2022 (8) TMI 727 - AT - Income Tax

Tribunal modifies effective date for cancellation of registration and approval

The Tribunal upheld the cancellation of registration under section 12A and approval under section 80G(5) but modified the effective date to be ... Cancellation of registration under section 12AA(3) - withdrawal of approval under section 80G(5) - activities not genuine or not being carried out in accordance with the objects of the trust - receipt of unaccounted/anonymous donations and admissions before ITSC - diversion of trust funds/benefit to trustees under section 13(2)/(3) - power of the Commissioner to cancel registration - prospective versus retrospective cancellation of registration - reasonable opportunity of being heard / principles of natural justiceCancellation of registration under section 12AA(3) - withdrawal of approval under section 80G(5) - activities not genuine or not being carried out in accordance with the objects of the trust - receipt of unaccounted/anonymous donations and admissions before ITSC - diversion of trust funds/benefit to trustees under section 13(2)/(3) - Validity of the Pr. CIT's cancellation of the trust's registration under section 12AA(3) and withdrawal of approval under section 80G(5). - HELD THAT: - The Tribunal upheld the cancellation of registration under section 12AA(3) and withdrawal of approval under section 80G(5) on the ground that the assessee ceased charitable activities by selling its educational institutions, and that material (including the assessee's own disclosure before the ITSC and seized material) supported findings of unaccounted receipts and transactions with parties related to trustees. The Judicial Member concluded that while certain incidents (such as admitted anonymous donations offered to tax) would ordinarily be assessment issues, the undisputed sale of the institutions meant the trust no longer carried on charitable activities and thereby disentitled it to benefits under sections 11 and 12; that single ground sufficed to sustain cancellation. The Accountant Member recorded additional concern about undisclosed donations, possible nexus of receipts with admissions (capitation/forced collections) and inter-party advances involving trustees, and directed that, if remand were ordered, the authority should require detailed evidence. The majority accepted the view that cancellation was sustainable on the ground of cessation of charitable activity and misuse of status as found by the Pr. CIT and Judicial Member.Cancellation of registration under section 12AA(3) and withdrawal of approval under section 80G(5) are upheld on the ground that the trust's charitable activities ceased upon sale of its educational institutions and facts on record supported disentitlement.Prospective versus retrospective cancellation of registration - power of the Commissioner to cancel registration - reasonable opportunity of being heard / principles of natural justice - Whether cancellation/withdrawal could be given retrospective effect from earlier years or must be prospective. - HELD THAT: - The Tribunal in majority held that cancellation under section 12AA(3) cannot be given retrospective effect. Citing precedent and principle, the Judicial Member and the Third Member concluded that the Commissioner's power under section 12AA(3) does not permit upsetting closed past transactions by backdating cancellation; consequently the effect of cancellation was limited to the previous year in which the trust's activities ceased (the year in which the educational institutions were sold). The Tribunal also recorded that the proviso requiring a reasonable opportunity of being heard must be respected, but found the Pr. CIT had proceeded on the later show cause notice and afforded opportunity.Cancellation/withdrawal cannot be given retrospective effect; it is to operate prospectively from the previous year in which the trust's charitable activities ceased (the year when the institutions were sold).Final Conclusion: The Tribunal partly allowed the appeal: the Pr. CIT's order cancelling registration under section 12AA(3) and withdrawing approval under section 80G(5) is upheld on the ground that the trust ceased charitable activities by sale of its educational institutions, but the cancellation/withdrawal shall operate prospectively from the financial year in which those activities ceased (2017-18) rather than retrospectively to earlier years. Issues Involved:1. Validity of the impugned order due to issuance of two show cause notices.2. Whether the assessee was subjected to search and seizure action within the meaning of section 132(1).3. Whether the activities of the assessee trust were genuine and carried out as per the objects of the trust.4. Whether the cancellation of registration under section 12A and approval under section 80G(5) should be with retrospective or prospective effect.Issue-Wise Detailed Analysis:1. Validity of the Impugned Order Due to Issuance of Two Show Cause Notices:The assessee argued that the proceedings for cancellation of registration under Section 12AA(3) concluded with their submissions on 01.08.2017 and that the re-initiation by the successor Pr. CIT with a second notice dated 20.12.2018 was invalid. The Tribunal held that the issuance of the second show cause notice was necessary due to a change in the incumbent and did not vitiate the proceedings. The impugned order was based on the second show cause notice, and thus, the proceedings were valid.2. Whether the Assessee Was Subjected to Search and Seizure Action Within the Meaning of Section 132(1):The Tribunal noted that the validity of the search was not relevant to the present appeal. The assessee's objections to the validity of the proceedings initiated under section 153A were deemed irrelevant for the order passed under section 12AA(3) and 80G(5). The Tribunal concluded that the search and seizure action and the subsequent proceedings were valid.3. Whether the Activities of the Assessee Trust Were Genuine and Carried Out as Per the Objects of the Trust:The Tribunal examined several issues:- Receipt of unaccounted donations: The assessee admitted to receiving anonymous donations not recorded in the books, which were offered to tax under section 115BBC. The Tribunal held that this incident alone did not render the trust's activities non-genuine.- Advances to trustees: The Tribunal found that the advances to trustees were repayments of loans received from group concerns and did not violate sections 11(5) or 13.- Sale of educational institutions: The Tribunal noted that the sale of all educational institutions in 2017 led to the cessation of charitable activities, justifying the cancellation of registration.4. Whether the Cancellation of Registration Under Section 12A and Approval Under Section 80G(5) Should Be With Retrospective or Prospective Effect:The Tribunal referred to the decisions of the Hon'ble Allahabad High Court and Hon'ble Rajasthan High Court, which held that cancellation of registration under section 12AA(3) cannot be retrospective. The Tribunal concurred with these decisions, holding that the cancellation would be prospective from the previous year in which the assessee sold the educational institutions (FY 2017-18).Conclusion:The Tribunal upheld the cancellation of registration under section 12A and approval under section 80G(5) but modified the effective date to be prospective, from the previous year in which the assessee sold its educational institutions. The appeal was partly allowed.