In cases where principle of mutuality applicable, registration u/s. 12AA cannot be cancelled simply by relying on first proviso to S. 2(15)

IN THE ITAT MUMBAI

Bombay Presidency Golf Club Ltd.

V/s.

Director of Income-tax (Exemptions)

IT Appeal No. 319 (Mum.) of 2012

[Assessment Year 2009-10]

MAY 30, 2012

ORDER

Amit Shukla, Judicial Member

This appeal has been filed by the assessee against the order dated 08-12-2011 passed by the Director of Income Tax (Exemption), Mumbai u/s 12AA(3) cancelling the registration granted u/s 12AA.

2. The assessee is a Club which has been granted registration u/s 12AA with effect from 01-04-2001 on the following objects :

1.  To provide a golf course at or near mazagaon sewri, reclamation in the city of Bombay and or elsewhere in the presidency of Bombay, and to lay out and prepare any such course for playing the game of golf and other purposes of the club, and to provide pavilions, lavatories, refreshment rooms and other conveniences in connection therewith, and with a view there to in particular to take on lease or otherwise acquire from the trustee of the port of Bombay vacant land at mazagaon sewri reclamation aforesaid at such rent, for such period and upon such terms and conditions as may seen expedient.

2.  To afford to the members of the club all the usual privileges, advantages, conveniences and accommodation of a club.

3.  To promote all forms of athletic sports and pastimes.

4.  To buy, repair, make, supply, sell and deal in all kinds of apparatus and appliances used in connection with sports, and all kinds of provisions and refreshments required for use by the members of the club or other persons for the time being entitled to use the club buildings or premises of the club.

5.  To promote and hold either alone or jointly with any other associations, club or person, sports meeting, competitions and matches and to give, or contribute towards prizes, medals and awards and to promote give or support dinners, balls, concerts and other entertainments.

6.  To establish, promote, or assist in establishing or promoting, and to subscribe to or become a member of any other association or club whose objects are similar, or in part similar to the objects of the Club, or the establishment or promotion of which may be beneficial to the club. Provided that no subscription be paid to any such other association or club out the funds of the club except bonafide in furtherance of the objects of the club.

7.  To purchase, take on lease, or hire or otherwise acquire any moveable or immovable property, or any rights or privileges necessary or convenient for the purpose of the Club.

8.  To construct or alter or keep in repair any buildings required for the club, and to pull down or demolish any buildings not so required.

9.  To hire and employ secretaries, clerks, managers, servants and workmen and pay them and other persons in return for services rendered to the club, salaries, wages, gratuities and pensions.

10. To invest the money of the club not immediately required. In such securities as may from time to time be determined, including any debenture, bonds or other securities issued by the club.

11. To borrow or to raise money which may be required for the purpose of the club upon bonds debentures, bills of exchange, promissory notes, or other obligations, or securities of the club, or by mortgage or change of the club property.

12. To sell, improve, manage, develop, lease mortgage, dispose of or otherwise deal with, all or any part of the property of the club, whether moveable or immovable, with power, especially to sell and distribute wine, spirits, tobacco and other stores among the members, for consumption inside the permanent or any temporary premises of the club.

13. Generally, to do all such other things, as are

Since then the assessee has been given benefit for exemption u/s 11 by the Department.

3. From the facts borne out from the impugned order, it is seen that a proposal for cancellation of registration was sent from the ITO(E)I(1), Mumbai to the DIT(E) on the ground that the assessee has been carrying on activities in the nature of trade, commerce, business etc. and is hit by the proviso to section 2(15), applicable from assessment year 2009-10. Accordingly, a show cause notice dated 31-10-2011 was issued to the assessee for cancellation of registration u/s 12AA(3). The learned DIT(E), from the details of income and expenditure account, noted the following receipts which were in the nature of commerce or trade during the assessment year 2009-10:

The learned DIT(E) also drew attention of the assessee towards newly inserted proviso to section 2(15), applicable from assessment year 2009-10 and required the assessee as to why under the said proviso the assessee’s activities should not be treated as in the nature of trade, commerce, business etc.

