Case Law Details
ITAT BANGALORE BENCH ‘C’
Kodava Samaja
Versus
Director of Income-tax (Exemption)
IT Appeal NO. 200 (BANG.) of 2012
[ASSESSMENT YEAR 2009-10]
FEBRUARY 8, 2013
ORDER
N.V. Vasudevan, Judicial Member
This is an appeal by the assessee against the order dated 15.12.2011 of the DIT(Exemptions), passed u/s. 12AA(3) of the Income-tax Act, 1961 [hereinafter referred to as “the Act” in short”], whereby the DIT(E) cancelled the registration already granted to the assessee u/s. 12A of the Act.
2. The assessee is a society registered under the Societies Registration Act. It was granted a certificate of registration u/s. 12A of the Act vide order under No.PRO/718/10A/Vol.A-II/K.386 dated 27.06.1980. The main objections for which the assessee was formed as per its Memorandum of Association was as follows:-
“(a) To Preserve, Protect and Maintain, the traditional customs, culture, heritage and language of the Kodavas.
(b) To promote and advance the social, cultural economic, educational, physical and spiritual progress and development of the members of the Samaja.
(c) To promote educational institutions such as schools, colleges and professional colleges of Medical, Engineering, Agriculture and other allied subjects. To promote higher education and to impart training and competence to the youth for entry in Civil and Defence services and to provide them with placement services.
(d) To Provide for Construction and running of community halls, auditorium, Open air theatres, Schools, Colleges, Social service camps, Hospitals, Nursing Homes, Old age homes, Working women’s and Student hostels, Sports and Games Centers, social and Cultural Centers for the benefit of the Kodava Community in particular and the General Public at large.
(e) To promote Social Welfare, Health Care, Employment opportunities, Infrastructure development, Resettlement of Ex-Servicemen, Para Military personnel, War Widows, Disabled and to support those who are in financial need in Kodava Community and the general public at large.
(f) To promote Sports, recreation clubs, libraries, public reading rooms and other places of learning.”
3. The Provisions of Sec.2(15) of the Act, which defines the expression “Charitable purpose” for the purpose of the Act had undergone an amendment by the Finance Act, 2008 with effect from 01-04-2009. The expression of charitable purpose, prior to the aforesaid amendment read as follows:-
“(15) “Charitable purpose” includes relief to the poor, education, medical relief and the advancement of any other object of general public utility”
The definition after the amendment reads as follows;
“Charitable purpose” includes relief of the poor, education, medical relief, (preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest 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”.
4. It can be seen from the proviso to Sec.2(15) which came into effect from 01-04-2009 that 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. In view of the aforesaid amendment, the DIT(E) was of the view that the certificate of registration already granted to the assessee u/s. 12A of the Act should be cancelled by invoking the provisions of section 12AA(3) of the Act, because the Assessee society was carrying on activity in the nature of trade, commerce or business. The DIT(E) entertained such belief for the following reasons. From a perusal of the consolidated accounts of the assessee for the year ended 31.03.2009, the DIT(E) observed that the income of the society was 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 assessee. The DIT(E) was of the view that there was no charity involved in providing services by the assessee to its members. In this regard, he has examined the income & expenditure account of the assessee for the year ended 31.03.2009 & 31.03.2010, from which he found that the excess of income over expenditure of the assessee was Rs.63,61,403 for A.Y. 2009-10 and Rs.82,54,493 for A.Y. 2010-11. The DIT(E) therefore issued a show cause notice dated 22.11.2011 calling upon the assessee to show cause as to why the registration already granted to it u/s. 12A of the Act should not be cancelled.
