PCIT cannot cancel 12A registration using Section 12AA(5) for post-2021 orders or Section 12AB(4) before 2022

ITAT Delhi allowed the assessee's appeal against PCIT's order cancelling 12A registration for alleged non-genuine activities and fund diversion. The Tribunal held that show cause notices dated 05.07.2023 and 16.08.2023 were erroneous as Section 12AA(5) provisions cannot apply to orders after 01.04.2021. Similarly, invoking Section 12AB(4) for cancellation was impermissible as it wasn't applicable before 01.04.2022 for Assessment Years 2015-16 to 2021-22. The PCIT's order was found to be bad in law, whimsical, and demonstrated bias, constituting colourable exercise of power.

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The core legal questions considered in this judgment include:

1. Whether the Principal Commissioner of Income Tax (PCIT) had jurisdiction to cancel the registration granted under section 12A read with sections 12AA and 12AB of the Income Tax Act, 1961 ("the Act").

2. Whether the cancellation of registration under section 12A/12AA/12AB can be applied retrospectively to prior assessment years.

3. Whether the reference made by the Assessing Officer (AO) to the PCIT for cancellation of registration under the second proviso to section 143(3) of the Act was valid, especially considering the timing of the reference relative to the completion of assessment proceedings.

4. Whether the PCIT was the appropriate authority to exercise powers of cancellation of registration, or whether such powers vested exclusively with the Commissioner of Income Tax (Exemptions) [CIT(E)] as per relevant notifications.

5. Whether the cancellation of registration was justified on the grounds of "specified violations" under section 12AB(4), particularly violations alleged to have occurred prior to the effective date of the relevant statutory amendments.

6. The applicability and effect of procedural provisions, notifications, and circulars relating to registration, cancellation, and jurisdiction, including the impact of the Finance Act 2022 amendments and CBDT notifications dated 22.10.2014.

7. The validity of the impugned order in light of the assessment orders passed post-search and seizure operation, which had accepted the genuineness of the assessee's charitable activities.

Issue-wise Detailed Analysis:

1. Jurisdiction of PCIT to Cancel Registration:

Legal Framework and Precedents: Section 12AB(4) of the Act, inserted by the Finance Act 2022 w.e.f. 01.04.2022, empowers the Principal Commissioner or Commissioner to cancel registration upon satisfaction of specified violations. Prior to this, cancellation powers were governed under section 12AA. Notification Nos. 52/2014 and 53/2014 dated 22.10.2014 vested powers relating to exemption claims under sections 10, 11, 12, 13A, and 13B with designated CIT(Exemptions) offices territorially. Section 127 of the Act allows transfer of cases between assessing officers but does not explicitly transfer jurisdiction over exemption or registration cancellation matters.

Court's Reasoning: The Tribunal observed that the PCIT Central-3 exercised cancellation powers based on a transfer order under section 127 dated 04.01.2021, which was limited to coordinated assessment and did not transfer jurisdiction for cancellation of registration. The PCIT was not the assessing officer subordinate to the CIT(E) Chandigarh, who alone had jurisdiction over exemption matters for the assessee's territorial area, as per the 2014 notifications. The Tribunal relied on a coordinate Bench decision in a similar matter which held that the PCIT's order cancelling registration was without jurisdiction.

Application of Law to Facts: The cancellation order was passed by PCIT Central-3, who did not have the statutory authority to cancel registration under section 12AB(4) as the power was vested with CIT(E) Delhi (or Chandigarh depending on territorial jurisdiction). The transfer under section 127 did not extend to exemption jurisdiction. The Tribunal concluded that the PCIT acted without jurisdiction, rendering the cancellation order invalid.

Treatment of Competing Arguments: The Revenue's reliance on the transfer order and the Explanation to section 127 defining "case" was rejected, as the "case" definition related to assessment proceedings and not to exemption or registration cancellation powers. The assessee's contention that the PCIT had no jurisdiction was upheld.

Conclusion: The cancellation order passed by PCIT was without jurisdiction and liable to be quashed.

2. Validity and Timing of Reference by AO under Second Proviso to Section 143(3):

Legal Framework: The second proviso to section 143(3), effective from 01.04.2022, allows the AO to send a reference to the PCIT or Commissioner to withdraw approval or registration where specified violations are noticed during assessment proceedings. The proviso requires the reference to be made during the pendency of assessment proceedings.

Court's Interpretation: The Tribunal noted that in the present case, the assessment proceedings for AYs 2015-16 to 2021-22 had been completed by 29.03.2022, prior to the insertion of the proviso. The AO's reference dated 23.08.2022 was made post-completion of assessment and thus was not valid. Further, the reference was made to PCIT Central-3, who was not the authorized authority to receive such reference.

Application to Facts: The reference by AO was held to be contrary to statutory provisions and hence invalid. The PCIT's reliance on this reference to cancel registration was unsustainable.

Competing Arguments: The Revenue argued that incriminating material found during search justified cancellation. However, the Tribunal emphasized procedural correctness and jurisdictional limits over substantive allegations.

Conclusion: The reference was invalid and the consequent cancellation order was without legal basis.

