2025 (11) TMI 1502 - AT - Income Tax

Tribunal restores trust registration, limits PCIT's retrospective cancellation powers under sections 12AA, 12AB, 127 and 143(3).

ITAT Bengaluru held that PCIT (Central) is legally empowered to cancel a trust's registration u/s 12AA/12AB once jurisdiction is conferred through an ... Cancellation of registration u/s 12AA - PCIT (Central) power to cancel the registration granted by The CIT (E) - whether the principal Commissioner of income tax is empowered to cancel the registration already granted or not? - HELD THAT:- Explanation to section 127 is more comprehensive which includes pending proceedings as well as proceedings to be initiated in future. Thus, the only meaning that can be assigned to the Explanation is that 'case' means entire proceedings under the Act. Nothing suggests that it should be only restricted to assessment only. Therefore, all these functions and powers assigned in the juridical hierarchy would also be available to the PCIT. CIT(DR) has submitted a letter dated 19.1.2024 wherein a reference was made to Notification No.52/2014 dated 22.10.2024 and then it is stated that the above Notification makes it clear that the CIT(E) does not exercise any jurisdiction in respect of persons claiming exemption u/s. 11 & 12 of the Act which have been assigned to the AO, subordinate to the PCIT u/s. 127 of the Act. Therefore para 2.13 of that letter clearly says that CIT(E) does not have any power to cancel the registration, there it is crystal clear that it is only the PCIT who will have the power to cancel the registration when an order u/s. 127 is passed. Further if it is held that only CIT ( Exemption) has such power than the whole mechanism provided by the second proviso to section 143(3) would also fail. Proper and correct interpretation of the Notification mentioned in the letter dated 19.1.2024 undisputedly shows that the PCIT assumes the power to cancel the registration over the assessee trust if an order u/s. 127 is passed conferring the jurisdiction to the AO subordinate to him. PCIT (Central) has correctly assumed the power over the assessee for cancelling the registration. It is valid and legal. Thus, we reject the contention of the assessee that the PCIT(Central) does not have the jurisdiction to cancel the registration granted to the assessee by invoking the provisions of section 12AA(4) of the Act. Whether reference made under second proviso to section 143(3) of the Act before issuance of any notice u/s 143 (2) of the Act is valid? - According to the provisions of section 143(2) of the Act, the notices to be issued for verification of the return if the AO considers it necessary or expedient to ensure that the assessee has not under-stated the income or has not computed the excessive loss has not under-paid the tax in any manner, then only such notices are to be issued. The notice u/s. 143(2) has to be followed by a detailed enquiry, examination, verification and then has to be followed by the assessment u/s. 143(3) of the Act. Therefore prior to issue of such notices, there could not have been any satisfaction on the part of the AO that there is a specified violation. If the ld. AO simply borrows what is found during the course of search, then law makers would not have required the satisfaction of the AO himself about the specified violation. Such satisfaction could only have been arrived after proper verification of the details and obtaining the explanation of the assessee and then reaching at a conclusion that there is a specified violation as prescribed in Explanation to section 12AB(4) of the Act and then only the AO could have invoked the second proviso to section 143(3) of the Act. We do not subscribe that the AO has reached at a satisfaction for AYs 2015-16, 2016-17 and 2019-20 about specified violation. Therefore, for these reasons. We quash the order of the ld. PCIT cancelling the registration of the trust for AYs 2015-16, 2016-17 and 2019-20. With respect to the order cancelling the registration for AY 2022-23, we find that the proposal was sent on 19.2.2024 wherein the notice u/s. 143(2) of the Act was issued to the assessee on 31.5.2023 on the return of income filed by the assessee on 30.9.2022. Therefore, on this ground, the order passed by the ld. PCIT on 30.9.2024 with respect to the AY 2022-23 is correctly passed. Whether the Powers granted for cancellation with effect from 1/4/2022 applies only from AY 2022-23? - Cancellation of registration would be for the previous year in which specified violation has taken place and all subsequent previous years. The cancellation could be retrospective in nature if the specified violation is noticed from an earlier previous year. There appears no time limit as regards the number of previous years that have passed for the purpose of cancellation