Allahabad H.C : Where under guise of carrying out charitable activities after obtaining exemption under section 80G, trust had, in fact, diverted a major part of donations received by it in constructing a shopping complex and amount spent for charitable purpose was very negligible, approval under section 80G(5) was rightly denied to assessee

High Court Of Allahabad

Vishal Khanna Public Charitable Trust Vs. Union Of India

Section : 80G, 2(15)

Prakash Krishna And Manoj Kumar Gupta, JJ.

Writ Tax No. 1613 Of 2006

May  3, 2013

JUDGMENT

1. The petitioner, which is a registered trust, has filed the instant writ petition for quashing the order dated October 3, 2006, whereby the Commissioner of Income-tax-1, Kanpur, has rejected the application for renewal of extension under section 80G of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) and a show-cause of even date issued by him for cancelling the registration under section 12A of the Act.

2. The brief facts necessary for the purpose of the instant writ petition are as follows :

3. The petitioner trust, namely, Vishal Khanna Public Charitable Trust, is a registered trust settled by Sri Bishambhar Nath Khanna, S/o the late Kailash Nath Khanna, by trust deed dated February 24, 1998. Its trustees are his son, Shri Kanchan Khanna, the wife, Smt. Puspha Khanna, and the daughter-in-law, Smt. Ragini Khanna. The object of the trust is to construct, establish, maintain and support charitable hospitals, nursing homes and dispensaries.

4. The petitioner trust claims to be running a charitable homeopathic clinic from two rooms on the ground floor of the premises No. 33/70-72, Topi Bazar, Chowk, Kanpur. These rooms were made available free of cost to the petitioner trust by its owner, Shri Shivji Behari Trust.

5. The petitioner trust claims that it is providing free medical facilities to the needy patients.

6. It appears that the petitioner trust obtained a registered lease deed dated March 9, 1998, from Shri Shivji Behari Trust for raising construction on the roof of property No. 33/70-72, Topi Bazar, Chowk, Kanpur. The purpose for obtaining the lease as mentioned in the lease deed is for raising construction of a public charitable dispensary. It appears that constructions were started in February, 2002, and were completed sometime in March, 2002, and, thereafter, the petitioner trust obtained another lease dated March 9, 2002, for raising construction over the roof of the first floor of the building constructed by it under the previous lease deed. In the said lease deed, again, it has been specifically mentioned that the lessee will raise construction over the roof of the first floor, in order to enable it to raise a building for running a public charitable dispensary. It appears that in pursuance of the aforesaid lease deed, the petitioner trust instead of raising construction for charitable homeopathic clinic and dispensary had constructed 12 shops on the first floor and two halls and one store room on the second floor. It also appears to have let out certain shops on the first floor and the hall on the second floor. It is an admitted fact that the constructions made by the petitioner trust on the first and second floor were not of such nature as could be utilized for running a public charitable dispensary nor, in fact, any such dispensary was opened nor intended to be opened (admitted to the petitioner in its reply dated September 7, 2000 ; annexure 9).

7. The petitioner trust soon after it came into existence get itself registered under section 12A of the Act. It was also granted exemption under section 80G of the Act, vide certificate dated January 15, 1999, and it was renewed on May 7, 2002, and August 3, 2004. It further appears that the petitioner trust filed an application dated July 24, 2006, for renewal of exemption under section 80G of the Act for a further period of five years. In the said application, it has been stated that the trust is running a public charitable homeopathic dispensary in the name of Vishal Khanna Public Charitable Dispensary at 33/70-71 Bihariji Gali, Topi Bazar, Kanpur, and which is being attended by Dr. S. C. Gupta and where free medicines are dispensed to patients.

8. On receipt of the said application, the Commissioner of Income-tax-1, Kanpur (hereinafter referred to as the CIT), vide his letter dated August 18, 2006, called for certain other informations and the details regarding the charitable activities carried by the petitioner trust during the last three years.

