all the assessment years repeatedly has not doubted the reasonableness of the rent paid by the assessee society.
- The finding of the CIT (E) without conducting any enquiry is based purely on assumption and conjectures and not on the correct facts.
With regards to income from medical shop
- It is not in dispute that the assessee never invested any amount in the medical shop but the shop was owned and run by a person mentioned in Section 13(3)
- Further it is also not an allegation of the CIT (E) that such person has charged excessive or unreasonable price of the medicines either from the assessee society or from the patients treated in the hospital.
- Thus mere running a medical shop by a person specified under section 13(3) of the Act would not amount to diversion of income of the assessee society.
- Rather the medical shop is essential in providing the services to the patients and, therefore, it can be an aid to the activity of providing medical facility to the patients of the assessee society instead of considering it as diversion of income.
- There is no allegation that during the period when the person covered under Section 13(3) was running the shop has got any favour/benefit in the shape of monetary or otherwise from the assessee society.
- The CIT (E) has not disputed this fact that the medicine stocks of medical shop in question was donated to the assessee society and, therefore, thereafter there is no question of even alleged benefit or diversion of income to the specified persons.
- In view of these facts, when there was no specific instance of any favour or diversion, then running a shop by the specified person itself cannot be regarded as a violation of provisions of section 13 of the Act until and unless any benefit is provided in the shape of income applied on such persons.
Issue regarding spurt in donation
- The CIT(E) recorded the details of the donations received by the assessee from the financial years 2008- 09 to 2011-12 and observed that there is a sudden increase in the donations received by the assessee. Assessee also failed to produce the complete details including address, PAN of the donors leading to the finding that the activities carried out by the assessee are not genuine.
- Assessee has produced the bank details of the donations showing that the entire donation is received through cheque.
- Prima facie, the donations received by the assessee through cheques satisfy the condition that the donations were received from the parties.
- Though it may be a subject matter of assessment proceedings to go into the deep enquiry and investigation to find out whether these donations are genuine or not and consequently if the same can be treated as income and not eligible for deduction under section 11.
- However, at the stage of granting registration under section 12AA, if the assessee was able to establish that the entire donation was received through cheques and from the different persons, then non providing of PAN and complete address at that point of time would not deprive the assessee from registration when the other facts of charitable nature of objects and running the hospital by the assessee are not in dispute.
Hence it was found that the CIT (E) has raised objections only to deny the registration to the assessee instead of giving a concluding finding that the donations are actually bogus and assessee’s own income has been routed back in the garb of donation.
It was noted that once the matter was remanded back to the CIT(E) then the limitation for passing the order/decision cannot be more than the limitation provided for deciding the application under Section 12AA of the Act.
As per the provisions of Section 12AA(2) of the Act, limitation for granting or refusing the registration is prescribed as before expiry of 6 months from the end of the month in which the application was received.
Tribunal held that once the limitation prescribed under Section 12AA of the Act expired and the consequential default on the part of the CIT(E) in deciding the application would result deemed grant of registration is a settled proposition.
Therefore, it has been held by the Tribunal that the judgment of the CIT(E) is reversed on merits and registration would stand granted to the assessee by prescription of law made in Section 12AA(2) of the Act.
The Tribunal in this behalf relied on the judgment of Lucknow Bench of the Tribunal in Harshit Foundation Vs. CIT in which case it was held that where the Commissioner does not pass any order even after six months from receipt of Tribunal’s order remitting the matter to him, the registration will be deemed to have been granted.
In view of above, the High Court dismissed the contention that registration is not to be granted to the assessee. Where the Commissioner does not pass any order even after six months from receipt of Tribunal’s order remitting the matter to him, the registration under section 12AA will be deemed to have been granted.