By TIOL News Service

CHENNAI, DEC 24, 2013: THE issues before the Bench are - Whether when a State Cricket association receives huge grant from BCCI earned from sponsorship and sale of media rights, the same still amounts to subsidy and not a commercial income; Whether revenue earned from conducting cricket match tournaments and sale of tickets serves any objective of general public utility and Whether activities like conducting IPL matches through sale of high priced tickets does not per-se affect the genuineness of the charitable activities of the association u/s 12AA. And the verdict goes in favour of the assessee.

Facts of the case

The assessee is a Society registered under the Tamil Nadu Societies Registration Act. The assessee is a member of Board of Control for Cricket in India (BCCI), which in turn is a member of ICC (International Cricket Council). BCCI allots test matches with visiting foreign team and one day international matches to various member cricket association which organise the matches in their stadium. The franchisees conduct matches in the Stadium belonging to the State Cricket Association. The assessee, being a State Cricket Association is entitled to all in-stadium sponsorship advertisement and beverage revenue and it incurs expenses for the conduct of the matches. BCCI earns revenue by way of sponsorship and media rights as well as franchisee revenue for IPL and it distributes 70% of the revenue to the member cricket association. Thus the assessee is also the recipient of the revenue. The objective of the assessee is to maintain a general control of the game of cricket in the State, to spread the game throughout the State by organizing tournaments, to communicate with public authorities and various sports organizations in India and abroad and concert and promote measures for the development of the game.

After considering the genuineness of these objects, as early as 2003, the assessee was granted registration as a Trust under Section 12AA. However, on 19.07.2011. a notice was issued by the Director of Income Tax (Exemptions) u/s 12AA(3) that the statement of income and expenditure revealed that the assessee derived income from the following activities i.e., subscription; rent for hiring cricket ground, rooms and premises; fees for providing services to IPL; income from advertisement; subsidy from BCCI; sale of ticket for conducting of matches and restaurant and catering income etc. The DIT held that these receipts were in the nature of trade or commerce or business and hit by the proviso to Section 2(15) of the Income Tax Act.

The assessee replied that the receipts were not in the nature of trade or commerce or business, since, the income of the assessee included interest income earned from Fixed Deposits with Banks; subsidy from BCCI was a voluntary grant from the parent body for promotion and development of the game of cricket in Tamil Nadu. It was further submitted that there was no commercial activity involved in the conduct of the IPL matches for which only subsidy was received by the assessee from BCCI like other cricket associations; thus, the receipt of subsidy was not a payment for carrying on of any trade, commerce or business. It was also pointed out that the assessee was not running any canteen or restaurant, the assessee submitted that as far as fee for providing services to IPL is concerned, the entire income from the sale of tickets belonged to the franchisee, and therefore, there was no service rendered or charges made by the assessee.

The assessee also submitted that only once the satisfaction was recorded as to the genuineness of the objects of the association under the provision contained in Section 12AA, the registration was granted. Further, the assessee pointed out that the genuineness of the objects of the trust, thus not being in question and the objects of the trust remaining the same as before and the activities also being in accordance with the objects of the trust, there was no case made out for cancelling the Registration.

However, the contentions of the assessee were rejected and the registration of the assessee was cancelled.

The DIT (Exemptions) viewed that most of the advertisements through TV telecasting are received by the BCCI, thus the so called subsidy given by the BCCI is nothing but some sort of sharing of the advertisement income on account of holding of matches. As regards the entrance fee charged, the DIT(Exemptions) held that the receipts out of IPL matches by giving its ground for conducting those matches were commercial in nature. Referring to Section 12AA(3) read with Section 2(15) of the Income Tax Act, the DIT(Exemptions) viewed that even if the activities were carried on in accordance with the arrangement with the other party, the activities being not charitable, it was hit by Section 12AA(3) of the Income Tax Act. It was held that the activities were not carried on in accordance with the objects of the trust; the activities not being charitable, the same could not be held to be genuine and the institution was not a charitable institution. The DIT (Exemptions) held that "genuineness" was a term used only to find out whether the institution was charitable or not; thus once the institution was held as not for charitable purpose, Section 12AA registration had to be necessarily cancelled.

On appeal before the Tribunal, the assessee raise all the contentions as raised before the DIT(Exemptions). The assessee also contended that the view of the DIT (Exemptions) that the assessee was not carrying on charitable activity as per Section 2(15) of the Act is erroneous in law; in any event, all that Section 12AA(3) of the Act prescribes for cancellation is the genuineness of the activities of the trust or that the activities are not carried on in accordance with the objects of the trust.

