A public charitable trust registered since 2009 and re-registered under the current regime runs a vocational skills centre for school leavers. It charges Rs 12,000 a course against a delivered cost of about Rs 11,300, and also earns Rs 34 lakh a year from renting its auditorium to outside organisations. After a survey, a show cause notice proposes cancellation of registration for a specified violation, on the footing that the fee-charging and auditorium activity is trade or commerce and that the trust has applied income for the benefit of an interested person. The interested-person charge is that the trust pays Rs 45,000 a month as rent for its administrative office to a building owned by a trustee's family, against a municipal rateable value suggesting Rs 30,000. Separately, the assessing officer has denied exemption under s.11 for assessment year 2022-23 on the whole income of Rs 4.1 crore because of that rent and because Rs 20 lakh was placed in a debenture that is not among the permitted modes. The audit report for the same year was uploaded eleven months after the return. The trust wants to know whether it is looking at a bad year or the end of the institution.
Look at who signed the cancellation order and which financial year the alleged specified violation is said to fall in, before touching the merits. The library holds that only the exemptions Commissioner has authority to grant or cancel registration under the current provision, and that the specified violation clause effective from 1 April 2022 cannot be applied to earlier financial years. A cancellation founded on a pre-2022 year or signed by the wrong authority can be quashed without the trust having to argue about its own objects at all, which also removes the exit tax risk that follows a cancellation.
The library records a cancellation quashed on exactly these two grounds: that only the exemptions Commissioner and not the Principal Commissioner may cancel registration under the current provision, and that the specified violation clause, effective from 1 April 2022, could not be applied to an earlier financial year. The library now also sets out what the Commissioner must do before he cancels — the closed list of specified violations, the duty to call for documents or make enquiry, a written order and a reasonable opportunity of being heard — and the outer date for that order, six months from the end of the quarter in which the first notice was issued, which is worth computing from the notice on the file at the same time as the two grounds above. The library's account of the registration regime also confirms that registration is now a time-limited grant with defined renewal cycles rather than a one-off event, so check the term of the current registration and the correct renewal window as well.
The library holds that a general public utility charity cannot carry on an activity in the nature of trade, commerce or business for consideration, but that charging on a cost or nominal mark-up basis is not business, and that such activity is permissible when conducted in the actual course of achieving the object. A fee of Rs 12,000 against a delivered cost of Rs 11,300 fits the nominal mark-up description, and the arithmetic should be filed course by course. The auditorium letting is the harder item and has to be defended, if at all, as incidental to the object with separate books, not as part of the core activity.
The library records that the word solely means to the exclusion of all others and that the earlier predominant object test was rejected, so an institution seeking the education-specific exemption must have objects solely concerned with education, with business receipts exempt only where the business is incidental to the object and separate books are kept. A skills centre with substantial hall rentals is unlikely to satisfy that formulation, which is a reason to defend under the general public utility limb rather than reaching for the education limb. Choose one line and stay on it.
The library holds that where a deposit or investment is made outside the permitted modes only the income from that investment is taxable, and that the breach does not deny exemption in respect of the total income. It carries a second entry to the same effect on funds reaching a trustee, confining the denial to the amount actually diverted. On the rent itself the library now carries the adequacy question directly: the deeming clauses are qualified by words of adequacy and reasonableness, so what has to be made out is the shortfall or the excess and not the dealing, and a High Court entry holds that material picked off the internet or gathered from estate agents is not corroborative evidence and that the market rate is not the only yardstick. Ask in writing for the comparables behind the rateable value figure the officer has used and file comparable rentals for the locality against it, noting that the entry on the point is recorded from digest reports rather than from the judgment and that the proposition about where the burden lies rests on commentary rather than on a holding.
The library sets out the baseline that 85% of income must be applied each year, that the balance may be accumulated only on filing the prescribed form specifying the purpose, applying the money within five years and keeping it in the permitted modes. It also records that exemption cannot be refused merely because the audit report was furnished late and that the condonation power must be exercised equitably, and it carries Board circulars setting out who condones delays in the trust forms by reference to the length of the delay, and reopening the application window for entities whose applications were rejected solely for lateness.
The library records that the exit charge taxes accreted income, broadly the fair market value of total assets less total liabilities, at the maximum marginal rate on conversion into a non-eligible form, merger with a non-eligible entity, or failure to transfer assets on dissolution. For a trust holding a building and an auditorium that figure will dwarf the disputed exemption for a single year, and it changes the calculation on whether to contest or to restructure.
The library records that registration cannot be refused merely because a newly formed entity has not yet commenced activities, since proposed activities count, which matters if the trust has to make a fresh application. It also records that corpus donations received for a specific purpose by a trust without registration are capital receipts and not taxable, which limits the damage on that class of receipt even in a year where exemption is lost.
Cancellations founded on the wrong authority or on a pre-2022 year are frequently set aside without the merits being reached, which buys the trust a fresh proceeding rather than a final answer. On the exemption denial the realistic middle outcome is that the tainted rent margin and the income from the impermissible investment are taxed while the balance of the exemption survives, though the library records that the total-denial view has strong support and this varies by forum. The fee-charging point usually turns on the cost workings the trust can actually produce, and the auditorium letting is the item most often lost.