Court Upholds Charitable Trust's Registration Despite Commercial Activities

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Case Name:

Director of Income Tax vs. Sri Kuthethur Gururajachar Charities (High Court of Karnataka)

Income Tax Appeal No.345/2013

Key Takeaways

- Registration Conditions:

A trust's registration under Section 12A (of Income Tax Act, 1961) can only be canceled if its activities are not genuine or not in accordance with its objectives.

- Commercial Activities:

The fact that a trust engages in commercial activities does not automatically disqualify it from being considered charitable.

- Tribunal's Role:

The Tribunal found that the Director of Income Tax (Exemptions) did not provide sufficient evidence that the trust's activities were not genuine or not in accordance with its objectives.

- Legal Precedents:

The court emphasized the importance of adhering to the specific grounds for cancellation as outlined in Section 12AA(3) (of Income Tax Act, 1961).

Issue

Can the registration of a charitable trust under Section 12A (of Income Tax Act, 1961) be canceled solely based on the trust engaging in commercial activities?

Facts

- Parties Involved:

The appellant is the Director of Income Tax (Exemptions), and the respondent is Sri Kuthethur Gururajachar Charities.

- Timeline:

The trust was granted registration under Section 12A (of Income Tax Act, 1961) on July 10, 1994. A notice for revocation was issued on October 6, 2010, and the registration was canceled on October 26, 2010.

- Dispute:

The Director of Income Tax (Exemptions) canceled the trust's registration, claiming that its activities were commercial in nature and not charitable.

Arguments

- Revenue's Argument:

The revenue argued that the trust's activities were commercial and exceeded the threshold of Rs.25,00,000, thus falling under the first proviso to Section 2(15) (of Income Tax Act, 1961), which disqualifies it from being considered charitable.

- Assessee's Argument:

The assessee contended that the registration could only be canceled if the activities were not genuine or not in accordance with the trust's objectives, which was not the case here.

Key Legal Precedents

- Section 12AA(3) (of Income Tax Act, 1961):

This section allows for the cancellation of registration if the activities of the trust are not genuine or not carried out in accordance with its objectives.

- Section 2(15) (of Income Tax Act, 1961):

Defines "charitable purpose" and includes provisions for commercial activities, but this alone is not a ground for cancellation of registration.

Judgement

The High Court upheld the Tribunal's decision, stating that the Director of Income Tax (Exemptions) did not provide sufficient evidence that the trust's activities were not genuine or not in accordance with its objectives. Therefore, the cancellation of the registration was not justified. The appeal by the revenue was dismissed.

FAQs

Q1: Can a trust's registration under Section 12A (of Income Tax Act, 1961) be canceled if it engages in commercial activities?

A1: No, the registration can only be canceled if the activities are not genuine or not in accordance with the trust's objectives.

Q2: What was the main reason for the Tribunal overturning the cancellation of the trust's registration?

A2: The Tribunal found that the Director of Income Tax (Exemptions) did not provide sufficient evidence that the trust's activities were not genuine or not in accordance with its objectives.

Q3: What is the significance of Section 2(15) (of Income Tax Act, 1961) in this case?

A3: Section 2(15) (of Income Tax Act, 1961) defines "charitable purpose" and includes provisions for commercial activities. However, engaging in commercial activities alone is not a ground for canceling a trust's registration under Section 12A (of Income Tax Act, 1961).

Q4: What does Section 12AA(3) (of Income Tax Act, 1961) state?

A4: Section 12AA(3) (of Income Tax Act, 1961) allows for the cancellation of a trust's registration if its activities are not genuine or not carried out in accordance with its objectives.

1. The above appeal is filed by the revenue challenging the order dated 20.2.2013 passed by the Tribunal setting aside the order of the Director of

Income Tax (Exemptions) dated 26.10.2010 in cancelling the registration of the Trust as a Charitable Trust under Section 12A (of Income Tax Act, 1961) (for short hereinafter referred to as ‘the Act’).

