AI Drafter 
TaxTMI 
TaxTMI 
2026 (5) TMI 1776
X X X X Extracts X X X X
X X X X Extracts X X X X
....2022-23 to 2026-27. The Appellant Society has managed three educational institutions imparting education to the students of diverse socio economic background namely (i) Billabong High International School, Nodia, (ii) Kangaroo Kids School, Noida and (iii) Sanchetna, Noida. A search and seizure operation u/s. 132 of the Act was conducted on 11.07.2023 in the case of PPC Group Companies and consequential search was carried in the case of assessee society also. It is the claim of the assessee that no incriminating material evidence was found during the course of search action on the assessee society so as to casts any doubt about the nature and genuineness of its pre dominant activity of imparting education. 3. However, Ld. PCIT by invoking the provisions of section 12AB(4) of the Act, had issued the show cause notice dated 24.12.2024 u/s. 12AB of the Act proposing to withdrawal of registration. Thereafter, the Ld. PCIT has discussed the findings of search action and withdrew the registration granted u/s. 12AA or 12AB of the Act from AY 2018-19 and onwards. Ld. CIT-DR further submits that assessee has paid bogus salary to various entities and the said sum was siphoned to the person....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ond proviso to Section 143(3) r.w.s. 12AB(4)(b) of the Act is void ab initio and bad in law, as no satisfaction note was recorded by the AO before making such reference. Further, the PCIT erred in acting upon the said reference without appreciating that the second proviso to Section 143(3), inserted by the Finance Act, 2022 w.e.f. 01.04.2022, is prospective in nature; therefore, reliance on the said proviso for initiating action under Section 12AB(4) in respect of AYs 2018-19 to 2022-23 is without jurisdiction and legally untenable. 5. That the show cause notice issued by the PCIT proposing cancellation of registration under Section 12AB of the Act is vague and devoid of any specific charge, as it fails to specify the particular clause allegedly violated. Consequently, the notice so issued and the subsequent order cancelling the registration are arbitrary, without jurisdiction, and liable to be quashed. On Merits of the case: A. Advances given for acquiring residential property for senior staff 6. That on the facts and in the circumstances of the case and in law, the PCIT has erred in treating the advances paid by the Appellant-Society to Mrs. Ja....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der Section 13(3) or "specified violations" under the Explanation to Section 12AB(4) is arbitrary, speculative, and unsustainable in law. C. Cash receipts from incidental activities 8. That on the facts and in the circumstances of the case and in law, the PCIT has erred in alleging that the Appellant Society engaged in impermissible cash transactions arising from incidental activities such as use of sports facilities, without appreciating that such activities were incidental to and in furtherance of the Society's educational objects and formed part of its charitable functioning. 8.1 That the PCIT has further erred in alleging diversion of cash receipts to the personal account of a trustee and routing of funds through personal accounts of staff based merely on unverified statements and electronic messages, without any corroborative documentary, accounting, or banking evidence, and without affording opportunity of cross-examination; consequently, the invocation of Explanation to Section 12AB(4)(e) of the Act is arbitrary, speculative, and unsustainable in law. D. Alleged bogus expenses and billing 9. That on the facts and in the circum....
X X X X Extracts X X X X
X X X X Extracts X X X X
....submits that the Ld. PCIT has cancelled the registration with retrospective effect for the reason that the aforesaid 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) of the Act. Based on such alleged violation, the Ld. PCIT has further sought to invoke clause (a) of the Explanation to section 12AB(4) of the Act. Ld. PCIT has alleged that by entering into the said transaction, the Assessee committed violation of Clause (e) of Explanation to section 12AB(4) of the Act on the premise that the activities of the trust were rendered non-genuine. Before us, the e Ld. AR vehemently submits that the show-cause notice and the subsequent notices issued by Ld. PCIT did not contain any specific reference to either Clause (a) or Clause (e ) of Explanation to Section 12AB(4) of the Act, which were alleged to have been violated by the Assessee Society. The show cause notice dated 24-12-2024 and subsequent notice issued by the Ld. PCIT are placed at pages 281 to 290 and pages 323 to 324 of the Paper Book. Ld. AR contends that enti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of its objectives or separate books of account are not maintained by such trust or institution in respect of the business which is incidental to the attainment of its objectives; or (c) the trust or institution has applied any part of its income from the property held under a trust for private religious purposes, which does not enure for the benefit of the public; or (d) the trust or institution established for charitable purpose created or established after the commencement of this Act, has applied any part of its income for the benefit of any particular religious community or caste; or (e) activity being carried out by the trust or institution,- (i) is not genuine; or (ii) is not being carried out in accordance with all or any of the conditions subject to which it was registered; or (f) the trust or institution has not complied with the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of sub-section (1), and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality ; or (g) the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erred to in sub-section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution : Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3) in so far as such use or application relates to any period before the 1st day of June, 1970; (d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year- (i) any funds of the trust or institution are invested or deposited after the 28th day of February, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11; (ii) or any funds of the trust or instit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (e) if any share, security or other property is purchased by or on behalf of the trust or institution from any person referred to in sub-section (3) during the previous year for consideration which is more than adequate; (f) if any share, security or other property is sold by or on behalf of the trust or institution to any person referred to in sub-section (3) during the previous year for consideration which is less than adequate; (g) if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub-section (3): Provided that this clause shall not apply where the income, or the value of the property or, as the case may be, the aggregate of the income and the value of the property, so diverted does not exceed one thousand rupees; (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971), in any concern in which any person referred to in sub-section (3) has a substantial interest. (3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....medical institution or a hospital, the exemption under section 11 or section 12 shall not be denied in relation to any income, other than the income referred to in subsection (2) of section 12, by reason only that such trust has provided educational or medical facilities to persons referred to in clause (a) or clause (b) or clause (c) or clause (cc) or clause (d) of sub-section (3). (7) ................... (8) ................... (9) ................... (10) .................. (11) ................... Explanation 1.