2017 (11) TMI 1667 - HC - Income Tax

Exemption u/s 11 - allowability of expenses incurred for religious purposes - Income from property held for charitable or religious purposes - Held that - Though a Christian organization its Memorandum of Association is unambiguous and categorical that it was created for the benefit of all people irrespective of caste creed or religion and it has been mentioned above that there is evidence to show its beneficiaries include Hindus and Muslims. At the same time there is no evidence to show that during the period under consideration the appellant incurred expenses for purposes other than its stated objectives. Even if its is held to be a religious organization it is eligible for registration and entitled to benefits of section 12A Assessee being a religious and charitable society the expenses incurred by it relating to both religious as well as charitable activities were for the purpose for which the society was established and therefore the expenses incurred for religious purposes could not be disallowed for the purpose of exemption u/s 11 Taking into consideration the fact that the matter which is pending before the High Court the observations made by the tribunal are just and proper. 12AA registration could not have been given on the basis which is stayed by the High Court. In that view of the matter the issue is answered in favour of the assessee and against the department.

Summary

Issues Involved:
1. Applicability of Section 13(1)(b) of the Income Tax Act to the assessee society.
2. Justification of the Tribunal in setting aside the order of the CIT canceling the registration under Section 12AA(3).

Issue-Wise Detailed Analysis:

1. Applicability of Section 13(1)(b) of the Income Tax Act:

The appellant challenged the Tribunal's decision, which dismissed the department's appeal and confirmed the CIT(A)'s order. The primary question was whether the provisions of Section 13(1)(b), which override Sections 11 and 12, apply to the assessee society since it was established for the benefit of a particular community, i.e., Christians.

The AO assessed the income of the assessee at ?2,02,21,283/- after noticing that the activities were contrary to the provisions of Sections 11, 12, and 13(1)(b) of the Income Tax Act. The AO disallowed various expenses incurred by the assessee, which were primarily for propagating Christianity.

The CIT(A) observed that the registration under Section 12A was still valid and that the assessee had been carrying out its activities in the same manner for years. The CIT(A) concluded that the AO's decision was based on a narrow and incorrect interpretation of Section 11, which recognizes both charitable and religious purposes. The Tribunal upheld this view, stating that the expenses were incurred for charitable purposes and that the assessee was entitled to the benefits of Section 12A.

2. Justification of the Tribunal in Setting Aside the Order of the CIT Canceling the Registration under Section 12AA(3):

The second issue was whether the Tribunal was justified in setting aside the CIT's order, which canceled the registration of the assessee under Section 12AA(3) due to irregularities and illegal activities.

The Tribunal noted that the CIT's decision was influenced by the cancellation of the society's registration by the Registrar of Societies. However, the Tribunal found that the CIT had not provided the assessee with the AO's report, which was used as a basis for the cancellation. The Tribunal emphasized the need for natural justice and directed that the report be provided to the assessee.

The Tribunal also considered the pending writ petition before the High Court, where the society challenged the Registrar's cancellation order. The High Court had stayed the operation of the Single Judge's order, indicating that the Registrar might not have the authority to cancel the registration.

The Tribunal concluded that the CIT's order under Section 12AA(3) needed to be reconsidered, taking into account the observations made and providing the assessee an opportunity for a hearing.

Conclusion:

The High Court found that the Tribunal's observations were just and proper, and the 12AA registration could not have been canceled based on the grounds stayed by the High Court. Consequently, the issue was resolved in favor of the assessee, and the department's appeals were dismissed, along with the cross-objections filed by the assessee.