2015 (5) TMI 652 - HC - Income Tax

Registration under Section 12A cancelled - Whether AO could have rendered findings questioning the exemption under Section 12-A enjoyed by the assessee, on the basis of the donation which was made to the Ram Krishna and Sons Charitable Trust? - Held that - The AO in the present case noticed that after the donation of the institution to the assessee on 26.05.2002 a significant portion of income i.e. fee collection etc., was donated to the RKSCT. Now, when the notice was issued under Section 12A by the Director of Income Tax, the assessee was under a duty to furnish particulars and satisfy the authority as to how and why the amounts made over to Ram Krishan & Sons Charitable Trust from its earnings through its charitable activities were either not a device, or were permissible under its trust. Given the significance of the amounts involved i.e. ₹ 2.74 crore and ₹ 60 lakhs in AY 2004-05 and ₹ 4,43,37,505/- crores in AY 2003-04, the assessee was certainly expected to give an explanation better than the one it argued that the AO s reasoning was not supported by law as he was not the authority to doubt such expenditure. The obligation required of a charitable trust enjoying the benefit of tax exemption under Section 12A is clearly categorical in that it has applied for registration under Section 80G(5) towards its charitable activities. In these circumstances the DIT (Exemption) was certainly within her rights to insist on a proper explanation which in the circumstances of the case, the assessee failed to provide perhaps more as a result of its mistake on his mis-apprehension that the entire basis for the revocation proceedings or the AO s opinion for AY 2003-04 and 2004-05. Once the notice under Section 12A proposing revocation was issued in the independent nature of the proceedings had to be satisfied. The assessee was under an obligation to provide such material to satisfy that the donation fulfilled the objective and were of charitable nature and as such rendered any proposed action for revocation unwarranted.The matter is remitted to the DIT (Exemption) for fresh examination after consideration of such material as the assessee may choose to place on record within the next four weeks.

Summary

Issues:
1. Questioning exemption under Section 12-A based on donations made to a charitable trust.
2. Justification of setting aside the order canceling registration under Section 12A by the Director of Income Tax (Exemption).

Issue 1: Questioning Exemption under Section 12-A:
The case involved three connected appeals, with the first two appeals questioning the Assessing Officer's findings on the exemption under Section 12-A based on donations made to a charitable trust. The High Court analyzed the powers of the Assessing Officer in doubting the certificate granted under Section 12A. It was established that while the AO could examine the nature of expenditure, he could not challenge the certificate issued under Section 12A. The Court concluded that the AO's actions were not justified, and the question of law was answered against the Revenue in favor of the assessee.

Issue 2: Setting Aside Order Canceling Registration under Section 12A:
The third appeal raised the issue of the legality of revoking the certificate under Section 12-A by the Director of Income Tax (Exemption). The Director's order was based on the AO's findings for specific assessment years and subsequent show cause notices to the assessee. The Director concluded that the trust's activities did not qualify for registration under Section 12A due to alleged violations of Section 2(15) and conducting business transactions under the guise of charitable activities. However, the ITAT accepted the assessee's arguments, highlighting that the revocation lacked substantial reasoning and evidence of non-genuine activities. The ITAT emphasized the need for cogent reasoning before canceling registration under Section 12A.

The High Court observed that while the Director of Income Tax should base revocation decisions on material and reasoning, the assessee should have been more vigilant in providing explanations and justifications for the significant amounts involved in donations to the charitable trust. The Court noted that the assessee's failure to adequately explain the nature of donations and charitable activities led to the revocation order. Consequently, the Court set aside both the ITAT's and the Director's orders, remitting the matter back to the Director for fresh examination based on any additional material the assessee may provide within four weeks. The Court partially allowed the appeal in these terms.