5. In reply, the assessee submitted that its objects were charitable in nature and has already been accepted to be so by the revenue by granting certificate of registration u/s. 12A of the Act. The assessee also submitted that marriage hall was let out by the assessee to all persons irrespective of their caste or religion. The assessee also submitted that letting out of properties and deriving income therefrom cannot be treated as business income and in this regard, relied upon the following decisions:-
(i) CIT v. Sengunthar Thirumana Mandapam [2008] 298 ITR 330
(ii) CIT v. Sri Rao Baghadur ADK Dharmaraja Educational Charity Trust [2008] 300 ITR 365 (Mad)
(iii) Marwar Textiles (Agency) (P) Ltd. v. ITO [2009] 116 ITD 336
6. The assessee also pointed out that it also carries on sports and recreational activities. The assessee pointed out that sale of liquor was only to members and not to outsiders and therefore principle of mutuality would apply and the income so derived cannot be brought to tax. In particular, the assessee pointed out that it was also carrying out the activity of education to poor and middle class people of Karnataka.
7. The DIT(E) however was not convinced with the explanation given by the assessee. The DIT(E), after extracting the objections of the assessee, which we have already set out in the earlier part of this order and after referring to the amendment to definition of “charitable purpose” u/s. 2(15) of the Act, was of the view that though the assessee was running schools & colleges, but its predominant object was not education. He held that the assessee was running a recreation club having a liquor bar and provided tables for playing cards. He held that such activities cannot be called “charitable”. The DIT(E) also held that the Assessee cannot take the plea that it is a charitable organization since it is running a school and the surplus if any generated from other activities is utilized for the development of the education. In this regard the DIT(E ) referred to the fact that besides expenditure on educational activities, expenditure on promotion of sports, function and cultural activities meant for promoting/retaining Kodava Culture, customs, heritage and languages was only to the tune of Rs.15,50,373/- which according to him was negligible. He also held that even from educational activities the Assessee was making huge surplus year after year and there was no application of surplus/income from other activities for educational purpose. He was of the view that in any case retention or application of surplus from commercial activities is of no relevance.
8. Thereafter, the DIT(E) examined the receipts of the assessee and observed as follows:-
“It is also pertinent to note that the receipts during the FY:2008-09 accounted by the Samaja from letting out of choultry-Rs. 51,93,372, rent from tenants – Rs.16,79,197 and Kitchen rent – Rs. 2,92,500/- are commercial in nature. Apart from this, Kodava Samaja Sport and Recreation Club has shown an income of Rs. 25,90,958/- from sale of Liquor, Rs. 3,70,002/- from sale of soda soft drinks etc., room rent Rs. 8,36,480/- and card room collection Rs.2,57,531/-. Similarly, in the FY:2009-10 also there are substantial receipts from these activities. Some of the predominant activities of Samaja are evidently running of bar/restaurant and renting out of the rooms to its members/their guests and from letting out of choultry on daily basis. The Samaja’s contention that letting out of choultry is not business activity and proviso to section 2(15) of the Act are not applicable is not acceptable.”
9. The DIT(E) also distinguished the cases relied upon by the assessee. The DIT(E) was of the view that the decision of Hon’ble Madras High Court in the case of Sengunthar Thirumana Mandapam (supra), was a case of where the question involved was utilization surplus funds for other charitable purposes. Similarly, he held that the decision of the Madras High Court in the case of Sri Rao Baghadur ADK Dharmaraja Educational Charity Trust (supra) was a case, where the letting out of property was on lease basis and not on daily basis whereas in the case of the Assessee letting of the property was on a daily basis. On similar reasoning, the DIT distinguished the decision of the Mumbai ITAT decision in the case of Marwar Textiles (Agency) (P.) Ltd. (supra).
10. The DIT(E) also made a reference to the judgment of Hon’ble Karnataka High Court in the case of Sri Subharam Trust in ITA No.380/2009 dated 30.5.2011, wherein the Hon’ble Karnataka High Court held that leasing kalyana mantap is commercial in nature and such objects are not wholly charitable. He also held that where there are charitable and non-charitable activities, one has to look at the predominant activities of the assessee and in this regard referred to the judgment of the Hon’ble Delhi High Court in the case of Daulat Ram Public Trust v. CIT , [2000] 112 Taxman 128. The DIT(E) also held that the plea of the assessee that income from club facilities is exempt on the principle of mutuality cannot be accepted, because even non-members can avail the facilities of the club by visiting the club as a guest of a member. For all the above reasons, the DIT(E) cancelled the registration already granted to the assessee u/s. 12A of the Act.
