SPORTS ASSOCIATIONS AND PROVISO TO SECTION 2(15)

ISSUE FOR CONSIDERATION

A charitable organisation is entitled to exemption from tax under sections 11 and 12 of the Income-tax Act, 1961 in respect of income derived from property held under trust for charitable purposes. The term ‘charitable purpose’ is defined in section 2(15) as under:

‘“charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:

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 –

(a)   such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(b)   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;’

For the purposes of income tax exemption, promotion of sports and games is regarded as a charitable activity, as clarified by the CBDT vide its Circular No. 395 dated 14^th September, 1984. Many sports associations conduct tournaments where sizeable revenues are generated from sale of tickets, sale of broadcasting and telecasting rights, sponsorship, advertising rights, etc. resulting in earning of a large surplus by such associations.

The issue has arisen before the appellate authorities as to whether such sports associations can be regarded as carrying on an activity in the nature of trade, commerce or business and whether their activities of conducting tournaments cease to be charitable activities by virtue of the proviso to section 2(15), leading to consequent loss of exemption under sections 11 and 12. While the Jaipur, Chennai, Ahmedabad and Ranchi Benches of the Tribunal have held that such activity does not result in a loss of exemption, the Chandigarh Bench has recently taken a contrary view, holding that the association loses its exemption for the year due to such activity.

THE RAJASTHAN CRICKET ASSOCIATION CASE

The issue came up before the Jaipur Bench of the Tribunal in Rajasthan Cricket Association vs. Addl. CIT, 164 ITD 212.

In this case, the assessee was an association registered under the Rajasthan Sports (Registration, Recognition and Regulation of Association) Act, 2005. It was formed with the objective of promotion of the sport of cricket within the state of Rajasthan. The main object of the association was to control, supervise, regulate, or encourage the game of cricket in the areas under the jurisdiction of the association on a ‘no profit-no loss’ basis. It was granted registration u/s 12A. The assessee had filed its return claiming exemption u/s 11 for the assessment year 2009-10.

During the course of assessment proceedings, the AO observed that the assessee had earned substantial income in the shape of subsidy from the Board of Control for Cricket in India (BCCI), advertisement income, membership fees, etc. and concluded that since the assessee was earning huge surplus, the same was not in the nature of charitable purpose and was rather in the nature of business. The AO, therefore, denied exemption u/s 11, computing the total income of the association at Rs. 4,07,58,510, considering the same as an AOP. The Commissioner (Appeals) upheld the order of the AO confirming the denial of exemption u/s 11.

It was argued before the Tribunal on behalf of the assessee that:

(i)    the term ‘any activity in the nature of trade, commerce or business’ was not defined and thus the same had to be understood in common parlance and, accordingly, the expression ‘trade, commerce or business’ has to be understood as a regular and systematic activity carried on with the primary motive to earn profit, whereas the assessee never acted as a professional advertiser, TV producer, etc.;

(ii)   no matches of any game other than cricket or no other events were organised to attract an audience, only cricket matches were being organised, whether the same resulted in profit or loss. Further, not all the cricket matches attracted an audience – the surplus had been earned only from one cricket match;

(iii)   the Hon’ble Madras High Court in the case of Tamil Nadu Cricket Association, 360 ITR 633 had held that volume should not be the sole consideration to decide the activity of the society – rather, the nature of activity vis-a-vis the predominant object was to be seen;

(iv) being registered under the Rajasthan Sports (Registration, Recognition and Regulation of Association) Act, 2005, the assessee was authorised as well as well-equipped for organising all the cricket matches taking place in the state of Rajasthan.

(v)   all the payments in the shape of sponsorship, advertisements, TV rights, etc. were received directly by BCCI which had later shared such receipts with the assessee. Further, BCCI had delegated the task of the organisation of matches to state associations and, in turn, state associations were paid some funds for promotion and expansion of their charitable activities;

(vi) a major benefit of organising the matches was that the local teams, being trained by RCA, got an opportunity to learn from the experience of coaches of international calibre assisting them during practice matches and by witnessing the matches played by international players, by spending time with them, etc. Ultimately, organising such matches resulted in promotion of the sport of cricket and the surplus generated, if any, was purely incidental in nature;

(vii) the assessee had been organising matches even in the remote areas of Rajasthan where there few spectators and the assessee association had to essentially incur losses in organising such matches;

(viii)  the surplus was the result of subsidies only and not from the conducting of tournaments on a commercial basis. The subsidies were a form of financial aid granted for promoting a specific cause, which was ultimately for the overall benefit of a section of the public, but never for the benefit of an individual organisation. The subsidy received was utilised in the promotion and development of the sport of cricket in the state at each level, i.e., from mofussil areas to big cities like Jaipur;