-For the purposes of sections 11, 12, 12A, 12AA, 12AB and this section, "trust" includes any other legal obligation and for the purposes of this section "relative", in relation to an individual, means- (i) spouse of the individual; (ii) brother or sister of the individual; (iii) brother or sister of the spouse of the individual; (iv) any lineal ascendant or descendant of the individual; (v) any lineal ascendant or descendant of the spouse of the individual; (vi) spouse of a person referred to in sub-clause (ii), sub-clause (iii), sub-clause (iv) or sub-clause (v); ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the purposes of this section, "specified income" means,- (a) income accumulated or set apart in excess of fifteen per cent of the income where such accumulation is not allowed under any specific provision of this Act; or (b) deemed income referred to in Explanation 4 to the third proviso to clause (23C) of section 10, or sub-section (1B) or sub-section (3) of section 11; or (c) any income, which is not exempt under clause (23C) of section 10 on account of violation of the provisions of clause (b) of the third proviso of clause (23C) of section 10, or not to be excluded from the total income under the provisions of clause (d) of sub-section (1) of section 13; or (d) any income which is deemed to be income under the twenty-first proviso to clause (23C) of section 10 or which is not excluded from the total income under clause (c) of sub-section (1) of section 13; or (e) any income which is not excluded from the total income under clause (c) of sub-section (1) of section 11. (Emphasis supplied by us) 8. As per ld. AR Clause(e) of Explanation to Section 12AB(4) of the Act is wholly inapplicable and could not have been validly invoked in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1) The Principal Commissioner or Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) or clause (ab) of sub-section (1)] of section 12A, shall- (a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about,- (i) the genuineness of activities of the trust or institution; and (ii) the compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects, and may also make such inquiries as he may deem necessary in this behalf; and (b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities as required under sub-clause (i) of clause (a) and compliance of the requirements under sub-clause (ii) of the said clause, he- (i) shall pass an order in writing registering the trust or institution; (ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant : ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... power to cancel registration on the ground that activities of the Society are not genuine is an exceptional power, which can be exercised only where the predominant and substantive activities of the Society are shown to be sham, fictitious, non-existent or a mere facade. It is settled position of law that so long as the core charitable activities for which the Society is established are real, ongoing and carried out in accordance with its objects, registration cannot be cancelled merely because certain transactions are questioned. 13. The Ld. AR further tried to make a distinction between an 'activity' and 'transaction' by stating that what is relevant to be seen at the time of registration of a society or sustenance of the registration of the society is the activities carried out by the said society and not to be carried away by few transactions carried out thereon. In this regard, ld. AR submits that there is a clear conceptual distinction between the 'activities' of a Society and the 'transactions' undertaken in the course of administering those activities. The expression 'activities' refers to the overall, substantive and continuing charitable functions carried out by the S....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... it. He further stated that the evidences were found as a result of search suggesting that directly or indirectly benefits were provided to the specified persons and thus the assessee society has made specific violation of section 13(3) of the Act. Hence ld. CIT DR submits that there is no difference between the two and both the words convey the same meaning for the purpose of determining the genuineness of activities of the Assessee Society. Ld. CIT DR stated that the Ld. PCIT was duly justified in invoking the provisions of Clause (e) of Explanation to Section 12AB(4) of the Act in the facts and circumstances of the instant case. 16. In rejoinder, ld. AR contended that only the predominant activity carried out by the society is to be examined and if the said predominant activity is found to be genuine and in accordance with the objects, registration cannot be cancelled at all merely on allegations of misapplication of funds or benefit to the related parties which are the subject matter of assessment proceedings. In support of this proposition, the Ld. AR rightly placed reliance on the decision of Hon'ble Karnataka High Court in the case of CIT vs A S Kupparaju Brothers Charita....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re. In fact, the said fact is not disputed even by the revenue. But what is contended is that the activities of the trustees and the trust shows that it is not a genuine trust. It is in support of the said contention, the aforesaid activities of the trustees in treating the property as family property and dividing the same, executing a rectification deed, offering the property as a security for borrowing loan for businesses conducted by the trustees in their individual name and constructing buildings in the trust land and letting it out for rent and not collecting the rent from them are cited as instances to show the trust is not genuine. 11. It is in this context, it is necessary to know whether any of those activities in law has any value, Once the authors of the trust transferred the land, which belonged to them, to the trust and got it duly registered, the title of the property vests in the trust and the trustees and the original owners do not have any right over the title of the property. Even though the original owners were also appointed as trustees under the trust deed, the trustees hold the property for the benefit of the beneficiaries and the original owners have....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es would amount only to a breach of trust and would not detract from the declaration of trust. Therefore, the subsequent-conduct of the founder in dealing with the funds of the trust long after the creation of the trust may not put an end to the trust itself." We are in full agreement with the principle stated in the aforesaid passage and we hold that the trustee had no authority or jurisdiction to execute a fresh Trust Deed and the document dated 1st July, 1944 is of no consequence and is no more than a scrap of paper. The Trust as originally established by the Deed dated 28th November, 1941 remained unchanged or unaffected by the later document dated 1st July, 1944." 