The Tribunal pointed out that the activities were genuine; however the matches conducted did not go to the extent of "advancement of any other object of general public utility". The Tribunal also pointed out that the activities of conducting matches did not come within the conceptual framework of charity, vis-a-vis the activity of general public utility as given under Section 2(15) and the activities were all commercial in character. The Tribunal viewed that the provisions under Section 12 AA (3) could not be read in disregard of Section 2(15) first proviso. It further held that after the insertion of first proviso to Section 2(15) of the Income Tax Act, 1961, effective from 1st April, 2009, every activity on the advancement of the general public utility to be called as for "charitable purpose" has to qualify itself as charitable activity within the meaning of the expression 'charitable purpose'. As such, the activities of the assessee could not be considered as for a charitable purpose.

The Tribunal pointed out that the proviso clearly pointed out that advancement of any other object of general public utility shall not be a charitable purpose, if it involved the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. Considering the said amendment and looking at the activities of the assessee, the Tribunal held that the conduct of the matches by cricket associations could be nothing but in the nature of commercial ventures. The Tribunal observed that the IPL matches held were big game with big money involved; and akin to the entertainment industry, which contributed in earning hyper profits and contributed 86.5% of the receipts of the assessee.

On the crucial question of general public utility, the Tribunal held that the activities of the assessee are all commercial activities and not in the nature of activities for advancement of any object of general public utility. The Tribunal further viewed that there was no conflict between the first proviso to Section 2(15) of the Act and the conditions laid down under Section 12AA(3) of the Act for cancelling the registration; thus, when the assessee's case is hit by Section 2(15) of the Act, consequential action is automatic to pass an order u/s 12AA(3).

Aggrieved, the assessee has filed this appeal before the Tribunal.

The Counsel for the assessee raised almost all the submissions as raised before the lower authorities. The Counsel further r referred to Section 12AA (3), he further pointed out that the cancellation of registration granted is possible only under the stated circumstances, viz., on the Commissioner recording his satisfaction that the activities of the trust are not genuine or are not being carried out in accordance with the objects of the trust or institution; thus unless and until the show cause notice issued contained the grounds and materials as prescribed under Section 12AA(3) of the Act, the question of cancellation of registration, per se, does not arise. The counsel reiterated the submission that registration u/s 12AA was granted only on the Commissioner satisfying himself on the objects of the trust and the genuineness of the activities. The nature of activity carried on by the assessee continues to be the same without any change till this date. One of the prime arguments of the counsel was that if any of its activities resulted in an income not incidental and not connected with the main activity or main object of the Trust, it would be a matter for assessment. Thus what has to be a subject matter for assessment cannot be considered as a ground for cancelling the registration u/s 12 AA (3).

The Counsel relied on the Circular No.11 of 2008 of CBDT dated 19.12.2008 issued and submitted that the question of rejection of registration u/s 12AA(3) would arise only in those cases where an entity uses this status of charitable institution with a charitable object of general public utility as a mask or a device to hide its commercial activities. It was argued, that the Revenue has not substantiated with any material to show the absence of genuineness, except that the Revenue alleges is by conduct of matches, it has exhibited a sense of business or commercial character. The counsel also referred to the decision of this Court reported in the case of CIT Vs. Sarvodaya Ilakkiya Pannai, wherein, under similar circumstances, this Court had held that when a trust is registered with definite objects to carry on its activities and u/s 12AA, the Commissioner is empowered to cancel registration only on two conditions laid down u/s 12AA(3).

The Departmental Representative contended that the condition for continuance of the registration depends on the satisfaction of the conditions given under the definition of 'charitable purpose' laid down u/s 2(15) of the Act; when the assessee's activities do not go hand in hand with the objects of the assessee's assessment, rightly, the Revenue had cancelled the registration. He further pointed out that at the time of grant of registration, the Commissioner is empowered to look into the objects of the trust, for the purpose of grant of registration. However, after granting registration, if the Revenue finds that the activities of the trust are not genuine and that the advancement of the object of the general public utility is not in terms of the objects of the trust and that the objects are in the nature of carrying on trade, commerce or business, the grant of registration originally given may be cancelled.

