2025 (11) TMI 1162 - AT - Income Tax

Section 12AB(4) notice set aside for failing to specify alleged violations and for improper retrospective application

ITAT DELHI - AT set aside cancellation proceedings under section 12AB(4), holding the notice dated 14.03.2024 defective because it failed to specify which ... Cancellation of Registration obtained fraudulently u/s 12A(1)(ac)(i) - 'specified violations' for purposes of section 12AB(4) - HELD THAT:- Cancellation of registration by the impugned order was on the basis of certain alleged acts which occurred prior to 01.04.2022. The Revenue cannot dispute that the provisions for ‘specified violations’ are inserted in sub-section (4) of section 12AB w.e.f. 01.04.2022. Now, the ‘specified violations’ enumerated in section 12AB(4) recognise the specific nature and scope of violation giving rise to penal consequences of cancellation of registration. The first and foremost we would like to observe is that when the consequences are of the nature of withdrawing a recognition or cancellation of registration, the same can have a catastrophic effect on the existence of an institution and its activities. Thus, the provisions of the law have to be strictly interpreted and complied with. As we take into consideration provisions and scope of 12AB(4) of the Act, we find that it refers to the powers granted for an action subsequent to grant of registration or provisional registration of a trust under section 12AA of the Act, and if, ‘subsequently’, specified violations are discovered, then, the competent authority is entitled to initiate an action by following a procedure enshrined in clauses (i) to (iv) of sub-section (4) of section 12AB of the Act. In case of the assessee, if we examine the show cause notice for cancellation of registration u/s 12AA(3)/12AB(4) of the Act issued on 14.03.2024, we find that there is no reference to Explanation to sub-section (4) of section 12AB of the Act indicating as to for violation of which of the various ‘specified violations’ defined in clause (a) to (g) of the Explanation, the action of cancellation of registration is called for explanation from the assessee. At the same time there is no mention that competent authority intends to invoke cancellation powers with retrospective effects. At the time of issuance of notice on 14.03.2024 calling upon the assessee to show cause for the purpose of clause (ii) of sub-section (4) of section 12AB of the Act the competent authority has not reached any conclusion on the basis of information called from the assessee or any independent inquiry as to which of the class of ‘specified violations’ defined in Explanation to sub-section (4) of section 12AB of the Act are being invoked. Neither there is proposal to cancel the registration retrospectively. It is only after the registration is undertaken within the meaning of Section 12AB, then only, if any punitive action by way of cancellation of registration is to be undertaken by the revenue same can be u/s 12AB of the Act, meaning there by that the ‘specified violations’ should be subsequent to the new regime coming into effect. That being the case, we are of the considered view that the notice dated 14.03.2024 itself was defective and did not vest powers to cancel the registration for any alleged ‘specified violation’ and that too retrospectively. The aforesaid discussion also establishes that the ‘specified violations’ allegedly pertained to a period prior to 01.04.2022 thereby provisions of section 12AB(4) of the Act could not have been invoked. Thus, we are inclined to hold that assumption of jurisdiction u/s 12AB(4) of the Act is vitiated and, thus, allow ground No. 5 to 10. ISSUES PRESENTED AND CONSIDERED 1. Whether the competent authority validly invoked section 12AB(4) to cancel a pre-1996 registration with retrospective effect, given the insertion of 'specified violations' w.e.f. 01.04.2022. 2. Whether a show-cause notice under section 12AB(4) must identify which of the Explanation clauses (a)-(g) (the 'specified violations') are alleged and must indicate any intention to apply cancellation retrospectively prior to initiating inquiry. 3. Whether 'specified violations' for purposes of section 12AB(4) can be based on acts which occurred prior to the new regime (i.e., prior to 01.04.2022) or otherwise prior to grant of registration under the new provision. 4. Whether leasing of trust hospital premises and receipt of rent constitutes a non-charitable, profit-making business activity falling under Explanation (a)/(b) to section 12AB(4) when rent is applied to charitable objects and leasing is authorised by trust deed. 5. Whether alleged criminal acts of doctors or third parties operating at a trust hospital can, without direct proven involvement or criminal liability of the trust or trustees, justify cancellation under Explanation (e)/(f) to section 12AB(4). 6. Whether registration obtained under section 12A(1)(ac)(i) on 29.03.2022 was vitiated by fraud where earlier cancellation was pending in litigation at the time of application and full disclosures were made with the application. 