The Income Tax Appellate Tribunal’s conclusion in BCCI vs. Principal Commissioner, Income Tax, is not only naive but enables tax avoidance by the BCCI, despite clear evidence of commercialisation of its IPL tournaments, writes GAURAV SAXENA.
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ON November 2, 2021, the Income Tax Appellate Tribunal (ITAT) issued a decision in favour of the Board of Control for Cricket in India (BCCI), upholding the argument that though the BCCI is earning money through hosting the Indian Premier League (IPL), the object of promoting cricket remains intact and hence its registration as an institution under Section 12A of the Income-tax Act, 1961 should continue and its income earned should be exempt from tax.
The Appeal was filed by the BCCI from a decision of the Principal Commissioner, Income Tax rejecting the application made by the BCCI under Section 12AA (procedure for registration) of the Act. Through this piece, I aim to provide a factual background to the dispute as well as summarise the ITAT’s reasoning for its decision.
Facts
The BCCI is a society registered in Madras under the Societies Registration Act, 1880 (subsequently repealed and substituted by the Tamil Nadu Societies Registration Act, 1975). On February 12, 1996, the BCCI was issued a certificate of registration under section 12A of the Act (given to not-for-profit organisations to enable them to get exemption from tax on income earned).
Subsequently in 2006, the BCCI amended its Memorandum of Association which led to examination by the Director of Income Tax (Exemptions) (DIT) who then informed the BCCI that once the objects changed, the very foundation for the grant of registration had eroded and so the registration would not survive.
The BCCI appealed before a coordinate bench of the ITAT. The appeal was dismissed on a technical ground, but the bench observed that “registration granted under Section 12A … cannot be extended to the amended objects unless the DIT examines the same and comes to a conclusion that the registration granted under Section 12A can be extended to the revised objects …”.
Show-cause notices were issued by the authorities requiring BCCI to show cause as to why the registration ought not to be cancelled/withdrawn. BCCI’s main argument was that the changes were minor and did not affect the grounds for granting registration. Regardless, the proceedings were dropped as the proposed action was not taken by the Commissioner, and the registration remained intact.
Concurrently, the Supreme Court had appointed the Justice R.M. Lodha Committee which submitted its comprehensive report recommending a slew of changes to be made in order to achieve the objects for which the committee was set up including, among other things, an amended memorandum of association (MoA).
The Supreme Court (SC) vide Order dated July 24, 2017 accepted – barring a few – the recommendations of the Committee. A draft constitution was drawn up and approved by the Supreme Court in its judgment dated August 9, 2018. On September 15 2018, BCCI filed an application seeking registration under section 12AA read with section 12A(1)(b). The Commissioner was thus once again seized of the matter of continuance of registration.
The Commissioner noted the clauses pertaining to the conduct of the IPL and opined that “activities of the applicant specially in relation to the IPL are in the nature of trade, commerce or business and therefore, the applicant is squarely covered by proviso to Section 2(15) and hence the applicant’s claim… cannot be held to be charitable purpose” [paragraph 9 of the order]. The Application was rejected. BCCI, aggrieved by the stand of the Principal Commissioner, filed an appeal before the ITAT.
Section 2(15) defines what is “charitable purpose”. The proviso to section 2(15) provides that advancement of an object of general public utility shall not be a charitable purpose if it involves carrying out a commercial activity – unless such activity is undertaken in the actual advancement of the object of general public utility. In this case, the promotion of cricket is to be read as an object of general public utility.
ITAT’s reasoning
The 1996 registration was granted on the basis of the MoA of the BCCI dated November 28, 1940. The aforesaid provisions of the Act are to come into play only if there are significant variations in the MoA. Section 12A(1)(b) comes into play only when the modifications do not conform to the conditions under which the registration was obtained.
The ITAT carried out a detailed comparison between the MoA of 1940 and the amended MoA of 2018. It concluded that on a perusal of the chart [para 18, pages 11-15 of the Order], there is no change in the 2018 MoA that is contrary to the 1940 MoA.
Section 2(15) of the It Act defines what is “charitable purpose”. The proviso to section 2(15) provides that advancement of an object of general public utility shall not be a charitable purpose if it involves carrying out a commercial activity – unless such activity is undertaken in the actual advancement of the object of general public utility. In this case, the promotion of cricket is to be read as an object of general public utility.
