C/TAXAP/408/2012 JUDGMENT IN HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 408 of 2012 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE J. B. PARDIWALA Sd and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Sd 1 Whether Reporters of Local Papers may be allowed NO to see judgment ? 2 To be referred to Reporter or not? NO 3 Whether their Lordships wish to see fair copy NO of judgment ? 4 Whether this case involves substantial question NO of law as to interpretation of Constitution of India or any order made thereunder ? COMMISSIONER OF INCOME TAX GANDHINAGAR Versus GUJARAT MARITIME BOARD Appearance: MRS MAUNA M BHATT for Appellant. MR SN SOPARKAR, SR.ADVOCATE with MR GH VIRK for Opponent. CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 17/02/2020 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1. This Tax Appeal under Section 260A of Income Tax Act, 1961 (for short, 'the Act 1961') is at instance of Revenue Page 1 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT and is directed against order passed by Income Tax Appellate Tribunal, 'A' Bench, Ahmedabad, dated 20 th January 2012, in ITA No.36/Ahd/2011. 2. facts giving rise to this Tax Appeal may be summarised as under : 3. respondent-assessee is engaged in activity of administering, controlling and managing minor ports in State of Gujarat. respondent-assessee is registered under Section 12AA of Act 1961 w.e.f. 1 st April 2002. Commissioner of Income Tax, Gandhinagar, vide order dated 7 th December 2010, cancelled registration of respondent-assessee as charitable institution. order passed by Commissioner of Income Tax reads thus : 2. activity of assessee is related to levying various fees of charges from users of ports under various heads like (1) Port Infrastructure facilities (2) Marine Services (3) Clearing, forwarding and Harboring (4) Storage Area and Land Rental (5) Equipment & Harbor Craft Rental (6) License Fees (7) Income from other Port Services. Similarly, assessee used to keep payment to various bodies and Govt. of Gujarat by way of fees, charges etc. description of receipts and expenditure incurred by assessee shows that assessee runs its activities in professional and business like manner from these activities. It is also clear that assessee derives profit out of various business activities. Thus, there being no free services or utilities to public, cost of entire activities being fully Page 2 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT recouped, there was no charity meant for public within meaning of section 2(15) of IT Act, 1961. As activities carried out by Gujarat Maritime Board were more of commercial nature resulting in commercial income, show cause notice u/s. 12AA(3) of IT Act was issued vide letter dated 3.9.2010 and 14.10.2010 of this office, proposing to cancel registration accorded u/s. 12AA of IT Act on 15.6.2005. 3. By aforesaid show cause notices, amended provisions of section 2(15) of IT Act by Amendment Act, 2010 with retrospective effect from 1.4.2008 are specifically pointed out and it was brought to notice of assessee that assessee cease to be charitable organization which was earlier covered under forth limb of charitable purpose i.e. advancement of any other object of general public utility as aggregate value of receipts which were in nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for cess or fee or any other consideration, irrespective of nature of use or application or retention of income from such activity, exceeds prescribed minimum limit of Rs.10 lakhs for enabling status of charitable institution. 4. It has been found that assessee while furnishing return of income for A.Y. 2009-10 appended notes as under : GMB has been granted registration u/s.12AA of Page 3 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT IT Act by Hon'ble CIT Gandhinagar vide order dt. 15.6.2005 and computation of income has been arrived at by treating its income as exempt u/s.11 of IT Act. status of charitable trust/entity has been claimed by GMB as it holds firm and considered view that inspite of insertion of proviso to Section 2(15) of IT Act, 1961 by Finance Act 2008 it continues to be as such due to fundamental nature of its activities and subsisting registration certificate which has not been cancelled by IT Deptt. by having recourse to section 12AA(3) of IT Act 1961. GMB has been advised in legal opinion dt. 29.9.2009 given by Senior Advocate of Supreme Court of India, it continues to be charitable trust/entity in view of above subsisting registration certificate. 5. In addition to above, following claim has been made while filing return of income. Without prejudice to rights of GMB, Tax Audit Report u/s.44AB were filed under protest with original Income-tax return, as matter of abundant precaution upto previous year 2004-05 as GMB's application for u/s.12AA was pending before Hon'ble ITAT, Ahmedabad Bench after being turned down by CIT, Gandhinagar. In view of fact that subsequent to verdict by Hon'ble ITAT, Ahmedabad Bench, aforesaid registration u/s.12AA has been granted on 15.6.2005 w.e.f. 1.4.2002 ultimately duly upheld by Hon'ble Page 4 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT Supreme Court of India coupled with ground reality that GMB is only carrying out objects of advancement of general public utility in terms of mandate given under provision of Gujarat Maritime Board Act, 1981 and not any business and/or trade, same are once again filed under protest. 9. main argument of assessee is that activities of assessee cannot be held as not genuine and that Gujarat Maritime Board has been carrying out its activities as empowered as per Gujarat Maritime Board Act, 1981 and it is State Govt. entity local authority constituted under Gujarat Maritime Board Act, 1981 duly granted to State Government by virtue of constitution of India (item list III, seventh schedule). There was no change in nature of activities and they cannot carry out any business and hence section u/s.12AA(3) initiated being bad in law may be dropped and contention of assessee has been upheld in various judicial pronouncement in case of CIT vs. VAP State Transport Corporation (159 ITR 1(ITR 1 (SV) and in case of GMB itself (295 ITR 561 SC). 