If Trust conducts marathon in commercial manner, then it cannot be said to be existing only for charitable purposes

IN THE ITAT HYDERABAD BENCH ‘A’

Hyderabad Runners Society

Versus

Director of Income-tax (Exemptions) Hyderabad

IT APPEAL NO. 974 (HYD.) OF 2012

[ASSESSMENT YEAR 2012-13]

OCTOBER 12, 2012

ORDER

Chandra Poojari, Accountant Member

This appeal by the assessee is directed against the order of the Director of Income-tax (Exemptions) [DIT(E) for short], Hyderabad dated 30.4.2012.

2. The assessee’s raised the following grounds of appeal:

(a)  The DIT(E) erred in law and facts of the case in not granting the approval under section 12A of the Income-tax Act, 1961.

(b)  Your appellant submits that having accepted that the Society activities are fully in the nature of ‘advancement of any other object of general public utility’, wrongly applied the proviso to section 2(15), as this activity of running does not fall under “carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business”, DIT(E) ought to have granted approval.

(c)  DIT(E) ought to have appreciated the fact that there are no sales and the collection is only by way of participation fee only by Members of the Society and public at large, erred in rejecting the application.

(d)  Your appellant object for the denial of the approval on the ground that wrong address was given without affording an opportunity to explain the same or gather the correct particulars. Your appellant submits that the present address as on the date of application was given.

3. Brief facts of the issue are that the assessee filed an application for registration u/s. 12AA of the Act on 19.10.2011. The DIT(E) called for details of specific points and documents and books of account and bills and vouchers for verification. On verification of the documents the DIT(E) found that in Form No. 10A and bye-laws of the society, registered office of the society is mentioned that it is situated at 4th Floor, Plot Nos. 6/2 and 6/3, Huda Techno Enclave, Hightec City, Madhapur, Hyderabad-81. However, as per the certificate issued by the Registrar of Societies, the address of the society was mentioned as Vijaypuri, ECIL Post, Hyderabad-61.

4. Further it was observed by the DIT(E) that in the By-Laws, under the Membership, it was clarified that the Membership of the society shall be of four categories viz., Core Members, Runners, Corporate Members and Honorary Members. Though the fee amount in respect of Core Member is mentioned at Rs. 5000, in clause 3.4 such fees in respect of the other two members i.e, Runners and Corporate Members have not been indicated. In clause 5.1, relating to corporate members, it is mentioned that the Corporate Membership shall be open to corporate organizations and shall comprise of membership for a group of its employees on payment of a onetime corporate fees at the time of induction and thereafter an annual membership fees from 1st April of the subsequent year. Further, in clause 5.2 relating to criteria for corporate membership, it is mentioned that “The qualifying criteria for Corporate Membership, the number of Runners per Corporate, the quantum of One Time Corporate fee and the Annual Membership Fee shall be decided and fixed by the Managing Committee from time to time at its Regular Meeting.”

5. In absence of such induction fees and annual fees amount in respect of the above two categories of members, mentioned therein, it clearly shows that the assessee society has not furnished complete and full information in its said By-Laws and it is up to the discretion of the managing committee of the above society for deciding on such memberships and fixing those fees. Under these circumstances, the above society cannot be treated as a public charitable organization. Further, during the proceedings, the above society has filed a profit & loss account for the period from 01.04.2011 to 31.03.2012 i.e., financial year 2011-12 determining first-of-all gross profit at Rs. 27,53,538/- and net profit at Rs. 3,69,648.60. Such account up to the point of determination of gross profit as furnished in that statement, is as under:

6. From the above financial statement for the financial year 2011-12, it is seen that under direct income a sum of Rs. 2,44,425 is shown as collection from Auroville Marathon 2012 and a sum of Rs. 22,80,506 from participant fee-Receipt-Hvd-Marathon 2011. The Hyderabad Marathon was conducted on 28th August, 2011. The receipts from fees etc., from both the Marathons i.e., Auroville Marathon & Hyderabad Marathon during the financial year 2011-12 were to the extent of Rs. 25,24,931 i.e., more than Rs. 25 lakhs. As may be seen from that financial statement, the total receipts in the hands of the above society from sale of T-shirts and from fees etc., received from both the above Marathons, during financial year 2011-12, were exceeding Rs. 25 lakhs. Since, the assessee society has shown the entire such receipts as direct income under the major head ‘Sales account’, in that statement and the activities in case of the society are fully in the nature of advancement of any other object of general public utility, it is thus hit by the amended proviso to section 2(15) of the Act which read as under:

“Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.

Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is ten lakh rupees or less in the previous year. (in place of Rupees Ten Lakhs, Rupees Twenty Five Lakhs is substituted vide Finance Act 2011, w.e.f. 01-04-2012 i.e., A. Y 2012-13)”

7. Having regard to above amended proviso and since the activities in the case of above society were in nature of advancement of any other object of general public utility and moreover the gross receipts from different fees etc., during the financial year 2011-12 were exceeding Rs. 25 lakhs, under that circumstance they are hit by the said amended proviso to section 2(15) of the Act and hence such activities in their case cannot be considered as for charitable purpose and thus they cannot be allowed registration u/s 12AA of the Act. In view of the above, the DIT(E) rejected registration u/s. 12AA of the Act.

8. The learned AR submitted that the assessee is registered as a Society under the Andhra Pradesh Societies Registration Act, 2001 on 23.10.2010 and the copy of the bye laws of the society and the registration certificate have been submitted to the DIT(E) along with the application. The assessee is engaged in the promotion of running as the most preferred form of fitness activity in the twin cities and also help runners attempt endurance running or sport as part of healthy lifestyle. The assessee, Hyderabad Runners is not profit oriented society and is a group of passionate runners with regular running activities in the city. Members of the Society have been actively participating in marathon events across India and overseas with over 170 full marathon and 600+ half marathon participations since its inception. Its members have participated in events all over the country and across 60 cities spanning five continents and sometimes its members have gone on to do a podium finish. The assessee operates through an online group with 1100+ runners and growing each day with the aim of making running as the most preferred form of fitness activity in the twin cities. The society has been bringing out to the general public at large the awareness, benefit and advantages of running. The offline activities include four running and fitness related activities. It is an ancient, scientific and profound belief that daily running improves the body fitness and mental stability. Even today most of the training centres like Military Training, , Police Training, and various residential training centres start their day only with running/jogging for at least about 2-3 km to keep them physically and mentally fit. It is an undisputed fact that jogging is one form of running and marathon is an advanced and technically higher level of jogging. The marathon is a long-distance running event with an official distance of 42.195 kilometres (26 miles and 385 yards)

9. The AR submitted that it is also a known fact that marathon is a sport by itself and the popularity is evident by the fact that there are nearly 1600 marathons organized all over the world across all the seven continents. In the international and national sport events and as well as in the various levels of sports events conducted we do have relay marathons or marathons. The society through its Members are conducting events at intervals presently annually, bring this awareness to the public at large. In this process the society collects an amount from the participants, which is termed as participation fee. Therefore, it falls within the definition of charitable purpose as defined in section 2(15) coming under the limb “any other act general public utility”. The DIT(E) though undoubtedly accepts that the activity is under the limb “any other act of general public utility” wrongly construed that collection of fee becomes either carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to trade, commerce or business, which is totally incorrect. Conducting a marathon is a Herculean job, needs to comply with certain national and international standards, provide the runners / participants with energy supplements, electric gadgets to monitor their speed, time and location, all these expenses are met of participation fee, donations, sponsorship amount and membership fee. The AR submitted that the assessee brings awareness of its activity through the online groups notifying the locations and details of the runs. The group had more than 500 participants during each month for the training sessions, runs, motivational talks and also other running related activities which have all been conducted free of cost since its inception. This entire expenditure has been met out of the members’ contribution and out of the Hyderabad Marathon conducted in August, 2011.

10. The AR submitted that the DIT(E) ought to have appreciated the above and granted approval. On the contrary merely because the head sales account has been used, without any finding, brushed aside the real activity and denied the approval, which is not correct. As regards the fee and Membership it was explained that they are categorized as:

(1) Core Members – It consists of the founding members of the society which currently constitutes seven members and it is proposed to increase it to a total of 11 members. The membership fee has been fixed at Rs. 5000 per head apart from the criterion of completing a full marathon once in years and also a half marathon in every calendar year.

(2) Associate Members – It consists of online members of the group who have been active and do plan to take part in the regular offline weekly and other activities. There is no criterion for it apart from paying an annual fee which is yet to be finalized. Currently the core members are spending money on their own to keep the activities of the group going seamlessly.

