Section 12AB(4) amendments apply prospectively from April 2022, cannot cancel approvals for earlier violations
ITAT Indore held that amendments to section 12AB(4) through Finance Act, 2022 are prospectively applicable from 01.04.2022 and cannot be applied retrospectively for violations committed before this date. The assessee's search was conducted on 02.02.2023 for violations occurring prior to 01.04.2022. Following established precedents, the tribunal quashed PCIT(Central)'s order cancelling approval under section 10(23C)(vi) and restored the assessee's approval. The tribunal noted that decisions regarding cancellation of registration under sections 12A/12AA apply equally to approval cancellations under section 10(23C)(vi) as the core legal issue remains identical.
The core legal questions considered in this appeal primarily revolve around three broad issues: (i) the validity of the impugned order cancelling the approval granted under section 10(23C)(vi) of the Income-tax Act, 1961, particularly with respect to the retrospective application of the amended provisions introduced by the Finance Act, 2022; (ii) the jurisdictional competence of the Principal Commissioner of Income-tax (Central), Bhopal ("PCIT(Central)") to pass the impugned cancellation order, given the statutory framework and notifications governing jurisdiction; and (iii) the impact and relevance of the alleged violations on the assessment and cancellation proceedings.
Issue-wise Detailed Analysis
Issue (i): Validity of the Impugned Order - Retrospective Application of the 15th Proviso to Section 10(23C)
The assessee challenged the cancellation order on the ground that the 15th proviso to section 10(23C), as amended by the Finance Act, 2022 with effect from 01.04.2022, introduces the concept of "specified violations" and the power to cancel approval based on such violations. The assessee contended that these amended provisions are prospective in nature and cannot be applied retrospectively to alleged violations occurring prior to 01.04.2022.
The legal framework involves a comparison between the pre-amended and post-amended provisions of the 15th proviso to section 10(23C). Prior to 01.04.2022, the proviso allowed cancellation of approval on broader grounds such as non-application of income in accordance with objects, non-genuine activities, or non-compliance with other laws. The amendment introduced a more structured regime, defining "specified violations" (including misapplication of income, business income not incidental to objectives, non-genuine activities, and non-compliance with other laws) and empowering the Principal Commissioner or Commissioner to cancel approval after due inquiry.
Additionally, the Finance Act, 2022 introduced the second proviso to section 143(3), empowering the Assessing Officer (AO) to make a reference to the PCIT/CIT for cancellation of approval in cases of specified violations.
The Court examined the impugned order, which was passed by PCIT(Central) relying on a reference from the AO under the second proviso to section 143(3) and invoked the 15th proviso to section 10(23C) for cancellation. The PCIT(Central) found specified violations including diversion of funds to promoter families, excessive salary payments, payment of rent to a partnership firm owned by promoter families, and use of society funds for private benefits.
The assessee relied on several judicial precedents from ITAT Benches (Bangalore, Jaipur, and Delhi) which held that the amendments introduced by the Finance Act, 2022 are prospective and cannot be applied retrospectively to violations occurring before 01.04.2022. These decisions emphasized the settled principle that penal provisions, such as cancellation of registration or approval, must be applied prospectively unless explicitly stated otherwise. The principle was supported by Supreme Court decisions affirming that the law applicable is that in force in the relevant assessment year.
The Court noted that the impugned cancellation order was applied retrospectively to assessment years prior to 2022-23, which is contrary to the legal position established by the cited precedents. The Court observed that the PCIT(Central) had rejected the assessee's claim on this ground but the reasoning was contrary to the binding precedents. Accordingly, the Court held that the impugned order is invalid to the extent it applies the amended provisions retrospectively and quashed the cancellation order, restoring the approval held by the assessee.
Issue (ii): Jurisdiction of PCIT(Central) to Pass the Impugned Order
The assessee contended that the PCIT(Central), Bhopal, lacked jurisdiction to cancel the approval under section 10(23C)(vi) because the approval was originally granted by the Commissioner of Income-tax (Exemption), Bhopal ("CIT(E)"), who is the prescribed authority for persons located in Madhya Pradesh and Chhattisgarh, as per Notification Nos. 52/2014 and 53/2014 dated 22.10.2014 issued by the CBDT under section 120 of the Act.
