Assistant Commissioner of Income Tax vs Ahmedabad Urban Development Board

 

Name: - Aditya Suryavanshi

College: - K.C Law College

Year: - 3^rd (Sem V)

 

Cricket bodies run on business lines not for Charitable Purpose

In the case of Assistant Commissioner of Income Tax vs Ahmedabad Urban Development Board 2022 (SC) 865it was decided that the Gujarat, Saurashtra, Baroda, Rajkot and Rajasthan are running on business and should not be granted exemption as a Charitable Trust under Section 11 of the Income Tax Act 1961.

1.    Introduction

As the case is majorly dealing with what constitutes a “Charitable Trust” it is necessary to understand the meaning of the same

The expression “Charitable Purpose” has been defined under Section 2(15) of the Income Tax Act to include:

•        relief of the poor,

•        education,

•        medical relief,

•        preservation of environment (including water sheds, forests and wildlife),

•        preservation of monuments or places or objects of artistic or historic interest and

•       Any other object of public utility.

 

EDUCATION: The word ‘Education’ means training and developing the knowledge, skill, mind and character of students by normal schooling. The running of a private coaching institute for the purpose of training the students to appear at certain specified examinations upon taking specified sum from the trainees is not a charitable purpose.The tax exemption is granted under “Education” as cricket association is imparting skills and training for the sports enthusiast.

2.    Issues Raised

The issue involved was whether the activities of the cricket associations could be considered as "general public utility" under the definition of “Charitable Purpose" in Section 2(15) of the Income Tax Act 1961. Gender Public Utility is defined as it is necessary that the benefit to provide a section of the public as eminent from specified individuals. The object of general public utility includes benefit to a section of the public and it is not obligatory that the object should benefit the whole mankind of country or state.

3.    Legal Provision of the Case

•       Section 2 (15) of the IT Act (which came into force on 01.04.1962 and repealed the old IT Act) defined “Charitable Purpose” as follows: charitable purpose includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit.”

•       The first two provisos to Section 2(15) were eliminated by the Finance Act, 2015 (effective as of April 1, 2016), and instead, the following caveat was added: "Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if such advancement involves the conduct of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, The resultant Section 2(15) was as follows when the phrase "not involving the carrying on of any activity for profit" was deleted:

•       "Charitable purpose" includes advancing any other cause of wide public benefit as well as providing aid to the needy, education, medical care, and relief from poverty  or a charge, cess, or any other kind of business unless the activity is carried out

(i) In the course of actually advancing another object of general public utility, and

(ii) The aggregate receipts from such activity or activities during the previous year do not exceed twenty percent of the total receipts of the trust or institution carrying out such activity or activities during the preceding year.

 

Sections 10, 11, 12, 12A, 12AA and 13 of the IT Act

 The effect of Sections 11, 12, 12A 12AA and 13 have been the subject of certain

decisions of this court. These decisions have noticed that Section 11 deals with income

from trusts for charitable and religious purposes and sets out which shall be subject to tax. Section 11(1) relates to application of income towards the objects of the trust and exempts income of trusts with objects wholly charitable or religious, or parts of income which relate to such objects. Section 11(1-A) provides for exemption of capital gains derived by trusts. Section 11(1B), speaks of failure to apply income as per option under Explanation (2) to Section 11(1). Section 11(2) relates to setting apart or accumulation of income. Section 11(3) deals with consequences of misapplication of income or improper investment, while Section 11(3-A) relates to modification of purposes specified in Form 10 under Section 11(2). Sections 11(4) and 11(4-A) relate to business income of charitable trusts. Lastly, Section 11(5) provides for the prescribed modes of investment in regard to the said trusts. Section 12 enacts that income of trusts created wholly for charitable or religious purpose from voluntary contributions would be deemed as income from the property held under such trust for the purposes of Sections 11 and 13 of the Act. Section 12-A prescribes the conditions for applicability of Sections 11 and 12 of the Act. It enacts two essential conditions which are to be satisfied by a charitable or religious trust for claiming exemption under those sections: firstly, that the person in receipt of the income has made an application for registration of the trust on or after 01.06.2007 in the prescribed form and manner to the Commissioner and such a trust is registered under Section 12-AA and secondly, where the total income of the trust exceeds the maximum amount which is not chargeable to income tax in any previous year, the accounts of the trust must be audited by a chartered accountant and the person in receipt of the income should furnish such audit report in the prescribed form along with the return of income. The procedure for grant (or refusal) of registration is prescribed by Section 12AA. Section 13 enlists the circumstances under which tax exemption is unavailable to religious or charitable trusts otherwise falling under Sections11 or 12. Section 13 therefore, has to be read with the provisions of Sections 11 and 12 for deciding eligibility of a trust’s claim for exemption.

 

Distinction between business held under Trust [Section 11(4)] and Trust carrying on business [Section 11(4A)] .