(ix) the renting of premises was done wholly and exclusively for the purpose of cricket and no other activity of whatsoever nature had been carried out, and neither was it engaged in the systematic activity as a hotelier;

(x)   RCA was run by a committee which consisted of members from different walks of life – such members were not professional managers or businessmen. The agreement with the players was only to control and monitor their activities, to ensure that the same was in accordance with the objects;

(xi) The RCA was providing technical and financial support to all the DCAs (District Cricket Associations), i.e., providing equipments, nets, balls, etc. without any consideration. RCA was getting only nominal affiliation fee from them and had provided grants of a substantial amount to the DCAs;

(xii) RCA was organising various matches of national level tournaments like Ranji Trophy, Irani Trophy, Duleep Trophy, Maharana Bhagwat Singh Trophy, Salim Durrani Trophy, Laxman Singh Dungarpur Trophy, Suryaveer Singh Trophy, matches for under-14s, u-15s, u-19s, u-22s, etc., without having any surplus. Rather, they were organised for the development of the game of cricket at the national level and to identify the players who could represent the country at the international level;

(xiii)  RCA was spending a large amount on the training and coaching camps for which no fee was charged from the participants;

(xiv)  the assessee had organised several championships in various interior towns and smaller cities of Rajasthan in order to provide an opportunity and to create a competitive environment for the talented youth, without any profit motive and with the sole intention to promote the game of cricket;

(xv)       the surplus, if any, generated by the assessee was merely incidental to the main object, i.e., promotion of the sport of cricket and in no way by running the ‘business of cricket’.

Reliance was placed on behalf of the assessee on the following decisions:

(a)   the Delhi High Court in the case of Institute of Chartered Accountants of India vs. Director-General of Income Tax (Exemptions) 358 ITR 91;

(b)   the Madras High Court in the case of Tamil Nadu Cricket Association vs. DIT(E) 360 ITR 633;

(c)   the Delhi bench of the ITAT in Delhi & District Cricket Association vs. DIT (Exemptions) 69 SOT 101 (URO); and

(d)   the Delhi bench of the ITAT in the case of DDIT vs. All India Football Federation 43 ITR(T) 656.

On behalf of the Revenue, it was argued that:

(1)   the entire argument of the assessee revolved around the theory that grant of registration u/s 12A automatically entitled it for exemption u/s 11. The case laws cited by the assessee in the case of the T.N. Cricket Association and DDCA, etc., were in the context of section 12A and were inapplicable;

(2)   the domain of registration u/s 12AA and eligibility for exemption u/s 11 were totally independent and different. At the time of registration, CIT was not empowered to look into the provisions of section 2(15); these were required to be examined only by the AO at the time of assessment;

(3)   once the first proviso to section 2(15) got attracted, the assessee lost the benefit of exemption as per the provisions of section 13(8) – therefore, the only question to be decided was whether the assessee was engaged in commercial activity for a fee or other consideration;

(4)   the nature of receipt in the hands of the assessee was by way of sharing of sponsorship and media rights with BCCI, as well as match revenue for conducting various cricket matches. The assessee had earned surplus of 75% out of the receipts in the shape of advertisement, canteen and tickets, which amounted to super-normal profit. Therefore, the income of the assessee from ‘subsidy’ was nothing but a percentage of the fee gathered from the public for matches and a percentage of advertisement receipts while conducting matches;

(5)   the nature of receipts in the hands of the assessee certainly fell under ‘Trade & Commerce’ as understood in common parlance. Once the receipts were commercial in nature and such receipts exceeded the threshold of Rs. 10 lakhs as the proviso then provided (both conditions satisfied in the assessee’s case), the assessee would be hit by the proviso to section 2(15);

(6)   and once the proviso to 2(15) was attracted, the assessee ceased to be a charitable organisation irrespective of whether it was registered u/s 12A. Grant of registration u/s 12A did not preclude the AO from examining the case of the assessee in the light of the said proviso and if he found that the assessee was hit by the proviso, then the assessee ceased to be a charitable organisation;

(7)   the receipts of ICAI were basically from members (and not the public as in the case of the assessee) and did not exploit any commercial / advertisement / TV rights as in the case of the assessee. One test of the commercialism of receipt was whether receipts were at market rates and were open to subscription by the general public as opposed to a select few members;

(8)   and once the provisos to 2(15) were attracted, the assessee lost the benefit of exemption u/s 11 as per section 13(8) and the entire income became taxable.

The Tribunal noted that the Revenue had not doubted that the assessee had conducted cricket matches; the only suspicion with regard to the activity was that during the One-Day International match played between India and Pakistan there was huge surplus and the assessee had rented out rooms belonging to the association at a very high rate. Therefore, according to the Tribunal, it could be inferred that the AO was swayed by the volume of receipts. It noted that these identical facts were also before the Hon’ble Madras High Court in the case of Tamil Nadu Cricket Association vs. DIT (Exemptions) 360 ITR 633, wherein the Court opined that from the volume of receipts an inference could not be drawn that an activity was commercial and that those considerations were not germane in considering the question whether the activities were genuine or carried on in accordance with the objects of the association.

