|CORAM:||C. M. Garg (JM), Sudhakar Reddy (AM)|
|CATCH WORDS:||cancellation of registration, Charitable purpose|
|DATE:||January 13, 2015 (Date of pronouncement)|
|DATE:||January 21, 2015 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 11 (charity) and 12AA (cancellation of registration): Important propositions of law laid down|
(i) In Oxford Academy for Career Development 315 ITR 382 (2009) the High Court has clearly held that s.12AA(3) has no retrospective effect as it is neither explanatory nor clarificatory in nature and the CIT has no power to rescind the order passed by the CIT prior to 1st Oct.2004. Now there is an amendment to s.12AA(3) by the Finance Act, 2010, which has inserted the phrase “or has obtained registration at any time u/s 12A” after the words “sub-s.(1)” as appearing in s.12AA(3). This amendment has been made applicable and effective from 1st June,2010. Keeping in view the ratio laid down by the Hon’ble High Court in the case of Oxford Academy for Career Development (supra) and also the amendment of s.12AA(3) by the Finance Act, 2010 wef 1st June,2010, it is amply clear that s.12AA(3) is prospective in nature and if any trust/institution has been registered prior to 1st Oct.2004 either u/s 12A or 12AA, the CIT has no power to cancel the registration u/s 12AA(3).
(a) For the cancellation of registration u/s 12AA(3), the Commissioner should record a satisfaction that the activities of the Trust or Institution are not genuine or that the activities are not being carried on in accordance with the objects of the Trust. In the absence of such a finding registration granted u/s 12A or u/s 12AA cannot be cancelled. Cancellation of registration of a charitable Trust, in a given case, is permissible, only under the circumstances stated u/s 12AA(3) of the Act.
(b) For an assessee to be classified as charitable under the residuary category i.e. “advancement of any other object of general public utility” u/s 2(15) of the Act, the following four factors have to be satisfied.
i. Activity should be for advancement of ‘general public utility’.
ii. Activity should not involve any activity in the nature of trade, commerce and business.
iii. Activity should not involve rendering of services in relation to any trade, commerce or business.
iv. Activities in Clauses b and c above, should not be for a fees, cess or other consideration, the aggregate value of which should not exceed the amount specified in the Second Proviso to S.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.
(d) The scope of the term “activity in the nature of trade, commerce or business” would mean that:
i. It is undertaken with the 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 show 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 vs. Lord Fisher (1981) STC 238 and the propositions in the case of CST vs. Sai Publication Fund 258 ITR 70 (SC) apply.
v. Business activity is an important prevailing element of self interest.
(e) From a perusal of Circular no.11 of 2008 issued by the CBDT, it is clear that the new Proviso of S.2(15) of the Act, is applicable to the assesses who are engaged in commercial activities i.e. carrying of trade, commerce or business in the garb of “public utility” to avoid tax liability, and where the object of “general public utility” was sometimes, only to mask or device to hide the true purpose, which was “trade, commerce or business.”
(f) Charitable activity is anti-thesis of activity having an 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 demonstratable but it is not equivalent to self sacrifice and abnegation.
(g) The antiquated definition of 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 seminal question, is it 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 Clauses, should be wholly, substantially or in part be funded by voluntary contributions.
(l) A pragmatic view is required when we examine the data, which should be analysed objectively. A narrow and coloured view will be counter productive and contrary to S.2(15) of the Act.
(m) Accumulation of money/funds over a period of two to three years may not be relevant in determining the nature and character of activity and whether the same should be treated indicative of profit motive i.e. 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 decision making.