Mere denial of sec. 11 relief won’t invalidate trust registration

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IT : Mere fact that an income is not
exempt under section 11 would not by itself render Tamil Nadu Cricket
Association’s registration under section 12AA liable to be cancelled
• If a particular activity of the
institution appeared to be commercial in character, and it is not dominant,
then it is for the Assessing Officer to consider the effect of section 11 of
the Act in the matter of granting exemption on particular head of receipt.
• The mere fact that the said income
does not fit in with section 11 of the Act would not, by itself, herein lead to
the conclusion that the registration granted under section 12AA is bad and
hence, to be cancelled. Only possible enquiry under section 12AA of the Act for
cancellation is to find out whether the activities of the trust are genuine or
in accordance with the objects of the trust. If any of the income arising on
the activities are not in accordance with the objects of the trust, the
assessee’s income, at best, may not get the exemption under section 11 of the
Act. But this, by itself, does not result in straight rejection of the
registration as ‘trust’ under section 12AA of the Act. The question as to
whether the particular income qualified under section 11 of the Act or not is
not the same as activity being genuine or not which is relevant for
cancellation of registration.


[2013] 40 taxmann.com 250 (Madras)
HIGH COURT OF MADRAS
Tamil Nadu Cricket Association
v.
Director of Income-tax (Exemptions)
MRS. CHITRA VENKATARAMAN AND T.S.
SIVAGNANAM, JJ.
Tax Case (Appeal) No. 450 of 2013
M.P. No. 1 of 2013
OCTOBER  21, 2013 
P.S. Raman and P.R. Raman for the Appellant. J.
Narayanaswamy
for the Respondent.
JUDGMENT
Mrs. Chitra Venkataraman, J.
The assessee is on appeal as
against the order of the Income Tax Appellate Tribunal and seeks admission of
Tax Case (Appeal) on the following substantial questions of law:-
“1.
Whether the Tribunal was right in upholding the
cancellation of registration under Section 12AA(3) of the Income Tax Act,
1961 on the ground that the activities of the appellant could not be said to
be genuine after the amendment of the definition of ‘charitable purpose’ ?
2.
Whether the Tribunal was right in law in holding that the
activities of the appellant could be said to be “not genuine”, when
the appellant was carrying on activities in accordance with its objects and
similar to its activities in earlier years, merely on account of the
amendment to the definition of ‘charitable purpose’ in the Act ?
3.
Whether the Tribunal was right in not following the
decisions of the jurisdictional High Court and coordinate benches of the
Tribunal, on the ground that certain aspects had not been highlighted before
the Hon’ble High Court and the coordinate Benches ?”
2. The assessee is a Society registered under the Tamil
Nadu Societies Registration Act. The said Society was granted registration
under Section 12AA of the Income Tax Act, 1961 on 28.03.2003. As is evident
from the reading of the Memorandum of Association, the objects of the
Association are as follows:-
(a)
To maintain a general control of the game of cricket in
the State and the Union Territory of Pondicherry and give its decision on all
matters concerning the game either when referred to or suo moto.
(b)
to spread the game throughout the State by organizing
tournaments, including Inter-University, Inter-School and Inter- Association
matches, to educate young sportsmen in the game generally and also in the
field of physical culture and the spirit of sportsmanship. The benefits would
be available to the General Public irrespective of caste, creed, religion or
sex.
(c)
to maintain a library of books, publications and
periodicals of interest of sportsmen and to diffuse knowledge of cricket and
its ideals of sportsmanship.
(d)
to communicate with public authorities and various sports
organizations in India and abroad and concert and promote measures for the
development of the game and to provide social security safe guards for the
players, officials such as Managers, Coaches, Umpires, Selectors and others
who are directly connected with the game.
3. Apart from this, yet another object is to afford
required facilities for the cricketers, officials such as Managers, Coaches,
Umpires, Selectors and others who are directly connected with the game, members
to acquire by purchase, lease, hire or otherwise suitable playgrounds, stadia
and any other property, movable and immovable, rights or privileges etc.
4. The objects further seek to impart physical education
through the medium of cricket and take all steps to assist the citizens to
develop their physique and have a healthy mind and a healthy body; to
establish, promote or assist in establishing and promoting and to subscribe to
and become a member of any other Association or Club whose objects are similar
or in part to the objects of the Association; to create, foster and maintain
friendly relations with and among the population of the area under its control
through sports, tournaments and competitions connected therewith, to create,
develop and foster a healthy spirit of sportsmanship and a broad and generous
outlook devoid of all prejudices and to mould the character of citizen through
the medium of sports in general and cricket in particular; to spread the ideals
of cricket and all that it stands for throughout the length and breadth of its
area by arranging schools for coaching, lectures, tournaments and run
international matches between India and other leading foreign countries so as
to develop mutual goodwill and better understanding between India and other
countries; to collect funds and whenever necessary borrow with or without
security for purposes of the Association and in particular by the issue of
debentures or debenture stock perpetual or otherwise charged upon all or any of
the Association’s property both or future and to purchase, redeem or payoff any
such securities and to utilise such funds in such manner as the General Body
may consider desirable for the fulfillment of the objects of the Association;
to invest monies and funds of the Association as per the provisions of the
Income Tax Act, 1961; to maintain a panel of approved cricket umpires and to do
such acts as may be necessary for this purpose including holding of prescribed
periodical tests with a view to enable them to qualify themselves as first
class umpires; to organise a proper coaching scheme for the benefit of
cricketers in the City and in the Districts under the supervision of coaches
from India and abroad; to take such action as may be necessary to coordinate
the activities of affiliated club, District Associations and institutions and
their members in relation to the Association and amongst themselves.
5. To achieve the objects, the assessee takes steps to
arrange, supervise, regulate and finance visits of State teams or Foreign teams
under the auspices of bodies like the Board of Control for Cricket in India; to
draw up and organise a proper coaching scheme for the benefit of young and
promising cricketers within the State and the Union Territory of Pondicherry,
to draw up a scheme of net practice whether free of charge or on payment for
members of affiliated clubs, District Associations and for players selected to
represent the Association in various competitions within or outside State, and
to arrange for group coaching lectures, exhibition of cricket films for this
purpose, etc; to engage a person or persons as a professional or amateur
cricket or cricketers and to pay remuneration or honorarium to him or them; to
start or sponsor charity or benefit matches and/or to subscribe to funds for
the benefit of cricketers, coaches, umpires Staff of the Association or their
families; to do all such other acts, deeds, and things as are incidental to or
as the Association may deem conducive to the attainment of the objects of the
Association.