7. Whether claiming exemption under section 11 by filing ITR-7 during pendency of litigation (when registration was under challenge) constitutes a 'specified violation' warranting cancellation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of invoking section 12AB(4) to cancel pre-1996 registration retrospectively Legal framework: Section 12AB(4) (as amended w.e.f. 01.04.2022) prescribes cancellation of registration on occurrence of specified violations and sets out procedural steps; section 12AA(5) limits applicability of earlier provisions post 01.04.2021. Precedent treatment: Reliance was placed on multiple tribunal and High Court decisions interpreting the temporal scope of section 12AB(4) and CBDT guidance indicating prospective operation of new regime. Interpretation and reasoning: The Tribunal emphasised that provisions imposing penal consequences (withdrawal of recognition) must be strictly construed. Section 12AB(4) refers to actions taken 'subsequently' to grant/registration under the new regime; thus the power contemplates violations discovered after the new statutory scheme came into force. The Tribunal found the impugned cancellation invoked 12AB(4) for events predating 01.04.2022 and therefore outside the intended temporal scope. Ratio vs. Obiter: Ratio - section 12AB(4) cannot be used to retrospectively cancel registrations based on specified violations that occurred prior to its effective date; such use is impermissible absent express statutory language. Conclusion: Invoking section 12AB(4) retrospectively to cancel a pre-1996 registration (or otherwise for acts prior to 01.04.2022) was invalid; ground succeeds. Issue 2 - Requirement in show-cause notice to identify which 'specified violation' is invoked and to notify retrospective intent Legal framework: Section 12AB(4) prescribes calling for documents/information and affording hearing after forming satisfaction regarding specified violations; procedural clauses (i)-(iv) require an inquiry before cancellation. Precedent treatment: Tribunal relied on earlier coordinate bench decisions criticizing generic or non-specific notices under section 12AB(4); reference made to cases where failure to specify the particular Explanation clause was deemed a defect. Interpretation and reasoning: The Tribunal held that the show-cause notice dated 14.03.2024 did not state which Explanation clause(s) were being invoked nor did it indicate any intention to apply cancellation retrospectively. Clause (i) read with clause (ii) requires the competent authority to form an opinion and specify the alleged class of violation before seeking explanations; absence of that specificity vitiates jurisdiction to cancel under 12AB(4). Ratio vs. Obiter: Ratio - a show-cause notice under section 12AB(4) must disclose the particular 'specified violation(s)' relied upon and must indicate retrospective operation if retrospective cancellation is proposed; failure to do so renders the notice defective. Conclusion: The show-cause notice was defective for failure to identify the specified violations and to inform the assessee of retrospective cancellation intent; consequent exercise of 12AB(4) powers was vitiated. Issue 3 - Temporal application of 'specified violations' (subsequent discovery requirement) Legal framework: Use of the word 'subsequently' in section 12AB(4) and the legislative history introducing specified violations w.e.f. 01.04.2022. Precedent treatment: Decisions of multiple tribunals and High Courts (including a Madras High Court view) were discussed, which construe 'subsequently' as subsequent to registration under the new regime (i.e., violations discovered after enactment/registration under section 12AB scheme). Interpretation and reasoning: The Tribunal reasoned that the statutory scheme contemplates discovery of specified violations after the new procedural regime is in force; permitting retrospective invocation against earlier acts would dramatically alter rights and consequences without clear statutory mandate. Ratio vs. Obiter: Ratio - specified violations under section 12AB(4) should be read as referring to violations discovered subsequent to the new regime/registration under that regime; they do not authorize retrospective penal cancellation for pre-enactment acts. Conclusion: The competent authority could not rely on specified violations predating 01.04.2022 to cancel registration under section 12AB(4). Issue 4 - Leasing of hospital premises and rent receipts: whether business/profit motive Legal framework: Section 11 permits income derived from property held for charitable purposes to be applied to objects; Explanation (a)/(b) to section 12AB(4) treats application of property other than for objects or receipt of business profits not incidental as specified violations. Precedent treatment: Authorities where rent from commercial property did not lead to cancellation when applied to charitable purposes were relied upon (e.g., decisions upholding that application of rent to charitable purposes negates business/profit motive). Interpretation and reasoning: The Tribunal noted trustees' power in the trust deed to lease property and found undisputed evidence that rental income was applied for charitable objects. Mere