2024 (7) TMI 133 - AT - Income Tax

Cancellation of registration u/s 12AB(4) - appellant Trust violated certain provisions of the Income of the Income tax Act, 1961 by not adhering to the conditions of registration granted u/s. 12A - assessee has violated/deviated as Non-intimation of change of Trustees to the Department - HELD THAT - Once the Trust Deed provides for appointment of trustees, including filling of casual vacancies on account of death or resignation of any trustees, in our considered view, such appointment of trustees is an administrative matter of the trust as provided in the Trust Deed which need not be informed to the department. Further, as per law, the information to the department or taking a prior approval from the CIT(E) will arise only in a case where modifications or amendments is made to the Trust Deed which are repugnant to the provisions of sections 11, 12 and 13 of the Act. Since the appointment of trustees to fill casual vacancies does not repugnant to the provisions of sections 11, 12 and 13 of the Act, in our considered view, the said changes need not to be informed to the department. Therefore, in our considered view, the Ld.CIT(E) erred in observed that above issue is deviation/specified violation referred to u/s. 12AB(4) of the Act for cancellation of registration of Trust. Unexplained security deposit received - The appellant has filed ledger extract which shows receipt of amounts from the developer through proper banking channel. The assessee has explained the credit with necessary evidences before the AO and argued that said sum of Rs. 1 crore was received from builder as advance for security deposit. AO did not accept the explanation of the assessee and has made addition u/s. 68 of the Act for the AY. 2017-18. The assessee has challenged the assessment and additions made thereon before the appellate authorities, which is pending for adjudication. Unless the issue is reached finality, by adjudication from the appellate authorities, in our considered view it cannot be said that additions made by the AO towards unexplained credit is sacrosanct and further the said addition violated the provisions of section 13(1)(c) of the Act. Thus, it is pre-mature for the Ld.CIT(E) to come to the conclusion that additions made in the assessment is a basis to hold that the assessee is not maintaining books of accounts properly and further the said violation comes under specified violation referred to u/s. 12AB(4) of the Act. Therefore, on this ground, the assumption of jurisdiction by the Ld.CIT(E) and cancellation of registration is illegal and devoid of merit. Activity of construction and sale of flats and under reporting of sale consideration - The Trust has only commercially exploited its property with the permission of the court in terms of section 34 of the Trust Act, 1882 subject to condition that the proceeds should be appropriated or applied for the objects of the Trust. The court has permitted the appellant Trust to enter into Joint Development Agreement and sale of property. In our considered view, the said activity cannot be considered as adventure in the nature of trade or commerce or business, which can be considered in light of proviso to section 2(15) of the Act. Further, the appellant Trust can be said to have involved in trade or commerce or business only if the appellant is engaged in the activity of buying and selling properties or entering into Joint Development Agreement with some other land owners for development of property on commercial lines and sells the property. In the present case, it is not a case of the Ld.CIT(E) that the appellant was engaged in the business activity of buying and selling of the property or entering into Joint Development Agreement with land owners in commercial lines and carrying on trade and commerce. The appellant Trust is only exploiting its property, which is incidental to the attainment of main objects of the Trust of construction of a hospital that too when the Trust finds that the property in question was not suitable for its objects and which can be utilised to construct hospital in some other land owned or possessed by the Trust for the purpose of construction of hospital. Therefore, we are of the considered view that the allegation of the Ld.CIT(E) that the Trust is engaged in the activity of trade and commerc is devoid of merit and fails. Allegation of the Ld.CIT(E) in light of the report of the Inspector in our considered view said report issued by the Inspector of Income Tax is only a self-serving document for the Ld.CIT(E) to take an adverse inference against the assessee - the selling rate of any property depends on various factors, including the time of the sale, terms and conditions between the parties relationship with the seller and location of the property. Therefore, there cannot be any uniform selling rate for all flats in society and particularly in different time. Therefore, the allegation of the Ld.CIT(E) based on the self-serving report of Inspector of Income Tax is only a suspicion, without any evidence to the contrary that the appellant has sold property as claimed by the Ld.CIT(E) - there is no evidence including any agreement to sell with the department to allege that even a single flat was sold for the rate claimed by the Inspector of Income Tax. Therefore, the conclusion drawn by the CIT(E) on the basis of the inspector report to cancel the registration of the Trust u/s. 12AB(4) of the Act is illegal and devoid of merits. Non-intimation of transfer of property and acquisition of property - As regards the transfer of property held by the Trust in pursuant to Joint Development