2026 (3) TMI 705 - AT - Income Tax

Specified violation for registration cancellation must be pleaded specifically; cancellation cannot rest on assessment-stage diversion alone.

Cancellation of registration under Section 12AB(4) was quashed because the authority invoked Explanation clauses (a) and (e) without showing that the ... Cancellation of registration u/s 12AB(4) - Transactions directly or indirectly resulted in extension of benefit to certain trustees or related parties within the meaning of section 13(3) of the Act, thereby allegedly attracting the provisions of section 13(1)(c ) - Scope of specified violation under section 12AB(4) - distinction between activities and transactions for registration - consequences of section 13(1)(c) confined to assessment stage - requirement of specific statutory limb in show-cause notice - jurisdiction for registration matters vested in CIT (Exemptions) Distinction between activities and transactions for registration - HELD THAT: - The Tribunal held that Clause (e) targets the genuine nature and conduct of the predominant activities of the trust or institution and not isolated or disputed financial transactions. The Assessee's predominant activity-imparting education through functioning schools-was neither shown to be a sham nor to have deviated from its stated objects; the PCIT's order confined itself to specific alleged financial irregularities and did not record any adverse finding that the Society's core activities were fictitious or carried out contrary to registration conditions. Consequently, invoking Clause (e) without an adverse finding on the genuineness or statutory conditions was misconceived. [Paras 9] Invocation of Clause (e) was rejected and the cancellation could not be sustained on that ground. Scope of specified violation under section 12AB(4) - consequences of section 13(1)(c) confined to assessment stage - Whether alleged payments/transactions attracting section 13(1)(c) (benefit to specified persons) constitute a 'specified violation' under Explanation to section 12AB(4) warranting cancellation of registration - HELD THAT: - The Tribunal concluded that the Explanation to section 12AB(4) must be interpreted purposively and restrictively to cover violations that strike at the predominant object of the trust. Judicial precedent and the post Finance Act, 2022 statutory scheme confine the consequence of violations under section 13 to denial or taxation of the diverted income (and related penal consequences), not automatic cancellation of registration. The legislature's amendments (including section 115BBI and the 2022 changes) manifestly limit the effect of section 13 violations to assessment stage consequences, so stretching section 13 allegations into grounds for cancellation under section 12AB(4) is impermissible. [Paras 10, 12] The PCIT's reliance on alleged section 13(1)(c) violations as a basis for cancellation failed; no specified violation under Explanation to section 12AB(4) was established. Requirement of specific statutory limb in show-cause notice - Validity of the show-cause notices and the proceedings when the notices did not specify which clause of the Explanation to section 12AB(4) was alleged to be attracted - HELD THAT: - The Tribunal found that the Explanation enumerates distinct, mutually exclusive 'specified violations' and that communicating the precise statutory limb relied upon is a mandatory precondition to assume jurisdiction. Notices that merely contain omnibus or general allegations without identifying the specific clause leave the assessee unable to meet the statutory case and vitiate the proceedings. The PCIT's notices failed to specify the exact limb of the Explanation relied upon, constituting a jurisdictional defect. [Paras 13] Proceedings were vitiated by failure to specify the particular clause of the Explanation to section 12AB(4) in the show cause notices. Scope of specified violation under section 12AB(4) - Application of section 12AB(4) to alleged violations occurring in periods prior to its effective date (retrospective application) - HELD THAT: - The Tribunal held that the concept of 'specified violation' and the cancellation mechanism under section 12AB(4) were introduced with effect from 1/4/2022 and cannot be applied retrospectively to earlier assessment years in the absence of clear legislative intent. Fiscal disabilities must be construed strictly and prospectively; accordingly, treating acts of earlier years as 'specified violations' under the post 2022 regime was without authority of law. [Paras 14] The cancellation could not be sustained insofar as it was founded on alleged 'specified violations' predating 1.4.2022. Jurisdiction for registration matters vested in CIT (Exemptions) - Whether the Learned PCIT (Central), Kanpur had jurisdiction to cancel the Assessee's registration when the registration and related exemption matters were within the administrative jurisdiction of the Commissioner of Income tax (Exemptions)? - HELD THAT: - The Tribunal examined the statutory scheme, the CBDT Notification delineating territorial and functional jurisdiction of CIT (Exemptions), and the limits of powers under section 127 (transfer of 'case' between assessing officers). It concluded that section 127 transfers assessing officer cases for assessment purposes and does not, absent specific delegation or notification, transfer the distinct registration/grant/cancellation jurisdiction vested in the CIT (Exemptions). There was no subsequent Board authorisation or notification conferring section 12AB cancellation powers on the PCIT in place of the CIT (Exemptions). Hence the PCIT's exercise of power to cancel registration on the basis of the transfer order under section 127 was legally untenable. [Paras 15, 16] The impugned cancellation was invalid for want of jurisdiction in the authority that passed the order. Final Conclusion: The Tribunal quashed the PCIT's order cancelling the Society's registration for multiple independent reasons: Clause (e) was misapplied as the Society's predominant educational activities were genuine; alleged section 13 violations do not, under the amended statutory scheme, justify cancellation but are matters for assessment; the show cause notices failed to identify the specific statutory limb relied upon; retrospective application of section 12AB(4) was impermissible; and the PCIT lacked jurisdiction to pass the cancellation order. The Assessee's appeal was allowed. Issues: (i) Whether cancellation of registration under section 12AB(4) could be sustained by invoking Explanation clauses (a) or (e) when the society's predominant activity of imparting education was not shown to be non-genuine or carried out contrary