By TIOL News Service

ERNAKULAM, JAN 03, 2018: THE issue is - Whether when the charitable body is found to have spent more on administrative charges than the charitiable activities and largely made use of only the Govt subsidy and not the income derived over the years, the Revenue is right in denying registration u/s 12A. YES is the answer.

Facts of the case

The assessee, a charitable institution, claimed registration u/s 12A of the Act, which was earlier denied to it. The assessee's stated objective was the promotion of non-resident Keralites. A Division Bench of this Court earlier observed had that the assessee was concerned with the advancement of general public utility, which although was covered under ambit of 'charitable purpose' u/s 2(12) of the Act, the Court did not find it fit to grant registration. The Bench directed the Commissioner to verify the source of funds of the assessee, and their utilization to determine whether the assessee's activities were in line with its avowed objective. The Bench reasoned that though verification of accounts was an annual exercise conducted during assessment, after grant of registration, the same could be undertaken while considering grant of registration as well. The Court observed that under the cover of its stated objectives, the assessee could be collecting charges and so would be a profitable organization. The Court drew attention to certain expenditures which it deemed to be unnecessary, and which evidenced that the stated objectives were not being complied with. Subsequent order passed by the FAA and upheld by the Tribunal, led to the present appeal.

On hearing the matter, the High Court held that,

++ the monies spent for charitable purposes as noticed by the Commissioner in all the aforesaid years, are mostly out of the funds of the Government. As has been emphasised by the Standing Counsel for the Department, very little has been spent, out of the income derived over the years, for any charitable purpose. The administrative expenses ate up a good percentage and the rest ended up as profits. The Counsel for the assessee argued that in implementing the schemes of the Government, there, necessarily, will be administrative charges. But, it cannot be above the amounts actually expended. We find that in all the years, the expenditure has exceeded the amounts spent for charitable purposes;

++ as per Section 12AA, the Commissioner is empowered to call for documents or information from the assessee, which are necessary to satisfy the authority about the genuineness of the activities of the institution. The Division Bench of this Court had also directed that such verification is to be done to ascertain whether actually the funds generated as income were expended for charitable purposes. It was incumbent upon the assessee to show that it had utilized its income, in advancement of the objectives as stated in the Memorandum of Association. The objectives of the Memorandum of Association have been extracted both in the order of the Commissioner and also of the Tribunal. It does not in fact speak of a constitution, for the purposes of merely canalizing the funds made available by the Government. The charitable activities of the assessee was only in applying the government funds; which too was not spent to the extent made available. As noticed by the Tribunal and the Commissioner, the charitable activities carried out by the assessee, was only in so far as expending the fund provided by the Government, that too, not to its full extent. The assessee was found to have not applied any part of their net income to the objectives stated in the Memorandum of Association. Thus, the assessee was also found to have not carried out any charitable activity in the relevant years, from the income derived from various activities of facilitation of certification and other matters in respect of the Non-Resident Keralites. The Tribunal found that, though technically, the objects of the assessee comes within the ambit of advancement of an object of general public utility, as described in Section 2(15) as it existed prior to the assessment year 2009-2010, it has not carried out any such charitable activity. This Court does not find any reason to interfere with the orders of the Tribunal or of the Commissioner of Income Tax. Therefore, the Income Tax Appeal stands rejected. The parties are directed to suffer their respective costs.

(See 2018-TIOL-11-HC-KERALA-IT)