Agreement, in our considered view, the said transaction has been entered into with the court permission in terms of section 34 of the Indian Trust Act. The Hon'ble City Civil Court, Secunderabad has passed an order and permitted the appellant to transfer the property subject to a condition that sale proceeds should be applied for objects of the Trust. Once the property has been sold with the permission of court, in our considered view, there is no requirement under the law to intimate the transfer of property to the Income Tax Department or to the Ld.CIT(E). Although subsequent amendment to section 12AB which has been inserted by the Finance Act, 2021 with effect from AY. 2022-23 stipulates that the Ld.CIT(E) can impose any other conditions while granting registration u/s. 12AA of the Act, in our considered view, the Ld.CIT(E) cannot impose any conditions, which cannot be enforceable or implemented. In the present case, transfer of property by Joint Development Agreement and subsequent sale in pursuant to court order is an administrative matter of the trust and trustees can decide the affairs in accordance with the rules and regulations of the Trust, if the Trust rules permit the trustees to sell or purchase the property, then the same can be done subject to satisfaction of relevant laws. In the present case, the appellant has transferred the property in pursuant to court order in terms of section 34, of the Indian Trust Act, in our considered view, the said Act of the Trust cannot be or need not to be intimated to the Income Tax Department. Therefore, on this ground, the Ld.CIT(E) cannot cancel the registration of the Trust. Cancellation of Lease Deed on a property taken by the Trust for 99 years and subsequent acquisition of property by way of a Will from one of the trustees and not informing the said changes to the court or the department - Trust had taken a lease of land for a period of 99 years from one of the trustees for establishment of a hospital. Subsequently, one of the trustees has executed a Will and bequeathed another property in the name of the Trust for establishment of hospital. On demise of the trustee, the said land has been came into the possession and enjoyment of the Trust. The appellant Trust has cancelled the earlier Lease Deed entered into with another company for taking certain land on lease for 99 years because the said land was not long required to the appellant. Since the appellant has got land on its own by way of Will, and it can use the said land for the purpose of construction of hospital, in our considered view, cancellation of Lease Deed cannot be a strategy of imagination referred to u/s. 12AB(4) of the Act. If the Trust Deed provides for the trustees and entered into various agreement for better utilization of the Trust, including buying and selling of the property, such an act should not be considered as repugnant to the provisions of sections 11, 12 and 13 of the Act unless the activity or changes carried out by the Trust, which is repugnant to the provisions of sections 11, 12 and 13 of the Act. In our considered view, the Trust need not to intimate the said act or take permission from the Ld.CIT(E) before entering into the said transactions. Application of income for purposes other than charitable purposes as appellant has constructed Gosala in Nandiwanaparthy village land which is not in accordance with the objects of the Trust - The reasons given by the Ld.CIT(E) for cancellation of registration is unwarranted and devoid of merit for the simple reason that construction and maintenance of Gosala has definitely come under the advancement of any other object of general public utility. Therefore, if the assessee applied its income for the purpose of construction of Gosala, then it cannot be said that the income of the Trust is not applied for the objects of the Trust. Further, the appellant also explained that by establishing Gosala, the appellant Trust has got benefit for its Ayurvedic Hospital. Although the appellant is in the process of establishing Ayurvedic Hospital, still the appellant can very well spend its income for construction and maintenance of Gosala, which in our considered view falls under the objects of the Trust, i.e advancement of any other object general public utility. Therefore, the observation of the Ld.CIT(E) that construction of Gosala is not in accordance with the objects of the Trust, is devoid of merit and thus rejected. The powers of the Ld.CIT(E) u/s. 12AB(4) of the Act is limited inasmuch as the Ld.CIT(E) can exercise his powers in a case where any Trust violates any of the specified violations as defined in explanation to section 12AB(4) of the Act - In the present case, if you go by the reasons given by the Ld.CIT(E) and deviations/violations referred to in his order, we find that none of the reasons given by the Ld.CIT(E) falls under the specified violations referred to in explanation to section 12AB(4) of the Act. Therefore, in our considered view the Ld.CIT(E) is erred in cancelling the registration of the Trust u/s. 12AB(4) r.w.s. 12AB(5) of the Act w.e.f. 16-08-2018. Decided in favour of assessee.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Cancellation of registration under section 12AB(4) of the Income Tax Act, 1961.
3. Non-intimation of change of Trustees to the Department.
4. Unexplained security deposit received.
5. Activity of construction and sale of flats and underreporting of sale consideration.
6. Non-intimation of transfer of property and acquisition of property.
7. Application of income for purposes other than charitable purposes.
8. Violation of principles of natural justice.

