2025 (5) TMI 328 - AT - Income Tax

Tax Exemption Claim Invalidated Due to Procedural Flaws, Assessee Denied Fair Hearing Under Sections 80G and 12AA

Tribunal in tax exemption case remanded matter to CIT (Exemptions) after finding procedural irregularities. The HC held that the assessee was denied ... Denial of registration u/s 80G and 12AA on account of non-compliance by the assessee - HELD THAT:- As in the interest of justice, it was considered imperative that the assessee may be granted another opportunity to file its submission in response to the notice issued by the Ld. CIT (Exemption) for justifying the genuineness of the activities and claim of exemption. Hence, both the orders of the CIT (Exemption) are set aside and the matter is remanded to him for deciding the application afresh after granting an opportunity of being heard to the assessee and seeking the reply from the assessee in respect of the queries raised and in accordance with law. Appeals filed by the assessee are allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in these appeals relate to the denial of registration and exemption under two specific provisions of the Income Tax Act, 1961: Section 80G(5) and Section 12AA(1)(ac)(iii). The issues are:Whether the assessee was provided adequate opportunity by the Commissioner of Income Tax (Exemption) to submit necessary documents and justify eligibility for registration under Section 80G(5) and Section 12AA(1)(ac)(iii).Whether the assessee's inability to procure legal assistance within the stipulated timeframe impacted its capacity to comply with procedural requirements for registration.Whether the assessee has complied with all statutory and procedural requirements under Sections 80G(5) and 12AA(1)(ac)(iii) to establish its eligibility for registration and exemption.Whether the social and charitable activities conducted by the assessee satisfy the conditions prescribed under the relevant sections of the Income Tax Act.Whether the denial of registration and exemption without allowing an opportunity for a personal hearing and submission of supporting documents was justified.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Adequacy of Opportunity Provided by the CIT (Exemptions) for Submission of DocumentsLegal Framework and Precedents: The principles of natural justice and procedural fairness require that an assessee be given a reasonable opportunity to present its case and submit relevant documents before adverse orders are passed. Registration under Sections 80G and 12AA is contingent upon satisfying prescribed criteria and procedural compliance, which includes submission of requisite documentation. Precedents emphasize that denial of opportunity to be heard vitiates the order.Court's Interpretation and Reasoning: The Tribunal noted the assessee's submission that the timeframe prescribed by the Ld. CIT (Exemption) was insufficient to gather and file all necessary documents. The assessee contended that this procedural constraint prevented it from adequately demonstrating eligibility. The Tribunal recognized the importance of affording a fair opportunity to the assessee to substantiate its claim.Key Evidence and Findings: The assessee's grounds highlighted procedural limitations and the absence of adequate time to obtain necessary documentation. The Tribunal observed that the Ld. CIT (Exemption) had denied registration on grounds of non-compliance without allowing a further opportunity to respond to queries.Application of Law to Facts: Given the procedural nature of the requirements and the assessee's assertion of readiness to submit all documents, the Tribunal found that the denial of opportunity was contrary to the principles of natural justice.Treatment of Competing Arguments: The Department maintained that non-compliance justified denial. However, the Tribunal balanced this against the assessee's right to be heard and found merit in the claim of inadequate opportunity.Conclusion: The Tribunal held that the assessee was entitled to an opportunity to file submissions and documents before the CIT (Exemption) passed final orders on registration.Issue 2: Impact of Lack of Legal Assistance and Guidance on ComplianceLegal Framework and Precedents: While the law does not mandate legal representation, the availability of professional assistance can be critical for compliance with complex procedural requirements. Courts have acknowledged that difficulties in obtaining legal aid may affect an assessee's ability to comply within strict timelines.Court's Interpretation and Reasoning: The Tribunal noted the assessee's explanation regarding challenges in procuring suitable legal consultancy within the stipulated period, which impeded timely submission of documents. The Tribunal considered this factor relevant in assessing the fairness of the process.Key Evidence and Findings: The assessee's affidavit and submissions indicated diligent efforts to secure legal assistance but constraints due to time limitations.Application of Law to Facts: The Tribunal found that procedural fairness requires consideration of such practical difficulties and that rigid enforcement of deadlines without accommodating such challenges may be unjust.Treatment of Competing Arguments: The Department did not dispute the factual difficulty but emphasized compliance requirements. The Tribunal balanced this against the need for fairness and procedural justice.Conclusion: The Tribunal