2015 (7) TMI 198 - AT - Income Tax

Tribunal overturns cancellation of registration under Income-tax Act, emphasizes genuine activities.

Bangalore Development Authority Versus Director of Income-Tax (Exemptions) Bangalore

The Tribunal held that the cancellation of the assessee's registration under Section 12A of the Income-tax Act was erroneous. It found the assessee's ... Registration given to it u/s 12A cancelled - Whether the Tribunal was correct in holding that the assessee is entitled to continue registration under Section 12A? - Held that:- A registration granted earlier under Section 12A of the Act can be cancelled under two circumstances; (a) If the activities of such trust or institution are not genuine, (b) The activities of trust or institution not being carried out in accordance with the object of the trust or institution. Only on those two conditions being satisfied, the registration granted under Section 12A of the Act could be cancelled by the authorities. It is not in dispute that there is no violation of the said two conditions by the assessee. The activities carried on by the assessee is a genuine one. As could be seen from the profits they have generated, the said profit is earned by carrying on the activities in accordance with the object of the trust. Therefore, the two conditions stipulated in subsection (3) of Section 12AA of the Act, which empowers the authority to cancel registration, do not exists in this case. The registration granted is cancelled in view of the amendment of first proviso to Section 2(15) of the Act. That is not a ground specified in the Statute for cancellation of the registration. In fact, sub-section(8) to Section 13 which is introduced by Financial Act, 2012 which came into effect from 1.4.2009 categorically provides that, nothing contained in Section 11 or Section 12 shall operate so as to exclude any income from the total income of the previous year or any receipt there of. If the provisions of the first proviso to Clause 15 of Section 2 becomes applicable in the case of such person in the said previous year, the Statute has protected the interest of revenue. Not withstanding the fact that the assessee is conferred registration under Section 12A of the Act, unless the assessee falls within Section 2(15) of the Act, excluding the first proviso, the assessee would not be entitled to the benefit of exemption from the tax. If the case of the assessee falls with first proviso to Section 2(15) of the Act, the benefit of registration which flow from Section 12A of the Act is not available. Anyhow, that is a matter to be considered by the Assessing Authority. But on that ground, registration cannot be cancelled, which is precisely the Tribunal has held. See Director of Incometax (Exemption) vs. Karnataka Industrial Area Development Board (Income-tax Appeal [2015 (7) TMI 169 - KARNATAKA HIGH COURT]. - Decided in favour of assessee. Issues Involved:1. Cancellation of registration under Section 12A of the Income-tax Act, 1961.2. Applicability of the proviso to Section 2(15) of the Act.3. Assessment of whether activities are genuine and in accordance with the objects of the institution.4. Comparison with the Karnataka Industrial Area Development Board case.Detailed Analysis:1. Cancellation of Registration under Section 12AThe primary issue in this appeal is the cancellation of the registration granted to the assessee under Section 12A of the Income-tax Act, 1961 by the Director of Income-tax (Exemption) [DIT(E)]. The assessee, a statutory body formed by the Government of Karnataka, was initially granted registration under Section 12A on 26/3/2003. However, the DIT(E) issued a show cause notice on 15/3/2011, questioning the continuation of this registration due to an amendment to Section 2(15) of the Act. The DIT(E) subsequently cancelled the registration, citing that the assessee's activities were commercial in nature and not charitable.2. Applicability of the Proviso to Section 2(15) of the ActThe DIT(E) argued that the assessee's activities fell under the proviso to Section 2(15) of the Act, as amended effective from 1/4/2009. The assessee had substantial receipts from commercial activities, including the sale and auction of houses/sites, and development of shopping complexes. The DIT(E) noted that these activities did not align with the concept of charity as defined under the Act. The assessee contended that its activities were charitable, focusing on the relief of the poor, education, medical relief, and the advancement of any other object of general utility. However, the DIT(E) maintained that the commercial nature of the activities disqualified the assessee from enjoying tax exemption under Section 11 of the Act.3. Assessment of Whether Activities are Genuine and in Accordance with the Objects of the InstitutionThe Tribunal examined whether the activities of the assessee were genuine and carried out in accordance with its stated objectives. The Tribunal referenced the case of the Karnataka Industrial Area Development Board (KIADB), where similar issues were addressed. The High Court in the KIADB case held that for registration under Section 12A to be cancelled, the activities must either be non-genuine or not in accordance with the institution's objects. The Tribunal found that in the case of the assessee, as with KIADB, the activities were genuine and aligned with its objectives. Therefore, the conditions stipulated in Section 12AA(3) for cancellation were not met.4. Comparison with the Karnataka Industrial Area Development Board CaseThe Tribunal heavily relied on the precedent set by the Karnataka Industrial Area Development Board case. In that case, the High Court ruled that the mere fact that an institution's activities fell under the proviso to Section 2(15) did not justify the cancellation of registration under Section 12A. The High Court emphasized that the assessment of whether the activities were genuine and in accordance with the objects should be considered by the assessing authority, not as grounds for cancellation of registration. The Tribunal found that the assessee's situation was analogous to KIADB and thus applied the same legal reasoning.ConclusionThe Tribunal concluded that the DIT(E) erred in cancelling the registration of the assessee under Section 12A. The Tribunal set aside the order of the DIT(E), allowing the appeal of the assessee. The Tribunal reiterated that the assessment of whether the activities fell under the proviso to Section 2(15) should be determined by the assessing authority and not used as a basis for cancelling registration. The judgment was pronounced in the open court on 10.4.2015, with the appeal of the assessee being allowed.