6. After Considering the genuineness of these objects,
as early as 2003 ,the assessee was granted registration as a Trust under
Section 12AA of the Income Tax Act, 1961 (hereinafter called as the
“Act”). However, on 19.07.2011. a notice was issued by the Director
of Income Tax (Exemptions) under Section 12AA(3) of the Act that the statement
of income and expenditure revealed that the assessee derived income from the
following activities:-
1.
Subscription
2.
Rent for hiring cricket ground, rooms and premises
3.
Fees for providing services to IPL
4.
Income from advertisement
5.
Subsidy from BCCI
6.
Sale of ticket for conducting of matches
7.
Restaurant and catering income etc.
Thus, these receipts were held
to be in the nature of trade or commerce or business and hit by the proviso to
Section 2(15) of the Income Tax Act, 1961 (hereinafter called as the
“Act”). In the circumstances, notice was issued proposing to withdraw
the registration granted to the assessee under Section 12AA of the Income Tax
Act, 1961.
7. Immediately, on the receipt of the notice, the
assessee replied that the receipts were not in the nature of trade or commerce
or business, since, the income of the assessee included interest income earned
from Fixed Deposits with Banks; subsidy from BCCI was a voluntary grant from
the parent body for promotion and development of the game of cricket in Tamil
Nadu; there was no commercial activity involved in the conduct of the IPL
matches for which only subsidy was received by the assessee from BCCI like
other cricket associations; thus, the receipt of subsidy was not a payment for
carrying on of any trade, commerce or business; the TV subsidy was given to all
State Associations and was part of the scheme of BCCI, being a voluntary
donation, there was no commercial character attached to these receipts; so too,
the donations and contributions and the sale of tickets in conducting matches
organised by BCCI. Pointing out that the Association was not running any
canteen or restaurant, the assessee submitted that as far as fee for providing
services to IPL is concerned, the entire income from the sale of tickets
belonged to the franchisee, and therefore, there was no service rendered or
charges made by the assessee.
8. Referring to the satisfaction recorded as to the
genuineness of the objects of the association under the provision contained in
Section 12AA of the Act, the assessee pointed out that the genuineness of the
objects of the trust, thus not being in question and the objects of the trust
thus remaining the same as before and the activities also being in accordance
with the objects of the trust, there was no case made out for cancelling the
Registration.
9. After hearing the assessee, the respondent passed the
order under Section 12AA (3) rejecting the claim of the assessee and thereby
cancelling the registration as trust.
10. The Director of Income Tax (Exemptions) viewed that
though BCCI confirmed the payment to the assessee on IPL matches as grant of
subsidy , the same was not in the nature of grant. It was also pointed out that
most of the advertisements through TV telecasting are received by the BCCI, it
being the apex body, thus the so called subsidy given by the BCCI is nothing
but some sort of sharing of the advertisement income on account of holding of
international test matches and ODI matches, due to which the BCCI has gathered
huge advertisement income; thus, the nature of receipt, even though called
subsidy by the assessee was necessarily in the nature of income received by the
activity of the assessee.
11. As regards the entrance fee charged, the the Director
of Income Tax (Exemptions) held that the receipts out of IPL matches by giving
its ground for conducting those matches were commercial in nature.
12. Referring to Section 12AA(3) read with Section 2(15)
of the Income Tax Act, 1961, the respondent/Director of Income Tax (Exemptions)
viewed that even if the activities were carried on in accordance with the
arrangement with the other party, the activities being not charitable, it was
hit by Section 12AA(3) of the Income Tax Act, 1961; thus it was held that the
activities were not carried on in accordance with the objects of the trust; the
activities not being charitable, the same could not be held to be genuine and
the institution was not a charitable institution. Reading genuineness into the
activities of the trust and looking at the the objects of the trust, the
Director of Income Tax (Exemptions) held that “genuineness” was a
term used only to find out whether the institution was charitable or not; thus
once the institution was held as not for charitable purpose, Section 12AA
registration had to be necessarily cancelled. In the circumstances, the
registration originally granted to the assessee stood cancelled with effect
from 01.04.2009.
13. The assessee contended before the Income Tax
Appellate Tribunal that since its inception and the date of granting of the
registration under the Act, the objects of the Association ever remained same
and it has not undergone any change to question its genuineness. The assessee
contended that the view of the Director of Income Tax (Exemptions) that the
assessee was not carrying on charitable activity as per Section 2(15) of the
Act is erroneous in law; in any event, all that Section 12AA(3) of the Act
prescribes for cancellation is the genuineness of the activities of the trust
or that the activities are not carried on in accordance with the objects of the
trust. The assessee contended that it conducts National and International
matches including the District League. In addition to the income arrived by
sale of tickets, income out of advertisement revenue arising out of the
telecast rights auctioned to different visual media, obtained from BCCI in
India was distributed among the different States in India and this is in the
nature of grant/subsidy from BCCI which had been confined by BCCI.
14. The Income Tax Appellate Tribunal pointed out that
the physical play of cricket game was not the sole point which would decide as
to whether the assessee association was carrying on its activities as stated in
the memorandum of association or the activities were genuine or not. The
Tribunal pointed out that the activities were genuine; however the matches
conducted did not go to the extent of “advancement of any other object of
general public utility”. The Tribunal also pointed out that the activities
did not come within the conceptual framework of charity, vis-a-vis the activity
of general public utility as given under Section 2(15) and the activities were
all commercial in character. Thus the matches conducted were not conducted in
accordance with the objects of the association and as explained in the proviso
to the provision in Section 2(15). Thus, according to the Tribunal, when the
assessee’s case was fully covered by the proviso, the proceedings taken under
Section 12AA(3) were justified. Thus the Tribunal viewed that the provisions
under Section 12 AA (3) could not be read in disregard of Section 2(15) first
proviso. It further held that after the insertion of first proviso to Section
2(15) of the Income Tax Act, 1961, effective from 1st April, 2009, every
activity on the advancement of the general public utility to be called as for
“charitable purpose” has to qualify itself as charitable activity
within the meaning of the expression ‘charitable purpose’. As such, the
activities of the assessee could not be considered as for a charitable purpose.
