2017 (1) TMI 670 - AT - Income Tax

Withdrawal of registration granted earlier u/s 12AA - as per DIT the assessee is not running for charitable purposes, but has been running for the purpose of profit as no major expenditure was for direct benefit of farmers - change in the society s objectives or the activities carried on by the assessee are in contravention of its objectives - Held that - The assessee is certifying the seeds on the application of a society or an agent with whom the seed growers have entered into an agreement and who, after securing such certification, sells such seeds to farmers at market price determined by them. The Hon ble High Court in the assessee s own case, on similar set of facts (2013 (1) TMI 63 - ANDHRA PRADESH HIGH COURT ) has come to the conclusion that this involves commercial activity as it facilitates trade, commerce or business in the certified seeds being sold by the clients of the society and therefore, the provisions of the proviso to section 2(15) of the Act comes into operation. As examined the nature of the activities carried on by the assessee and held that the activities of the assessee are not for the advancement of any other object of general public utility and hence is not for charitable purposes in view of the second limb of the first proviso to section 2(15) of the Act. Respectfully following the decision of the jurisdictional High Court we see no reason to interfere with the order of the DIT (E). - Decided against assessee

Summary

Issues Involved:
1. Withdrawal of registration under section 12AA(3) of the Income Tax Act.
2. Applicability of proviso to section 2(15) of the Income Tax Act.
3. Nature of activities carried out by the assessee and their alignment with charitable purposes.

Issue-wise Detailed Analysis:

1. Withdrawal of registration under section 12AA(3) of the Income Tax Act:
The primary issue in this case is the withdrawal of the registration granted to the assessee under section 12AA of the Income Tax Act, 1961. The assessee, a society registered under section 12AA since January 1, 2004, was also granted registration under section 10(23C)(iv) of the Act. The Director of Income Tax (Exemptions) [DIT(E)] observed that the society was not running for charitable purposes but for profit, as indicated by substantial income and minimal expenditure benefiting farmers directly. Consequently, the DIT(E) issued a show cause notice to the assessee, questioning why the registration should not be withdrawn. Despite the assessee's explanation that it was established by the Government of Andhra Pradesh and continued to fulfill its objectives, the DIT(E) concluded that the society was engaged in commercial activities and withdrew the registration under section 12AA(3). The assessee appealed against this decision.

2. Applicability of proviso to section 2(15) of the Income Tax Act:
The DIT(E) argued that the assessee's activities fell within the proviso to section 2(15) of the Income Tax Act, which excludes entities engaged in trade, commerce, or business from being considered as charitable institutions. The assessee countered that its activities were in line with its objectives and did not involve trading. The assessee's counsel referred to various judicial decisions and a CBDT circular, which clarified that the registration should not be canceled solely due to the proviso to section 2(15). However, the DIT(E) maintained that the assessee's activities were commercial, thus invoking the proviso to section 2(15) and justifying the withdrawal of registration.

3. Nature of activities carried out by the assessee and their alignment with charitable purposes:
The core of the dispute revolves around whether the assessee's activities align with its stated charitable objectives. The DIT(E) observed that the society's primary beneficiaries were traders of quality seeds rather than farmers, indicating a commercial nature. The Hon'ble High Court, in a related case concerning the assessee's application for registration under section 10(23C)(iv), held that the assessee's activities facilitated trade and commerce in certified seeds, thus falling under the proviso to section 2(15). The High Court's judgment emphasized that the assessee's certification services were rendered to agents and traders, not directly to farmers, and hence did not qualify as charitable activities under the Act.

Conclusion:
The Tribunal, after considering the rival contentions and material on record, upheld the DIT(E)'s decision to withdraw the registration under section 12AA(3). The Tribunal noted that the CBDT circular clarified that the registration should not be canceled solely due to the proviso to section 2(15), but the High Court's judgment in the assessee's own case for a subsequent assessment year confirmed the commercial nature of the assessee's activities. Respectfully following the jurisdictional High Court's decision, the Tribunal dismissed the assessee's appeal, affirming that the activities did not qualify as charitable under the second limb of the proviso to section 2(15) of the Income Tax Act.