Having heard the parties, the High Court held that,

Cancellation of registration u/s 12AA

++ thus, the anxiety of the Parliament in introducing the proviso to Section 2(15) of the Act is only to check those institution, which attempt to gain exemption under the cloak of a trust;

+ thus in contrast to Section 12AA(1)(b) of the Income Tax Act, 1961, where the grant of registration requires satisfaction about the objects of the trust as well as genuineness of the activities, for the cancellation of the registration under Section 12AA(3), all that it is insisted upon is the satisfaction as to whether the activities of the trust or institution are genuine or not and whether the activities are being carried on in accordance with the objects of the trust. Thus, even if the trust is a genuine one i.e., the objects are genuine, if the activities are not genuine and the same not being carried on in accordance with the objects of the trust, this will offer a good ground for cancellation. Thus, in every case, grant of registration as well as cancellation of registration rests on the satisfaction of the Commissioner on findings given on the parameters given in Section 12AA(1) and 12AA(3) of the Act, as the case may be;

+ thus, when the assessee is in receipt of income from activities, which fits in with Sections 11 and 12 of the Act as well as from sources which do not fall strictly with the objects of the trust, would not go for cancellation of registration under Section 12AA of the Act on the sole ground that the assessee is in receipt of income which does not qualify for exemption straight away by itself. All that ultimately would arise in such cases is the question of considering whether Section 11 of the Act would at all apply to exempt these income from liability. These are matters of assessment and has nothing to do with the genuineness of the activity or the activities not in conformity with the objects of the trust. As rightly pointed out by learned Senior counsel appearing for the assessee, as is evident from the reading of Circular No.11 of 2008 dated 19.12.2008, the object of the insertion of first proviso to Section 2(15) of the Act was only to curtail institution, which under the garb of 'general public utility', carry on business or commercial activity only to escape the liability under the Act thereby gain unmerited exemption under Section 11 of the Act;

+ as already pointed out earlier, the question as to whether the particular income of trust is eligible for exemption under Section 12 of the Act is a matter of assessment and this Court had pointed out in the reported in in the case of CIT Vs. Sarvodaya Ilakkiya Pannai. This Court pointed out that the cancellation made in the case of assessee therein was not on the ground that the activities were not genuine, but the activities of the trust in publication and sale and spread of Sarvodaya Literature and Gandhian Ideologies was not the objects of the trust. This Court pointed out that the cancellation was made not on the ground that the activities of the trust were not genuine but the activities of the trust were not in accordance with the objects of the trust; when the trust was registered with definite objects, carrying on such activities would be in terms of the objects for which registration was granted.

+ in the light of the law declared by this Court in the above said decision, we do not find that the scope of Section 12AA(3) of the Act is of any doubt for a fresh look;

+ leaving that aside, there being no dispute raised by the Revenue as to the genuineness of the trust, or as to the activities of the trust not being in accordance with the objects of the trust, the question of cancellation under Section 12AA of the Act does not arise. We further hold that at the time of grant of registration on 28.3.2003, the same was made taking into consideration the objects of the institution fitting in with the definition of 'charitable purpose' defined under Section 2(150 of the Act and the substitution of the Section itself came only 2008, with effect from 01.04.2009. As rightly pointed out by the senior counsel appearing for the assessee, the circular clearly brings out the object of the amendment and the amended provision has no relevance to the case. The power regarding cancellation, hence has to be seen with reference to the registration and the object satisfying the definition on 'charitable purpose', as it stood at the time of registration and not by the subsequent amendment to Section 2(15) of the Income Tax Act;

+ thus, if a particular activity of the institution appeared to be commercial in character, and it is not dominant, then it is for the Assessing Officer to consider the effect of Section 11 of the Act in the matter of granting exemption on particular head of receipt. The mere fact that the said income does not fit in with Section 11 of the Act would not, by itself, herein lead to the conclusion that the registration granted under Section 12AA is bad and hence, to be cancelled;

General public utility

+ In the decision in the case of Hiralal Bhagwati Vs. Commissioner of Income Tax , the Gujarat High court considered the said phrase in the context of Section 12AA registration and held that registration of the charitable trust under Section 12AA of the Act is not an idle or empty formality. Thus, the Gujarat High Court held that in order to be charitable, the purpose must be directed to the benefit of the community or a section of the community; the expression "object of general public utility", however, is not restricted to the objects beneficial to the whole of mankind; an object beneficial to a section of the public is an object of general public utility; the section of the community sought to be benefited must undoubtedly be sufficiently defined and identifiable by some common quality of a public or impersonal nature;