accepted that lack of legal assistance within the limited timeframe was a factor warranting a fresh opportunity for the assessee.Issue 3: Compliance with Statutory and Procedural Requirements under Sections 80G(5) and 12AA(1)(ac)(iii)Legal Framework and Precedents: Registration under Section 80G(5) requires the entity to be engaged in charitable activities and comply with prescribed documentation and procedural conditions. Similarly, Section 12AA registration mandates that the entity's objects and activities align with charitable purposes as defined under the Act. Precedents require the assessing authority to verify genuineness of activities and compliance before granting or denying registration.Court's Interpretation and Reasoning: The assessee asserted that all necessary documents are now available and demonstrate compliance with the statutory criteria. The Tribunal noted that the Ld. CIT (Exemption) had denied registration solely on non-compliance grounds without examining the merits of the documents or the genuineness of activities.Key Evidence and Findings: The Tribunal relied on the assessee's submission of continuous engagement in social and charitable activities aligned with the objectives stated in the application for registration.Application of Law to Facts: The Tribunal emphasized that denial of registration without considering the substantive compliance and genuineness of activities would be inappropriate. The matter required fresh consideration after allowing the assessee to submit documents and respond to queries.Treatment of Competing Arguments: The Department's reliance on procedural non-compliance was outweighed by the need to examine the substantive eligibility of the assessee.Conclusion: The Tribunal directed that the CIT (Exemption) reconsider the application on merits after affording the assessee an opportunity to submit documents and justify its claim.Issue 4: Social and Charitable Work Conducted by the Assessee and Its Alignment with the ActLegal Framework and Precedents: The Income Tax Act requires that entities seeking exemption under Sections 80G and 12AA be engaged in genuine charitable activities for public benefit. The genuineness and continuity of such activities are critical factors in granting registration.Court's Interpretation and Reasoning: The assessee asserted continuous engagement in social and charitable activities consistent with its stated objectives. The Tribunal acknowledged that cancellation or denial of registration would disrupt the assessee's ability to serve the community.Key Evidence and Findings: The Tribunal noted the assurances by the assessee regarding ongoing charitable work and the alignment of such work with statutory requirements.Application of Law to Facts: The Tribunal found that the denial of registration without assessing the genuineness of activities was premature and warranted reconsideration.Treatment of Competing Arguments: The Department did not contest the nature of activities but focused on procedural lapses. The Tribunal prioritized substantive compliance.Conclusion: The Tribunal held that the assessee's charitable activities merited consideration in the registration process upon fresh examination.Issue 5: Request for Personal Hearing and Submission of Supporting DocumentsLegal Framework and Precedents: The right to be heard, including the opportunity for a personal hearing and submission of evidence, is a fundamental principle of administrative law and is applicable in tax exemption proceedings.Court's Interpretation and Reasoning: The Tribunal observed that the Ld. CIT (Exemption) had not provided the assessee an adequate opportunity for a personal hearing or to submit all relevant documents before denying registration.Key Evidence and Findings: The assessee's repeated requests for hearing and document submission were documented in the grounds of appeal.Application of Law to Facts: The Tribunal emphasized that procedural fairness necessitates granting such an opportunity before adverse orders are issued.Treatment of Competing Arguments: The Department's position on procedural non-compliance was insufficient to justify denial without hearing.Conclusion: The Tribunal directed that the assessee be granted a personal hearing and allowed to submit supporting documents during reconsideration.3. SIGNIFICANT HOLDINGSThe Tribunal set aside the orders of the Ld. CIT (Exemption) denying registration under Sections 80G(5) and 12AA(1)(ac)(iii) and remanded the matters for fresh consideration. It held:'In the interest of justice, it is considered imperative that the assessee may be granted another opportunity to file its submission in response to the notice issued by the Ld. CIT (Exemption) for justifying the genuineness of the activities and claim of exemption.'The Tribunal established the core principle that denial of registration on procedural grounds without affording an adequate opportunity to be heard and submit documents contravenes the principles of natural justice and statutory requirements.It further held that the genuineness of the assessee's social and charitable activities and compliance with the statutory criteria must be examined afresh after providing the assessee an opportunity for personal hearing and submission of all relevant documents.Finally, the appeals were allowed for statistical purposes, underscoring that the matter requires reconsideration in accordance with law and procedural fairness.