Further, it was not in dispute that the TV subsidy, sale on advertisements, surplus from the ODI between India and Pakistan, income from the RCA Cricket Academy were all related to the conduct of cricket matches by the association. Without the conduct of matches, such income could not have been derived. Therefore, the incomes were related to the incidental activity of the association which incomes could not accrue without the game of cricket.

The Tribunal, while examining the facts from the perspective of volume of receipts and constant increase in surplus, referred to the Supreme Court decision in the case of Commissioner of Sales Tax vs. Sai Publication Fund [2002] 258 ITR 70, for holding that where the activity was not independent of the main activity of the assessee, in that event, such ancillary activity would not fall within the term ‘business’.

It added that the objection of the AO was that the other activities overshadowed the main activity, based upon the receipts of the assessee from the other activity. It, however, noted that all those activities were dependent upon the conduct of the match. Referring to various High Court decisions, the Tribunal was of the view that the AO was swayed by the figures and the volume of receipts. It noted that such receipts were intermittent and not regular and also were dependent on the conduct of cricket matches. It was not the other way round, that the cricket matches were dependent upon such activities. According to the Tribunal, the facts demonstrated that the assessee had been predominantly engaged in the activity of promoting cricket matches. The Tribunal, therefore, held that the AO was not justified in declining the exemption.

A similar view has also been taken by the Tribunal in the cases of Tamil Nadu Cricket Association vs. DDIT(E) 42 ITR(T) 546 (Chen.); DCIT(E) vs. Tamil Nadu Cricket Association 58 ITR(T) 431 (Chen.); Gujarat Cricket Association vs. JCIT(E) 101 taxmann.com 453 (Ahd.); Jharkhand State Cricket Association vs. DCIT(E) (Ran.); Chhattisgarh State Cricket Sangh vs. DDIT(E) 177 ITD 393 (Rai.); and DDIT(E) vs. All India Football Federation 43 ITR(T) 656 (Del).

THE PUNJAB CRICKET ASSOCIATION CASE

The issue again came up before the Chandigarh Tribunal in the case of the Punjab Cricket Association vs. ACIT 109 taxmann.com 219.

In this case, the assessee cricket association was a society registered under the Societies Registration Act, 1860. It was also registered u/s 12A of the Income Tax Act. It filed its return of income claiming exemption u/s 11 for the assessment year 2010-11.

The AO observed that the income of the assessee was inclusive of an amount of Rs. 8,10,43,200 from IPL­subvention from BCCI and Rs. 6,41,100 as service charges for IPL (Net). The AO observed that the IPL event was a highly commercial event and the assessee had generated income from the same by hosting matches of Punjab franchisee ‘Kings XI, Punjab’ during the Indian Premier League through TV rights subsidy, service charges from IPL and IPL-subvention, etc. Similarly, the assessee had earned income from the facilities of swimming pool, banquet hall, PCA chamber, etc., by hosting these facilities for the purpose of recreation or one-time booking for parties, functions, etc., which activities were commercial in nature, as the assessee was charging fees for providing the facilities to its members. The assessee had also received income from M/s Silver Services who provided catering services to Punjab Cricket Club and its restaurant, which again was a commercial activity, as the assessee was earning income from running of the restaurant which was not related to the aims and objectives of the society. According to the AO, the activities of the assessee were not for charitable purposes, and therefore, in view of the proviso to section 2(15), he disallowed the claim of exemption u/s 11.

The Commissioner (Appeals) dismissed the appeal of the assessee observing that:

(a)   it could not be disputed that the Indian Premier League was a highly commercialised event in which huge revenue was generated through TV rights, gate-money collection, merchandising and other promotions;

(b)   the franchises had been sold to corporates and individuals and in this process, the appellant had received a huge income of Rs. 8,10,43,200 for IPL-subvention from BCCI, service charges (Net) of Rs. 6,41,100 and reimbursement of Rs. 1,86,64,990 from BCCI;

(c)   the argument of the appellant that all the tickets of the IPL matches were sold by the BCCI or the franchisee team, and the IPL players were sold in public auction for a huge amount, was all done by the BCCI and the appellant had no role in conducting these matches, could not be accepted, as huge revenue was generated in this commercial activity and whether it was done by BCCI or by the appellant, the share of the income so generated had been passed on to the appellant;

(d)   the Chennai Tribunal’s decision in the case of Tamil Nadu Cricket Association (Supra) did not apply to the appellant’s case as in that case the assessee had received funds from BCCI for meeting the expenditure as the host, while in the case of the appellant it was not only the reimbursement of expenses but over and above that a huge amount had been passed on to the appellant;

(e)   the activity generating the income, whether undertaken by BCCI or by the appellant, was purely a business activity of which the appellant was a beneficiary.

