1 IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 12th DAY OF JANUARY, 2015 PRESENT HON' BLE MR. JUSTICE N.KUMAR AND HON' BLE MR. JUSTICE B. VEERAPPA INCOME TAX APPEAL No. 165/2013 BETWEEN: 1. Director of Income Tax, Exemption, C.R. Building, Queens Road, Bangalore. 2. Director of Income Tax, Exemption, Circle-1(1), C.R. Building, Queens Road, Bangalore. ... APPELLANTS (BY SRI K V ARAVIND, ADVOCATE) AND: M/s. Karnataka Badminton Assn. No.4, Jasma Bhavan Road, Millers Tank Bed Area, Bangalore-560 005. ... RESPONDENT (BY SRI A. SHANKAR & LAVA, ADVOCATES) 2 This ITA is filed under Section 260-A of Income Tax Act, 1961 arising out of Order dated 22.11.2012 passed in ITA No. 1272/Bang/2011 praying to formulate substantial questions of law stated therein and allow appeal and set aside orders passed by ITAT Bangalore in ITA No.1272/Bang/2011, dated 22.11.2012 and confirm order passed by Appellate Commissioner confirming order passed by Director of Income Tax, Circle-1(1), Bangalore. This Income Tax Appeal coming on for Hearing this day, B.VEERAPPA J., delivered following: JUDGMENT above appeal is filed by revenue challenging order dated 22.11.2012 passed by Tribunal setting aside order of Director of Income Tax dated 20.10.2011 in cancelling registration of assessee as Charitable Trust under Section 12A of Income Tax Act, 1961 (for short hereinafter referred to as Act ). 2. respondent-assessee M/s. Karnataka Badminton Association (for short hereinafter referred to as KBA ) was granted registration under Section 12A of 3 Act on 25.10.1980 by order passed by Commissioner of Income Tax. Subsequently, notice came to be issued on 13.4.2011 as to why registration under Section 12A of Act should not be revoked by invoking provisions of Section 12AA(3) of Act by authorities. In response to said notice, KBA filed written submission on 6.8.2011 and contested matter. authorities took note of fact that accounts for year ending 31st March, 2009 shows that total receipts to 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 assessment years 2008-09 and 2009-10 respectively. extract of income and expenditure account for financial years 2008-09 and 2009-10 are reproduced as under: 4 RECEIPTS Department/services F.Y.2008-09 F.Y.2009-10 Bar Department 56,82,834 69,50,023 Room Tariff Collection 21,75,436 19,89,830 Coaching receipts 6,10,775 7,60,018 Shuttle sales 4,09,584 6,06,204 Court booking 3,91,934 6,01,276 Summer Coaching Camp 1,88,809 1,85,340 Total 94,59,372 1,10,92,691 Expenses incurred towards development of Badminton sports: Particulars F.Y.2008-09 F.Y.2009-10 Inter Club Tournament 72,677 2,44,759 expenses Summer Coaching camp 51,020 52,151 expenses Inter Club KBA BADM 3,06,657 28,135 tournament Shuttle purchase 3,69,576 1,33,532 Shuttle Discount to Members 3,48,639 4,26,272 Coaching expenses 4,05,997 4,28,148 Total 15,54,566 13,12,997 3. Director of Income Tax (Exemptions) considering entire material on record, by his order dated 20.10.2011, exercising his powers under provisions of Section 12A of Act has cancelled registration observing that examination of records KBA has earned net profit of Rs. 94,59,372/- 5 and Rs.1,10,92,691/- for assessments years 2008- 09 and 2009-10 respectively. Under various heads, KBA has earned huge profits and after taking note of change in definition of Section 2(15) of Act which came into effect from 1.4.2009, it held that activity carried on by assessee is in nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business. Therefore, consideration received irrespective of nature of use or application, or retention, of income from such activity would take case out of Section 2(15) of Act and after referring various judgments, Director has cancelled registration. Aggrieved by said order, assessee filed appeal ITA No. 1272/2011 before Tribunal. 4. Tribunal after considering entire material on record recorded finding that registration granted under Section 12A of Act 6 cannot be revoked on account of commercial activities by assessee in pursuing advancement of objects of general public utility and registration can be cancelled only on arriving at finding that activities of assessee are not genuine and not carried in accordance with objects of Trust. Accordingly, Tribunal by its impugned order dated 22.11.2012 has allowed appeal against which present appeal is preferred by revenue. 5. substantial questions of law which arise for our consideration are as follows: i) Whether Tribunal was correct in holding that assessee is entitled for registration under Section 12A of Act, without appreciating fact that predominant activity carried out by assessee Trust was running of bar which is not in accordance with objects and same cannot be considered as charitable activity and recorded perverse finding? 7 ii) Whether Tribunal was correct in holding that assessee is entitled for registration under Section 12A of Act, when activities of assessee are like club, catering to members and it exists for mutual benefits of its members and consequently not carrying on charitable activity and recorded perverse finding? 