Trust's Profit Doesn't Negate Charitable Status: Court Upholds Registration

Case Name**: DIRECTOR OF INCOME TAX (EXEMPTION) VS KARNATAKA INDUSTRIAL AREA DEVELOPMENT BOARD **Key Takeaways**: 1. Profit-making doesn't automatically disqualify an organization from charitable status. 2. Registration under Section 12A (of Income Tax Act, 1961) can only be cancelled under specific conditions outlined in Section 12AA(3) (of Income Tax Act, 1961). 3. Changes in the definition of charitable purpose (Section 2(15) (of Income Tax Act, 1961)) don't automatically lead to cancellation of registration. 4. The assessing authority, not the registration authority, determines tax exemption eligibility. **Issue**: Can a trust's registration under Section 12A (of Income Tax Act, 1961) be cancelled solely because its activities generate profit, even if those activities align with its charitable objectives? **Facts**: 1. KIADB was granted registration under Section 12A (of Income Tax Act, 1961) in 1988. 2. In 2009, KIADB showed significant profits, including Rs.18,69,72,000 from land disposal and a net profit of Rs.155,76,64,004. 3. The Income Tax Department issued a notice to cancel KIADB's registration, citing the amendment to Section 2(15) (of Income Tax Act, 1961). 4. The Department cancelled KIADB's registration, which was later reinstated by the Tribunal. 5. The Department appealed this decision in the High Court. **Arguments**: Revenue's Arguments: 1. KIADB's activities are commercial in nature and fall under the first proviso to Section 2(15) (of Income Tax Act, 1961). 2. The amendment to Section 2(15) (of Income Tax Act, 1961) means KIADB no longer qualifies as a charitable institution. KIADB's Arguments: 1. Registration can only be cancelled under conditions specified in Section 12AA(3) (of Income Tax Act, 1961), which don't apply here. 2. Changes to the definition of charitable purpose should be considered by the assessing authority, not used to cancel registration. **Key Legal Precedents**: 1. Karnataka Badminton Association in ITA No.1272/Bang/2011 - The Tribunal relied on this case to support its decision. 2. Section 12AA(3) (of Income Tax Act, 1961) - Specifies conditions for cancellation of registration. 3. Section 2(15) (of Income Tax Act, 1961) - Defines charitable purpose, including the amendment affecting organizations with commercial activities. **Judgement**: The High Court dismissed the appeal, ruling in favor of KIADB. Key points: 1. Registration under Section 12A (of Income Tax Act, 1961) can only be cancelled under conditions specified in Section 12AA(3) (of Income Tax Act, 1961). 2. KIADB's activities were genuine and aligned with its objectives. 3. Changes to Section 2(15) (of Income Tax Act, 1961) don't provide grounds for cancellation of registration. 4. The assessing authority, not the registration authority, should determine tax exemption eligibility. **FAQs**: 1. Q: Does making a profit disqualify an organization from being charitable? A: No, profit-making doesn't automatically disqualify an organization if the activities align with its charitable objectives. 2. Q: Can changes in tax law lead to automatic cancellation of charitable status? A: No, changes in law (like the amendment to Section 2(15) (of Income Tax Act, 1961)) don't automatically lead to cancellation of registration. 3. Q: Who determines if an organization is eligible for tax exemption? A: The assessing authority determines tax exemption eligibility, not the registration authority. 4. Q: What conditions must be met to cancel a trust's registration under Section 12A (of Income Tax Act, 1961)? A: Registration can be cancelled if the trust's activities are not genuine or if they're not being carried out in accordance with the trust's objectives, as per Section 12AA(3) (of Income Tax Act, 1961). 5. Q: What's the significance of this judgment for other charitable organizations? A: This judgment reinforces that profit-making doesn't negate charitable status and that registration cancellation requires specific statutory grounds.

1. The Revenue has preferred this appeal challenging the order passed by the Tribunal which has set aside the order passed by the lower authorities 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 assessee, Karnataka Industrial Area Development Board, (for short hereinafter referred to as ‘KIADB’) was granted registration under Section 12A (of Income Tax Act, 1961) vide order dated 20.6.1988 passed by the Commissioner of Income Tax (Exemption). A notice was issued to the assessee under Section 12AA(3) (of Income Tax Act, 1961) calling upon to show cause as to why the said registration should not be cancelled on the ground that case falls under first proviso to Section 2(15) (of Income Tax Act, 1961). The assessee appeared, 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 gain on disposal of land to the extent of Rs.18,69,72,000/- and excess of income over expenditure at Rs.155,76,64,004. An extract of the Income and Expenditure account for the financial year 2008-09 is reproduced as under:

INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31.3.2009 EXPENDITURE RS. INCOME RS.