It was argued before the Tribunal on behalf of the assessee that:

It was argued on behalf of the Revenue that:

(1)   in the annual report of BCCI, the concept of IPL was described as merger of sport and business – the various IPL-related activities described in the report indicated that the entire IPL show was a huge money-spinner and had been rightly termed as ‘cricketainment’ by the BCCI;

(2)   the 38^th Report of the Standing Committee on Finance, dealing with Tax Assessment / Exemptions and related matters concerning IPL / BCCI, mentioned that the income derived from media rights and sponsorships was shared with the franchisees as envisaged in the franchise agreement. The franchisees had to pay the BCCI an annual fee which BCCI distributed to the associations as subvention. The report highlighted the commercial character of IPL, which established that no charitable activity was being promoted in organising the commercial venture called BCCI-IPL;

(3)   the Justice Lodha Committee, set up by the Supreme Court, highlighted the unhealthy practices of match-fixing and betting. Its report highlighted the indisputable fact that there was absolutely no charitable work which was undertaken by the BCCI or its constituents while organising the cricket, especially IPL, where the entire spectacle of ‘cricketainment’ was a glamorous money-spinner;

(4)   the Justice Mudgal IPL Probe Committee, set up by the Supreme Court, highlighted the allegation of match / spot-fixing against players. It further found that the measures undertaken by the BCCI in combating sporting fraud were ineffective and insufficient. The facts demonstrated that no charitable activity was undertaken in various matches conducted by BCCI-IPL. The report highlighted the commercial character of the venture sans any trace of charitable activity;

(5)   the Bombay High Court, in the case of Lalit Kumar Modi vs. Special Director in WP No. 2803 of 2015, observed that if the IPL had resulted in all being acquainted and familiar with phrases such as ‘betting’, ‘fixing of matches’, then the RBI and the Central Government should at least consider whether holding such tournaments served the interest of a budding cricketer, the sport and the game itself;

(6)   the tripartite agreement / stadium agreement proved that the assessee was intrinsically and intimately involved in organising the commercial extravaganza of the IPL. It required the PCA to provide all the necessary co-operation and support to the BCCI-IPL and the franchisee. It mandated the PCA to provide adequate, sufficiently skilled and trained personnel to BCCI-IPL at its own cost. The PCA was duty-bound to ensure that TV production took place at the stadium according to the requirements of TV producers. It required PCA to erect and install all the desired facilities, structures and equipment required in connection with the exploitation of media rights at its own cost. It was to use its best endeavour to make areas surrounding the stadium available for exploitation of the commercial rights. The PCA agreed to assist the BCCI-IPL with local trading standard department, police, private security arrangements, with a view to minimising or eliminating certain exigencies pertaining to matches, advertising / promotions, unauthorised sale of tickets, etc. All costs of such services were to be borne by the PCA;

(7)   the above clauses amply demonstrated that the PCA, being the federal constituent and full member of BCCI, had taken various steps / initiatives at its own cost to ensure that the BCCI-mandated IPL matches were organised smoothly and were a huge commercial success;

(8)   no claim was made on behalf of the assessee that the BCCI-IPL matches were charitable activities;

(9)   a perusal of the case laws cited on behalf of the assessee revealed that the Hon’ble Courts therein were not presented with public documents / Standing Committee Reports / facts wherefrom judicial notice could be taken as per the Evidence Act.

Summons was issued to the BCCI by the Tribunal for determination of the character of the amounts paid by it to the assessee. BCCI clarified that there were two types of payments made by it – reimbursements of expenditure which the state associations had to incur for conduct of matches, and a share in the media rights income earned by the BCCI. The claim of the BCCI was that these payments were application of income for the purpose of computation of income u/s 11. Since the tax authorities were denying BCCI the exemption u/s 11, strictly in the alternative and without prejudice to its contention that the entire sum was allowable as an application, BCCI had contended that the payments were allowable as a deduction u/s 37(1).

The Tribunal observed that a perusal of the accounts of the BCCI revealed that it had booked the above payments to the state associations as expenditure out of the gross receipts. The BCCI had taken a clear and strong stand before the tax authorities, including appellate authorities, that the payment to the state associations was not at all an appropriation of profits. The Tribunal noted certain appellate submissions made by the BCCI in its own case, which seemed to indicate that it was organising the matches jointly with the state associations.