6. learned Counsel for revenue assailing impugned order contended that definition of charitable institution has undergone change with effect from 1.4.2009. activities carried on by assessee is renting choultry for marriages, social activities as well as commercial activities i.e, to put up exhibition for sale of various consumer products and aggregate value of receipts from said activities exceeds Rs.25,00,000/- and therefore, it squarely falls under first proviso to Section 2(15) of Act. Therefore, it ceases to be institution for charitable purpose and therefore, rightly registration 8 under Section 12A of Act was cancelled which has been erroneously interfered with by Tribunal. 7. Per contra, learned Counsel for assessee contended that once person is granted registration under Section 12A of Act, said benefit could be denied only if case falls under Section 12AA(3) of Act. Admittedly, case of assessee does not fall under aforesaid provision. Even if activities carried on by assessee ceases to be charitable purpose in view of amendment brought about to definition of charitable purpose under Section 2(15) of Act, it is matter to be considered by assessing authority to extend benefit of exemption or not and sought to justify impugned order passed by Tribunal. 8. We have given our thoughtful consideration to rival contentions urged by parties to lis and it is not in dispute that assessee was granted 9 registration under Section 12A of Act. Now said registration is cancelled by invoking power conferred under provisions of Section 12AA(3) of Act. Therefore, it is necessary to find out under what circumstances registration granted earlier could be cancelled. Section 12AA(3) of Act reads as under: [(3) Where trust or 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 Finance (No. 2) Act, 1996 (33 of 1996) and subsequently Commissioner is satisfied that activities of such trust or institution are not genuine or are not being carried out in accordance with objects of trust or institution, as case may be, he shall pass order in writing cancelling registration of such trust or institution: 10 Provided that no order under this sub-section shall be passed unless such trust or institution has been given reasonable opportunity of being heard.] 9. plain reading of aforesaid provision makes it very clear that registration granted under Section 12A of Act can be cancelled under two circumstances i.e., (i) If activities of such trust or institution are not genuine and (ii) activities of trust or institution not being carried out in accordance with object of trust or institution. Only on these two conditions/grounds being satisfied, registration granted under provisions of Section 12A of Act could be cancelled by authorities. 10. It is not in dispute that Director of Income Tax (Exemption) has not recorded any such finding about violation of two conditions stated above. Tribunal while deciding matter has rightly recorded finding that perusal of impugned order 11 shows that Director of Income Tax (Exemptions) has not arrived at any such finding. fact that receipts from commercial activities are more compared to overall receipts of charitable organization can neither lead to conclusion that activities of trust or institution are not genuine nor it can be said that activities of trust or institution are not being carried out in accordance with objects of trust or institution and therefore, two conditions stipulated under provisions of Sub-section (3) of Section 12AA of Act, which empowers authority to cancel registration, do not exist in present case. registration granted is cancelled in view of amendment of first proviso to Section 2(15) of Act. That is not ground specified in statute for cancellation of registration. In fact, Sub-section (8) of Section 13 of Act which is introduced by Financial Act, 2012 which came into effect from 1.4.2009 categorically provides that, nothing contained in Section 12 11 or 12 shall operate so as to exclude any income from total income of previous year or any receipt there of. If provisions of first proviso to clause (15) of Section 2 becomes applicable in case of such person in said previous year, statute has protected interest of revenue. Notwithstanding fact that assessee is conferred registration under provisions of Section 12A of Act, unless assessee falls within provisions of Section 2(15) of Act, excluding first proviso, assessee would not be entitled to benefit of exemption from tax. If case of assessee falls in first proviso to Section 2(15) of Act, benefit of registration which flow from Section 12A of Act is not available. Anyhow, that is matter to be considered by Assessing Authority. But on that ground, registration cannot be cancelled, which is precisely Tribunal has held by allowing appeal in present impugned order. 13 11. In that view of matter, we do not see any merit in present appeal and no interference is called for. substantial questions of law are answered against revenue and in favour of assessee. Hence, appeal is dismissed. Sd/- Judge Sd/- Judge Nsu/- Director of Income-tax, Exemption, Bangalore / Director of Income-tax, Exemption, Circle -1(1), Bangalore v. Karnataka Badminton Assn