It relied upon the Supreme Court’s decisions where it has been reiterated that the BCCI is carrying out public functions, as discussed here, and therefore any changes specifically approved by the Court cannot be said to dilute the fundamental objective espoused by the BCCI viz. promoting the game of cricket. The ITAT thus held that the order of the Commissioner is wholly unsustainable and misconceived. It held that Section 12A(1)(ab) specifically refers to ‘objects’ and therefore it cannot be open to the Commissioner to go beyond the ‘objects’ in the MoA so far as jurisdiction under the provision is concerned.
Relying on Notes to the Finance Bill of 2017, the ITAT held that there is no doubt that “.it is not a change simpliciter in the memorandum of association, which was basis of the earlier registration granted to the assessee, that triggers the provisions of Section 12A(1)(ab) being invoked, the change has to be such that it does not conform to the original objects of the trust or institution based on which registration was granted …” [para 21].
It further held that the fact that BCCI has filed an application under section 12A (1)(ab) does not vest jurisdiction in the Principal Commissioner to deal with the matter on merits unless it is evident that there is modification in the object clause not conforming to the conditions on which the original registration was granted [para 23]. In view of the above, the ITAT was of the view that the Principal Commissioner erred in declining registration and it ought to have held that the registration granted in 1996 still held good in law.
Coming to the basis of declining registration, which was invoking the proviso to section 2(15) of the Act on the ground that the conduct of the IPL is a commercial activity crossing the threshold limit in the exceptions to the proviso – the ITAT observed that it is well settled law that section 2(15) has no application where registration under section 12AA of the Act is concerned.
For this, it relied on a decision of a coordinate bench in Kapurthala Improvement Trust vs. CIT (2015). Once again relying on the Explanatory Notes to the Finance Bill, it held that the application of the proviso to section 2(15) is to be done on a year to year basis, while grant is a one-time exercise. Therefore, the registration must first be granted and only on a yearly basis it must be seen whether the proviso to Section 2(15) applies. If for example, the BCCI does not remain charitable due to the application of the proviso to section 2(15) on account of income received for a financial year, then it shall only be denied exemption for that year and its registration as a whole shall not be revoked.
Lastly, coming to the nature of the activity of conducting IPL matches, which must be noted was argued vehemently by both sides, the ITAT observed in favour of the BCCI. Before elaborating, I would like to point out that these were mere observations, as the ITAT held that it is not necessary for it to go into this aspect of the matter at this stage, since the Principal Commissioner’s order was vitiated on the aforesaid points as discussed hereinabove [para 29].
This decision is a huge win for Public Trusts that are conducting sporting events and/or using their funds in furtherance of their objects (a large number of sporting bodies are in the nature of Public Charitable Trusts) – while the revenue authorities seem to have lost out on a large chunk of potential taxpayer money.
Its view was that just because a tournament is structured in such a manner so as to popularise it, leading to more commercialisation, the same cannot be said to erode the basic purpose of the tournament – which is to promote/popularise the sport of cricket. There is no conflict between cricket becoming popular and cricket becoming more entertaining. The commercialisation of the sport leads to more economic opportunities for those associated with the sport. The funds raised from this are also used in the furtherance of the sport of cricket.
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Decision and comment
The ITAT held that BCCI was entitled to continuance of registration as obtained in 1996 and accordingly the order of the Principal Commissioner was dismissed.
This decision is a huge win for Public Trusts that are conducting sporting events and/or using their funds in furtherance of their objects (a large number of sporting bodies are in the nature of Public Charitable Trusts) – while the revenue authorities seem to have lost out on a large chunk of potential taxpayer money.
The ITAT’s observation, however, that all the income raised from the IPL is being used for the promotion of the sport of cricket sounds naïve at best. With the ever-growing nature of commercial sport in our country, sports federations can easily avoid paying tax on income earned through sports leagues – that are oftentimes highly profitable – but if the ITAT is to be believed, the revenue earned is being used for the promotion of the sports and so the sports federations will continue to be entitled to tax exemption.
(Gaurav Saxena is an advocate, with a keen interest in the intersection between sports and law, currently engaged as a judicial clerk at the Supreme Court of India. The views expressed are personal.)
