2013 (11) TMI 1280 - AT - Income Tax

Tribunal reinstates registration under Income-tax Act, citing failure to meet statutory requirements

The Tribunal overturned the cancellation of registration under Section 12A of the Income-tax Act, 1961, finding that the DIT(E) failed to meet the ... Cancellation of Registration Granted u/s 12A of Income Tax Act,1961 – Objects of the Trust – Charitable or not – Proceedings u/s 12AA (3) - Held that:- Registration already granted to the Assessee cannot be cancelled on the ground that the Assessee which pursues as a charitable purpose, “advancement of objects of general public utility” carries on commercial activities -the order passed u/s. 12AA(3) of the Act was liable to be quashed – Relying upon CIT v. Sarvodaya Ilakkiya Pannai [2012 (2) TMI 160 - Madras High Court] The income of the society comprised of receipts from the activity of letting out a kalyana mantapa owned by it on rent, fees received from the members on sale of liquor in the bar run by the assesse, it does not follow that the activities of the Assessee are not genuine or that the activities were not being carried out in accordance with the objects of the Assessee - The DIT(E) in the order had only commented about the objects of the Assessee not being charitable - That cannot be a ground for the DIT (E) to invoke the provisions of Sec.2(15) of the Act - by reason of the statutory amendment to the definition of “Charitable Purpose” u/s.2(15) of the Act by insertion of a second proviso, by the Finance Act, 2010 with retrospective effect from 1.4.2009, even if there are receipt from commercial activities - it was not open to the DIT(E) in an action u/s. 12AA(3) of the Act to examine the objects of the trust to see if the same were charitable in nature - That had already been done when a registration was granted to the assessee u/s. 12AA(1) of the Act - It was not open to the DIT(E) to re-examine the objects of the trust in proceedings u/s.12AA(3) of the Act. The DIT(E) in exercise of his powers u/s 12AA(3) of the Act, cannot curtail the right of an assessee which was charitable trust or institution which pursues the advancement of objects of general public utility from claiming the exemption u/s 11 & 12 of the Act in a year in which the receipts of the charitable organization from commercial activities is less than the limits prescribed in the second proviso to Sec.2(15) of the Act - It was clear from the reading of the provisions of Sec.2(15) of the IT Act, 1961 as well as Sec.12AA(3) of the Act, that registration already granted u/s 12A cannot be revoked for the reasons that the charitable trust or institution pursuing of advancement of objects of general public utility carries on commercial activities - the order u/s12AA(3) is liable to be cancelled. Nature of Income – Business Income or not - Rental Income from letting out – Held that:- Relying upon COMMISSIONER OF INCOME-TAX Versus SENGUNTHAR THIRUMANA MANDAPAM [2006 (6) TMI 64 - MADRAS HIGH COURT] - The kalyana mantap had been let out to one of the trustees - The trustees had the absolute discretion to apply the income to any of the objects - the reasons set out in the order by the DIT(E) for canceling the registration does not satisfy any of the conditions laid down in section 12AA(3) of the Act - Decided in favour of Assessee. Issues Involved:1. Cancellation of registration under Section 12A of the Income-tax Act, 1961.2. Definition and scope of 'charitable purpose' under Section 2(15) of the Act.3. Examination of the activities of the assessee in the context of trade, commerce, or business.4. Application of the principle of mutuality.5. Legal precedents and their applicability to the case.Detailed Analysis:1. Cancellation of Registration under Section 12A of the Income-tax Act, 1961:The primary issue was the cancellation of the registration granted to the assessee under Section 12A of the Income-tax Act, 1961. The DIT(E) cancelled the registration on the grounds that the assessee was engaged in activities in the nature of trade, commerce, or business, which, according to the DIT(E), disqualified it from being considered a charitable organization under the amended definition of 'charitable purpose' in Section 2(15) of the Act.2. Definition and Scope of 'Charitable Purpose' under Section 2(15) of the Act:The amendment to Section 2(15) by the Finance Act, 2008, effective from 01-04-2009, introduced a proviso stating that the advancement of any other object of general public utility shall not be considered a charitable purpose if it involves carrying on any activity in the nature of trade, commerce, or business. The DIT(E) interpreted this amendment to mean that the assessee's activities of letting out a kalyana mantapa and running a bar were commercial in nature and thus not charitable.3. Examination of the Activities of the Assessee in the Context of Trade, Commerce, or Business:The DIT(E) observed that the income from letting out the kalyana mantapa, fees from the sale of liquor, and other commercial activities indicated that the assessee was engaged in business activities. The DIT(E) noted substantial receipts from these activities and concluded that the predominant activities of the assessee were commercial rather than charitable.4. Application of the Principle of Mutuality:The assessee argued that the sale of liquor was only to members and not to outsiders, invoking the principle of mutuality. The DIT(E) rejected this argument, stating that non-members could avail the facilities as guests of members, thereby negating the principle of mutuality.5. Legal Precedents and Their Applicability to the Case:The assessee cited several legal precedents to support its case, arguing that letting out properties and deriving income therefrom cannot be treated as business income. The DIT(E) distinguished these cases on various grounds, such as the nature of letting out (daily basis vs. lease basis) and the specific facts of each case.The Tribunal, however, found that the DIT(E) did not provide specific findings to satisfy the conditions under Section 12AA(3) for cancellation of registration, which are:(a) The activities of the trust are not genuine.(b) The activities are not being carried out in accordance with the objects of the trust.The Tribunal emphasized that the DIT(E) cannot re-examine the objects of the trust in proceedings under Section 12AA(3) and that the reasons given did not meet the statutory requirements for cancellation. The Tribunal also referenced the retrospective amendment to Section 2(15) by the Finance Act, 2010, which provided that if the aggregate value of receipts from commercial activities is below Rs. 25 lakhs, the purpose shall still be considered charitable.Conclusion:The Tribunal concluded that the DIT(E) did not satisfy the conditions required to cancel the registration under Section 12AA(3) and that the reasons provided were insufficient. The Tribunal quashed the order of the DIT(E) and allowed the appeal of the assessee, reinstating the registration under Section 12A.