In response to the above observations, it was contended on behalf of the assessee that:

(a)   the primary plea / stand of the BCCI is that the payments / grants made by it to the state associations is application of income, hence it is only a voluntary grant given by the BCCI to the state associations, including the assessee, for the purpose of the promotion of the game of cricket, hence it cannot be treated as income of the assessee from IPL matches;

(b)   the alternate stand of the BCCI that the payments to the state associations be treated as expenditure in the hands of the BCCI was opposite and mutually destructive to the primary stand of the BCCI and thus could not be made the basis to decide the nature of receipts from BCCI in the hands of the assessee;

(c)   the Revenue authorities, even otherwise, have consistently rejected the aforesaid alternate contention of the BCCI and the entire receipts from the IPL had been taxed in the hands of the BCCI;

(d)   if the BCCI was treated as an Association of Persons (AOP) as per the plea of the Revenue, still, once the entire income from IPL had been taxed in the hands of an AOP, further payment by BCCI to its member associations could not be taxed as it would amount to double taxation of the same amount.

The corresponding submissions of the Revenue were:

(A)   the Punjab Cricket Association was absolutely involved in the commercial venture of IPL;

(B)   BCCI had stated that it did not have the infrastructure and the resources to conduct the matches by itself and was dependent on the state associations to conduct them;

(C)   according to BCCI, the income from media rights was dependent on the efforts of the state associations in conducting the matches from which the media rights accrued;

(D) as per the BCCI, the state associations were entitled by virtue of established practice to 70% of the media rights fee. It was in expectation of the revenue that the various state associations took an active part and co-operated in the conduct of the matches. The payment was therefore made only with a view to earn income from the media rights;

(E)   it was clear that the transaction between the BCCI and the PCA was purely commercial in nature and the income / receipts received by the PCA were in lieu of its services rendered to BCCI;

(F)   the share of revenue from BCCI out of sale of media rights was not a grant – the various payments made by the BCCI ensured that the state associations were ever ready with their stadia and other infrastructure to ensure smooth execution of IPL matches.

On the basis of the arguments, the Tribunal observed that the status of the BCCI was of an Association of Persons (AOP) of which the state associations, including the assessee, were members. It noted that the BCCI, in its consistent plea before the tax authorities had claimed that the payments made to the state associations were under an arrangement of sharing of revenues with them. BCCI had pleaded that it had just acted as a facilitator for the sale of media rights collectively on behalf of the state associations for the purpose of maximising the profits, for which it retained 30% of the profits and the remaining 70% belonged to the state associations. According to the Tribunal, when the payer, i.e., BCCI, had not recognised the payments made by it to the state associations as voluntary grant or donation, rather, the BCCI had stressed that the payments had been made to the state associations under an arrangement arrived at with them for sharing of the revenues from international matches and the IPL, then the payee (the recipient associations) could not claim the receipts as voluntary grants or donations at discretion from the BCCI.

The Tribunal, however, noted that the legal status as of that date was that BCCI was being treated by the tax authorities as an AOP and the payments made to the state associations as distribution of profits. The BCCI payments to the state associations, including the appellant, having already been taxed in the hands of BCCI, could not be taxed again in the hands of the member of the AOP, i.e., the state association, as it would amount to double taxation of the same amount.

Further, it observed that the state associations in their individual capacity were pleading that the IPL might be the commercial venture of their constituent and apex body, the BCCI, but that they were not involved in the conduct of the IPL. However, these associations had collectively formed the apex association named BCCI, got it registered under the Tamil Nadu Societies Registration Act and thereby collectively engaged in the operation and conduct of the IPL through their representatives in the name of BCCI. As per the Tribunal, PCA was individually taking a totally opposite stand to the stand it had taken collectively with other associations under the umbrella named as BCCI.

The Tribunal observed that it was settled law that what could not be done directly, that could not be done indirectly, too. If an institution claiming charitable status being constituted for the advancement of other objects of public utility as per the provisions of law was barred from involving in any commerce or business, it could not do so indirectly also by forming a partnership firm or an AOP or a society with some other persons and indulge in commercial activity. Any contrary construction of such provisions of law in this respect would defeat the very purpose of its enactment.

According to the Tribunal, the assessee was a full member of BCCI, which was an AOP, which had been held to be actively involved in a large-scale commercial venture by way of organising IPL matches, and therefore the assessee could be said to have been involved in a commercial venture as a member of the BCCI, irrespective of the fact whether it received any payment from the BCCI or not, or whether such receipts were applied for the objects of the assessee or not. However, once the income was taxed in the hands of the AOP, the receipt of share of the income of the AOP could not be taxed in the hands of the member of the AOP. For the sake of ease of taxation, the AOP had been recognised as a separate entity; however, actually, its status could not be held to be entirely distinct and separate from its members and that was why the receipt of a share by a member from the income of its AOP would not constitute taxable income in the hands of the member.

