No Cancellation Of Educational Trust Registration For Generating Surplus: Punjab & Haryana High Court

The Punjab and Haryana High Court on 27 February held that mere generation of surplus by an educational institution cannot be a ground for cancelling registration of a charitable trust, so long as the activities are genuine and carried out in accordance with the objects of the trust.

A Division Bench comprising Justice Lisa Gill and Justice Parmod Goyal dismissed an appeal filed by the Income Tax Department and upheld the order of the Income Tax Appellate Tribunal (ITAT) restoring the registration of Baba Gandha Singh Education Trust under Section 12AA of the Income Tax Act, 1961.

The Bench stated:

"mere generation of surplus money, if the same is in course of providing education or education activities or for object for which registration under Section 12AA of 1961 Act has been accorded, in that case, surplus money by itself cannot be a ground to cancel registration."

The dispute arose after the Commissioner of Income Tax, Patiala issued a notice proposing cancellation of the Trust's registration on the ground that it had generated significant surplus during the assessment years 2002–03 to 2007–08.

The Commissioner concluded that the Trust was not carrying out charitable activities within the meaning of Section 2(15) of the Act and cancelled its registration.

The Trust contended that it was running educational institutions and that the surplus generated was reinvested in developing educational infrastructure such as laboratories, libraries and other facilities. It argued that generating surplus in the course of educational activities and utilising it to strengthen infrastructure does not violate the objects of the trust.

The ITAT accepted the Trust's contention and set aside the cancellation order, observing that the Commissioner had not disputed the genuineness of the educational activities being carried out by the Trust. Aggrieved by the Tribunal's order, the Department approached the High Court.

The High Court noted that Section 12AA(3) permits cancellation of registration only where the Commissioner is satisfied that the activities of the Trust are not genuine or are not being carried out in accordance with its stated objects. In the present case, there was no finding that the Trust had undertaken activities beyond its objects or that its activities were not genuine.

The Bench stated:

"Commissioner of Income Tax has failed to find any deviation on the part of respondent-society from the objects for which it was registered. There is no finding that trust/society has generated surplus by indulging in any activity which is not as per its object. The manner in which surplus money has been used cannot be dictated by Commissioner of Income Tax but can only be adjudged in accordance with objects of the society. However, there is no such finding by Commissioner of Income Tax as to attract provisions of Section 12AA(3) of 1961 Act. Therefore, in present case, the sole ground on which certificate under Section 12AA of 1961 Act was cancelled by Commissioner of Income Tax is generation of surplus money."

The Court observed that the Commissioner had relied solely on the fact that the Trust generated surplus income and had waived fees for only a small number of students.

It held that the Income Tax authorities cannot dictate the manner in which a Trust should apply its surplus funds, so long as they are used to further the objects of the institution. The Bench opined:

"Whereas provisions of Section 12AA of 1961 Act are wider and includes all charitable purposes as defined under Section 2(15) of 1961 Act and is available to trust or institution or society. Therefore, interpretation of Section 10(23C) of 1961 Act cannot be read in place of provisions of Section 12AA of 1961 Act."

The Court concluded that mere generation of surplus funds cannot justify cancellation of registration under Section 12AA, particularly when there is no material showing deviation from the charitable objects of the Trust.

Accordingly, it dismissed the appeal filed by the Income Tax Department and upheld the Tribunal's decision restoring the registration of the educational Trust.

For Petitioner: Advocate, Pridhi J. Sandhu

For Respondent: Senior Advocate, Radhika Suri and Advocate, Pranika Singla