12. From the aforesaid statement of law, it is clear that once the authors of the trust transfers the title of the property to the trustees and creat a trust, they have no right to meddle with the property even if they have created partition deed, rectification deed and offered the property as security to the bank to raise funds. As pointed out by the Apex Court in the aforesaid judgment, they are of no consequence and is no more than a scrap of paper. All those transactions are void ab initio and i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sappropriation of funds and it is hit by section 13 of the Act, certainly, they can deny the benefit of exemption. But that is not a ground to deny the registration in the instant case under Section 12AA, when admittedly the trust has been established to run schools and colleges for imparting education, which is a charitable purpose. In that view of the matter, we do not see any merit in this appeal. The substantial question of law framed in this appeal is answered in favour of the assessee and against the revenue. Accordingly, the appeal is dismissed. 17. The Hon'ble Karnataka High Court in the case of CIT vs Islamic Academy of Education reported in 229 Taxman 274 (Kar), has expressed the similar view and held that once the object of the trust is imparting education which is a charitable purpose and carrying out of such activity in accordance with objects is not disputed by the revenue, the registration of the trust cannot be cancelled merely on the ground that trustees are misappropriating the funds of the trust. In such a scenario, it would be open to the tax authorities to deny the benefit under section 11 of the Act but that cannot be a ground for cancellation of registrati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the Assessee Society are not genuine or are not being carried out in accordance with its objects. 20. Accordingly, we hold that invocation of Clause (e) of Explanation to Section 12AB(4) of the Act without any adverse finding on the genuineness or nature of the Assessee Society's activities is wholly misconceived and action of the Ld. PCIT in this regard is rejected. 21. The Ld. PCIT had invoked Clause (a) of Explanation to Section 12AB(4) of the Act by stating that the Assessee had committed specified violation thereon. The provisions of Section 12AB(4) of the Act together with its Explanation are already reproduced hereinabove. On a plain and harmonious reading of Clause (a) of Explanation to Section 12AB(4) of the Act, it is very clear that the said provision could be invoked only where the income of the Assessee society is applied for purposes other than its stated charitable objects. The statutory trigger herein is thus restricted to diversion of income away from the objects for which registration was granted. For the purpose of grant, continuation or cancellation of registration, the determinative and decisive test is the predominant or principal activity of the Asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The only allegation stated by the Ld. PCIT in his order is that the Assessee Society had carried out certain financial transactions which would fall in the category of an 'irregularity' as it extends benefit to certain related parties referred to Section 13(3) of the Act. 24. Now coming to issues pointed out by Ld. PCIT where the benefit was extended to the related parties referred to in section 13(3) of the Act, which according to Ld. PCIT is a financial irregularity. The various financial irregularities classified by the Ld. PCIT are as under:- 25. In Grounds of appeal No. 6 to 6.6, the assessee society has challenged the allegation of the ld. PCIT that payments were made to Smt. Jasmine Gandhi and Smt. Kulpreet Gandhi for acquiring residential property for senior school staff of Rs. 3.60 Crores during the Assessment Years 2019-20 to 2024-25. The allegation levelled on the Assessee Society is that Society funds were regularly transferred to the home loan EMI accounts of Smt. Jasmine Gandhi and Smt. Kulpreet Gandhi and these EMIs were their personal housing loan EMIs, and unrelated to the charitable objects of the Society. 26. The accountant of the assessee society Shri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t any premium, hence no benefit accrued /transferred to the members. 30. The ld. AR submits that the allegation made by ld. PCIT of diversion is primarily based on the statement of the accountant Shri Amit Bhasin, who only handled accounting entries and did not have full knowledge of the transaction. Ld. Ar drew our attention to the fact that even in the assessment orders, no disallowance was made as the society had not claimed the same as application of income. It is further contended by ld. At that if this amount is not claimed as application of income than it will not fall within the ambit of specified violation referred in the clause (a) and (e) of Section 12AB(4) of the Act. Even otherwise, the benefit if any to a related party is not a specified violation under clause (a) and (e) of Section 12AB(4) of the Act. It is further submitted by ld. AR that sub-section (4) of Section 12AB of the Act was introduced by the Finance Act, 2022 and is applicable only from AY 2023-24 onwards. Accordingly, the PCIT had no jurisdiction to invoke or rely upon the said provision for AYs 2018-19 to 2022-23, as the amendment does not operate retrospectively and cannot be applied to earlier asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nts were made through banking channels and subjected to TDS, and the recipients have declared such income in their Income-tax Returns and paid taxes thereon, evidencing genuineness of the payments. The allegation of bogus salary is primarily based on select WhatsApp chats and the statement of the accountant (Mr. Amit Bhasin), which cannot be treated as conclusive evidence of fictitious payments. The role of the accountant was purely limited to accounting and processing of payments, and he had no role in recruitment, HR decisions, employee supervision or determination of salary, therefore, his statement cannot determine the genuineness of employment. 