To repairs and 76,18,544 By sale of 1,11,91,886 Maintenance application forms Administrative 15,42,79,785 Recoveries of fines 7,01,51,481 Expenses and penalties Water and 10,61,92,021 Interest 131,17,52,356 Electricity received charges Special and Other

Charges 9,43,78,709 Other receipts 14,16,03,730 Depreciation 63,04,074 Rent received 1,92,99,492 Forfeiture of Deposits 1,12,40,038 Water supply Charges 17,42,26,156

To Excess Of income by gain on Over disposal of 18,69,72,000 Expenditure 1,55,76,64,004 land

3. From the aforesaid figures, it is evident that the KIADB charges for every services it renders. Therefore, the authority was of the view, there is no element of charity or providing any services or industrial sites free of cost. After meeting all the expenses, KIADB has earned a net profit of Rs.155,76,64,004/-. Under various heads, KIADB has earned huge profit. Thereafter, 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 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 the 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 therefore after referring to the various judgments relied on it, proceed to pass an order cancelling the registration granted under Section 12AA (of Income Tax Act, 1961) with effect from the assessment year 2009-10. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal relying on the judgment in the case of Karnataka Badminton Association in ITA No.1272/Bang/2011 held; the registration already granted under Section 12A (of Income Tax Act, 1961) cannot be revoked for the reason that the Charitable Trust or Institution pursuing of advancement of objects of general public utility carried on commercial activities and therefore as the conditions stipulated in Section 12AA(3) (of Income Tax Act, 1961) do not exists in this case, set aside the order of cancellation and registration of assessee under Section 12A (of Income Tax Act, 1961). Aggrieved by the said order, revenue is in appeal.

4. This appeal is admitted to consider the following substantial questions of law:

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 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 institutions, 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) were applicable and recorded a perverse finding?

5. 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 activity carried on by the assessee is in the nature of trade, commerce or business or at any rate activity of rendering any services in relation to any trade, commerce or business 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) and therefore it ceases to be an institution for charitable purpose. Therefore, rightly the registration under Section 12A (of Income Tax Act, 1961) was cancelled which has been erroneously interfered with by the Tribunal.

6. Per contra, learned counsel appearing for the assessee contended, 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). Admittedly, the assessee’s case do not fall under that provision. Even if the activity 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), that is a matter to be considered by the assessing authority to extend the benefit of exemption or not. Therefore he submits that, no case for interference is made out.

7. From the aforesaid facts and rival contentions, 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 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: Section 12AA(3) (of Income Tax Act, 1961)

[(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.]

8. A reading of the aforesaid provision makes it very clear, a registration granted earlier under Section 12A (of Income Tax Act, 1961) can be cancelled under two circumstances; (a) If the activities of such trust or institution are not genuine, (b) The activities of trust or institution not being carried out in accordance with the object of the trust or institution. Only on those two conditions being satisfied, the registration granted under Section 12A (of Income Tax Act, 1961) could be cancelled by the authorities.

9. It is not in dispute that there is no violation of the said two conditions by the assessee. The activities carried on by the assessee is a genuine one. As could be seen from the profits they have generated, the said profit is earned by carrying on the activities in accordance with the object of the trust. Therefore, the two conditions stipulated in sub- section (3) of Section 12AA (of Income Tax Act, 1961), which empowers the authority to cancel registration, do not exists in this case. The registration granted is cancelled in view of the amendment of first proviso to Section 2(15) (of Income Tax Act, 1961). That is not a ground specified in the Statute for cancellation of the registration. In fact, sub-section(8) to 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 (of Income Tax Act, 1961) or Section 12 (of Income Tax Act, 1961) 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 revenue. Not withstanding the fact that the assessee is conferred registration under Section 12A (of Income Tax Act, 1961), unless the assessee falls within Section 2(15) (of Income Tax Act, 1961), 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 with 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, registration cannot be cancelled, which is precisely the Tribunal has held. In that view of the matter, we do not see any merit. The substantial questions of law are answered in favour of the assessee and against the revenue.

Hence, the appeal is dismissed.

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JUDGE

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JUDGE