11. However, it may be clarified that aforesaid decisions and decisions cited by assessee found mentioned earlier in this order are based on provision of definition of Charitable Purpose as per section 2(15) of IT Act. Whereas show cause notice presently issued is based on definition of Charitable Purpose as Amended by Finance Act 2010 with applicability with retrospective effect from 1-4-2008, particularly insertion of proviso which Page 5 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT provides that in case where gross receipts from all activities in nature of trade, commerce or any activity rendering services in relation to any trade, commerce for cess or any consideration, irrespective of nature of use of applicability or retention of income from such activity exceeds amount of Rs.10 lakhs, unit/entity/ institution ceases to be of Charitable Institution under fourth limb, i.e. advancement of any other object of general public utility other than relief of poor, education and medical relief which are other 3 limbs under head Charitable purpose. 12. Unfortunately, assessee has chosen not submit any reply on this core issue of eligibility of Charitable Purpose u/s.2(15) under fourth limb, i.e. carrying on any activity of advancement of any other object of general public utility having gross receipt of less than Rs.10 lakhs but on contrary, they have placed reliance on provision of Section 12AA(3) of IT Act which provides methodology to cancel registration already granted u/s.12AA(3) of IT Act. In fact what is relevant is that where trust or institution has been granted registration under clause (b) or sub-section (1) and subsequently Commissioner is satisfied that activities of such trust or institution are not genuine or not being carried out in accordance with objects of trust with reference to definition of Charitable Purpose as provided section 2(15) of IT Act, as case may be, he shall pass order in writing cancel registration of such trust or institution. Thus, provision for section 12AA(3) are enabling provision for CIT to Page 6 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT examine whether, trust/institution is carrying out activities which are falling in definition of Charitable Purpose or not and it is not so, CIT can cancel such registration w.e.f. 1-4-08 even if registration is already granted earlier to such entity/Trust. 13. Accordingly, I am satisfied that activity of Gujarat Maritime Board were not carried out in accordance with object of institution as per definition of charitable purpose for which registration was granted on 15-6-2005 w.e.f. 1-4-2002 in view of amendment made in definition of charitable purpose w.e.f 1-4-2008 by Amendment by Finance Act 2010 as said institution is not eligible for registration thereafter as total receipts for year under consideration is more than Rs.10 lakhs as prescribed for eligible charitable purpose under fourth limb of charitable purpose i.e. Advancement of object of general public utility; is cancelled u/s.12AA(3) of IT Act w.e.f. 01-04-2008 applicable to A.Y. 2009-10. 4. respondent-assessee, being dissatisfied with aforesaid order passed by Commissioner of Income Tax cancelling registration under Section 12AA(3) of Act w.e.f. 1st April 2008 applicable to Assessment Year 2009-10, preferred appeal before Appellate Tribunal. appeal came to be allowed by Tribunal, holding as under : 2. ld.Commissioner has observed that activity of appellant relates to charge of fees from users of sea-port for facilities such as port infrastructure facility, Page 7 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT marine service, clearing and forwarding, use of storage area, land rental, harbouring, etc. On one hand, fees is charged and on other hand, payments are to be made to Government of Gujarat. From description of receipts and expenditure, it was in nature of running of professional activity, more like in manner of business activity, ld.Commissioner has observed. In his opinion, assessee has derived profit out of various business activities. activities of Board are of commercial nature and there was no charity within meaning of section 2(15) of IT Act. show-cause notice was issued. In show-cause notice it was informed that due to amended provisions of section 2(15) of IT Act with retrospective effect from 1.4.2008, assessee seizes to be charitable organization. It was informed that aggregate value of receipts had exceeded prescribed minimum limit of Rs.10 lacs. Ld.Commisisoner has also found that while furnishing return for A.Y.2009-10 note was appended that assessee had been granted registration u/s.12AA by CIT Gandhinagar vide order dated 15/06/2005. income was computed by claiming exemption u/s.11 of IT Act. In said note it was claimed that in spite of insertion of proviso to section 2(15) of IT Act by Finance Act, 2008, assessee has continued to be charitable institution being registration was granted u/s.12AA of IT Act. However, ld.Commissioner was not convinced and denied registration as follows:- 11. However, it may be clarified that aforesaid decisions and decisions cited by assessee found Page 8 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT mentioned earlier in this order are based on provision of definition of Charitable Purpose as per section 2(15) of IT Act. Whereas show cause notice presently issued is based on definition of Charitable Purpose as Amended by Finance Act 2010 with applicability with retrospective effect from 1-4-2008, particularly insertion of proviso which provides that in case where gross receipts from all activities in nature of trade, commerce or any activity rendering services in relation to any trade, commerce for cess or any consideration, irrespective of nature of use of applicability or retention of income from such activity exceeds amount of Rs.10 lakhs, unit/entity/institution ceases to be of Charitable Institution under fourth limb, i.e. advancement of any other object of general public utility other than relief of poor, education and medical relief which are other 3 limbs under head Charitable purpose. 