By TIOL News Service

AHMEDABAD, OCT 12, 2018: THE ISSUE BEFORE THE BENCH IS - Whether agreement to purchase agriculture land in name of Managing trustee of assessee-trust, when such land is to be use for setting up educational institution, can be construed as violation of section 13(1)(c) so as to take away charitable character of the trust. AND THE VERDICT IS NO.

Facts of the case

THE assessee-Trust, engaged in educational activities had been granted registration u/s 12A. However, the Director of Income Tax (Exemptions), issued a show cause notice proposing cancellation of registration of the Trust on three principal grounds. According to the DIT(E), the assessee had violated provisions of section 11(1)(d), which pertains to income from property held for charitable or religious purposes. It was also alleged that the assessee had violated provisions of section 13(1)(C)(ii) and therefore, it was not eligible for registration. According to the DIT(E), an amount of Rs 4.50 cr was transferred by the Trust to one of its trustees and his sons who had in turn paid a sum of Rs.3.50 crores to one Sonalben Jaksania towards agreement to purchase land from her. It was averred that no sale deed was executed so far and also the transaction with the trustee Muktak Kapadiya and his son was not reflected in the Form-10B. According to the DIT(E), the Trust has thus concealed the actual mode of transaction and transferred the funds to the trustee by violating the provisions of section 13(1)(c) of the Act. It was also contended by the DIT(E) that the land proposed to be acquired by the Trust is an agricultural land which was not yet controverted into non agricultural use. He further contended that the objects of the Trust were educational and not for carrying out agricultural activities and therefore, the Trust could not divert its funds for the purpose of agriculture.

On assessee's appeal, the Tribunal was of the view that purpose of acquiring land was for expanding educational activities of the Trust and payment was made to the land holder, which was accounted in the Trust account under the head "advance towards land". According to the Tribunal, since land was purchased not for investment but to set-up educational institution, there was no case of altering the objects of the Trust.

The High Court held that,

++ the Tribunal had examined the materials on record, agreed with the Trust's contentions that desire on part of the Trust was to acquire land which could be used for setting up educational institution. Agreement to purchase agriculture land was executed in name of the Managing trustee since obviously the Trust should not have even entered into an agreement to purchase agriculture land. Equally, merely because donations are received would not per say imply that the Trust was operating along commercial lines. The Tribunal noted that the Trust was running several self finance educational institutions. Collecting fees for such purpose would be part of the normal activities. Even for an educational institution, to retain a reasonable surplus out of its activities has never been frowned upon by judicial decisions. If at all this is getting more liberal. Prime requirement is that such surplus should not be diverted for any other purpose. It must be utilized for the objects of the Trust. Reference in this respect can be made to decision of Supreme Court in case of Queen's Educational Society vs. Commissioner of Income Tax;

++ the Revenue's reliance on the amended section 2(15) is also of no avail. Section 2(15) of the Act defines charitable purpose as to include any relief for the poor, education, yoga, medical relief, preservation of environment including water sheds, forests and wildlife and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility. Proviso to sub-section (15) to section 2 of the Act was added by the Finance Act, 2010 providing that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for cess or fee or any other consideration irrespective of the nature of use or application, or retention of the income from such activity. This proviso therefore applies to activity for the advancement of any other object of general public utility. Such activity would be excluded from the definition of charitable purpose if it involves carrying on any activity in the nature of trade, commerce or business or for cess or fee or any other consideration. Clearly, the legislature did not desire this condition or restriction to be attached to the remaining activities which were defined or categorized as charitable purpose under sub-section (15) which includes the education.

(See 2018-TIOL-2129-HC-AHM-IT)