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Registration U/s. 12AA cannot be cancelled merely because collection exceeds threshold limit provided u/s 2(15)

CBDT has also clarified that in view of this position, it shall not be mandatory, for the registration granted u/s 12AA of the Act to a charitable institution, to be cancelled merely on the ground that the cut off specified in the proviso to section 2(15) of the Act is exceeded in a particular year without there being any change in the nature of the activities of the institution

Telangana State Seed Certification Agency Vs. CIT (Exemptions) (ITAT Hyderabad)

Hon’ble High Court has held that the assessee is rendering services in relation to trade commerce or business and since its income exceeded Rs. 25.00 lakhs, it cannot be treated as a charitable institution. This decision of the Hon’ble High Court is dated 17.12.2012. We find that there are amendments to section 2(15) subsequent to this date. Vide Finance Act of 2015 w.e.f. 1.4.2016, the cut off benchmark has been changed to 20% of the total receipts instead of the fixed limit of Rs. 25.00 lakhs as it existed earlier. Further, we also observe that vide Finance Act of 2012, a new sub-section 8 has been inserted u/s 13 to provide that such organization would not get the benefit of tax exemption in the particular year in which its receipts from the commerce activities exceeds the threshold limit whether or not the registration granted is cancelled and the amendment has been made retrospectively from 1.4.2009 and therefore, it applies to A.Ys 2009-10 on wards. The CBDT has also clarified that in view of this position, it shall not be mandatory, for the registration granted u/s 12AA of the Act to a charitable institution, to be cancelled merely on the ground that the cut off specified in the proviso to section 2(15) of the Act is exceeded in a particular year without there being any change in the nature of the activities of the institution and that, if in any particular year, the specified limit exceeds, the tax exemption would be denied to the institution in that year and cancellation of the registration would not be mandatory unless such cancellation become necessary on the ground(s) prescribed under the Act. Thus, it can be seen that the assessee is carrying on activity for advancement of any other object or general public utility, falling within the definition of “charitable purpose” as defined u/s 2(15) of the Act and may be eligible for exemption u/s 2(15) of the Act, in a year where it does not cross the cut-off percentage and may not be eligible for exemption in the year, in which it crosses the cut-off mark. Therefore, it cannot be made to seek registration u/s 12AA of the Act in each of the year where it shall become eligible to claim exemption. The Hon’ble High Court was considering the application u/s 10(23)(C) of the Act which would ultimately take the assessee out of the tax ambit, unless it violates the terms & conditions of such exemption.

The CIT (E) is supposed to consider the aims and objects of the society for grant of registration u/s 12AA of the Act. The Hon’ble High Court has held that the assessee’s activities falls under the activity of advancement of any general public utility and we are of the opinion that the registration u/s 12AA of the Act should be considered on its own merits. If the assessee is carrying on or is rendering any services with respect to any trade, commerce or business and crosses the threshold limit provided u/s 2(15) of the Act, then its income shall not be exempt from tax u/s 11 of the Act in the relevant A.Y. Therefore, we direct the CIT (E) to consider the aims and objects of the society and grant registration u/s 12AA of the Act if the assessee’s activities falls under the definition of charitable purpose u/s 2(15) of the Act without reference to the proviso there under. Therefore, assessee’s appeal is treated as allowed for statistical purposes.

RELEVANT EXTRACT OF ITAT JUDGMENT

This is assessee’s appeal against the order of the Commissioner of Income Tax (Exemptions), dated 29.04.20 16 rejecting the assessee’s application for grant of registration u/s 12AA of the Act.

2. Brief facts of the case are that the assessee is a society registered as the A.P. State Seed Certification Agency. It filed an application for registration u/s 1 2AA of the Act by filing form No. 10A on 30.10.2015 along with (i) the certified copy of the instrument under which the Trust was established; (ii) list of Trustees; (iii) copy of PAN; and (iv) a brief note on activities of the organization. The CIT (E) required the assessee to produce the original Trust Deed/MOU for verification and to furnish detailed reply on specific points. Though the learned representative of the assessee appeared from time to time, he failed to file the required details. On going through the information already filed by the Society, the CIT (E) observed that the Hon’ble High Court of Andhra Pradesh has held that the objects of A.P. State Seed Certification Agency are not for “advancement of any other object of general public utility” and hence not for ‘charitable purposes’ and dismissed the writ filed by the A.P. State Seed Certification Agency. Observing that the said case law is squarely applicable to the assessee society, he rejected the assessee’s application, against which, the assessee is in appeal before us.

