2024 (1) TMI 491 - AT - Income Tax

PCIT lacks jurisdiction to cancel Section 12AA registration, only CIT(E) has authority under Section 12AB(4)

ITAT Delhi quashed PCIT Gurgaon's order cancelling assessee's registration under Section 12AA. The tribunal held PCIT Gurgaon lacked jurisdiction to ... Jurisdiction of PCIT (Central), Gurgaon cancelling registration granted to the assessee u/s. 12AA - assumption of jurisdiction for cancellation of registration u/s. 12AB(4) by virtue of transfer of jurisdiction order u/s. 127 - HELD THAT:- In any case the ‘reference’ by jurisdictional AO was to be made not to the PCIT or Commissioner, to whom this AO was subordinate but one authorised by board for the purpose of Section 12AB. The one who could grant or cancel the registration as per amended provisions which is not PCIT, Gurgaon, but, would be CIT(E), Chandigarh. Thus assumption of jurisdiction for cancellation of registration u/s. 12AB(4) of the Act by virtue of aforesaid transfer of jurisdiction order u/s. 127 of the Act is not conceivable. We observe that reference in section 12AB is not to PCIT or Commissioner to whom the said Assessing Officer would be subordinate, but, the CIT(E) who has been given special power for grant and cancellation of the registration as original jurisdiction. In this case, the exercise of power u/s. 12AB(4) of the Act seems to also not have been done in accordance with law. As what comes up further is that, if at all, PCIT, Gurgaon was acting under clause (a) to Section 12AB(4), then, before issuing the notice dated 08.09.2022, itself the ld. PCIT, Gurgaon should have first formed his opinion that the assessee had committed one or more of a ‘specified violation'. However, as we go through the relevant part of the impugned order we find that the ld.PCIT has not mentioned as to which amongst the various specified violations mentioned in Explanation attached to subsection (4) of section 12AB were attracted so as to show cause the assessee under sub-section (4) of section 12AB of the Act and ask for information by notice dated notice dated 08.09.2022. Thus, if it was the case of the PCIT (Central), Gurgaon that he was exercising the powers u/s. 12AB(4)(a) on his own cognizance of the ‘specified violation’, then, at first instance as he was not competent authority u/s. 12AB(1) to pass an order of registration of the Trust, then, he had no powers u/s. 12AB(4) to call for to show cause an order of cancellation. In any case, the manner of exercise of jurisdiction without first making conclusive notice of the alleged ‘specified violation’ is not sustainable. Thus we are of the considered view that the impugned order has been passed by Ld. PCIT, Gurgaon, without jurisdiction in context to territorial powers and subject matter as well not in accordance with law and same is liable to be quashed. Accordingly, the additional ground raised by the assessee is allowed. The core legal issues considered in this judgment are:1. Whether the cancellation of registration granted under section 12AA of the Income Tax Act, 1961 (the Act) by the Principal Commissioner of Income Tax (Central), Gurgaon (PCIT) under section 12AB(4) of the Act, with retrospective effect from 01.04.2014, is valid and lawful.2. Whether the PCIT (Central), Gurgaon had jurisdiction-territorial and subject matter-to pass the cancellation order under section 12AB(4), given that the registration was originally granted by the Commissioner of Income Tax (Exemptions), Chandigarh (CIT(E), Chandigarh).3. Whether the transfer of the case under section 127 of the Act to the PCIT (Central), Gurgaon included the power to cancel registration under section 12AB(4), or was limited only to assessment proceedings.4. Whether the retrospective cancellation of registration under section 12AB(4) is permissible under the Act.5. Whether the procedural requirements and legal framework for cancellation under section 12AB(4) were properly followed, including the issuance of show cause notices and identification of specified violations.Issue-wise Detailed Analysis1. Validity and Lawfulness of Cancellation of Registration under Section 12AB(4) with Retrospective EffectThe legal framework governing registration and cancellation of charitable trusts under the Income Tax Act involves section 12AA (registration), which was substituted by section 12AB from 01.04.2021. Section 12AB(4) provides the procedure for cancellation of registration if the Principal Commissioner or Commissioner is satisfied that specified violations have occurred.The PCIT (Central), Gurgaon cancelled the registration granted under section 12AA with retrospective effect from 01.04.2014, relying on section 12AB(4) which came into effect from 01.04.2021.The assessee contended that retrospective cancellation is impermissible, relying on the settled principle that presumption is against retrospectivity and that the concept of 'specified