12. Unfortunately, assessee has chosen not submit any reply on this core issue of eligibility of Charitable Purpose u/s. 2(15) under fourth limb, i.e. carrying on any activity of advancement of any other object of general public utility having gross receipt of less than Rs.10 lakhs but on contrary, they have placed reliance on provision of Section 12AA(3) of IT Act which provides methodology to cancel registration already granted u/s.12AA(3) of IT Act. In fact what is relevant is that where trust Page 9 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT or institution has been granted registration under clause (b) or sub-section (1) and subsequently Commissioner is satisfied that activities of such trust or institution are not genuine or not being carried out in accordance with objects of trust with reference to definition of Charitable Purpose as provided section 2(15) of IT Act, as case may be, he shall pass order in writing cancel registration of such trust or institution. Thus, provision for section 12AA(3) are enabling provision for CIT to examine whether, trust/institution is carrying out activities which are falling in definition of Charitable Purpose or not and it is not so, CIT can cancel such registration w.e.f. 1-4-08 even if registration is already granted earlier to such entity/Trust. 13. Accordingly, I am satisfied that activity of Gujarat Maritime Board were not carried out in accordance with object of institution as per definition of charitable purpose for which registration was granted on 15-6-2005 w.e.f. 1-4-2002 in view of amendment made in definition of charitable purpose w.e.f 1-4-2008 by Amendment by Finance Act 2010 as said institution is not eligible for registration thereafter as total receipts for year under consideration is more than Rs.10 lakhs as prescribed for eligible charitable purpose under fourth limb of charitable purpose i.e. Advancement of object of general public utility; is cancelled Page 10 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT u/s.12AA(3) of IT Act w.e.f. 01-04-2008 applicable to A.Y. 2009-10. 3. Being aggrieved now assessee is before us. At outset, following two decisions have been cited by ld.AR. (i) ITAT D Bench Ahmedabad in case of Gujarat Industrial Security vs. DIT (Exemption) in ITA No.902/Ahd/2010, order dated 30.12.2011. (ii) ITAT Bench Ahmedabad in case of Ahmedabad Urban Development Authority in ITA No.754/Ahd/2010 for A.Y.2009-10, order dated 21/05/2010. 3.1 In case of Gujarat Industrial Security (supra), relevant portion is reproduced below:- 3. Ld. Counsel for assessee invited our attention to rules and regulations of society. There is no dispute to fact that assessee has been declaring its income from assessment year 2001-02 to 2005-06 as business income as is evident from page 3 of DIT(Exemption) order. Thereafter, assessee applied for registration u/s 12AA which was granted to it only w.e.f. 01.04.2005 and registration sought form 1997 was refused by not condoning delay. As matter of fact, we find no material on record where funds have been utilized for profit motive or for non charitable purpose and Page 11 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT there is no basis found in this regard in order of DIT (Exemption). assessee has also invited our attention to P & L account up to year ended 31.03.2008 in which assessee has used 85% of funds collected. There is nothing on record that assessee has violated any conditions laid down u/s 12AA(3) of Act. Reliance was placed on decision of ITAT Ahmedabad Bench in I.T.A.No. 754/Ahd/2010 dated 21.05.2010 and decision of ITAT Bench Chennai in I.T.A.No. 987/Md/2010 dated 19.09.2011 which are directly on issue in hand. Thus, following these Tribunal orders of Ahmedabad Bench and Chennai Bench mentioned hereinabove and in facts and circumstances of present case and in absence of any violation of Section 12AA(3) of Act, registration granted u/s 12AA cannot be cancelled. Therefore, we cancel order of DIT(Exemption) dated 22.01.2010 and direct DIT (Exemption) to restore order of registration granted u/s 12AA of Act. 3.2. In case of Ahmedabad Urban Development Authority (supra), relevant portion is reproduced below:- 7. In view of above, we are satisfied that none of conditions as prescribed under Section 12AA(3) is satisfied in case of assessee so as to cancel registration granted under Section 12AA. We therefore quash order of DIT(Exemption) passed under Section 12AA(3) and restore order of Page 12 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT Registration passed by DIT(Exemption) under Section 12AA(1) dated 23-10-2003. 8. Before we part with matter, we may point out that learned counsel for assessee had argued at length that activities of assessee are charitable and therefore assessee is entitled for registration under Section 12AA. In support of this contention, he has relied upon decision of Hon'ble Apex Court as well as Hon'ble jurisdictional High Court. learned DR has also argued at length to support revenue s point that assessee is not entitled to registration under Section 12AA. In support of his contention, he has also relied upon various decisions. However, issue before us is not whether assessee is entitled to registration or not because assessee- institution is already registered vide order of DIT (Exemption) under Section 12AA(1) dated 23-10-2003. limited issue in this appeal before us whether DIT (Exemption) was justified in canceling such registration by invoking power under Section 12AA(3). 