2015 (1) TMI 1109 - AT - Income Tax

Registration under section 12A declined - assessee is not engaged in charitable activity within the meanings of that expression under section 2 (15) - Held that - 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. There has to be, therefore, something more than mere charging a fees by an institution which can demonstrate that activity undertaken is in the nature of business, and the onus of demonstrating that fact is on the revenue authorities. The reason for this onus is simple; nobody can be expected to prove a negative, as was held by Hon ble Supreme Court in the case of K P Varghese Vs ITO 1981 (9) TMI 1 - SUPREME Court , and the assessee cannot, therefore, be asked to prove that the assessee is not carrying on an activity with business motive. A perusal of the impugned order, however, indicates that the only reason for which the assessee is held to be pursuing business activity is charging of fees and there is no other legally sustainable finding to support that conclusion. In view of these facts, as also bearing in mind, we are of the considered view that the learned Director of Income Tax (Exemptions) was indeed in error in rejecting the registration under section 12 A, as sought by the assessee. We, therefore, direct the learned Director to grant the registration under section 12A. - Decided in favour of assessee.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Rejection of registration under section 12A of the Income Tax Act, 1961.
3. Determination of whether the appellant's activities qualify as charitable under section 2(15) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal was delayed by 73 days. The appellant, a defense establishment, explained that the delay was due to the misplacement of the impugned order by an outsourced agency. The documents were retrieved on 18th May 2011, and the appeal was filed on 26th May 2011 after consulting professionals. Considering the appellant's limited interaction with tax laws and the reasonable explanation provided, the delay was condoned by the Tribunal.

2. Rejection of Registration under Section 12A:
The appellant's application for registration under section 12A was rejected by the Director of Income Tax (Exemptions). The rejection was based on the observation that the appellant's main objective was to provide placement services to ex-army personnel and their dependents for a fee, which was deemed a commercial activity in violation of Section 2(15) of the Income Tax Act, 1961.

3. Determination of Charitable Activities:
The Tribunal examined whether the appellant's activities qualified as charitable under section 2(15). The appellant, a welfare and non-profit organization set up by the Indian Army, aimed to arrange placements for retiring/retired army personnel, their widows, and dependents, and to assist them in skill development and career counseling. The Tribunal noted that the nominal fees charged were barely sufficient to cover operational costs and did not change the fundamental charitable nature of the activities. The Tribunal emphasized that the services were provided to individuals rather than any trade, commerce, or business, and thus, the second limb of Explanation to Section 2(15) did not apply.

The Tribunal referred to Rule 23(d) of the appellant's rule book, which detailed the nominal fees charged for registration. The Tribunal held that the modest fees and the restriction of services to army personnel and their dependents indicated the charitable intent of the organization. Additionally, the Tribunal highlighted that the appellant operated on a "No Profit No Loss Basis" and was under the direct control of the Ministry of Defence, further supporting its charitable nature.

The Tribunal concluded that the mere charging of fees did not convert a charitable activity into a commercial one. The true test for a business activity includes profit motive and continuity on recognized business principles, neither of which applied to the appellant. The Tribunal cited the Delhi High Court's observations in the case of the Institute of Chartered Accountants of India Vs DGIT (Exemption) to support this view.

The Tribunal found that the Director of Income Tax (Exemptions) had erred in rejecting the registration under section 12A. The Tribunal directed the Director to grant the registration under section 12A of the Income Tax Act, 1961.

Conclusion:
The appeal was allowed, and the Tribunal directed the Director of Income Tax (Exemptions) to grant the registration under section 12A of the Income Tax Act, 1961. The judgment emphasized that the appellant's activities were charitable in nature, and the nominal fees charged did not alter this fundamental character.