34. Ld. AR further drew out attention to the fact that Shri Samit Bajaj has retracted from the statements and Shri Paramjit Gandhi in his statement confirmed that the payments of salary were genuine. Ld. AR contended that the department has not brought any concrete "evidence such as proof of cash return, non-existence of employees, or falsification of payroll records to establish that the salaries were fictitious. He thus submitted that the salary payments were genuine business expenditure incurred for running the educational institu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....12AB(4) of the Act. 36. Before us, ld. AR for the assessee submits that the appellant society was neither the recipient nor the beneficiary of the alleged cash receipts from sports/ancillary activities conducted after school hours. The tennis, cricket and swimming academies were run by coaches in their individual capacities, and the Society had no involvement in operating these academies. Certain coaches who were engaged during school hours requested permission to use the school premises after school hours for providing additional coaching to interested students, which is a common practice in the NCK region. As per ld. AR such activities were permitted in the interest of students and to retain quality coaches, as it helped students receive additional training and enhanced the reputation of the school when students performed well in competitions. Since no expenditure was incurred by the Society for running such academies and no revenue was earned or retained by the Society from these activities and the coaches themselves were responsible for maintaining, developing and operating the academies, including arranging equipment, manpower and other operational requirements. 37. The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n off the society's funds, which were allegedly received back in cash and utilized for the benefit of related/specified persons. Therefore, it was held that these transactions resulted in diversion of charitable funds for the benefit of related parties, attracting violation of Section 13(3) and constituting a specified violation under clauses (a) and (e) of Section 2AB(4) of the Act. 40. Before us, ld. AR for the assessee contended that all expenses relating to construction, maintenance and procurement were genuine and incurred for the objects of the Society and were duly recorded in the books of account. It was submitted by ld. AR that all payments to vendors were made through proper banking channels after due verification and approval as per the internal accounting system of the appellant society and complete supporting documents such as invoices, work orders, bills and vouchers were available, and no defect in the books of account had been established. All such documents are placed at Pages 412-465 of PB. 41. The ld. AR argued that no independent verification of vendors or actual work executed was conducted by the ld. PCIT before concluding that the bills were bogus. H....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the Act. Ld. CIT DR submits that based on such overwhelming evidences and contrary material found as a result of search, the ld. PCIT was of the opinion that the assessee society has devised these mechanism to siphon out the funds of the society for the benefit of related parties, attracting violation of Section 13(3) and constituting a specified violation under clauses (a) and (e) of Section 2AB(4) of the Act. He therefore prayed for the confirmation of the order of ld. PCIT cancellation of registration granted u/s. 12AA/12A of the Act w.e.f. AY 2018-19 and onwards. 45. Heard the parties and perused the material available on records. First issue is regarding retrospective cancellation of the registration granted u/s. 12A/12AA of the Act w.e.f. Ay 2018-19. 46. Regarding the issue of cancellation of registration with retrospective effect. It is observed that the PCIT has invoked the explanation to section 12AB(4) to hold the assessee committed "specified violations," particularly in terms of application of income and genuineness of the activities. As the Finance Act, 2022, introduced the concept of "specified violations" under section 12AB(4), became effective only from Apri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on from the following cases with reference to the issue of cancellation or withdrawal of registration with retrospective effect: 50. The CBDT vide circular no. 11/2022 dt. 03.06.2022 explain the amendment and clearly observed that these amendments are effective from 1.4.2022, it reads as under: "Finance Act, 2022 has inserted sub-section (4) in section 12AB of the Income-tax Act, 1961 (the Act) allowing the Principal Commissioner or Commissioner of Income-tax to examine if there is any "specified violation" by the trust or institution registered or provisionally registered under the relevant clauses of sub-section (1) of section 12AB or subsection (1) of section 12AA. Subsequent to examination by the Principal Commissioner or Commissioner of Income-tax, an order is required to be passed for either cancellation of the registration or refusal to cancel the registration. Similar provisions have also been introduced in clause (23C) of section 10 of the Act by substituting the fifteenth proviso of the said clause with respect to fund or institution trust or institution or any university or other educational institution or any hospital or other medical institution referred un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted parties, such an alleged violation does not fall within the scope of Clause (a) of Explanation to Section 12AB(4) of the Act. In this regard, the Learned AR rightly placed reliance on the provisions of section 13(1)(c ) of the Act, which is a self-contained code by itself to deal with situations involving alleged benefit to specified persons. He submitted that the provisions of section 13(1)(c) of the Act prior to amendment by the Finance Act 2014 was confined only to denial of exemption to the extent prescribed for the relevant assessment year and does not extend to cancellation of registration. He referred to the provisions of section 13(1)(c) of the Act as it stood prior to amendment by the Finance Act 2014 and impressed upon us to drive home the point that the legislature has consciously provided a distinct mechanism and consequence under section 13 for alleged benefits to related parties, which is limited to taxability of the diverted income alone and not the withdrawal or cancellation of registration. The Learned AR also placed reliance in support of the aforesaid proposition on the decision of Hon'ble Bombay High Court in the case of CIT (Exemptions) vs Audyogik Shikshan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....102 (Punj. & Har.) • Cancer Aid & Research Foundation v. DIT (Exemption) [2014] 66 SOT 86/49 taxmann.com 537 (Mum. - Trib.) • CIT (Exemptions) v. Cancer Aid & Research Foundation Income Tax Appeal No.505 of 2015 • Prabodhan Shikshan Prasarak Sanstha v. Dy. CIT [2014] 44 taxmann.com 33/[2015] 152 ITD 473 (Pune - Trib.) • Tamil Nadu Cricket Association v. DIT (Exemption) [2014] 360 ITR 633/221 Taxman 275 [2013] 40 taxmann.com 250 (Mad.) 12. Therefore, in view of our aforesaid discussion, on the preliminary point itself, we find that the impugned order of the Commissioner cancelling the registration u/s. 12AA(3) of the Act is bereft of a valid jurisdiction. 13. Now, we may come to the argument set up by the learned CIT-DR. According to him, the activities, which has resulted in violation of section 13 of the Act can be construed as activities carried out by the Trust, which are not in accordance with the objects of the Trust. In our considered opinion the argument set up by the CIT-DR is quite misconceived in as much as the activities that are required to be considered for the present purpose are the activities whic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mmissioner has wrongly invoked section 12AA(3) of the Act in as much as the requisite conditions contained therein are not fulfilled. Before parting, we may clarify that we have not examined the merits of the reasoning advanced by the Commissioner, which in any case, in our considered opinion, the Revenue is free to examine in the course of the relevant assessment proceedings carried out by the Assessing Officer, as advised in law. 15. In conclusion, we set-aside the order of the Commissioner and restore the registration originally granted to the assessee u/s. 12AA of the Act on 22.01.1979 (supra). 