4. Having heard submissions of both sides, provisions of section 12AA(3) prescribes that once trust or institution has been granted registration u/s. 12AA(3) and subsequently if Commissioner finds that one of condition, viz. activity of trust is not genuine or that activity of trust not been carried out, then Commissioner has power to cancel registration granted Page 13 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT u/s.12AA(1) of IT Act. In above cited decision of Ahmedabad Urban Development (supra), it was held that when under Act specific provision for cancellation of registration is prescribed and cancellation is possible under specific condition then fulfillment of those conditions are necessary for invoking jurisdiction u/s. 12AA(3). In present case reason for cancellation for registration was that definition of charitable purpose u/s. 2(15) has been amended therefore assessee has not carried out activity as per definition of charitable purposes . This very issue has already been dealt with by Respected Benches, therefore respectfully following these decisions we hereby reverse view taken by ld.Commissioner and direct not to cancel registration u/s.12AA(3) of IT Act. Grounds raised by assessee are hereby allowed. 5. Being dissatisfied with aforesaid order passed by Appellate Tribunal, Revenue is here before this Court with present Appeal. 6. This Tax Appeal came to be admitted for consideration of following substantial question of law : Whether Income-Tax Appellate Tribunal was right in law and facts in cancelling order of Commissioner (Appeals) passed under Section 12AA(3) of Income Tax Act, 1961 in view of amendment made under Section 2(15) of Act brought into effect from 1 st April 2009. Page 14 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT 7. Mrs.Mauna Bhatt, learned senior standing counsel appearing for Revenue, vehemently submitted that Tribunal committed serious error in allowing appeal preferred by respondent-assessee. It is submitted that Commissioner was justified in cancelling registration of respondent-assessee under Section 12AA(3) of Act as activities of assessee are commercial in nature and such activities, by any stretch of imagination, cannot be termed as falling within ambit of 'charity' as defined under Section 2(15) of Act. It is submitted that respondent-assessee derived profits out of its various business activities and there is no charity within meaning of Section 2(15) of Act as amended w.e.f. 1st April 2009 by Finance Act. In such circumstances referred to above, learned senior standing counsel prays that there being merit in this Appeal, same be allowed and substantial question of law be answered in favour of Revenue and against assessee. 8. On other hand, this Tax Appeal has been vehemently opposed by Mr.Soparkar, learned senior counsel appearing for respondent-assessee. Mr.Soparkar would submit that no error, not to speak of any error of law, could be said to have been committed by Appellate Tribunal in passing impugned order. It is argued that proceedings for cancellation of registration under Section 12AA(3) of Act can be initiated strictly only upon satisfaction of prescribed conditions and cannot be initiated upon any perceived violation of proviso to Section 2(15) of Act. In other words, argument of learned senior counsel is that violation of Section 2(15) of Act is irrelevant factor for cancellation of proceedings under Section 12AA(3) of Act. proceedings Page 15 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT under Section 12AA(3) of Act could be initiated only upon fulfillment of prescribed conditions which are absent in case on hand. 9. In such circumstances referred to above, Mr.Soparkar, learned senior counsel, prays that there being no merit in this Appeal, same be dismissed and substantial question of law as formulated by this Court may be answered in favour of respondent-assessee and against Revenue. 10. Having heard learned counsel appearing for parties and having gone through materials on record, only question that falls for our consideration is, whether Appellate Tribunal committed any error in passing impugned order. 11. It is not in dispute that assessee was granted registration under Section 12A of Act. Now said registration is cancelled by invoking power conferred under 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 Page 16 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT writing cancelling registration of such trust or institution: Provided that no order under this subsection shall be passed unless such trust or institution has been given reasonable opportunity of being heard. 12. reading of aforesaid provision makes it very clear, registration granted earlier under Section 12A of Act can be cancelled under two circumstances; (a) If activities of such Trust or Institution are not genuine, and (b) activities of Trust or Institution not being carried out in accordance with object of Trust or Institution. Only on those two conditions being satisfied, registration granted under Section 12A of Act could be cancelled by authorities. 13. It is not in dispute that there is no violation of said two conditions by assessee. activities carried on by assessee is genuine one. As could be seen from profits they have generated, said profit is earned by carrying on activities in accordance with object of Trust. Therefore, two conditions stipulated in sub-section (3) of Section 12AA of Act, which empowers authority to cancel registration, do not exist in this 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) to Section 13 which is introduced by Financial Act, 2012, which came into effect from 1.4.2009 categorically provides that, nothing contained in Section 11 or Section 12 shall operate so as to Page 17 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT exclude any income from total income of previous year or any receipt thereof. 