Trust registration cancellation overturned due to incorrect application of Finance Act 2022 provisions to AY 2021-22

The ITAT Bangalore allowed the assessee-trust's appeal against cancellation of registration under section 12AB(4). The PCIT had cancelled registration based on AO's reference citing fund diversion to trustees' personal establishments and cash transaction violations. The tribunal held that the AO's reference under second proviso to section 143(3) and invocation of "specified violations" under section 12AB(4) were legally untenable as these provisions were introduced by Finance Act 2022, effective from AY 2022-23, while the disputed assessment year was 2021-22. Additionally, the AO's satisfaction was based on borrowed satisfaction from search materials without independent inquiry or allowing the assessee to rebut presumptions under sections 132(4A) and 292C.

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The core legal questions considered in this judgment are:

i. Whether the reference made by the Assessing Officer (AO) to the Principal Commissioner of Income Tax (PCIT) under the second proviso to section 143(3) of the Income Tax Act, 1961 (the Act) for cancellation of registration under section 12AB is without jurisdiction and invalid, given the retrospective application to Assessment Year (AY) 2021-22.

ii. Whether the PCIT erred in applying the amended provisions of section 12AB(4) of the Act, introduced by the Finance Act, 2022 with effect from April 1, 2022, to the facts of AY 2021-22, thereby applying the law retrospectively.

iii. Whether the AO's satisfaction, which formed the basis for the reference to the PCIT, was arrived at without proper application of mind and independent inquiry, amounting to 'borrowed satisfaction' and thus legally unsustainable.

Regarding the first issue, the relevant legal framework is the second proviso to section 143(3) of the Act, which empowers the AO to make a reference to the PCIT for withdrawal of registration under sections 12AA/12AB. This proviso was inserted by the Finance Act, 2022, effective from April 1, 2022, and therefore applicable only from AY 2022-23 onwards. The AO's reference in this case related to AY 2021-22, prior to the insertion of this proviso.

The Court relied on authoritative precedents, notably the judgment of the Hon'ble Delhi High Court and Supreme Court in the Ericsson India Pvt Ltd case, which held that the jurisdiction of tax authorities is defined by the law in force at the time of the event or assessment year. The Court emphasized the principle that retrospective application of substantive provisions is impermissible unless expressly provided by the legislature.

Applying this principle, the Court concluded that the AO's reference under a provision not in force during AY 2021-22 was without jurisdiction and invalid. The Court further noted consistent findings of coordinate benches of the Tribunal, which held that references made under the second proviso to section 143(3) before its effective date lack legal basis and are liable to be quashed.

On the second issue, the Court examined the amended section 12AB(4) of the Act introduced by the Finance Act, 2022, which expanded the grounds for cancellation of registration to include 'specified violations' such as diversion of funds for personal benefit and non-application of funds in accordance with the trust's objectives. The pre-amendment section 12AB(4) was more general, allowing cancellation if the activities of the trust were not genuine or not in accordance with its objects.

The Court reiterated the settled legal principle that the law applicable to an assessment is the law in force during the relevant assessment year, citing landmark Supreme Court decisions including Isthmian Steamship Lines, Karimtharuvi Tea Estate Ltd., and Shree Choudhary Transport Corpn. These rulings establish that amendments to tax laws are prospective unless expressly stated otherwise.

Applying this framework, the Court found that the PCIT erred in applying the amended provisions of section 12AB(4) to AY 2021-22, when those provisions were not yet in force. The Court emphasized that retrospective cancellation of registration under the amended provisions is impermissible absent explicit legislative intent. The Court also referred to Tribunal and High Court decisions holding that cancellation orders operate prospectively from the date of the order, not retrospectively.

On the third issue, the Court analyzed the AO's satisfaction that the assessee trust committed violations warranting cancellation. The AO's reference was primarily based on materials seized during search proceedings under section 132 of the Act, which included alleged diversion of funds for personal benefit of trustees, acceptance of unaccounted cash as capitation fees, and improper loans in violation of sections 269SS and 269T.

The Court noted that while section 132(4A) and section 292C of the Act create a presumption regarding the ownership and truthfulness of seized documents, these are rebuttable presumptions. The AO, however, did not conduct an independent inquiry or verification of the seized materials' genuineness and authenticity. Instead, the AO relied solely on the search materials and statements recorded during the search without affording the assessee an opportunity to rebut the presumption.

The Court observed that the AO's satisfaction was a case of 'borrowed satisfaction', which is legally impermissible. It emphasized the principle that mere possession of incriminating material does not establish wrongdoing without corroborative evidence obtained through independent inquiry. The Court also noted that the AO issued notices under section 142(1) during assessment proceedings, indicating an opportunity for inquiry was available but seemingly not utilized effectively to verify facts.

Balancing the competing arguments, the Court found merit in the assessee's contentions that the AO's reference was invalid due to jurisdictional defects, the PCIT's application of amended provisions was erroneous, and the AO's satisfaction lacked proper foundation. The Revenue's argument that the pre-amendment and post-amendment provisions are substantively similar was rejected on the basis that the law applicable to the relevant assessment year must be applied, and the amended provisions introduced new concepts not previously existing.

The Court's conclusions were as follows:

i. The AO's reference under the second proviso to section 143(3) for AY 2021-22 was without jurisdiction and invalid, as the proviso was not in force for that year.

ii. The PCIT erred in applying the amended provisions of section 12AB(4), effective from AY 2022-23, to cancel registration retrospectively for AY 2021-22. Such retrospective application is impermissible absent express legislative intent.

iii. The AO's satisfaction was based on borrowed satisfaction without independent verification or inquiry, rendering the reference legally unsustainable.

iv. Consequently, the cancellation of the assessee's registration under section 12AB is legally unsustainable and liable to be set aside.

Significant holdings include the following verbatim excerpts of legal reasoning:

"It is the trite law that the provisions of law as applicable to the relevant year has to be applied in that year."

"The event of default defines the jurisdiction of the concerned authority, who may proceed to initiate the penalty proceedings. In the present case, since the event falls prior to the amendment, the impugned order was wholly without jurisdiction."

"In income-tax matters, the law to be applied is the law in force in the assessment year unless otherwise stated or implied."

"Without a specific mention of the amended provisions to operate retrospectively, no cancellation for the earlier years could be made."

"The AO's satisfaction appears to be a case of borrowed satisfaction, which is legally unsustainable."

The Court thus established the core principles that:

- Jurisdictional provisions must be invoked only as per their effective dates, and retrospective application is impermissible unless expressly provided.

- Cancellation of registration under section 12AB must be based on the law applicable to the relevant assessment year.

- AO's satisfaction must be based on independent inquiry and not mere reliance on seized materials; borrowed satisfaction is invalid.

- Cancellation orders have prospective effect unless otherwise legislated.

Accordingly, the Court set aside the cancellation order of the PCIT and directed restoration of the assessee's registration under section 12AB with immediate effect, allowing the appeal.

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