2012 (7) TMI 266 - AT - Income Tax

Cancellation of registration u/s 12AA(3)- 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 - Held that - Considering the Order cancelling registration it is noted that DIT(E) has nowhere 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. Cancellation 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 - 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 - decided in favour of assessee.

Summary

Issues Involved:
1. Cancellation of registration under Section 12AA(3) of the Income Tax Act.
2. Applicability of amended provisions of Section 2(15) regarding "charitable purposes."
3. Examination of the "principle of mutuality."

Detailed Analysis:

1. Cancellation of Registration under Section 12AA(3):
The primary issue was whether the registration granted under Section 12AA could be canceled due to the newly inserted proviso to Section 2(15). The assessee, a club, had its registration canceled by the Director of Income Tax (Exemption) [DIT(E)] on the grounds that its activities were in the nature of trade, commerce, or business, thus violating the amended Section 2(15). The tribunal emphasized that registration under Section 12AA can only be canceled if the activities are not genuine or not carried out in accordance with the objects of the trust. It was noted that the DIT(E) did not record any satisfaction that the activities were not genuine or were not in line with the trust's objects.

2. Applicability of Amended Provisions of Section 2(15):
The amendment to Section 2(15) introduced a proviso stating that "advancement of any other object of general public utility" shall not be considered a charitable purpose if it involves trade, commerce, or business activities. The tribunal analyzed the nature of the club's receipts and activities, concluding that they were primarily for promoting the game of golf and were incidental to this purpose. The tribunal cited the Delhi High Court's interpretation in the case of Institute of Chartered Accountants of India vs. DGIT(E), which clarified that activities should not be considered business if they are incidental to the main charitable purpose and not pursued with a profit motive.

3. Examination of the "Principle of Mutuality":
The tribunal also considered the principle of mutuality, which applies when transactions occur among members of an association contributing to a common fund without dealings with outside bodies. The tribunal referred to the CBDT Circular No. 11 of 2008, which clarified that entities operating under the principle of mutuality are not impacted by the proviso to Section 2(15). The tribunal found that the club's activities were restricted to its members, and there was no evidence of dealings with non-members, thus the principle of mutuality applied.

Conclusion:
The tribunal concluded that the DIT(E)'s order canceling the registration was not tenable in law or on facts. The tribunal set aside the order, reinstating the registration under Section 12AA, as the conditions for cancellation under Section 12AA(3) were not met and the amended proviso to Section 2(15) did not apply to the assessee's activities. The appeal filed by the assessee was allowed.