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Case Number

Income Tax Appeal No. 259/2013

Advocates

Sri. K.V. Aravind, Advocate
Sri. R. Srinivasa Gowda, Advocate

Judges

N. Kumar
B. Veerappa, JJ.

Acts

Section 12A of the Income Tax Act, 1961 (for short hereinafter referred
FINANCE NO 2 ACT 1996
clause (b) of sub-section (1)

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Smart Summary

Judgment Summary: Appeal by Revenue challenging cancellation of registration under Section 12A

Factual and Procedural Background

This appeal was filed by the revenue challenging the Tribunal's order dated 31.01.2013 which set aside the Director of Income Tax (Exemptions)'s order dated 28.10.2011 cancelling the assessee's registration as a charitable body under Section 12A of the Income Tax Act, 1961.

The respondent-assessee, Karnataka Housing Board (KHB), had been granted registration under Section 12A on 03.02.2004 by the Commissioner of Income Tax. On 15.03.2011 a notice was issued proposing revocation of registration by invoking Section 12AA(3). KHB submitted written submissions on 25.03.2011 contesting the proposed revocation.

The accounts for the year ending 31.03.2009 (reproduced in the opinion) showed substantial receipts from sale of houses/sites (Rs. 226,90,11,264) and an excess of income over expenditure of Rs. 21,62,52,560 for the financial year 2008–09. The Director of Income Tax (Exemption) cancelled registration by order dated 28.10.2011, concluding that post the amendment to Section 2(15) effective 01.04.2009 the assessee's activities were commercial in nature and fell outside the definition of "charitable purpose".

Aggrieved by the cancellation, the assessee appealed to the Tribunal (ITA No. 1049/2011). The Tribunal allowed the appeal on 31.01.2013, holding that registration under Section 12A cannot be revoked solely because of commercial activities pursued in advancement of objects of general public utility, and that cancellation is permissible only upon findings that activities are not genuine or not in accordance with the objects. The revenue filed the present appeal against the Tribunal's order.

Legal Issues Presented

Whether the Tribunal was correct in holding that the assessee is entitled to continue registration under Section 12A of the Act, notwithstanding the amendment to Section 2(15) effective 01.04.2009, which the revenue contends renders the assessee's activities commercial in nature and therefore not charitable under Section 2(15).
Whether the Tribunal was correct in holding that the Director of Income Tax (Exemption) did not give any finding regarding the genuineness of activities or whether the activities were not in accordance with the objects, despite the revenue's contention that a clear finding was recorded that activities were not in accordance with objects and that objects were amended without departmental approval, thereby invoking Section 12AA(3).

Arguments of the Parties

Appellant (Revenue) — Counsel's contentions

The definition of "charitable institution" was amended effective 01.04.2009 (change in Section 2(15)), and the activities carried on by KHB (purchase and sale of sites/houses; providing housing across LIG, MIG, HIG with infrastructure and commercial components) are commercial in nature.
The aggregate receipts from these activities exceed Rs. 25,00,000 and therefore fall within the first proviso to Section 2(15), excluding the activities from "charitable purpose".
Because of this, KHB ceases to be an institution for charitable purpose and cancellation of registration under Section 12A was justified; the Tribunal erred in interfering with the Director's order.

Respondent (Assessee — KHB) — Counsel's contentions

Once registration under Section 12A is granted, that benefit can be denied only if the case falls within Section 12AA(3); the present case does not fall under that provision.
Even if post-amendment the activities cease to be charitable under Section 2(15), that is a matter for the assessing authority to determine for the purpose of granting exemption — and does not justify cancellation of registration under Section 12AA(3).

