LOTUS CHARITABLE TRUST,KOLKATA vs. DIT(EXEMPTIONS), KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA [Before Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM]

I.T.A No.398/Kol/2012 Assessment Year: 2009-10 Lotus Charitable Trust Vs. Director of Income-tax (Exemption) (PAN: AAATL3593R) Kolkata. (Appellant) (Respondent)

Date of hearing: 18.05.2016 Date of pronouncement: 08.06.2016

For the Appellant: Shri D. S. Damle, FCA For the Respondent: Shri Rajat Subhra Biswas, CIT, DR

ORDER Per Shri M Balaganesh, AM:

This appeal by assessee is arising out of order of DIT(E), Kolkata vide M. No. DIT(E)/Kol/12AA(3)/2011-12/3072-74 dated 16.01.2012, withdrawing the registration granted u/s 12AA(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

2 ITA No.398/K/2012 Lotus Charitable Trust AY 2009-10 (iii) To open, found, establish, maintain and assist leper asylums or other institutions for the treatment of leprosy. (iv) To open, found, established assist and maintain schools, colleges and boarding houses. v) To open, found, establish and assist schools, colleges hostels for the blind, the deaf and the dumb. vi) To open, found, establish or contribute to the maintenance of orphanages, widow homes, lunatic, asylums, poor houses etc. vii) To distribute dhotis, blankets, rugs, woolen clothing, quilts or cotton, woolen, silken or other variations of clothings in the poor. viii) To pay stipends, scholarships and other aid for prosecuting studies, training or research. ix) To establish found and maintain libraries, reading rooms for the convenience of the public. x) To start maintain and assist in relief measures in these areas which are or become subjected to natural calamities such as femine, epidemics, firm, floor, death of water, earthquake. xi) To renovate or repair any such temple, mosque, gurdwara, church or other place which is notified by the Central Government in the official Gazette to be of historic, archeological or Artistic importance or to be a place of public worship or known throughout any state or states.”

3 ITA No.398/K/2012 Lotus Charitable Trust AY 2009-10 along. The Learned AR placed on record a copy of the assessment order for the Asst Year 2004-05 framed u/s 143(3) of the Act on 29.12.2006 (pages 14 to 15 of paper book) which was framed subsequent to the commencement of ‘Solace’. In the said assessment, the Learned AO after examining the books of accounts of the assessee from Asst Years 1999-2000 to 2004-05 accepted the activities carried out by the assessee as charitable in nature and granted exemption u/s 11 of the Act.

4 ITA No.398/K/2012 Lotus Charitable Trust AY 2009-10 being in the nature of commerce and hit by the amended provision of section 2(15) of the Act. b) For that the Ld. Director of Income Tax (Exemption) erred in holding that the activities of the Trust/ Institution are not genuine and do not conform to the objective outlined in the Trust Deed. c) For that the Ld. Director of Income Tax (Exemption) further erred in holding that the activities of the Trust cannot be categorized under the limb of "medical relief' within the meaning of the provision of Section 2(15) of the Act.

3) For that the Ld. Director of Income Tax (Exemption) erred in holding that term medical relief in common parlance, means only provision of facility for diagnosis of ailments through modern scientific methods and treatment of diseases through medication or surgery for achieving recovery and cure and the term 'medical relief cannot be stretched to include provision of facilities for maintaining or promoting physical/medical fitness. a) For that the Ld. Director of Income Tax (Exemption) erred in holding that the "Solace" is nothing but a health club and affordable by only the well-to-do sections of the society. b) For that the Ld. Director of Income Tax (Exemption) failed to appreciate the fact that the major part of the gross income of the Trust not only comprises of membership fees but also fees from patients and realization from treatment, therapies & others.

5) a) For that the Ld. Director of Income Tax (Exemption) failed to appreciate the fact that there is no change in the activities of the Trust and it has been availing benefit of Section 12AA of the Income Tax Act, 1961 since inception. b) For that the Ld. Director of Income Tax (Exemption) also failed to appreciate the fact that the Trust has been allowed the benefit of Section 11 of the Act in all its completed Tax Assessments till the Assessment Year 2008-09.”

