Deemed tax exemption & surplus from charitable activities

Income Tax Appellate Tribunal (ITAT)
Pune in the case of ‘Yashaswi Education
Society Vs CIT (ITAT Pune)’, Appeal Number: ITA No. 250/PUN/2014, Order dated:
13th April 2017 has maintained that:

1. Generation of surplus while
carrying out charitable activities would not dis-entitle the assessee for
registration under section 12AA of the Income Tax Act.

It
is a well-settled principle of law that the test to determine as to what would
be a charitable purpose within the meaning of section 2 (15) of the Act, is to
ascertain what is the dominant object of the activity; whether it is to carry
out a charitable purpose or to earn profit. If the pre-dominant object is to
carry out a charitable purpose and not to earn profit, the purpose would not
lose its charitable character merely because the some profit arises from the
activity. (Reference: CIT Andhra Pradesh v. APSRTC Hyderabad (1986) 2 SCC 391).

2. As per the provisions of section
12AA(2) of the Income tax Act, the order granting or refusing registration
should be passed before the expiry of six months from the end of the month in
which the application was received.

It
is again a well settled law that if the application for grant of registration
under section 12A is not disposed of within the stipulated time, it shall be
deemed that the registration is granted to the assessee. The Supreme Court of
India, in the case of Commissioner of Income Tax & Ors. v. Society for the
Promotion of Education (supra) has reiterated this position.

Earlier judgments upholding the same
view:

The Supreme Court of India in the case of Commissioner of Income Tax v.
Society for the Promotion of Education 382 ITR 6 had held that if the assessee
has not been granted registration within the period of 6 months from the date
of making application, it shall be presumed that deemed registration has been
granted to the assessee.

The Karnataka High Court in the case of Sanjeevamma Hanumanthe Gowda
Charitable Trust v. Director of Income Tax (Exemptions) 285 ITR 327 has
maintained: 

“Having regard to the scheme of sections 11, 12 and 13 ultimately
what the Commissioner has to look into is not the source of income to the trust
but whether such income is applied for charitable or religious purposes. The
satisfaction of the Commissioner should be regarding the application of the
income of the trust for the aforesaid purposes, which only entitles the
assessee to claim exemption. For arriving at such satisfaction primarily he has
to look at the object of the trust, when the same is reduced into writing in
the form of trust deed. If on the date of the application the trust has
received income from its property, then find out how the said income has been
expended, and whether it can be said that the income is utilized towards
charitable and religious purposes, i.e., towards the object of the trust.
Therefore, for the purpose of registration under section 12AA of the Act, what
the authorities have to satisfy is the genuineness of the activities of the
trust or institution and how the income derived from the trust property is
applied to charitable or religious purpose and not the nature of the activity
by which the income was derived by the trust.”