2018 (4) TMI 865 - AT - Income Tax

Tribunal Overturns CIT Rejection, Emphasizes Commercial Nature for Tax Exemption

The Tribunal found that the CIT was not justified in rejecting the registration application under section 12AA of the Income Tax Act. The Tribunal ... Registration under section 12AA - charitable purpose under section 2(15) - test of predominant object - genuineness of objects as distinct from commencement of activities - commerciality to be examined at assessment under sections 11 and 12 - threshold for commercial receipts under the proviso to section 2(15) - CBDT guidance on cancellation of registrationRegistration under section 12AA - genuineness of objects as distinct from commencement of activities - test of predominant object - commerciality to be examined at assessment under sections 11 and 12 - CBDT guidance on cancellation of registration - Whether the Commissioner was justified in rejecting the society's application for registration under section 12AA on the grounds that activities were limited, members were charged fees, and future involvement of sponsors/donors might introduce commercial elements. - HELD THAT: - The Tribunal held that the Commissioner erred in refusing registration on the stated grounds. At the registration stage the proper inquiry is into the genuineness of the objects of the society and not into activities which have not yet commenced or are only nascent; refusal merely because activities are little or not substantial is impermissible. The Tribunal applied the settled principle that the test is whether the predominant object of activities is charitable and not whether incidental surplus or prudent self-sustenance arises from those activities. Allegations or apprehensions about possible future commercial aspects (such as sponsorships, advertisements, ticketing or broadcasting) cannot, without positive evidence that the objects or activities are non-genuine or predominantly for profit, justify denial of registration. Questions of whether specific activities are commercial and whether receipts from them fall within the exclusion in the definition of charitable purpose are to be examined at assessment under sections 11 and 12; temporary or speculative excess of commercial receipts does not mandate denial or cancellation of registration, particularly in view of the CBDT guidance that cancellation should not be automatic merely because thresholds in the proviso to section 2(15) are crossed in a particular year. On these foundations and relying on the authorities cited in the order, the Tribunal directed grant of registration under section 12AA. [Paras 14, 16, 17]Impugned order of the Commissioner rejecting registration is set aside and the Commissioner is directed to grant registration under section 12AA to the assessee society.Final Conclusion: The appeal is allowed: registration under section 12AA must be granted to the society as the Commissioner was not justified in refusing registration on the grounds of limited activities, membership fees, or speculative commercial involvement; commerciality and entitlement to exemption are matters for assessment and ordinary scrutiny, and cancellation of registration should not be mechanically resorted to in light of the CBDT guidance. Issues Involved:1. Rejection of application for registration under section 12AA of the Income Tax Act.Issue-wise Detailed Analysis:1. Rejection of Application for Registration under Section 12AA:The appeal was filed by the assessee against the order of the Commissioner of Income Tax (CIT), Cuttack, dated 29.7.2013, which rejected the application for registration under section 12AA of the Income Tax Act.Facts of the Case:The assessee, a registered society under the Societies Registration Act, 1860, applied for registration under section 12AA of the Income Tax Act on 21.1.2013. The CIT rejected the application on the grounds that the financial statements for the last three years showed minimal surplus and limited activities, primarily construction of a tennis court and charging fees from participants. The CIT observed that the society's activities were not charitable or philanthropic and anticipated that future activities involving sponsors and donors might lead to commercial considerations, which would not qualify as 'charity' under section 2(15) of the Act.Arguments by the Assessee:The assessee argued that for granting registration, the CIT should consider the objects of the trust and the genuineness of its activities. The presence of incidental surplus should not be a ground for rejecting the registration application.Arguments by the Revenue:The Revenue relied on the order of the CIT.Tribunal's Observations:The Tribunal noted that the assessee is a registered public society formed on 23.2.1985, and its application for registration under section 12AA was denied by the CIT. The Tribunal examined the objects of the society, which included promoting tennis and other sports, acquiring property for its aims, and conducting necessary activities to achieve its objectives.Legal Precedents Considered:1. Hardayal Charitable & Educational Trust vs CIT (355 ITR 534): The court held that at the time of registration under section 12AA, the CIT should not focus on the activities if they have not commenced but should test the genuineness of the objects.2. CIT vs. Red Rose School (212 CTR 394): The court emphasized that registration cannot be refused based on presumptions about the misuse of income or apprehensions about non-charitable activities.3. Professional Golf Tour of India vs CIT (143 ITD 165): The Tribunal held that prudent management to become self-sustained does not make a society commercial, and activities aimed at promoting a sport do not negate its charitable nature.4. Queen’s Educational Society vs CIT (372 ITR 699): The Supreme Court discussed the definition of 'charitable purpose' and stated that the predominant object should be to serve the charitable purpose, not profit-making.Tribunal's Conclusion:The Tribunal found that the CIT, Cuttack, was not justified in refusing registration under section 12AA based on the grounds stated. The CIT could not demonstrate that any object of the society was non-charitable or any activity was non-genuine. The Tribunal emphasized that minimal activities or incidental surplus should not be grounds for denial of registration. The issue of commercial nature should be examined during the assessment for exemption under sections 11 and 12.CBDT Circular No. 21/2016:The Tribunal referred to the CBDT circular clarifying that exceeding the cut-off for receipts from commercial activities in a particular year does not mandate cancellation of registration unless there is a change in the nature of activities.Order:The Tribunal set aside the order of the CIT, Cuttack, and directed the CIT to grant registration under section 12AA of the Act to the assessee society. The appeal filed by the assessee was allowed.Result:The appeal filed by the assessee was allowed, and the order was pronounced on 12/04/2018.