violation' under section 12AB(4) is applicable only from 01.04.2022 as per the Finance Act, 2022 and CBDT Circular No. 23/2022. Therefore, cancellation with effect from 2014 was ultra vires and contrary to legislative intent.The PCIT (Central), Gurgaon argued that section 12AB(4) empowers cancellation of registration granted under section 12AA prior to 01.04.2021 and that cancellation and registration are distinct proceedings. The PCIT relied on the wording of section 12AB(4) which allows cancellation for any previous year where specified violations are noticed.The Tribunal observed that the cancellation of registration and grant of registration are separate processes and that section 12AB(4) contemplates cancellation of registrations granted under section 12AA before 01.04.2021. However, the Tribunal did not decide on the substantive merits of retrospective cancellation because the jurisdictional issue was dispositive.2. Jurisdiction of PCIT (Central), Gurgaon to Cancel Registration under Section 12AB(4)The key legal question was whether PCIT (Central), Gurgaon had the territorial and subject matter jurisdiction to cancel registration originally granted by CIT(E), Chandigarh.The assessee relied on CBDT Notification No. 52/2014 dated 22.10.2014, which vested jurisdiction over exemption matters including registration and cancellation under sections 10, 11, 12, 13A, and 13B of the Act with the Commissioner of Income Tax (Exemptions) for specified territorial areas. The assessee's trust fell under the jurisdiction of CIT(E), Chandigarh.The Revenue relied on the order under section 127 of the Act dated 26.10.2020, which transferred the case of the assessee from Circle-2(E), Chandigarh to DCIT, Central Circle-2, Faridabad for coordinated post-search investigation and assessment proceedings. The Revenue argued that the Explanation to section 127 defines 'case' broadly to include all proceedings under the Act, and thus the PCIT (Central), Gurgaon had jurisdiction to proceed under section 12AB(4).The Tribunal carefully examined section 127 of the Act, which empowers transfer of cases among Assessing Officers subordinate to the same or different Principal Commissioners or Commissioners, subject to agreement between them. The Tribunal noted that PCIT (Central), Gurgaon is not an Assessing Officer and that the order dated 26.10.2020 transferred only the assessment jurisdiction, not the jurisdiction relating to registration or cancellation under section 12AB(4).Further, the Tribunal held that the Notification dated 22.10.2014 vested powers to grant and cancel registrations exclusively with CIT(E), Chandigarh and did not authorize transfer of such powers to PCIT (Central), Gurgaon. The transfer under section 127(2)(a) requires agreement between Commissioners of equal rank, which was not established.Relying on judicial precedents, including decisions of coordinate benches and the Supreme Court, the Tribunal held that the absence of a positive agreement between jurisdictional Commissioners renders the transfer invalid. The transfer order under section 127 was for assessment purposes only and did not confer jurisdiction on PCIT (Central), Gurgaon to cancel registration.Accordingly, the Tribunal concluded that PCIT (Central), Gurgaon had no jurisdiction to pass the cancellation order under section 12AB(4), making the impugned order liable to be quashed.3. Transfer of Case under Section 127 and Its ScopeThe assessee argued that the transfer order under section 127 dated 26.10.2020 was limited to assessment proceedings post search and seizure and did not include proceedings for cancellation of registration under section 12AB(4).The Revenue contended that the Explanation to section 127 defines 'case' broadly to include all proceedings under the Act, pending or completed, and those commenced thereafter, thus including cancellation proceedings.The Tribunal analyzed the legislative provisions and the scope of section 127. It emphasized that section 127 permits transfer of cases between Assessing Officers, not Commissioners, and that the cancellation of registration is a function vested with the Commissioner of Income Tax (Exemptions) under the Notification dated 22.10.2014.The Tribunal found that the transfer under section 127(2)(a) was specifically for assessment purposes and did not extend to the power to cancel registration, which is a distinct jurisdiction. The transfer order did not mention transfer of jurisdiction for cancellation proceedings, nor was there any agreement between Commissioners to that effect.Therefore, the Tribunal held that the transfer of jurisdiction under section 127 did not empower PCIT (Central), Gurgaon to cancel registration under section 12AB(4).4. Retrospective Effect of Cancellation under Section 12AB(4)The assessee contended that cancellation under section 12AB(4) cannot be retrospective, especially since the concept of 'specified violation' and