(3) Corporate Members – Since the group has been set up with the idea of making distance running as the most preferred form of fitness activity, the group has been contemplating approaching corporate bodies to help spread distance running as a form of activity as part of the individual and corporate wellness programmes. The proposed membership centre will concentrate on a corporate signing up with Hyderabad Runners Society to develop a wellness programme based on running and also training for 10K, Half-Marathons and Full-Marathons and also the number of people who have signed up for such a programme. Since the group has been evolving over the last few years and since there are no full time staff for this, a membership fees nor structure have not been evolved. During August, 2011, the group for the first time in the city conducted a marathon as per international guidelines and it has been well-received. This has spurred the group to announce the second edition of the event to be held on 26th August, 2012 which has been endorsed by 90% of the running groups in the country. There has been a lot of awareness created during the last couple of years and the group will evolve a corporate membership programme and based on the quantum of work, it will be priced accordingly.

(4) Honorary Memberships: This kind of membership includes attracting members of repute from the field of sports and also other fields where there have been achievements in the area of endurance sports such as marathon running, triathlons, etc., there is no fee and this is only by invitation and consensus amongst the core members. Till date, we have not appointed anyone.

11. The learned AR submitted that the assessee has approached various corporate bodies like Bank of America, Deloitte, GMR Group, PEPSI, Airtel, etc., and they have shown interest in making their employees to participate in the runs on a regular basis. In August 2011 Marathon, Airtel was the main sponsor in addition to the above other corporate bodies. About 400 participants are exclusively from the corporate sector out of 1300 participants of the August 2011 Marathon. Thought not formalized the Committee is in the process of fixing the Annual Membership fee for each corporate at Rs. 50,000. A participation fees for corporate employees will be charged at approximately Rs. 300 per annum which entitles them to participate in all the events conducted by the group. In case of Associate Members Rs. 750/- per annum and they can participate in all events. The Society will provide during each event water, energy drinks, medical aid, and advice and facilitate availability of equipments for weekly runs conducted. In addition to this, the entry fee to the members for annual full marathon and half yearly half marathons will be at concessional rates. The primary and dominant objective is to promote Running as a medium of fitness, good health amongst the citizens and particularly the youth through our training programmes and events.

12. The learned AR submitted that this is not disputed by the DIT(E) on one hand and on the other hand says this is commercial without there being an iota commercial activity. Any surplus from the activities also would be applied only for development of popularity of endurance running as a daily exercise. The membership is open to members of general public who are interested in participating in the activities, without any restrictions. Even on the winding up of the society, all its assets remaining after settlement of all its liabilities shall not be distributed amongst the members but shall be handed over to any other similar organization registered as charitable organization under the provisions of section 12A and other applicable provisions of Income Tax Act. Therefore, all the conditions generally required for registration of society for general public utility have been complied with. The AR prayed that approval under section 12A may be granted.

13. The AR also drew our attention to a decision of Andhra Pradesh High Court in the case of CIT v. Andhra Pradesh Riding Club [1987] 168 ITR 393, wherein the High Court held that “Assessee club engaged in promoting horse riding among section of the public being open to general public and its income being utilized for those activities, is said to be carrying on an object of general public activity not involving carrying on of any activity for profit under s. 2(15) and hence is entitled for exemption under s. 11(1).” The AR submitted that the objects of the society are also of similar nature and fall under the same category based on the primary and dominant objectives. The DIT(E) should have raised the question with regard to the change in address of the assessee. The present address was given in the application, without finding out the facts cannot come to the conclusion that the assessee has provided wrong address and based on this the approval should not have been denied. It is brought to the notice of the DIT(E) that the assessee has submitted Membership Application online to Association of International Marathons and Distance Race (AIMS), London and submitted a letter from Sports Authority of Andhra Pradesh (SAAP) giving permission and support for the Marathon 2012. The DIT(E) without considering all the above facts rejected the application.

14. The learned DR relied on the order of the DIT(E).

15. We have heard both the parties and perused the material on record. Section 12AA of the Act provides as follows:

“12AA. (1) The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) of section 12A shall –

(a)  call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and

(b)  after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he –

(i)  shall pass an order in writing registering the trust or institution;

(ii)  shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution,

and a copy of such order shall be sent to the applicant:

Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.

(1A) All applications, pending before the Chief Commissioner on which no order has been passed under clause (b) of sub-section (1) before the 1st day of June, 1999, shall stand transferred on that day to the Commissioner and the Commissioner may proceed with such applications under that sub-section from the stage at which they were on that day.

(2) Every order granting or refusing registration under clause (b) of sub-section (1) shall be passed before the expiry of six months from the end of the month in which the application was received under clause (a) section 12A.