The assessee argued that the transfer of the case from DCIT(Exemption) to DCIT(Central) under section 127(2) was only for the limited purpose of coordinated assessment following search proceedings, and did not transfer jurisdiction relating to cancellation of approval. Further, the transfer of cases under section 127 is from one Assessing Officer to another and does not extend to transfer of jurisdiction from CIT(E) to PCIT(Central), as CITs are not Assessing Officers. The assessee relied on several ITAT decisions (including ITAT Indore in Devi Shakuntala Thakaral Charitable Foundation and Oriental University cases, ITAT Jaipur in Wholesale Cloth Merchant Association, and ITAT Delhi in Lakhmi Chand Charitable Society) which held that PCIT(Central) does not have jurisdiction over exemption cases originally under CIT(E), and that cancellation of registration or approval can only be done by the prescribed authority who granted it.
The Court analyzed the statutory provisions, CBDT notifications, and judicial precedents. It noted that Notification No. 70/2014 dated 13.11.2014, relied upon by the revenue and PCIT(Central), is a general notification empowering PCIT(Central) to exercise powers over cases assigned to subordinate Assessing Officers under section 127. However, Notification Nos. 52/2014 and 53/2014 are specific notifications conferring jurisdiction to CIT(E) over exemption cases in Madhya Pradesh and Chhattisgarh. The Court observed that specific notifications prevail over general ones.
The Court further examined the letter dated 19.01.2024 issued by the CBDT, which was relied upon by PCIT(Central) to justify jurisdiction. The Court observed that this letter is an internal communication without statutory force and cannot override statutory notifications or judicial precedents. The letter was issued to clarify departmental stand in ongoing litigation and does not confer jurisdiction where none exists by law.
The Court also considered the procedural requirements under section 127 regarding transfer of cases and noted that transfer of jurisdiction from one Commissioner to another requires agreement between Commissioners of equal rank, which was not demonstrated. The Court highlighted that the transfer order was for coordinated assessment only and did not confer jurisdiction for cancellation proceedings.
Given the conflicting judicial precedents and the pendency of departmental appeal before the Madhya Pradesh High Court on this issue, the Court declined to decide the jurisdictional issue finally. It directed the Assessing Officer to take up the matter after the High Court's decision and kept the issue open. However, the Court expressed its view in favor of the assessee based on existing precedents.
Issue (iii): Impact of Alleged Violations on Assessment and Cancellation Proceedings
The assessee contended that the alleged violations relied upon by PCIT(Central) for cancellation, such as excessive rent payments and salary payments to promoter family members, had already been adjudicated in earlier assessment proceedings and appeals. The ITAT had previously quashed the cancellation of approval on these grounds and directed fresh consideration. The CIT(A) had deleted additions relating to excessive rent payments, and no further appeals were filed by the revenue.
The assessee submitted that the violations, if any, are relevant only for assessment purposes and not for cancellation of approval under section 10(23C)(vi). The Court agreed with the assessee's submission and refrained from adjudicating on the merits of the alleged violations in the present appeal, noting that such issues are better dealt with in assessment proceedings.
Significant Holdings
On the retrospective application of the amended 15th proviso to section 10(23C), the Court held: "the amendments introduced by the Finance Act, 2022 w.e.f. 01.04.2022 are prospective in nature and cannot be applied retrospectively to alleged violations committed before that date. Cancellation of approval under the amended proviso for prior years is invalid." This principle aligns with settled judicial precedents emphasizing that penal provisions must be applied prospectively unless expressly provided otherwise.
Regarding jurisdiction, the Court noted the primacy of specific CBDT notifications over general ones and the necessity of statutory authority for cancellation proceedings. It observed: "the jurisdiction to cancel approval under section 10(23C)(vi) vests exclusively in the prescribed authority who granted the approval, namely the Commissioner of Income-tax (Exemption) for persons located in Madhya Pradesh and Chhattisgarh, as per Notification Nos. 52/2014 and 53/2014 dated 22.10.2014." The Court further observed that transfer of cases under section 127 is limited to Assessing Officers and does not extend to transfer of jurisdiction between Commissioners without requisite agreement.
On the impact of alleged violations, the Court held that such matters are primarily relevant for assessment proceedings and do not constitute grounds for cancellation of approval under section 10(23C)(vi), especially where they have been adjudicated or are subject to appeal.
In conclusion, the Court quashed the impugned order cancelling the approval under section 10(23C)(vi) on the ground of retrospective application of the amended proviso and restored the approval held by the assessee. The jurisdictional issue was kept open for decision post the High Court's ruling. The Court refrained from adjudicating on the merits of alleged violations in the cancellation proceedings, leaving them to assessment proceedings.
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