Court Upholds KBA's Charitable Status Despite Commercial Activities

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Case Name:

Director of Income Tax (Exemption) and Another vs Karnataka Badminton Association (High Court of Karnataka)

Income Tax Appeal No.165/2013

Date: 12th January 2015

Key Takeaways

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

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

- Commercial Activities:

The court ruled that higher receipts from commercial activities do not automatically imply that the activities are not genuine or not aligned with the trust's objectives.

- Legal Precedents:

The court referred to the amendment of the first proviso to Section 2(15) (of Income Tax Act, 1961) and Sub-section (8) of Section 13 (of Income Tax Act, 1961), which protect the revenue's interest but do not provide grounds for canceling registration.

Issue

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

Facts

- Parties Involved:

The appellant is the Director of Income Tax (Exemption), and the respondent is the Karnataka Badminton Association (KBA).

- Timeline:

KBA was granted registration under Section 12A (of Income Tax Act, 1961) on October 25, 1980. A notice for revocation was issued on April 13, 2011, and the registration was canceled on October 20, 2011. The Tribunal set aside this cancellation on November 22, 2012.

- Financials:

KBA's receipts from commercial activities were significant, with net profits of Rs.94,59,372 and Rs.1,10,92,691 for the assessment years 2008-09 and 2009-10, respectively.

Arguments

- Revenue's Argument:

The revenue argued that KBA's predominant activity was running a bar, which is not charitable. They also contended that KBA's activities were commercial and exceeded the threshold under the first proviso to Section 2(15) (of Income Tax Act, 1961).

- KBA's Argument:

KBA argued that their activities were genuine and aligned with their objectives. They contended that the cancellation did not meet the conditions under Section 12AA(3) (of Income Tax Act, 1961).

Key Legal Precedents

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

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

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

The amendment specifies that commercial activities exceeding a certain threshold do not qualify as charitable, but this does not automatically lead to the cancellation of registration.

Judgement

The court upheld the Tribunal's decision, stating that the Director of Income Tax (Exemption) did not provide evidence that KBA's activities were not genuine or not aligned with its objectives. The court dismissed the appeal, ruling in favor of KBA and maintaining its registration under Section 12A (of Income Tax Act, 1961).

FAQs

Q1: What was the main issue in this case?

A1: The main issue was whether KBA's registration under Section 12A (of Income Tax Act, 1961) could be canceled based on its commercial activities.

Q2: What did the court decide?

A2: The court decided that KBA's registration could not be canceled as the activities were genuine and aligned with its objectives.

Q3: What are the conditions for canceling registration under Section 12A (of Income Tax Act, 1961)?

A3: Registration can be canceled if the activities are not genuine or not in accordance with the trust's objectives.

Q4: Did the court find KBA's activities to be non-genuine?

A4: No, the court found that the activities were genuine and aligned with KBA's objectives.

Q5: What is the significance of the amendment to Section 2(15) (of Income Tax Act, 1961)?

A5: The amendment specifies that commercial activities exceeding a certain threshold do not qualify as charitable, but this does not automatically lead to the cancellation of registration.

1. The above appeal is filed by the revenue challenging the order dated 22.11.2012 passed by the Tribunal setting aside the order of the Director of

Income Tax dated 20.10.2011 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. Karnataka Badminton Association (for short hereinafter referred to as ‘KBA’) was granted registration under Section 12A (of Income Tax Act, 1961) on 25.10.1980 by an order passed by the Commissioner of Income Tax. Subsequently, a notice came to be issued on 13.4.2011 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 KBA filed written submission on 6.8.2011 and contested the matter. The authorities took note of the fact that the

accounts for the year ending 31st March, 2009 shows that total receipts to an extent of Rs.1,01,03,322/- and Rs.1,18,35,000/- and excess of income over

expenditure at Rs.94,59,372 /- and Rs.1,10,92,691/- for the assessment years 2008-09 and 2009-10 respectively. The extract of income and expenditure

account for the financial years 2008-09 and 2009-10 are reproduced as under:

RECEIPTS

3. The Director of Income Tax (Exemptions)

considering the entire material on record, by his order

dated 20.10.2011, exercising his powers under the

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

registration observing that the examination of

records KBA has earned a net profit of Rs. 94,59,372/-

and Rs.1,10,92,691/- for the assessments years 2008-

09 and 2009-10 respectively. Under various heads, the

KBA has earned huge profits and after taking note of

the change in the 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 assessee 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 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 the various

judgments, the Director has cancelled the registration.

Aggrieved by the said order, the assessee filed an appeal

– ITA No. 1272/2011 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 22.11.2012

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 predominant

activity carried out by the assessee Trust

was running of bar which is not in

accordance with the objects and the same

cannot be considered as charitable activity

and recorded a perverse finding?

ii) Whether the Tribunal was correct in holding

that the assessee is entitled for registration

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

activities of the assessee are like a club,

catering to the members and it exists for the

mutual benefits of its members and

consequently not carrying on charitable

activity 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 (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 (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