Duty of CIT – Registration of Trust, Disclosure of reasons to refuse registration - Natural justice

The assessee applied for registration under s.12A. It was issued a memo pointing out certain defects were pointed out by the CIT. The assessee cured all the defects and Trust Deed was duly rectified, so as to bring it in conformity with the directions of the CIT. Yet the CIT rejected the application for registration on the ground that Trust was not carrying out activities mentioned in the objects of the trust deed and that the only activity was running a school. The rejection was based on the ground or reasons not conveyed to the assessee. The rejection was based on some enquiry conducted at assessee's back. Thus order of rejection was not valid being in violation of principles of natural justice. Case was remitted. High Court of Kerala Adarsha Vidyanidhi Trust vs CIT O.P. No. 24964 of 1998 (V) K. Balakrishnan Nair, J 16 January 2007 M. Pathrose Mathai and Ramesh John for the Petitioner P. K. R. Menon, Sr. and George K. George for the Respondent JUDGMENT K. Balakrishnan Nair, J—The petitioner is a public charitable trust registered on December 4, 1995. Exhibit P1 is the trust deed. It applied to the respondent for getting itself registered under section 12A of the Income-tax Act, 1961 so that it can avail of the benefits under sections 11 and 12 of the Income-tax Act. Exhibit P2 is the application submitted by it. The respondent issued exhibit P3 defect memo pointing out the defects to be cured in the petitioner's application. On receipt of the said memo, the petitioner submits it cured all the defects and exhibit P4 rectification deed was also executed so as to make the trust deed in conformity with the directions in exhibit P3. The petitioner was heard pursuant to exhibit P5 notice and the respondent passed exhibit P6 order rejecting its application for registration. It is an order passed under section 12AA(1)(b) of the Income-tax Act, 1961. The petitioner attacks exhibit P6. According to the petitioner, the defects pointed out in the application of the petitioner were those mentioned in exhibit P3. Its application was rejected for not curing those defects. The ground mentioned in exhibit P6 for rejecting the application is that the trust is not carrying out the activities mentioned as its objects in the trust deed. The only activity carried on is running of a school. So, the application was rejected by the respondent. The relevant portion of the said order reads as follows : "Even though the trust deed contains a very large number of objectives, it is not carrying out any activities in accordance with most of them. The only activity carried on is the running of the school. In these circumstances I am not satisfied about most of the objectives of the trust. Hence registration under section 12A is not granted." The petitioner points out that this was not a ground pointed out as a defect in exhibit P3. Further, learned counsel for the petitioner relied on the decision of the Allahabad High Court in Fifth Generation Education Society v. CIT [1990] 185 ITR 634 and of the Madras High Court in New Life in Christ Evangelistic Association v. CIT [2000] 246 ITR 532. These decisions would indicate that actually carrying on of charitable activities is not a relevant factor at the time of grant of registration and the same will be relevant only at the time of considering the eligibility of the trust to enjoy the benefits of sections 11 and 12. The respondent has filed a counter affidavit resisting the prayers in the original petition. In the counter affidavit it is stated that the respondent has made an enquiry into the affairs of the functioning of the trust, it was found that for running the school the petitioner was collecting interest-free loan of Rs. 5,000 from its students at the time of admission and monthly tuition fee of Rs. 300. At present there are 255 students. So, the school being run by the trust on commercial lines, the same cannot be described as a charitable trust. The respondent also relied on the decision of the apex court in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1. The observation in the said judgment is to the effect that if the activity is carried out for profiteering, the same should be treated as non-charitable, even if it may serve the general public as public utility. Heard learned counsel on both sides. While judicially reviewing exhibit P6, this court is not concerned with the decision, but the decision making process. Going by that principle, I feel that the impugned decision is vitiated. The ground which has not been put to the petitioner and which does not find a place in the impugned order has been relied on, as evident from the counter affidavit, to reject the petitioner's application. The counter affidavit would show that some enquiry was held behind the back of the petitioner and reliance was made on it to reject its application. So, the order has been passed in violation of the principles of natural justice. Accordingly exhibit P6 is quashed. The respondent is directed to reconsider exhibit P2 application. The statement contained in the counter affidavit shall be treated as the objection of the respondent to grant registration. The petitioner may file its response to that objection, within one month from today. The respondent shall thereafter afford an opportunity of being heard to the petitioner and pass fresh orders taking into account the contentions of the petitioner. Since the matter is remitted, I am not expressing any opinion regarding the contentions raised by both sides relying on the decisions of the Allahabad and the Madras High Courts and also the decision of the apex court. The original petition is disposed of as above.