of registration, although on general principle, reasonable time limit may have to be read in. The cancellation of registration for an earlier previous year and of previous years subsequent thereto could trigger reassessment u/s. 147 subject to the time limits provided u/s. 149 of the Act. Therefore, according to this authoritative commentary, the retrospective powers are also available to cancel the registration even prior to the AY 2022-23. The Notes on Clauses to the Finance Bill, 2022 wherein this amendment was brought into by amendment to clause (vii) also states that these amendments take effect from 1.4.2022. Memorandum also states that these amendments take effect from 1.4.2022. It does not refer to any assessment year. CBDT Circular No. 23/2022 dated 3.11.2022 in para 9.3.3 has categorically held that such provisions are effective from 1.4.2022, irrespective of assessment year. Therefore, neither in the Memorandum of Finance Bill, Notes on Clauses and the CBDT Circular says that these amendments are effective only from assessment year 2022-23. From 1/4/2022 the ld CIT is empowered to cancel the registration if reference is received or if he notices Suo moto. It is the effective date of granting power to an authority and not applicability of a provision from a particular assessment year. Therefore, respectfully following the same starting from the decision of Amala Jyothi Vidya Kendra Trust [2024 (1) TMI 998 - ITAT BANGALORE] and the last decision pointed out before us in the case of Sri Srinivasa Educational & Charitable Trust [2025 (4) TMI 1128 - ITAT BANGALORE] wherein it has been held that the amendment made w.e.f. 1.4.2022 would only apply from assessment year 2022-23. Therefore, the order passed by the ld. PCIT(Central), Bengaluru cancelling the registration u/s. 12AB(4) for AYs 2015-16, 2016-17 and 2019-20 deserves to be quashed. Reference by the AO, 'satisfaction' of the AO mandatory for cancellation. [ AY 2022-23] - As the case before us is that the reference has been received from the AO u/s. 143(3) invoking the 2nd proviso for the impugned assessment year falling under clause 12AB(4)(b), the mentioning of specified violation by the ld. PCIT when such violation mentioned by the ld. AO in the reference would not have met with the provisions of the law. The provisions of 2nd proviso to section 143 of the Act also speaks about the satisfaction of the AO about the specified violation. The reference made as per para 10 were merely on the basis of the search material and not his own satisfaction. Therefore, the order of the ld. PCIT based on such borrowed satisfaction of the ld. AO which makes the reference unsustainable, naturally the order passed on such reference is also unsustainable. Accordingly, the order passed u/s. 12AB(4) of the Act cancelling the registration for AY 2022-23 by the impugned order dated 30.9.2024 is not sustainable and hence quashed. We have not examined the merits of the case but restored the registration of the assessee u/s 12 AA of the Act by quashing the order passed by the PCIT cancelling the registration on reference made by the ld AO. The merits of the case would be dealt with separately in the assessment proceedings, without being influenced by this order. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the Principal Commissioner of Income Tax (Central) had jurisdiction and statutory authority to cancel the assessee's registration under sections 12AA / 12AB, or whether such power vested exclusively in the Commissioner/Director of Income Tax (Exemption). 1.2 Whether a reference made by the Assessing Officer to the Principal Commissioner under the second proviso to section 143(3) for cancellation of registration is valid when made prior to issuance of a notice under section 143(2), and in the absence of the Assessing Officer's own satisfaction regarding 'specified violation'. 1.3 Whether the power to cancel or withdraw registration under section 12AB(4), inserted with effect from 01.04.2022, can be exercised in respect of assessment years prior to AY 2022-23. 1.4 For AY 2022-23, whether the cancellation of registration under section 12AB(4) based on a reference under the second proviso to section 143(3) was sustainable in law, having regard to the requirements of 'satisfaction' of the Assessing Officer regarding specified violations. 1.5 Whether an additional, purely legal ground challenging the validity of the reference made by the Assessing Officer under the second proviso to section 143(3) could be admitted at the appellate stage. