Registration Under Section 12A Precludes Denial of Exemption on Commercial Activity Grounds

Registration Under Section 12A Precludes Denial of Exemption on Commercial Activity Grounds

The Issue

Whether an Improvement Trust, possessing a valid registration under Section 12AA, can be denied tax exemptions under Sections 11 and 12 on the grounds that its activities (such as selling plots) are commercial in nature and violate the proviso to Section 2(15).

The Facts

• Initial Scrutiny: The Assessing Officer (AO) denied the exemption for AY 2014-15, alleging that the Moga Improvement Trust was engaged in business activities (sale and development of plots) rather than charitable work.

• Registration Battle: The Trust’s Section 12AA registration had been cancelled by the Department. However, the ITAT Amritsar had already set aside that cancellation and restored the registration via an order dated June 29, 2015.

• First Appeal: The CIT (Appeals) followed the ITAT Amritsar’s restoration of registration and granted the exemption, noting that the objects of the Trust had already been held charitable by the Punjab & Haryana High Court.

The Decision

The ITAT Chandigarh (represented by Vice President Raj Pal Yadav) dismissed the Revenue’s appeal, reinforcing the following legal principles:

1. Binding Nature of Registration: A valid registration under Section 12A/12AA is a statutory prerequisite for claiming exemptions. Once the ITAT (Amritsar) restored this registration, the Trust was legally an “eligible charitable institution.”

2. AO’s Jurisdictional Limit: The Tribunal held that an Assessing Officer cannot “sit as an appellate authority” over a higher Tribunal’s order. If the registration exists, the AO must grant the benefit of Section 11, provided the income is applied for the Trust’s objects.

3. Ancillary Business vs. Charity: Following High Court precedents, the Tribunal noted that statutory Improvement Trusts are created for public utility. Earning a surplus from plot sales is incidental to the primary object of town improvement and does not automatically convert the charity into a commercial business.

4. Outcome: The appeal by the Revenue was dismissed. The AO was directed to treat the entity as a “Trust” and allow the claimed exemptions. In favour of assessee.

Key Takeaways for Statutory Bodies & Trusts

• Registration is the Foundation: As long as your Section 12A/12AB registration is active and not cancelled, the AO cannot arbitrarily reclassify your status as an “AOP” (Association of Persons) to deny exemptions.

• Judicial Consistency: If a higher court or another bench of the Tribunal has already decided on your registration or charitable status for a previous year, that decision holds strong “persuasive value” for subsequent years under the principle of consistency.

• Incidental Profit: Profit earned from activities that are incidental to the main charitable objective (like a hospital pharmacy or a school bookstore) is generally protected, provided separate books are maintained.