2. The respondent-assessee – Sri Kuthethur Gururajachar Charities was granted registration under Section 12A (of Income Tax Act, 1961) on 10.7.1994 by an order passed by the Commissioner of Income Tax. Subsequently, a notice came to be issued on 6.10.2010 as to why registration under Section 12A (of Income Tax Act, 1961) should not be revoked by invoking the provisions of Section 12AA(3) (of Income Tax Act, 1961) by the authorities. In response to the said notice, the assessee filed its written submission and contested the matter. The authorities took note of the fact that for the assessment year 2010-11 excess of income over expenditure is at Rs.3,12,000/ and excess of income over expenditure is only 19.35% of the gross receipts.

3. The Director of Income Tax (Exemption)

considering the entire material on record, by his order

dated 26.10.2010, exercising his powers under the

provisions of Section 12A (of Income Tax Act, 1961) has cancelled the

registration observing that the examination of

records shows that the dominant activity of the Trust is

letting out the choultry on daily rental basis which is in

the nature of business and hence, not charitable

irrespective of quantum of rent charged and the

assessee has earned huge profits and after taking note

of the change in definition of Section 2(15) (of Income Tax Act, 1961)

which came into effect from 1.4.2009, it held that the

activity carried on by the assesse is in the nature of

trade, commerce or business or any activity of rendering

any service in relation to any trade, commerce or

business. Therefore, the consideration received

irrespective of nature of use of the application, or

retention, of the income from such activity would take

the case out of Section 2(15) (of Income Tax Act, 1961) and after

referring the various judgments, the Director has

cancelled the registration. Aggrieved by the said order,

the assessee filed an appeal – ITA No.1304/2010 before

the Tribunal.

4. The Tribunal after considering the entire

material on record recorded a finding that the

registration granted under Section 12A (of Income Tax Act, 1961)

cannot be revoked on account of commercial activities

by the assessee in pursuing the advancement of objects

of general public utility and registration can be

cancelled only on arriving at a finding that the activities

of the assessee are not genuine and not carried in

accordance with the objects of the Trust. Accordingly,

the Tribunal by its impugned order dated 20.2.2013 has

allowed the appeal against which the present appeal is

preferred by the revenue.

5. The substantial questions of law which arise

for our consideration are as follows:

i) Whether the Tribunal was correct

in holding that the assessee is

entitled to continue registration

under Section 12A (of Income Tax Act, 1961),

without appreciating the fact that,

in view of the amendment to

Section 2(15) (of Income Tax Act, 1961), the

activities carried on by the

assessee were commercial in

nature and therefore cannot be

considered as charitable under

Section 2(15) (of Income Tax Act, 1961)?

ii) Whether the Tribunal was correct

in holding that the Director of

Income Tax (Exemption) has not

given any finding with regard to

genuineness of the activities or the

activities not in accordance with

the objects of the institution,

without appreciating that clear

finding is recorded holding

activities of the assessee were not

in accordance with the objects

and the objects are amended

without approval of the

department and therefore,

provisions of Section 12AA(3) (of Income Tax Act, 1961) of

the Act were applicable and

recorded a perverse finding?

6. The learned Counsel for the revenue assailing

the impugned order contended that the definition of

‘charitable institution’ has undergone a change with

effect from 1.4.2009. The activities carried on by the

assessee is renting the choultry for marriages, social

activities as well as commercial activities i.e, to put up

exhibition for sale of various consumer products and

the aggregate value of the receipts from the said

activities exceeds Rs.25,00,000/- and therefore, it

squarely falls under the first proviso to Section 2(15) (of Income Tax Act, 1961) of

the Act. Therefore, it ceases to be an institution for

charitable purpose and therefore, rightly the registration

under Section 12A (of Income Tax Act, 1961) was cancelled which has

been erroneously interfered with by the Tribunal.