11. Before us, the ld. counsel for the assessee submitted that it was not open to the DIT(E) in proceedings u/s. 12AA(3) of the Act to re-examine the objects of the trust and come to the conclusion that they are not charitable. In this regard, our attention was drawn to the following decisions:-
(i) CIT v. Sarvodaya Ilakkiya Pannai , 343 ITR 300 (Mad)
In this case, the Hon’ble Madras High Court took a view that once a certificate of registration u/s. 12A of the Act is granted, the same can be cancelled only on satisfaction of two conditions laid down in section 12AA(3) of the Act, viz., (a) that the activities of the trust or institution are not genuine; and (b) that the activities of the trust or institution are not being carried out in accordance with the objects of the trust or institution. The Hon’ble High Court expressed the view that there must be specific findings with regard to the aforesaid two conditions.
(ii) Chaturvedi Har Prasad Educational Society v. CIT, 46 DTR (Lucknow) (Trib) 121
(iii) Bharat Jyoti v. CIT 63 DTR (Lucknow)(Trib) 409
In both these decisions, it has been laid out that in an action u/s. 12AA(3) of the Act, the objects of the charitable trust cannot be re-examined by the DIT and that the two conditions laid out in section 12AA(3) should be satisfied before registration granted can be cancelled.
12. The ld. counsel for the assessee also reiterated other contentions put forth by the assessee before the DIT(E) with regard to the nature of income from letting out the kalyana mantap, education being one of the main activities of the assessee, supply of liquor being not income chargeable to tax on the principle of mutuality, etc.
13. Besides the above, our attention was also drawn to the decision of the ITAT, Bangalore Bench in the case of Karnataka Badminton Association v. DIT(E), ITA No.1272/Bang./2011, order dated 22.11.2012, wherein an identical issue has been considered by the Tribunal.
14. The ld. DR, on the other hand, relied on the order of the DIT(E). He also relied on the decision of the Hon’ble Andhra Pradesh High Court in the case of Andhra Pradesh State Seed Certification Agency v. Chief CIT [2013] 212 Taxman 493. In this decision, the Hon’ble Andhra Pradesh High Court considered the claim made by an assessee with regard to rejection of an application for approval u/s. 10(23C)(iv) of the Act, which provides for exemption from tax of any income received by any person on behalf of institution established for charitable purpose which is approved by a prescribed authority. The Hon’ble Andhra Pradesh High Court after making a reference to the definition of “charitable purpose” u/s. 2(15) of the Act as amended by the Finance Act, 2009, held that the activity of the petitioner facilitated sale of certified seeds to farmers and was facilitating trade, commerce or business in certified seeds and was therefore hit by the proviso to section 2(15) of the Act.
15. We have considered the rival submissions. The power to cancel registration already granted u/s.12AA of the Act is contained in Sec.12AA (3) of the Act and it reads as follows:
“(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. A perusal of the above provisions shows that the power to cancel registration already granted can be done in two situations;
(a) satisfaction of the Commissioner that the activities of the trust or institution are not genuine
(b) satisfaction of the Commissioner that the activities of the trust or institution are not being carried out in accordance with the objects of the trust or institution.
17. In the impugned order there is no finding on the satisfaction of any of the above two conditions. From the fact that 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 are not being carried out in accordance with the objects of the Assessee. The DIT(E ) in the impugned order has 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. As can be seen from the later part of this order, 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, if below Rs.25 lacs will still be considered as “Charitable Purpose”. Besides the above, it is 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 has already been done when a registration was granted to the assessee u/s. 12AA(1) of the Act. It is not open to the DIT(E) to re-examine the objects of the trust in proceedings u/s.12AA(3) of the Act. The decisions relied upon by the ld. counsel for the assessee in this regard support the plea of the assessee.
