2014 (5) TMI 733 - AT - Income Tax

Cancellation of registration u/s 12A of the Act Scope of the term charitable purpose u/s 2(15) of the Act - Advancement of any other objects of general public utility Held that - Following Ghatkopar Jolly Gymkhana v. DIT (E) 2014 (4) TMI 201 - ITAT MUMBAI - the action of the CIT(A) relying upon the newly inserted proviso from 01.04.2009 in cancelling the registration of the trust is not correct or justified - The only effect will be that the Assessee will not be entitled for exemption or tax benefits which otherwise would have been available to it being registered as charitable institution, for the relevant year during which its income has crossed the limit of Rs.10.00 lacs - merely because the income of the assessee has crossed prescribed limit of Rs. 10 lakhs, that itself cannot be ground for cancellation of its registration invoking section 12AA(3) of the Act - for the previous year, during which the gross receipt income crosses limit of Rs.10.00 lacs, the trust will not get exemption or benefit of its being charitable in nature despite its carrying out charitable activities but, it will get benefit if it is registered as charitable institution and income from business activities, as mentioned in first proviso to section 2(15), does not cross limit of Rs.10.00 lacs thus, the order of the DIT(E) is set aside and the registration to the assessee council granted u/s 12A of the Act is restored Decided in favour of Assessee.

Summary

Issues:
Cancellation of registration granted to the assessee under section 12A of the Income Tax Act based on the newly added proviso to section 2(15) of the Act.

Analysis:
The assessee, a charitable trust registered for "advancement of any other objects of general public utility," faced cancellation of registration by the Director of Income tax (Exemp.), Mumbai, under section 12AA(3) due to engaging in activities resembling trade, commerce, or business with gross receipts exceeding Rs.10.00 lacs. The appeal challenged this cancellation, arguing that once registration is granted to a charitable institution, it cannot be revoked due to the amended proviso to section 2(15) of the Income Tax Act. The contention was supported by legal precedents. The Tribunal referred to a similar case and highlighted the impact of the first and second provisos to section 2(15) post the amendment on charitable activities. It emphasized that the second proviso, effective from 01.04.2009, does not restrict charitable trusts engaging in business activities, provided gross receipts do not surpass Rs.10.00 lacs. The Tribunal clarified that the registration's cancellation does not affect the institution's status as charitable; it only limits tax benefits for the year when gross receipts exceed the threshold. The Tribunal cited a relevant judgment to support its interpretation, overturning the cancellation of registration.

The Tribunal further considered the applicability of section 12AA(3) to previously registered trusts post the 2009 amendment. It highlighted that tax benefits are tied to activities falling within the charitable purpose definition. If a registered institution's activities deviate from charitable purposes, tax benefits can be revoked, regardless of continued charitable activities. Notably, the Tribunal stressed that the second proviso's mention of the "previous year" makes the interpretation more lenient, affecting benefits only for the year of excess receipts. The Tribunal's decision to restore the registration was reinforced by a Co-ordinate Bench ruling, emphasizing the liberal interpretation post the amendment.

The Madras High Court's judgment in a related case provided additional insights. It clarified that income sources not strictly aligning with trust objects do not warrant registration cancellation under section 12AA solely based on exemption qualification. The Court emphasized that assessing whether income qualifies for exemption under section 11 is crucial, not grounds for registration cancellation. It further highlighted that the revenue must demonstrate activities deviating from trust objects and primarily involving trade, commerce, or business to invoke section 12AA read with section 2(15). The absence of evidence indicating a shift in the trust's dominant activities towards commercial endeavors negates the grounds for cancellation. The Court's analysis underscored the importance of genuineness and adherence to trust objectives when considering registration cancellation.

In conclusion, the Tribunal's decision to restore the registration of the assessee council under section 12A was based on the interpretation of the amended provisions and legal precedents emphasizing the charitable nature of the institution despite exceeding the gross receipts threshold. The restoration order nullified the cancellation by the Director of Income tax, ensuring continued tax benefits for the charitable trust.