2016 (4) TMI 1006 - AT - Income Tax

Cancellation of registration u/s. 12AA(3) - cancellation of grant of certificate u/s. 80G(5)(vi) of the Act by DIT(E), Kolkata - Held that - The amendment brought in section 12AA(3) by adding a proviso by Finance No. 2 Act, 2004 and by Finance Act, 2008 adding proviso to section 2(15) of the Act have been discussed in great detail and laid down the principles that registration granted u/s. 12A of the Act cannot be withdrawn or cancelled by DIT by invoking the provisions of section 12AA(3) of the Act. Section 12AA(3) of the Act empowers the DIT to cancel the registration granted u/s. 12AA(1)(b) of the Act if he is satisfied that the activities of the trust or institution are not genuine or are not being carried out in accordance with the object of the trust or institution, as the case may be. The combined reading of both the sections of section 12AA(3) and 12AA(1)(b) of the Act makes it clear that registration can be cancelled only in those cases where registration has been granted u/s. 12AA(1)(b) of the Act but it no where empowers DIT to cancel or withdraw the registration granted u/s. 12AA of the Act. Similar is the position in respect to exemption/rejection u/s. 80G(5)(vi) of the Act in the present case in the given facts and circumstances. Accordingly, we quash the orders passed by DIT(E) cancelling the registration u/s. 12AA(3) and rejection/exemption granted u/s. 80G(5)(vi) of the Act dated 08.03.2011. - Decided in favour of assessee.

Summary

Issues Involved:
1. Cancellation of registration under Section 12AA(3) of the Income Tax Act.
2. Cancellation of the grant of certificate under Section 80G(5)(vi) of the Income Tax Act.

Detailed Analysis:

1. Cancellation of Registration under Section 12AA(3):

The primary issue was whether the assessee society, which runs an educational institute and a textile division, should have its registration under Section 12AA(3) of the Income Tax Act canceled. The DIT(E) argued that the society was engaged in business activities through its textile division, which incurred significant losses adjusted against the educational institute's income. This, according to DIT(E), violated the proviso to Section 2(15) of the Act, leading to the cancellation of the registration.

The assessee contended that the textile division was integral to the educational activities, providing practical training to students, and thus was not a commercial activity. The assessee's counsel cited CBDT Circular No. 11/2008, which clarified that the proviso to Section 2(15) does not apply to institutions whose primary purpose is education, even if they incidentally engage in commercial activities. The JCIT's report supported this by confirming that the textile division was used for practical training.

The Tribunal considered the history of the society, its continuous exemption under Section 10(23C)(vi) since 1985, and the practical training provided by the textile division. The Tribunal found that the textile division's activities were incidental to the educational purpose and not commercial. The Tribunal also referenced the Madras High Court's decision in The Tamil Nadu Cricket Association vs. The Director Of Income Tax (Exemption), which emphasized that amendments to Section 2(15) were intended to curb entities disguising commercial activities as charitable purposes, not genuine educational institutions.

2. Cancellation of the Grant of Certificate under Section 80G(5)(vi):

The second issue was the cancellation of the certificate under Section 80G(5)(vi) of the Income Tax Act. The DIT(E) canceled the certificate on similar grounds, arguing that the textile division's business activities disqualified the society from being considered charitable.

The Tribunal found that the DIT(E) had not properly considered the educational nature of the society's activities and the integral role of the textile division in providing practical training. The Tribunal noted that the society's primary purpose was educational, and any incidental commercial activities did not detract from its charitable status.

The Tribunal also referenced the CCIT's order granting exemption under Section 10(23C)(vi), which recognized the textile division as part of the educational activities. The Tribunal concluded that the DIT(E) had erred in canceling the registration and certificate, as the society's activities were genuine and in accordance with its educational objectives.

Conclusion:

The Tribunal quashed the orders passed by the DIT(E) canceling the registration under Section 12AA(3) and the certificate under Section 80G(5)(vi). The appeals of the assessee were allowed, reaffirming the society's charitable status and its entitlement to the exemptions under the Income Tax Act.