This was a batch of 21 tax appeals relating to three assessees, namely, Gujarat Cricket Association (GCA), Baroda Cricket Association and Saurashtra Cricket Association (SCA), pertaining to assessment years ranging from 2004-05 to 2009-10.
The questions dealt by the High Court in its common judgment and order dated 27.9.2019 can be broadly divided into the following—
Whether the registration of GCA under section 12AA could be cancelled under section 12AA (3) on the ground that it violated proviso to section 2(15) of the Income-tax Act, 1961 (IT Act)?
Whether the assessee could be regarded as violating proviso to section 2(15)?
Whether the subsidy / donation received from Board for Cricket Control in India (BCCI) could be regarded as corpus donations under section 11(1)(d)?
I. Whether the registration of GCA under section 12AA could be cancelled under section 12AA (3) on the ground that it violated proviso to section 2(15)?
1.1. Relevant facts of the case
GCA is a society registered under the 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 the registration under section 12AA (3) on the ground that the activities of the assessee were commercial in nature and the assessee could not be regarded as for “charitable purpose” under proviso to section 2(15) inserted by the Finance Act, 2010 with effect from 1.4.2009.
On appeal, the Tribunal decided the issue in favour of GCA by holding that it is not permissible for DIT to cancel the registration under section 12AA (3) on the ground that the assessee had violated amended proviso to section 2(15).
Being dissatisfied with the order of the Tribunal, the tax department filed an appeal before the High Court.
1.2. Observations of the High Court
The High Court, concurring with the view of Madras High Court in Tamil Nadu Cricket Association, (2014) 360 IT 633 (Mad) and the Delhi High Court in GS1 India v. DIT, (2014) 360 ITR 138 (Del), summed up the principles of law as follows:
(a) For the purpose of cancellation of the registration under section 12AA (3), the Commissioner should record a satisfaction that the activities of the charitable institution are not genuine or that the activities are not being carried on in accordance with the objects of the charitable institution. In the absence of such a finding, the registration granted under section 12A/12AA cannot be cancelled.
(b) For an assessee to be classified as charitable under the category of “advancement of any other object of general public utility” under section 2(15), the following four factors need to be satisfied —
(i) Activity should be for the advancement of the ‘general public utility’;
(ii) Activity should not be in the 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, the aggregate value of which should not exceed the amount specified in the second proviso to section 2(15).
(c) The earlier test that if the income so collected, is applied towards the charitable activity, then the trust cannot be held as non-charitable, is no longer relevant after the statutory amendment in proviso to section 2(15).
(d) The scope of the term “activity in the nature of trade, commerce or business” would mean that –
(i) It is undertaken with a profit motive;
(ii) The 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 the activity undertaken is in fact, in the nature of business;
(iv) The five tests propounded in the case of Customs and Excise Commissioner v. Lord Fisher (1981) STC 238 and the propositions in the case of CST v. Sai Publication Fund 258 ITR 70 (SC) apply.
(v) Business activity is an important prevailing element of self-interest.
(e) From a perusal of the CBDT Circular explaining the amendment, it is clear that the proviso of section 2(15) is applicable to the assessees who are engaged in commercial activities, that is, carrying of trade, commerce or business in the garb of “public utility” to avoid tax liability, and where the object of the “general public utility” is only a mask or device to hide the true purpose, which was “trade, commerce or business.”
(f) Charitable activity is the anti-thesis of activity having an element of self-interest. Charity is driven by altruism and desire to serve others, though the 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) The antiquated definition of the term “charity”, which entails giving and receiving nothing in return, is outdated.
(h) Enrichment of oneself or self-gain should be missing and the predominant purpose of the activity should be to serve and benefit others, the mandatory features being, selflessness or illiberal spirit.
(i) The quantum of fee charged, the economic status of the beneficiaries who pay, commercial values in comparison to the fee, purpose and object behind the fee etc. are several factors which decide whether an activity is “business”.
(j) The Revenue cannot take a contradictory stand that the assessee carries on charitable activity under the residuary head “general public utility”, but, simultaneously record the said activity as business.
(k) There is no statutory mandate that a charitable institution falling under the residuary category should be wholly, substantially or in part be funded by voluntary contributions.
