2023 (7) TMI 459 - HC - Income Tax

Appeal Admitted on Fund Diversion & Section 13(1)(c) Violations; CIT(E) Directed to Grant Section 12AA Registration.

Commissioner of Income Tax Versus Orissa Cricket Association

The HC admitted the appeal, focusing on the legal question regarding fund diversion and section 13(1)(c) violations during the section 12AA registration ... Exemption u/s 11 - Registration u/s 12AA seeked in course of conducting its activities under the objects has suffered survey and, search and seizure of its honorary secretary - receipts from Board of Control for Cricket in India (BCCI) were shown as corpus fund instead of treating them as revenue receipts - CIT(E) refused to grant registration mainly on the ground that funds of the assessee were diverted for personal benefits of the executives of the society, in violation of provisions of section 13 (1)(c) - HELD THAT:- We have given our anxious consideration to contentions put forth at the Bar. Assessment years under consideration are 1997-98 and 2011-12. The rejection appears to have been made in respect of these two assessment years. In this context, we have perused Tamil Nadu Cricket Association [2013 (12) TMI 833 - MADRAS HIGH COURT] - We find that by clause (b) under sub-section (1) of section 12AA the Commissioner requires satisfaction about objects of the trust or institution and the genuineness of its activities. In considering the application for purpose of the satisfaction, the Commissioner had taken into consideration the facts regarding survey, search and seizure, respectively of the assessee’s premises as well as its honorary secretary. We admit the appeal on the following question of law to be answered. Where an assessee seeking registration under section 12AA in course of conducting its activities under the objects has suffered survey and, search and seizure of its honorary secretary and there has been violation of provisions in section 13(1)(c), can the facts be considered for the purpose of satisfaction on the application for grant of registration? List on 13th July, 2023, for hearing of the appeal on the papers already on record. ISSUES PRESENTED AND CONSIDERED 1. Whether facts revealed by a survey under section 133A and search and seizure under section 132 and findings of diversion of funds in breach of section 13(1)(c) may be considered by the Commissioner for the purpose of satisfaction on an application for registration under section 12AA(1)(b) of the Income Tax Act, 1961. 2. Whether, in deciding grant of registration under section 12AA(1), the Commissioner must assess the genuineness of activities and conformity with objects on the basis of material gathered in pre-assessment operations, or whether issues of diversion/violation under section 13(1)(c) should be left to assessment proceedings before the Assessing Officer. ISSUE-WISE DETAILED ANALYSIS Issue 1: Admissibility of survey/search and section 13(1)(c) findings in section 12AA(1)(b) satisfaction Legal framework: Section 12AA(1)(b) requires the Commissioner to be satisfied about the objects of the trust or institution and the genuineness of its activities before granting registration; section 13(1)(c) proscribes diversion of income for the personal benefit of persons referred therein and can lead to denial or withdrawal of tax benefits. Survey under section 133A and search and seizure under section 132 may reveal incriminating documents bearing on activities and fund application. Precedent Treatment: The Court considered the Supreme Court discussion in C.I.T. (Addl.) v. Surat Art Silk Cloth Mfrs. Assn. on the meaning of 'advancement' and the activity-oriented nature of charitable purpose; and a coordinate High Court view in Tamil Nadu Cricket Association v. Director of Income Tax (Exemptions) which distinguishes the parameters for grant (12AA(1)) and cancellation (12AA(3)), emphasizing that both grant and cancellation hinge on Commissioner's satisfaction about objects and genuineness of activities, but that cancellation focuses on genuineness and conformity of activities. Interpretation and reasoning: The Tribunal set aside the Commissioner's refusal on the ground that the assessee's objects were admitted to be charitable and no specific activities were pointed out as not genuine; it held that alleged violation of section 13(1)(c) was a matter to be examined by the Assessing Officer in assessment proceedings after grant of registration. The Commissioner relied on the survey/search and impounded material indicating diversion of funds and treated certain receipts as corpus rather than revenue, thereby concluding non-genuineness and misuse. The Court recognizes that section 12AA(1)(b) contemplates satisfaction about both objects and genuineness of activities and that material obtained in operations under sections 133A/132 may be relevant to that satisfaction; but it also notes authorities emphasizing that detailed factual determination of diversion and tax consequences often occur in assessment proceedings. Ratio v. Obiter: The Court did not pronounce a final ratio resolving the conflict; rather, it admitted the appeal and formulated the specific question of law for determination. Observations about the content of section 12AA(1)(b), the relevance of survey/search material, and the Tribunal's approach constitute preparatory reasoning and are therefore interlocutory rather than conclusively ratio. Conclusion: The Court admitted the appeal and framed the legal question (see Issue 1) for full hearing. No final determination on the admissibility or weight of survey/search findings or on the proper forum (grant under section 12AA v. assessment proceedings) was made at this stage. Issue 2: Standard and scope of Commissioner's satisfaction under section 12AA(1)(b) - objects v. activities; grant v. cancellation Legal framework: Section 12AA(1)(b) requires satisfaction regarding the objects and genuineness of activities of the trust/institution. Section 12AA(3) empowers cancellation where activities are not genuine or not carried out in accordance with objects. The statutory language differentiates between consideration of objects and the on-ground conduct of activities. Precedent Treatment: The Madras High Court (coordinate bench) decision was relied upon for the proposition that grant under section 12AA(1)(b) involves satisfaction about both objects and genuineness of activities, while cancellation under section 12AA(3) concentrates on genuineness and conformity of activities. The Supreme Court's exposition in Surat Art Silk was relied on to clarify that 'advancement' connotes activity directed to an object and that restrictive clauses operate with reference to the activity of advancement. Interpretation and reasoning: The Court observed the distinction drawn by precedent: while the objects may be formally charitable, the genuineness and character of activities remain relevant to registration. The Tribunal's emphasis on admitted charitable objects and the absence of specific allegations about non-genuine activities was noted; conversely, the Commissioner's reliance on operational evidence of diversion (survey/search, impounded books, treatment of receipts) demonstrates a factual basis for refusing registration. The Court identified the competing approaches: one treating pre-assessment operational material as properly bearing on the Commissioner's satisfaction at the registration stage; the other treating substantive findings of diversion and taxability as matters more appropriately addressed in assessment proceedings after registration. Ratio v. Obiter: The Court did not resolve whether the Commissioner must or must not consider the particular class of pre-assessment operations when forming satisfaction under section 12AA(1)(b). The observations about statutory distinction and precedent constitute guiding analysis but are not adjudicative ratio in the absence of final decision. Conclusion: The Court directed admission of the appeal on the formulated question and listed the matter for hearing on the papers, indicating that the precise standard and scope of the Commissioner's satisfaction under section 12AA(1)(b) - particularly vis-à-vis material from sections 133A/132 operations and alleged breaches of section 13(1)(c) - require determination on the merits. Cross-references and procedural outcome The Triangle of Authorities: The Court referred to (a) the Supreme Court's interpretative exposition that 'advancement' denotes activity relevant to charitable purpose, and (b) the coordinate High Court view distinguishing parameters for grant and cancellation. These authorities are engaged as interpretive guides; the present appeal has been admitted to reconcile application of those principles to factual material from survey/search and alleged section 13(1)(c) violations. Procedural conclusion: The appeal was admitted on the identified question of law and listed for hearing on the papers; no final adjudication on the merits of registration refusal was pronounced in the present order.