2017 (3) TMI 103 - AT - Income Tax

Cancellation of registration granted u/s 12AA - carrying on activities in the nature of trade, commerce or business etc., and the gross receipts from the same were in excess of the stipulated limit of ₹ 10 lac as stood contemplated under the first proviso of Sec. 2(15) - Held that - As it is neither the case of the revenue that the assessee which after verification of the genuineness of its objects and activities had been granted registration by the department u/s Sec.12AA(1)(b)(i), had during the year embarked on to any such new activities, which can safely be characterized as non-genuine activities, nor is it the claim of the revenue that the assessee subsequent to its registration is found to be carrying out activities which are not in accordance with its objects, therefore in the absence of satisfaction by the assessee of either of the aforesaid preconditions which forms the very foundation for exercising of the jurisdiction by the DIT(Exemption) for cancelling the registration of the assessee under Sec. 12AA(3), it can safely be concluded that the DIT(Exemption) had wrongly cancelled the registration of the assessee vide his order passed u/s 12AA(3) of the Act . We thus set aside the order passed by the DIT(Exemption) u/s 12AA(3) and therein restore the registration granted to the assessee u/s Sec.12AA(1)(b)(i). - Decided in favour of assessee

Issues Involved:
1. Cancellation of registration under Sec. 12AA(3) of the Income-tax Act, 1961.
2. Interpretation of the first proviso to Sec. 2(15) of the Income-tax Act, 1961.
3. Determination of whether the assessee's activities fall under the definition of "charitable purpose."

Issue-wise Detailed Analysis:

1. Cancellation of Registration under Sec. 12AA(3):
The assessee, a wholly owned subsidiary of NCDEX, was registered as a charitable institution under Sec. 12AA(1)(b)(i) of the Income-tax Act, 1961. The DIT(Exemption) cancelled this registration under Sec. 12AA(3) on the grounds that the assessee was engaged in activities in the nature of trade, commerce, or business, with gross receipts exceeding ?10 lakh, thus violating the first proviso to Sec. 2(15). The assessee appealed against this cancellation, arguing that its activities were in line with its objectives as a charitable institution and that the DIT(Exemption) wrongly interpreted the provisions to cancel its registration.

2. Interpretation of the First Proviso to Sec. 2(15):
The DIT(Exemption) concluded that the assessee's income from running courses and franchisee fees constituted systematic income generation from business activities, thus falling under the first proviso to Sec. 2(15). This proviso deems that if an entity's activities involve trade, commerce, or business and exceed the stipulated monetary limit, it is not considered to be for charitable purposes. The assessee contended that even if it was hit by the first proviso, it should only affect its entitlement to claim exemption under Sec. 11 for that particular year and not lead to the cancellation of its registration under Sec. 12AA/12A.

3. Determination of Whether the Assessee's Activities Fall Under the Definition of "Charitable Purpose":
The tribunal examined whether the assessee's activities of running courses and receiving franchisee fees could be considered as charitable. It was noted that Sec. 2(15) and Sec. 11 are interlinked, but the impact of the first proviso to Sec. 2(15) should be limited to the denial of exemption for that specific year rather than leading to the cancellation of registration. The tribunal emphasized that Sec. 12AA(3) provides for cancellation only if the activities are not genuine or not in accordance with the trust's objects, which was not the case here.

Judgment:
The tribunal held that the DIT(Exemption) had wrongly cancelled the registration of the assessee under Sec. 12AA(3). The tribunal found substantial force in the assessee's argument that the first proviso to Sec. 2(15) should not affect the continuation of registration under Sec. 12AA/12A. The tribunal restored the registration, noting that the DIT(Exemption) had overstepped by interpreting the provisions to cancel the registration based on the assessee's income exceeding the stipulated limit.

The tribunal also clarified that it refrained from adjudicating whether the assessee's activities were hit by the provisions of Sec. 2(15) and left this issue open for the assessee to contest before the Assessing Officer (A.O.).

Conclusion:
The appeal of the assessee was partly allowed, with the tribunal setting aside the order of the DIT(Exemption) and restoring the registration granted under Sec. 12AA(1)(b)(i). The tribunal emphasized a strict literal interpretation of statutory provisions and rejected the DIT(Exemption)'s broader interpretation that led to the cancellation of registration. The issue of whether the assessee's activities fall under the definition of "charitable purpose" as per Sec. 2(15) was left open for further contestation.

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