receipt of rent, in absence of a finding that rent was diverted to non-charitable purposes or that leasing was outside trustee powers, does not constitute a specified violation. Ratio vs. Obiter: Ratio - leasing of trust property authorised by trust deed and application of rental income to charitable objects does not ipso facto amount to business activity/profit motive for cancellation under Explanation (a)/(b). Conclusion: Allegation that leasing showed profit motive was not established; this factor did not justify cancellation (although Tribunal's ultimate decision turned on temporal and notice defects - see cross-reference to Issues 1-3). Issue 5 - Criminal acts by doctors/third parties and vicarious liability of the trust Legal framework: Explanation (e)/(f) to section 12AB(4) refers to activities not genuine or illegal activities attracting cancellation; criminal law principles require proof of involvement/culpability. Precedent treatment: Tribunal cited authorities holding that criminal acts by third parties do not automatically render the trust liable for cancellation unless the trust/trustees are directly implicated. Interpretation and reasoning: The Tribunal observed that prosecutions and convictions primarily implicated doctors; the manager was acquitted; FIRs did not charge the trust or trustees. Suspension of transplant licence by State authority in respect of transplant activity alone, when hospital continued other multidisciplinary services and continued application of income to objects, did not justify revocation of charitable registration absent direct proven culpability of the trust. Ratio vs. Obiter: Ratio - allegation of illegal activity by third-party doctors, without proven direct involvement or vicarious culpability of the trust/trustees, cannot be the basis for cancelling registration under Explanation (e)/(f). Conclusion: Vicarious cancellation based on third-party criminal acts was unsupported; no direct link established to justify cancellation. Issue 6 - Allegation of fraudulent obtaining of registration on 29.03.2022 Legal framework: Explanation (g) to section 12AB(4) (as amended) addresses obtaining registration by false or incorrect information; procedural mens rea and timing of the proviso are relevant. Precedent treatment: Authorities and CBDT guidance were examined regarding retrospective applicability and temporal scope of the newly introduced ground. Interpretation and reasoning: The Tribunal considered that the applicant had made full disclosure in its application dated 22.03.2022, including historical facts of cancellation and pending litigation, and thus the claim of fraud was factually unsubstantiated. Moreover, even if misrepresentation were alleged, the temporal constraints and requirement that specified violations be discovered subsequent to the new regime bear upon the propriety of invoking Explanation (g) for earlier events. Ratio vs. Obiter: Obiter/ratio mix - fact-specific finding that disclosures were made negated a finding of fraudulent procurement; coupled with the broader temporal reasoning (Issues 1-3), Explanation (g) could not properly be used to anchor retrospective cancellation. Conclusion: Fraudulent procurement of the 29.03.2022 registration was not established; the ground failed in both fact and as a matter of law given the temporal limits on 12AB(4). Issue 7 - Filing ITR-7 and claiming section 11 exemption during pendency of litigation Legal framework: Filing returns and claiming exemptions implicates compliance but, in absence of final adjudication, may be bona fide; section 12AB(4) contemplates specific categories of misconduct. Precedent treatment: Authorities show that procedural or disclosure defaults alone are ordinarily insufficient for cancellation unless coupled with qualified specified violations. Interpretation and reasoning: The Tribunal recorded evidence of alternative tax computations, payment of assessed taxes, audit reports with disclosures of cancellation status and prompt deposit of refunds when issued; these facts indicated bona fides. The filing of returns claiming exemption while litigation was pending, especially when full disclosures and provisional compliance occurred, does not necessarily amount to a specified violation warranting cancellation. Ratio vs. Obiter: Ratio - filing ITR-7 during pendency of litigation, with candid disclosures and subsequent corrective steps, is not by itself a specified violation warranting cancellation. Conclusion: The allegation that claiming exemption during pendency amounted to a specified violation failed on facts and in law. Overall Conclusion The Tribunal allowed the appeal, holding that the show-cause notice and the exercise of powers under section 12AB(4) were vitiated because (i) specified violations relied upon related to periods prior to the effective date of the amended section (01.04.2022) and (ii) the notice failed to specify which Explanation clause(s) were invoked or to indicate any intention to proceed retrospectively. Consequent findings on leasing, alleged criminality, fraud and return filings were not upheld on facts and law. The impugned cancellation order was quashed.