The Tribunal observed that even otherwise, PCA was involved in commercial activity in a systemic and regular manner not only by offering its stadium and other services for conduct of IPL matches, but by active involvement in the conduct of matches and exploiting their rights commercially in an arrangement arrived at with the BCCI. According to the Tribunal, there was no denial or rebuttal by the appellant to the contention that the IPL was purely a large-scale commercial venture involving huge stakes, hefty investments by the franchisees, auction of players for huge amounts, exploiting to the maximum the popularity of the game and the love and craze of the people of India for cricket matches. From a reading of the tripartite agreement, the Tribunal was of the view that it showed that the assessee was systematically involved in the conduct of IPL matches and not just offering its stadium on rent to BCCI for the conduct of the matches.

The Tribunal further accepted the Department’s argument that the BCCI, which was constituted of the assessee and other state associations, had acted in monopolising its control over cricket and had also adopted a restrictive trade practice by not allowing the other associations, who may pose competition to the BCCI, to hold and conduct cricket matches for the sole purpose of controlling and exclusively earning huge revenue by way of exploiting the popularity of cricket. PCA, being a constituent member of the BCCI, had also adopted the same method and rules of the BCCI for maintaining its monopoly and complete domain over the cricket in the ‘area under its control’. Such an act of exclusion of others could not be said to be purely towards the promotion of the game, rather, it was an act towards the depression and regression of the game. Hence the claim of the assessee that its activity was entirely and purely for the promotion of the game was not accepted by the Tribunal. The Tribunal also did not accept the assessee’s argument that the payment to it by the BCCI was a grant, holding that it was a payment in an arrangement of sharing of revenue from commercial exploitation of cricket and infrastructure thereof.

The Tribunal took the view that the commercial exploitation of the popularity of cricket and its infrastructure by the assessee was not incidental but was, inter alia, one of the main activities of the assessee. It relied upon certain observations of the Supreme Court in the case of Addl. CIT vs. Surat Art Silk Cloth Manufacturers’ Association 121 ITR 1, to point out that there was a differentiation between ‘if some surplus has been left out of incidental commercial activity’ and ‘the activity is done for the generation of surplus’ – the former would be charitable, the latter would not be charitable. The Tribunal was of the view that despite having the object of promotion of sports, the fact that the activity of the assessee was also directed for generation of profits on commercial lines would exclude it from the scope of charitable activity.

Even if it was assumed that the commercial exploitation of cricket and infrastructure was incidental to the main purpose of promotion of cricket, even then, in view of the decision of the Chandigarh Bench of the Tribunal in the case of Chandigarh Lawn Tennis Association vs. ITO 95 taxmann.com 308, as the income from the incidental business activity was more than Rs. 10 lakhs [as the proviso to section 2(15) then provided], the proviso to section 2(15) would apply, resulting in loss of exemption.

Therefore, the Tribunal held that the case of the assessee would not fall within the scope of ‘charitable purpose’ as defined in section 2(15), as the commercial exploitation of the popularity of the game and the property / infrastructure held by the assessee was not incidental to the main object but was apparently and inter alia one of the primary motives of the assessee. Hence the assessee was not entitled to exemption u/s 11.

The Tribunal further noted that PCA had amended its objects to add the following object: ‘To carry out any other activity which may seem to the PCA capable of being conveniently carried on in connection with the above, or calculated directly or indirectly to enhance the value or render profitable or generate better income / revenue, from any of the properties, assets and rights of the PCA;’

According to the Tribunal, the amendment revealed that the assessee’s activities inter alia were also directed for generation and augmentation of revenue by way of exploitation of its rights and properties, and with the amended objects it could exploit the infrastructure so created for commercial purposes which supported the view taken by the Tribunal.

OBSERVATIONS

The Chandigarh Tribunal seems to have gone into the various facts in far greater detail than the Jaipur, Chennai, Ahmedabad and Ranchi Benches, having examined the stand taken by the BCCI, in its accounts and before the tax authorities, as well as examined the reports of various committees set up by the Supreme Court to look into match-fixing and the management of the affairs of BCCI. It rightly highlighted the observations of the Supreme Court in Surat Art Silk Cloth Manufacturers Association (Supra), where it observed:

‘Take, for example, a case where a trust or institution is established for promotion of sports without setting out any specific mode by which this purpose is intended to be achieved. Now obviously promotion of sports can be achieved by organising cricket matches on free admission or no-profit-no-loss basis and equally it can be achieved by organising cricket matches with the predominant object of earning profit. Can it be said in such a case that the purpose of the trust or institution does not involve the carrying on of an activity for profit, because promotion of sports can be done without engaging in an activity for profit. If this interpretation were correct, it would be the easiest thing for a trust or institution not to mention in its constitution as to how the purpose for which it is established shall be carried out and then engage itself in an activity for profit in the course of actually carrying out of such purpose and thereby avoid liability to tax. That would be too narrow an interpretation which would defeat the object of introducing the words “not involving the carrying on of any activity for profit”. We cannot accept such a construction which emasculates these last concluding words and renders them meaningless and ineffectual.’