5 ITA No.398/K/2012 Lotus Charitable Trust AY 2009-10 I am directed to state that you are inter alia, operating a Spa and a club. The activities in which you are engaged in is in the nature of trade, commerce or business within the meaning of 1st proviso to sec. 2(15) of the I. T. Act. As such objects of your society do not qualify as being for charitable purpose with effect from 01.04.2009 in view of the amendments to sec. 2(15), by the Finance Act 2009. In view of the discrepancies and violation of law noted above, the Director of Income Tax (Exemptions), Kolkata proposes to cancel the registration u/s. 12AA granted to you. You are hereby required to show cause as to why the registration should not be revoked. Your reply must reach this office within 07 days from the receipt of this communication. Yours faithfully, Sd/ (D. K. Kedia) I.T.O. (Exemptions), Hqrs., Kolkata For Director of Income Tax (Exemption), Kolkata”

The Learned AR stated that the assessee duly filed reply to this show cause notice meeting each and every allegation of the Learned DIT(E). He argued that the trust is providing medical relief and services of mental and physical fitness which are incidental to the main objects of the trust of imparting medical relief among others. He argued that the activities of the trust are divided into ‘Medical Relief Centre’ and ‘Health Centre’ known as ‘Sunny Park Diabetic Endocrine Centre’ and ‘Solace’ respectively. In Sunny Park Diabetic Endocrine Centre, the trust is treating patients by Pranic Healing techniques that utilize ‘Prana’ i.e ‘life force’ to cure various illnesses. This technique treats diseases in a holistic way factoring in the entire health profile of a patient. He stated that Pranic Healing has achieved tremendous progress in treating various diseases and helped in preventing further deterioration of health. To perform this technique of Pranic healing there is a requirement of peaceful environment from where the healers can do their healing to cure the patients. Initially when the trust started this activity, treatment based on pranic healing was neither well accepted nor so well known. Initially many patients who came to the centre were one who had tried out other systems of treatment and pranic healing was their last hope. The Trust is treating patients without any distinction of caste and creed in its centre. The success was achieved gradually as the trust educated more and more people about the technique of pranic Healing to heal the past trauma and depression. Rising healthcare costs have also prompted people to turn towards such alternate systems of medicine. Patients who benefited from our system of medicine are t he best ambassadors of the technique. Thus, this activity of the trust in no circumstances can be equated with any activity other than medical relief.

6 ITA No.398/K/2012 Lotus Charitable Trust AY 2009-10

He further argued that as per section 2(15) of the Act, relief also by alternative method is per se charitable purpose irrespective of the fact that for providing relief the trust charges fee, and there is no condition to hold that to become eligible for charitable purpose in respect of medical relief, the same should be imparted freely or without charging any fee. Mere making of profit would not be ground to cancel registration once the objects of the trust were for charitable purpose and especially where two institutions were being run by the trust which was registered since 22.08.1980 as a Charitable Trust, and solely because the trust was charging fees and was getting surplus, would not be a reason to deny registration.

The unit "Solace" have variety of members (old and young, men and women, rural and metropolitan, corporate and non-corporate, public servants and private, permanent and temporary, service membership or otherwise). The period of membership is also as per choice of the individuals. In fact the centre is not mean for any individual or for a group of individuals or families and such variety of members is represented from a cross-section of the public at large. The member's admission to the centre is not restricted at all. Further It is neither necessary that medical relief, clinical services and/or fitness services should only be given to poor, nor it can be presumed that unless any particular percentage of services are rendered free a clinic Centre would not become a charitable one. Further since the unit have a variety of members and period of membership is also as per choice to avail the benefit of physical fitness and awareness to maintain good health, the trust is operating a Centre for the same and not operating a spa and a club.

The activities of the trust are not for the purpose of any profit though the Trust had income from Rent and Interest besides membership fees, fee from treatment, therapies & others, and receipt from Pranik Healing Treatment. Such receipts or collection of fees in the course of activities of the Trust cannot be viewed as receipts in consideration of rendering the services to trade, commerce or business as the services that are provided are at a very subsidized rate when compared with the rates prevailing in the market. The receipts of the trust are not with a profit motive but essentially only

7 ITA No.398/K/2012 Lotus Charitable Trust AY 2009-10 to recoup the cost of discharging services. The surplus generated is utilized for the development and promotion of the trust.