9. In response to it, the petitioner trust made its submission, vide its covering letter dated August 18, 2006, August 29, 2006, and September 7, 2006. Therein, it has been admitted that the petitioner trust has constructed 12 shops on the first floor and two halls and one small store room on the second floor of premises No. 33/70-72, Topi Bazar, Chowk, Kanpur. It has been further admitted that four shops on the first floor and one hall on the second floor were let out by that time. The petitioner trust tried to justify its aforesaid activities by stating that the construction of shops is not the business of the trust and the corpus donation received by it were mostly utilized for constructing the building in question. It was further stated that letting out of shops is not the object of the trust nor its business but it intends to utilize the rental income for achieving the object of the trust. It was further stated that such act is only incidental to its main object of carrying out charity and in such circumstances, it may be granted renewal under section 80G of the Act.

10. The Commissioner of Income-tax, after considering the submissions and explanation given by the petitioner trust, came to the conclusion that the petitioner trust had utilized a major part of corpus donation received till May 31, 2005, for construction of shopping complex. He also came to the conclusion, after examining the balance-sheets, that only a meagre sum has been applied for charitable purpose, while a major part of corpus donations have been spent in constructing the commercial complex. He further found that the dispensary being run on the ground floor of the building is not even registered by the CMO and the amount spent in medicines for running so-called homeopathic dispensary is a paltry sum of Rs. 12,325 during the period 2004-05 and Rs. 9,490 during the period 2003-04. He found that the construction of the shopping complex by the petitioner trust under the guise of constructing building for running homeopathic clinic is against the object of the trust.

11. He further found that letting out of the shops and the halls is with profit motive. He, therefore, concluded that the aforesaid activities cannot be said to be incidental to the attainment of the object of the trust and after recording the said findings, he refused to extend the exemption under section 80G of the Act and rejected the application. On the same date, the Commissioner of Income-tax issued a show-cause notice dated October 3, 2006, purporting to be under section 12AA(3) calling upon the petitioner trust to show cause why registration granted to it under section 12A of the Act may not be cancelled.

12. Aggrieved by the aforesaid order of the Commissioner of Income-tax and the show-cause notice dated October 3, 2006, the present writ petition has been filed.

13. We have heard Sri Ashish Bansal, counsel for the petitioner, and Sri Shambhu Chopra, counsel for the Income-tax Department.

14. Sri Ashish Bansal, counsel for the petitioner, vehemently contended that the construction of the building from the corpus of the trust does not ipso facto militate against charitable nature of the trust. He further contended that the conclusion arrived by the Commissioner of Income-tax that the petitioner trust is predominantly engaged in the business of constructing the commercial property, is manifestly incorrect. According to him, the utilization of the corpus of the trust to generate income to fulfil the object of the trust cannot be said to be a commercial activity. He vehemently urged that the letting out of some portion of the newly constructed building is to augment the income of the trust and which will be utilized for charitable purpose. It does not denude the petitioner of it’s charitable character.

15. Per contra, Sri Shambhu Chopra, standing counsel for the Income-tax Department, placing reliance upon paragraph 10 of the counter-affidavit argued that there is no illegality in the impugned order and it deserves to be upheld. For the sake of convenience, paragraph 10 of the counter-affidavit is reproduced below :

“That on a perusal of details submitted by the petitioner it is noticed that the corpus donations were substantially utilized for commercial activities in the nature of construction of shopping complex as mentioned in paragraph 1.7 above. The petitioner, however, used meager amount of fund on its other activities. The details of total expenditure debited in the profit and loss account are as under.

Financial Year Amount spent (Rs.) Remark
2004-05 83,276 Out of total receipt Rs. 6,18,378 including corpus donation of Rs. 5,33,000
2003-04 53,655
2000-01 64,610

Thus, as compared to the income and donation received by the petitioner only a meagre amount of money was spent in activities other than the construction of commercial property. The petitioner trust thus violated the provisions of section 80G(5) inasmuch as-

The corpus donations made to the trust was used for construction of commercial property in violation of the provision (b) to section 80G(5)(i). No separate books of account in respect of the said commercial activity of constructing a commercial building were maintained. This is in contravention of proviso (a) to section 80G(5)(i).

