2018 (6) TMI 1656 - AT - Income Tax

Tribunal rules in favor of trust, deems sports facilities as charitable activities.

The Tribunal allowed the appeal of the assessee, holding that the activities of the trust, including providing sports facilities, were aligned with its ... Cancellation of registration under section 12AA(3) - proviso to definition of 'charitable purpose' in section 2(15) - change in nature of activities as requirement for cancellation - CBDT Circular No. 21 of 2016 - limits on cancellation for excess business receipts - retrospective cancellation of registrationCancellation of registration under section 12AA(3) - proviso to definition of 'charitable purpose' in section 2(15) - change in nature of activities as requirement for cancellation - CBDT Circular No. 21 of 2016 - limits on cancellation for excess business receipts - Whether cancellation of the assessee's registration under section 12AA(3) on the ground that the trust is hit by the proviso to section 2(15) was justified - HELD THAT: - The Tribunal found that the assessee's principal activities - provision of swimming facilities, promotion of aquatic sports and allied training for other sports - remained the same as previously recognised and formed part of the objects for which the Government of Maharashtra had granted the lease. Cancellation under section 12AA(3) arises only where activities are not genuine or there is a change in the nature of activities. Reliance was placed on the Bombay High Court decision in Khar Gymkhana and CBDT Circular No.21 of 2016 which prescribe that mere excess receipts from commercial activities (bringing the proviso to section 2(15) into play) do not, by themselves, justify cancellation of registration; the Assessing Officer may deny exemption for the year while framing assessment, but registration continues unless there is a change in nature or genuineness of activities. As there was no change in nature of activities and no finding of non-genuineness independent of receipt levels, the cancellation on the basis that the trust was hit by the proviso was unsustainable.Cancellation under section 12AA(3) was not justified; the order cancelling registration was set aside and DIT(Exemption) directed to grant registration.Retrospective cancellation of registration - proviso to definition of 'charitable purpose' in section 2(15) - Whether the DIT(Exemptions) could withdraw/cancel the registration retrospectively with effect from AY 2009-10 - HELD THAT: - The impugned cancellation was made effective from AY 2009-10 on the basis that the proviso to section 2(15) came into effect for that year. The Tribunal, applying the reasoning of the Bombay High Court and CBDT Circular No.21 of 2016, held that retrospective withdrawal of registration solely because receipts exceeded the proviso threshold in that year is not permissible in the absence of change in nature or genuineness of activities. The correct course, where receipts from commercial activities exceed the proviso limit, is denial of exemption for the relevant assessment year during assessment proceedings rather than retrospective undoing of registration.The retrospective cancellation from AY 2009-10 was not sustainable; registration could not be withdrawn retrospectively on the said basis.Final Conclusion: The Tribunal allowed the assessee's appeal, set aside the DIT(Exemptions) order cancelling registration, held that mere operation of the proviso to section 2(15) (by reason of excess receipts) without any change in nature or genuineness of activities does not justify cancellation under section 12AA(3), and directed the DIT(Exemptions) to grant registration. Issues Involved:1. Jurisdiction to cancel registration under section 12AA(3).2. Applicability of proviso to section 2(15) regarding charitable purpose.3. Nature of activities of the trust and their alignment with the trust's objectives.4. Retrospective effect of cancellation of registration.Issue-wise Detailed Analysis:1. Jurisdiction to cancel registration under section 12AA(3):The assessee argued that the Director of Income Tax (Exemptions) [DIT(E)] erred in holding jurisdiction to cancel the registration under section 12AA(3) of the Act. The section applies only if the activities of the trust are not genuine or not being carried out in accordance with the objects of the trust. The assessee maintained that for over 35 years, it had been entitled to exemption under section 11, indicating the genuineness of its activities.2. Applicability of proviso to section 2(15) regarding charitable purpose:The DIT(E) held that the assessee was hit by the proviso to section 2(15), which states that the advancement of any other object of general public utility shall not be a charitable purpose if it involves trade, commerce, or business activities. The DIT(E) concluded that the trust’s activities, such as providing swimming pool facilities and other sports facilities, were commercial in nature and thus, the trust could not be considered charitable. The assessee contested this, arguing that these activities were part of the trust's objectives and had been previously considered charitable.3. Nature of activities of the trust and their alignment with the trust's objectives:The DIT(E) observed that the trust's activities, including providing sports facilities and running a canteen, were not charitable and were in the nature of business income. The assessee argued that these activities were aligned with the trust’s objectives, which had been upheld by the Tribunal and the High Court in earlier assessments. The Tribunal noted that these activities had been consistently considered charitable in past assessments and were part of the trust's objectives as recognized by the Government of Maharashtra.4. Retrospective effect of cancellation of registration:The assessee argued that the cancellation of registration could not be applied retrospectively. The DIT(E) had cancelled the registration with effect from AY 2009-10, following the amendment to section 2(15). The Tribunal, referencing the Bombay High Court decision in the case of Khar Gymkhana, noted that the jurisdiction to cancel registration arises only if there is a change in the nature of activities or if the activities are not genuine. The Tribunal concluded that there was no change in the nature of the trust’s activities and that the effect of section 11 could be considered during assessment, but the registration should not be cancelled.Conclusion:The Tribunal found that the main activities of the assessee trust, such as providing sports facilities, were aligned with its objectives and had been previously considered charitable. The Tribunal held that the DIT(E) could not cancel the registration merely because the proviso to section 2(15) had come into play. The Tribunal directed the DIT(E) to grant the registration, following the precedent set by the Bombay High Court in the case of Khar Gymkhana. The appeal of the assessee was allowed, and the order was pronounced on 15-06-2018.