The Income Tax Appellate Tribunal pointed out that the proviso inserted with
effect from 01.04.2009 clearly pointed out that advancement of any other object
of general public utility shall not be a charitable purpose, if it involved the
carrying on of any activity in the nature of trade, commerce or business or any
activity of rendering any service in relation to any trade, commerce or
business, for a cess or fee or any other consideration, irrespective of the
nature of use or application, or retention, of the income from such activity.
Considering the said amendment and looking at the activities of the assessee,
the Income Tax Appellate Tribunal held that the conduct of the matches by
cricket associations could be nothing but in the nature of commercial ventures
and the assessee was selling the game for the highest amount of revenue and the
effect and the thrust of the assessee was towards maximising the revenue.
Citing IPL matches held and the manner of selection of players, the Income Tax
Appellate Tribunal held that the matches were big game with big money involved;
in the words of the Income Tax Appellate Tribunal, “In fact it is an
entertainment industry by itself”. It pointed out that 78% of the total
receipts came out of advertisement revenue and in the background of the nature
of activity undertaken, the entire activity of commercial nature were oriented
towards earning hyper profits and these activities contributed 86.5% of the
receipts of the assessee in the Financial Year 2008-09. In this background, the
Income Tax Appellate Tribunal referred to the decision reported in 77 ITR
435
in the case of Bangalore Race Club v. Commissioner of Income
Tax
, which related to the case of horse racing and held the same could not
be held to be of public utility or interest. After referring to the decision of
this Court reported in 343 ITR 300 in the case of CIT v.
Sarvodaya Ilakkiya Pannai
, wherein, this Court considered the effect of
Section 12AA(3) of the Act, the Income Tax Appellate Tribunal held that this
Court had not considered the effect of Section 2(15) proviso and the necessary
facts of the case relating to charitable purpose was not highlighted. It also
referred to the decision of the Ahmedabad Bench-A rendered in the case of Gujarat
Cricket Association
v. DIT (Exemption) in ITA.No.93(Ahd)/2011
dated 31.01.2012
as well as other decision of the Nagpur Bench rendered in
the case of M/s.Vidarbha Cricket Association v. Commissioner of
Income Tax-I, Nagpur in ITA.No.3/Nag/10 dated 30.05.2011
, which were
against the similar rejection order passed and reversed by the Income Tax
Appellate Tribunal and held that these orders had considered only the physical
aspect of the cricket game promoted by the assessee; however, all the
assessee’s activities centered around the celebrated game of cricket.
15. As far as on the crucial question of general public
utility was concerned, the Income Tax Appellate Tribunal held that the
activities of the assessee are all commercial activities. The Income Tax
Appellate Tribunal held that the activities of the association are not in the
nature of activities for advancement of any object of general public utility;
consequently, the appeal has to be dismissed. The Income Tax Appellate Tribunal
upheld the rejection order passed under Section 12AA of the Income Tax Act. The
Income Tax Appellate Tribunal further viewed that there was no conflict between
the first proviso to Section 2(15) of the Act and the conditions laid down
under Section 12AA(3) of the Act for cancelling the registration; thus, when
the assessee’s case is hit by Section 2(15) of the Act, consequential action is
automatic to pass an order under Section 12AA(3) of the Income Tax Act, 1961.
It further pointed out that when the assessee was given registration
originally, it was on the ground that it was a charitable institution inasmuch
as it engaged itself in the advancement of an object of general public utility;
however, when the Revenue had found the assessee’s activities were oriented
towards generating income by converting the sport of cricket into a celebrated
industry, the activities not being genuine, rightly, the Revenue had cancelled
the registration granted under Section 12AA of the Income Tax Act, 1961.
Aggrieved by the same, the present appeal has been preferred by the assessee.
16. Learned Senior counsel appearing for the assessee
took us through the various objects of the Association and pointed out to the
clear distinct words used in Section 12AA(1) and 12AA(3) of the Act as well as
the first proviso to Section 2(15) of the Act and pointed out that the grant of
registration originally as early as 2003 clearly pointed out the satisfaction
of the authorities that the assessee was public charitable trust under Section
12AA of the Act. Referring to Section 12AA (3) of the Act, he further pointed
out that the cancellation of registration granted is possible only under the
stated circumstances, viz., on the Commissioner recording his satisfaction that
the activities of the trust are not genuine or are not being carried out in
accordance with the objects of the trust or institution; thus unless and until
the show cause notice issued contained the grounds and materials as prescribed
under Section 12AA(3) of the Act, the question of cancellation of registration,
per se, does not arise.
17. Learned Senior Counsel appearing for the appellant
further pointed out that the appellant was granted registration under Section
12AA of the Act only on the Commissioner satisfying himself on the objects of
the trust and the genuineness of the activities. The nature of activity carried
on by the assessee continues to be the same without any change till this date
and if any of the activities carried on by the assessee resulted in an income
not incidental and not connected with the main activity or main object of the
Trust, it would be a matter for assessment. Thus what has to be a subject
matter for assessment cannot be considered as a ground for cancelling the
registration under Section 12 AA (3).
18. Taking us through Circular No.11 of 2008 of Central
Board of Direct Taxes dated 19.12.2008 issued immediately in the wake of the
insertion of proviso to Section 2(15) of the Income Tax Act, 1961, learned
Senior counsel appearing for the assessee submitted that as is evident from the
reading of the circular, the question of rejection of registration under
Section 12AA(3) would arise only in those cases where an entity uses this
status of charitable institution with a charitable object of general public
utility as a mask or a device to hide the true purpose and that object is
nothing other than trade, commerce or business or the rendering of any service
in relation to trade, commerce or business; as far as the present case is
concerned, Revenue has not substantiated with any material to show the absence
of genuineness; all that the Revenue alleges is by conduct of matches, it has
exhibited a sense of business or commercial character. This according to the
assessee is not a good ground for cancelling the registration under Section
12AA of the Income Tax Act, 1961.
