2007 (10) TMI 318 - AT - Income Tax

Cancellation of registration u/s 12AA - Society registered as a Charitable trust - certain papers and documents impounded - diversion of funds of the institution for personal benefits of the founder members of the trust - Whether the CIT should have waited till the final assessment is completed or not - HELD THAT - Despite the facts that the assessee has disclosed a sizeable amount for reasons best known to them, simply should not be a basis for immediate cancellation of registration without final determination/assessment in the search and seizure proceedings. We consider the same to be premature and in clear cut judicial terms it is like hanging a person before pronouncement of a judgment. Even otherwise going through the cancellation order of the CIT it transpires that the basis of cancellation as has been adopted by the CIT is on the search and seizure assessment proceeding alone. No other finding have been depicted in his order. His apprehension and argument that continuance of registration will have a bearing on the search and seizure assessment proceedings is equally vital as on the other hand cancellation of registration will also have a bearing to the assessment proceeding. In our considered opinion both the cancellation as well as continuance of registration will have an effect and a bearing on the assessment proceeding. It does not mean that the assessment proceeding being a quasi judicial proceeding should be interfered like the present one. Rather in all fairness the CIT should have taken precaution to complete the assessment expeditiously and then should have arrived at the conclusion of proposed cancellation of registration. The present act of the CIT amounts to interruption in the assessment proceeding. The power under s. 12AA(3) has been enunciated under the Act is an unbridled power in the hands of CIT to safeguard the interest of Revenue as and when he is satisfied to do so. It does not mean that this unbridled power given by the Act after much deliberation in the Parliament should be utilized without clear cut satisfaction. As per strict judicial discipline we consider that power of punishment is a unbridled power like the present power of cancellation envisaged under s. 12AA(3). But such unbridled power should be utilized quite cautiously and consciously. With the aforesaid findings we are of the considered opinion that the order of the CIT is a prematured one which has been utilized at a prematured stage in haste. Accordingly the assessee succeeds in its appeal regarding continuance of registration. Before parting with our order it will not be out of place to mention here that our order has nothing to do with the search and seizure assessment proceedings. The concluding finding in the search and seizure assessment proceeding may be utilized by the Revenue or by the assessee in their respective favour accordingly. In the result, the appeal filed by the assessee is allowed as stated above.

Summary

Issues Involved:
1. Cancellation of registration under Section 12AA of the IT Act.
2. Alleged non-charitable activities and diversion of funds.
3. Maintenance and authenticity of books of account.
4. Handling and storage of cash and documents.
5. Authority and timing of the CIT's power to cancel registration under Section 12AA(3).

Detailed Analysis:

1. Cancellation of Registration under Section 12AA of the IT Act:
The appellant society challenged the order of the CIT, Bhubaneswar, dated 15th Dec. 2006, which cancelled its registration under Section 12AA of the IT Act. The appellant argued that the CIT's opinion was incorrect, unjustified, and against the facts of the case. The tribunal noted that the appellant society had been registered as a charitable trust since 30th June 1992 and had been regularly assessed. The cancellation was a consequence of a search and seizure operation conducted on 9th Aug. 2005, and the CIT issued a show-cause notice under Section 12AA(3) for the first time.

2. Alleged Non-Charitable Activities and Diversion of Funds:
The CIT's order alleged that the appellant society diverted funds for the personal benefit of its founder members. The CIT doubted the maintenance of a locker in Allahabad Bank, Nayapalli Branch, which the appellant claimed was for the safe custody of papers and documents. The tribunal reviewed various case laws cited by both parties, including those that discussed the CIT's power to cancel registration and the scope of such power. The tribunal found that the CIT's order was based on the findings of the search and seizure operation, which was still ongoing.

3. Maintenance and Authenticity of Books of Account:
The appellant argued that proper books of account were maintained and that most were seized during the search operation. The CIT did not verify these books or request the production of those not seized. The tribunal observed that the CIT's apprehension regarding the maintenance of proper books of account was not sustainable in law.

4. Handling and Storage of Cash and Documents:
The appellant clarified that cash was kept in a safe locker for emergency needs and that bank lockers were used to store valuable documents. The CIT did not inquire further into the nature of these emergency needs or the explanation provided. The tribunal found the CIT's assumptions to be baseless and unjustified.

5. Authority and Timing of the CIT's Power to Cancel Registration under Section 12AA(3):
The tribunal reframed the issue to determine whether the CIT could utilize his power under Section 12AA(3) before the completion of the search and seizure assessment. It was noted that Section 12AA(3) grants the CIT the power to cancel registration if the activities of the trust are not genuine or not in accordance with its objects. However, the tribunal emphasized that administrative functions (registration and cancellation) and quasi-judicial functions (assessment) should not be mixed. The tribunal concluded that the CIT's order was premature and amounted to an interruption in the assessment proceeding. The CIT should have waited until the final assessment was completed before deciding on the cancellation of registration.

Conclusion:
The tribunal allowed the appeal filed by the appellant, stating that the CIT's order was premature and issued in haste. The tribunal clarified that its order had no bearing on the ongoing search and seizure assessment proceedings and that the final findings of the assessment could be utilized by either party accordingly. The appellant's registration under Section 12AA was to be continued.