In a recent matter^ before the Income Tax Appellate Tribunal (ITAT) Bench at Hyderabad, the main issue involved was the retrospective cancellation of registration of the concerned assessee (a charitable society with promotion of a sport as the main object) under section 12AA(3) of the Income Tax Act 1961 (the Act), thus making the said society ineligible to claim exemption from income tax under section 11 of the Act.
Previously, a ‘survey’ was conducted under section 133A of the Act, in the premises of the assessee, where it was found that the assessee was carrying on activities which were not ‘charitable’ in nature as sizeable income was derived from various commercial sources. Consequent to such findings made, the concerned Director of Income Tax (Exemptions) was of the opinion that the assessee had ‘lost its character’ as a charitable society, contrary to the relevant provisions under section 2(15) of the Act.
ITAT’s adjudication and restating the law
The ITAT in the above said matter discussed the history of amendments made to section 2(15) defining ‘charitable purpose’ and adjudicating in favour of the appellant assessee held as follows (edited and paraphrased in parts) —-
- Through the insertion of the proviso to the said section, the definition of ‘charitable activity’ had undergone a change. Considering the prescription of ‘limits’ (i.e. aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts) therein to the carrying on of any activity in the nature of trade, commerce or business activities and not total prohibition on the same, the assessee will thus not lose its nature of being a charitable institution because it is also carrying on such trade, commerce or business activities.
- For the assessee’s total income to be eligible for exemption from income tax as provided under section 11 of the Act, the assessee has to be carrying on charitable activities and has to prove that it has applied its income for charitable purposes.
- Incurrence and claim of expenditure which is not supported by bills and vouchers, can only lead to disallowance against income and not for withdrawal of registration.
- A one-off activity alleged to be in contravention of the objects of the charitable society, even if so considered, is a solitary deviation and ground for disallowance but not cancellation of registration.
- For the above said purposes, there is no limitation that the assessee shall not make any profit out of its activities and that under section 11, the thrust is on application of income.
- DIT has no jurisdiction to cancel registration of a charitable institution on the ground that it is carrying on commercial activities which are in breach of the amended definition of “charitable purpose” in section 2(15), and that registration can be cancelled only if the activities are not genuine or are not being carried out in accordance with its objects, as expressed in section 12AA(3), as was stated earlier by the Hon’ble Bombay High Court’s decision in the case of DIT (E) vs. Khar Gymkhana vide decision dated 6th June, 2016 in IT Appeal No.2349 of 2013.
- The above has been further clarified by CBDT Circular No.21 of 2016 .
Reference and application of Hon’ble Madras High Court decision in Tamil Nadu Cricket Association*matter
In the earlier decided above said matter, the Hon’ble Madras High Court had adjudicated on facts and issues near identical to the above discussed matter before the said ITAT, and was accordingly followed by the latter as precedent on the said issues involved.
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^Refer Hyderabad Cricket Association, Hyderabad v CIT (Exemptions), Hyderabad in ITA No.649/Hyd/2015 as decided by the Hon’ble ITAT “B” Bench at Hyderabad on 13 October 2016
*Refer Tamil Nadu Cricket Association v Director of Income Tax (Exemptions) in ITA No.72 of 2014 as decided by the Hon’ble Madras High Court on 21 October 2013