4. In response, the assessee submitted that it is not hit by proviso since the Club is not carrying out any activities in the nature of trade, commerce, business or any activities of rendering any service in relation to trade, commerce or business for a cess or a fee or any other consideration. Its main object is to provide facilities relating to Golf and to afford to the members of the club all the usual privilege, advantages and convenience associated with the game of Golf. It is also authorized to carry out activities which are incidental and auxiliary to promote the said game. All the receipts as have been pointed out in the show cause notice revolves around the said promotion of golf only.

5. The learned DIT(E), however, rejected the contention of the assessee and after referring to the amended provision of section 2(15) read with proviso, held that following receipts are in the nature of business income :

Further, he held that even if the aforesaid income is treated as not in the nature of trade, then also what the assessee is receiving, is income from commercial exploitation of its property in a systematic manner which is only a business income. In support of his conclusion, he referred and relied upon the judgment of Hon’ble Supreme Court in the case of Shambhu Investment (P.) Ltd. v. CIT [2003] 263 ITR 143/129 Taxman 70. He also relied upon the following decisions :

(i)  Saswad Mali Sugar Factory Ltd. v. CIT [1999] 236 ITR 706/103 Taxman 477 (Bom).

(ii)  CIT v. Halai Nemon Association [2000] 243 ITR 439/111 Taxman 326 (Mad),

(iii) Mukherjee Estate (P) Ltd. v. CIT [2000] 244 ITR 1/113 Taxman 313 (Cal).

Accordingly he held that the assessee trust is directly hit by the proviso to section 2(15) which has been introduced from assessment year 2009-10, where there is a deeming provision that such an activity is not for charitable purposes. He, therefore, cancelled the registration u/s 12AA(3) with effect from assessment year 2009-10.

6. The learned Sr. Counsel appearing on behalf of the assessee submitted that nowhere the learned DIT(E) has recorded any satisfaction that the activities of the trust are not genuine or has not been carried out in accordance with the objects of the trust. Until and unless these two conditions are not satisfied, registration granted u/s 12AA cannot be cancelled. He further submitted that cancellation of registration u/s 12AA(3) was nothing to do with the amended provisions of section 2(15) and the DIT(E) was only required to look into genuineness of the activities and objects of the trust. All the aspects which has been highlighted in the impugned order is the subject matter of assessment which has to be seen and examined by the AO in the course of assessment. In support of his contention, he has relied upon the following decisions :

(i)  Shri Shanmukhananda Fine Arts & Sangeetha Sabha v. DIT (Exemption) [2011] 48 SOT 91/14 taxmann.com 114 (Mum).

(ii)  CIT v. Surya Educational & Charitable Trust [2011] 203 Taxman 53/15 taxmann.com 12 (Punj. & Har.).

(iii) Institute of Chartered Accountants of India v. Director General of Income-tax (Exemptions) [2011] 202 Taxman 1

7. On the other hand, the learned CIT-DR submitted that for the purpose of granting registration and for cancelling the registration, one has to see the definition of “charity” as defined in section 2(15). Once the definition of “Charitable purposes” has been amended with effect from 01-04-2009, then the activities and genuineness of the trust has to be seen from the angle of new definition as has been brought in the statute. He further submitted that there is a clear cut finding by the DIT(E) about the nature of receipts which were clearly in the nature of trade and business income. He thus strongly relied upon the findings given by the DIT(E).

8. We have carefully considered the rival submissions and perused the impugned order and the material placed on record. The solitary issue involved herein this appeal is whether the registration granted under Section 12AA can be cancelled in view of the newly inserted proviso to section 2(15). Registration u/s 12AA is granted to a trust or institution for claiming exemption u/s 11 of the Act. Commissioner of Income-tax or Director of Income-tax on a receipt of an application for registration will call for such documents or information from the trust or institution as he think necessary in order to satisfy himself about the genuineness of the activities of the trust or institution and may also make such enquiries as he may deem necessary in this regard. After being satisfied himself about the objects of the trust or institution or genuineness of its activities he will grant registration. Thus, it is after these formalities, registration is granted to a trust. However, such registration granted u/s 12AA can be cancelled if the Commissioner or DIT 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 in terms of section 12AA(3). Thus power to cancel the registration already granted can be exercised u/s. 12AA(3) only under two conditions :

(i)  the activities of the trust or institution are not genuine; or

(ii)  the activities of the trust or institution are not being carried out in accordance with the objects of the trust or institution.

