2016 (10) TMI 1402 - HC - Income Tax

Cancellation of exemption granted in favour u/s 12AA - activities of the Board could not be termed to be charitable in nature - pursuit of charitable purposes is a necessary condition for the grant and continuance of registration u/s 12AA - Whether the authority granting registration u/s 12AA of the Act has the inherent power to withdraw such registration when the objects are found to be not charitable in nature? - HELD THAT - The cancellation of registration without justifiable reasons may, therefore, cause additional hardship to an assessee institution due to attraction of tax-liability on accreted income. The field authorities are, therefore, advised not to cancel the registration of a charitable institution granted u/s 12AA just because the proviso to section 2(15) comes into play. Substantial questions of law, so framed by this Court, on which the appeal came to be admitted, no longer arises for consideration, as it is for the appropriate authority i.e. the AO to examine the matter in the light of the returns furnished by the assessee and the material placed by the parties with regard to the income generated with respect to each financial year. Revenue stands advised to take appropriate action in terms of the clarification issued by the appropriate authority. We dispose off the present appeal with the direction to the Assessing Officer to pass appropriate orders, in the light of the aforesaid circular No. 21/2016, dated 27.5.2016.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment from the Himachal Pradesh High Court addresses the following core legal questions:

Whether the pursuit of charitable purposes is a necessary condition for the grant and continuance of registration under Section 12AA of the Income Tax Act for an institution claiming to be a charitable institution.
Whether the authority granting registration under Section 12AA of the Act has the inherent power to withdraw such registration when the objects are found to be not charitable in nature.
Whether the provision of Section 293C is not curative in nature, especially in view of the amendment of Section 12AA(3) of the Income Tax Act by Section 7 of the Finance Act of 2010.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Charitable Purposes as a Condition for Registration

Relevant Legal Framework and Precedents: Section 12AA of the Income Tax Act outlines the procedure for registration of a charitable institution. Sections 11 and 12 provide tax exemptions for income derived from property held under trust for charitable or religious purposes.
Court's Interpretation and Reasoning: The court considered whether the activities of the Himachal Pradesh Road Transport Corporation aligned with its claimed charitable purposes. The court noted that the pursuit of charitable purposes is indeed a fundamental condition for registration under Section 12AA.
Key Evidence and Findings: The initial registration was granted based on the corporation's application, but subsequent assessments questioned the genuineness of its charitable activities.
Application of Law to Facts: The court evaluated whether the corporation's activities genuinely adhered to its stated charitable objectives, as required for maintaining its registration.
Treatment of Competing Arguments: The court acknowledged the arguments regarding the necessity of charitable activities for registration and the conditions under which such registration could be revoked.
Conclusions: The court emphasized that maintaining registration requires continuous adherence to charitable purposes.

Issue 2: Authority to Withdraw Registration

Relevant Legal Framework and Precedents: Sub-section (3) of Section 12AA empowers the Commissioner of Income Tax to cancel registration if the activities are not genuine or not in accordance with the objectives of the trust.
Court's Interpretation and Reasoning: The court examined whether the Commissioner acted within his authority to cancel the registration based on the assessment of the corporation's activities.
Key Evidence and Findings: The Commissioner issued a show cause notice and subsequently cancelled the registration, citing non-compliance with charitable objectives.
Application of Law to Facts: The court assessed whether the cancellation was justified under the statutory provisions, considering the corporation's activities.
Treatment of Competing Arguments: The court evaluated arguments concerning the inherent powers of the authority to withdraw registration and the conditions under which this could occur.
Conclusions: The court concluded that the authority does possess the power to revoke registration if the institution's activities are not aligned with its charitable objectives.

Issue 3: Nature of Section 293C

Relevant Legal Framework and Precedents: Section 293C deals with the power to withdraw approval or registration. The amendment to Section 12AA(3) by the Finance Act of 2010 was also considered.
Court's Interpretation and Reasoning: The court considered whether Section 293C was curative and how it interacted with the amended Section 12AA(3).
Key Evidence and Findings: The court noted the circular issued by the authority, which clarified the conditions under which registration could be cancelled.
Application of Law to Facts: The court evaluated the implications of the circular and the statutory amendments on the case at hand.
Treatment of Competing Arguments: Arguments regarding the curative nature of Section 293C and its impact on the registration process were considered.
Conclusions: The court concluded that the circular and statutory amendments provided clarity on the conditions for registration cancellation, aligning with the legislative intent.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: The court emphasized, "It shall not be mandatory to cancel the registration already granted u/s 12AA to a charitable institution merely on the ground that the cut-off specified in the proviso to section 2(15) of the Act is exceeded in a particular year without there being any change in the nature of activities of the institution."
Core Principles Established: The pursuit of genuine charitable purposes is essential for registration under Section 12AA. The authority has the power to revoke registration if activities deviate from charitable objectives. The statutory framework and circulars provide guidance for such decisions.
Final Determinations on Each Issue: The court directed the Assessing Officer to evaluate the corporation's activities in light of the circular and statutory provisions, ensuring compliance with the law before deciding on registration status.

In conclusion, the High Court provided clarity on the conditions under which a charitable institution's registration under Section 12AA can be granted, maintained, or revoked, emphasizing the importance of genuine charitable activities and adherence to statutory provisions.

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