to registration conditions; (ii) Whether allegations of benefit to specified persons under section 13(1)(c) can, by themselves, constitute a 'specified violation' warranting cancellation of registration under section 12AB(4); (iii) Whether the show-cause notices and communications adequately specified the particular clause of the Explanation to section 12AB(4) relied upon (notice specificity and natural justice); (iv) Whether Section 12AB(4) (and its concept of 'specified violation') could be applied retrospectively to earlier assessment years prior to its effective date of 01.04.2022; (v) Whether PCIT (Central), Kanpur had jurisdiction to cancel the registration instead of the authority that granted registration (CIT (Exemptions)).Issue (i): Whether Clause (e) or Clause (a) of Explanation to Section 12AB(4) could be validly invoked where the society's predominant activity of imparting education was ongoing and not shown to be sham or in breach of registration conditions.Analysis: The Tribunal examined the statutory language of Section 12AB(4) and its Explanation, the nature of Clause (e) (activities not genuine or not in accordance with registration conditions), the facts that the society ran recognised schools continuously, and that the PCIT's findings were confined to discrete alleged financial irregularities rather than any finding that core educational activities were a facade or that conditions of registration were breached. Precedents (Karnataka High Court decisions and Tribunals) were applied to distinguish between isolated transactions and the genuineness of predominant activities; the Tribunal also reviewed Form No.10AC conditions and found no pleaded or established violation of those conditions.Conclusion: Clause (e) and Clause (a) of Explanation to Section 12AB(4) could not be validly invoked on the facts; cancellation on that basis was legally unsustainable. Conclusion favours the assessee.Issue (ii): Whether alleged benefits to specified persons under Section 13(1)(c) amount to a 'specified violation' under Explanation to Section 12AB(4) warranting cancellation of registration.Analysis: The Tribunal analysed the statutory scheme of Section 13 and the post-amendment framework (Finance Act changes and introduction of Section 115BBI) showing legislative intent to confine consequences of Section 13 violations to assessment-stage taxation/denial of exemption to the extent of diverted income. The Explanation to Section 12AB(4) does not include clauses corresponding to Section 13(1)(c)/(d) as 'specified violations'. Judicial precedent and CBDT guidance were relied upon to show that stretching Section 13 into grounds for cancellation would defeat the statutory distinction between assessment consequences and registration withdrawal.Conclusion: Alleged violation of Section 13(1)(c) does not, by itself, constitute a 'specified violation' for cancellation under Section 12AB(4). Conclusion favours the assessee.Issue (iii): Whether the show-cause notices and the PCIT's communications sufficiently identified the specific clause of the Explanation relied upon, and whether failure to specify vitiates the proceeding.Analysis: Tribunal reviewed the notices and found only omnibus allegations without identification of the specific Explanation clause relied upon. It held that specifying the particular limb is a mandatory jurisdictional requirement because each 'specified violation' carries different factual and legal connotations; absence of such specification deprives the assessee of meaningful opportunity to meet the charge and vitiates the jurisdictional basis for initiating cancellation proceedings. Tribunal relied on its coordinate decisions on notice specificity.Conclusion: Notices lacking specification of the particular clause of the Explanation vitiate the cancellation proceedings. Conclusion favours the assessee.Issue (iv): Whether Section 12AB(4) and the concept of 'specified violation' introduced effective 01.04.2022 could be applied retrospectively to assessment years prior to that date.Analysis: Tribunal applied principles of strict and prospective construction of fiscal statutes creating disabilities and examined legislative materials (Memorandum to Finance Bill 2022) and authoritative guidance; it concluded there was no clear legislative intent to apply the new 'specified violation' regime retrospectively. The tribunal noted that the PCIT applied Section 12AB(4) to earlier assessment years without authority.Conclusion: Section 12AB(4) cannot be applied retrospectively to years prior to 01.04.2022; retrospective application in this case was invalid. Conclusion favours the assessee.Issue (v): Whether PCIT (Central), Kanpur had jurisdiction to cancel registration in place of the authority competent to grant/cancel registration (CIT (Exemptions)).Analysis: Tribunal examined Section 127 transfer provisions, the Explanation of 'case' in Section 127, Rule 17A, CBDT Notification No.52/2014 (territorial/subject-matter jurisdiction of CIT (Exemptions)), and related precedent. It held that the transfer under Section 127 pertains to assessment machinery and does not transfer original power to grant or cancel registration vested in CIT (Exemptions) absent explicit Board authorisation; the CIT (Exemptions) had not validly delegated registration cancellation powers to PCIT (Central) for the purpose of Section 12AB(4). Tribunal concluded PCIT (Central), Kanpur lacked jurisdiction to cancel registration.Conclusion: PCIT (Central), Kanpur lacked jurisdiction to pass the cancellation order; conclusion favours the assessee.Final Conclusion: The impugned order cancelling the society's registration under Section 12AB is quashed on multiple independent grounds (misapplication of Clause (e)/(a), improper reliance on Section 13(1)(c), defective/unspecific notices, impermissible retrospective application, and lack of jurisdiction of PCIT (Central)); accordingly the appeal is allowed and the cancellation is set aside.Ratio Decidendi: Cancellation of a trust or institution's registration under Section 12AB(4) requires a clear jurisdictional foundation: (a) the specific limb of the Explanation relied upon must be identified in notice; (b) cancellation is confined to cases where predominant activities are non-genuine or registration conditions are breached; (c) alleged diversion under Section 13 is to be addressed at assessment stage and does not, by itself, constitute a 'specified violation' for cancellation absent statutory specification; and (d) powers to cancel registration vested in the authority that grants registration cannot be assumed transferred by ordinary assessment-case centralization under Section 127 without explicit authorisation.