2018 (8) TMI 263 - AT - Income Tax

Denying the exemption u/s 11 - assessee is hit by section 13(8) of the Income Tax Act - holding of the Devis Cup Tie was not the object of the assessee - proof of charitable activities - Held that - We find that except the above commercial exploitation of rights during the holding of Davis Cup match, there is no dispute that the pre-dominant object of the assessee society is promotion of game of tennis including the selection of players, training of players, and conduct of matches both domestic and international. We, therefore, do not think that the other income of the assessee such as from nominal registration fees or nominal coaching fees which is charged so as to attract only the genuinely interested trainees/players can be said to be its business income as it sans the profit motive. The Ld. Counsel has explained in detail that the holding of matches for commercial purpose is not a regular feature or regular activity of the assessee. Even the Davis Cup was also organized as part of the objects of the assessee and even the incidental income has been ploughed back and applied for carrying the aims and objects of the assessee society. Therefore, we hold that though the assessee Chandigarh Lawn Tennis Association is carrying out the activities towards the advancement of objects of general public utility, which is its dominant activity, however, it has also involved in carrying out the incidental activity in the nature of trade, commerce or business in the course of actual carrying out of advancement of object of general public utility by way of commercially exploiting the rights of hosting the Davis Cup Match . As per the amended provisions of section 2(15), 10(23C), 11(4), 11(4A), 13(8) and 143(3) and in view of our discussion and interpretation of the relevant provisions as given above, the income of the assessee from the incidental and commercial activity i.e. income from organizing of Davis Cup up to the limit prescribed as per the second proviso to section 2(15), which for the assessment year under consideration is ₹ 25 lacs, will be treated as income from charitable purposes and the assessee will be entitled to claim the exemption u/s 11 of the Act up to that extent in respect of the said income along with other income, if any, from the non-business activity of the assessee. However, the income over and above amount for ₹ 25 lacs from the business activity i.e. from the exploitation of its right to hold Davis Cup will be treated as business income of the assessee and will be liable to include in its total income. The assessing officer, therefore, is directed to bifurcate the income from commercial activity and non-commercial activity and assess the income of the assessee as directed above. - Decided partly in favour of assessee

Issues Involved:

1. Denial of exemption under section 11 of the Income Tax Act, 1961.
2. Interpretation and application of section 2(15) of the Income Tax Act.
3. Commercial exploitation of charitable activities.
4. Applicability of various judicial precedents and amendments to the Income Tax Act.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 11 of the Income Tax Act, 1961:

The assessee, a society registered under the Societies Registration Act and recognized as a charitable entity under section 12AA of the Income Tax Act, was denied exemption under section 11 by the Assessing Officer. The officer's rationale was that the assessee's activities were hit by section 13(8) of the Act due to commercial exploitation during the hosting of the 'Cloud India vs. New Zealand Davis Cup Tie'. The CIT(A) upheld this denial, stating that the event was not incidental to the main objective of the assessee, which was the promotion of lawn tennis.

2. Interpretation and Application of Section 2(15) of the Income Tax Act:

The Tribunal examined the amendments to section 2(15) and the introduction of provisos that restrict the definition of "charitable purpose" if it involves activities in the nature of trade, commerce, or business. The Tribunal noted that the first proviso to section 2(15) excludes entities from being considered as having a charitable purpose if they engage in commercial activities. However, the second proviso, introduced to mitigate the harshness of the first, allows such activities if the aggregate receipts do not exceed a specified limit.

3. Commercial Exploitation of Charitable Activities:

The Tribunal analyzed whether the assessee's hosting of the Davis Cup Tie, which generated significant income through advertisements, ticket sales, and sponsorships, constituted a commercial activity. It was found that while the event generated a surplus, the primary objective of the assessee remained the promotion of lawn tennis. The Tribunal emphasized that the income from such events should be incidental to the main charitable activities and should not exceed the prescribed limit to maintain the status of a charitable organization.

4. Applicability of Various Judicial Precedents and Amendments to the Income Tax Act:

The Tribunal referred to several judicial precedents, including the decisions of the Hon'ble Supreme Court and various High Courts, to interpret the provisions of section 2(15). The Tribunal also considered the impact of amendments to sections 2(15), 10(23C), 11, 13, and 143 of the Income Tax Act, which collectively aim to balance the prevention of business activities under the guise of charity and the protection of genuine charitable organizations.

Conclusion:

The Tribunal concluded that the assessee's primary objective was charitable, focusing on the promotion of lawn tennis. However, the income from the Davis Cup Tie, being a commercial activity, should be bifurcated. The income up to the prescribed limit (?25 lakhs for the relevant assessment year) would be considered as charitable, while the excess would be treated as business income and subject to tax. The appeal was thus partly allowed, directing the Assessing Officer to reassess the income accordingly.

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