2013 (11) TMI 516 - AT - Income Tax

Invalid Withdrawal of Registration Under Income Tax Act: Scope Exceeded, Cancellation Deemed Unlawful

Maharashtra Housing & Area Development Authority Versus ADIT(E)-1(1)Mumbai

Maharashtra Housing & Area Development Authority Versus ADIT(E)-1(1)Mumbai - TMI Issues Involved:1. Whether the withdrawal of registration under section 12A/12AA of the Income Tax Act is maintainable in law.2. The power of the Director of Income Tax (Exemptions) [DIT(E)] to withdraw or cancel the registration.3. The scope and ambit of section 12AA(3) of the Income Tax Act.4. The impact of the amendment to section 2(15) of the Act on the registration status of the assessee.5. The validity of the withdrawal of registration in light of the assessee's activities and objects.Detailed Analysis:1. Maintainability of Withdrawal of Registration:The core issue in the appeal is whether the withdrawal of registration under section 12A/12AA of the Income Tax Act is legally maintainable. The registration was initially granted to the assessee on 24.2.2003, effective from 1.4.2002. However, due to an amendment in section 2(15) of the Finance Act, 2008, effective from 1.4.2009, the definition of 'charitable purpose' was altered. The amendment specified that the advancement of any other object of general public utility would not be considered charitable if it involved any trade, commerce, or business activity. The assessee's principal revenue streams, which included the sale of residential houses, lease rentals, and tenancy receipts, were considered by the DIT(E) to fall under this category, leading to the withdrawal of registration.2. Power of DIT(E) to Withdraw or Cancel Registration:The assessee objected to the DIT(E)'s power to withdraw the registration, arguing that the registration was granted under section 12A and not under section 12AA(1)(b)(i). However, the Finance Act, 2010, expanded the scope of section 12AA(3) to include registrations under section 12A, effective from 1.6.2010. The Tribunal noted that the constitutional validity of section 12AA(3) was upheld by the High Court in the case of Sinhagad Technical Education Society, which clarified that the provision would cover registrations granted under section 12A. Therefore, the DIT(E) had the authority to cancel the registration post 1.6.2010.3. Scope and Ambit of Section 12AA(3):Section 12AA(3) allows the Commissioner to cancel the registration if the activities of the trust are not genuine or are not being carried out in accordance with the objects of the trust. The Tribunal emphasized that the scope of section 12AA(3) is limited to these two conditions and does not extend to a review of whether the objects continue to be charitable. The Tribunal found that a change in law, such as the amendment to section 2(15), does not fall within the scope of section 12AA(3).4. Impact of Amendment to Section 2(15):The amendment to section 2(15) introduced a proviso that excluded activities involving trade, commerce, or business from being considered charitable. The assessee argued that there had been no change in its activities since its incorporation and that its activities were consistent with its objects. The Tribunal noted that the amendment impacted the manner in which the assessee's activities were to be achieved but did not directly impinge on the objects themselves. Therefore, the registration could not be withdrawn solely based on the amendment to section 2(15).5. Validity of Withdrawal of Registration:The Tribunal concluded that the DIT(E) was empowered to exercise his power for cancellation of registration in December 2011, effective from A.Y. 2009-10. However, the cancellation was not sustainable in this case due to the limited mandate of section 12AA(3), which does not include a condition of continuing satisfaction by the Commissioner that the objects remain charitable. The Tribunal emphasized that the review of registration is limited to the genuineness of activities and their alignment with the objects, not the charitable nature of the objects themselves.Conclusion:The Tribunal held that the DIT(E)'s cancellation of the assessee's registration was not sustainable within the limited scope of section 12AA(3). The Tribunal clarified that while the DIT(E) had the authority to withdraw the registration, such action must be based on the conditions specified in section 12AA(3) and not on changes in the law affecting the definition of 'charitable purpose.' As a result, the assessee's appeal was allowed, and the question of the maintainability of the withdrawal of registration was answered in the negative, favoring the assessee. The Tribunal further noted that the Assessing Officer has the authority to examine the allowability of exemption under section 11 during assessment, considering the applicability of the proviso to section 2(15).