cancellation under section 12AB(4) was introduced by the Finance Act, 2022, effective from 01.04.2022, and supported by CBDT Circular No. 23/2022 which clarified the applicability from FY 2022-23 onwards.The PCIT (Central), Gurgaon argued that section 12AB(4) empowers cancellation of registration granted under section 12AA prior to 01.04.2021 and that cancellation and registration are separate proceedings, allowing retrospective cancellation.The Tribunal noted that the issue of retrospective cancellation is significant but did not decide on this point in detail, as the jurisdictional issue was dispositive. The Tribunal observed that cancellation is a draconian and punitive action and must be strictly construed, implying that retrospective cancellation requires clear legislative mandate.5. Procedural Compliance and Identification of Specified ViolationsThe PCIT (Central), Gurgaon initiated cancellation proceedings under clause (a) of section 12AB(4) based on 'noticing' specified violations relating to diversion of funds and non-application of income for the objects of the trust.The assessee argued that the PCIT did not specify which of the 'specified violations' under the Explanation to section 12AB(4) were noticed before issuing the notice dated 08.09.2022 calling for information, thus violating procedural fairness and statutory requirements.The Tribunal observed that the PCIT's impugned order merely stated that 'it was noticed that the assessee trust has committed one or more specified violation' but did not identify the specific violations at the stage of calling for information. The show cause notice dated 14.03.2023 mentioned the alleged violation of applying income other than for the objects of the trust.The Tribunal held that when exercising powers under clause (a) of section 12AB(4), the authority must first form an opinion that one or more specified violations have occurred before issuing a notice for information. The failure to specify the violations at the outset renders the procedure unsustainable.6. Additional Grounds and Judicial PrecedentsThe assessee relied on coordinate bench decisions holding that cancellation of registration under section 12AB(4) is the prerogative of the CIT(E) having territorial jurisdiction and cannot be transferred or exercised by PCIT without proper authorization.The Tribunal also referred to the Supreme Court's decision emphasizing that absence of positive agreement between Commissioners under section 127(2)(a) invalidates transfer of cases.The Tribunal relied on a detailed decision of the Jaipur Bench in Wholesale Cloth Merchant Association's case, which held that transfer under section 127 is limited to assessment proceedings and does not confer jurisdiction to cancel registration under section 12AA/12AB.ConclusionsThe Tribunal concluded that:- The order of transfer under section 127 dated 26.10.2020 transferred only assessment jurisdiction and did not transfer powers relating to registration or cancellation under section 12AB(4).- The PCIT (Central), Gurgaon is not an Assessing Officer and lacked jurisdiction to cancel registration granted by CIT(E), Chandigarh.- The Notification dated 22.10.2014 vested jurisdiction over exemption matters, including registration and cancellation, with CIT(E), Chandigarh, and did not authorize transfer of such jurisdiction to PCIT (Central), Gurgaon.- The absence of a positive agreement between the Commissioners as required under section 127(2)(a) renders the transfer order invalid for cancellation proceedings.- The cancellation order passed by PCIT (Central), Gurgaon under section 12AB(4) is without jurisdiction and liable to be quashed.- The procedural requirements under section 12AB(4) were not properly followed, as the PCIT did not specify the particular specified violations before issuing the notice for information.Accordingly, the Tribunal allowed the additional ground raised by the assessee challenging jurisdiction and quashed the impugned cancellation order. Other grounds raised by the assessee were left open as academic.Significant Holdings'The order passed by Ld. PCIT, Gurgaon without jurisdiction in context to territorial powers and subject matter as well not in accordance with law and same is liable to be quashed.''The transfer of jurisdiction under section 127 was only for assessment purposes and did not confer jurisdiction on PCIT (Central), Gurgaon to cancel registration under section 12AB(4).''The Notification dated 22.10.2014 vested powers to CIT(E), Chandigarh for grant and cancellation of registration and did not authorize transfer of such powers to any other authority.''Absence of a positive agreement between jurisdictional Commissioners under section 127(2)(a) invalidates the transfer of cases.''When exercising powers under clause (a) of section 12AB(4), the authority must first form an opinion of specified violation before issuing notice for information.'