Number of queries are received from charitable institutions from time to time specially since the monitoring of such institutions have been undertaken by the income tax department under a special wing for this purpose.

There are a number of issues posed by charitable institutions and organisations especially after the law was made more rigid by the Finance Act, 2008. They are dealt with herein below.

QUESTION: Does a trust or institution lose its right to be treated as an educational charity, merely because it has got some minor objects, which are religious or of general public utility, though its activities are solely confined to education?

ANSWER: A trust or institution is judged not merely with reference to its objects but also its activities. Where it is solely engaged in running educational institutions, some permissive clauses with innocuous objects, especially in the trusts made long time before and not acted upon, need not come in the way of inference that the trust or institution is meant solely for education for purposes of Sec. 10(23C)(iiiab), (iiiad) or (vi). This inference should have equal application for purposes of exemption under Sec. 11 as well.

The other objects should not be material, when they have not been acted upon. In a case, where there was reference to the object of spreading faith in God and basic identity of all religions, such objects were not considered as religious, so as to come in the way of exemption, since the trust was itself engaged in running educational institutions without profit motive meriting exemption as educational institution under section 10(22) [now Sec. 10(23C)] as decided in CIT v Geetha Bhavan Trust (1995) 213 ITR 296 (Ker).

A recent decision follows this reasoning for exemption under Sec. 11 in Pinegrove International Charitable Trust v Union of India (2010) 327 ITR 73 (P&H).

QUESTION: Whether charging of fees resulting in a surplus for the school would come in the way of exemption following the decision of the Supreme Court in Municipal Corporation of Delhi v Children Book Trust [AIR 1992 SC 1456]?

ANSWER: The decision referred to in the query is now being adverted to for denying the exemption on the wrong ground that such institutions making a profit do not satisfy the requirement, that there should be no profit motive.

This decision was the subject matter of elaborate discussion in Pinegrove International Charitable Trust v Union of India (2010) 327 ITR 73 (P&H), where the decision of the Supreme Court in Children Book Trust, it was pointed out, was rendered with reference to the provisions of Delhi Municipal Corporation Act, 1957, which did not have a mechanism for ensuring the use of surplus solely for its objects as under the provisions under the income tax law.

Further, the assumption that there should be no profit or only a minimal profit overlooks the fact that the government relies more and more on self-financing institutions for promoting education and job opportunities. A bench consisting of 11 judges of the Supreme Court in T. M. A. Pai Foundation v State of Karnataka (2002) 8 SCC 481 held that educational institutions are bound to generate funds for the betterment and growth of institutions.

This has been recognised by the Supreme Court in Aditanar Educational Institutions v Addl.CIT (1997) 224 ITR 310 (SC) and Vanita Vishram Trust v Chief CIT (2010) 327 ITR 121 (Bom).

The scheme of tax exemption under the income tax law is that the amount should be utilised within the specified time limit subject to the approval of the assessing officer. It was for these reasons it was held that the surplus cannot be treated as a disqualification for exemption.

Such a view has also been taken by the H.P. High Court in Maa Saraswari Educational Trust v UOI (2010) 6 Taxman Com.131 (HP).

Cross-subsidisation even by charging larger fees from a few to finance the deserving has been recognised as permissible in Breach Candy Hospital Trust v Chief CIT (2010) 322 ITR 246 (Bom) and CIT v Pulikkal Medical Foundation P. Ltd. (1994) 210 ITR 299 (Ker).

Any other view would scuttle the funds, which can otherwise be mobilised for such objects like education and medical relief.

QUESTION: Some Commissioners/ Directors require evidence of commencement of activities of the charitable institution before registration. Is it a requirement of law?

ANSWER: Registration under Sec. 12A is a threshold requirement for exemption. Approval is sought under Sec. 80G, because it allows deduction to donors for mobilising funds for the charity, which is being promoted.

The requirements relating to compliance with regulations like application, accumulation and approved investments of the surplus and barring any benefit to any interested persons are subject to annual scrutiny.

These need not and could not be subject matter of verification at the time of registration as repeatedly pointed out in a number of decisions as in New Life in Christ Evangelistic Association v CIT (2000) 246 ITR 532 (Mad) and Fifth Generation Education Society (1990) 185 ITR 634 (All). Registration for defunct trusts can always be withdrawn.

Where a trust or institution has been in existence for a number of years without any activity, it may be reasonable to expect activity before registration as it had happened in Aman Shiv Mandir Trust (Regd.) v CIT (2008) 296 ITR 415 (P&H) and as recently decided by the Tribunal in Jasoda Devi Charitable Trust v CIT (2010) 4 ITR (Trib) 547 (Jaipur). But newly formed trusts and institutions claiming registration under Sec. 12AA and seeking approval under Sec. 80G require both registration and approval to enable them to collect funds to start their activities. It may be necessary for an applicant to prove its bona fides of its intent, but not expect activities from day one.

It is not, therefore, correct to insist on activity before registration as it will be putting the cart before the horse.

QUESTION: Is it wrong to make an application under Sec. 80G along with application for registration under Sec. 12AA?

ANSWER: Mobilisation of funds on an appeal by a registered society on the strength of recognition by Commissioner under Sec. 80G is the first step that is usually taken by the promoters, since the funds provided by them may not always be sufficient.

The promoters may themselves hold back further donations awaiting 80G approval.

While it is understandable that the Commissioner/ Director would first process registration under Sec. 12AA and then consider the claim for approval under Sec. 80G, there is no legal bar for simultaneous application of both registration and approval. Such applications together are also a matter of convenience both for charities and the registering authorities.

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