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 Section 12A of Act, unless assessee falls within Section 2(15) of Act, excluding first proviso, assessee would not be entitled to benefit of exemption from tax. If case of assessee falls within 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. 14. We may refer to recent pronouncement of this High Court in case of Gujarat Cricket Association. coordinate bench of this Court, disposed of batch of twenty-one Tax Appeals relating to three assessees, namely, Gujarat Cricket Association (GCA), Baroda Cricket Association (BCA) and Saurashtra Cricket Association (SCA), pertaining to Assessment Years ranging from 2004-05 to 2009-10. questions dealt by coordinate bench of this Court in its common judgment and order dated 27 th September 2009 can be broadly divided into following : I. Whether registration of GCA under section 12AA could be cancelled under section 12AA(3) on ground that it violated proviso to section 2(15) of Income-tax Act, 1961 (IT Act) ? Page 18 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT II. Whether assessee could be regarded as violating proviso to section 2(15) ? III. Whether subsidy/donation received from Board for Cricket Control in India (BCCI) could be regarded as corpus donations under section 11(1)(d) ? 15. facts of said litigation may be summarised as under : GCA is society registered under Societies Registration Act, 1860. It was granted registration under section 12AA vide DIT s order dated 16.4.2003 with effect from Assessment Year 2004-05 onwards. It derived its income from sponsorship, ICC matches, sale of tickets, subsidies/grants from BCCI, etc. Subsequently, vide its order dated 6.12.2010, DIT cancelled registration under Section 12AA(3) on ground that activities of assessee were commercial in nature and assessee could not be regarded as for 'charitable purpose' under proviso to Section 2(15) inserted by Finance Act, 2010, with effect from 1.4.2009. On appeal, Tribunal decided issue in favour of GCA by holding that it is not permissible for DIT to cancel registration under Section 12AA(3) on ground that assessee had violated amended proviso to Section 2(15). Page 19 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT Being dissatisfied with order of Tribunal, Revenue filed appeal before this High Court. 16. principles of law discernible from decision of this Court are as under : (a) For purpose of cancellation of registration under section 12AA(3), Commissioner should record satisfaction that activities of charitable institution are not genuine or that activities are not being carried on in accordance with objects of charitable institution. In absence of such finding, registration granted under section 12A/12AA cannot be cancelled. (b) For assessee to be classified as charitable under category of 'advancement of any other object of general public utility' under section 2(15), following four factors need to be satisfied (i) Activity should be for advancement of general public utility ; (ii) Activity should not be in nature of trade, commerce or business; (iii) Activity should not involve rendering of services in relation to any trade, commerce or business; (iv) Activities in clauses (ii) and (iii) above, should not be for fees, cess or other consideration, aggregate Page 20 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT value of which should not exceed amount specified in second proviso to section 2(15). (c) earlier test that if income so collected, is applied towards charitable activity, then trust cannot be held as non-charitable, is no longer relevant after statutory amendment in proviso to section 2(15). (d) scope of term 'activity in nature of trade, commerce or business' would mean that (i) It is undertaken with profit motive; (ii) activity is continued on sound and recognized business principles and is pursued with reasonable continuity; (iii) There should be facts and other circumstances which justify and indicate that activity undertaken is in fact, in nature of business; (iv) five tests propounded in case of Customs and Excise Commissioner v. Lord Fisher (1981) STC 238 and propositions in case of CST v. Sai Publication Fund 258 ITR 70 (SC) apply. (v) Business activity is important prevailing element of self-interest. Page 21 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT (e) From perusal of CBDT Circular explaining amendment, it is clear that proviso of section 2(15) is applicable to assessees who are engaged in commercial activities, that is, carrying of trade, commerce or business in garb of 'public utility' to avoid tax liability, and where object of 'general public utility' is only mask or device to hide true purpose, which was 'trade, commerce or business'. (f) Charitable activity is anti-thesis of activity having element of self-interest. Charity is driven by altruism and desire to serve others, though element of self-preservation may be present. For charity, benevolence should be omnipresent and demonstrable but it is not equivalent to self-sacrifice and abnegation. (g) antiquated definition of term 'charity', which entails giving and receiving nothing in return, is outdated. (h) Enrichment of oneself or self-gain should be missing and predominant purpose of activity should be to serve and benefit others, mandatory features being, selflessness or illiberal spirit. (i) quantum of fee charged, economic status of beneficiaries who pay, commercial values in comparison to fee, purpose and object behind fee etc. are several factors which decide whether activity is 'business'. Page 22 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT (j) Revenue cannot take contradictory stand that assessee carries on charitable activity under residuary head 'general public utility', but, simultaneously record said activity as business. (k) There is no statutory mandate that charitable institution falling under residuary category should be wholly, substantially or in part be funded by voluntary contributions. (l) pragmatic view is required to be taken while