2017 (7) TMI 364 - HC - Income Tax

Entitlement to registration under Section 12A - whether some of the activities of the assessee are found to be commercial in nature and its gross receipts from such activities exceed, year on year, the limit set out in the proviso to Section 2(15) ? - Held that - Section 13(8) of the Income Tax Act, 1961, inserted by the Finance Act, 2012 with effect from 01-4-2009 makes it clear that nothing contained in Section 11 or 12 shall operate so as to exclude any income from the total income of the previous year of the person in receipt thereof, if the provisions of the first proviso to Section 2(15) become applicable in the case of such person in the said previous year. Therefore, at the stage of grant of exemption, the question of looking at the gross receipts does not arise. To understand it in simple terms, we must look at the provisions as providing 2 gate passes. The 1st gate pass is in Section 12AA. The 2nd is under various provisions which deal with exemptions or exclusion of income. The respondent/assessee is actually at the outer gate. The very 1st entry pass is denied to the respondent, on a wrong application and understanding of the scope of Section 2(15). It is only after an institution is granted registration under Section 12AA that the examination of the gross receipts year after year for the purpose of finding out the eligibility for exemption would arise. Therefore, we are of the considered view that the Director of Income Tax (Exemptions) as well as the Tribunal committed 2 mistakes, namely, (a) that of overlooking the first 6 activities covered by Section 2(15) and focusing on the 7th activity which has a correlation to the first proviso and (b) that of looking at the gross receipts even before the grant of registration. - Decided against revenue

Issues Involved:
1. Entitlement to registration under Section 12A of the Income Tax Act, 1961.
2. Interpretation of the term "charitable purpose" under Section 2(15) of the Income Tax Act.
3. Applicability of the first proviso to Section 2(15) regarding commercial activities.
4. Relevance of gross receipts in determining eligibility for registration.
5. Jurisdictional precedence and applicability of High Court decisions.

Issue-wise Detailed Analysis:

1. Entitlement to Registration under Section 12A:
The primary issue was whether the assessee is entitled to registration under Section 12A of the Income Tax Act, 1961, despite engaging in activities deemed commercial in nature, with gross receipts exceeding the limit specified in the proviso to Section 2(15). The Tribunal had allowed the registration based on the Delhi High Court's decision in India Trade Promotion Organisation v. Director of Income Tax (Exemptions), which the Revenue contested.

2. Interpretation of "Charitable Purpose" under Section 2(15):
The court examined the definition of "charitable purpose" under Section 2(15), which includes relief of the poor, education, yoga, medical relief, preservation of the environment, preservation of monuments, and advancement of any other object of general public utility. The first proviso to Section 2(15) excludes activities involving trade, commerce, or business from being considered charitable unless specific conditions are met.

3. Applicability of the First Proviso to Section 2(15):
The court noted that the first proviso to Section 2(15) applies only to the seventh category—advancement of any other object of general public utility. The second proviso exempts activities from the first proviso if the aggregate receipts are ?25 lakhs or less in the previous year. The court emphasized that the assessee's activities should be examined to determine if they fall under the first six categories, which are not subject to the first proviso.

4. Relevance of Gross Receipts in Determining Eligibility for Registration:
The court clarified that the issue of gross receipts exceeding the limit is relevant only at the stage of granting exemptions under Sections 11 or 12, not during the initial registration under Section 12AA. The court highlighted that the Director of Income Tax (Exemptions) and the Tribunal erred by focusing on gross receipts before granting registration. The CBDT Circular No. 21/2016 was cited, which explains that an entity can be treated as a charitable institution in one year and not in another based on its commercial receipts.

5. Jurisdictional Precedence and Applicability of High Court Decisions:
The court addressed the Revenue's grievance that the Tribunal did not follow the jurisdictional High Court's decision in A.P. State Seed Certification Agency v. Chief CIT, which dealt with Section 10(23C) and not Section 12AA registration. The court concluded that the Tribunal was not bound to follow this decision as it did not pertain to the same legal question. The court also found the Kerala High Court's decision in Infoparks Kerala v. Deputy CIT irrelevant, as it did not address the refusal of registration under Section 12A.

Conclusion:
The court dismissed the appeal, holding that the Director of Income Tax (Exemptions) and the Tribunal erred by not considering the first six categories under Section 2(15) and by prematurely focusing on gross receipts. The court affirmed that the assessee is entitled to registration under Section 12A, as the initial stage of registration should not involve examining gross receipts. The question of law was answered against the department, and the appeal was dismissed without costs.

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