(l) A pragmatic view is required to be taken while examining the data and the same should be analysed objectively. A narrow and coloured view may prove to be counter productive and contrary to section 2(15).
(m) Accumulation of money / funds over a period of two to three years may not be relevant in determining the nature and character of the activity and whether the same should be treated indicative of profit motive, that is, the desire or intention to carry on business or commerce.
(n) The so-called “business activities”, when intrinsically woven into and is part of the charitable activity undertaken, the business activity is not feeding charitable activities, as they are integral to the charity/charitable activity.
(o) What has to be seen is, as to what is the core / main activity of the assessee. The predominant activity shall be the basis of the decision making.
1.3. The Court further observed that-
(a) The contention of the tax department that receipt of share in advertisement revenue (in form of grants) from BCCI makes the assessee a commercial organisation, is not correct.
(b) Merely because an activity is performed in an organized manner, that alone, will not make such activities as business / commercial activity. The profit motive is one essential ingredient which was apparently missing in the case of GCA. In carrying out an activity, one may earn profit or one may incur loss. But for making it as a business activity, the presence of the profit motive is sine qua non.
(c) The assessee was promoting cricket on charitable basis as far as real beneficiary (cricketer) is concerned since there was no quid pro quo relationship with the cricketer.
In the result, the appeal filed by the Revenue was dismissed by the High Court.
(a) A number of High Courts have held that registration is not liable to be cancelled under section 12AA (3) on the ground that proviso to section 2(15) is
(i) DIT(E) v. Karnataka Industrial Area Development Board, (2015) 55 taxmann.com 34 (Karn)
(ii) DIT(E) v. Kodava Samaja, (2015) 57 taxmann.com 187 (Kar) [SLP granted by the Supreme Court in DIT(E) v. Kodava Samaja, (2015) 64 taxmann.com 380 (SC)]
(iii) DIT(E) v. Sri Kuthethur Gururajachar Charities, (2015) 58 taxmann.com 75 (Kar)
(iv) DIT(E) v. Khar Gymkhana, (2016) 70 taxmann.com 181 (Bom)
(v) DIT(E) v. North Indian Association, (2017) 79 taxmann.com 410 (Bom)
(b) This aspect is also now clarified by insertion of section 13(8) by the Finance Act 2012, with effect from 1-4-2009, to the effect that section 11 / 12 shall not apply in a previous year in which proviso to section 2(15) is applicable. By implication, it could be argued that even in such a year, the registration is not liable to be cancelled but only benefit of section 11/12 will not be available.
(c) CBDT Circular No. 21/2016 dated 27-5-2016
The relevant part of the CBDT Circular reads as follows:
“…With the introduction of Chapter XII-EB in the Act vide Finance Act, 2016, prescribing special provisions relating to tax on accreted income of certain trusts and institutions, cancellation of registration granted u/s 12AA may lead to a charitable institution getting hit by sub-section (3) of section 115TD and becoming liable to tax on accreted income. The cancellation of registration without justifiable reasons may, therefore, cause additional hardship to an assessee institution due to attraction of tax-liability on accreted income. The field authorities are, therefore, advised not to cancel the registration of a charitable institution granted u/s 12AA just because the proviso to section 2(15) comes into play. The process for cancellation of registration is to be initiated strictly in accordance with section 12AA(3) and 12AA(4) after carefully examining the applicability of these provisions.”
Thus, the CBDT has advised the field authorities not to cancel the registration under section 12AA because of violation of proviso to section 2(15).
The case of the tax department to cancel the registration under section 12AA (3) primarily rested on the contention that GCA violated the amended proviso to section 2(15). However, in light of the judgments of the Bombay and Karnataka High Court and the CBDT Circular (which is binding on the tax authorities), it could be argued that that the proceedings for cancellation of registration under section 12AA (3) can be initiated strictly only upon satisfaction of prescribed conditions and cannot be initiated upon such perceived violation of proviso to section 2(15). In other words, violation of section 2(15) is an irrelevant factor for cancellation proceedings under section 12AA (3). Therefore, with respect, it is submitted that after observing that the proceedings under section 12AA(3) could be initiated only upon fulfilment of the prescribed conditions which were absent in the present case, it was not necessary for the High Court to examine whether proviso to section 2(15) was violated by GCA or not.