18. With regard to rental income from letting out the community hall, we are of the view that the decision of the Madras High court squarely supports the plea of the assessee that they cannot be regarded as business income. In our view, DIT(E) has distinguished those decisions relied upon by the assessee on rather flimsy grounds. The fact that the letting out was on a daily basis or fixed period of time, will not change the character of income. We are also of the view that the decision of the Hon’ble Karnataka High Court in the case of Sri Subharam Trust (supra) are on a totally different set of facts. It was a case of grant of deduction u/s. 80G of the Act. On facts, it was found that the kalyana mantap had been let out to one of the trustees and on those facts, the Hon’ble High court accepted the view of the Tribunal that the objects of the trust were not charitable and certificate u/s. 80-G of the Act cannot be granted. We are of the view that the aforesaid decision cannot help the case of the revenue in so far as the facts of the present case are concerned, where the letting out of the Kalyana Mandap for use by the general public is not denied. We are also of the view that the decision of the Hon’ble Delhi High Court in the case of Daulat Ram Public Trust (supra) is totally on different facts. It was a case where some of the objects of the trust were charitable and some were non-charitable. The trustees had the absolute discretion to apply the income to any of the objects. It was on those facts that the Hon’ble Delhi High Court came to the conclusion that the assessee was not entitled to the benefits of section 11 of the Act.
19. As already stated, the reasons set out in the impugned order by the DIT(E) for cancelling the registration does not satisfy any of the conditions laid down in section 12AA(3) of the Act. As far as the decision of the Andhra Pradesh High Court in the case of Andhra Pradesh State Seed Certification Agency (supra) is concerned, we are of the view that the said decision stands on a totally different footing. It was a case of exemption u/s. 10(23C)(iv) of the Act. The present case has to be decided on the parameters laid down u/s.12AA(3) of the Act. As already observed, the conditions for invoking those provisions are different. We are therefore of the view that none of the reasons given by the DIT(E) for cancellation of registration already granted to the assessee can be sustained.
20. We are also of the view that in view of the retrospective amendment to the provisions of section 2(15) of the Act by introducing the second proviso thereto by the Finance Act, 2010 w.e.f. 1.4.2009, the revenue cannot seek to revoke the registration already granted to a trust by invoking section 12AA(3) of the Act, as held by this Tribunal in the case of Karnataka Badminton Association (supra). The Tribunal in the aforesaid decision took the view that a further proviso was introduced to the provisions of Sec.2(15) of the Act, by the Finance Act 2010 with retrospective effect from 01-04-2009, which provided as follows;
“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”.
The Tribunal took note of the Memorandum explaining the provisions of Finance Bill 2012 (reported in 343 ITR 234 (stat.) at pages 286 & 287) wherein while explaining the rationale behind the introduction of second proviso to Sec.2(15) of the Act, it has been mentioned as follows;
“Assessment of charitable organization in case commercial receipts exceed the specified threshold
Sec.11 and 12 of the Act, exempt income of any charitable trust or institution, if such income is applied for charitable purposes in India and such institution is registered u/s 12AA of the Ac, 1961. Sec. 10(23C) of the IT Act, also provides exemption in respect of approved charitable funds or institutions.
Sec.2(15) of the Act provides definition of charitable purpose. It includes ‘advancement of any other object of general public utility” as charitable purpose provided that it does not involve carrying on of any activity in the nature of trade, commerce or business.
The second proviso to said section provides that in case where the activity of any trust or institution is of the nature of advancement of any other object of general public, utility, and it involves carrying on of any activity in the nature of trade, commerce or business, but the aggregate value of receipts from the commercial activities dos not exceed Rs.25,00,000/- in the previous year, then the purpose of such institution shall be considered as charitable and accordingly, the benefits of exemption shall be available to it.
Thus, a charitable trust or institution pursuing advancement of object of general public utility may be a charitable trust in one year and not a charitable trust in another year depending on the aggregate value of receipts from commercial activities.
