2021 (10) TMI 1466 - AT - Income Tax

ITAT Mumbai allows section 11 exemption after registration cancellation under section 12AA(3) set aside

ACIT, CC-2 (1) Mumbai Versus M/s. Lilavati Kirtilal Mehta Medical Trust

ITAT Mumbai held that denial of exemption under section 11 was unjustified when based solely on cancelled registration under section 12AA(3). The AO ... Denial of exemption u/s. 11 - AO has denied the exemption only because the CIT(Central)-1, Mumbai had cancelled the registration granted to assessee u/s. 12AA(3) - HELD THAT:- As decided AO has not brought out any other single fact regarding violation of provisions of section 11 or section 13 in the assessment order. The only and sole reason for denial of exemption u/s. 11 was that registration u/s 12AA was denied by CIT(Central)-1,. However, since the order of CIT(C)-1, Mumbai u/s. 12AA(3) stands set aside and registration originally granted under section 12AA stands restored the reason for denial of exemption under section 11 by the Assessing Officer ceases to exists - Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in these appeals are:- Whether the cancellation of registration of the trust under section 12AA(3) of the Income Tax Act, 1961, by the Principal Commissioner of Income Tax (CIT-Central) was justified, particularly in light of alleged violations of sections 11 and 13 of the Act.- Whether the trust is entitled to exemption under section 11 of the Income Tax Act for the assessment years 2013-14, 2014-15, and 2016-17, given the cancellation or restoration of its registration under section 12AA.- The legal effect of the ITAT's prior orders restoring the trust's registration and setting aside the cancellation orders, and whether those orders bind the current proceedings.- The extent to which the Assessing Officer (AO) must establish specific violations of sections 11 and 13 to deny exemption under section 11, notwithstanding the status of registration under section 12AA.- Whether the Revenue's appeals should be entertained given that the ITAT's orders in the trust's own case have been appealed before the Hon'ble High Court but not stayed or set aside.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of Cancellation of Registration under Section 12AA(3)Relevant legal framework and precedents: Section 12AA(3) of the Income Tax Act empowers the Principal Commissioner or Commissioner to cancel the registration of a trust if it is found that the activities of the trust are not genuine or are not being carried out in accordance with the objects of the trust. The registration under section 12AA is a prerequisite for claiming exemption under section 11. However, cancellation must be based on cogent reasons, including violations of sections 11 and 13, which govern the application of income and prohibit certain transactions with specified persons.Precedents relied upon by the Tribunal include the ITAT order in ITA No. 2827/Mum/2014 dated 12.06.2019 in the trust's own case, wherein the ITAT set aside the cancellation order and restored registration with effect from AY 2001-02.Court's interpretation and reasoning: The Tribunal noted that the cancellation by the CIT-Central was primarily on the ground of alleged violations of sections 11 and 13. However, the AO and CIT(A) failed to point out any specific instances of such violations in the assessment orders or during appellate proceedings. The ITAT emphasized that cancellation of registration cannot be sustained merely on the basis of presumptive or general allegations without concrete evidence of violations.Key evidence and findings: The AO's assessment orders for AYs 2013-14, 2014-15, and 2016-17 did not contain any specific findings of violation of sections 11 or 13. The CIT(A) also confirmed that no such specific facts were brought on record. The ITAT relied heavily on the prior ITAT order restoring registration, which had not been set aside by the High Court at the time of the present appeals.Application of law to facts: Since the cancellation was based solely on alleged violations of sections 11 and 13, and no such violations were established, the cancellation order was held to be unsustainable. The restoration of registration under section 12AA by the ITAT was binding on the AO and CIT(A) for the relevant assessment years.Treatment of competing arguments: The Revenue contended that the cancellation was justified and challenged the ITAT's order before the High Court. However, the Tribunal observed that the High Court had not stayed or reversed the ITAT's order at the time, and therefore the ITAT's decision must be followed. The Departmental Representative conceded that the issue was covered by the ITAT's earlier order.Conclusions: The cancellation of registration under section 12AA(3) was not justified due to lack of specific violations of sections 11 and 13. The trust's registration was restored, entitling it to claim exemption under section 11, subject to fulfillment of other conditions.Issue 2: Entitlement to Exemption under Section 11 for the Assessment Years 2013-14, 2014-15, and 2016-17Relevant legal framework and precedents: Section 11 provides exemption of income of charitable or religious trusts if income is applied or accumulated for charitable purposes. Section 12AA registration is a prerequisite but not conclusive for exemption; each year's activities and compliance with sections 11 and 13 