Section 12AA Registration Cannot Be Denied on Ground of Related Party Rent: MP High Court Ruling in CIT Vs Divine Shiksha Samiti

Overview of the Case

The Madhya Pradesh High Court, in CIT Vs Divine Shiksha Samiti (I.T.A No.64/2019, decided on 06/01/2020), dismissed the Revenue's appeal filed under Section 260-A of the Income Tax Act, 1961, thereby upholding the order of the Income Tax Appellate Tribunal, Indore. The Tribunal, vide its order dated 5 October 2018 in ITA No.1034/Ind/2016, had set aside the refusal of registration granted by the CIT(E), Bhopal and directed that registration be granted to Divine Shiksha Samiti under Section 12AA of the Act.

This ruling carries significant implications for charitable and educational societies seeking registration, as it reinforces the settled principle that the scope of inquiry at the registration stage is confined to the genuineness of the objects of the institution — not to the manner in which its income is applied.

Background: What Led to the Dispute?

Divine Shiksha Samiti, an educational society running St. Mary's Higher Secondary School at Sehore, affiliated to the M.P. Board, applied for registration before the Commissioner of Income Tax, Bhopal under Section 12AA of the Income Tax Act, 1961.

The CIT(E), Bhopal refused to grant registration primarily on the following grounds:

• Related party rent: The Society was paying rent to its own office bearers — namely Lissy Babu, Babu Antony, and Manish Tiwari — and the CIT alleged that such rent was not on a pro-rata basis despite the premises being adjoining.
• Repair and maintenance expenditure: The Society had incurred repair and maintenance expenses amounting to Rs.7,89,850/- for the financial year 2014-15. The CIT held that these expenses, combined with the rent payments, indicated diversion of Society funds for the personal benefit of office bearers and their families.
• Conclusion of the CIT: Based on the above observations, the CIT concluded that the Society existed for the profit of its office bearers and not for genuine charitable purposes, thereby invoking the spirit of the proviso to Section 13(1)(c) of the Act.

Submissions Made by the Assessee Before the Tribunal

The assessee Society contested each of the CIT's findings before the ITAT, Indore, and tendered detailed explanations supported by documentary evidence. The key submissions were as follows:

On the Question of Rent Paid to Related Parties

The Society compiled a comprehensive tabular statement covering land area, built-up area, open land, number of rooms, monthly rent as per agreements, and monthly rent as per PWD fair rental valuation, to demonstrate that the rent being paid was reasonable and well within the fair rental value assessed by the PWD, Sehore office.

The details furnished were as under:

The Society pointed out specific errors in the CIT's analysis: