2022 (4) TMI 1200 - HC - Income Tax

Exemption u/s 11 - cancellation of registration under Section 12AA(3) based on money laundering activities carried out by the assessee trust with Herbicure Health Care Bio Herbal Research Foundation - HELD THAT - The assessee submitted his reply denying the allegations and stating as to how the donation was received by cheque and was credited in the bank account of the assessee and the donation was applied for the objects of the assessee - assessee categorically stated that their activities are in accordance with the objects of the Trust and are genuine. In spite of such reply having been given by the assessee, we find that the CIT(E) has not considered the reply, nor brought on record anything to show that the activities of the assessee are not genuine or the activities are not being carried out in accordance with the objects of the Trust. In fact, the order passed by the CIT(E) narrates certain facts about Herbicure, extracts Section 12AA(3) of the Act and holds that the activities of the assessee are not genuine and are not being carried out in accordance with the objects of the society and, therefore, the registration has been cancelled. Mere use of the words and sentences as contained in Section 12AA(3) of the Act, would not be sufficient. CIT(E) has to record a finding on fact as to how the activities of the assessee are not genuine and how the activities of the assessee are not being carried out in accordance with the objects of the Trust. In the absence of any such factual conclusion, we find that the Tribunal was right in setting aside the order of cancellation. Tribunal after elaborately going through the facts, taking note of the answers given by the Director of Herbicure to the various questions posed to him found that there is nothing on record to indicate that the assessee was in contact with the brokers, nor there was any evidence brought on record to show that the assessee was engaged in money laundering as it may be a case of the department that Herbicure was indulging in money laundering. That by itself would not be sufficient to hold that the assessee was also indulging in money laundering in the absence of any evidence to connect the assessee with the money laundering activities of Herbicure CIT(E) did not consider the explanation offered by the assessee as to how the donation was received by cheque and it was credited to the bank account of the assessee and the donation was applied to the objects of the assessee in Trust, were recorded any factual finding on the submissions made by the assessee. Thus, the order passed by the CIT(E) was wholly unsustainable. If the CIT(E) proposed to rely upon the statement of a third party to form an opinion that the assessee is also involved in money laundering activities, the basic principle of natural justice would require that the entire documents based on which the CIT(E) formed such prima facie opinion, should have been made available to the assessee and if third party statement is to be relied on then the third party should have been made available for a cross-examination by the assessee. In fact, a specific ground was canvassed by the assessee by contending that no opportunity of cross-examination was allowed to them and therefore, the order was in violation of the principle of natural justice. The contention advanced by the assessee was perfectly right and justified and the Tribunal after taking note of the entire facts has found that there is no iota of evidence against the assessee to justify the allegation of money laundering - Decided in favour of assessee.

Issues Involved:
1. Whether the Tribunal was right in quashing the order for cancellation of registration under Section 12AA(3) of the Income Tax Act, 1961 based on alleged money laundering activities.
2. Whether the Tribunal erred in holding that there were no allegations or findings that the activities of the trust are not genuine or not carried out in accordance with its objects.

Detailed Analysis:

Issue 1: Quashing of Registration Cancellation Order
The revenue's appeal under Section 260A of the Income Tax Act, 1961, challenged the Tribunal's decision to quash the cancellation of registration under Section 12AA(3). The Commissioner of Income Tax (Exemptions) [CIT(E)] had cancelled the registration based on a survey operation on M/s. Herbicure Health Care Bio-Herbal Research Foundation (Herbicure), which revealed money laundering activities. Herbicure allegedly provided accommodation entries by accepting donations and returning them after retaining a commission. The assessee received ?85,000 from Herbicure, leading to a show-cause notice and subsequent cancellation of registration by the CIT(E).

The Tribunal found that the donation was duly accounted for and there was no evidence of cash payments or money laundering by the assessee. The Tribunal noted that the CIT(E) had not provided any evidence to show a connection between the assessee and the brokers involved in money laundering. The Tribunal also referenced a similar case, Shri Mayapur Dham Pilgrim and Visitors Trust, where the facts were identical, but the assessee's case was deemed stronger. Consequently, the Tribunal quashed the cancellation order, deeming it bad in law.

Issue 2: Allegations of Non-Genuine Activities
The revenue argued that the Tribunal ignored the CIT(E)'s findings that the assessee's activities were not genuine. However, the Tribunal found that the CIT(E) failed to record any factual findings to support this claim. The show-cause notice and subsequent order were based solely on the statement of Herbicure's Director, without any direct evidence against the assessee. The assessee's reply, which detailed the receipt and application of the donation, was not considered by the CIT(E).

The Tribunal emphasized that for the CIT(E) to invoke Section 12AA(3), there must be clear findings that the trust's activities are not genuine or not in accordance with its objects. The CIT(E) merely used the language of the statute without substantiating it with facts. The Tribunal found no evidence to connect the assessee with Herbicure's money laundering activities, making the cancellation order unsustainable.

Principles of Natural Justice
The Tribunal also noted that the CIT(E) violated principles of natural justice by not allowing the assessee to cross-examine Herbicure's Director. The Tribunal held that if the CIT(E) relied on a third-party statement, the assessee should have been given an opportunity for cross-examination. The lack of such an opportunity further invalidated the cancellation order.

Conclusion
The Tribunal's decision to set aside the CIT(E)'s order was upheld. The Tribunal correctly found no evidence of non-genuine activities or money laundering by the assessee. The appeal was dismissed, and the substantial questions of law were answered against the revenue. The Tribunal's order was deemed proper, and the principles of natural justice were upheld.

Final Judgment:
The appeal is dismissed, and the Tribunal's order quashing the cancellation of registration is upheld. The substantial questions of law are answered against the revenue.

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