1.4.2. Whether CIT can invoke cancellation proceedings under section 12AA (4)?
Cancellation under section 12AA (4) is permitted, inter alia, if the provisions of section 11 / 12 do not apply “due to operation of sub-section (1) of section 13” [section 12AA(4)(a)]. If a charitable institution violates proviso to section 2(15), it loses its exemption under section 11 / 12 for that previous year by virtue of section 13(8), and not section 13(1). Therefore, it is submitted that the DIT is not permitted to cancel the registration under section 12AA (4) also for violation of proviso to section 2(15).
II. Whether the assessee could be regarded as violating proviso to section 2(15)?
2.1 Relevant facts of the case
GCA filed its return of income on 14-09-2009 declaring total loss of ₹ 3,45,54,247, claiming exemption under section 11 for assessment year 2009-10. During the assessment proceedings, the Assessing Officer observed that the activity of the assessee was in the nature of trade, business or commerce for a cess or fees in the form of tickets with profit motive and the receipt from the BCCI in the form of TV rights was not voluntary contribution but price paid for hosting cricket tournament on assessee’s stadium and therefore, it was not educational activity of the assessee. Further, the Assessing Officer held that the activities carried out by the assessee were in the nature of advancement of any other object of general public utility and invoked proviso to section 2(15), denying the benefit of section 11.
Being aggrieved, the assessee filed appeal before CIT(A). The CIT(A) held that the assessee was not doing any charitable/educational activity by promoting game of cricket but it was in the business of entertainment of people at large by arranging / hosting national and international levels cricket tournaments and thereby, received approximately ₹ 3 crores which indicated that the activities of the assessee was carrying out activities in the nature of business, etc. and thereby was covered by the proviso to section 2(15).
On appeal, after examining the facts of the assessee, the Tribunal held that the assessee was not engaged in the activities in the nature of business, etc.
Aggrieved by the order of the Tribunal, the Revenue filed an appeal before the High Court.
2.2 Observations of the High Court
The High Court, upholding the findings of the Tribunal, observed as follows:
(a) The object of introduction of proviso to section 2(15) was to deny benefit of the tax exemption to purely commercial and business entities which wear the mask of a charity.
(b) The registration of an assessee as a charitable institution under section 12A / 12AA would, prima facie, clothe the assessee with the character of a charitable institution. However, that, by itself, was not conclusive on the question whether an assessee is established for a “charitable purpose”.
(c) While framing the assessment order, it is not open to the Assessing Officer to ignore the certificate of registration granted under Section 12AA and to go behind the registration obtained by the assessee under Section 12AA.
(d) The expression ‘charitable purpose’ is an inclusive one and not an exhaustive one and is sufficiently wide in scope to include a variety of activities. However, at the same time, the fact that remote and indirect benefits are derived by the members of the public will not be sufficient to make the purpose a “charitable purpose”.
(e) The word ‘Charity’ connotes altruism in thought and action. It involves an idea of benefiting others rather than oneself.
(f) While construing proviso to section 2(15), the principle of purposive interpretation should be adopted as it serves the legislative intent.
(g) If an activity in the nature of trade, commerce or business is carried on and it generates income, the fact that such income is applied for charitable purposes, would not make any difference and the activity would nonetheless not be regarded as being carried on for a charitable purpose.
(h) Merely because the assessee puts up tickets of the international cricket matches for sale and earns some profit out of the same, it would not lose its character of having been established for a charitable purpose. The driving force is not the desire to earn profit but the object is to promote the game of cricket and nurture the best of the talent.
(i) The core of the matter is to see whether the activity which resulted into income or loss was carried on with the object of doing some trade, commerce or business, etc., or it was in furtherance of the objects (non-business) etc., for which the assessee was set up. In other words, the predominant object of the activities should be seen as to whether it is aimed at carrying on some business, trade or commerce or the furtherance of the object for which it was set up.
(j) In carrying on the charitable activities, certain surplus may ensue. However, earning of surplus, itself, should not be construed as if the assessee existed for profit. The word “profit” means that the owners of the entity have a right to withdraw the surplus for any purpose including the personal purpose. The three Associations had not distributed any profits outside the organization. The profits, if any, are ploughed back into the very activities of promotion and development of the sport of cricket and, therefore, the assessees cannot be termed to be carrying out commercial activities in the nature of trade, commerce or business.
