2015 (5) TMI 1210 - AT - Income Tax

ITAT invalidates cancellation of trust's registration under Income Tax Act, deeming retrospective effect unlawful. Trust's activities genuine.

The ITAT quashed the CIT's order cancelling the trust's registration under section 12AA(3) of the Income Tax Act, deeming the cancellation with ... Cancellation of registration u/s. 12AA(3) - charitable activity u/s 2(15) - as per CIT activities of the assessee's Trust, which involves rendering of services in relation to the port related business of stevedores and clearing and forwarding agents at Visakhapatnam Port, has a prominently commercial tinge about it, which fact has not been denied by the assessee trust so far - HELD THAT:- The undisputed fact is that the objects of the assessee society are charitable in nature. It was for this reason that the Ld. CIT had granted registration to the assessee w.e.f. 19.1.1994 - ITAT in the assessee's own case for the earlier AY [2010 (1) TMI 1276 - ITAT VISAKHAPATNAM]held that the assessee is a charitable organization. Right from the year 1994-95, the assessee has been claiming exemption u/s. 11 and the Revenue has been granting the same. Whether the Ld. CIT was right in cancelling the registration by invoking his powers u/s. 12AA(3)? - In the case on hand the Ld. CIT clearly gives a finding that the assessee is carrying on its activities in accordance with the objects. There is no finding arrived at by the Ld. CIT, that the activities of the assessee Trust are not genuine. Hence on facts there is no dispute that the activities of the Institution are genuine and that the assessee trust is carrying on its activities in accordance with its objects. In the absence of contrary findings, we have to hold that the Ld. CIT was wrong in invoking the provisions u/s. 12AA(3) As the conditions specified under the section 12AA(3) have not been satisfied, the cancellation of registration is bad in law. The finding of the Ld. CIT that the provisions of S. 12AA(3) need to be construed in a holistic manner, with a view to give effect to the object which the legislation intends to achieve and to derecognize the objects of the assessee, on the ground that they are not charitable under certain circumstances prescribed in both the provisions of S. 2(15) of the Act, in letter and spirit, is not the correct position of law. This interpretation is not based on a plain reading of the provisions of the Statute. The Courts have stated the manner in which this section has to be interpreted. Thus, we uphold the contentions of the assessee the very invocation of the power of cancellation of registration by the Ld. CIT u/s. 12AA(3) of the Act is bad in law. Cancel registration u/s. 12AA(3) with retrospective effect from 1.4.2009 relevant to the AY 2009-10 - This issue is no more res integra. Withdrawal of registration with retrospective effect from 1.4.2009 by the order passed u/s. 12AA(3), is bad in law. Whether the registration can be cancelled on the ground that the activities of the assessee attract the provisos to S. 2(15) ? - Assessee is not operating with a profit motto and that its activities are not in the nature of business and that the objects and activities of the trust are charitable in nature as recognized by the Ld. CIT when registration was granted. 'Profit motto' is sine-qua-non of business or service in the nature of business. As there is no profit motive, there is no business activity. a) The finding of the Ld. CIT, Visakhapatnam is that the assessee falls under the category 'advancement of any other object of general public utility' u/s. 2(15) of the Act. Hence is a charitable organization. The only issue is whether the assessee falls within the ken of the provisos inserted to S. 2(15) of the Act by the Finance Act, 2010 w.e.f. 1.4.2009; When the finding of the ITAT is that the assessee activities are not with any 'profit motive' and when it is held that the assessee is not carrying on any business, then the provisions to sec. 2(15) of the Act are not attracted in the case on hand and exemption cannot be withdrawn. (b) In this case the fee/labour charge that has to be charged, are fixed by Visakhapatnam Port Trust through the Visakhapatnam Dock Labour Board and this fee is charged for supply of labour, which is in turn paid to the labour force. Such charge of fee, can not in our opinion be construed as commercial activity carried out by the Trust, when the tests laid down by various Courts are applied to the facts of this case. (c) The main and predominant object of the assessee is to promote the welfare of the workers. The assessee is admittedly formed for supply of labour when there is shortage of work force in the port and for taking care of the welfare of the workers. The maximum expenditure incurred by the assessee is towards payment for the workers and for their welfare. The prime object of the assessee is not to do trade, commerce or business or rendering of any activity or services in relation to trade, commerce or business etc. The assessee has no profit motto. Hence the Proviso to S. 2(15) does not apply to the case of the assessee. Thus the cancellation of registration