19. Going by the tenor of the language in Section 12AA(3)
of the Act and Section 12AA(1) of the Act, the cancellation of the registration
under Section 12AA of the Income Tax Act, 1961 is without any substance. He
further pointed out that when in a similar assessee’s case viz., Gujarat
Cricket Association
v. DIT (Exemption) in ITA.No.93(Ahd)/2011 and
in the case of M/s.Vidarbha Cricket Association v. Commissioner of
Income Tax-I, Nagpur
the Income Tax Appellate Tribunal Ahmedabad Bench-A
dated 31.01.2012 and in I.T.A.No.3/Nag/10 dated 30.05.2011 of
the Nagpur Bench, respectively on the very same allegations for cancellation of
registration under Section 12AA(3) had held that the cancellation of the
registration under Section 12AA of the Income Tax Act, 1961 was contrary to
law, the Chennai Bench of the ITAT ought to have followed these decisions,
which were rendered as early as 2011 and 2012. He further pointed out to the
unreported decision of this Court in the case of Gowri Ashram v.
Director of Income Tax (Exemptions)
in T.C(A).No.91 of 2013 dated 29.04.2013
as well as 315 ITR 428 in the case of Commissioner of Income Tax v.
National Institute of Aeronautical Engineering Educational Society
and
submitted that they stand on a different line, they being the decisions
rendered on the rejection of the application for registration. He also referred
to the decision of this Court reported in 343 ITR 300 in the case of CIT
v. Sarvodaya Ilakkiya Pannai, wherein, under similar circumstances,
this Court had held that when a trust is registered with definite objects to
carry on its activities and under Section 12AA of the Income Tax Act, 1961, the
Commissioner is empowered to cancel registration only on two conditions laid
down under Section 12AA(3) of the Income Tax Act, 1961. He further pointed out
that whether the income derived from such transaction would be assessed to tax
or whether the trust would be entitled to exemption under Section 11 of the
Income Tax Act, 1961 are entirely matters to be considered at the time of
assessment. Thus, placing reliance on the decision of this Court reported in 343
ITR 300
(CIT v. Sarvodaya Ilakkiya Pannai), learned Senior
Counsel appearing for the assessee submitted that the Income Tax Appellate
Tribunal committed serious error in upholding the rejection order passed by the
Director of Income Tax (Exemptions).
20. Countering the claim made by the learned Senior
Counsel appearing for the assessee, learned Standing counsel appearing for the
Revenue, however, submitted that the condition for continuance of the
registration depends on the satisfaction of the conditions given under the
definition of ‘charitable purpose’ laid down under Section 2(15) of the Act;
when the assessee’s activities do not go hand in hand with the objects of the assessee’s
assessment, rightly, the Revenue had cancelled the registration. He further
pointed out that at the time of grant of registration, the Commissioner is
empowered to look into the objects of the trust, for the purpose of grant of
registration. However, after granting registration, if the Revenue finds that
the activities of the trust are not genuine and that the advancement of the
object of the general public utility is not in terms of the objects of the
trust and that the objects are in the nature of carrying on trade, commerce or
business, the grant of registration originally given may be cancelled; thus,
rightly, the registration was cancelled, hence, no exception could be taken to
the order of the Income Tax Appellate Tribunal.
21. Heard learned Senior counsel appearing for the
assessee and learned Standing counsel appearing for the Revenue and perused the
materials available on record.
22. We had already extracted in the preceding paragraph,
the objects of the association. Going by the objects, we find that the trust
falls under the head of “any other object of general public utility”
and hence falls within the meaning of charitable purpose under Section 2(15) of
the Act. Section 2(15) of the Act defines “charitable purpose” as it
originally stood at the time of grant of registration as under:
” ‘charitable purpose’ includes relief of the
poor, education, medical relief and the advancement of any other object of
general public utility.”
23. Section 2(15) was amended under Finance Act,2008,
with effect form 1.4.2009 by substituting the following provision which reads s
under:
“2. Definitions.
…. (15) “charitable purpose” includes
relief of the poor, education, medical relief, preservation of environment
(including waterheds, forests and wildlife) and preservation of monuments or
places or objects of artistic or historic interest, and the advancement of any
other object of general public utility.
Provided that the advancement of any other object of
general public utility shall not be a charitable purpose, if it involves the
carrying on of any activity in the nature of trade, commerce or business, or
any activity of rendering any service in relation to any trade, commerce or
business, for a cess or fee or any other consideration, irrespective of the
nature of use or application, or retention, of the income from such activity;)
24. Section 2(15) as it stood prior to 1983 defined
‘charitable purpose’ to include relief of the poor, education, medical relief,
and the advancement of any other object of general public utility not involving
the carrying on of any activity for profit. The phrase “not involving the
carrying on of any activity for profit” was omitted from the Section by
the Finance Act 1983, with effect from 01.04.1984, consequent on the amendment
to Section 11, where under profits and gains of business in the case of
charitable or religious trust and institutions would not be entitled to
exemption under that Section, except in cases where the business fulfilled the
conditions under Section 11 (4). The Section was once again amended by
substitution in the year 2008 under the Finance Act, 2008, with effect from
01.04.2009, streamlining the definition of ‘charitable purpose’, considering
the fact that taking advantage of the phrase ‘advancement of any other object
of general public utility’, number of entities operating on commercial lines
claimed exemption on their income either under Section 20(23c) or under Section
11 of the Act. Thus, to limit the scope of this expression, Section was amended
in the year 2008 that the advancement of any other object of general public
utility shall not be a charitable purpose, if the object involved the carrying
on of any activity in the nature of trade, commerce or business, or any
activity of rendering any service in relation to any trade, commerce or
business, for a cess or fee or any other consideration, irrespective of the
nature of use or application, or retention, of the income from such activity.
Though the section as it stood prior to the substitution in 2008 contained no
provision as in the proviso under the 2008 amendment, yet the Supreme Court
held that that if the primary or dominant purpose of a trust or institution is
charitable, another object which by itself may not be charitable but which is
merely ancillary or incidental to the primary or dominant purpose would not
prevent the trust or institution from being a valid charity: vide CIT v.
Andhra Chamber of Commerce [1965] 55 ITR 722 (SC) (referred to in the decision
reported in (1980) 121 ITR 1 (Addl. Commissioner of Income-tax
v. Surat
Art Silk Cloth Manufacturers Association)
. Thus if the dominant object or
the primary object was charitable, the subsidiary object for the purpose of
securing the fulfillment of the dominant object would not militate against its
charitable character and the purpose would not be any the less charitable. The
amendment in the year 2008 made a drastic amendment to deny the status of a
charitable purpose to an institution with the object of general public utility,
having any activity in the nature of trade, commerce or business, or any
activity of rendering any service in relation to any trade, commerce or
business, for a cess or fee or any other consideration.