Except for under these two conditions, the CIT/DIT cannot cancel the registration which has already been granted earlier. Thus, under the Act, registration already granted can be cancelled if two conditions u/s.12AA(3) are satisfied and not otherwise. From the perusal of the impugned order before us, it is seen that nowhere the DIT(E) has recorded any satisfaction that the activities of the assessee trust are not genuine or are not being carried out in accordance with the objects on which it was granted registration u/s 12AA. In absence of such satisfaction, registration u/s. 12AA cannot be cancelled. Section 12AA(3) does not extend to re-examination of the “objects” of the trust or institution once registration has been granted u/s. 12AA 910. It becomes fait accompli, unless twin conditions provided under sub section (3) of section 12AA are satisfied. The only reason for cancellation in this case is that in view of the amended provisions of section 2(15) read with proviso with effect from 01-04-2009 the assessee cannot be held to be carrying out activities of charitable purposes. The insertion of proviso would not have any bearing on section 12AA (3) since it does not extend to the objects of the trust or institution but only to its activities as stated therein. Registration granted u/s. 12AA(1) cannot be subjected to cancellation u/s. 12AA(3) to re-examine or review the objects.

9. For better appreciation of the issue involved, let us examine the relevant provision of section 2(15) read with proviso which has been brought on the statute by Finance Act, 2008 with effect from 01-04-2009, which reads as under :

“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 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 out 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 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 lac rupees or less in the previous year.”

There are six categories of activities which are within the definition of charitable purposes :-

(i)  Relief to the poor;

(ii)  Education;

(iii) Medical Relief;

(iv) Preservation of environment (including watersheds, forests and wildlife);

(v)  Preservation of monuments or places or objects of artistic or historical importance; and

(vi) Advancement of any other object of general public utility.

The first proviso thus puts a rider only on the sixth category i.e. for “advancement of any other object of general public utility”, that it will not be held to be charitable purpose if it involves the carrying out 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 any other consideration, irrespective of the nature of use or application. Second proviso carves out the exception to the first proviso wherein the receipts from such activities is less than Rs.10 lakhs. Thus, the nature and dominant object of general public utility should not be in the nature trade, commerce or business. The proviso inserted with effect from 01-04-2009 need not to be analyzed as it has been subject matter of judicial scrutiny specifically the term ‘business’, ‘trade’ & ‘commerce’ by the Hon’ble Delhi High court in the case of Institute of Chartered Accountants of India (supra) wherein it was held that :

“12. As the first proviso was introduced with effect from 1st April, 2009, the scope and ambit of the said proviso to section 2(15) of the Act has to be examined and considered. Earlier orders under section 10(23C)(iv) are not relevant and are inconsequential, as they have not examined the scope and ambit of the first proviso. The proviso applies only if an institution is engaged in advancement of any other object of general public utility and postulates that such an institute is not “charitable” if it is involved in carrying on 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. The second part, “any activity of rendering any service in relation to any trade, commerce or business” obviously intends to expand the scope of the proviso to include services, which are rendered in relation to any trade, commerce or business. The proviso further stipulates that the activity must be for a cess or fee or any other consideration. The last part states that the proviso will apply even if the cess or fee or any other consideration is applied for a charitable activity/purpose. The proviso has to be given full effect to. Thus, even if cess, fee or consideration is used or utilized for charitable purposes, the proviso and the bar will apply. An institution will not be regarded as established for charitable purpose/activity under the last limb, if cess, fee or consideration is received for carrying on any activity in nature of trade, commerce or business or for any activity of rendering of any service in relation to any trade, commerce or business, even if the consideration or the money received is used in furtherance of the charitable purposes/activities. In view of the first proviso, the decisions that the application of money/profit is relevant for determining whether or not a person is carrying on charitable activity, are no longer relevant and apposite. Even if the profits earned are used for charitable purposes, but fee, cess or consideration is charged by a person for carrying on any activity in the nature of trade, commerce or business or any activity of rendering of any service in addition to any trade, commerce or business, it would be covered under the proviso and the bar/prohibition will apply.

