2017 (10) TMI 1676 - AT - Income Tax

Registration under s.12AA restored from Jan 20, 1997; s.12AA(3) disallowance of expenses not a cancellation ground

ITAT HYDERABAD dismissed the Revenue's appeal and restored the assessee's registration under s.12AA w.e.f. 20 Jan 1997, holding the Co-ordinate Bench had ... Eligibility of exemption u/s 11 - Withdrawal of the registration granted earlier u/s. 12AA - assessee has lost its character as a charitable society in view of the first proviso to Section 2(15) - DIT(E) held that assessee is carrying on activities not according to its objects and further that it is carrying on commercial activities - HELD THAT:- Revenue has filed the present appeal which is under consideration. However, aggrieved with the order of the DIT(E), assessee filed an appeal before the Co-ordinate Bench of this Tribunal challenging the cancellation of the registration u/s. 12AA. The Co-ordinate Bench has passed the order in [2016 (10) TMI 537 - ITAT HYDERABAD] setting aside the order of the DIT(E) for withdrawal of registration u/s. 12AA(3) of the Act. Further, in the above order, it has opined that the expenditure which is not supported by bills and vouchers also that which can only lead to disallowance and not for withdrawal of registration u/s. 12AA(3) of the Act. With the above direction, registration of the assessee is restored w.e.f. 20th January, 1997. Since the present appeal is filed by Revenue before the findings of the Co-ordinate Bench in our considered view, at this stage, the appeal of the Revenue is not maintainable considering the findings of the Co-ordinate Bench in the order accordingly appeal filed by the Revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether cancellation of registration under section 12AA(3) and subsequent directions/remand affect the assessee's entitlement to exemption under section 11 for the relevant assessment years. 2. Whether the activities and receipts of the assessee (sale of corporate boxes, ticket sales, TV subsidy, sponsorships, in-stadia advertisements, ground fees) amount to commercial activities or trade/commerce so as to disentitle the assessee from charitable status under the first proviso to section 2(15) and to exemption under section 11. 3. Whether non-production of vouchers/bills (on account of seizure by Anti-Corruption Bureau) justifies additions/disallowances (including under section 40A(3), denial of expenditure as not applied for charitable purposes, and disallowance of depreciation) and whether the extent of disallowance made by Assessing Officer was appropriate. 4. Admissibility and effect of additional evidence (vouchers/bills) produced before the Tribunal after being collected from investigating agency, and proper procedure for verification and disposal of such evidence. ISSUE-WISE DETAILED ANALYSIS Issue 1: Effect of cancellation/remand of registration under section 12AA(3) on entitlement to exemption under section 11 Legal framework: Registration under section 12AA is a precondition for claiming exemption under section 11; cancellation under section 12AA(3) can deprive an entity of exempt status. A remand or setting aside of cancellation by an appellate forum can restore registration prospectively/backdated as directed by that forum. Precedent Treatment: The Tribunal relied on its Coordinate Bench order which set aside the cancellation and directed restoration of registration with retrospective effect (w.e.f. 20-01-1997). The Tribunal treated that Coordinate Bench order as binding for purposes of maintainability of Revenue's appeal and for entitlement to exemption. Interpretation and reasoning: The Tribunal noted that prior cancellation following survey was challenged and, on appeal, the Coordinate Bench set aside the DIT(E)'s cancellation and opined that non-production of vouchers may lead to disallowance but not to withdrawal of registration. Given that the present Revenue appeal was filed before the Coordinate Bench decision, the Tribunal found the Revenue appeal not maintainable in view of the Coordinate Bench's restorative order. The Tribunal thus concluded the assessee's registration stood restored and, subject to substantiation of expenditures, exemption under section 11 could not be denied solely for absence of registration. Ratio vs. Obiter: Ratio - where a higher/coordinate appellate order sets aside cancellation and restores registration, subsequent appeals challenging income-tax consequences for the relevant year may be untenable while that restorative order stands; absence of registration alone is not a ground for withdrawal of exemption if registration has been restored. Obiter - observations about prospective application or nuances of retrospective restoration beyond the facts were not delineated. Conclusion: Registration was held restored by operation of the Coordinate Bench order; consequently, exemption under section 11 could not be denied on the ground of absence of registration for the assessment years under consideration. Issue 2: Whether activities/receipts constitute commercial activity disentitling charitable status (section 2(15) proviso; section 11) Legal framework: The first proviso to section 2(15) excludes certain activities resembling trade/commercial undertakings from charitable purposes; income applied to charitable purposes is eligible under section 11 if the objectives and activities are charitable and consistent with the memorandum of association. Precedent Treatment: The Tribunal and CIT(A) compared facts with the decision in the case of a similarly constituted cricket association (Tamil Nadu Cricket Association), relying on that authority to conclude that analogous receipts and activities did not convert the association into a business/trade for denying exemption. Interpretation and reasoning: The CIT(A) examined the nature of receipts (TV subsidy, ticket sales, sponsorships, corporate box sales, advertisement rights) and concluded, following the Madras High Court authority concerning a cricket association, that such receipts did not amount to commercial trading such as would strip charitable character. The Tribunal accepted the CIT(A)'s reliance on that precedent and the Coordinate Bench's observation that non-supported expenditures may attract disallowance but do not, by themselves, warrant withdrawal of registration under section 