16. In the result, the appeal is allowed, as above. 12.1. Similar views were expressed by the Hon'ble Jurisdictional Delhi High Court in the case of DIT(E) vs Agrim Charam Foundation reported in 253 ITR 593 (Del) ; Hon'ble Karnataka High Court in the case of CIT vs Fr. Mullers Charitable Institutions reported in 363 ITR 230 (Kar) ; Hon'ble Bombay High Court in the case of DIT (E ) vs Sheth Mafatlal Gagalbhai Foundation reported in 249 ITR 533 (Bom) ; Hon'ble Allahabad High Court in the case of CIT vs Red Rose School reported in 163 Taxman 19 (All). Even as per ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of such trusts which are otherwise chargeable to tax. In other words, where such a trust contravenes the provisions of section 13(1)(c) or (d) of the Act, the maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provisions. (Emphasis supplied by us) 12.2. In view of the plain statutory scheme of provisions of Section 13(1)(c) of the Act as it stood prior to the amendment by the Finance Act 2014, read with the consistent and binding judicial interpretations thereof mentioned herein above, we hold that the legislature never intended violation of Section 13 to operate as a ground for cancellation or withdrawal of registration. The consequence contemplated under Section 13 of the Act is consciously limited to denial of exemption only to the extent of income alleged to have been diverted for the benefit of the specified persons leaving the registration of the trust intact. This distinction between assessment stage consequences and registration stage consequences has been uniformly recognized by the Hon'ble High Courts and Tribunals. Hence, we are in complete agreement with the arguments advanced b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a benefit extended to specified persons referred to section 13(3) of the Act either directly or indirectly, then only such part of the income so diverted would be subjected to tax in the hands of the trust and to that extent, the exemption under section 11 of the Act would be denied, while the charitable character and registration of the trust would remain intact. For this, a specific section 115BBI of the Act has been introduced by the statute that the diverted amounts in terms of section 13(1)(c) of the Act shall get taxed at a maximum marginal rate of 30% on gross basis. Accordingly, once the statute itself limits the consequence of Section 13(1) of the Act violation, to taxation of the income so diverted, any attempt to invoke cancellation of registration on the same set of allegations amounts to imposing a consequence which the legislature has consciously chosen to exclude under the Post Finance Act 2022 regime. In fact, had it been the intention of the legislature to continue cancellation or withdrawal of registration as a consequence of violation of Section 13(1) of the Act, then there was absolutely no necessity to introduce a specific statutory mechanism providing for den....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sions of both the exemption regimes by- I. ensuring their effective monitoring and implementation; II. bringing consistency in the provisions of the two exemption regimes; and III. providing clarity on taxation in certain circumstances. 2. Some consequential amendments are also proposed following the amendments of past few years. All the proposals are discussed below:- 3. Ensuring effective monitoring and Implementation of two exemption regimes 3.1. Books of account to be maintained by the trusts or institutions under both the regimes a) Where the total income of any trust or institution under the second regime, as computed under this Act without giving effect to the provisions of section 11 and section 12 of the Act, exceeds the maximum amount which is not chargeable to income-tax in any previous year, it is required to get its accounts audited. Similar provision exists for the trusts or institutions under the first regime in the tenth proviso to clause (23C) of section 10 of the Act. b) However, there is no specific provision under the Act providing for the books of accounts to be maintained by such trusts or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 13 where the violation is noticed for the first time during any previous year; and (ii) a sum equal to two hundred percent of the aggregate amount of income of such person applied, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 13, where violation is noticed again in any subsequent previous year. c) These amendments will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years. [Clause 76] 3.3 Reference to the Principal Commissioner or Commissioner (PCIT/CIT) for the cancellation of registration/approval: a) The following issues related to the process of approval or registration, or cancellation or withdrawal thereof, have been noticed, namely:- (i) Registration or approval of non-genuine trusts or institution under automated approval system: First and second provisos to clause (23C) of section 10 of the Act were substituted by new provisos by the Taxation and Other Laws ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... proviso to clause (23C) of section 10 of the Act as follows: (i) Sub-section (4) of section 12AB of the Act is proposed to be substituted with a new sub-section (4) to provide that where registration or provisional registration of a trust or an institution has been granted under clause (a) or clause (b) or clause of sub-section (1) of section 12AB or clause (b) of sub-section (1) of section 12AA, as the case may be, and subsequently, (a) the Principal Commissioner or Commissioner has noticed occurrence of one or more specified violations during any previous year; (b) the Principal Commissioner or Commissioner has received a reference from the Assessing Officer under the second proviso to sub-section (3) of section 143 for any previous year, or (c) such case has been selected in accordance with the risk management strategy, formulated by the Board from time to time, for any previous year, the Principal Commissioner or Commissioner shall- (i) call for such documents or information from the trust or institution or make such inquiry as he thinks necessary in order to satisfy himself about the occurrence or otherwise of any specified violati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion (5) of section 12AB of the Act is proposed to be substituted with a new sub-section (5) to provide that that the order under clause (ii) or (iii) of subsection (4) shall be passed before expiry of the period of six months, calculated from the end of the quarter in which the first notice is issued by the Principal Commissioner or Commissioner, on or after the 1st day of April, 2022, calling for any document or information, or for