7. Per contra, learned Counsel for the assessee

contended that once a person is granted registration

under Section 12A (of Income Tax Act, 1961), the said benefit could be

denied only if the case falls under Section 12AA(3) (of Income Tax Act, 1961) of the

Act. Admittedly, the case of the assessee does not fall

under the aforesaid provision. Even if the activities

carried on by the assessee ceases to be a charitable

purpose in view of the amendment brought about to the

definition of ‘charitable purpose’ under Section 2(15) (of Income Tax Act, 1961) of

the Act, it is a matter to be considered by the assessing

authority to extend the benefit of exemption or not and

sought to justify the impugned order passed by the

Tribunal.

8. We have given our thoughtful consideration to

the rival contentions urged by the parties to the lis and

it is not in dispute that the assessee was granted

registration under Section 12A (of Income Tax Act, 1961). Now the said

registration is cancelled by invoking the power conferred

under the provisions of Section 12AA(3) (of Income Tax Act, 1961).

Therefore, it is necessary to find out under what

circumstances the registration granted earlier could be

cancelled.

Section 12AA(3) (of Income Tax Act, 1961) reads as under:

“[(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.]”

9. A plain reading of the aforesaid provision

makes it very clear that a registration granted under

Section 12A (of Income Tax Act, 1961) can be cancelled under two

circumstances i.e., (i) If the activities of such trust or

institution are not genuine and (ii) The activities of trust

or institution not being carried out in accordance with

the object of the trust or institution. Only on these two

conditions/grounds being satisfied, the registration

granted under the provisions of Section 12A (of Income Tax Act, 1961)

could be cancelled by the authorities.

10. It is not in dispute that the Director of

Income Tax (Exemptions) has not recorded any such

finding about the violation of the two conditions stated

above. The Tribunal while deciding the matter has

rightly recorded a finding that a perusal of impugned

order shows that Director of Income Tax (Exemptions)

has not arrived at any such finding. The fact that the

receipts from commercial activities are more compared

to the overall receipts of the charitable organization can

neither lead to the conclusion that the activities of the

trust or institution are not genuine nor it can be said

that the activities of the trust or institution are not

being carried out in accordance with the objects of the

trust or institution and therefore, the two conditions

stipulated under the provisions of Sub-section (3) of

Section 12AA (of Income Tax Act, 1961), which empowers the authority

to cancel the registration, do not exist in the present

case. The registration granted is cancelled in view of

the amendment of first proviso to Section 2(15) (of Income Tax Act, 1961) of the

Act. That is not a ground specified in the statute for

cancellation of the registration. In fact, Sub-section (8)

of Section 13 (of Income Tax Act, 1961) which is introduced by Financial

Act, 2012 which came into effect from 1.4.2009

categorically provides that, nothing contained in Section

11 or 12 shall operate so as to exclude any income from

the total income of the previous year or any receipt

there of. If the provisions of the first proviso to clause

(15) of Section 2 (of Income Tax Act, 1961) becomes applicable in the case of such

person in the said previous year, the statute has

protected the interest of the revenue. Notwithstanding

the fact that the assessee is conferred registration under

the provisions of Section 12A (of Income Tax Act, 1961), unless the

assessee falls within the provisions of Section 2(15) (of Income Tax Act, 1961) of

the Act, excluding the first proviso, the assessee would

not be entitled to the benefit of exemption from the tax.

If the case of the assessee falls in the first proviso to

Section 2(15) (of Income Tax Act, 1961), the benefit of registration which

flow from Section 12A (of Income Tax Act, 1961) is not available.

Anyhow, that is a matter to be considered by the

Assessing Authority. But on that ground, the

registration cannot be cancelled, which is precisely the

Tribunal has held by allowing the appeal in the present

impugned order.

11. In that view of the matter, we do not see any

merit in the present appeal and no interference is called

for. The substantial questions of law are answered

against the revenue and in favour of the assessee.

Hence, the appeal is dismissed.

Sd/-

Judge

Sd/-

Judge