25. Proviso to Section 2(15) of the Income Tax Act states
that if the objects involve the carrying on any activity in the nature of
trade, commerce or business, for a cess or fee or any other consideration,
irrespective of the nature of use or application, or retention, of the income
from such activity, the status of the institution will not be one for
‘charitable purpose’.
26. The Central Board of Direct Taxes, in paragraph 3.2
pointed out to the scope of the circular as under:
“In such a case, the object of ‘general public
utility’ will be only a mask or a device to hide the true purpose, which is
trade, commerce or business or the rendering of any service in relation to
trade, commerce or business. Each case would, therefore, be decided on its own
facts and no generalization is possible. Assessees, who claim that their object
is ‘charitable purpose’ within the meaning of Section 2(15), would be well
advised to eschew any activity which is in the nature of trade, commerce or
business or the rendering of any service in relation to any trade, commerce or
business.”
27. Thus, the anxiety of the Parliament in introducing
the proviso to Section 2(15) of the Act is only to check those institution,
which attempt to gain exemption under the cloak of a trust.
28. Section 11 of the Act states that income from
property held for religious or charitable purposes shall not be included in the
total income of the previous year. Section 12 deals with income of trusts or
institutions from contributions. Section 12A deals with making application for
registration of the trust/association so that the said institution will have
the benefit of exemption under Section 11 and 12 of the Act.
29. Section 12AA of the Act prescribes procedure for
registration. As per this, on receipt of the application for registration, the
Commissioner is to call for such documents or information from the trust or
institution in order to satisfy himself about the genuineness of activities of
the trust or institution. The Section further empowers the Commissioner to make
such enquiry as he deems necessary in this regard. Once the Commissioner is
satisfied himself about the objects of the trust or institution and the
genuineness of the activities of the trust, he has to pass an order in writing
registering the trust or institution; if he is not so satisfied, he has to pass
an order in writing refusing to register the trust or institution.
30. Section 12AA(3) of the Act inserted with effect from
01.10.2004 under the Finance (No.2) Act, 2004 and the amendment inserted by
Finance Act, 2010, with effect from 01.06.2010 therein empowering the
Commissioner to cancel the registration granted under the stated circumstances,
reads as under:-
Provision inserted under Finance Act, 2004:
Section 12AA(3):- Where a trust or an institution has
been granted registration under clause (b) of sub-section (1) and subsequently
the Commissioner is satisfied that the activities of such trust or institution
are not genuine or are not being carried out in accordance with the objects of
the trust or institution, as the case may be, he shall pass an order in writing
cancelling the registration of such trust or institution.
Provided that no order under this sub-section shall be
passed unless such trust or institution has been given a reasonable opportunity
of being heard.
31. After amendment in the year 2010, Section 12AA(3) of
the Income Tax Act reads as follows:
“Section 12AA(3):- Where a trust or an
institution has been granted registration under clause (b) of sub-section (1)
or has obtained registration at any time under section 12A as it stood before
its amendment by the Finance (No.2) Act, 1996 (33 of 1996) and subsequently the
Commissioner is satisfied that the activities of such trust or institution are
not genuine or are not being carried out in accordance with the objects of the
trust or institution, as the case may be, he shall pass an order in writing
cancelling the registration of such trust or institution:
Provided that no order under this sub-section shall be
passed unless such trust or institution has been given a reasonable opportunity
of being heard.”
32. Thus in contrast to Section 12AA(1)(b) of the Income
Tax Act, 1961, where the grant of registration requires satisfaction about the
objects of the trust as well as genuineness of the activities, for the
cancellation of the registration under Section 12AA(3), all that it is insisted
upon is the satisfaction as to whether the activities of the trust or
institution are genuine or not and whether the activities are being carried on
in accordance with the objects of the trust. Thus, even if the trust is a
genuine one i.e., the objects are genuine, if the activities are not genuine
and the same not being carried on in accordance with the objects of the trust,
this will offer a good ground for cancellation. Thus, in every case, grant of
registration as well as cancellation of registration rests on the satisfaction
of the Commissioner on findings given on the parameters given in Section
12AA(1) and 12AA(3) of the Act, as the case may be.
33. Registration of the trust under the Act, confers
certain benefits from taxation under the provisions of the Act. The conditions
under which the income of the trust would be exempted under the provisions of
the Act are clearly laid down under Section 11 as well as in Section 12 of the
Act. Section 11 of the Act specifically points out the circumstances under
which income of the trust is not to be included in the total income of the
previous year of the person. So too, Section 12 of the Act on the income derived
from property held for charitable or religious purposes.
34. Thus, when the assessee is in receipt of income from
activities, which fits in with Sections 11 and 12 of the Act as well as from
sources which do not fall strictly with the objects of the trust, would not go
for cancellation of registration under Section 12AA of the Act on the sole
ground that the assessee is in receipt of income which does not qualify for
exemption straight away by itself. All that ultimately would arise in such
cases is the question of considering whether Section 11 of the Act would at all
apply to exempt these income from liability. These are matters of assessment
and has nothing to do with the genuineness of the activity or the activities
not in conformity with the objects of the trust. As rightly pointed out by
learned Senior counsel appearing for the assessee, as is evident from the
reading of Circular No.11 of 2008 dated 19.12.2008, the object of the insertion
of first proviso to Section 2(15) of the Act was only to curtail institution,
which under the garb of ‘general public utility’, carry on business or commercial
activity only to escape the liability under the Act thereby gain unmerited
exemption under Section 11 of the Act.
