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Trust do not lose its Charitable Nature if the Surplus is used for Building Infrastructure, for use of Charitable Purposes: Punjab & Haryana HC [Read Judgment]

In a recent case, the division bench of the Punjab and Haryana High Court comprising of Chief Justice S.J Vasifdar and Justice Deepak Sibal observed that the assessee- establishment is entitled to get the benefit of section 80G of the Income Tax Act, if substantial surplus is generated, but the same is found to have been ploughed back for building infrastructure/assets, which in turn are used for educational/charitable purposes, the institution would not lose its charitable character.

In the instant case, the assessee, Gulabdevi Memorial Hospital availed registration under section 12A and exemption under section 10(23C)(vi) of the Income Tax Act, through the order of the Supreme Court.Simultaneously, exemption under Section 80G of the Act was also granted to the assessee. The Commissioner held that the assessee is not entitled to exemption u/s 80G since it was found that the assessee was generating substantial surplus and was spending only a small percentage for charitable purposes.Tribunal concluded the matter in favour of the assessee by observing that there was no mis-utilization of funds by the assessee and that generating of surplus was not fatal to the grant of exemption under Section 80G of the Income Tax Act as such surplus was found to have been utilized by the assessee in large scale expansion of its facilities which in turn were used for charitable purposes.

The bench noted that though the grant of exemption under Section 10(23C) of the Income Tax Act and registration under Section 12A of the Income Tax Act in favour of an institution would be essential and persuasive factors for the grant of exemption under Section 80G of the Act, this itself would not entitle the assessee to avail exemption u/s 80G of the Income Tax Act.

“As per Rule 11 AA (2), the application for the grant of exemption under Section 80G of the Income Tax Act is required to be accompanied by a copy of registration granted under Section 12A or a copy of the exemption granted under Section 10(23) or Section 10(23C) of the Income Tax Act, as the case may be, along with notes on the activities of the institution since its inception or during the last three years, whichever is less and copies of accounts of the institution since its inception or during the last three years, whichever is less. Thus,the registration under Section 12A or the exemption under Section 10(23) and Section 10(23C) of the Income Tax Act are only one of the factors, which make eligible an applicant for the grant of exemption under Section 80G of the Income Tax Act.”

As per Rule 11AA(3) in addition to the above information, the Commissioner may call for any further information as he deems necessary in order to satisfy himself about the genuineness of the activities of the applicant.

The Revenue relied upon the decision of the Karnataka High Court in Visvesvaraya’s case,wherein it was held that since the surplus generated by the assessee-University was substantial, not incidental, was being accumulated year after year and had not resulted in lowering of fee in the subsequent years, the assessee therein was indulging in profiteering and had thus deviated from its charitable character.

The bench refused to apply the above case to the present one and noticed that when the above matter was challenged before the Apex Court, the Court that huge surplus had been accumulated by the University and that the difference between the fees collected and the actual expenditure incurred for the purposes, for which fee was collected, was significant. It was thus, concluded that, the University existed solely for educational purpose and not for the purpose of profit. While returning such finding, the exemption granted to the University under Section 80G of the Income Tax Act was also held to have evidentiary value.

Concurring with the findings of the Appellate Tribunal, the bench noted that the assessee is entitled to the benefit under s. 80G.

Read the full text of the Judgment below.

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