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court analyzed the statutory scope for cancellation of registration under Section 12AA(3) of the Income Tax Act. It reproduced the text of sub-section (3) and drew the following legal conclusions from a plain reading:

Registration granted under Section 12A can be cancelled only in two situations expressly provided by Section 12AA(3): (i) if the activities of the trust/institution are not genuine; or (ii) if the activities are not being carried out in accordance with the objects of the trust/institution. The power to cancel is confined to these two statutory grounds.
The Director of Income Tax (Exemptions) in his order dated 28.10.2011 did not record findings satisfying either of the two statutory grounds (not genuine; not in accordance with objects). The Tribunal therefore correctly recorded that the Director had not arrived at such findings.
The Court emphasized that the mere fact that receipts from commercial activities are large or that income exceeds expenditure cannot, by itself, lead to the conclusion that activities are not genuine or are not in accordance with objects. Thus the quantitative predominance of commercial receipts is not one of the statutory bases for cancellation under Section 12AA(3).
The Director cancelled registration on the ground that the amendment to the first proviso to Section 2(15) made the activities commercial and therefore outside "charitable purpose". The Court held that exclusion from the definition of charitable purpose under Section 2(15) (including its first proviso) is not a ground specified in Section 12AA(3) for cancellation of registration.
The opinion refers to Sub-section (8) of Section 13 (introduced by the Finance Act, 2012, referred to as coming into effect from 01.04.2009 in the text) and explains that that provision "categorically provides that, nothing contained in Section 11 or 12 shall operate so as to exclude any income from the total income of the previous year or any receipt thereof" if the first proviso to Section 2(15) becomes applicable for that previous year; the statute thus protects the revenue's interest where the proviso applies. In other words, even if an institution remains registered under Section 12A, the applicability of Section 2(15)'s first proviso in a particular previous year can result in exclusion of income from exemption — a matter for assessment.
The Court concluded that the question whether the first proviso to Section 2(15) applies in a particular assessment year is a matter for the assessing authority and the assessment machinery; it is not a ground, by itself, to cancel registration under Section 12AA(3).
Given that the Director did not make findings on the two specific statutory grounds required for cancellation, and that cancellation was instead premised on the change to Section 2(15), the Tribunal's interference in setting aside the cancellation order was justified.

Holding and Implications

Holding: The appeal is dismissed. The substantial questions of law are answered against the revenue and in favour of the assessee.

Implications:

The direct effect is that the Tribunal's order restoring the assessee's registration under Section 12A is affirmed; the Director's order cancelling registration dated 28.10.2011 is set aside.
The Court clarified that cancellation of registration under Section 12AA(3) is limited to the statutory grounds of non-genuineness of activities or activities not being carried out in accordance with the objects; exclusion from "charitable purpose" under Section 2(15) (including its first proviso) is not by itself a ground for cancellation under Section 12AA(3).
Where the first proviso to Section 2(15) applies in a given previous year, the assessing authority may treat income accordingly for that year (the statute provides protection to revenue in such assessment), but that assessment consequence does not equate to automatic cancellation of registration — that is to be decided by the assessment process rather than under Section 12AA(3) cancellation proceedings.
No broader precedent beyond the direct holding is discussed in the opinion; the decision's immediate effect is the restoration of registration in this case and the limitation on the grounds for cancellation identified above.

This summary is strictly confined to the material and reasoning contained in the provided opinion and does not add or infer facts or legal authorities beyond that text.

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The Director Of Income Tax, Exemption, C.R. Building, Queens Road, Bangalore, v. The Director Of Income Tax, Exemption, Circle-1(1), C.R. Building, Queens Road, Bangalore

JUDGMENT

The above appeal is filed by the revenue challenging the order dated 31.1.2013 passed by the Tribunal setting aside the order of the Director of Income Tax (Exemptions) dated 28.10.2011 in cancelling the registration of the assessee as a Charitable Board under Section 12A of the Income Tax Act, 1961 (for short hereinafter referred to as ‘the Act’).