By no stretch of logic, the activities of the Trust can be said to be not genuine. The Trust is admittedly pursuing the objects for which it was established When the trust is engaged in bona fide activities, with the frame work of law, to pursue its objectives, it cannot be said that the activities of the trust are not genuine and there is no legally sustainable reasons for cancelling or withdrawing Registration granted u/s. 12AA of the Act.

8 ITA No.398/K/2012 Lotus Charitable Trust AY 2009-10 8.1. We find that the provisions of section 12AA(3) of the Act could be invoked in the following circumstances :-

When the Principal Commissioner or Commissioner is satisfied 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, as the case may be.

It is not the case of the revenue that the activity carried out in ‘Solace’ is not a genuine activity. In any case, the Learned DIT (E) had held that the objects carried out by the assessee trust falls in the fourth limb of the definition of charitable purpose u/s 2(15) of the Act i.e ‘advancement of any other object of general public utility’. Hence we find that the Learned DIT(E) had accepted the objects of the assessee to be charitable in nature . Having construed so, there is no need to cancel the registration u/s 12AA(3) of the Act. The revenue, if it is of the opinion that the assessee falls under the fourth limb of the definition u/s 2(15) of ‘advancement of any other object of general public utility’ and thereby the proviso thereon would become applicable, is at liberty to look into the same in the assessment proceedings for the purpose of granting exemption u/s 11 of the Act , but that does not entitle the Learned DIT(E) to invoke the provisions of section 12AA(3) of the Act for cancellation of registration of the trust. There may be a situation that in one year the gross receipts, if fourth limb is considered as applicable to trust, might exceed Rs 25 lacs and accordingly the objects might not be charitable in nature, whereas in another year, the gross receipts might be less than the permissible limits and accordingly the activities would be construed as charitable in nature. Hence under these circumstances, if the registration u/s 12AA of the Act is cancelled, then the maximum eligible amount prescribed in the proviso to section 2(15) of the Act itself would become redundant and unworkable. In this regard, the reliance placed by the Learned AR on the decision of the Hon’ble Madras High Court in the case of Tamil Nadu Cricket Association vs DIT(E) reported in (2014) 360 ITR 633 (Mad) is directly on the point and is favourable to the assessee, wherein it was held that :-

“32. 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 the genuineness of the activities, for the cancellation of the registration under section

9 ITA No.398/K/2012 Lotus Charitable Trust AY 2009-10 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 section 12AA(3) of the Act, as the case may be. 33. Registration of the trust under the Act confers certain benefits from taxation under the provisions of the Act. The conditions under which the income of the trust would be exempted under the provisions of the Act are clearly laid down under section 11 as well as in section 12 of the Act. Section 11 of the Act specifically points out the circumstances under which income of the trust is not to be included in the total income of the previous year of the person. So too, section 12 of the Act on the income derived from property held for charitable or religious purposes. 34-35. 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 straightaway 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 December 19, 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.

8.1.1. We find that similar issue was addressed by the Co-ordinate Bench of Mumbai Tribunal in the case of Ghatkopar Jolly Gymkhana vs DIT(E) reported in (2013) 40 taxmann.com 207 (Mumbai-Trib) dated 23.10.2013 wherein the facts before the Mumbai Tribunal are as below:- “The assessee a club was engaged in encouraging and promoting sports, pastimes and athletics and social contract amongst its member assessee was registered as a charitable trust, falling in the category of ‘advancement of any other objects of general public utility’ as per the definition of ‘charitable purpose’ given under section 2(15).

The Director (Exemption) noticed that the assessee was carrying out activities in the nature of trade, commerce or business, etc. and gross receipts therefrom were in excess of Rs. 10 lakhs and by taking resort to the newly added proviso w.e.f. 1-4-2009 to section 2(15), he cancelled the registration of assessee. He had further held that once a trust lose its identity or character or charitable trust, it became a non-genuine charitable trust.

10 ITA No.398/K/2012 Lotus Charitable Trust AY 2009-10 On appeal, the assessee submitted that registration once granted to the assessee being a charitable institution could not be cancelled or taken away because of the newly inserted proviso to section 2(15) which defines charitable purposes.”

