DIT cancelled section 12AA(3) registration without adequate hearing opportunity violating natural justice principles

ITAT Hyderabad allowed the appeal and remitted the matter back to DIT (E) after finding violation of natural justice principles. The DIT (E) had cancelled the registration under section 12AA(3) retrospectively for commercial cricket activities without providing adequate opportunity to the assessee to explain issues that were not raised in the show cause notice or during personal hearing. The tribunal held that before cancelling registration, the DIT (E) must communicate all factors that allegedly changed the assessee's charitable nature and provide fair opportunity for explanation. The appeal was allowed for statistical purposes.

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Issues Involved:
1. Cancellation of registration under section 12AA(3) of the Income Tax Act.
2. Alleged commercial activities by the assessee society.
3. Violation of rules of natural justice by the DIT (E).

Detailed Analysis:

1. Cancellation of Registration under Section 12AA(3):
The primary issue revolves around the cancellation of the assessee society's registration under section 12AA(3) of the Income Tax Act. The society, registered under the A.P. Societies Registration Act, had been enjoying exemption under section 11 since its registration under section 12A on 20-1-1997. A survey conducted on 21-10-2011 revealed that the society derived income from various sources such as league fees, ticket sales, accommodation charges, and sponsorship money, among others. The DIT (E) concluded that these receipts were of a commercial nature, which led to the issuance of a show cause notice on 17-11-2011. The DIT (E) ultimately cancelled the registration, citing that the society indulged in commercial activities, thus losing its character as a charitable organization.

2. Alleged Commercial Activities:
The DIT (E) identified several income streams as commercial activities, including:
- Sponsorship Money: Received from corporate bodies for naming rights.
- Sale of Corporate Boxes and In-Stadia Advertising Rights: Considered commercial due to the process of inviting tenders.
- TV Subsidy and IPL Matches Revenue: Substantial amounts received from BCCI for conducting IPL matches and TV advertisement rights.
- Sale of Tickets: The sale of 154 tickets for World Cup 2007 was highlighted as a commercial activity.
The assessee argued that these activities were incidental to promoting cricket and not carried out with a commercial intent. They emphasized that the revenue generated was used to develop and sustain cricket at lower levels, thus aligning with their charitable objectives.

3. Violation of Rules of Natural Justice:
The assessee contended that the DIT (E) violated the rules of natural justice by cancelling the registration based on issues not raised in the show cause notice. Specific instances cited by the DIT (E), such as expenditure on running a club, expenses without vouchers, and amounts spent on women's cricket tournaments, were never communicated to the assessee. The assessee argued that had these issues been pointed out, they could have provided explanations or produced relevant documents to address the DIT (E)'s concerns.

Conclusion and Remand:
The Tribunal observed that the DIT (E) should have given the assessee a fair opportunity to explain its position on all issues before cancelling the registration. The Tribunal noted that the assessee was previously registered under section 12A, and it was incumbent upon the DIT (E) to inform the assessee of all factors leading to the cancellation. The Tribunal remitted the matter back to the DIT (E) to communicate all issues to the assessee and provide a reasonable opportunity for explanation. The DIT (E) was directed to decide the issue in accordance with the law after considering the assessee's submissions and relevant judicial decisions. The Tribunal clarified that it had not expressed any opinion on the merits of the case and that the rest of the grounds were purely academic.

Order:
The appeal was allowed for statistical purposes, and the matter was remitted to the DIT (E) for reconsideration. The order was pronounced on 26-03-2014.

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