2016 (6) TMI 489 - HC - Income Tax

Registration u/s. 12A - whether in view of amended Section 2(15) of the Act, restricting the definition charitable purpose , by excluding carrying on any trade, commerce and business in receipt of an amount in excess of ₹ 25 lakhs would by itself entitle the Director of Income Tax to cancel a Registration under Section 12AA (3) of the Act? - Held that - Circular No.21 of 2016 clearly provides that mere receipts on account of business being in excess of the limits in the proviso would not result in cancellation of Registration granted under Section 12AA of the Act unless there is a change in nature of activities of the institution. Admittedly, there is no change in nature of activities of the institution during the subject Assessment Year. The further submission on behalf of the Revenue that looking at the quantum of receipts on account of commercial activities, it is unlikely/ improbable that in the subsequent Assessment Years, the receipts would fall below ₹ 25 lakhs and therefore, the Commissioner is entitled to cancel the Registration. The aforesaid submission made on behalf of the Revenue is based not on facts as existing but on probability of future events. We are unable to accept the submission based on clairvoyance. Further, we are unable to understand what prejudice is caused to the Revenue since whenever the receipts on account of commercial activities is in excess of the limits provided in proviso to Section 2(15) of the Act, the Assessing Officer is mandated/ required to deny exemption under Section 11 of the Act as provided in Circular No.21 of 2016 dated 27th May, 2016. Accordingly, the issue stands covered in favour of the Revenue by virtue of Circular No.21 of 2016. In view of the issue being covered by the CBDT Circular No.21 of 2016, no grievance against the impugned order can be made by the Revenue.

Summary

Issues:
- Interpretation of Section 2(15) of the Income Tax Act, 1961 regarding "charitable purpose"
- Validity of cancellation of registration under Section 12AA(3) of the Act based on commercial activities exceeding a specified limit
- Application of Circular No.21 of 2016 by the Central Board of Direct Taxes in determining the cancellation of registration

Analysis:

Issue 1: Interpretation of Section 2(15) regarding "charitable purpose"
The appeal challenges the Tribunal's decision on whether the activities of the assessee qualify as "charitable purpose" under Section 2(15) of the Income Tax Act, 1961. The dispute arises from the amended Section 2(15), which restricts the definition of "charitable purpose" by excluding activities of trade, commerce, or business exceeding a specified amount. The Tribunal held that cancellation of registration under Section 12AA(3) is justified only if the trust's activities are not genuine or not aligned with its objects.

Issue 2: Validity of cancellation of registration under Section 12AA(3)
The impugned order set aside the cancellation of registration under Section 12AA(3) by the Director of Income Tax, emphasizing that cancellation is warranted only if there is a change in the nature of the institution's activities. The Circular No.21 of 2016 clarifies that cancellation should not be automatic based solely on commercial receipts exceeding the specified limit, unless there is a fundamental change in the institution's activities. The Revenue argues that the Commissioner can cancel registration if commercial receipts are consistently above the limit, but the Court holds that cancellation requires a change in activities or lack of genuineness.

Issue 3: Application of Circular No.21 of 2016
The Circular provides guidance on canceling registration under Section 12AA, emphasizing that cancellation is not mandatory solely due to commercial receipts exceeding the limit specified in Section 2(15). The Circular directs authorities to examine if there is a change in the institution's activities before canceling registration. The Court upholds the Circular's stance, stating that cancellation should not occur unless there is a change in the institution's nature of activities, even if commercial receipts exceed the limit. The Court rejects the Revenue's argument that future commercial receipts justify cancellation, emphasizing that cancellation requires a present change in activities, not speculative future events.

In conclusion, the Court dismisses the appeal as the issue is covered by Circular No.21 of 2016, which guides the cancellation of registration under Section 12AA based on the nature of activities rather than just commercial receipts exceeding the specified limit. The judgment highlights the importance of assessing actual changes in activities before canceling registration, as outlined in the Circular.