2012 (11) TMI 990 - AT - Income Tax

Registration u/s 12AA - Charitable purpose - Section 2(15) - advancement of any other object of general public utility - Held that - If the assessee conducts marathon in a commercial manner, then the trust cannot be said to be existing only for charitable purposes in view of the amended definition of the charitable purpose w.e.f. 1.4.2008 - DIT(E) is directed to examine whether receipt of fees from marathon is incidental to charitable object of the assessee or it is the main activity of the assessee and decide thereupon. If the assessee falls under the purview of amended provision of section 2(15), then registration is not to be granted - In the result, appeal of assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Denial of approval under section 12A of the Income-tax Act, 1961.
2. Application of proviso to section 2(15) of the Income-tax Act.
3. Assessment of the nature of society's activities as charitable or commercial.
4. Examination of society's financial activities and their alignment with charitable purposes.

Issue-wise Detailed Analysis:

1. Denial of approval under section 12A of the Income-tax Act, 1961:
The assessee appealed against the order of the Director of Income-tax (Exemptions) [DIT(E)], Hyderabad, dated 30.4.2012, which denied approval under section 12A. The primary contention was that the DIT(E) erred in not granting approval despite the society's activities being in the nature of 'advancement of any other object of general public utility'. The assessee argued that the activities did not fall under "carrying on of any activity in the nature of trade, commerce or business" as per the proviso to section 2(15).

2. Application of proviso to section 2(15) of the Income-tax Act:
The DIT(E) observed that the society's activities, which included organizing marathons and collecting participation fees, were in the nature of trade, commerce, or business, thus falling under the amended proviso to section 2(15). The proviso states that "advancement of any other object of general public utility" shall not be considered a charitable purpose if it involves any trade, commerce, or business activities for a fee or any other consideration, exceeding Rs. 25 lakhs.

3. Assessment of the nature of society's activities as charitable or commercial:
The society argued that its primary objective was to promote running as a fitness activity, which is a public utility. The DIT(E) noted discrepancies in the society's by-laws regarding membership fees and found that the society had significant receipts from marathon participation fees, which were recorded as direct income under 'Sales account'. The society contended that these fees were incidental to its charitable activities and necessary to cover the costs of organizing marathons.

4. Examination of society's financial activities and their alignment with charitable purposes:
The financial statements for the financial year 2011-12 showed gross receipts exceeding Rs. 25 lakhs from marathon-related activities. The society's argument was that these receipts were used to cover the costs of organizing the events and were not for profit. The DIT(E) concluded that such significant receipts from participation fees indicated commercial activities rather than charitable purposes.

Judgment:
The Tribunal directed the DIT(E) to re-examine whether the receipt of fees from marathon activities was incidental to the charitable objects of the society or constituted its main activity. If the society's activities were found to fall under the amended proviso to section 2(15), registration under section 12AA should not be granted. The appeal was allowed for statistical purposes, requiring further examination of the nature of the society's activities and their compliance with the definition of charitable purposes under the Income-tax Act.