examining data and same should be analysed objectively. narrow and coloured view may prove to be counter productive and contrary to section 2(15). (m) Accumulation of money/funds over period of two to three years may not be relevant in determining nature and character of activity and whether same should be treated indicative of profit motive, that is, desire or intention to carry on business or commerce. (n) so-called 'business activities', when intrinsically woven into and is part of charitable activity undertaken, business activity is not feeding charitable activities, as they are integral to charity/charitable activity. (o) What has to be seen is, as to what is core/main activity of assessee. predominant activity shall be basis of decision making. Page 23 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT 17. While upholding order passed by Appellate Tribunal, this Court observed as follows : (a) object of introduction of proviso to section 2(15) was to deny benefit of tax exemption to purely commercial and business entities which wear mask of charity. (b) registration of assessee as charitable institution under section 12A/12AA would, prima facie, clothe assessee with character of charitable institution. However, that, by itself, was not conclusive on question whether assessee is established for 'charitable purpose'. (c) While framing assessment order, it is not open to Assessing Officer to ignore certificate of registration granted under Section 12AA and to go behind registration obtained by assessee under Section 12AA. (d) expression charitable purpose is inclusive one and not exhaustive one and is sufficiently wide in scope to include variety of activities. However, at same time, fact that remote and indirect benefits are derived by members of public will not be sufficient to make purpose 'charitable purpose'. (e) word charity connotes altruism in thought and action. It involves idea of benefiting others rather than Page 24 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT oneself. (f) While construing proviso to section 2(15), principle of purposive interpretation should be adopted as it serves legislative intent. (g) If activity in nature of trade, commerce or business is carried on and it generates income, fact that such income is applied for charitable purposes, would not make any difference and activity would nonetheless not be regarded as being carried on for charitable purpose. (h) Merely because assessee puts up tickets of international cricket matches for sale and earns some profit out of same, it would not lose its character of having been established for charitable purpose. driving force is not desire to earn profit but object is to promote game of cricket and nurture best of talent. (i) core of matter is to see whether activity which resulted into income or loss was carried on with object of doing some trade, commerce or business, etc., or it was in furtherance of objects (non-business) etc., for which assessee was set up. In other words, predominant object of activities should be seen as to whether it is aimed at carrying on some business, trade or commerce or furtherance of object for which it was set up. (j) In carrying on charitable activities, certain surplus Page 25 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT may ensue. However, earning of surplus, itself, should not be construed as if assessee existed for profit. word 'profit' means that owners of entity have right to withdraw surplus for any purpose including personal purpose. three Associations had not distributed any profits outside organization. profits, if any, are ploughed back into very activities of promotion and development of sport of cricket and, therefore, assessees cannot be termed to be carrying out commercial activities in nature of trade, commerce or business. (k) It is not correct to say that since assessees received share of income from BCCI, their activities could be said to be activities of BCCI. If Associations host any international match once in year or two at behest of BCCI, then income of Associations from sale of tickets etc., in such circumstances, would not portray character of commercial nature. (l) State Cricket Associations and BCCI are distinct taxable units and must be treated as such. It would not be correct to say that member body can be held liable for taxation on account of activities of apex body. (m) Irrespective of nature of activities of BCCI (commercial or charitable), what is pertinent for purpose of determining nature of activities of assessees, is object and activities of assessees and not that of BCCI. nature of activities of assessee Page 26 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT cannot take its colour from nature of activities of donor. 18. This Court reiterated that in order to constitute 'business', it is essential to have profit motive. This is in line with number of judgments including following (i) GS1 v. DGIT(E), (2014) 360 ITR 138 (Del) (ii) India Trade Promotion Organization v. DGIT, (2015) 371 ITR 333 (Del) (iii) PHD Chamber of Commerce & Industry v. DIT(E), (2013) 357 ITR 296 (Del) (iv) Bureau of Indian Standards v. DIT, (2012) 27 taxmann.com 127 (Del) (v) DIT (E) v. Shree Nashik Panchvati Panjrapole, (2017) 81 taxmann.com 375 (Bom) (vi) DIT(E) v. Lala Lajpatrai Memorial Trust, (2016) 69 taxmann.com 158 (Bom) (vii) CIT v. Gujarat Industrial Development Corporation, (2017) 83 taxmann.com 366 (Guj) 19. We may also refer to and rely upon decision of this Court in case of Director of Income Tax (Exemption) v. N.H.Kapadia Education Trust (Tax Appeal No.356 of 2012, decided on 28th/29th October 2018. In said case, Trust had collected Page 27 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT sum of Rs.1.90 crore from students at time of their admission. This amount was directly credited to balance and claimed as corpus donations instead of showing it in income and expenditure account. Trust had failed to establish