making any inquiry, under clause (i) of subsection (4); IV) Similarly, the fifteenth proviso to clause (23C) of section 10 of the Act is proposed to be substituted to provide that where the fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via) of clause (23C) of the said section 10 is approved under said clause and subsequently- a. the Principal Commissioner or Commissioner has noticed occurrence of one or more specified violations during any previous year; b. the Principal Commissioner or Commissioner has received a ref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rst regime has been applied other than for the objects for which it is established; or b) the trust or institution under the first regime has income from profits and gains of business is not incidental to the attainment of its objectives or separate books of account are not maintained by it in respect of the business which is incidental to the attainment of its objectives; or c) any activity being carried out by the trust or institution under the first regime- A. is not genuine; or B. is not being carried out in accordance with all or any of the conditions subject to which it was notified or approved; or (d) the trust or institution under the first regime has not complied with the requirement of any other law for the time being in force, and the order, direction or decree, by whatever name called, holding that such noncompliance has occurred, has either not been disputed or has attained finality. Consequentially sub-section (3) of section 143 of the Act is proposed to be amended by deleting the reference to trusts or institution under the first regime in the first proviso and delete the existing third proviso. It is als....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7, 40 and 48] 4. Bringing consistency in the provisions of two exemption the regimes As mentioned earlier, there is a requirement for alignment of certain provisions of the two regimes as they both intend to grant similar benefit. 4.1 Accumulation provisions i) Under the existing provisions of the Act, a trust or institution is required to apply 85% of its income during any previous year. However, if it is not able to apply 85% of its income during the previous year, it is allowed to accumulate such income for a period not exceeding 5 years as per the following provisions, namely: I. sub-section (2) of section 11 of the Act for the trusts or institution under the second regime; and II. third proviso to clause (23C) of section 10 of the Act for trusts or institution under the first regime. ii) However, the accumulation of income, as per the provisions of sub-section (2) of section 11 of the Act is allowed subject to the fulfilment of certain conditions while there are no such conditions specifically provided under the third proviso to clause (23C) of section 10 of the Act; iii) Similarly, sub-section (3) of sect....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... furnished on or before the due date specified under sub-section (1) of section 139 for furnishing the return of income for the previous year; (C) It is proposed to insert a proviso to the proposed Explanation 3 to the third proviso to clause (23C) of section 10 of the Act to provide that in computing the period of five years referred to in sub-clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded. (D) It is also proposed to insert an Explanation (Explanation 4) to third proviso to clause (23C) of section 10 to provide that any income referred to in the proposed Explanation 3 shall be deemed to be the income of the previous year in which the following takes place- a) the income is applied for purposes other than wholly and exclusively to the objects for which the trust or institution under the first regime is established or ceases to be accumulated or set apart for application thereto, or b) the income ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5) of section 11,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under the second regime are required not to pass on any unreasonable benefit to the trustee or any other specified person. It is proposed to insert twenty first proviso in clause (23C) of section 10 of the Act to provide that where the income or part of income or property of any trust or institution under the first regime, has been applied directly or indirectly for the benefit of any person referred to in sub-section (3) of section 13, such income or part of income or property shall be deemed to be the income of such person of the previous year in which it is so applied. The provisions of sub-section (2), (4) and (6) of section 13 of the Act shall also apply to trust or institution under the first regime. ii) This amendment will take effect from 1 st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years. [Clause 4] 4.3 The provisions of section 115TD to apply to any trust or institution under the first regime. i) Chapter XII-EB was introduced by the Finance Act, 2016. It provides for the taxation of accreted income of the trust in certain cases. A society or a company or a trust or an instit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... relation to the assessment year 2023-24 and subsequent assessment years. [Clause 4] 5. Providing clarity on taxation in certain circumstances There are various conditions prescribed for availing exemption under the two regimes. There is a need for clear provisions in the Act listing out how income is to be computed in case of non-compliance. Hence, it is proposed to provide for the same so that there is no dispute and the law is applied consistently. 5.1 Allowing certain expenditure in case of denial of exemption i) Different provisions mandate denial of exemption to the trusts or institutions under both the regimes. Some of the provisions under which exemption is not available for its violation are as follows: a) Having commercial receipts in excess of 20% of the annual receipts in violation of the provisions of proviso to section 2(15); b) Not getting the books of account audited; c) Not filing the return of income presently specifically provided under the second regime only; ii) There is presently lack of clarity on computation of taxable income in case of nonavailability of exemption in these cases. For....