2017 (10) TMI 867 - HC - Income Tax

Registration u/s 12AA - bogus donation - cancellation of registration - Held that - While it is possible that a particular donation may be bogus or fictitious and, as such, the assessee may be assessed to tax therefor and other steps may be taken against the assessee for recovery of interest or penalty, if permissible; but the fact that one donation may be bogus would not establish that the activities of the trust are not genuine or that the activities are not being carried out in accordance with the objects of the trust - However, if there are multiple bogus transactions of similar kind, it may lead to the reasonable assessment of the commissioner that the trust may be engaged in such activities and, as such, the activities of the trust may be found to be not genuine or such activities may be found not to be in conformity with the objects of the trust. The matter has been remanded before the appropriate commissioner, but only for the purpose of ascertaining whether the officials of the donor would stand by their statements in the wake of any cross-examination that they may have to face from the petitioner herein - appeal allowed by way of remand.

Summary

Issues:
Scope of challenge in canceling registration under Section 12AA of the Income Tax Act, 1961; Principles of natural justice in cancellation proceedings; Distinction between a bogus donation and genuine activities of a trust.

Analysis:
The judgment delves into the limited scope of challenging the cancellation of registration under Section 12AA of the Income Tax Act, focusing on the department's exercise in canceling such registration. The case involves a donor alleging a donation of ?37 lakh to a trust as bogus, leading to proceedings for canceling the trust's registration. The petitioner raised concerns regarding the department's adherence to natural justice principles, leading to the tribunal remanding the matter for the petitioner to cross-examine the donor's representatives. This remand practice was noted as routine in similar cases where donors alleged donations to be bogus.

The petitioner highlighted Section 12AA(3) of the Act, emphasizing that the cancellation of registration requires satisfaction that the trust's activities are not genuine or in line with its objects. The petitioner argued that the department did not assess these conditions but merely focused on a single alleged bogus donation. The judgment acknowledges the distinction between a single bogus transaction and the overall genuineness of a trust's activities, stating that multiple similar bogus transactions could indicate non-genuine activities.

The judgment emphasizes that a solitary transgression may not necessarily imply the trust's activities are not genuine, likening it to one swallow not making a summer. The court noted that even if the donor's representatives withstand cross-examination regarding the alleged bogus donation, it does not automatically implicate the trust's overall activities. Consequently, the court set aside the impugned order and quashed the tribunal's decision, allowing the department to conduct further investigations to ascertain the trust's genuineness based on multiple transactions, unimpeded by the current order.

The judgment did not address the petitioner's argument against cancellation with retrospective effect due to the order made. The court concluded by not awarding costs in the matter, leaving the department free to undertake additional steps to determine the trust's genuineness based on further findings of bogus transactions.