must be examined. The ITAT's earlier order in the trust's own case restored registration and thus prima facie entitlement to exemption.Court's interpretation and reasoning: The AO denied exemption solely on the ground that registration was cancelled. No other factual or legal grounds were cited regarding violation of sections 11 or 13. The CIT(A) and ITAT held that once registration was restored, the basis for denial of exemption ceased to exist. The Tribunal underscored that exemption under section 11 must be considered on merits for each year, but in absence of any adverse findings, exemption must be allowed.Key evidence and findings: The trust had filed returns claiming exemption under section 11, including a large exemption claim of over Rs. 369 crores for AY 2016-17. The AO's assessment order added this entire amount as business income without pointing to any violation of the relevant provisions. The CIT(A) and ITAT found no material to deny exemption.Application of law to facts: The denial of exemption was directly linked to cancellation of registration. Since registration was restored and no other violations were found, exemption under section 11 was rightly allowed by the CIT(A) and upheld by the ITAT.Treatment of competing arguments: The Revenue's appeal was based on challenging the ITAT's restoration order pending before the High Court. The Tribunal held that until the High Court sets aside the ITAT order, the same must be followed. The Departmental Representative conceded that the issue was covered by the ITAT's earlier decision.Conclusions: The trust is entitled to exemption under section 11 for the relevant assessment years, as the registration under section 12AA is valid and no violations of sections 11 or 13 were established.Issue 3: Effect of Pending Appeal Before the High Court Against ITAT OrdersRelevant legal framework: The principle of finality and binding effect of ITAT orders unless stayed or reversed by a higher court applies. Pending appeals before the High Court do not automatically suspend the operation of ITAT orders.Court's interpretation and reasoning: The Tribunal noted that the Revenue had filed appeals against the ITAT orders restoring registration before the High Court but that the High Court had not set aside or stayed those orders. Therefore, the ITAT's decisions remain binding for the purposes of the present appeals.Application of law to facts: Since the High Court had not intervened to reverse or stay the ITAT's order, the Tribunal was bound to follow the ITAT's earlier restoration of registration and consequent entitlement to exemption under section 11.Conclusions: The pending appeal before the High Court does not affect the binding nature of the ITAT's order. The Revenue's appeals were dismissed accordingly.3. SIGNIFICANT HOLDINGS'Once the assessee is registered u/s 12A of the Act, 1961, then it is entitled for exemption u/s 11 of the I.T.Act, 1961, but entitlement of exemption u/s 11 should be examined for each assessment year in light of activities of the assessee and provisions of section 11 and 13 of the Act, 1961, irrespective of the fact that the trust is registered u/s 12A of the I.T.Act, 1961.''The main reason for cancellation of registration u/s 12A of the I.T.Act, 1961 as per CIT-Central is violations of provisions of section 11 and 13 of I.T.Act, 1961. In our considered view, entitlement of exemption should be considered in light of violation referred to under section 11 and 13 of the I.T.Act, 1961.''Since order of CIT u/s 12AA(3), stands set aside and registration originally granted u/s 12AA on 22.01.2019 stands restored vide ITAT order dated 12.06.2019, and no fact of violation of section 11 or 13 has been specifically pointed out by AO in the assessment order, the raison d'etre of denial of exemption u/s. 11 by AO for both the assessment years ceases to exist.''The AO has denied the exemption only because the CIT(Central)-1, Mumbai had cancelled the registration granted to assessee vide his order dated 28.03.2014 u/s. 12AA(3). AO has not brought out any other single fact regarding violation of provisions of section 11 or section 13 in the assessment order.''Since it is not the case that Hon'ble Bombay High Court has set aside the order of ITAT, respectfully following the precedents we uphold the order of learned CIT(A).'Core principles established include:- Cancellation of registration under section 12AA(3) must be based on specific violations of sections 11 and 13, and cannot be sustained on mere presumptions or general allegations.- Restoration of registration by the ITAT is binding unless set aside or stayed by the High Court.- Entitlement to exemption under section 11 depends on compliance with sections 11 and 13 and must be examined year-wise on facts and activities of the trust.- Denial of exemption solely on the basis of cancellation of registration, without specific findings of violations, is unsustainable.- Pending appeals before the High Court do not affect the binding nature of ITAT orders unless specifically stayed or reversed.Final determinations:The Revenue's appeals for AYs 2013-14, 2014-15, and 2016-17 were dismissed. The trust's registration under section 12AA was restored, and the exemption under section 11 was allowed for the relevant years due to absence of any specific violation of sections 11 or 13. The ITAT's earlier orders were upheld and followed.