+ admittedly when the assessee was granted registration, the Revenue recorded its satisfaction that the objects are of charitable purpose. Thus only possible enquiry under Section 12AA of the Act for cancellation is to find out whether the activities of the trust are genuine or in accordance with the objects of the trust. If any of the income arising on the activities are not in accordance with the objects of the trust, the assessee's income, at best, may not get the exemption under Section 11 of the Act. But this, by itself, does not result in straight rejection of the registration as 'trust' under Section 12AA of the Act. Consequently, we reject the prayer of the Revenue that Section 12AA(1) of the Income Tax Act, 1961 must be read along with Section 12AA(3) of the Income Tax Act, 1961 before considering the cancellation;

Genuineness of activities

+ as rightly pointed out by the assessee, Revenue does not allege anything against the genuineness of the objects of the assessee or its activities. It rests its order only on the ground of the assessee receiving income from holding of matches which according to the assessee were not held by it. Thus, as regards the question as to whether the particular income qualified under Section 11 of the Act or not is not the same as activity being genuine or not. In the circumstances, we do not agree with the view of the Income Tax Appellate Tribunal that the order passed by the Director of Income Tax (Exemptions) was in accordance with the provisions of the Income Tax Act, 1961;

+ the Income Tax Appellate Tribunal pointed out that the physical aspect of the game was one in accordance with the objects of the assessee and the activities are genuine. However, the matches held were not in advancement of any specific object of general public utility. The pattern of receipt is commercial in character and the matches conducted are not in accordance with the objects of the Association. Thus, it rejected the assessee's case and held that both the conditions under Section 12AA(3) of the Act stood attracted;

+ as seen from the observation of the Income Tax Appellate Tribunal, although generally it accepted the case of the assessee that the physical aspect of the game was one in accordance with the objects, the quantum of receipt apparently led the Income Tax Appellate Tribunal and the Revenue to come to the conclusion that the activities are commercial and hence by Section 2(15) proviso to the Act, the receipt from BCCI could not be called as subsidy. As for the observation of the Income Tax Appellate Tribunal that the twin conditions stood satisfied is concerned, it is not denied by the Revenue that at the time of granting registration, the Commissioner had satisfied himself about the objects of the trust and the genuineness of the activities as falling within the meaning of 'charitable purpose', as it stood in 2003. The Revenue does not deny as a matter of fact that the objects remain as it was in 2003 and there is no change in its content to call the assessee's object as not genuine. There are no materials to indicate that the grant of registration was not based on materials indicating objects of general public utility;

+ the assessee is a member of Board of Control for Cricket in India (BCCI), which in turn is a member of ICC(International Cricket Council). BCCI allots test matches with visiting foreign team and one day international matches to various member cricket association which organise the matches in their stadia. The franchisees conduct matches in the Stadia belonging to the State Cricket Association. The State Association is entitled to all in-stadia sponsorship advertisement and beverage revenue and it incurs expenses for the conduct of the matches. BCCI earns revenue by way of sponsorship and media rights as well as franchisee revenue for IPL and it distributes 70% of the revenue to the member cricket association. Thus the assessee is also the recipient of the revenue. Thus, for invoking Section 12AA read with Section 2(15) of the Act, Revenue has to show that the activities are not fitting with the objects of the Association and that the dominant activities are in the nature of trade, commerce and business. We do not think that by the volume of receipt one can draw the inference that the activity is commercial. The Income Tax Appellate Tribunal's view that it is an entertainment and hence offended Section 2(15) of the Act does not appear to be correct and the same is based on its own impression on free ticket, payment of entertainment tax and presence of cheer group and given the irrelevant consideration. These considerations are not germane in considering the question as to whether the activities are genuine or carried on in accordance with the objects of the Association. We can only say that the Income Tax Appellate Tribunal rested its decision on consideration which are not relevant for considering the test specified under Section 12AA(3) to impose commercial character to the activity of the Association. In the circumstances, we agree with the assessee that the Revenue has not made out any ground to cancel the registration under Section 12AA(3) of the Act;

+ as regards the observation of the Income Tax Appellate Tribunal that IPL Matches and Celebrity Cricket Matches are also being held by the Association and hence it is an entertainment industry, we need not go into these aspects, for, the order of the Director of Income Tax (Exemptions) casts no doubt on the genuineness of the objects of the trust. Hence, it is for the Assessing Officer to take note of all facts, while considering the same under Section 11 of the Income Tax Act, 1961. We disapprove the approach of the Tribunal in this regard. In the above said circumstances, we set aside the order of the Income Tax Appellate Tribunal.

(See 2013-TIOL-1074-HC-MAD-IT)