2014 (9) TMI 424 - AT - Income Tax

Cancellation of registration granted u/s 12AA Loans taken from the two private companies detriment to the objects of the trust or not - Held that - DIT(E) was of the view that the assessee has invested in purchase of equity shares of M/s. Matrix Laboratories Ltd. which is in violation of objects of trust deed and loans were obtained from two private companies which is in contravention of the trust deed Held that - DIT(E) cannot reopen the issue again for the purpose of cancellation of registration, more so, after the order of the ITAT - it appears from the reply to show-cause notice, assessee has not referred to the order of the Tribunal, however, on a reference to the order of ITAT it is clear a copy of the order was also marked to the DIT(E) - in spite of such order of the ITAT holding that there is no violation by the assessee of the provisions contained in section 11(5) r.w.s. 13(1)(d) of the Act, the action of the DIT(E) in cancelling registration on the issue of investment in shares cannot be appreciated. Regarding receiving unsecured loans from M/s. Vanpic Projects (P) Ltd. and M/s. Vanpic Ports (P) Ltd., it is clear that in respect of the loans also there is no violation of the provisions contained under the trust deed - clause 5 of the trust deed empowers the trustees to obtain loan from banks and financial institutions, it cannot be construed in a manner to suggest that the said clause restricts the trust/ trustees from obtaining loans from private parties - Even raising of loans is not coming under the object clauses of the trust deed - There is nothing brought on record by the DIT(E) to show that funds have not been applied for achieving the objects of the trust - DIT(E) can cancel the registration of a trust or institution if he is satisfied that the activities of the trust are not genuine or not in accordance with the objects of the trust - neither in the order of the DIT(E) nor from any other facts and materials on record, it is established that the activities of the trust are not genuine or are not in accordance with the objects of the trust - The grounds on which the DIT(E) has cancelled the registration are neither germane nor relevant for the purpose of section 12AA(3) of the Act - Nothing has been brought on record to show that obtaining of loans from the two private companies is in detriment to the objects of the trust or they are for the benefit of the trustees or their relatives - cancellation of registration by the learned DIT(E) u/s. 12AA(3) of the Act is legally unsustainable Decided in favour of assessee.

Summary

Issues Involved:
1. Cancellation of registration under section 12AA of the Income-tax Act, 1961.
2. Investment in shares by the trust.
3. Obtaining unsecured loans from private companies.

Detailed Analysis:

1. Cancellation of Registration under Section 12AA:
The primary issue in this case is the cancellation of registration granted to the assessee under section 12AA of the Income-tax Act, 1961. The Director of Income Tax (Exemptions) [DIT(E)], Hyderabad, cancelled the registration on the grounds that the trust engaged in activities that were not in accordance with its stated objects, specifically the investment in shares and obtaining unsecured loans from private companies. The tribunal examined whether these actions justified the cancellation of the registration.

2. Investment in Shares:
The DIT(E) argued that the trust's transaction of buying and selling shares was not in accordance with its objects. The trust had invested in 20 lakh equity shares of M/s. Matrix Laboratories Ltd., which were later sold at a profit. The DIT(E) initially rejected the trust's registration application due to this investment, citing violations of section 11(5) read with section 13(1)(d) of the Act. However, upon reconsideration under section 154, the DIT(E) granted registration, acknowledging that the trust had complied with the proviso (iia) to section 13(1)(d) by disposing of the shares within the stipulated period.

The tribunal noted that this issue had already been resolved in favor of the assessee by the DIT(E) and later by the ITAT in ITA No. 670/Hyd/2012, which held that the assessee did not violate section 11(5) r.w.s. 13(1)(d). Therefore, the DIT(E) could not revisit this issue to cancel the registration, as it would amount to reviewing a settled matter.

3. Obtaining Unsecured Loans:
The DIT(E) also cited the trust's receipt of unsecured loans from M/s. Vanpic Projects (P) Ltd. and M/s. Vanpic Ports (P) Ltd., companies promoted by individuals with substantial capital, as a reason for cancellation. The trust argued that these loans were interest-free and did not harm its financial interests. The tribunal found that clause 5 of the trust deed allowed borrowing from banks and financial institutions but did not restrict borrowing from private entities. The tribunal emphasized the distinction between the source of funds and their application, noting that the trust's activities should be judged based on whether the funds were used to achieve its objects.

The tribunal concluded that the DIT(E) failed to demonstrate that the trust's activities were not genuine or not in accordance with its objects, as required under section 12AA(3). The grounds for cancellation were deemed irrelevant to the statutory provisions.

Conclusion:
The tribunal held that the cancellation of registration under section 12AA(3) by the DIT(E) was legally unsustainable. The issues of investment in shares and obtaining unsecured loans had been previously resolved in favor of the assessee, and the DIT(E) could not revisit these matters to justify cancellation. The tribunal quashed the impugned order and allowed the assessee's appeal.

Pronouncement:
The judgment was pronounced in the open court on 10.9.2014.