2016 (6) TMI 1404 - AT - Income Tax

Trust's Registration Reinstated: CIT Overstepped Authority

The Patiala Improvement Trust Versus The CIT, Patiala

The Tribunal allowed the appeal, ruling that the CIT exceeded its powers in canceling the trust's registration under section 12AA. The Tribunal emphasized ... Exemption u/s 11 - Charitable activity u/s 2(15) - Scope of amendment to section 2(15) basis for cancellation of registration granted earlier u/s 12AA - HELD THAT:- Trust was carrying out activities in accordance with the statute under which it was created the same could be still considered to be non charitable in nature as per section 2(15) - we find has remanded the issue to the Tribunal for fresh examination of this aspect and has further categorically stated that anything observed in the order shall not be taken to be an expression on the merits of the controversy. At this juncture it is pertinent to point out that even the CBDT has vide its Circular No. 21/2016 dt. 27/05/2016 clarified that registration of a charitable institution granted u/s 12AA should not be cancelled merely on account of the proviso to section 2(15) coming into play. Sections 11 and 12 exempt income of charitable trusts or institutions, if such income is applied for charitable purpose and such institution is registered under section 12AA of the Act. An entity, pursuing advancement of object of general public utility, could be treated as a charitable institution in one year and not a charitable institution in the other year depending on the aggregate value of receipts from commercial activities, The position remains similar when the first and second provisos of section 2(15) get substituted by the new proviso introduced w.e.f. 01-04-2016 vide Finance Act, 2015, changing the cut-off benchmark as 20% of the total receipts instead of the fixed limit of ₹ 25,00,000/- as it existed earlier. The temporary excess of receipts beyond the specified cut-off in one year may not necessarily be the outcome of alteration in the very nature of the activities of the trust or institution requiring cancellation of registration already granted to the trust or institution. Hence, section 1 of the Act has been amended vide Finance Act, 2012 by inserting a new sub-section (8) therein to provide that such organization would not get benefit of tax exemption in the particular year in which its receipts from commercial activities exceed the threshold whether or not the registration granted is cancelled. This amendment has taken effect retrospectively from 1st April, 2009 and accordingly applies in relation to the assessment year 2009- 10 onwards. It shall not be mandatory to cancel the registration already granted u/s 11 to a charitable institution merely on the ground that the cut-off specified in the proviso to section 2(15) of the Act is exceeded in a particular year without there being any change in the nature of activities of the institution. If in any particular year, the specified cut-off is exceeded, the tax exemption would be denied to the institution in that year and cancellation of registration would not be mandatory unless such cancellation becomes necessary on the ground(s) prescribed under the Act. The cancellation of registration without justifiable reasons may, therefore, cause additional hardship to an assessee institution due to attraction of tax-liability on accreted income. The field authorities are, therefore, advised not to cancel the registration of a charitable institution granted u/s 12AA just because the proviso to section 2(15) comes into play. The process for cancellation of registration is to be initiated strictly in accordance with section 12 (3) and 12AA(4) after carefully examining the applicability of these provisions. We hold that amendment to section 2(15) of the Act cannot be the basis for cancellation of registration granted earlier under section 12AA of the Act. Thus we set aside the order under appeal and hold that CIT was not justified in canceling the registration in the present case. Appeal of assessee is allowed. Issues Involved:1. Justification of CIT in canceling the registration of the trust granted under section 12AA by invoking section 12AA(3).2. Whether the CIT's action amounts to contempt of the Punjab & Haryana High Court's decision.3. CIT's satisfaction regarding the conditions prescribed in section 12AA(3).4. Consideration of amendments in law and Board Circular No. 11 of 2008.5. Legality and factual correctness of the CIT's order.Issue-wise Detailed Analysis:1. Justification of CIT in canceling the registration of the trust granted under section 12AA by invoking section 12AA(3):The assessee, a society created by the State Government, was granted registration under section 12AA of the Income Tax Act, 1961, effective from 12.06.2003. The CIT issued a show cause notice proposing to cancel this registration, arguing that the activities of the assessee were in the nature of trade and commerce, aiming to earn huge profits. The CIT concluded that these activities did not fall under the purview of general public utility as per the amended section 2(15) of the IT Act, 1961. The Tribunal, however, found that the scope of the CIT's powers under section 12AA(3) is limited to cases where the activities of the trust are not genuine or are not carried out in accordance with the objects of the trust. Since the CIT did not establish that the activities were not genuine or not in accordance with the trust's objects, the cancellation was deemed beyond the scope of section 12AA(3).2. Whether the CIT's action amounts to contempt of the Punjab & Haryana High Court's decision:The assessee argued that the CIT's action contradicted the Punjab & Haryana High Court's decision, which had declared the objects of Improvement Trusts in Punjab as charitable and of general public utility. The Tribunal noted that the CIT should have adhered to the High Court's binding decision, which had already approved the objects of the trust as charitable.3. CIT's satisfaction regarding the conditions prescribed in section 12AA(3):The Tribunal observed that the CIT failed to record satisfaction on the two conditions prescribed in section 12AA(3) regarding the genuineness of the activities and their alignment with the trust's objects. The Tribunal emphasized that the CIT's action of canceling the registration was not justified as it exceeded the powers granted under section 12AA(3).4. Consideration of amendments in law and Board Circular No. 11 of 2008:The Tribunal highlighted that the CIT did not properly consider the amendments in section 13(8) and 143 B proviso made by the Finance Act 2012, effective from 1.4.2009, and Board Circular No. 11 of 2008, which was binding. The Tribunal noted that these provisions clarified that the temporary excess of receipts beyond the specified cut-off in one year should not necessarily lead to the cancellation of registration granted under section 12AA.5. Legality and factual correctness of the CIT's order:The Tribunal found that the CIT's order was against the law and facts of the case. The Tribunal cited the Amritsar Bench of ITAT's decision in the case of Kapurthala Development Trust vs. CIT, which held that the proviso to section 2(15) has no role in the registration of a trust under section 12A or 12AA. The Tribunal reiterated that the considerations of the first proviso to section 2(15) are extraneous to the context of registration status under section 12A or 12AA. The Tribunal also referred to the CBDT's Circular No. 21/2016, which clarified that registration should not be canceled merely because the proviso to section 2(15) comes into play.Conclusion:The Tribunal allowed the appeal, holding that the CIT was not justified in canceling the registration of the trust under section 12AA. The Tribunal emphasized that the amendment to section 2(15) cannot be the basis for canceling registration granted earlier under section 12AA. The Tribunal set aside the CIT's order and restored the registration of the trust.