that such amount was by way of corpus donations. In such circumstances, Director of Income Tax came to conclusion that Trust had violated provisions of Section 11(1)(d) and Section 13(1)(C)(ii) of Income Tax Act, 1961, and was not eligible for registration under Section 12A(i) of Income Tax Act, 1961. Director took view that same attracted amended definition of 'charitable purpose' in Section 2(15) of Act, 1961, by insertion of proviso w.e.f. 1 st April 2009 as activities could be said to be commercial in nature. registration granted to Trust under Section 12A of Act came to be cancelled under Section 12AA(3) of Act. While dismissing appeal preferred by Revenue challenging order passed by Appellate Tribunal, Bench observed as under : 9. assessee challenged this decision of Commissioner before Tribunal. Tribunal took note of documents on record and rival contentions. Tribunal allowed assessee's appeal by impugned judgement. summary of Tribunal's consideration and conclusions is as under: (i) Tribunal recorded that assessee-Trust is running educational institution since decades. activities of Trust cannot be stated to be non-genuine. Page 28 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT (ii) It was noted that purpose of acquiring land was for expanding educational activities of Trust. payment was made to land holder. It was accounted in Trust account under head advance towards land . Such payment was not reflected in accounts of Managing trustee or his family members. land was purchased not for investment but to set-up educational institution. There was thus no case of altering objects of Trust. (iii) In relation to amended section 2(15) of Act, Tribunal was of opinion that amended proviso would apply only in case of advancement of any other object of general public utility and in such case it shall not be charitable purpose. Case of assessee therefore would not fall within amended section 2(15) of Act. It was also noticed that accounts of assessee-Trust reveal deficit of Rs. 75.18 lacs and expenditure of Rs. 5.80 crores was made towards educational activities. (iv) Commenting on section 12AA inserted in Act w.e.f. 01.04.1997, Tribunal was of opinion that for alleged violations of section 11(1)(d) or section 13(1)(c) of Act, registration of Trust cannot be cancelled in exercise of powers under section 12AA(3) of Act. 10. Appearing for Revenue, learned counsel Mrs. Bhatt vehemently contended that Tribunal has committed Page 29 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT error in disturbing order of Commissioner. Sizeable funds from corpus of Trust were transferred to Managing trustee and his sons ostensibly to purchase agriculture land. Sale was not completed for years later on. objects of Trust did not permit Trust to engage in agriculture activities. Donations were received from students in nature of capitation fees. It was thus clear that Trust was engaged in profiteering. Commissioner was therefore perfectly justified in cancelling registration. 11. On other hand, learned counsel Mr Soparkar opposed appeal contending that Tribunal has correctly examined relevant aspects emerging from record. Trust desired to purchase land in newly developing area in outskirts of city of Ahmedabad where educational institution could be set up. decision to purchase agriculture land and then to apply for conversion arose out of commercial expediency. Trust probably hoped to acquire agriculture land in name of trustee who enjoyed agriculture status at cost lesser than non-agriculture land would be available. expenditure was debited in accounts of Trust. trustee has never claimed any title or interest in land. Merely because of some legal complications, sale deed could not be completed would not imply that funds of Trust were diverted for unauthorized use. 12. Counsel further submitted that there is no prohibition against collecting funds from students particularly, in self-finance institutions. Even educational institutions Page 30 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT enjoying registration under Act are allowed to retain portion of profit out of such activity as long as same is utilized for purpose of its educational activities. 13. Counsel lastly contended that, in any case, section 12AA(3) of Act did not permit cancellation of registration on ground of violation of section 11(1)(d) or 13(1)(c) of Act. 14. Before adverting to rival contentions, we may take brief note of this statutory provisions. Section 11 of Act pertains to income from property held for charitable or religious purposes. Sub-section (1) of section 11 provides that subject to provisions of sections 60 to 63, income referred to in clauses (a) to (d) shall not be included in total income of previous year of person in receipt of income. Clause-(d) of sub-section (1) of section 11 pertains to income in form of voluntary contributions made with specific direction that they shall form part of corpus of trust or institution. Section 12 of Act pertains to income of trusts or institutions from contributions. Sub-section (1) of section 12 provides that any voluntary contributions received by trust created wholly for charitable or religious purposes or by institution established wholly for such purposes (not being contributions made with specific direction that it shall form part of corpus of trust or institution) shall for purposes of section 11 be deemed to be income derived from property holding under Trust wholly for charitable or religious purpose and provisions of that section and Page 31 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT section 13 shall apply accordingly. Section 12A prescribes conditions for applicability of section 11 and 12. Under sub-section (1) of section 12A, one of conditions is requirement of such trust or educational institution being registered under section 12AA of Act. Section 12AA of Act in turn, prescribes procedure for registration. Sub-section (3) which was added to section 12AA w.e.f. 01.10.2004 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 [Principal Commissioner or] 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: Provided that no order under this sub-section shall be passed unless such trust or institution has been given reasonable opportunity of being heard.] 