Court Upholds Charitable Trust's Registration Despite Commercial Receipts

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Case Name:

Director of Income Tax vs. Kodava Samaja (High Court of Karnataka)

Income Tax Appeal No.344/2013

Key Takeaways

- Commercial Receipts:

The presence of significant commercial receipts does not automatically disqualify a charitable trust from its registration under Section 12A (of Income Tax Act, 1961).

- Grounds for Cancellation:

Registration can only be canceled if the trust's activities are not genuine or not carried out according to its objectives.

- Tribunal's Role:

The Tribunal found no evidence that the trust's activities were not genuine or misaligned with its objectives, leading to the reinstatement of the trust's registration.

- Legal Precedents:

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

Issue

Can a charitable trust's registration under Section 12A (of Income Tax Act, 1961) be canceled solely based on its commercial receipts exceeding its overall receipts?

Facts

- Parties Involved:

The appellant is the Director of Income Tax (Exemption), and the respondent is M/s. Kodava Samaja.

- Timeline:

The trust was granted registration on June 27, 1980. A notice for cancellation was issued on November 22, 2011, and the registration was canceled on December 15, 2011. The Tribunal overturned this decision on February 8, 2013.

- Financials:

The trust had significant commercial receipts, including rentals and other income, leading to substantial profits for the assessment years 2008-09 and 2009-10.

Arguments

- Director of Income Tax (Exemption):

Argued that the trust's activities were commercial in nature, thus not qualifying as charitable under the amended Section 2(15) (of Income Tax Act, 1961).

- Kodava Samaja:

Contended that their activities were genuine and aligned with their charitable objectives, and that commercial receipts alone should not lead to cancellation of their registration.

Key Legal Precedents

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

Specifies that registration can be canceled if the activities are not genuine or not in accordance with the trust's objectives.

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

Defines charitable purposes and includes provisions for commercial activities.

Judgement

The High Court upheld the Tribunal's decision, stating that the Director of Income Tax (Exemption) did not provide evidence that the trust's activities were not genuine or misaligned with its objectives. The court emphasized that commercial receipts alone do not justify cancellation of registration under Section 12A (of Income Tax Act, 1961).

FAQs

Q1: Can a trust's registration be canceled if it has significant commercial receipts?

A1: No, not unless it is proven that the trust's activities are not genuine or not in accordance with its objectives.

Q2: What are the grounds for canceling a trust's registration under Section 12A (of Income Tax Act, 1961)?

A2: The grounds are if the activities of the trust are not genuine or not carried out according to its objectives.

Q3: What was the Tribunal's finding in this case?

A3: The Tribunal found no evidence that the trust's activities were not genuine or misaligned with its objectives, leading to the reinstatement of the trust's registration.

Q4: What does Section 2(15) (of Income Tax Act, 1961) entail?

A4: It defines charitable purposes and includes provisions for commercial activities, impacting the eligibility for tax exemptions.

Q5: What was the High Court's final decision?

A5: The High Court dismissed the appeal, upholding the Tribunal's decision to reinstate the trust's registration.

1. The above appeal is filed by the revenue challenging the order dated 8.2.2013 passed by the Tribunal setting aside the order of the Director of

Income Tax (Exemption) dated 15.12.2011 in cancelling the registration of the assessee as a Charitable Trust under Section 12A (of Income Tax Act, 1961) (for short hereinafter referred to as ‘the Act’).

2. The respondent-assessee – M/s. Kodava Samaja was granted registration under Section 12A (of Income Tax Act, 1961) on 27.6.1980 by an order passed by the

Commissioner of Income Tax. Subsequently, a notice came to be issued on 22.11.2011 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 on 2.12.2011 and contested the matter. The authorities took note of the fact that the accounts for the year ended 31.3.2009

shows receipts by way of rentals and other income to an extent of Rs.75,92,080/- and excess of income over expenditure of Rs.63,61,403/- for the assessment year 2008-09 and Rs.82,54,493/- for the assessment year

2009-10. An extract of the Income and Expenditure account for the financial year is reproduced as under:

3. The Director of Income Tax (Exemption)

considering the entire material on record, by his order

dated 15.12.2011, exercising his powers under the

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

registration observing that on examination of records

shows that the Samaja has earned profit of Rs.

63,61,403/- and 82,54,493/- for the assessment years

2008-09 and 2009-10 respectively. Under various

heads, the Samaja has earned huge profits and after

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

of the Act which came into effect from 1.4.2009, it was

held that the activity carried on by the assessee is in the

nature of trade, commerce or business or any activity of

rendering any services in relation to trade, commerce or

business and therefore, the consideration received

irrespective of the nature of use or 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 to the various judgments, the Director of

Income Tax (Exemption) has cancelled the registration.

Aggrieved by the said order, the assessee filed an appeal

– ITA No. 200/2012 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 Samaja 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 Samaja are not genuine and not carried in

accordance with the objects of the Samaja. Accordingly,

the Tribunal by its impugned order dated 8.02.2013 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 for registration

under Section 12A (of Income Tax Act, 1961), without

appreciating the fact that, in view of

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

running of Bar/Restaurant, renting out of

rooms to its members/guests and letting out

choultry on commercial basis are not

charitable activities and recorded a

perverse finding?

ii) Whether the Tribunal committed an error in

holding that DIT (exemption) has not

recorded its finding with regard to

genuineness of the activities of the Trust or

that the activities of the assessee were not

in accordance with the objects of the Trust,

without appreciating that running of liquor

bar and restaurant was not in accordance

with the objects of the Trust and the

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

is satisfied for cancellation of registration

and consequently 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

Samaja is in the nature of renting the marriage hall

cum choultry for reasonable rent irrespective of caste,

religion, colour and nationality on rental basis,

conducting sports and recreation club etc., 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).

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 (of Income Tax Act, 1961) [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 (Exemption) 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 (Exemption) 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