3. The learned Counsel for the assessee submitted that the assessee has been formed after the formation of the State of Telangana, but the aims and objects of the assessee society are the same as in the case of A.P. State Seed Certification Agency. He submitted that the issue before the Hon’ble A.P. High Court is different from the issue of registration u/s 12AA of the Act before the CIT (E). Therefore, according to him, the CIT(E) ought not to have relied upon the decision of the Hon’ble High Court to deny the registration. He submitted that in the case of A.P. State Seed Certification Agency, the issue before the Hon’ble High Court was the registration u/s 10(23)C(iv) of the Act and the Hon’ble High Court, after considering the amended proviso to section 2(15) of the Act, observed that the assessee was engaged in the activity of trade/business/commerce and that its income was more than Rs.25.00 lakhs for the relevant A.Ys, has denied the registration u/s 10(23)(C)(iv) of the Act, whereas according to him, the Hon’ble High Court has agreed that the activities carried on by the assessee were towards the advancement of general public utility. He submitted that vide registration u/s 10(23)(C) of the Act, the income of the assessee would go entirely out of the tax ambit whereas the registration u/s 12A would only enable the assessee to claim the deduction u/s 11 of the Act which is again subject to verification by the AO year after year. Therefore, according to him, both the sections are independent and stand part and the decision of the Hon’ble High Court with respect to allowability of section 10(23)(C) cannot be applied to a case of rejection of registration u/s 12AA of the Act. He has also drawn our attention to the main objects of the assessee society to demonstrate that the seed certification is for the purpose of the benefit of the farmers of the State and therefore, the work involves “advancement of general public utility”. He submitted that section 2(15) has since undergone an amendment, whereby the cut off bench mark has been fixed at 20% of the total receipts instead of the fixed limit of Rs.25.00 lakhs w.e.f. 1.4.20 16. He referred to the circular of CBDT dated 27.05.20 16 which clarified that it shall not be mandatory to cancel the registration already granted u/s 12AA to a charitable institution, merely because the cut off specified in the provisions of section 2(15), is exceeded in a particular year without there being any change in the nature of the activities of the institution and that if in any particular year, the specified cut off is exceeded, the tax exemption would be denied to the Institution in that year and cancellation of registration would not be mandatory unless such cancellation becomes necessary on the ground(s) prescribed under the Act. Thus, he submitted that the eligibility of the assessee to claim exemption u/s 11 of the Act is to be verified by the AO every year, even though the registration is granted u/s 12A of the Act unlike the registration granted u/s 10(23)(C) of the Act under which the exemptions shall be allowed till such registration is revoked. Thus, he prayed that the assessee should be granted registration u/s 1 2AA of the Act. He has also placed reliance upon the various case law to the effect that section 12A registration shall not be cancelled in view of the applicability of the amended proviso to section 2(15) of the I.T. Act.

4. The learned DR, on the other hand, supported the orders of the CIT (E) and also placed reliance upon the decision of the Hon’ble High Court of Andhra Pradesh in the case of A.P. State Seed Certification Agency referred to by the CIT (E).

5. Having regard to the rival contentions and the material on record, we find that the assessee earlier known as A.P. State Seed Certification Agency, on formation of the State of Telangana in the year 2014, had been formed as Telangana State Seed certification Agency and submitted an application for registration u/s 12AA of the Act in Form No. 10A. We find that the CIT (E), without verifying the aims and objects of the assessee society, has rejected the same by following the decision of the Hon’ble A.P. High Court in the case of A.P. State Seed Certification Agency vs. Chief Commissioner of Income Tax & Others, reported in (2013) 356 ITR 0360 (A.P). We have gone through the decision of the Hon’ble High Court and we find that the grievance of the assessee therein was against the rejection of the assessee’s application for approval u/s 10(23)(C) of the Act. While considering the assessee’s application for renewal of registration u/s 10(23)(C)(iv) of the Act for the A.Y 2010-11, the Hon’ble High Court has also considered the audited accounts of the assessee for the financial year 2009-10 relevant for the A.Y 2010-11 and observed that the assessee is carrying on the activity of rendering the service in relation to any trade, commerce of business under the provisions of section 2(15) of the Act and therefore, such an activity falls within the “advancement of any other object or general public utility” included in the terms charitable purpose as defined in section 2(15) of the Act. The Hon’ble High Court held that, in view of the fact that the certification of the seed by the petitioners facilitates trade, commerce or business in the certifying the seeds of the clients of the petitioner, the proviso to sub-section would come into operation and therefore, its activities cannot be held to be for charitable purposes and therefore, upheld the rejection of the petitioner’s appeal for renewal of registration u/s 10(23(C)(iv) of the Act. The relevant portion of the decision is reproduced here under for ready reference:

“17. Section 8 of the Seeds Act, 1966 empowers the State Government or the Central Government in consultation with the State Government to establish, by notification in the official gazette, a certification agency for the State to carry out the functions entrusted to the certification agency by or under the Seeds Act. The petitioner was registered under the Andhra Pradesh (Telangana Area) Public Societies Registration Act, 1350 Fasli with registration No. 334/76. By G.O.Ms.No.435 Food and Agriculture (EP-II) Department dated 01-06- 1977, the State Government approved the proposal of the Director of Agriculture and directed that the petitioner shall carry on the functions of the certification agency under the Seeds Act, 1966 in the Andhra Pradesh State with effect from 01-06-1977. The objects of the petitioner have already been set out above. The petitioner thus certifies the Seeds which meet the minimum seeds certification standards as per Indian Minimum Seed Certification Standards, 1988. Seed growers enter into contract with a society/agent, who approaches the petitioner for certification of the seeds and after securing certification, they sell the certified seeds to the farmers at a market price determined by them. The petitioner collects a fee for providing certification as the process of certification involves technical and scientific evaluation of the seeds although the fee collected by it would be enough to enable it to sustain its activities and may not result in much profit. The term “advancement of any other object of general public utility” used in Section 2 (15) of the Act includes all objects to promote the welfare of the public particularly when the object is to promote or protect the interest of a particular trade or industry. The activity of the petitioner which facilitates sale of certified seeds to farmers therefore falls within “advancement of any other object of general public utility” included in the definition of the term “charitable purpose” as defined in Section 2 (15) of the Act but in view of the fact that certification of seeds by the petitioner facilitates trade, commerce or business in the certified seeds by the client of the petitioner, the proviso to the said section would come into operation. Thus the petitioner’s activity assists the sale of certified seeds and is “in relation to any trade, commerce or business” and therefore its activity cannot be held to be a “charitable purpose”. In this view of the matter, we hold that the 1st respondent rightly rejected the application of the petitioner for approval under Section 10 (23C) (iv) of the Act”.

6. We thus, find that the Hon’ble High Court has held that the assessee is rendering services in relation to trade commerce or business and since its income exceeded Rs. 25.00 lakhs, it cannot be treated as a charitable institution. This decision of the Hon’ble High Court is dated 17.12.2012. We find that there are amendments to section 2(15) subsequent to this date. Vide Finance Act of 2015 w.e.f. 1.4.2016, the cut off benchmark has been changed to 20% of the total receipts instead of the fixed limit of Rs. 25.00 lakhs as it existed earlier. Further, we also observe that vide Finance Act of 2012, a new sub-section 8 has been inserted u/s 13 to provide that such organization would not get the benefit of tax exemption in the particular year in which its receipts from the commerce activities exceeds the threshold limit whether or not the registration granted is cancelled and the amendment has been made retrospectively from 1.4.2009 and therefore, it applies to A.Ys 2009-10 on wards. The CBDT has also clarified that in view of this position, it shall not be mandatory, for the registration granted u/s 12AA of the Act to a charitable institution, to be cancelled merely on the ground that the cut off specified in the proviso to section 2(15) of the Act is exceeded in a particular year without there being any change in the nature of the activities of the institution and that, if in any particular year, the specified limit exceeds, the tax exemption would be denied to the institution in that year and cancellation of the registration would not be mandatory unless such cancellation become necessary on the ground(s) prescribed under the Act. Thus, it can be seen that the assessee is carrying on activity for advancement of any other object or general public utility, falling within the definition of “charitable purpose” as defined u/s 2(15) of the Act and may be eligible for exemption u/s 2(15) of the Act, in a year where it does not cross the cut-off percentage and may not be eligible for exemption in the year, in which it crosses the cut-off mark. Therefore, it cannot be made to seek registration u/s 12AA of the Act in each of the year where it shall become eligible to claim exemption. The Hon’ble High Court was considering the application u/s 10(23)(C) of the Act which would ultimately take the assessee out of the tax ambit, unless it violates the terms & conditions of such exemption.

7. The CIT (E) is supposed to consider the aims and objects of the society for grant of registration u/s 12AA of the Act. The Hon’ble High Court has held that the assessee’s activities falls under the activity of advancement of any general public utility and we are of the opinion that the registration u/s 12AA of the Act should be considered on its own merits. If the assessee is carrying on or is rendering any services with respect to any trade, commerce or business and crosses the threshold limit provided u/s 2(15) of the Act, then its income shall not be exempt from tax u/s 11 of the Act in the relevant A.Y. Therefore, we direct the CIT (E) to consider the aims and objects of the society and grant registration u/s 12AA of the Act if the assessee’s activities falls under the definition of charitable purpose u/s 2(15) of the Act without reference to the proviso there under. Therefore, assessee’s appeal is treated as allowed for statistical purposes.

8. In the result, assessee’s appeal is treated as allowed for statistical purposes.

Order pronounced in the Open Court on 25th January, 2018.

Categories: Income Tax
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