Detailed Analysis:

Delay in Filing the Appeal:
The appeal was time-barred by four days. After hearing both sides, the delay in filing the appeal was condoned, and the matter was heard on merits.

Cancellation of Registration under Section 12AB(4):
The appellant's charitable trust, registered under section 12A of the Income Tax Act, 1961, had its registration canceled by the Commissioner of Income Tax (Exemptions) [CIT(E)], Hyderabad, under section 12AB(4). The CIT(E) issued a show cause notice citing five violations and subsequently canceled the registration.

Non-Intimation of Change of Trustees:
The CIT(E) noted that the trust failed to intimate changes in the constitution of the trust, such as the appointment of new trustees following the demise of existing trustees. The tribunal found that the trust deed allowed for such changes without needing to inform the department, as these were administrative matters and not repugnant to sections 11, 12, and 13 of the Act.

Unexplained Security Deposit Received:
The CIT(E) pointed out an addition of Rs. 1 crore under section 68 for the AY 2017-18, which was claimed to be a security deposit for a Joint Development Agreement. The tribunal held that the addition was under dispute before appellate authorities and had not reached finality. Therefore, it could not be considered a specified violation under section 12AB(4).

Activity of Construction and Sale of Flats:
The CIT(E) alleged that the trust engaged in trade and commerce by entering into a Joint Development Agreement and selling flats, which was contrary to its charitable objects. The tribunal found that the trust had court permission to enter into the agreement and that the activity was incidental to its main object of constructing a hospital. The tribunal did not find this to be a violation under section 12AB(4).

Non-Intimation of Transfer of Property and Acquisition of Property:
The CIT(E) argued that the trust did not inform the department about the transfer of property via a Joint Development Agreement and subsequent acquisition of property by will. The tribunal held that the trust had court permission for these transactions and that such administrative decisions did not need to be reported to the department.

Application of Income for Purposes Other Than Charitable Purposes:
The CIT(E) contended that the trust applied its income for constructing a Gosala, which was not in line with its charitable objects. The tribunal found that the construction of the Gosala fell under the advancement of any other object of general public utility and was thus in accordance with the trust's objects.

Violation of Principles of Natural Justice:
The tribunal noted that the CIT(E) did not provide adequate reasons to prove that the trust had committed specified violations under section 12AB(4). The tribunal emphasized that unless the CIT(E) could prove one or more specified violations, the registration could not be canceled.

Conclusion:
The tribunal concluded that none of the reasons provided by the CIT(E) for canceling the trust's registration fell under the specified violations referred to in section 12AB(4). Therefore, the order of the CIT(E) canceling the registration was set aside, and the registration granted under section 12A(1)(ac) for the AYs 2022-23 to 2026-27 was restored. The appeal of the assessee was allowed.