There is, therefore, need to expressly provide in law that exemption would be available for a previous year, to a trust or institution to which firs proviso of sec.2(15) become applicable for that particular previous year.
However, this temporary excess in one year may not be treated as altering the very nature of the trust or institution so as to lead to cancellation of registration or withdrawal of approval or rescinding of the notification issued in respect of trust or institution.
Therefore, there is need to ensure that if the purpose of a trust or institution does not remain charitable due to application of the first proviso on account of commercial receipt threshold provided in the second proviso in a previous year. Then, such trust or institution would not be entitled to get benefit of exemption in respect of its income for that previous year for which such proviso is applicable. Such denial of exemption shall be mandatory by operation of law and would not be dependent on any withdrawal of approval or cancellation of registration or a notification being rescinded.
It is, therefore, proposed to amend Sec.10(23C), sec.13 and sec.143 of the Act to ensure that such organization does not get benefit of tax exemption in the year in which it’s receipts from commercial activities exceed the threshold whether or not the registration or approval granted or the notification issued is cancelled, withdrawn or rescinded.
This amendment will take effect retrospectively from 1st April, 2009 and will, accordingly, apply in relation to the assessment year 2009-10 and subsequent assessment years”. (emphasis supplied)
The Tribunal took note of the submission on behalf of the Assessee that the aggregate value of the receipts from commercial activities in a particular year might exceed a prescribed limit of Rs. 10.00 lakhs (which was the limit prior to 01-04-2012) which was enhanced to Rs. 25.00 lakhs with effect from 01-04-2012. The Tribunal took the view that if, in a particular year, the receipts from commercial activities, is less than the limit prescribed above, then not withstanding the fact that the charitable organization is carrying on activity in the nature of trade or commerce or business, it would still be entitled to the benefit u/s.11 & 12 of the IT Act, 1961. The Tribunal also took note of the submission that if, in exercise of power u/s12AA(3) of the IT Act, the DIT(E) cancels the registration granted to an assessee, then such assessee would not be entitled to benefit of exemption in a year in which the aggregate value of the receipts from commercial activity is less than the limit prescribed by the second proviso to Sec.2(15) of the Act. The Tribunal thereafter held as follows:
“12. We have considered the rival submissions. In our view, the contention put forth on behalf of the assessee deserves to be accepted. In this regard, the first aspect which has to be taken note of is the principle that the grant of registration u/s12A of the Act, does not automatically enable an assessee to claim exemption u/s 11 & 12 of the Act. The AO even in a case, where a trust or charitable organization for which registration u/s 12A of the Act subsists has to go in to the question, as to whether the income has been applied for charitable purposes and to the extent contemplated by Sec.11 & 12 of the Act. Even in a case, where the trust or charitable organization applies its income for charitable purposes, but does not have registration u/s 12A of the Act, such trust or charitable organization cannot claim the benefit of Sec.11 & 12 of the Act. It would therefore, not be correct to accept the submission of the learned DR, that when the mandatory limits are exceeded by the trust or charitable organization (as prescribed by second proviso to Sec.2(15) of the Act) then there would be no use of grant of registration. Even going by the Memorandum explaining the provisions in the Finance Bill 2012 and in particular, the second proviso to Sec.2(15) of the Act, it is clear that as to whether charitable trust or institution which pursues the advancement of objects of general public utility, will fall within the second proviso to Sec.2(15) of the Act, has to be examined each year by the AO. The DIT(E) in exercise of his powers u/s 12AA(3) of the Act, cannot curtail the right of an assessee which is 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 is, thus, 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. On this short ground, the order u/s12AA(3) is liable to be cancelled and is hereby cancelled.”
21. We are of the view that the aforesaid decision of the Tribunal supports the plea of the Assessee 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. For the reasons given above, we are of the view that the order passed u/s. 12AA(3) of the Act is liable to be quashed and the same is hereby quashed.
22. In the result, the appeal of the assessee is allowed.