35.-36. In the decision reported in [2012] 343 ITR 23 (Bom)
(Sinhagad Technical Education Society
v. Commissioner of Income Tax
(Central), Pune & Anr)
, the Bombay High Court held as follows:
“As a result of the amendment, which has been
brought about by the Finance Act of 2010, Sub-section (3) of Section 12AA has
been amended specifically to empower the Commissioner to cancel a registration
obtained under Section 12A as it stood prior to its amendment by the Finance
(No.2) Act, 1996. Sub-section (3) was inserted into the provisions of Section
12AA by the Finance (No.2) Act, 2004 with effect from 1 October 2004. As it
originally stood, under sub-section (3), a power to cancel registration was
conferred upon the Commissioner where a trust or an institution had been
granted registration under clause (b) of sub-section (1) of Section 12AA. The
Commissioner, after satisfying himself that the objects of the trust or an
institution are not genuine or are not being carried out in accordance with the
objects of the trust or institution, as the case may be, was vested with the
power to pass an order in writing cancelling the registration of such trust or
institution. By the Finance Act of 2010, sub-section (3) was amended so as to
empower the Commissioner to cancel the registration of a trust or an
institution which has obtained registration at any time under Section 12A (as
it stood before its amendment by the Finance (No.2) Act, 1996). As a result of
the amendment, a regulatory framework is now sought to be put in place so as to
cover also a trust or an institution which has obtained registration under
Section 12A as it stood prior to its amendment in 1996.
**
**
**
power under Section 12AA(3) can be exercised by the
Commissioner in respect of a trust registered prior to 1 June 2010. The mere
fact that a part of the requisites for the action under Section 12AA (3) is
drawn from a time prior to its passing namely registration as a charitable
trust under Section 12A prior to 2010 would not make the amendment
retrospective in operation. The amendment does not take away any vested right
nor does it create new obligations in respect of past actions.”
37. As already pointed out earlier, the question as to
whether the particular income of trust is eligible for exemption under Section
12 of the Act is a matter of assessment and this Court had pointed out in the
decision reported in 343 ITR 300 in the case of CIT v.
Sarvodaya Ilakkiya Pannai
, as under:
“In order to avail the benefit of exemption under
Section 11 of the Income Tax Act, 1961, a Trust can make an application to the
Commissioner for registration under Section 12A of the Income Tax Act, 1961. On
receipt of the said application for registration of a trust or institution, the
Commissioner should satisfy himself about the genuineness of the activities of
the trust or institution. In order to satisfy himself, the Commissioner may
also make such enquiry as he may deem necessary in that behalf. In the event
the Commissioner satisfies himself that the trust is entitled to registration
keeping in mind the objects, shall grant registration in writing in terms of
Section 12AA(1)(b)(i) of the Income Tax Act, 1961. In the event the
Commissioner is not satisfied, he shall refuse such registration in terms of
Section 12AA(1)(b)(ii) of the Income Tax Act, 1961. Once such a satisfaction is
arrived at by the Commissioner to grant, such registration cannot be cancelled
by following the very same provision of section 12AA(b)(i) of the Income Tax
Act, 1961 to go into the genuineness of the activities of the trust. However,
the Commissioner is empowered to revoke the certificate in terms of Section
12AA(3) of the Income Tax Act, 1961. As Commissioner is empowered to revoke the
certificate in terms of section 12AA(3) of the Income Tax Act, 1961. As per the
said provision, in the event the Commissioner is satisfied subsequently i.e.,
after registration that the activities of such trust or institution are not
genuine or not being carried out in accordance with the objects of the trust or
the institution as the case may be, he shall pass an order in writing
cancelling the registration of such trust or institution.”
38. After the grant of registration, if the Commissioner
is satisfied subsequently that the activities of the institution are not
genuine or they are not carried on in accordance with the trust/ institution,
he could pass an order in writing cancelling the registration of such trust or
institution.
39. Referring to Section 11 and 12A of the Act, this
Court pointed out that the act of granting registration under Section 12AA(1)
itself is a result of a satisfaction recorded by the Commissioner as regards
the genuineness of the objects of the trust as well as the activities of the
trust and once a satisfaction is arrived at by the Commissioner, the
cancellation could only be in terms of Section 12AA(3) of the Income Tax Act,
1961.
40. This Court pointed out that the cancellation made in
the case of assessee therein was not on the ground that the activities were not
genuine, but the activities of the trust in publication and sale and spread of
Sarvodaya Literature and Gandhian Ideologies was not the objects of the trust.
This Court pointed out that the cancellation was made not on the ground that
the activities of the trust were not genuine but the activities of the trust
were not in accordance with the objects of the trust; when the trust was
registered with definite objects, carrying on such activities would be in terms
of the objects for which registration was granted.
41. Referring to Section 12AA of the Income Tax Act,
1961, this Court has held as under:-
“9. Under section 12AA, the Commissioner is
empowered to grant or refuse the registration and after granting registration,
would be empowered to cancel and that too, only on two conditions laid down
under Section 12AA(3) of the Income Tax Act, 1961. Whether the income derived
from such transaction would be assessed for tax and also whether the trust
would be entitled to exemption under section 11 are entirely the matters left
to the assessing officer to decide as to whether it should be assessed or
exempted.”
42. In the light of the law declared by this Court in the
above said decision, we do not find that the scope of Section 12AA(3) of the
Act is of any doubt for a fresh look. It is relevant herein to point out that
in two other assessee’s case, the Income Tax Appellate Tribunal, Ahmedabad
Bench-A rendered in the case of Gujarat Cricket Association v. DIT
(Exemption)
in ITA.No.93(Ahd)/2011 dated 31.01.2012 and that
of the Nagpur Bench rendered in the case of M/s.Vidarbha Cricket Association
v. Commissioner of Income-tax-I, Nagpur in ITA.No.3/Nag/10 dated
30.05.2011, considered the said decision reported in 343 ITR 300 in
the case of CIT v. Sarvodaya Ilakkiya Pannai rendered under
Section 12AA(3) of the Act. On appeal before the respective High Courts, the
decision of the Income Tax Appellate Tribunal was confirmed.
43. Leaving that aside, there being no dispute raised by
the Revenue as to the genuineness of the trust, or as to the activities of the
trust not being in accordance with the objects of the trust, the question of
cancellation under Section 12AA of the Act does not arise. We further hold that
at the time of grant of registration on 28.3.2003, the same was made taking
into consideration the objects of the institution fitting in with the
definition of ‘charitable purpose’ defined under Section 2(150 of the Act and
the substitution of the Section itself came only 2008, with effect from
01.04.2009. As rightly pointed out by the learned senior counsel appearing for
the assessee, the circular clearly brings out the object of the amendment and
the amended provision has no relevance to the case . The power regarding
cancellation, hence has to be seen with reference to the registration and the
object satisfying the definition on ‘charitable purpose’, as it stood at the
time of registration and not by the subsequent amendment to Section 2(15) of
the Income Tax Act.
