2011 (4) TMI 1357 - AT - Income Tax

Director of Income Tax's cancellation of registration u/s.12A deemed invalid, assessee's appeal upheld

The Tribunal deemed the cancellation of registration u/s.12A of the I.T. Act by the Director of Income Tax as invalid due to lack of authority at the time ... - ISSUES PRESENTED AND CONSIDERED 1. Whether the Director of Income Tax (Exemption) had statutory power to cancel an assessee's registration under section 12A of the Income-tax Act with effect from a date prior to the amendment of sub-section (3) to section 12A by the Finance Act, 2010 (effective 01.06.2010). 2. Whether cancellation of registration under section 12A can be sustained on the ground that the trust's expenditure on medical relief was not in accordance with the scheme/objects as fixed by a court-approved scheme, where the authority purported to cancel registration before acquiring statutory power to do so. ISSUE-WISE DETAILED ANALYSIS Issue 1: Power of DIT to cancel registration under section 12A prior to 01.06.2010 Legal framework: Prior to the Finance Act, 2010 amendment, sub-section (3) of section 12A did not confer on the Director of Income Tax (Exemption) or CIT(A) express power to cancel the registration granted under section 12A. The 2010 amendment (effective 01.06.2010) vested such cancellation power in the DIT/CIT(A). Precedent treatment: No prior judicial precedent was relied upon in the decision; the Tribunal decided the question on statutory construction of section 12A as amended. Interpretation and reasoning: The Tribunal examined the temporal effect of the statutory amendment and concluded that the DIT lacked authority to cancel registrations under section 12A before the effective date of the 2010 amendment. The order of cancellation dated 07.09.2009 therefore was made without jurisdiction because the statutory power to cancel was not then exercisable by the DIT. Ratio vs. Obiter: Ratio - The operative legal holding is that an administrative authority may not cancel a registration under section 12A prior to the statutory conferral of such power; an order of cancellation made by the DIT before 01.06.2010 is void for want of jurisdiction. Conclusions: The cancellation order dated 07.09.2009 was invalid and was therefore set aside by the Tribunal for lack of statutory authority in the DIT at that time. Issue 2: Validity of cancelling registration on grounds that trust's medical relief expenditure contravened court-approved scheme/objects (considered but not determinatively decided) Legal framework: A trust's activities must conform to its objects as defined in its trust deed or in a court-approved scheme (here, a scheme framed by the City Civil Court). Deviation from the scheme/objects can in principle affect entitlement to registration and tax benefits under section 12A. Precedent treatment: The Tribunal did not apply or distinguish any authority on whether divergence from a court-approved scheme is independently sufficient for cancellation of section 12A registration; no precedent analysis appears in the impugned order as recorded. Interpretation and reasoning: Although the DIT's substantive rationale for cancellation was that the trust spent Rs. 2,42,300 on medical relief which was not covered by the specified objects in the court-approved scheme, the Tribunal did not adjudicate the merits of that factual and legal contention. The Tribunal's decision turned on lack of jurisdiction of the DIT to cancel prior to the 2010 amendment, rendering consideration of the substantive compliance issue unnecessary. Ratio vs. Obiter: Obiter - Any discussion that the trust's expenditure was not in accordance with the objects and thus could justify cancellation is obiter in the present decision because the Tribunal did not reach a conclusive determination on that ground due to the jurisdictional finding. Conclusions: The Tribunal declined to uphold or reject the substantive ground of non-compliance with the court-approved scheme because the cancellation was quashed on jurisdictional grounds. The question whether non-conforming expenditure (medical relief) would justify cancellation remains open for determination by the competent authority empowered post-amendment or by a court/tribunal on proper adjudication. Cross-references and Practical Effect Because the Tribunal's holding is jurisdictional, its ratio requires that any attempt to cancel a section 12A registration must be founded on powers actually vested in the authority at the time of the impugned order; procedural or substantive defects cannot validate an otherwise unauthorized cancellation. Where cancellation is sought after the 2010 amendment, substantive compliance with trust objects and court-approved schemes may be examined by the competent authority, a question not decided in this order.