Can benefit under Section 11 & 12 be availed merely because a Trust is registered under Section 12AA
Section 11 and 12 of the Income Tax Act provides exemptions on the income of charitable and religious organisations. Registration under Section 12A is a pre-condition and mandatory requirement for claiming those exemptions.
According to Section 12A, the provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the trust or organisation is registered.
According to Section 12AA, if an application of registration is not disposed within 6 months, then the charitable or religious organisation will be deemed to be registered.
Is benefit under Section 11 and Section 12 available, merely because an organisation is registered under Section 12AA?
Let us refer to an interesting case of The Director Of Income Tax vs St. Ann’S Education Society to understand the same.
Facts of the Case:-
- Assessee was registered as a society under the Karnataka Societies Registration Act.
- Object of the assesse is establishing and conducting Nursery, Primary and Middle Schools and technical training institutes, teachers training school, adult education, tutorial college, child care centre, crèche etc.
- The assessee established a school and the managers of the assessee took another school being run by another association.
- Assessee did not file returns of income.
- The assessee filed an application for grant of registration under Section 12A of the Act after 5 years.
Case against the Assessee:-
- A communication was issued to the assessee calling for certain details including audited statement of accounts for last 5 years and details of furnishing of returns of income.
- The assessee furnished audited accounts and stated that assessee being engaged only in advancement of education, its income is exempt under Section 10(22) of the Act and no returns of income have been filed.
- Thereafter, a search was conducted in the premises of the proprietor and concerns under Section 132 of the Act and subsequently, the proceeding under Section 158BD of the Act were initiated.
- It was found that admittedly, assessee had borrowed substantial amounts in cash from various persons at high interest rates and repayment and interest payments of such amounts have not been recorded in the regular books of accounts.
- Assessee had admitted that some voluntary contributions from parents were received which were the amounts collected from the parents to grant admissions to their children in the schools. It was also held that the aforesaid amounts were collected illegally.
- On the basis of the entries made in the audited balance sheets, it was held that association did not have adequate book balance of cash and association recorded payments and therefore, the cash was being maintained without recording the same in the books.
- It was also held that affairs of the associations are not being conducted either in a transparent manner or with a view to achieve the objects for which the assessee was formed.
- The funds of the assessee were diverted to private limited companies of the management. Thus, it was held that school was being run like a proprietary concern and existed on a paper only as a facade to enable the management to make money. Accordingly, the application under Section 12AA of the Act was rejected.
- Being aggrieved, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT).
Proceedings of ITAT
- The ITAT held that as per provisions of Section 12AA(2) of the Act, order on an application for grant of registration under Section 12A of the Act, either granting or refusing to grant registration has to be passed before expiry of six months.
- It was further held that the order of registration was passed almost over a period of 2 years after application for grant of registration was filed.
- Thus, the mandatory provision requiring the order to be passed on the application under Section 12A of the Act within six months has not been complied with.
- The ITAT therefore, directed the authorities to proceed as if registration was granted under Section 12AA of the Act. The registration under Section 12A of the Act shall be deemed to have taken effect after 6 months from the date of presentation of the application.
- It is further submitted that even assuming that assessee is entitled to registration under Section 12A of the Act, mere registration would not entitle the assessee to the benefit of provisions contained in Sections 11 and 12 of the Act automatically.
- It is also pointed out that block assessment proceedings were also initiated against the assessee, which has attained finality in view of order passed by division bench of the court.
- The appeal was disposed of with the observation that the mere grant of registration to the assessee shall not result in grant of benefit to it under Sections 11 and 12 of the Act and if any, regular assessment is pending, the same may be completed in accordance with law.
Thus, grant of registration under section 12A is not the only dominant condition for availing benefit under Section 11 and Section 12. Benefit under Section 11 and Section 12 may not be available if the provisions of the Act are not complied with.