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Jurisdiction and competence of the Principal Commissioner (Central) to cancel registration Legal framework (as discussed) 2.1 The Court examined section 127 regarding transfer of cases and its Explanation defining 'case' to include all proceedings under the Act, pending or to be initiated. The Court also considered Notifications No. 52/2014 and 70/2014 and an internal communication dated 19.01.2024 clarifying jurisdiction after transfer under section 127, in the context of section 12AA / 12AB powers. Interpretation and reasoning 2.2 Once a case is transferred under section 127 to an Assessing Officer subordinate to the Principal Commissioner (Central), the entire 'case' - i.e., all proceedings under the Act in relation to that assessee - stands vested in that jurisdiction. The term 'case' is comprehensive and not confined to assessment proceedings alone. 2.3 The communication dated 19.01.2024, with reference to Notification No. 52/2014, clarifies that after such transfer, the Commissioner (Exemptions) does not exercise jurisdiction in respect of persons claiming exemption under sections 11 and 12 where jurisdiction has been assigned under section 127 to an AO subordinate to the Principal Commissioner (Central). In such cases, the power to cancel registration necessarily moves to the Principal Commissioner having jurisdiction over the 'case'. 2.4 If the power to cancel registration were to remain exclusively with the Commissioner (Exemptions) despite the transfer of the case under section 127, the statutory scheme of the second proviso to section 143(3) and section 12AB(4) (which integrate the assessment and registration cancellation mechanisms) would be rendered unworkable. 2.5 The Tribunal noted that earlier coordinate Bench decisions cited for the contrary view had not been rendered after considering the above Notifications and communication, and therefore did not govern the issue in the present factual and legal setting. Conclusions 2.6 The Principal Commissioner (Central) had valid jurisdiction and statutory authority to cancel the assessee's registration under section 12AA/12AB pursuant to the transfer of the case under section 127. Grounds challenging his jurisdiction were rejected. Issue 2 - Validity of reference under the second proviso to section 143(3) made prior to notice under section 143(2) and without Assessing Officer's own 'satisfaction' (AYs 2015-16, 2016-17, 2019-20) Legal framework (as discussed) 2.7 Section 143(3), second proviso, requires that where the Assessing Officer is 'satisfied' that a trust has committed any 'specified violation' as defined in Explanation to section 12AB(4), he shall send a reference to the Principal Commissioner for cancellation of registration and shall not pass an assessment order without giving effect to such order under section 12AB(4). 2.8 Section 143(2) provides that where the AO considers it necessary or expedient to ensure that income has not been understated, loss has not been computed excessively, or tax has not been underpaid, he shall serve a notice on the assessee and thereafter carry out scrutiny leading to an assessment under section 143(3). 2.9 Section 12AB(4) requires the Principal Commissioner to act on, inter alia, a reference received under the second proviso to section 143(3), after satisfying himself about the occurrence of 'specified violation' as defined in the Explanation. Interpretation and reasoning 2.10 For AYs 2015-16, 2016-17 and 2019-20, the chronology was: - Returns filed in April 2023 in response to notices under section 148; - Notices under section 142(1) issued in November 2023 / August 2023; - Reference to the Principal Commissioner made on 05.03.2024; and - First notices under section 143(2) issued only on 26.06.2024. 2.11 The proposal/reference dated 05.03.2024, as examined by the Court, was entirely based on materials found during search and statements recorded therein. The AO merely reproduced the findings and quantifications of the Investigation Wing and, in para 7, asserted satisfaction solely on that basis, without any enquiry or verification during assessment proceedings or with reference to the returns filed. 2.12 At the time of making the reference (05.03.2024), no notice under section 143(2) had been issued. Hence, no scrutiny proceedings had commenced and no enquiry or independent evaluation had been carried out by the AO with respect to the returned income, application of funds, or alleged specified violations. 2.13 The statutory scheme requires the satisfaction to be that of the Assessing Officer himself, founded on some application of mind and enquiry; mere reliance on search material and conclusions of the Investigation Wing, without any scrutiny of the return or independent examination, constitutes 'borrowed satisfaction', which does not meet the statutory threshold. 