44. Learned Standing counsel appearing for the Revenue
placed heavy reliance on the proviso to Section 12AA(3) of the Act and
submitted that when the assessee has income received from conduct of the
matches, which are commercial in nature, as had been found by the Income Tax
Appellate Tribunal, the objects of the trust ceased to be charitable. He
submitted that going by the definition of Section 2(15) of the Act, rightly,
the Commissioner assumed jurisdiction under Section 12AA(3) of the Act to
cancel the registration. He further pointed out that for the finding to be
recorded that the activities of the trust are not genuine, one must necessarily
look into the objects of the association; if the objects of the association
reveal commercial nature in the conduct of matches, the association cannot be
one for charitable purpose as defined under Section 2(15) of the Act. Thus,
there could be no inhibition for the Commissioner to assume jurisdiction to
issue show cause notice calling upon the assessee to state whether the
association is genuine or not. He further submitted that on looking at the
activities of the association, the Commissioner had rightly come to the conclusion
that the assessee’s registration was liable to be withdrawn.
45. We do not accept the submission of learned Standing
counsel appearing for the Revenue. As rightly observed by learned Senior
counsel appearing for the assessee, the Revenue granted registration under
Section 12AA of the Act satisfying itself as to the objects of the association
befitting the status as charitable purpose as defined under Section 2(15), as
it stood in 2003 and after granting the registration, if the registration is to
be cancelled, it must be only on the grounds stated under Section 12AA(3) of
the Act with reference to the objects accepted and registered under Section
12AA, as per the law then stood under the definition of Section 2(15) of the
Income Tax Act. Even therein, Courts have defined as to when an institution
could be held as one for advancement of any other object of general public
utility. Thus, if a particular activity of the institution appeared to be
commercial in character, and it is not dominant, then it is for the Assessing
Officer to consider the effect of Section 11 of the Act in the matter of
granting exemption on particular head of receipt. The mere fact that the said
income does not fit in with Section 11 of the Act would not, by itself, herein
lead to the conclusion that the registration granted under Section 12AA is bad
and hence, to be cancelled.
46. It may be of relevance to note the language used in
the definition “charitable purpose” in Section 2(15) of the Act,
which states that charitable purpose includes relief of the poor, education,
medical relief and advancement of any other object of general public utility.
The assessee’s case falls within the phrase of the definition ‘general public
utility’. In the decision reported in (2000) 246 ITR 188 in the case of Hiralal
Bhagwati
v. Commissioner of Income Tax, the Gujarat High court
considered the said phrase in the context of Section 12AA registration and held
that registration of the charitable trust under Section 12AA of the Act is not
an idle or empty formality; the Commissioner of Income-tax has to examine the
objects of the trust as well as an empirical study of the past activities of
the applicant; the Commissioner of Income-tax has to examine that it is really
a charitable trust or institution eligible for registration; the object
beneficial to a section of the public is an object of “general public
utility”. The Gujarat High Court held that to serve as a charitable
purpose, it is not necessary that the object must be to serve the whole of
mankind or all persons living in a country or province; it is required to be noted
that if a section of the public alone are given the benefit, it cannot be said
that it is not a trust for charitable purpose in the interest of the public; it
is not necessary that the public at large must get the benefit; the criteria
here is the objects of general public utility. Thus, the Gujarat High Court
held that in order to be charitable, the purpose must be directed to the
benefit of the community or a section of the community; the expression
“object of general public utility”, however, is not restricted to the
objects beneficial to the whole of mankind; an object beneficial to a section
of the public is an object of general public utility; the section of the
community sought to be benefited must undoubtedly be sufficiently defined and
identifiable by some common quality of a public or impersonal nature.
47. The above said decision (2000) 246 ITR 188 –
Hiralal Bhagwati
v. Commissioner of Income Tax) came up on April 18,
2000. Evidently, the Revenue has not gone on appeal as against this judgment.
In the decision reported in (2008) 300 ITR 214(SC) in the case of Assistant
Commissioner of Income Tax
v. Surat City Gymkhana, reference was
made about this decision and the Apex Court pointed out that the Revenue did
not challenge this case and it attained finality.
48. It is no doubt true that the decision reported in (2008)
300 ITR 214(SC)
in the case of Assistant Commissioner of Income Tax v.
Surat City Gymkhana,
was in the context of Section 10(23) of the Income Tax
Act, 1961, nevertheless, the fact remains that the understanding of the scope
of the expression “general public utility” would nevertheless is of
relevance herein. Admittedly when the assessee was granted registration, the
Revenue recorded its satisfaction that the objects are of charitable purpose.
Thus only possible enquiry under Section 12AA of the Act for cancellation is to
find out whether the activities of the trust are genuine or in accordance with
the objects of the trust. If any of the income arising on the activities are
not in accordance with the objects of the trust, the assessee’s income, at
best, may not get the exemption under Section 11 of the Act. But this, by
itself, does not result in straight rejection of the registration as ‘trust’
under Section 12AA of the Act. Consequently, we reject the prayer of the
Revenue that Section 12AA(1) of the Income Tax Act, 1961 must be read along
with Section 12AA(3) of the Income Tax Act, 1961 before considering the
cancellation.
49. As far as the unreported decision of this Court in T.C(A).No.91
of 2013 dated 29.04.2013 (Gowri Ashram
v. Director of Income Tax
(Exemptions)
is concerned, on which heavy reliance was placed by the
Revenue, the said decision relates to the rejection of the registration at the
threshold of the application filed for registration. So too the decision of the
Apex court reported in 315 ITR 428 in the case of Commissioner of
Income Tax
v. National Institute of Aeronautical Engineering Educational
Society
, wherein, rejection was made on the threshold of application for registration
made by the assessee. The decisions relied on is thus distinguishable and has
no relevance to the facts of the present case.
50. As far as unreported decision of this Court in T.C(A).No.91
of 2013 dated 29.04.2013 (Gowri Ashram
v. Director of Income Tax
(Exemptions)
is concerned, while rejecting the appeal filed by the assessee
on the rejection of the application for registration, this Court observed that
it was open for the assessee Society to renew its application as and when it
expanded the objects of the Society and were approved by the competent Court.