(k) It is not correct to say that since the assessees received share of income from the BCCI, their activities could be said to be the activities of the BCCI. If the Associations host any international match once in a year or two at the behest of the BCCI, then the income of the Associations from the sale of tickets etc., in such circumstances, would not portray the character of commercial nature.
(l) The State Cricket Associations and the BCCI are distinct taxable units and must be treated as such. It would not be correct to say that a member body can be held liable for taxation on account of the activities of the apex body.
(m) Irrespective of the nature of the activities of the BCCI (commercial or charitable), what is pertinent for the purpose of determining the nature of the activities of the assessees, is the object and the activities of the assessees and not that of the BCCI. The nature of the activities of the assessee cannot take its colour from the nature of the activities of the donor.
2.3.1. Presence of profit motive is essential to constitute “business”
The Court has reiterated that in order to constitute “business”, it is essential to have a profit motive. This is in line with a number of judgments including the 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)
2.3.2. Whether the observations of the High Court are relevant for proviso to section 2(15) as amended by Finance Act, 2015?
With effect from assessment year 2016-17, the proviso now reads as follows:
“Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves 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, unless—
(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year.”
Essentially, the proviso now has two parts :
(a) The first part covers exceptions to the definition of “charitable purpose” (that is situations in which the definition is not satisfied);
(b) The second part starting after “unless” is an “exception” to the exception in the first part, that is, if the conditions in the said exceptions are satisfied then the first part will not be applicable and the definition of “charitable purpose” will remain satisfied.
So far as the first part is concerned, it is almost identical as the existing first proviso (inserted by Finance Act, 2008). The expression “carrying on of any activity in the nature of trade, commerce and business” used in the first part is identical as the expression in existing first proviso. Hence, it is submitted that the interpretation of the expression (and specifically the term “business”) for the purposes of first proviso will continue to apply. In other words, if the charitable institution is not carrying on business, etc. the amendment may not apply. Therefore, it appears that the observations of the High Court on what constitutes “business” would continue to remain relevant for interpreting the amended proviso also.
2.3.3. Comments on charitable status of BCCI
The Tribunal in its order observed that-
“We are not really concerned, at this stage, whether the allegations about commercialization of cricket by the BCCI are correct or not, because that aspect of the matter would be relevant only for the purpose of proviso to Section 2(15) being invoked in the hands of the BCCI. We do not wish to deal with that aspect of the matter or to make any observations which would prejudge the case of the BCCI… As we make these observations, and as we do not have the benefit of hearing the perspective of the BCCI, we make it clear that these observations will have no bearing on any adjudication in the hands of the BCCI.”
Thus, the Tribunal made it clear that its observations would not have any bearing on the tax adjudication of BCCI.
However, the High Court made a categorical observation [at para 163(iii)] as follows-
“It is not correct to say that as the assessees received share of income from the BCCI, their activities could be said to be the activities of the BCCI. Undoubtedly, the activities of the BCCI are commercial in nature. The activities of the BCCI are in the form of exhibition of sports and earn profit out of it.”
Thus, the High Court observed that the activities of BCCI are commercial in nature “undoubtedly”, which may be prejudicial to the assessments of BCCI (albeit unjustly).
However, at para 163(v), the High Court observed as follows-
“Irrespective of the nature of the activities of the BCCI (commercial or charitable), what is pertinent for the purpose of determining the nature of the activities of the assessees, is the object and the activities of the assessees and not that of the BCCI. The nature of the activities of the assessee cannot take its colour from the nature of the activities of the donor.”
Thus, the High Court appears to have diluted its earlier observation that BCCI is undoubtedly commercial in nature by stating that nature of activities of BCCI may be “commercial or charitable”.
With respect, it is submitted that the observations of the High Court are, at the highest, obiter and should not have any precedential value in tax assessments of BCCI.
III. Whether the subsidy / donation received from Board for Cricket Control in India (BCCI) could be regarded as corpus donations under section 11(1)(d)?
3.1. Relevant facts of the case
During the assessment proceedings, the Assessing Officer observed that-
(a) the claim of exemption of corpus donations from BCCI under section 11(1)(d) was liable to be rejected in the absence any documentary evidence to support its claim that the donation can be considered as corpus donation on instruction of BCCI.