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 10 of the Act to provide that where any trust or institution under the first regime violates the provisions of the eighteenth proviso or violates the conditions prescribed under tenth or twentieth proviso, its income chargeable to tax shall be computed after allowing deduction for the expenditure (other than capital expenditure) incurred in India, for the objects of such trust or institution, subject to fulfilment of the following conditions: (i) such expenditure is not from the corpus standing to the credit of such trust or institution as on the last day of the financial year immediately preceding the previous year relevant to the assessment year for which the income is being computed ; (ii) such expenditure is not from any loan or borrowing; (iii) claim of depreciation is not in respect of an asset, acquisition of which has been claimed as application of income in the same or any other previous year; and (iv) such expenditure is not in the form of any contribution or donation to any person. (e) It is also proposed to insert an Explanation in the twenty second proviso to clause (23C) of section 10 of the Act to provide that for th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income for maximum 5 years. Sub-section (3) of section 11 of the Act specifically provides for the trusts or institutions under the second regime that such accumulated income, which could not be applied within the period of accumulation (maximum 5 years), shall be deemed to be the income of the trust. Similarly, for the trusts or institutions under the second regime, there is a specific provision under clause (2) of Explanation 1 to sub-section (1) of section 11 of the Act providing for the accumulation of income for a period of one year. Subsection (1B) of section 11 of the Act provides that if the income accumulated under clause (2) of Explanation 1 to sub-section (1) of section 11 of the Act could not be applied within the time allowed; it shall be deemed to be the income of the trust. (d) The trusts or institutions under thefirst regime are also required to apply at least 85% of their income during the year. Where such trust is not able to apply 85% of its income during the year and does not accumulate such income, entire income of such trust shall be subjected to tax where the trust is approved under the second proviso to clause (23C) of section 10 of the Act since t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y way of any specified income, the income-tax payable shall be the aggregate of- (i) the amount of income-tax calculated at the rate of thirty per cent on the aggregate of specified income; and (ii) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of specified income referred to in clause (i). (f) The sub-section (2) of this new section seeks to provide that no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of the Act in computing specified income. (g) Explanation to the proposed section defines "specified income" to mean:- (i) income accumulated or set apart in excess of fifteen percent of the income where such accumulation is not allowed under any specific provisions of the Act; or (ii) deemed income referred to in Explanation 4 to third proviso to clause (23C) of section 10 or sub-section (3) of section 11 or sub-section (1B) of section 11;or (iii) any income which is not exempt under clause (23C) of section 10 on account of violation of the pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eft completely in the dark as to precise statutory charge it was required to meet, thereby vitiating the very assumption of jurisdiction under Section 12AB(4) of the Act. He submitted that the requirement of expressly invoking a specific limb of the statutory provision is not an empty formality, but a mandatory jurisdictional precondition. The Explanation to Section 12AB(4) of the Act exhaustively enumerates distinct and mutually exclusive 'specified violations', each carrying different factual and legal connotations. Unless the Learned PCIT forms a prima facie satisfaction as to which exact Clause is attracted and communicates the same to the assessee in the show-cause notice, the initiation of proceedings is rendered arbitrary, vague and unsustainable in law. A notice which does not disclose the precise statutory charge is no notice in the eyes of law. In this regard, we find that the learned AR rightly placed reliance on the Coordinate Bench decision of this Delhi Tribunal in the case of Aggarwal Vidya Pracharni Sabha, Faridabad v. PCIT Central in ITA No. 1308/Del/2023 dated 8-1-2024 wherein it was held as under:- "17.1 Furthermore, here in this case, the exercise of po....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onstruction of taxing statutes. In the present case, the Learned PCIT (Central) Kanpur has wrongly invoked the provisions of Section 12AB(4) of the Act to treat the alleged acts of the Assessee Society during financial years 2018-19, 2019-20, 2020-21 and 2021-22, relevant to assessment years 2019-20, 2020-21, 2021-22 and 2022-23, as 'specified violations', despite the fact that the said provision was not on the statute book during those years. It is a settled principle that fiscal statutes creating new liabilities or disabilities must be construed strictly and prospectively, unless the legislature expressly provides otherwise. We find that there is no express or implied legislative intent to apply the concept of 'specified violation' to periods prior to 1-4-2022. Accordingly, the cancellation of registration of the Assessee Society for assessment years 2019-20, 2020-21, 2021-22 and 2022-23 on the basis of alleged 'specified violations' is without authority of law, arbitrary and liable to be quashed. Further we find that the provisions introduced with effect from a particular date cannot be applied retrospectively in the absence of express legislative mandate. Reliance in this regar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t, whereby the registration of the Assessee Society was cancelled for assessment years 2019-20 to 2023-24 and for all subsequent assessment years. The Learned AR has submitted that the impugned order is void ab initio for lack of jurisdiction in as much as the authority competent to grant, cancel or withdraw registration under Section 12A/ 12AA / 12AB of the Act is the Commissioner of Income Tax (Exemptions), Lucknow and not PCIT (Central), Kanpur. He submitted that the order passed under Section 127 of the Act nearly provides for transfer of assessment jurisdiction from one assessing officer to another assessing officer. Section 127 falls under Chapter XIII of the Act, dealing exclusively with assessment machinery and does not extend to or govern statutory provisions relating to grant or cancellation of registration under Sections 12A / 12AA / 12AB of the Act, which operate in a different and distinct statutory field. He placed reliance on the decision of Co-ordinate Bench of this Delhi Tribunal in the case of Aggarwal Vidya Pracharni Sabha vs PCIT (Central) in ITA No. 1308 /Del /2023, dated 8-1-2024 in support of his contentions. The relevant operative portion of the said order i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ransferred are not subordinate to the same Principal Director General or Director General or Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner,- (a) where the Principal Directors General or Directors General or Principal Chief Commissioners or Chief Commissioners or Principal Commissioners or Commissioners to whom such Assessing Officers are subordinate are in agreement, then the Principal Director General or Director General or Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner from whose jurisdiction the case is to be transferred may, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so, and after recording his reasons for doing so, pass the order; (b) where the Principal Directors General or Directors General or Principal Chief Commissioners or Chief Commissioners or Principal Commissioners or Commissioners aforesaid are not in agreement, the order transferring the case may, similarly, be passed by the Board or any such Principal Director General or Director General or Principal Chief Commissioner or Chief Commissioner or Principal