The rejection order passed by the Revenue was on the ground that the objects of
the trust were not charitable in character. This decision also has no relevance
to the case on hand.
51. As already noted in the preceding paragraphs,
considering the provision under Section 12AA(3) of the Act, the cancellation or
registration in a given case could be done only under the stated circumstances
under Section 12AA(3) of the Act and in the background of the definition
relevant to the particular year of registration. As rightly pointed out by the
assessee, Revenue does not allege anything against the genuineness of the
objects of the assessee or its activities. It rests its order only on the
ground of the assessee receiving income from holding of matches which according
to the assessee were not held by it. Thus, as regards the question as to
whether the particular income qualified under Section 11 of the Act or not is
not the same as activity being genuine or not. In the circumstances, we do not
agree with the view of the Income Tax Appellate Tribunal that the order passed
by the Director of Income Tax (Exemptions) was in accordance with the
provisions of the Income Tax Act, 1961. He viewed that the conduct of test
matches and ODI are in the nature of commerce or business. Though the assessee
claimed their activities for promotion of sports, he held that the dominant
feature is evident from the huge profits received and hence the amount received
from BCCI as subsidy are commercial. As regards conducting of IPL Matches, he
pointed out that though no services are rendered by the assessee for conducting
the matches, the ground where the matches are played are given for rent which
is a commercial venture. The subsidy received from BCCI included mainly TV
Advertisements sold by BCCI for the conduct of IPL and their commercial
receipts arising for IPL transactions. Therefore, the nature of receipt was
important than the name of account under which it was accounted. Thus he viewed
that the objects and activities would no longer come within the definition of
Section 2(15) of the Act after the amendment come in effect from 01.04.2009.
52. As rightly pointed out by the assessee, the Revenue
does not question the objects of the Association as not genuine or are in
accordance with the objects. All that the Revenue stated was that the nature of
receipt could not be called a subsidy. Thus Revenue came to the conclusion that
the objects and activities could not come within the meaning of ‘charitable
purpose’ under Section 2(15) of the Act.
53. On going through the materials, the Income Tax
Appellate Tribunal pointed out that instead of promoting and developing the
game of cricket, the assessee was promoting and developing cricket as an
entertainment and the tickets are highly priced; here, the assessee has shifted
the activities of general public utility to commercial activity for generating
revenue; the public merely participate to view costly matches; hence the
conditions of Section 12AA(3) were satisfied. The Income Tax Appellate Tribunal
agreed with the Director of Income Tax (Exemptions) that the expression
‘subsidy from BCCI’ was a misleading nomenclature and it was a share from the
revenue collected by BCCI from the sale of telecast rights. The surplus from
IPL Season-I worked out to 8.5% of the total receipts. It further held that 78%
of the total receipt came out of advertisement revenue.
54. The Income Tax Appellate Tribunal pointed out that
the physical aspect of the game was one in accordance with the objects of the
assessee and the activities are genuine. However, the matches held were not in
advancement of any specific object of general public utility. The pattern of
receipt is commercial in character and the matches conducted are not in
accordance with the objects of the Association. Thus, it rejected the
assessee’s case and held that both the conditions under Section 12AA(3) of the
Act stood attracted.
55. As seen from the observation of the Income Tax
Appellate Tribunal, although generally it accepted the case of the assessee
that the physical aspect of the game was one in accordance with the objects,
the quantum of receipt apparently led the Income Tax Appellate Tribunal and the
Revenue to come to the conclusion that the activities are commercial and hence
by Section 2(15) proviso to the Act, the receipt from BCCI could not be called
as subsidy. As for the observation of the Income Tax Appellate Tribunal that
the twin conditions stood satisfied is concerned, it is not denied by the
Revenue that at the time of granting registration, the Commissioner had
satisfied himself about the objects of the trust and the genuineness of the
activities as falling within the meaning of ‘charitable purpose’, as it stood
in 2003. The Revenue does not deny as a matter of fact that the objects remain
as it was in 2003 and there is no change in its content to call the assessee’s
object as not genuine. There are no materials to indicate that the grant of
registration was not based on materials indicating objects of general public
utility.
56. The assessee is a member of Board of Control for
Cricket in India (BCCI), which in turn is a member of ICC(International Cricket
Council). BCCI allots test matches with visiting foreign team and one day
international matches to various member cricket association which organise the
matches in their stadia. The franchisees conduct matches in the Stadia
belonging to the State Cricket Association. The State Association is entitled
to all in-stadia sponsorship advertisement and beverage revenue and it incurs
expenses for the conduct of the matches. BCCI earns revenue by way of
sponsorship and media rights as well as franchisee revenue for IPL and it
distributes 70% of the revenue to the member cricket association. Thus the
assessee is also the recipient of the revenue. Thus, for invoking Section 12AA
read with Section 2(15) of the Act, Revenue has to show that the activities are
not fitting with the objects of the Association and that the dominant
activities are in the nature of trade, commerce and business. We do not think
that by the volume of receipt one can draw the inference that the activity is
commercial. The Income Tax Appellate Tribunal’s view that it is an
entertainment and hence offended Section 2(15) of the Act does not appear to be
correct and the same is based on its own impression on free ticket, payment of
entertainment tax and presence of cheer group and given the irrelevant
consideration. These considerations are not germane in considering the question
as to whether the activities are genuine or carried on in accordance with the
objects of the Association. We can only say that the Income Tax Appellate
Tribunal rested its decision on consideration which are not relevant for
considering the test specified under Section 12AA(3) to impose commercial
character to the activity of the Association. In the circumstances, we agree
with the assessee that the Revenue has not made out any ground to cancel the
registration under Section 12AA(3) of the Act.
57. As regards the observation of the Income Tax
Appellate Tribunal that IPL Matches and Celebrity Cricket Matches are also
being held by the Association and hence it is an entertainment industry, we
need not go into these aspects, for, the order of the Director of Income Tax
(Exemptions) casts no doubt on the genuineness of the objects of the trust.
Hence, it is for the Assessing Officer to take note of all facts, while
considering the same under Section 11 of the Income Tax Act, 1961. We
disapprove the approach of the Tribunal in this regard. In the above said
circumstances, we set aside the order of the Income Tax Appellate Tribunal.

58. In the result, the Tax Case (Appeal) stands allowed.
No costs. Consequently, connected MP is closed.
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