The Tribunal incorrectly interpreted this to apply to the facts of the assessee’s case, since the Tribunal was of the view that the assessee was organising cricket matches with a view to earn profit.

Besides holding that PCA was carrying on a business activity of assisting BCCI in the conduct of matches, one of the basis of the Chandigarh Tribunal decision was that since BCCI was carrying on a commercial activity every member of BCCI (an AOP) should also be regarded as carrying on a commercial activity through BCCI, which would attract the proviso to section 2(15). In so doing, it seems to have ignored the fact that under tax laws an AOP and its members are regarded as separate entities and the activities carried on by each need to be evaluated independently. For instance, if a charitable organisation invests in a mutual fund and its share of income from the mutual fund is considered for taxation in the hands of the charitable organisation, does it necessarily follow that the charitable organisation is carrying on the business of purchase and sale of shares and securities just because the mutual fund is doing so?

Secondly, the Chandigarh Tribunal relied on the BCCI’s alternative contention that the payments to the state associations should be treated as expenditure incurred by it, ignoring BCCI’s main contention that it was a division of surplus amongst the member associations. A division of surplus cannot be regarded as an income from exploitation of assets, nor can it be regarded as a compensation for services rendered.

Thirdly, the Tribunal relied on the then prevalent income tax appeal status of BCCI, ignoring the fact that the appeals had not yet attained finality; the conclusions in the appeals were therefore only a view of the interim appellate authorities which may undergo a change on attaining finality. Placing absolute reliance on such ratios of appeals of BCCI not yet finally concluded, for deciding the case of PCA, was therefore not necessarily the right approach.

The Chandigarh Tribunal also seems to have taken the view that generating better returns from use of properties, assets or rights amounts to commercialisation, vitiating the charitable nature. That does not seem to be justified, as every person or organisation, even though they may not carry on business, may seek to maximise their income from assets. Can a charitable organisation be regarded as carrying on business just because it invests in a bank which offers higher interest than its existing bank? Would it amount to business if it lets out premises owned by it to a person who offers to pay higher rent, rather than to an existing tenant paying lower rent? Seeking maximisation of return from assets cannot be the basis for determination of whether business is being carried on or not.

Can it be said that merely because PCA was assisting BCCI in conducting the IPL matches at its stadium it was engaged in a business activity? Such assistance may not necessarily be from a profit-earning motive. It could be actuated by the motive of popularising the game of cricket amongst the public, or by the desire to ensure better utilisation of its stadium and to earn rent from its use. This would not amount to carrying on of a business activity.

The question which would really determine the matter is as to the nature of the amounts paid by BCCI out of the telecast rights. Were such payments for the support provided by the associations, for marketing of telecast rights by BCCI on behalf of the state associations, a distribution of surplus by BCCI, or a grant by BCCI to support the state associations?

If one examines the submissions made by BCCI to the Tribunal in response to the summons issued to it, it had clarified that payments towards participation subsidy, match and staging subsidies were in the nature of reimbursements of expenditure which the state associations have to incur for conduct of matches. This indicates that the state associations incur the expenditure for the matches on behalf of BCCI, which expenditure is reimbursed by BCCI. This indicates that the activity of conduct of the tournament was that of BCCI.

In respect of the second category of payments in regard to a share in the media rights income earned by the BCCI, BCCI had clarified that these payments were application of income for the purpose of computation of income u/s 11. Either donations / grants or expenses incurred, both could qualify as application of income. In the submissions to the Commissioner (Appeals) in its own case, BCCI had clarified that such TV subvention represents payment of 70% of revenue from the sale of media rights to state associations. These payments were made out of the gross revenue from the media rights and not out of the surplus and were therefore not a distribution of profit. Even if there were to be losses in any year, TV subvention and subsidy would be payable to the state associations.

In its appeal submissions, BCCI has stated that the state association is entitled to the ticket revenue and ground sponsorship revenue. Expenses on account of security for players and spectators, temporary stands, operation of floodlights, score boards, management of crowds, insurance for the match, electricity charges, catering, etc. are met by the state associations. On the other hand, expenditure on transportation of players and other match officials, boarding and lodging, expenses on food for players and officials, tour fee, match fee, etc., are met by BCCI and the revenues from sponsorship belong to BCCI.

The submissions by BCCI, in its appeal, further clarified that for a Test series or ODI series conducted in multiple centres 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 optimise 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 70% of its receipts from media rights (less production cost) to the state associations. This amount has been utilised 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.