14. The most material and relevant words in the proviso are ‘trade, business or commerce”. The activities which are undertaken by the institute/person should be in the nature of trade, commerce or business of any activity of rendering any service in relation to any trade, commerce or business.”

Thereafter the Hon’ble High Court referred and analyzed the meaning of trade, business, commerce which have been elaborated by the Constitutional Bench of Hon’ble Supreme Court in the case of Addl. CIT v. Surat Art & Silk Cloth Mfrs Association [1980] 121 ITR 1/[1979] 2 Taxman 501, and other Supreme Court decisions; Sole Trustee Loka Shikshana Trust v. CIT [1975] 101 ITR 234, State of Punjab v. Bajaj Electrical Ltd. [1968] 2 SCR 536, Khodey Distillaries Ltd. v. State of Karnataka [1995] 1 SCC 574 and CST v. Sai Publication Fund [2002] 122 Taxman 437 and also referred to various other dictionary meaning and commentary and held that :

“18. The word “business” is the broadest term and it encompasses trade, commerce and other activities. Sec. 2(13) of the IT Act defines the term ‘business’ as under

“2. Definitions –

………….

“(13) “‘business’ includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.”

19. The word “business” is a word of large and indefinite import. Sec. 2(13) defines business to include any trade, commerce or manufacture or nay adventure or concern in the nature of trade commerce or manufacture. The intention of the legislature is to make the definition extensive as the term “inclusive” has been used. The legislature has deliberately departed from giving a definite import to the term “business” but made reference to several other general terms like “trade”, “commerce”, “manufacture” and “adventure or concern in the nature of trade, commerce and manufacture.”

29. It may be, however, pointed out that the term “profit motive” is not only the sole or relevant consideration that has to be kept in mind. It is one of the aspects. Normally intention to earn profit is required. Emphasis, however, it does appear, has shifted and the concept and principle of “economic activity” has gained acceptability. The definition of the term “business ” may also vary when we are examining taxability under Sales-tax, Excise Duty, Value Added Tax, etc. because these are not taxes on income but the taxable even occurs because of the “economic activity” involved. Even if a person/an organization is carrying on trading on the principle of “no loss no profit”, it may be liable to pay taxes or comply with the statute when the charge, or incidence of tax, is on the “economic activity”. This concept is today well recognized in European Union and England [see Riverside Housing Association Ltd. v. Revenue & Customs Commr. [2006] EWHC 2383 (Ch and the case law cited therein]. It may also be also appropriate here to refer the decision of the House of Lords in town Investments ltd. & Ors. v. Department of the Environment [1977] 1 All ER 813. In this case, a Government Department was claiming benefit under a legislation that protected “business tenancies” from increase in rent. The term “business” in the said case by a majority decision was held to include government activities. It was held that the word “business” is a etymological chameleon; it suits its meaning to the context in which it is found. It is not the term of legal art but in its dictionary meaning it includes anything which is an occupation, as distinguished from pleasure-anything which is an occupation or a duty which requires attention is business. It was also observed that business conveys in ordinary meaning the notion of a distinct enterprise (not necessarily for profit) having its distinct object, distinct management and distinct assets and liabilities.”