The decision of the Mumbai Tribunal on the said case is as under:

5.4 Thus, the action of the CIT(A) relying upon the newly inserted proviso from 01.04.2009 in cancelling the registration of the trust, in our view, is not correct or justified. The only effect will be that the Assessee will not be entitled for exemption or tax benefits which otherwise would have been available to it being registered as charitable institution, for the relevant year during which its income has crossed the limit of Rs.10.00 lacs. Subject to our above observations cancellation of registration ITA No.882/M/12 A.Y.09-10 9 granted to Assessee u/s. 12A is hereby set aside and same is hereby ordered to be restored.”

8.1.2. We find that the CBDT had come out with a circular very recently vide Circular No. 21/2016 (F.No. 197/17/2016-ITA-I) dated 27.5.2016 as below:- “Sections 11 and 12 of the Income-tax Act, 1961 ('Act') exempt income of charitable trusts or institutions, if such income is applied for charitable purpose and such institution is registered under section 12AA of the Act. 2. Section 2(15) of the Act provides definition of "charitable purpose". It includes "advancement of any other object of general public utility" provided it does not involve carrying on of any activity in the nature of trade, commerce or business etc. for financial consideration. The 2nd proviso to said section, introduced w.e.f. 1-4-2009 vide Finance Act 2010, provides that in case where the activities of any trust or institution is of the nature of advancement of any other object of general public utility and it involves carrying on of any activity in the nature of trade, commerce or business; but the aggregate value of receipts from such commercial activities does not exceed Rs. 25,00,000/- in the previous year, the purpose of such trust/institution shall be deemed as "charitable" despite it deriving consideration from such activities. However, if the aggregate value of these receipts exceeds the specified cut-off, the activity would no longer be considered as charitable and the income of the trust/institution would not be eligible for tax exemption in that year. Thus an entity, pursuing advancement of object of general public utility, could be treated as a charitable institution in one year and not a charitable institution in the other year depending on the aggregate value of receipts from commercial activities. The position remains similar when the first and second provisos of section 2(15) get substituted by the new proviso introduced w.e.f. 1-4-2016 vide Finance Act, 2015, changing the cut-off benchmark as 20% of the total receipts instead of the fixed limit of Rs.25,00,000/- as it existed earlier. 3. The temporary excess of receipts beyond the specified cut-off in one year may not necessarily be the outcome of alteration in the very nature of the activities of the trust or institution requiring cancellation of registration already granted to the trust or institution. Hence, section 13 of the Act has been amended vide Finance Act, 2012 by inserting a new sub-section (8) therein to provide that such organization would not get benefit of tax exemption in the particular year in which its receipts from commercial activities exceed the threshold whether or not the registration granted is cancelled. This amendment has taken effect retrospectively from 1st April, 2009 and accordingly applies in relation to the assessment year 2009-10 onwards. 4. In view of the aforesaid position, it is clarified that it shall not be mandatory to cancel the registration already granted u/s 12AA to a charitable institution merely on the ground

11 ITA No.398/K/2012 Lotus Charitable Trust AY 2009-10 that the cut-off specified in the proviso to section 2(15) of the Act is exceeded in a particular year without there being any change in the nature of activities of the institution. If in any particular year, the specified cut-off is exceeded, the tax exemption would be denied to the institution in that year and cancellation of registration would not be mandatory unless such cancellation becomes necessary on the ground(s) prescribed under the Act. 5. 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.

8.2. The issue before us is only as to whether the Learned DIT(E) is justified in cancelling the registration u/s 12AA(3) of the Act. At the cost of repetition, we would like to state that the Learned DIT(E) himself had stated in his order that the activity of ‘Solace’ would fall under the fourth limb of the definition of charitable purpose u/s 2(15) of the Act i.e ‘advancement of any other object of general public utility’. Hence in view of the aforesaid findings and judicial precedents relied upon and in view of the CBDT Circular No. 21/2016 dated 27.5.2016, we hold that the Learned DIT(E) should not have resorted to the act of cancellation of registration u/s 12AA(3) of the Act in the facts and circumstances of the case. The other issues, regarding whether the pranic healing activity would fall under the definition of ‘medical relief’ or whether ‘Solace’ is a health club/Spa or not, are left open as the same are not relevant for adjudication at present in this case. Accordingly, the grounds raised by the assessee are allowed.

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Copy of the order forwarded to:

APPELLANT – Lotus Charitable Trust, 4, Sunny Park, Kolkata-700019 1. Respondent –DIT(E), Kolkata. 2 The CIT(A), Kolkata 3. 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order,

Asstt. Registrar.