Com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f about the objects of the trust or institution and the genuineness of its activities under item (A), and compliance of the requirements under item (B), of sub-clause (i),- (A) pass an order in writing registering the trust or institution for a period of five years; (B) if he is not so satisfied, pass an order in writing rejecting such application and also cancelling its registration after affording a reasonable opportunity of being heard; (c) where the application is made under sub-clause (vi) of the said clause, pass an order in writing provisionally registering the trust or institution for a period of three years from the assessment year from which the registration is sought, and send a copy of such order to the trust or institution. (2) All applications, pending before the Principal Commissioner or Commissioner on which no order has been passed under clause (b) of sub-section (1) of section 12AA before the date on which this section has come into force, shall be deemed to be an application made under sub-clause (vi) of clause (ac) of sub-section (1) of section 12A on that date. (3) The order under clause (a), sub-clause (ii)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....illed in by not providing, fully or partly, or by providing false or incorrect information or documents required to be provided under sub-rule (1) or (2) or by not complying with the requirements of sub-rule (3) or (4), the Principal Commissioner or Commissioner, as referred to in sub-rule (5), after giving an opportunity of being heard, may cancel the registration in Form No. 10AC and Unique Registration Number (URN), issued under sub-rule (5), and such registration or such Unique Registration Number (URN) shall be deemed to have never been granted or issued. (7) In case of an application made under sub-clause (vi) of clause (ac) of sub-section (1) of 4 [section 12A as it stood immediately before its amendment vide the Finance Act, 2023,] during previous year beginning on 1st day of April, 2021, the provisional registration shall be effective from the assessment year beginning on 1st day of April, 2022. (8) In case of an application made in Form No. 10AB under clause (ii) of the sub-rule (1), the order of registration or rejection or cancellation of registration under sub-clause (ii) of clause (b) of sub-section (1) of section 12AB shall be in Form No. 10AD and i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ated 22.10.2014 providing for the territorial jurisdiction of CIT(E) in furtherance of powers given to the Board u/s. 120 (1) and (2) of the Act, made available at pages 2 to 5 of the paper book:- "NOTIFICATION New Delhi, the 22nd October, 2014 (Income-Tax) S.O. 2754 (E).-In exercise of the powers conferred by sub-section (1) and (2) of section 120 of the Income-Tax Act, 1961 (43 of 1961) and in supersession of the notification of the Government of India, Central Board of Direct Taxes number S.O.880(E), dated the 14th September, 2001, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub section (ii), dated the 14th September, 2001, except as respects things done or omitted to be done before such supersession, the Central Board of Direct Taxes hereby - SCHEDULE S. No. Designation Headquarters Territorial area Cases or classes of cases (1) (2) (3) (4) (5) Commissioner of Income-tax (Exemption), Ahmedabad Ahmedabad State of Gujarat, Union Territory of Daman and Diu, Union Territory of Dadra and Nagar Haveli All cases of persons in the territorial area specified column (4) claiming exemption unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on by the Principal Commissioner or Commissioner of Income-tax, an order is required to be passed for either cancellation of the registration or refusal to cancel the registration. Similar provisions have also been introduced in clause (23C) of section 10 of the Act by substituting the fifteenth proviso of the said clause with respect to fund or institution trust or institution or any university or other educational institution or any hospital or other medical institution referred under sub-clauses (iv), (v), (vi), (via) of this clause and which have been approved or provisionally approved under the second proviso to the said clause. These amendments are effective from 1st April, 2022. In addition to the specified violations referred above, the power of cancellation has also been granted under sub-rule (5) of rule 17A and subrule (5) of rule 2C of the Income-tax Rules, 1962 ( the Rules) to the Principal Commissioner or Commissioner authorised by the Board. This Circular only relates to cancellation of registration/approval or provisional registration/approval in the case of "specified violation". 13. Now, as we go through the impugned order passed u/s. 12AB(4) of the Act, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed in the column No.5 of the Schedule of this Notification and had created a specific jurisdiction on territorial basis in regard to the provisions generally dealing with claim of exemptions u/ss 10, 11,12, 13A and section 13B of the Act. 14.2 Thus as we refer to the Notification dated 22.10.2014, the clause (a) vested powers with Commissioners of Income-tax (Exemptions), for class or class of cases pertaining to section 10, section 11, section 12, section 13A and section 13B of the Act and clause (b), to issue orders in writing for the exercise of 'their' powers and perform all 'their' functions by Additional Commissioners of Income tax or Joint Commissioners of Income-tax and Tax Recovery Officers who are subordinate to them and that signifies that again this delegation of powers by CIT(E), Chandigarh could have been qua officers subordinate to CIT(E), Chandigarh only and not, in any way, gave powers to CIT(E), Chandigarh to pass an order u/s. 127(2)(b) of the Act to transfer powers vested by Board to any other Tax Authority. 14.3 Next, as we refer to Section 12 AB and Rule 17A which have come into effect from 01.04.2021, and read it with the Circular no. 11 dat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....virtue of the Explanation defining the scope of 'case' for the purpose of section 127, did not have power vested in him to cancel registration u/s. 12AB(4). The 'case' refers to assessment initiated as a consequence of search or consequential proceedings to such assessments only and cannot be extended to special powers of ld. CIT(E), Chandigarh. Thus, the assumption of jurisdiction on the basis of the order dated 26.10.2020 of CIT(E), Chandigarh is completely illegal and that makes the whole exercise of ld. PCIT passing the impugned order liable to be quashed. 16. Furthermore, if examine the legality of the procedure followed by ld. PCIT, Gurgaon to pass order u/s. 12AB(4), by recourse to exercise of powers by virtue of clause (a) of sub-section (4) of section 12AB, it comes up that ld. PCIT, Gurgaon admits that a 'proposal' for cancellation of the registration of the assessee trust granted u/s. 12AA of the Act was forwarded vide letter dated 23.08.2022 by the AO through the Range head. In this context, if we refer to second proviso to subsection (3) of section 143 of the Act, the same provides that if the AO is satisfied about any specified violation provided in sub-secti....