Income Tax Appeal No. 165 of 2013.

N. KUMAR and B. VEERAPPA, JJ.

K. V. Aravind, Advocate, for the appellants.
A. Shankar and Lava, Advocates, for the respondent.

JUDGMENT

The judgment of the court was delivered by

1. B. Veerappa J.-The above appeal is filed by the Revenue challenging the order dated November 22, 2012, passed by the Tribunal setting aside the order of the Director of Income-tax dated October 20, 2011, in cancelling the registration of the assessee as a charitable trust under section 12A of the Income-tax Act, 1961 (for short hereinafter referred to as "the Act").

2. The respondent-assessee, M/s. Karnataka Badminton Association (for short hereinafter referred to as "KBA"), was granted registration under section 12A of the Act on October 25, 1980, by an order passed by the Commissioner of Income-tax. Subsequently, a notice came to be issued on April 13, 2011, as to why registration under section 12A of the Act should not be revoked by invoking the provisions of section 12AA(3) of the Act by the authorities. In response to the said notice, the KBA filed written submission on August 6, 2011, and contested the matter. The authorities took note of the fact that the accounts for the year ending March 31, 2009, shows that the total receipts to an extent of Rs. 1,01,03,322 and Rs. 1,18,35,000 and excess of income over expenditure at Rs. 94,59,372 and Rs. 1,10,92,691 for the assessment years 2008-09 and 2009-10, respectively. The extract of income and expenditure account for the financial years 2008- 09 and 2009-10 are reproduced as under :
Receipts

Expenses incurred towards the development of Badminton sports :

3. The Director of Income-tax (Exemptions) considering the entire material on record, by his order dated October 20, 2011, exercising his powers under the provisions of section 12A of the Act has cancelled the registration observing that the examination of records KBA has earned a net profit of Rs. 94,59,372 and Rs. 1,10,92,691 for the assessment years 2008-09 and 2009-10, respectively. Under various heads, the KBA has earned huge profits and after taking note of the change in the definition of section 2(15) of the Act which came into effect from April 1, 2009, it held that the activity carried on by the assessee is in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business. Therefore, the consideration received irrespective of the nature of use or application, or retention, of the income from such activity would take the case out of section 2(15) of the Act and after referring the various judgments, the director has cancelled the registration. Aggrieved by the said order, the assessee filed an appeal-I. T. A. No. 1272 of 2011 before the Tribunal.

4. The Tribunal after considering the entire material on record recorded a finding that the registration granted under section 12A of the Act cannot be revoked on account of commercial activities by the assessee in pursuing the advancement of objects of general public utility and registration can be cancelled only on arriving at a finding that the activities of the assessee are not genuine and not carried in accordance with the objects of the trust. Accordingly, the Tribunal by its impugned order dated November 22, 2012, has allowed the appeal against which the present appeal is preferred by the Revenue.

5. The substantial questions of law which arise for our consideration are as follows :

"(i) Whether the Tribunal was correct in holding that the assessee is entitled for registration under section 12A of the Act without appreciating the fact that the predominant activity carried out by the assessee-trust was running of bar which is not in accordance with the objects and the same cannot be considered as charitable activity and recorded a perverse finding ?

(ii) Whether the Tribunal was correct in holding that the assessee is entitled for registration under section 12A of the Act, when the activi ties of the assessee are like a club, catering to the members and it exists for the mutual benefits of its members and, consequently, not carrying on charitable activity and recorded a perverse finding ?

6. The learned counsel for the Revenue assailing the impugned order contended that the definition of "charitable institution" has undergone a change with effect from April 1, 2009. The activities carried on by the assessee is renting the choultry for marriages, social activities as well as commercial activities, i.e, to put up exhibition for sale of various consumer products and the aggregate value of the receipts from the said activities exceeds Rs. 25,00,000 and, therefore, it squarely falls under the first proviso to section 2(15) of the Act. Therefore, it ceases to be an institution for charitable purpose and, therefore, rightly the registration under section 12A of the Act was cancelled which has been erroneously interfered with by the Tribunal.

7. Per contra, learned counsel for the assessee contended that once a person is granted registration under section 12A of the Act, the said benefit could be denied only if the case falls under section 12AA(3) of the Act. Admittedly, the case of the assessee does not fall under the aforesaid provision. Even if the activities carried on by the assessee ceases to be a charitable purpose in view of the amendment brought about to the definition of "charitable purpose" under section 2(15) of the Act, it is a matter to be considered by the assessing authority to extend the benefit of exemption or not and sought to justify the impugned order passed by the Tribunal.

8. We have given our thoughtful consideration to the rival contentions urged by the parties to the lis and it is not in dispute that the assessee was granted registration under section 12A of the Act. Now, the said registration is cancelled by invoking the power conferred under the provisions of section 12AA(3) of the Act. Therefore, it is necessary to find out under what circumstances the registration granted earlier could be cancelled.

Section 12AA(3) of the Act reads as under :

"(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996), and subsequently the Com missioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution :

Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable oppor tunity of being heard."

9. A plain reading of the aforesaid provision makes it very clear that a registration granted under section 12A of the Act can be cancelled under two circumstances, i.e., (i) if the activities of such trust or institution are not genuine, and (ii) the activities of the trust or institution not being carried out in accordance with the object of the trust or institution. Only on these two conditions/grounds being satisfied, the registration granted under the provisions of section 12A of the Act could be cancelled by the authorities.

10. It is not in dispute that the Director of Income-tax (Exemption) has not recorded any such finding about the violation of the two conditions stated above. The Tribunal while deciding the matter has rightly recorded a finding that a perusal of the impugned order shows that the Director of Income-tax (Exemptions) has not arrived at any such finding. The fact that the receipts from commercial activities are more compared to the overall receipts of the charitable organisation can neither lead to the conclusion that the activities of the trust or institution are not genuine nor can it be said that the activities of the trust or institution are not being carried out in accordance with the objects of the trust or institution and, therefore, the two conditions stipulated under the provisions of sub-section (3) of section 12AA of the Act, which empowers the authority to cancel the registration, do not exist in the present case. The registration granted is cancelled in view of the amendment of the first proviso to section 2(15) of the Act. That is not a ground specified in the statute for cancellation of the registration. In fact, sub-section (8) of section 13 of the Act which is introduced by Finance Act, 2012, which came into effect from April 1, 2009, categorically provides that, nothing contained in section 11 or section 12 shall operate so as to exclude any income from the total income of the previous year or any receipt thereof. If the provisions of the first proviso to clause (15) of section 2 becomes applicable in the case of such person in the said previous year, the statute has protected the interests of the Revenue. Notwithstanding the fact that the assessee is conferred registration under the provisions of section 12A of the Act, unless the assessee falls within the provisions of section 2(15) of the Act, excluding the first proviso, the assessee would not be entitled to the benefit of exemption from the tax. If the case of the assessee falls in the first proviso to section 2(15) of the Act, the benefit of registration which flow from section 12A of the Act is not available. Anyhow, that is a matter to be considered by the assessing authority. But on that ground, the registration cannot be cancelled, which is precisely the Tribunal has held by allowing the appeal in the present impugned order.