granted u/s. 12A(a) of the Act is bad in law. Violation of provisions of S. 13(3)(g) r.w.s. 13(cc) - Representative of M/s. South India Corporation Ltd. was not a trustee of the assessee trust, during the period when excess fee collected was refunded. This factual position, as already stated, was not controverted by the Ld. CIT, D.R. Thus prima facie, invocation of S. 13(2)(g) of the Act rws 13(3)(cc) is bad in law. Fee to be charged by the assessee trust is fixed by the Visakhapatnam Port Trust through the Visakhapatnam Dock Labour Board - Visakhapatnam Port refunded an aggregate amount of ₹ 7.99 crores, of which, an amount of ₹ 4.39 crores was adjusted by credit notes and the balance only was refunded to the party to which it was due. This amount was refunded to South India Corporation Ltd. on various dates during the A.Y. 2008-09, 2009-10 and 2010-11. Refunding the amount legally due to a party cannot be considered a violation of any of the provisions of the Act much less violation of S. 13 of the Act. The amount is rightfully and legally due to M/s. South India Corporation. In fact the Ld. CIT, Visakhapatnam has without proper verification of the facts, come to such wrong conclusions. Thus we reverse this finding of the Ld. CIT, Visakhapatnam and hold that there is no violation of Sec. 13(1)(c) read with sections 13(2)(g) and 13(3) of the Act. - Decided in favour of assessee. Issues Involved:1. Cancellation of registration under section 12AA(3) of the Income Tax Act, 1961.2. Interpretation and application of the provisos to section 2(15) of the Income Tax Act, 1961.3. Alleged violation of section 13(2)(g) read with section 13(3)(cc) of the Income Tax Act, 1961.Detailed Analysis:1. Cancellation of Registration under Section 12AA(3):Facts and Background:- The assessee, a trust, was granted registration under section 12A(a) on 2nd March 2001.- The Commissioner of Income Tax (CIT) cancelled this registration with retrospective effect from 1st April 2009, arguing that the trust's activities were not charitable as they involved business activities.Key Arguments:- The assessee argued that the CIT did not follow the binding order of the ITAT, which had previously held that the trust's activities were charitable.- The CIT contended that the trust's activities involved supplying labor, which was a business activity, thus not qualifying as charitable under the amended section 2(15).Judgment:- The ITAT held that the CIT erred in cancelling the registration as the conditions stipulated under section 12AA(3) were not satisfied.- The activities of the trust were found to be genuine and carried out in accordance with its objects.- The ITAT cited various judicial precedents to assert that the CIT must demonstrate that the activities are not genuine or not in accordance with the trust's objects to cancel registration.- The cancellation of registration with retrospective effect was deemed bad in law, as section 12AA(3) does not grant the power to cancel registration retrospectively.2. Interpretation and Application of the Provisos to Section 2(15):Facts and Background:- The CIT argued that the trust's activities fell under the provisos to section 2(15) of the Act, which excludes entities engaged in trade, commerce, or business from being considered as charitable.Key Arguments:- The assessee contended that its activities did not have a profit motive and were not in the nature of business.- The CIT maintained that the trust's activities had a commercial tinge, making it ineligible for charitable status.Judgment:- The ITAT referred to the binding decision in the assessee's own case, which held that the trust's activities were charitable and not business activities.- The ITAT emphasized that the dominant object of the trust was to promote the welfare of workers, and there was no profit motive.- It was concluded that the provisos to section 2(15) did not apply, as the trust's activities were not commercial in nature.3. Alleged Violation of Section 13(2)(g) Read with Section 13(3)(cc):Facts and Background:- The CIT alleged that the trust violated section 13(2)(g) by refunding excess fees to a member entity, South India Corporation Ltd.Key Arguments:- The assessee argued that the refunds were genuine transactions, mandated by the Visakhapatnam Dock Labour Board, and did not constitute a violation of section 13.- The CIT contended that these refunds provided undue pecuniary benefit to the member entity.Judgment:- The ITAT held that the issue of violation of section 13 should be examined at the time of assessment, not for the purpose of cancelling registration under section 12AA(3).- It was found that South India Corporation Ltd. was not a trustee at the time of the refunds, and the refunds were part of genuine transactions.- The ITAT concluded that there was no violation of section 13, and the cancellation of registration on this ground was also bad in law.Conclusion:The ITAT quashed the order of the CIT cancelling the registration of the trust under section 12AA(3) and allowed the appeal of the assessee. The trust's activities were found to be charitable, not commercial, and there was no violation of section 13.