2020 (12) TMI 397 - AT - Income Tax

Exemption u/s 11 - Denial of registration u/s 12AA - CIT(E) came to the conclusion that the assessee did not satisfy the nature of activities as charitable for enabling granting of the registration u/s.12AA - HELD THAT - The assessee was set up in the year 1999 and the application for registration was moved twenty years down the line on 31-03-2019. In such a situation we cannot take an exception to the ld. CIT(E) examining the activities of the assessee w.r.t. the annual accounts for earlier years. AR strenuously emphasized that the assessee was not accorded adequate opportunity of hearing inasmuch as the ld. CIT(E) just after obtaining information from the assessee passed the impugned order without confronting with his point of view or seeking clarifications from the assessee as to carrying or non-carrying out of any charitable activities. A prayer was made that another opportunity may be granted to explain the factual matrix in detail before the ld. CIT(E). No serious objection was raised by the ld. DR in this regard. In view of the position as obtaining in the instant case we are satisfied that it would be in the fitness of things if the impugned order is set-aside and the matter is restored to the file of the ld. CIT(E). We order accordingly and direct him to decide the issue afresh after allowing reasonable opportunity of hearing to the assessee - Assessee appeal is allowed for statistical purposes.

Summary

Issues:
1. Denial of registration under section 12AA of the Income Tax Act, 1961 based on the genuineness of activities of the trust and compliance with charitable requirements.

Analysis:
The appeal concerns the denial of registration by the CIT(Exemption) under section 12AA of the Income Tax Act, 1961. The assessee, a charitable and educational trust set up in 1999, applied for registration in January 2019. The CIT(E) found discrepancies in the financial records, noting a lack of expenditure on charitable activities and undisclosed income from Fixed Deposit Receipts (FDRs). Consequently, registration was denied, leading to the appeal before the Tribunal.

Upon review, the Tribunal acknowledged the CIT(E)'s authority to assess the genuineness of a trust's activities before granting registration, as outlined in section 12AA of the Act. The Tribunal differentiated between trusts newly seeking registration and those established for some time. In the latter scenario, examining the actual activities becomes essential to verify compliance with charitable objectives. In this case, where the trust had been operational for two decades before seeking registration, the CIT(E)'s scrutiny of past activities was deemed appropriate.

Regarding the financial discrepancies highlighted by the CIT(E), the assessee's representative explained a unique accounting method where a significant portion of interest income from FDRs was not reflected in the Income and Expenditure account but directly credited to specific funds in the balance sheet. The Tribunal found this practice contrary to standard accounting principles, emphasizing the necessity of reporting all income in the Income and Expenditure account.

Furthermore, the Tribunal noted the lack of a proper opportunity for the assessee to present their case before the CIT(E) before the registration denial. In light of this procedural flaw, the Tribunal set aside the order and remanded the matter to the CIT(E) for a fresh decision after affording the assessee a fair hearing. The Tribunal clarified that its decision to set aside the order was not a validation of either party's position, maintaining neutrality.

Ultimately, the appeal was allowed for statistical purposes, with the Tribunal emphasizing the importance of due process and a thorough examination of activities for charitable trust registrations.

This detailed analysis of the judgment highlights the critical legal principles and procedural considerations involved in the denial of registration under section 12AA of the Income Tax Act, 1961, providing a comprehensive understanding of the case.