(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) 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:”

16. Section 12AA of the Act confers power on the commissioner while considering the application for registration of a trust or institution made under the same provisions to call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of the activities of the trust of institution and also to make such enquiry as he may deem necessary in this behalf and if he satisfies himself about the object of the trust or institution and genuineness of the activities, he may pass an order in writing registering the trust or institution and if he is not satisfied he would refuse registration. In other words, the DIT has to satisfy himself about the genuineness of the activities of trust or institution in consonance with the objects of the trust or institution. Thus on enquiry, the learned DIT shall have to examine as to whether the assessee who has moved an application for registration is actually in the activities which are genuine. If the activities are genuine registration has to be granted.

17. In the present case the assessee’s application for registration u/s. 12AA of the Act was rejected on the reason that the assessee’s activities are not charitable in nature. The activities said to be carried on by the assessee were found for promoting commercial activities rather than charitable activities. Before us the learned AR submitted that the assessee collected fees for conducting marathon at Auroville and Hyderabad of more than Rs. 25 lakhs. According to the AR, it is only incidental to the main object of assessee’s charitable activities.

18. Charitable purpose has been defined under s. 2(15) of the IT Act. This clause has been substituted by the Finance Act, 2008 w.e.f. 1st April., 2009. The clause, which is relevant for the assessment year 2009-10 and relevant to the financial year 2008-09 onward, is as under :

“(15) ‘charitable purpose’ includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility :

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention of the income from such activity.”

19. In the Notes on Clauses to the Finance Bill, 2008, it is clearly mentioned that cl. 3 of the Finance Bill, which seeks amendment to s. 2 of the IT Act relating to definition of charitable purpose will take effect from 1st April, 2009 and will accordingly apply in relation to the asst. yr. 2009-10 and subsequent assessment years. In the memorandum explaining the provisions of the Finance Bill, it has been mentioned as under for bringing the amendment to the definition of the charitable purpose :

“Sec. 2(15) of the Act defines ‘charitable purpose’ to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility.

It has been noticed that a number of entities operating on commercial lines are claiming exemption on their income either under s. 10(23C) of s. 11 of the Act on the ground that they are charitable institutions. This is based on the argument that they are engaged in the ‘advancement of an object of general public utility’ as is included in the fourth limb of the current definition of ‘charitable purpose’. Such a claim, when made in respect of an activity carried out on commercial lines, is contrary to the intention of the provision.

With a view to limiting the scope of the phrase ‘advancement of any other object of general public utility’, it is proposed to amend s. 2(15) so as to provide that ‘the advancement of any other object of general public utility’ shall not be a charitable purpose if it involves the carrying on of—

(a)  any activity in the nature of trade, commerce or business of,

(b)  any activity of rendering of any service in relation to any trade, commerce or business, for a fee or cess or any other consideration, irrespective of the nature of use or application of the income from such activity, or the retention of such income, by the concerned entity.

This amendment will take effect from the 1st April, 2009 and will accordingly apply in relation to the asst. yr. 2009-10 and subsequent assessment years.”

20. Sec. 12(1) of the IT Act is reproduced as under :

“12(1) Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of s. 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and s. 13 shall apply accordingly.”

21. The voluntary contribution received by a trust created only for charitable or religious purposes is to be deemed as income u/s. 11 of the Act. In case some of the objects of the trust are charitable and some of the objects can be termed as non charitable then such a trust will not be covered u/s. 12 because then it is not a trust created wholly for charitable purposes. One has to go through the object clause of the trust deed and to see whether the activities carried on by the assessee are in the nature of charitable or not. As per the proviso to section 2(15) of the Act an object of general public utility will not be a charitable purpose if it is involved carrying on of any activity in the nature of trade, commerce or business or any activity rendering any service in relation to any trade, commerce, business for a cess or fee or any other consideration, irrespective of nature of use or application of retention of the income from such activities. If the assessee carried on any activity in the nature of trade, commerce or business, the assessee cannot be termed as existing for the purpose of charitable or religious activities. As per proviso to section 2(15) if the object of the trust is advancement of any other object of general public utility then the activity of rendering any service in relation to trade, commerce or business will make such an object of general public utility as not qualifying for charitable purpose. If the assessee conducts marathon in a commercial manner, then the trust cannot be said to be existing only for charitable purposes in view of the amended definition of the charitable purpose w.e.f. 1.4.2008. In view of this the DIT(E) is directed to examine whether receipt of fees from marathon is incidental to charitable object of the assessee or it is the main activity of the assessee and decide thereupon. If the assessee falls under the purview of amended provision of section 2(15), then registration is not to be granted.

22. In the result, appeal of the assessee is allowed for statistical purposes.