(b) The receipt of “infrastructure subsidy” from BCCI of ₹ 3.52 crores was revenue in nature and therefore, the difference between the receipt and the payment to District Cricket Association (₹ 1.39 crores) was added to the total income of the assessee.
Being aggrieved, the assessee filed appeal before CIT(A). The CIT(A) had held that no written specific direction was available with the amounts of donations from BCCI for the respective assessment years and therefore, the Assessing Officer had rightly treated the donation received from the BCCI as income of the assessee.
On appeal, the Tribunal observed that –
(a) there was specific confirmation to the effect that amounts were corpus donations. Further, on perusal of the BCCI resolution No. 5 dated 29.9.2001 which specifically stated that the TV subsidies should “henceforth” be sent to the member association towards corpus funds. Therefore, any payments made by the BCCI, without a legal obligation and with a specific direction that shall form corpus fund. Thus, the conditions under section 11(1)(d) are satisfied.
(b) the Assessing Officer was not justified in holding that infrastructure subsidy as revenue in nature. The assessee made claim for subsidy only after the expenditure having been incurred which is relatable to capital assets. The infrastructure subsidy was given to the assessee for the reimbursement of 50% of expenditure which was incurred on infrastructure related to the capital assets and therefore, it was not revenue receipt.
3.2. Observations of the High Court
The High Court did not interfere with the view of the Tribunal that any payments made by the BCCI, without a legal obligation and with a specific direction that it shall be for corpus fund is required to be treated as corpus donation not includible in total income. It is not necessary that each donation must be accompanied by a separate written document. Even without the two specific confirmations filed by the assessee, in the light of the BCCI resolution under which the payment is made and in the light of the payment not being under any legal obligation, the conditions under section 11(1)(d) were satisfied.
Voluntary contributions made with a specific direction that they shall form part of the corpus of the charitable institution is exempt under section 11 [section 11(1)(d)]. Thus, the donation has to be made with a specific direction that it shall form part of corpus of the recipient. The term ‘specific’ or ‘direction’ is not defined in the Act. In other contexts, they have been judicially construed as follows:
(a) The term ‘specific’ would mean ‘precise or exact, definite, explicit’. [Maru Ram v. UOI, AIR 1980 SC 2147, (1981) 1 SCR 1196]
(b) The term ‘directions’ could mean ‘instructions’ [Municipal Corporation of Greater Bombay v. Bharat Petroleum Corporation Ltd., (2002) 3 SCC 452].
Thus, for a donation to be covered by section 11(1)(d), there has to be precise or definite or explicit instruction from the donor to the effect that the contribution should be regarded as corpus donation. Further, the Act nowhere states as to how, in what manner and at what time such specific direction for treating a particular donation as “corpus” should be made. Hence, the direction has to be gathered from the facts and circumstances of the case [see Sukhdeo Charity Estate v. CIT, (1984) 149 ITR 470 (Raj); Mehrangarh Museum Trust v. ACIT, (2013) 156 TTJ 425 (Jd); Prabodhan Prakasham v. ADIT, (1994) 50 ITD 135 (Bom)].
The observations of the Tribunal appear to suggest that it is not even necessary to obtain subsequent confirmations from donor if it is possible to demonstrate by way of any other evidence (which presumably existed prior to the donation) that the donation was meant to be towards the corpus of the donee.
This decision of the Gujarat High Court reiterated the legal position that cancellation of registration under section 12AA (3) should be strictly in accordance with the conditions contained in the said provision and not for extraneous reasons including perceived violation of section 2(15). Further, the High Court reaffirmed the principle laid down by various Courts / Tribunal that in order for an activity to be regarded as “business” for the purpose of proviso to section 2(15), profit motive is sine quo non and it is necessary to see the driving force or the predominant object behind carrying out the activity. Also, pertinently, the High Court held that the nature of the activities of the donee cannot take its colour from the nature of the activities of the donor.
I would like to thank CA Rajesh Kadakia for his guidance and Legatax’s Charitable Institution Referencer for the informative material on the subject of charities.
- Tax Appeal No. 268 / 2012 and others; judgment dated 27.09.2019.