The petitioner trust has violated the terms and conditions of the trust deed inasmuch as investment was not made for construction of a charitable dispensary/hospital but the investment was made for construction of commercial building.

The petitioner trust has not taken permission from the competent authority for constructing the said building for the purpose of opening a homeopathic dispensary or hospital.

The petitioner trust let out the first and the second floor of the building to a company which further strengthens the belief that the said building was not acquired for the purpose of opening a dispensary or hospital.”

16. We have considered the rival submissions of the counsel for the parties. It is not in dispute that the petitioner trust was created by a trust deed dated February 24, 1998, a copy whereof has been filed as annexure 1 to the writ petition.

17. The object of the trust is to construct, establish, maintain and support charitable hospital, nursing home and dispensaries, to provide educational and vocational support to the poor and the needy, to give monetary help to the poor, and the blind and crippled persons, to give money to the persons affected by flood and other natural calamity, etc. The original corpus at the time of settlement was Rs. 5,000 only and over the years, it had multiplied several times on account of donations received by the trust. According to the finding recorded in the impugned order, the corpus donations received by the trust up to May 31, 2005, was Rs. 5,33,000. Most of it was utilized in constructing the shopping complex. The balance-sheet as on May 31, 2005, further reflects that an amount of Rs. 7,96,821 has been spent on construction. On the other hand, the petitioner had applied only a meagre amount of its income for running homeopathic dispensary. Though the petitioner is making tall claims of dispensing medicines free of cost, but it had spent a small amount of Rs. 12,325 on medicines in the year 2004-05 and Rs. 9,490 on medicines during the period of 2003-04.

18. The facts which remain undisputed and to which this court cannot shut its eyes are as follows :

(a) The petitioner trust when it was formed had a corpus of Rs. 5,000 only. It claims to have started a homeopathic clinic from two rooms on the ground floor of premises No. 33/70-72, Topi Bazar, Chowk, Kanpur, and which was made available to it free of cost by its owner, Sri Shivji Behari Trust.

(b) It took at lease roof of the said building by a lease deed dated March 9, 1998. The lease deed specifically recites that the demise of the roof to the petitioner trust was in order to enable to it to construct or run a public charitable dispensary. However, the roof of the building was not utilized for constructing any dispensary or clinic but a commercial complex having 12 shops.

(c) The petitioner trust after constructing the first floor entered into another lease agreement dated March 9, 2002, whereby the roof of the first floor of the building was demised in its favour giving right to construct a charitable dispensary. Again, no such constructions were made and, admittedly, on the second floor two halls and one store room were constructed.

(d) Admittedly, till date, the entire so-called charitable activities of the petitioner trust remained confined to two rooms on the ground floor of premises No. 33/70-72, Topi Bazar, Chowk, Kanpur, which were admittedly made available to it free of cost since the trust came into existence. Thus, the admitted fact of record reveals that there has been no expansion of any charitable activities.

(e) On the other hand, the petitioner trust under the guise of constructing a homeopathic hospital and dispensary has rather constructed a shopping complex and a major part of it has already been let out.

(f) The petitioner trust also does not dispute that its expenditure on medicines during the successive years had remained static and also could not place any material to show that the figures mentioned in the impugned order relating to the expenditure made in the name of charity is in any manner perverse.

19. In view of these facts, the Commissioner of Income-tax has rightly came to the conclusion that under the guise of carrying out charitable activities after obtaining the exemption under section 80G, the petitioner trust had, in fact, diverted a major part of donations received by it till March 31, 2005, in constructing a shopping complex. In these circumstances, the Commissioner of Income-tax rightly concluded that the petitioner trust has misutilized the donation received by it on the strength of exemption under section 80G. Construction of a shopping complex cannot be said to be a business incidental to the attainment of the object of the trust but is being pursued as the main activity, under the cloak of carrying out charity. Funds received in the name of charity have been utilised in attainment of a commercial mission.

20. This court also concurs with the findings recorded in this regard by the Commissioner of Income-tax, as the petitioner has failed to show that facts and figures mentioned in the impugned order are in any manner against the record or are perverse.