Section 11(4) applies to cases where the business undertaking itself is the property held by a trust. Thus, where the property held in trust, or where property settled by the donor or trust creator in favour of the trustees itself is a business undertaking, then the income from such an undertaking is covered by Section 11(4). Section 11(4A) operates differently. It is applicable to cases where the trust carries on a business. Section 11(4A) states that when a trust carries on a business, unless the business is incidental or ancillary to the attainments of the objectives of the trust, it would be disentitled to an exemption under Section 11(1). It imposes a further condition that separate books of accounts need to be maintained in such cases.

 

Justice Bhatt observed that:

For a Test series or ODI series conducted in multiple centers and organised by BCCI and multiple state associations, it was found that if each state association were to negotiate the sale of rights to events in its centre, its negotiating strength would be low. It was, therefore, agreed that BCCI would negotiate the sale of media rights for the entire country to optimize the income under this head. It was further decided that out of the receipts from the sale of media rights 70% of the gross revenue less production cost would belong to the state associations. Every year, BCCI has paid out exactly 154 Rule 3 (a)(ii)(B) of the latest BCCI Memorandum of Association and the Rules and Regulations 77 70% of its receipts from media rights (less- production cost) to the state associations. This amount has been utilized by the respective associations to build infrastructure and promote cricket, making the game more popular, nurturing and encouraging cricket talent, and leading to higher revenues from media rights. These media, or broadcasting, rights are protected under Sections 37 to 40 of the Copyrights Act of 1957 as intellectual property rights. These rights, particularly the television and digital rights, allow the licensee or the winning bidder to use the broadcast or telecast for commercial purposes by running adverts for different goods and services throughout the media. The associations' claims that BCCI only provided them with subsidies needed closer examination because:

1.     BCCI does not own the stadium and uses the entire physical infrastructure of the state associations, and

2.     BCCI expressly negotiates on their behalf for the sale of such rights (which appear to be purely commercial contracts).

 

 

 

 

4.    Case Laws

 

First Major Decision

Sole Trustee, Lok Shikshana Trust v. Commissioner of Income Tax 12 (hereafter "Lok Shikshana Trust") was the first significant judgement to interpret the new concept. This court rejected a claim that operating a newspaper business with numerous other goals in mind (including establishing educational institutions and disseminating information to the Kannada-speaking public through newspapers, among other things) constituted charitable. The result of the definition change, according to the court, is that in order to bring a case under the fourth category of charitable purpose, it would be necessary to demonstrate that:

 (1) The trust's purpose is the advancement of any other object of general public utility.

(2) The aforementioned purpose does not involve the carrying on of any business.

 

Major Decision passed in Assistant Commissioner vSuraj Art Silk Cloth Manufacturers Association

The most significant ruling on the matter was the verdict delivered by a bigger, five-judge Bench in Assistant Commissioner v. Surat Art Silk Cloth Manufacturers' Association (hereafter "Surat Art Silk"). Here, a non-profit corporation was created under Section 25 of the Companies Act of 1956, which is equivalent to Section 8 of the Companies Act of 2013. It claimed exemption because it was a benevolent organisation with philanthropic goals. The company's goals included, among other things, fostering trade and commerce in Art Silk yarn, raw silk, cotton yarn, Art Silk cloth, silk cloth, and cotton cloth. The company's memorandum stated in clause 5(1) that all income and assets were to be used "solely for the furtherance of its goals as set forth in the Memorandum". No portion of the revenue or property may be paid or transferred to anybody who is or has ever been a member of the assessee, directly or indirectly, in the form of a dividend, bonus, or other form of profit, according to clause 5(2). After an initial remand to the Appellate Commissioner, the Income Tax Appellate Tribunal (hereinafter "ITAT") ruled that "the assessee's major objective was to promote commerce and trade in Art Silk and Silk Yarn and Cloth." Since there was a disagreement over how to interpret the residual clause—which pertains to institutions working to advance broad public utility objectives and whether the corporation should be considered a public utility—the ITAT issued a straight referral of the matter to this court.

5.    Conclusion

Section 11(1) confers an exemption from tax only where the property itself is held under a trust or other legal obligation. It does not apply to cases where a trust or legal obligation is not created on any property, but only the income derived from any particular property or source is set apart and charged for a charitable or religious purpose. Similarly, when a business itself has been set aside for the objects of the trust, then such business is held under trust and will fall under sub-section (4) .As the cricket association of Gujarat, Saurashtra, Baroda, Rajkot and Rajasthan were earning revenue more than the prescribed limits and the expenditure was not towards imparting skill or knowledge. A direction is issued by the Supreme Court that the A.O. shall adjudicate the matter afresh after issuing notice to the concerned assesseses and examining the relevant material indicated in the previous paragraphs of this judgment

6.    Bibliography

1.    Livelaw

2.    Times of India