2.14 Absent any examination of the return or independent enquiry, the AO could not validly reach the requisite satisfaction about 'specified violation' in terms of section 12AB(4) Explanation and the second proviso to section 143(3). Conclusions 2.15 The references made by the Assessing Officer on 05.03.2024 for AYs 2015-16, 2016-17 and 2019-20 were invalid, as they were (i) made before commencement of scrutiny under section 143(2), and (ii) based only on borrowed satisfaction derived from search findings, without any independent satisfaction of the AO. 2.16 As the jurisdiction of the Principal Commissioner under section 12AB(4)(b) in these years was invoked only through such invalid references, the consequent cancellation orders for AYs 2015-16, 2016-17 and 2019-20 were held unsustainable in law and were quashed. Issue 3 - Temporal reach of section 12AB(4) (retrospectivity and applicability to pre-AY 2022-23 years) Legal framework (as discussed) 2.17 Section 12AB(4), introduced by the Finance Act, 2022, is stated to take effect from 01.04.2022. It sets out the circumstances in which the Principal Commissioner/Commissioner may cancel registration upon noticing or being informed of 'specified violations', and provides that cancellation shall apply 'for such previous year and all subsequent previous years'. 2.18 The Court examined: - Authoritative commentary (Sampath Iyengar, Law of Income Tax, 13th Ed., Vol. 3, p. 3269) stating that cancellation can be for the previous year of violation and all subsequent previous years, with no express time bar in the provision itself. - Notes on Clauses and the Memorandum to the Finance Bill, 2022, which state that the amendment 'takes effect from 1-4-2022' but do not expressly tie operation to a particular assessment year. - CBDT Circular No. 23/2022 dated 03.11.2022, para 9.3.3, which also states that these provisions are effective from 01.04.2022. - Several decisions of coordinate Benches holding that cancellation under section 12AB(4) / section 12AA(3)/(4) cannot operate with retrospective effect prior to AY 2022-23. Interpretation and reasoning 2.19 On a textual and conceptual reading, section 12AB(4) confers power on the Principal Commissioner with effect from 01.04.2022, without express restriction that it can only be exercised in relation to violations arising in AY 2022-23 and onwards. The phraseology 'for such previous year and all subsequent previous years' indicates that cancellation may, in principle, operate with retrospective effect from the year of the first noticed violation. 2.20 The commentaries, Notes on Clauses, Memorandum and Circular collectively indicate that 01.04.2022 is the effective date for conferring power on the authority, not necessarily the starting assessment year for which that power may be exercised. 2.21 However, multiple coordinate Bench decisions (including Amala Jyothi Vidya Kendra Trust and Sri Srinivasa Educational & Charitable Trust) have held that, in practice, the amended power under section 12AB(4) can be applied only from AY 2022-23 onwards, and that retrospective cancellation for earlier years is impermissible. 2.22 Judicial discipline requires that, in the absence of any contrary higher or coordinate Bench decision, the Tribunal follow those decisions, particularly when the Revenue could not point to any contrary authority. Conclusions 2.23 Respectfully following the binding and consistent line of coordinate Bench authority, the Court held that the amended provisions of section 12AB(4) taking effect from 01.04.2022 can be applied only from AY 2022-23 onwards. 2.24 Consequently, the cancellation of registration in respect of AYs 2015-16, 2016-17 and 2019-20, by an order dated 30.09.2024, was held to be beyond the permissible temporal reach of section 12AB(4) and was quashed on this independent ground as well. Issue 4 - Validity of cancellation for AY 2022-23 on reference under section 143(3) second proviso and requirement of Assessing Officer's 'satisfaction' Legal framework (as discussed) 2.25 Section 12AB(4)(b) authorises the Principal Commissioner to cancel registration where he 'has received a reference from the Assessing Officer under the second proviso to sub-section (3) of section 143 for any previous year'. 2.26 Under the second proviso to section 143(3), the Assessing Officer, if 'satisfied' that the trust has committed any 'specified violation' as defined in the Explanation to section 12AB(4), is mandated to send such reference and, thereafter, to complete assessment only after giving effect to the order under section 12AB(4). 2.27 The Explanation to section 12AB(4) defines 'specified violation' to include, inter alia, application of income other than for the objects of the trust, non-genuine activities, activities not in accordance with conditions of registration, etc. Relevant facts 2.28 For AY 2022-23, the return was filed on 30.09.2022 declaring nil income; notice under section 143(2) was issued on 31.05.2023, and the reference to the Principal Commissioner was made on 19.02.2024. 