From the above, it is clear that while the conduct of matches may be physically done by the state associations, it was BCCI which was responsible for the commercial aspects of the IPL, such as sale of sponsorship rights, media rights, etc. BCCI pays 70% of such revenues to the state associations for having permitted it to market such rights. The state associations are conducting the matches as a part of their object of promoting and popularising cricket. The conduct of matches was quite distinct from marketing the rights to sponsor or telecast those matches. Can the state associations be regarded as having carried on a commercial activity, if they have granted the right to market such sponsorship and media rights to the BCCI, with the consideration being a percentage of the revenues earned by BCCI from such marketing?

A mere passive receipt of income (though recurring and linked to gross revenues) for giving up a valuable right may perhaps not constitute a business activity. An analogy can be drawn from a situation where a business is given on lease to another entity for running (or conducting). If such a lease is for a long period, various Courts have taken the view that since the intention is not to carry on business by the lessor, such lease rentals are not taxable as business profits of the lessor. The mere fact that the lease rentals may be linked to the gross revenues of the business carried on by the lessee would not change the character of the income. It is only the lessee who is carrying on business and not the lessor. On a similar basis, the carrying on of the business of marketing of rights by BCCI would not change the character of matches conducted by the state associations from a charitable activity carried on in furtherance of their objects to a business activity, even if the state associations are entitled to a certain part of the revenues for having given up the right to market such rights.

In today’s times, when watching of sport is a popular pastime resulting in large revenues for the organisers, a mere seeking of maximising the revenue-earning potential of the matches, in order to raise funds for furtherance of the cause of the sport, cannot be said primarily to be the conduct of a business. The mere fact of the quantum being large cannot change the character of an activity from a charitable activity to a business activity, unless a clear profit-earning motive to the exclusion of charity is established. This is particularly so when all these state associations have been actively involved in encouraging sport at the grassroots level in cities as well as smaller towns.

In a series of decisions, the Supreme Court, the Madras, Gujarat and Bombay High Courts and various benches of the Tribunal have held that the section 12A registration of the state associations could not be cancelled merely on account of the fact that they have conducted IPL matches. These decisions are:

DIT(E) vs. Tamil Nadu Cricket Association 231 Taxman 225 (SC);

DIT(E) vs. Gujarat Cricket Association R/Tax Appeal 268 of 2012 dated 27^th September, 2019 (Guj.);

Pr. CIT(E) vs. Maharashtra Cricket Association 407 ITR 9 (Bom.);

Tamil Nadu Cricket Association vs. DIT(E) 360 ITR 633 (Mad.);

Saurashtra Cricket Association vs. CIT 148 ITD 58 (Rajkot ITAT);

Delhi & District Cricket Association vs. DIT(E) 38 ITR(T) 326 (Del. ITAT);

Punjab Cricket Association vs. CIT 157 ITD 227 (Chd. ITAT).

While most of these decisions have been decided on the technical ground that applicability of the proviso to section 2(15) cannot result in cancellation of registration u/s 12AA(3), in some of these decisions there has been a finding that the activity of the conduct of the matches by the state associations is a charitable activity in accordance with its objects.

Recently, in an elaborate judgment of over 200 pages, the Gujarat High Court, hearing appeals filed against the Tribunal orders in the case of Gujarat Cricket Association (Supra), Baroda Cricket Association and Saurashtra Cricket Association, in a series of appeals heard together (R/Tax 268 of 2012, 152 of 2019, 317 to 321 of 2019, 374 and 375 of 2019, 358 to 360 of 2019, 333 to 340 of 2019, 675 of 2019, and 123 of 2014, by its order dated 27^th September, 2019), has decided the matter in favour of the state associations. It noted from the resolution passed by BCCI that the grants given by it were in the nature of corpus donations to the state associations. After analysing the concept of ‘charitable purpose’, the insertion of the proviso to section 2(15) and various case laws on the subject of charity, the High Court held:

(i)    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 a personal purpose.

(ii)   It is not in dispute that the three associations have not distributed any profits outside the organisation. 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.

(iii)   It is not correct to say that as the assessees received a 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 earning profit out of it. However, 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 their character as being of a commercial nature.

(iv) 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.

(v)   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.

The Gujarat High Court has, therefore, squarely addressed all the points made by the Chandigarh Tribunal while deciding the issue. It has emphatically held that the conduct of the matches did not amount to carrying on of a business, particularly if the surplus was merely on account of one or two matches. Further, the nature of activity of BCCI cannot determine the nature of activity of the state associations.

Therefore, as discussed in detail by the Gujarat High Court, the better view seems to be that of the Jaipur, Chennai, Ahmedabad, Delhi and Ranchi Benches of the Tribunal. But, given the high stakes involved for the Revenue, it is highly likely that the matter will continue to be agitated in the courts, until the issue is finally settled by the Supreme Court.