By TIOL News Service

ERNAKULAM, AUG 07, 2018: THE ISSUE BEFORE THE COURT is - Whether sub-contract received by the so-called assessee-trust from either State Governments or intermediaries to supply food to the poor amounts to charitable activity when the AO has noted that the so-called trust has made profit and accumulated the same in a fund not utilised for charitable activities. NO is the answer.

Facts of the case:

The assessee-trust was engaged in establishing funds for carrying out public charity. Based on the registered deed, the assessee applied for registration u/s 12AA and the same was allowed by the Commissioner. The Commissioner stated that the question of eligibility for exemption u/s 11 would be decided by the AO during the assessment proceeding. However, after looking at the transactions of the assessee for the years 2008-09 and 2009-10, the Commissioner cancelled the assessee's registration. On appeal before the ITAT, the assessee submitted that it had participated in social welfare schemes of various State Governments and thus, carried on work of distribution of food in various schools. The ITAT observed that as per the object clause, there was a specific object in respect with aiding and supporting distribution of food to students or poor people or the downtrodden. The Tribunal was of the view that as long as the profit motive was absent, the assessee's participation in social welfare scheme of the State Government would be covered under the ambit of 'charitable activities'. Accordingly, the Tribunal set aside the cancellation.

The High Court held that,

++ the specific object is for carrying on charitable activities for which the assessee intended establishment of a fund for public charitable objects. There is no such fund established nor is there a claim of contributions, donations and endowments having been received from the Public, Government Bodies or Institutions. The specific case of the assessee is that it implements welfare schemes of other State Governments, with the funds supplied by the State Governments through another Trust, as per a contract awarded for the implementation. There cannot be any requirement that charitable activities should be from self generated funds because charitable institutions relies on donations, endowments and other contributions from philanthropic people and institutions to carry out such work. However, when a particular institution is involved in implementation of welfare schemes of the Government, we cannot find any charity in that. The mere assertion that there is no profit motive will not suffice especially when for implementing the schemes the assessee takes money from the State Government or the intermediary. Thus, the implementation of such schemes would not lead to any charitable activity by the assessee entitling registration u/s 12AA;

++ the transaction as admitted by the assessee is not one which would enable registration u/s 12AA. The proceedings were initiated for cancellation, on the report of the AO that the objectives of the Trust has been departed from and the assessee is carrying on business as sub-contractor, implementing the welfare schemes of various State Governments, supplying food to the poor school children. It was also reported that there was net profit earned from the sub-contract; which funds were accumulated to the Trust fund, without any charitable activity being carried on. The assessee also did not proffer any evidence as to a charitable activity carried on other than asserting that from its inception the activity of the assessee was of feeding the poor. However, this activity was, as an implementing agency of the State Governments, on funds earmarked and disbursed by the State Govt. There is no charity in implementation of welfare schemes of the Govt, with the funds of the State. Charity of the right hand, it is said, shall not be disclosed to the left hand. Here, the welfare measure of the State implemented with State funds is claimed as charity by the implementing agency, who receives consideration for such implementation;

++ the Commissioner, initially, had granted registration clearly specifying the exemption to be available only on the satisfaction of the AO. The instant proceedings were on the report of the AO that the objects of the Trust are deviated from. We do not find a mere change of opinion, and the Commissioner has dealt with the transactions of the assessee and also examined the accounts for the two years, which squarely fall under the exercise as provided for u/s 12AA(3). The Commissioner was satisfied that the activities of the Trust are not being carried out in accordance with the objects of the Trust. The sub-contract of the assessee cannot be considered to be a charitable activity, especially since the supply of food is with the funds of the State Government, received by the assessee as contract amounts. The activity of the assessee confined to such sub-contracts cannot be deemed to be a charitable activity and hence the Trust is not entitled to registration under Section 12AA. The Commissioner looked at the activities of the assessee and cancelled the registration for reason of the assessee being unable to substantiate the contention of charity in the two assessment years. The assessee, as rightly found, is engaged in a business and there can be no registration as a charitable institution.

(See 2018-TIOL-1550-HC-KERALA-IT)