15. In terms of sub-section (3) of section 12AA thus, registration can be cancelled in case of trust or institution if Commissioner is satisfied that activities of such trust or institution are not genuine or are not being carried out in accordance with object of Trust or institution, Page 32 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT thereupon, he would pass order in writing canceling registration of trust or new. 16. Section 13 carries title Section 11 not to apply in certain cases . Sub-section (1) of section 13 inter alia provides that nothing contained in section 11 or 12 shall operate so as to to exclude from total income of previous year of person in receipt thereof in case of trust for charitable or religious purposes or charitable or religious institution, any income thereof if any part of such income or property of trust or institution is during previous year unused or applied directly or indirectly for benefit of any person referred to in sub-section (3). 17. From above provisions, it can be immediately seen that event of cancellation of registration of Trust in exercise of powers under sub-section (3) of section 12AA of Act would arise when 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. Mere breach of provisions contained in section 11(1)(d) or 13(1)(c) per se would not fall within either of two grounds available to Commissioner to cancel registration viz. activity of Trust not being genuine or not being carried out in accordance with objects of Trust. Tribunal was thus perfectly justified in coming to such conclusion. Our view that we expressed gets force from decision of Uttranchal High Court in case of Welham Boy's School. Society vs. Central Board of Direct Taxes and Anr. reported Page 33 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT in 285 ITR 74. 19. Commissioner in order to bring his conclusions within the fold of sub-section (3) of section 12AA of Act extrapolated his findings that Trust had diverted its funds for objects other than for which Trust was created and Trust had received donations from students and activities of Trust thus carried on along commercial lines. Both conclusions, in our opinion, are completely incorrect. Tribunal had examined materials on record, agreed with Trust's contentions that desire on part of Trust was to acquire land which could be used for setting up educational institution. Agreement to purchase agriculture land was executed in name of Managing trustee since obviously Trust should not have even entered into agreement to purchase agriculture land. Equally, merely because donations are received would not per say imply that Trust was operating along commercial lines. Tribunal noted that Trust was running several self finance educational institutions. Collecting fees for such purpose would be part of normal activities. Even for educational institution, to retain reasonable surplus out of its activities has never been frowned upon by judicial decisions. If at all this is getting more liberal. Prime requirement is that such surplus should not be diverted for any other purpose. It must be utilized for objects of Trust. Reference in this respect can be made to decision of Supreme Court in case of Queen's Educational Society vs. Commissioner of Income Tax reported in 372 ITR 699. In said decision, Supreme Page 34 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT Court considered parameters for judging whether institution exist solely for educational purpose and not for profit. It was observed that fact, that institution makes profit, does not necessarily mean it exists for profit. Similar view was expressed by Supreme Court in case of Visvesvaraya Technological University vs. Assistant Commissioner of Income Tax reported in 384 ITR 37. 20. Revenue's reliance on amended section 2(15) is also of no avail. Section 2(15) of Act defines charitable purpose as to include any relief for poor, education, yoga, medical relief, preservation of environment including water sheds, forests and wildlife and preservation of monuments or places or objects of artistic or historic interest and advancement of any other object of general public utility. Proviso to sub-section (15) to section 2 of Act was added by Finance Act, 2010 providing that advancement of any other object of general public utility shall not be charitable purpose, if it involves carrying on of any activity in nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for cess or fee or any other consideration irrespective of nature of use or application, or retention of income from such activity. This proviso therefore applies to activity for advancement of any other object of general public utility. Such activity would be excluded from definition of charitable purpose if it involves carrying on any activity in nature of trade, commerce or business or for cess or fee or any other consideration. Clearly, legislature did not Page 35 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 C/TAXAP/408/2012 JUDGMENT desire this condition or restriction to be attached to remaining activities which were defined or categorized as charitable purpose under sub-section (15) which includes education. 20. In aforesaid view of matter, we hold that no case is made out by Revenue to disturb order passed by Appellate Tribunal. 21. In result, this Appeal fails and is hereby dismissed. substantial question of law is answered in favour of respondent-assessee and against Revenue. (J. B. PARDIWALA, J.) (BHARGAV D. KARIA, J.) MOINUDDIN Page 36 of 36 Downloaded on : Tue Apr 21 10:32:53 IST 2020 Commissioner of Income-tax, Gandhinagar v. Gujarat Maritime Board