2017 (9) TMI 721 - AT - Income Tax

Cancellation of registration granted u/s. 12A - assessee not engaged in any real charitable activities - assessee has given corpus donation to a trust - Held that - We find that the activities/ objects of the trust have not been doubted and on the basis of same activities/ objects registrations u/s 12AA was awarded to the assessee. Simply the assessee has given corpus donation to a trust cannot be the basis for the denial of the registration certificates as discussed above. It is also important to note that the activities of the assessee have not been doubted in all other years as discussed above. As such the activities of the trust were duly accepted by the Revenue as evidenced from the details submitted by the AR in the preceding paragraph and placed on record. The ld. DR has not brought anything on record contrary to the finding of ld. AR. Thus the amount of donation given by the assessee trust to the other trust is very much charitable activities. In this connection the CBDT has issued instruction No. 1132 date 05.01.1978 wherein it was clarified that the payment of a sum by one Charitable Trust to another for utilization by the donee-trust towards its charitable objects is proper application of income for a charitable purpose. No hesitation in reversing the order of ld. CIT(Ex) and accordingly the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Cancellation of registration under Section 12A with retrospective effect.
2. Allegations of non-genuine charitable activities and non-compliance with trust objectives.
3. The legality of retrospective cancellation of registration.
4. Evaluation of the trust's activities and their alignment with the objectives.
5. The impact of corpus donations on the application of income.
6. Jurisdiction and authority of the Commissioner of Income Tax (Exemptions) in cancelling the registration.

Detailed Analysis:

1. Cancellation of Registration Under Section 12A with Retrospective Effect:
The primary issue raised by the assessee was the cancellation of its registration under Section 12A of the Income Tax Act, 1961, with retrospective effect from April 1, 2005. The Commissioner of Income Tax (Exemptions) [CIT(Ex)] had cancelled the registration based on findings that the trust was not engaged in genuine charitable activities and was rotating donations among group trusts to claim tax exemptions.

2. Allegations of Non-Genuine Charitable Activities and Non-Compliance with Trust Objectives:
The CIT(Ex) held that the assessee trust was not performing genuine charitable activities, was not complying with its stated objectives, and was involved in rotating donations among group trusts. These findings were based on a survey operation and subsequent assessment proceedings, which revealed that the trust's income was mainly derived from investments and was being applied through donations to other group trusts.

3. The Legality of Retrospective Cancellation of Registration:
The assessee argued that the CIT(Ex) did not have the authority to cancel the registration with retrospective effect from April 1, 2005, as the power to cancel registrations under Section 12A was only granted with effect from June 1, 2010, as per Circular No. 1/2011. The tribunal agreed with this contention, citing that the CIT(Ex) had exceeded his jurisdiction by cancelling the registration from an earlier date.

4. Evaluation of the Trust's Activities and Their Alignment with the Objectives:
The tribunal examined whether the trust's activities were aligned with its objectives and whether they were genuine. It was noted that the trust had been making corpus donations to other trusts, which was not prohibited under the Act prior to the amendment effective from April 1, 2018. The tribunal found no evidence to suggest that the trust's activities were not in accordance with its objectives or that the donations were not genuine.

5. The Impact of Corpus Donations on the Application of Income:
The tribunal observed that corpus donations made out of current year’s income were considered an application of income under the law prior to April 1, 2018. The amendment introduced by the Finance Bill, 2017, which stated that corpus donations would not be treated as an application of income, was not applicable to the assessment years in question. Therefore, the trust's practice of making corpus donations was in compliance with the law at the time.

6. Jurisdiction and Authority of the Commissioner of Income Tax (Exemptions) in Cancelling the Registration:
The tribunal emphasized that the CIT(Ex) had the authority to cancel the registration only from the assessment year 2011-12 onwards. The retrospective cancellation from April 1, 2005, was beyond the CIT(Ex)'s jurisdiction. Additionally, the tribunal highlighted that the CIT(Ex) failed to provide concrete evidence that the trust's activities were not genuine or that the donations were being misused.

Conclusion:
The tribunal concluded that the CIT(Ex) had exceeded his jurisdiction by cancelling the registration with retrospective effect and that there was no substantial evidence to prove that the trust's activities were not genuine or in alignment with its objectives. The appeals by the assessee were allowed, and the order of the CIT(Ex) was reversed. The tribunal also noted that the trust's activities had been accepted by the Revenue in subsequent years, further supporting the assessee's case.