2015 (6) TMI 318 - AT - Income Tax

Registration U/s.12A canceled - whether assessee is not a charitable organisation as it is engaged in the business activity as a commercial concern and that it is a contractor to the Government of Andhra Pradesh - Held that - In the present case the DIT (E) has not established that the conditions (a) and (b) mentioned in section 12AA(3) of the I.T. Act are attracted. Therefore, order of the DIT (E) improper relying on the decision of the Tamil Nadu Cricket Association vs. DIT (E) Madras (2013 (12) TMI 833 - MADRAS HIGH COURT ). Also Director of Income Tax has proceeded to hold that if business is carried on by a charitable organisation, it will forfeit its exemption. The assessee is producing nutritious food to supply the ready-to-eat food to pregnant women, undernourished children and lactating mothers. The organisation is fulfilling its objects by supplying food so produced to the beneficiaries for the implementation of schemes promoted by the Women & Child Welfare Department of the Government of Andhra Pradesh and other such related programmes. The nutritious food produced by the assessee is not sold in the commercial market nor it is supplied to the parties other than the beneficiaries under the schemes referred to above. It cannot be referred to as a contractor to the Government of Andhra Pradesh as it is involved in manufacture and supply of the food to the beneficiaries. Only, the supervisory activities are carried on by the Government of Andhra Pradesh, in bringing out schemes for the benefit of the beneficiaries and fixing a suitable price to meet the cost of manufacturing and other overheads. Thus, there is no prohibition in the Act that a charitable institution should not indulge in any business activity. The only restriction is that it should conform to the provisions of subsections 4 & 4A of section 11 of the I.T. Act and the activity should come within the provisions of section 2(15) defining the charitable purposes.For the reason given above, we set aside the impugned order of the ld DIT (E) - Decided in favour of assessee.

Issues Involved:
1. Cancellation of Registration under Section 12A of the Income Tax Act.
2. Determination of whether the assessee's activities are charitable or commercial.
3. Application of Section 11(4A) and Section 2(15) of the Income Tax Act.
4. Jurisdiction of the Director of Income Tax (Exemptions) to cancel registration.

Issue-wise Detailed Analysis:

1. Cancellation of Registration under Section 12A of the Income Tax Act:
The Director of Income Tax (Exemptions) [DIT (E)] proposed to cancel the registration under Section 12A on the grounds that the assessee was engaged in business activities, resulting in high margins, and was not a charitable organization but a commercial concern. The DIT (E) referred to assessment records for multiple years showing the assessee carrying on the business of manufacturing and supplying Ready-to-Eat (RTE) Nutritious Food under government-sponsored nutrition programs. The DIT (E) concluded that the assessee forfeited the exemption under Section 11 due to these business activities.

2. Determination of whether the assessee's activities are charitable or commercial:
The assessee argued that its business activities were incidental to attaining the charitable objects of the Trust and permissible under Section 11(4A). The object of the institution was "relief of poor and medical relief," and the amendment to Section 2(15) effective from 1.4.2009 did not disentitle the exemption under Section 11. The assessee supplied nutritious food to beneficiaries under government schemes and did not sell in the commercial market, thus fulfilling its charitable objectives. The profits were ploughed back into carrying out the objects of the assessee.

3. Application of Section 11(4A) and Section 2(15) of the Income Tax Act:
The assessee contended that even if it carried on business, it would be entitled to exemption under Section 11 if the business was incidental to attaining its charitable objects. The amendment in the Finance Act 2008 to Section 2(15) affected only those organizations claiming exemption under the fourth limb, i.e., the advancement of any other object of general public utility, if they carried on business. The assessee's objects pertained to "relief of the poor" and "medical relief," thus continuing to enjoy the exemption even after the amendment. The DIT (E) did not establish that the assessee's activities were not genuine or not in accordance with its objects, as required under Section 12AA(3).

4. Jurisdiction of the Director of Income Tax (Exemptions) to cancel registration:
The assessee argued that the issues raised by the DIT (E) had already been decided by the Commissioner of Income Tax (Appeals) [CIT (A)] for previous assessment years, and hence the DIT (E) had no jurisdiction to pass an order on the same issues. The Tribunal found that the DIT (E) should establish that the activities of the assessee were not genuine or not carried on in accordance with the objects of the institution to invoke Section 12AA(3). The DIT (E) failed to do so, and the Tribunal relied on the decision in the case of Tamil Nadu Cricket Association vs. DIT (E), Madras (360 ITR 633).

Conclusion:
The Tribunal concluded that there was no prohibition in the Act against a charitable institution indulging in business activity, provided it conformed to the provisions of subsections 4 & 4A of Section 11 and the activity fell within the definition of charitable purposes under Section 2(15). The assessee's activities of producing and supplying nutritious food to beneficiaries under government schemes were charitable and not commercial. The order of the DIT (E) was set aside, and the appeal of the assessee was allowed. The Tribunal pronounced the order in the Open Court on 15th May 2015.

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