2. The respondent-assessee - Karnataka Housing Board (for short hereinafter referred to as ‘the KHB’) was granted registration under Section 12A of the Act on 3.2.2004 by an order passed by the Commissioner of Income Tax. Subsequently, a notice came to be issued on 15.3.2011 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 KHB filed written submission on 25.3.2011 and contested the matter. The authorities took note of the fact that the accounts for the year ending 31.3.2009 shows receipts by way of sale of houses/sites to an extent of Rs. 226,90,11,264/- and excess of income over expenditure at Rs. 21,62,52,560/-. The extract of income and expenditure account for the financial year 2008-09 is reproduced as under:

Particulars IncomeScheduleAs on 31.3.2009 Rs.Sales13226,90,11,264Interest Income144,98,34,617Rent and lease rent153,64,18,781Other income from schemes169,24,72,950Total244,77,37,612ExpenditureFinancial Charges172,01,25,707Cost of works sold (Sales)17A204,59,06,033Administration & other expenses1815,67,71,939Depreciation586,81,373Sub-Total223,14,85,052Excess of Income over expenditure21,62,52,560

3. The Director of Income Tax (Exemption) considering the entire material on record, by his order dated 28.10.2011, exercising his powers under the provisions of Section 12A of the Act has cancelled the registration observing that the examination of records shows that KHB has earned a net profit of Rs. 21,62,52,560/-. Under various heads, KHB has earned huge profits and after taking note of the change in definition of Section 2(15) of the Act, which came into effect from 1.4.2009, it was held that the activity carried on by the asses see is in the nature of trade, commerce or business or any activity of rendering any services in relation to trade, commerce or business and therefore, the consideration received irrespective of the nature o, fse 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 to the various judgments, the Director of Income Tax (Exemption) has cancelled the registration. Aggrieved by the said order, the asses see filed an appeal - ITA No. 1049/2011 before the Tribunal.

4. The Tribunal after considering the entire materia) on record recorded a finding that the registration grantea under Section 12A of the Act cannot be revoked on account of commercial activities by the Board 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 Board are not genuine and not carried in accordance with the objects of the Board. Accordingly, the Tribunal by its impugned order dated 31.01.2013 has allowed th, eppeal 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 to continue registration under Section 12A of the Act, without appreciating the fact that, in view of the amendment to Section 2(15) of the Act, the activities carried by the assessee were commercial in nature and therefore cannot be considered as charitable under Section 2(15) of the Income Tax Act?

ii) Whether the Tribunal was correct in holding that the Director of Income Tax (Exemption) has not given any finding with regard to genuineness of the activities or the activities not in accordance with the objects of the institution, without appreciating that clear finding is recorded holding activities of the assessee were not in accordance with the objects and the objects amended without approval of the department and therefore, provisions of Section 12AA(3) of the Act were applicable 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 1.4.2009 The activities carried on by the assessee is in the nature of purchase and sale of sites/houses, providing housing facilities to all under the LIG, MIG and HIG categories followed with basic infrastructure facilities like asphalting roads, electricity and drinking water supply, adequate sewage and drainage system including commercial complexes, commercial plazas planned with provision for retails outlets, entertainment zones and small Offices. The maintenance of these amenities lies with KHB until it hands over the Scheme to the local Municipal Authority, 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 an, dought 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 Commissioner 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 opportunity 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 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 considering the matter has rightly recorded a finding that a perusal of impugned order shows that Director of Income Tax (Exemption) 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 organization can neither lead to the conclusion that the activities of the trust or institution are not genuine nor it can 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 first proviso to Section 2(15) of th, ect. 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 Financial Act, 2012 which came into effect from 1.4.2009 categorically provides that, nothing contained in Section 11 or 12 shall operate so as to exclude any income from the total income of the previous year or any receipt there of. 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 interest 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, th, eegistration cannot be cancelled, which is precisely the Tribunal has held by allowing the appeal in the present impugned order.

11. In that view of the matter, we do not see any merit in the present appeal and no interference is called for. The substantial questions of law are answered against the revenue and in favour of the assessee. Hence, the appeal is dismissed.

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