“33. Section 2(15) defines the term ‘charitable purpose’. Therefore, while construing the term ‘business’ for the said section, the object and purpose of the section has to be kept in mind. We do not think that a very broad and extended definition of the term ‘business’ is intended for the purpose of interpreting and applying the first proviso to section 2(15) of the Act to include any transaction for a fee or money. An activity would be considered “business” if it is undertaken with a profit motive, but in some cases this may not be determinative. Normally the profit motive test should be satisfied but in a given case activity may be regarded as business even when profit motive cannot be established/proved. In such cases, there should be evidence and material to show that the activity has continued on sound and recognized business principles, and pursued with reasonable continuity. There should be facts and other circumstances which justify and show that the activity undertaken is in fact in the nature of business. The test as prescribe in Raipur Mfrs. Co.’s case (supra) and Sai Publications Fund’s case (supra) can be applied. The six indicia stipulated in Lord Fisher’s case (supra) are also relevant. Each case, therefore, has to be examined on its own facts.”

10. Thus, the test of business, trade or commerce has to be viewed from the angle that the activity of the trust has continued on business principle and pursued with reasonable continuity. If the principle and ratio laid down by the Hon’ble High Court is applied in the instant case, it would be seen that none of its receipts can be said to be arising or accruing from the activities which have been carried out for the purpose of business or in the nature of trade or commerce. All its activities are towards promotion of game of golf and other ancillary activities carried are only incidental to the said game only. Any transaction which are incidental or ancillary towards fulfillment of object of other general public utility will not normally amount to business, trade or commerce, unless there is some intention to carry on business, trade or commerce on a permanent basis or with a reasonable continuity. There is no evidence and material on record to show that the activities of the assessee trust were done on sound and recognized business principle or have been pursuing its business activities with reasonable continuity. If there is some incidental or ancillary receipts during the course of carrying out its promotional activity of game of golf or for maintenance of its club and the facilities, it cannot be held to be in the nature of business, trade or commerce. From the perusal of income and expenditure account, it is seen that there is a operating deficit of 978.96 lakhs i.e. expenditures are far more than the receipts. In such a situation a club or trust does try to generate receipts to cover its expenditure which are only for fulfillment of its objects. However, such receipts should be strictly confined to attainment of its object and not for simply accumulating surplus. Thus, the embargo or rider given in proviso to section 2(15), cannot be the ground for cancellation of registration in the case of the assessee. Even otherwise this aspect has to be examined in the course of assessment proceedings and not for the purpose of cancellation of registration u/s.12AA(3) which is confined to twin conditions laid down therein.

11. There is another angle in this case, that it is a Club and all its activities are restricted to among its members and, therefore, “principle of mutuality” applies in its case. Reliance has been placed on Board Circular No. 11 of 2008 dated 19-12-2008 by the assessee which explains the amended proviso to section 2(15) in the following manner :-

“The newly inserted proviso to section 2(15) will apply only to entities whose purpose is advancement of any other object of general public utility i.e., the fourth limb of the definition of ‘charitable purpose’ contained in section 2(15). Hence, such entities will not eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity”.

“There are industry and trade association who claim exemption from tax under section 11 on the ground that their objects are for charitable purpose as these are covered under ‘any other object of general public utility’. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such case, there must be a complete identity between the contributors and the participants. Therefore, where industry or trade associations claim both to be charitable institutions as well as mutual organizations and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the proviso to section 2(15) owing to the principle of mutuality. However, if such organizations have dealings with non-members, their claim to be charitable organizations would now be governed by the additional conditions stipulated in the proviso to section 2(15)”.

From the above, it is clear that even in terms of proviso to section 2(15), which has been clarified by the Board that in such cases where principle of mutuality are applicable, registration cannot be cancelled simply by relying on the proviso to section 2(15). No where it has been brought on the record that the activities of the assessee are not governed by “principles of mutuality” or it has been dealing with non members. Thus, from this aspect also new proviso does not apply to the case of the assessee.

12. In view of the above, we hold that cancellation of registration u/s 12AA(3) by learned DIT(E) in the case of the assessee is not tenable either in law or on facts and accordingly we set aside the order of the learned DIT(E) and direct that registration granted u/s 12AA earlier cannot be cancelled in view of the reasoning given by learned DIT(E). Accordingly ground taken by the assessee is allowed.

13. In the result, the appeal filed by the assessee is allowed.