21. The counsel for the petitioner during course of his argument has placed reliance on the decision of the apex court in Asstt. CIT v. Thanthi Trust [2001] 247 ITR 785/115 Taxman 126 wherein the apex court has held that in case the business income is utilized by the trust for achieving the genuine objects of the trust, it is covered under section 11(4A) of the Act. He also relied on the decision in CIT v. Janakiammal Ayyandar Trust [2005] 277 ITR 274 (Mad)wherein it has been held that a business whose income is utilized by the trust or the institution for achieving the objectives of the trust, is exempted if such business is incidental to the attainment of the objectives of the trust or institution. On the other hand, Sri Tripathi has placed reliance on the judgment in Vishwa Budha Parishad v. CIT [2003] 264 ITR 357/[2004] 139 Taxman 385 (Pat.), in which in similar circumstances, the writ court has declined to interfere with the order refusing renewal of exemption under section 80G on the ground that the institution has made very low expenses out of total donations received by it. He also placed reliance on (Madani Musafir Khana Welfare Society v. CIT [2003] 264 ITR 481/[2004] 139 Taxman 384 (Pat)) in which the application for renewal of exemption under section 80G was rejected on the ground that the institution has constructed a shopping complex and had not carried other charitable work.

22. There can be no dispute to the broad proposition of law that construction of a commercial building by itself cannot be a factor to refuse renewal under section 80G of the Act. However, it depends upon the facts and circumstances of each case. In the instant case, a cogent and categorical finding has been recorded in the impugned order that although a huge amount has been received as donations by the trust during the previous years, but the amount spent for the charitable purposes is merely an eye wash.

23. The explanation given by the petitioner trust in paragraph 23 of the writ petition that it had to confine its charitable activities to the ground floor of the building on account of compulsion, is not worthy of credence. The petitioner had stated that it is unable to shift to the first and second floor of the accommodation constructed by it on account of the fact that the patients visiting are old and feeble and it will be difficult for them to climb the stairs for consulting the doctor. No such explanation was given by the petitioner before the Commissioner of Income-tax and it is on the face of it, after thought. Further, it is apparently false, as in the two lease deeds, the petitioner had repeatedly mentioned that the lease is being obtained for construction of a homeopathic hospital and clinic. The first lease is of the year 1998 and the other one of the year 2002, i.e., after a gap of four years. In case it was so, as is being claimed by the petitioner, there was no occasion for the petitioner to obtain another lease after four years of the execution of the first lease deed, with the specific recital that the construction thereunder will be of a charitable hospital. It is thus evident on the face of record that the petitioner has only indulged in completing paper work for the purpose of obtaining exemption under section 80G of the Act so that it may continue to obtain donations under the guise of charity and utilize the same for commercial ventures. It is in these facts and circumstances, that the Commissioner of Income-tax was fully justified in holding that the activities being carried on by the petitioner trust cannot be said to be for charitable purpose and had rightly withdrawn the exemption granted under section 80G of the Act.

24. In so far as the challenge to the notice under section 12A(3) of the Act is concerned, suffice it to say that it is merely a show-cause notice and challenge to it at this stage is premature. It is open to the petitioner to file its reply to the show-cause notice against the purposed action before the Commissioner of Income-tax and in such proceedings it is open to the petitioner to produce all such evidence which may justify its claim for continuation of its registration as a charitable institution. In similar circumstances, the challenge to such notice has been held to be premature in the judgment in Madhya Pradesh Madhyam v. CIT [2002] 256 ITR 277/125 Taxman 382 (MP).

25. In view of the discussion made above, the instant writ petition is dismissed with liberty to the petitioner to file its reply to the show-cause notice dated October 4, 2006, for cancelling the registration certificate under section 12A of the Act and which shall be decided by the Commissioner of Income-tax in accordance with law taking into consideration the objections and the evidence, if any, led by the petitioner in this regard, without being influenced by either the finding recorded in the order dated October 4, 2006, refusing to grant exemption under section 80G of the Act or the findings recorded in the present judgment.

26. Subject to the above, the writ petition is dismissed.

[Citation : 356 ITR 442]