2021 (8) TMI 508 - AT - Income Tax

Assessment u/s 11 - registration u/s 12AA - Charitable activity u/s 2(15) - HELD THAT - We are of the considered view inter alia that when charitable objects to be undertaken by the assessee trust are not in dispute, assessee company cannot be expected to start its charitable activities within a period of about 2 months; that to get the benefit of sections 11 12 of the Act, registration u/s 12AA is necessary; that so far issue as to paying remuneration of ₹ 40,000/- to one of its Directors is concerned it can be decided during the assessment proceedings while examining the benefit u/ss 11 12 of the Act, the impugned order passed by the ld. CIT (E) is not sustainable in the eyes of law. CIT(E) is not required to look into the activities at the stage of registration, which can be well taken care of by the AO during the assessment proceedings and at this stage, only genuineness of the objects has to be examined by the ld. CIT(E) which he has not disputed in this case. So, impugned order passed by the ld. CIT (E) is set aside. Consequently, the appeal filed by the assessee is allowed directing the ld. CIT (E) to accord registration u/s 12AA of the Act to the assessee.

Issues:
1. Rejection of application for registration under section 12AA of the Income Tax Act.
2. Rejection based on lack of charitable activities and payment of salary to a Director.
3. Violation of Section 13(1)(c) read with Section 13(3) of the Income Tax Act.
4. Denial of reasonable opportunity to be heard.
5. Legality and arbitrariness of the appellate order.

Issue 1: Rejection of application for registration under section 12AA:
The Federation of Democratic Voice (the assessee) sought to set aside the order rejecting its application for registration under section 12AA of the Income Tax Act. The company was formed under section 8 of the Companies Act, 2013, and applied for registration within a month of its incorporation. The Commissioner of Income-tax (Exemption) declined registration citing lack of charitable activities and payment of a director's salary. However, the Tribunal held that registration cannot be denied solely based on the timing of charitable activities initiation, especially when the company applied promptly after formation. The Tribunal emphasized that the registration under section 12AA is crucial for carrying out charitable activities and obtaining benefits under section 11 of the Act.

Issue 2: Rejection based on lack of charitable activities and payment of salary:
The Commissioner also raised concerns regarding the payment of salary to a Director and invoked provisions under Section 13(1)(c) read with Section 13(3) of the Act. However, the Tribunal noted that as a company registered under section 8 of the Companies Act, the payment of reasonable remuneration to a member is permissible. The Tribunal highlighted that the issue of director's salary can be addressed during assessment proceedings for granting benefits under sections 11 and 12 of the Act. Citing judicial precedents, the Tribunal emphasized that at the registration stage, the focus should be on the genuineness of the objects, not the activities, which can be examined during assessment proceedings.

Issue 3: Violation of Section 13(1)(c) read with Section 13(3) of the Income Tax Act:
The Commissioner alleged a violation of Section 13(1)(c) read with Section 13(3) of the Income Tax Act due to the director's salary payment. However, the Tribunal clarified that the payment of remuneration to a director, in good faith, is not a ground for denying registration. The Tribunal highlighted that such issues can be addressed during assessment proceedings for determining benefits under sections 11 and 12 of the Act.

Issue 4: Denial of reasonable opportunity to be heard:
The assessee contended that they were not provided a reasonable opportunity to defend their case against the observations made in the assessment order. The Tribunal acknowledged the importance of a fair hearing and emphasized that procedural fairness is essential in tax matters. However, the Tribunal primarily focused on the substantive issues regarding registration under section 12AA.

Issue 5: Legality and arbitrariness of the appellate order:
The Tribunal found the impugned appellate order to be arbitrary, illegal, and in violation of fundamental principles of jurisprudence. The Tribunal set aside the order, emphasizing that registration under section 12AA should not be denied based on the timing of charitable activities initiation. The Tribunal directed the Commissioner to grant registration under section 12AA to the assessee, considering the genuineness of the objects and the procedural requirements under the Act.

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