Franchise of Kidzee school denied registration u/s 12AA for earning commercial profits

Franchise of Kidzee school chain denied registration u/s 12AA as Trust was running with primary objective of branding and earning commercial profits.

ABCAUS Case Law Citation:
ABCAUS 2937 (2019) (05) ITAT

Important Case Laws Cited/relied upon by the parties:
CIT Vs. Highlanders Educational Academy
Meritta Welfare Trust Vs. CIT 44 ITR 600.
CIT Vs National Institute of Aeronautical Engineering Educational Society [2009] 181 Taxman 205

The instant appeal was filed by the assessee against the order of the CIT (Exemption) denying registration u/s 12AA of the Income Tax Act, 1961 (the Act).

The stated aims and objects of the trust are to work for upliftment of Quality Education of almost all type.

The CIT(E) had observed that the assessee was a Franchisor of a famous school chain and the intellectual property rights were vested with the franchisor and the applicant trust merely remained an agent to the franchisor company for promoting its business on commercial basis on the terms and conditions set by the franchisor company for its own benefit, being a commercial enterprise.

The CIT(E) held that the heads of expenses as shown in the Income & expenditure account for the last two years since inception did not evidence carriage of any activity out of the sixteen point aims & objects mentioned in the trust deed of the applicant trust.

It was further noted that the terms of the agreement, the fee structure etc were all aligned to maximising the profits and its sharing between the franchisor and the franchisee. The structure of the trust, its character in terms of trustees etc were all controlled within a family.

It was held that the Trustees were running a franchise purely on commercial basis with no intent of imparting education to public at large. The regulations were predominantly those of the franchisor and aimed to maximize its returns/ receipts from the arrangements.

Holding thus the CIT(E) denied grant of Registration under section 12AA of the Act.

Before the Tribunal, the assessee contended that the Trust had 250 students and they belonged to different sections of the society and also to financially poor students.

It was submitted that the Trust had been formed for the purpose of providing education to the masses and for upliftment of education hence it was a public charitable trust and registration ought to have been granted.

It was also argued that the Trust run by the family members could not be an impediment for grant of Registration as the family members were looking after the affairs of the Trust in the position of Trustees but not for any personal financial gains.

It was further argued that mere entering into franchisee agreement with franchisor to set up school could not be a ground to conclude that earning profit is the main motive of the assessee trust. It was contended that the CIT(E) had to restrict himself to the objects of the Trust and genuineness of the activities and since there was no dispute about the activities of the case, the registration should be granted.

The Tribunal observed that the only activity the assessee involved was obtaining a franchisee of Kid Zee. The Franchisee Agreement undisputedly showed the commercial nature of the activities between the franchisee and the franchisor in the light of the following points emerging out of the above agreement:

1. It was the responsibility of the Trust to collect the annual fee on behalf of franchisor.
2. The fee would be determined by the franchisor. The trust would have no say in determining the fee structure.
3. All the students must pay the monthly tuition fee before the completion of the course.
4. There is a provision for collection of additional charge.
5. The franchisee fee is non refundable.
6. The provision for payment of interest calculated on daily basis in case of delayed payment.
7. The trust cannot vary the fee range or not authorized to give any discount and the trust is liable to damages and penalty claimed by the franchisee in case of any deviation of the fee structure.
8. The trust cannot offer any credit to students.

The Tribunal pointed out that the trust was operating on a commercial basis in conducting of its affairs which consists mainly running of “Kid Zee”.There was no provision for any type of free or concessional education to the poor and needy students. Rather the clauses in the franchisee Agreement made it binding on the trust not to offer any discounts or concessions as otherwise provided in the Agreement. The trust cannot even grant credit to the needy students in case of financial crisis and the interest is liable to be charged on day to day basis. Such type of activities could not be considered as charitable activity.

The Tribunal opined that when the provisions of the Section 2(15) are read with regard to the activities of the assessee, either by the aims and objective or by the conduct or implementation of the objective of the Trust, it did not qualify for registration under section 12AA.

The Tribunal observed that the Co-ordinate Bench of ITAT held that the institutions run by the charitable societies may collect fees and service charges does not mean that the institutions can charge fees, etc., at commercial rates from all the people without giving any element of charity to needy people. The charitable purpose defined and manifested as including relief of the poor, education, medical relief, etc., is to protect the basic concept of charity. Presence of real charity cannot be diluted. Charity always means helping the needy supporting the poor, working with compassion and dedication for the society. Running of an institution without any of the above virtues cannot be considered as a charitable institution.

The Tribunal in the instant case opined that the object of the assessee-trust was to establish a number of educational institutions in a brand name and run it on commercial lines, which could not be a charitable activity.

The Tribunal opined that merely writing aims and objectives as charitable in nature in the trust deed doesn’t entitle the trust to be charitable per se. It has to be proved beyond doubt that the activities of the trust are charitable in nature and genuine. There should be some evidence to satisfy the authorities concerned before granting the registration under section 12AA of the Act.

In the case in hand, the Tribunal observed that it was not a case where the trust had not started its activities, hence the burden was on the trust to prove that its objects as well as activities were charitable in nature. But the trust had not produced any evidence to the satisfaction of the CIT (E) about its real charitable character. On the other hand the CIT (E) could prove cogently the non charitable and commercial nature of the work undertaken by the assessee trust.

Accordingly, the Tribunal upheld the order of the CIT(E) and dismissed the appeal.

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