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 14th
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:
- the assessee was not involved in any manner
in organising or commercially exploiting the IPL matches. The commercial
exploitation, if any, was done by the BCCI;
- the only activity on the part of the
assessee was the renting out of its stadium to BCCI for holding of IPL matches;
- ‘T-20’ or IPL was also a
form of popular cricket. Since the main object of the assessee was the
promotion of the game of cricket, considering the popularity of the IPL
matches, the renting out of the stadium for the purpose of holding of IPL
matches by the BCCI for a short period of 30 days in a year was an activity
towards advancement of the objects of the assessee, of promotion of the game;
- in lieu of providing the
stadium, the assessee got rental income for a short period and renting out the
stadium was not a regular business of the assessee;
- the grant received from the
BCCI during the year under consideration in the form of share of TV subsidy of
Rs. 18,00,76,452 and IPL subvention of Rs. 8,10,43,200 was part of the largesse
distributed by BCCI to its member associations at its discretion for promotion
of the sport of cricket;
- BCCI was not obliged to
distribute the earnings generated by it to state cricket associations and no
such association could claim, as an integral right, any share in the earnings
of BCCI;
- even if a member state
association did not provide any assistance in holding of the IPL matches, or
when the IPL match was not hosted or organised at the stadium of an
association, yet the member cricket association got a grant out of the TV
subsidy. However, if a match was staged or hosted at the ground of an
association, the amount of subsidy was increased;
- whatever had been received
from the BCCI on account of IPL subvention was a voluntary, unilateral donation
given by BCCI to various cricket associations, including the assessee, to be
expended for the charitable objects of promotion of the game of cricket and not
in lieu of carrying out any activity for conducting of IPL;
- the assessee had no locus
with respect to the promotion and conduct of IPL, except for the limited extent
of providing its stadium and other allied services for holding of the matches.
The question whether the conduct of IPL was a commercial activity or not might
be relevant from BCCI’s standpoint, but not to the case of the assessee;
- the assessee’s income,
including grants received from BCCI, was applied for attainment of the objects
of the assessee society, i.e., mainly for promotion of the game of cricket;
- the assessee was running a
regional coaching centre wherein gaming equipment / material was also provided
such as cricket balls, cricket nets, etc. The assessee also distributed grants
to the district cricket associations attached to it for the purpose of laying
and maintenance of grounds, purchase of equipment, etc., as well as for holding
of matches and for the purpose of promoting the game of cricket;
- the assessee conducted
various tournaments for the member district cricket associations. On the basis
of the inter-district tournaments, players were selected for the Punjab team
who underwent training at various coaching camps and thereafter the teams were
selected to participle in the national tournaments for different age groups. In
addition, financial assistance had also been provided to the ex-Punjab players
in the shape of monthly grants;
- the assessee was also
maintaining an international cricket stadium, which gave needed practice and
exposure to the cricketers. Even other sports facilities like swimming pool,
billiards, lawn tennis, etc., were provided to the members as well as to the
cricketers, which activities were also towards the achievement of the objects
of the assessee society;
- the assessee had been
spending substantial amounts towards development of the game at the grassroots
level and also for the development and promotion of the game by holding
international matches;
- the assessee was only
conducting activities in pursuance of the objects, i.e., the promotion of the
game of cricket in India and that merely because some revenue had been
generated in pursuance of such activities, the same was not hit by the proviso
to section 2(15);
- the Supreme Court had held
in CIT vs. Distributors (Baroda) (P) Ltd. 83 ITR 377 that
‘business’ refers to real, substantial, organised course of activity for
earning profits, as ‘profit motive’ is an essential requisite for conducting
business;
- Delhi High Court in India
Trade Promotion Organization vs. DIT(E) 371 ITR 333, reading down the
scope of the proviso to section 2(15), had held that an assessee could be said
to be engaged in business, trade or commerce only where earning of profit was
the predominant motive, purpose and object of the assessee and that mere
surplus from incidental or ancillary activities did not disentitle claim of
exemption u/s 11;
- Punjab & Haryana High
Court in the cases of The Tribune Trust vs. CIT & CIT (Exemptions)
vs. Improvement Trust, Moga 390 ITR 547 had approved the predominant
object theory, i.e. if the predominant motive or act of the trust was to
achieve its charitable objects, then merely because some incidental income was
being generated that would not disentitle the trust to claim exemption u/s 11
r.w.s. 2(15);
- all the incidental income /
surplus so earned by the assessee in the course of advancement of its object of
promotion of the game of cricket had been ploughed back for charitable
purposes;
- profit-making was not the
motive of the assessee and the only object was to promote the game of cricket.
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 38th 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 27th
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
27th 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.