2.29 The proposal dated 19.02.2024 invoked search findings of diversion of funds to trustees, advances, bogus expenditure, unaccounted cash transactions, etc., and concluded in paras 10.1-10.4 that specified violations under clauses (a) and (b) of the Explanation to section 12AB(4) had been committed, and therefore a reference under the second proviso to section 143(3) was being made. Interpretation and reasoning 2.30 The Court examined the proposal in detail and found that, although a notice under section 143(2) had been issued much earlier, the proposal itself did not reflect any independent enquiry or evaluation by the AO in the course of assessment proceedings. 2.31 The proposal merely recited the evidence and conclusions of the search authorities (DDIT(Inv.)), including quantification of alleged violations, and then recorded the AO's satisfaction in formulaic terms without any indication of fresh scrutiny, examination of books, or independent correlation with the return and explanations furnished during assessment. 2.32 The statutory requirement under the second proviso to section 143(3) is that the satisfaction must be the Assessing Officer's own satisfaction, and not a mechanical adoption of the Investigation Wing's findings. A 'borrowed satisfaction' does not fulfil this requirement, especially where statements relied upon have been retracted and no further enquiry is undertaken. 2.33 A coordinate Bench in Sri Srinivasa Educational & Charitable Trust had, in substantially similar circumstances, held that such reliance solely on search material and reproduction of Investigation Wing's findings, without independent assessment-enquiry, amounted to borrowed satisfaction and vitiated the reference itself. One of the present Members was party to that decision, and the same reasoning was held applicable here. 2.34 Since, in AY 2022-23, the Principal Commissioner's jurisdiction under section 12AB(4)(b) was invoked solely on the basis of the reference made under the second proviso to section 143(3), and that reference was itself based on borrowed satisfaction, the foundational jurisdictional condition stood unfulfilled. Conclusions 2.35 The reference made by the Assessing Officer for AY 2022-23 did not reflect his own independent satisfaction as required by the second proviso to section 143(3) and section 12AB(4)(b), but was based entirely on borrowed satisfaction from search findings. 2.36 Consequently, the jurisdiction assumed by the Principal Commissioner under section 12AB(4)(b) for AY 2022-23 was vitiated, and the order dated 30.09.2024 cancelling registration for AY 2022-23 was held unsustainable in law and quashed. 2.37 The Court expressly refrained from adjudicating on the factual merits of the alleged diversion of funds, bogus expenditure, or other violations, clarifying that those issues would be examined, if necessary, in assessment proceedings uninfluenced by this order. Issue 5 - Admission of additional legal ground on validity of reference under second proviso to section 143(3) Legal framework (as discussed) 2.38 The Court considered the principles laid down in decisions permitting admission of additional grounds that are purely legal, go to the root of the matter, and do not require further investigation of facts. Interpretation and reasoning 2.39 The additional ground challenged the very validity of the reference made by the Assessing Officer under the second proviso to section 143(3), contending that it was without jurisdiction and not based on incriminating or fresh material. 2.40 The Court found that this ground was purely legal, arose out of admitted and already available facts (dates of search, issue of notices under sections 148/143(2), date of reference, nature of material relied on), and went to the root of the Principal Commissioner's jurisdiction to cancel registration. 2.41 No further factual enquiry was required for adjudicating this additional ground. Conclusions 2.42 The additional legal ground challenging the validity of the reference under the second proviso to section 143(3) was admitted and adjudicated, forming one of the principal bases for quashing the cancellation orders. Overall result 2.43 The Court upheld the jurisdiction of the Principal Commissioner (Central) in principle, but quashed the cancellation of registration for AYs 2015-16, 2016-17, 2019-20 and 2022-23 on the grounds that (i) the Assessing Officer's references under the second proviso to section 143(3) lacked valid 'satisfaction' and were based on borrowed satisfaction from search findings, and (ii) for pre-AY 2022-23 years, section 12AB(4) could not be invoked retrospectively in view of binding coordinate Bench decisions. Registration under section 12AA/12AB stood restored; merits of alleged violations were left open for examination in assessment proceedings.