3. Retrospective Cancellation of Registration and Applicability of Section 12AB(4):

Legal Framework: Section 12AB(4) was introduced w.e.f. 01.04.2022. Section 12AA(5) provides that provisions of section 12AA shall not apply on or after 01.04.2021. Earlier registrations granted under section 12A prior to these amendments cannot be cancelled retrospectively under the new provisions.

Court's Reasoning: The Tribunal referred to a coordinate Bench decision which held that cancellation under section 12AB(4) cannot be applied to violations prior to 01.04.2022. Similarly, show cause notices issued under section 12AA post 01.04.2021 were held to be invalid. The PCIT's attempt to cancel registration for AYs 2015-16 to 2021-22 under section 12AB(4) was therefore unlawful.

Application to Facts: The assessee's registration was valid and renewed up to AY 2026-27. The alleged violations pertained to periods prior to 01.04.2022 and hence could not be grounds for cancellation under the new provisions.

Competing Arguments: The Revenue's reliance on violations found during search was rejected on the ground that the statutory provisions invoked were not applicable retrospectively.

Conclusion: Retrospective cancellation under section 12AB(4) for prior years was impermissible and the impugned cancellation was unsustainable.

4. Legitimacy of Cancellation Based on Alleged Non-Genuine Activities and Diversion of Funds:

Legal Framework: Section 13(1)(c) prohibits certain activities by charitable trusts which may lead to withdrawal of exemption. However, the amended section 12AB(4) does not include violation of section 13(1)(c) as a specified violation warranting cancellation.

Court's Reasoning: The Tribunal referred to a judgment of the Bangalore Bench which clarified that violations under section 13(1)(c) or (d) do not constitute specified violations under section 12AB(4). The AO's assessment orders for AYs 2015-16 to 2021-22, passed after search, had accepted the genuineness of the assessee's charitable activities. No adverse inference was drawn in assessment orders, which were approved by higher authorities.

Application to Facts: The cancellation order was based on allegations of non-genuine activities and diversion of funds. However, the assessments had not found such violations. The Tribunal held that the PCIT's reasons were erroneous and self-contradictory.

Competing Arguments: Revenue argued that unaccounted cash and diversion justified cancellation. The Tribunal emphasized the finality of assessments and absence of findings against the assessee in those orders.

Conclusion: Cancellation on grounds of non-genuine activities was unjustified in absence of adverse findings in assessment orders.

5. Effect of Notifications and Circulars on Jurisdiction and Procedure:

Legal Framework: Notification Nos. 52/2014 and 53/2014 dated 22.10.2014 vest jurisdiction over exemption matters with CIT(Exemptions) in specified territorial areas. Circular No. 11 of 2022 clarified procedural aspects of cancellation under section 12AB.

Court's Interpretation: The Tribunal noted that no notification or circular authorized transfer of jurisdiction for cancellation powers from CIT(E) to PCIT. The PCIT's assumption of jurisdiction was therefore contrary to these notifications. The circular clarified the scope of cancellation powers and the procedural requirements, which the PCIT did not follow correctly.

Application to Facts: The PCIT Central-3's cancellation order was not supported by any valid transfer of jurisdiction or procedural compliance. The Tribunal relied on these instruments to quash the order.

Competing Arguments: Revenue did not produce any notification or circular to counter these submissions.

Conclusion: The order was passed in violation of jurisdictional and procedural mandates.

6. Effect of Search and Seizure and Assessment Orders:

Legal Framework: Search and seizure under section 132 allows the department to gather evidence. Subsequent assessments under section 153A/143(3) are to be completed considering such evidence. Final assessment orders are binding unless set aside.

Court's Reasoning: The Tribunal noted that the assessment orders post-search accepted the charitable nature of the assessee's activities and did not draw adverse inferences. The PCIT's cancellation order was based on alleged incriminating evidence found during search but not reflected in assessments.

Application to Facts: Since the assessments were final and accepted the assessee's claims, the cancellation order was contradictory and unsustainable.

Conclusion: Cancellation based on search material not reflected in assessment orders was invalid.

7. Miscellaneous Procedural Observations:

The Tribunal observed that the PCIT's order contained statements indicating a predetermined intent to cancel registration regardless of findings, which amounted to colourable exercise of power and bias. Such conduct further vitiated the order.

Significant Holdings:

"The cancellation order passed by the 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 reference made in terms of 2nd proviso of Section 143(3) of the Act to the PCIT to whom the AO was subordinate is not permissible rather it is the CIT(E) Delhi, having territorial jurisdiction specified in Notification Nos. 52/2014 and 53/2014 dated 22.10.2014, who is the appropriate authority."

"The cancellation of registration under section 12AB(4) of the Act cannot be applied retrospectively to violations prior to 01.04.2022."

"The assessment orders passed post-search and seizure, which accepted the genuineness of the assessee's charitable activities, cannot be contradicted by a cancellation order based on the same search material."

"The PCIT's exercise of power to cancel registration without jurisdiction and on invalid references is a colourable exercise of power and liable to be quashed."

The Tribunal allowed the appeal, quashing the impugned order of cancellation of registration under section 12A/12AA/12AB of the Act, holding that the PCIT lacked jurisdiction, the procedural requirements were not met, retrospective cancellation was impermissible, and the cancellation was not justified on merits based on the evidence and assessment orders.

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