12AA(3). Ratio vs. Obiter: Ratio - where an organization's core objects and activities relate to promotion and management of a sport, receipts from matches and related rights may not per se convert activities into commercial business so long as the activities are within or ancillary to its charitable objectives and applied as such. Obiter - detailed delineation of when particular types of sponsorship/franchise/advertisement receipts cross into commercial trade beyond the present facts was not expounded. Conclusion: On the facts and following binding precedent, the Tribunal found the activities and sources of income similar to those in the cited cricket association authority and concluded that the assessee was not engaged in trade/commerce so as to forfeit charitable status; entitlement to section 11 remained viable subject to substantiation of application of income. Issue 3: Validity and extent of additions/disallowances for unvouched expenditure and depreciation; correctness of AO's methodology Legal framework: Assessing Officer may make disallowances where expenditures are not vouched; section 40A(3) disallows payments above prescribed limits in certain circumstances; general principle permits disallowance where claimed expenditure is not substantiated. However, AO must quantify disallowance on evidence, reasonableness and without arbitrarily cancelling the entire claim where substantial vouchers exist. Precedent Treatment: The CIT(A) remit and subsequent confirmation of quantified disallowances (partly enhanced based on remand report) were accepted by the Tribunal, subject to verification of additional evidence filed before the Tribunal. Interpretation and reasoning: AO disallowed portions of expenditure for lack of vouchers, initially 20% under section 40A(3) and 10% for unsubstantiated expenditure, plus 10% depreciation disallowance on unproved assets. CIT(A) referred back and, after AO's remand report, confirmed a quantified disallowance (Rs. 4,34,950) and sustained other disallowances including confirmation of a large sum (Rs. 88,28,563) as not applied for charitable purposes because no supporting evidence was produced before authorities. The Tribunal, however, accepted additional evidence produced before it (vouchers seized earlier) and remitted that evidence to the AO for verification, noting that documentation seized by investigating agency when later produced can be examined to validate expenditures; the Tribunal directed the AO to verify and give the assessee opportunity of hearing. The Tribunal emphasized that unsupported expenditure may lead to disallowance but does not automatically justify withdrawal of registration. Ratio vs. Obiter: Ratio - disallowance for unvouched expenditure is permissible but must be based on quantification and proper verification; subsequent production of seized vouchers before the Tribunal can be remitted to AO for verification and potential acceptance; non-production may cause disallowance but not necessarily cancellation of registration. Obiter - the precise percentages applied (10%/20%) are fact-specific and do not set universal benchmarks beyond the assessment of reasonableness on facts. Conclusion: The confirmed disallowances by CIT(A) were accepted in part, but the Tribunal remitted additional evidence to the AO for verification and directed opportunity to be given to the assessee; therefore, amounts potentially allowable if substantiated after verification may be applied for charitable purposes and considered for deduction under section 11. Issue 4: Admissibility and effect of additional evidence produced before the Tribunal Legal framework: Tribunal has discretion to admit additional evidence not produced before revenue authorities in the interest of justice and may remit such evidence to AO for verification and decision in accordance with law, affording the assessee opportunity of hearing. Precedent Treatment: The Tribunal accepted the additional evidence (vouchers) produced before it, noting these were seized earlier by ACB and only later obtained by the assessee; it followed the Coordinate Bench direction that non-production may lead to disallowance but not to withdrawal of registration. Interpretation and reasoning: Recognizing that the bills/vouchers now produced were earlier seized and therefore unavailable to the assessee at the time of assessment/CIT(A), the Tribunal exercised its discretion to admit the material and remit it to the AO for verification. The Tribunal emphasized the need for AO to verify the genuineness and applicability of such evidence and to allow the assessee a proper opportunity to be heard in respect of any amendment of assessment or reversal of disallowance. Ratio vs. Obiter: Ratio - Tribunal may admit additional evidence seized by investigating agency and later obtained, and should remit such evidence to the AO for verification and decision with opportunity to be heard. Obiter - procedural limits or time-bar implications were not exhaustively addressed beyond directing remand and verification. Conclusion: Additional evidence was admitted and remitted to the AO for verification; the Tribunal directed that if substantiation is established, expenditures may be considered for deduction under section 11, subject to due process and hearing. Overall Conclusions 1. Revenue's appeals challenging CIT(A)'s allowance of exemption under section 11 were dismissed as not maintainable in view of the Coordinate Bench order restoring registration; registration stood restored and absence of registration could not be the sole basis to deny exemption. 2. On the question of whether receipts constituted commercial trading, the Tribunal followed precedent and concluded, on the facts, that the activities did not convert the entity into a trade/commerce undertaking disentitling it from charitable status. 3. Disallowances for unvouched expenditure and depreciation were sustained to the extent quantified by the authorities, but the Tribunal received additional documentary evidence and remitted it to the Assessing Officer for verification, directing opportunity of hearing; substantiated expenditures may be allowed for section 11 purposes. 4. Relief granted to the assessee by admission of additional evidence was for verification only; final tax consequence is to be determined by AO after verification in accordance with law.