2024 (12) TMI 461 - HC - Income Tax

Denial of Exemption u/s 11 - registration granted to the assessee-society u/s 12A cancelled holding that it was not working for the objects for which it was created - scope of Retrospective application of amendments to Section 12AA(3) - HELD THAT - In the present case, as per the object, the order passed takes into consideration the new clause of objects of the PIMS Society and also takes into consideration that the assessee had complied with the provisions of Section 11 (2) of the Act and had set apart funds in furtherance of its objects within the stipulated time and has proceeded to notice that the order of cancellation passed u/s 12AA (3) of the Act has been made with retrospective effect from 2004-2005. Thus, the CIT, who was given the jurisdiction only by an amendment made under the Finance Act 2010, has exercised the power as in the year 2004-2005. Retrospective jurisdiction cannot be given in cases where the right is already vested with any of the person. As in the year 2004-2005, the jurisdiction was not available to cancel the registration granted u/s 12A of the Act. We also find after considering all the aspects, as above, and the record that the assessee which is a Government organization cannot be said to be engaged in other activity. In the present case, the argument advanced by learned counsel for the Revenue that the construction of the building and the process of establishment of the College and Hospital cannot be said to be a charitable activity, is misconceived. If for advancement and furtherance of charitable activity other activities are done, which are incidental and necessary, and funds are invested for the said purpose, it cannot be said that the purpose for granting registration u/s 12A was wrongful or unjustified. The cancellation, therefore, is found to be without basis and is not based on sound principles, deserves to be set aside even prospectively. While the ITAT has set aside the order of cancellation dated 24.10.2013 on the ground that the power was not available retrospectively, having noticed all the facts as above, we find that even as on 24.10.2013 prospectively too the registration could not have been cancelled. Contention of the Assessee that the funds have been transferred to another society and for establishment of hospital in various other districts and for the said purpose the funds had been utilized and not for the same society, cannot be a ground to cancel the registration of the society. Cancellation of registration can only be in prospective and not retrospective. The Bombay High Court, therefore, upheld the amendment made in the Finance Act 2010. In the present case, we are not examining the validity of the amendment made in Section 12AA of the Act but are only examining two aspects. Firstly, the cancellation can be done with effect from the earlier year; and Secondly whether in the fact of the present case the said cancellation was warranted. We also note the judgment passed in Sri Vidyaranya Seva Sangha 2016 (5) TMI 1221 - ITAT BANGALORE which proceeded on a wrong interpretation of Bombay High Court judgment (supra) and upheld the registration being cancelled with retrospective effect. However, such power being not available, the judgment is erroneous and cannot be relied upon. Revenue by passing the order failed to take note of the aims and objects, which were added by the Assessee in October 2009. The order passed by the ITAT, therefore, does not warrant any interference. Revenue appeal dismissed.

Issues Involved:

1. Cancellation of registration under Section 12A of the Income Tax Act.
2. Eligibility for exemption under Section 11 of the Income Tax Act.
3. Retrospective application of amendments to Section 12AA(3) of the Income Tax Act.
4. Imposition of penalty under Section 271(C) of the Income Tax Act.
5. Interpretation of 'charitable purpose' under Section 2(15) of the Income Tax Act.

Detailed Analysis:

1. Cancellation of Registration under Section 12A:

The primary issue revolved around the cancellation of the registration granted to the assessee-society under Section 12A of the Income Tax Act. The Commissioner of Income Tax (CIT) had cancelled the registration retrospectively from the assessment year 2004-2005, citing that the society was not working for its intended charitable purposes. However, the court found that the CIT lacked jurisdiction to cancel the registration retrospectively as the power to do so under Section 12AA(3) was only introduced with effect from 01.06.2010. The court held that retrospective cancellation was illegal and unjustified, thus setting aside the order of the CIT.

2. Eligibility for Exemption under Section 11:

The assessee-society claimed exemption under Section 11, which was initially disallowed by the Revenue. The court examined whether the society's activities aligned with its charitable objectives. It was found that the funds were set aside for the construction and development of medical infrastructure, which fell within the ambit of charitable purposes. The court ruled that the exemption under Section 11 should be granted as the funds were utilized for the intended charitable activities, dismissing the Revenue's contention that the delay in construction negated the charitable purpose.

3. Retrospective Application of Amendments to Section 12AA(3):

The court addressed the issue of whether the amendment to Section 12AA(3), which empowered the CIT to cancel registrations, could be applied retrospectively. It was concluded that the amendment could not be applied to past assessment years where the jurisdiction was not available. The court emphasized that retrospective jurisdiction cannot be conferred where rights have already vested, thereby protecting the assessee's registration for the period prior to the amendment.

4. Imposition of Penalty under Section 271(C):

The Revenue's appeals included challenges related to the imposition of penalties under Section 271(C) for alleged non-compliance. However, given the court's findings that the cancellation of registration and denial of exemption were unjustified, the basis for imposing penalties was nullified. Consequently, the court dismissed the appeals concerning the imposition of penalties, aligning with its broader findings on the legitimacy of the assessee's activities.

5. Interpretation of 'Charitable Purpose' under Section 2(15):

The court extensively discussed the definition of 'charitable purpose' as per Section 2(15) of the Act. It reiterated that activities related to education, medical relief, and advancement of general public utility fall within this definition. The court referenced Supreme Court judgments to support its interpretation, emphasizing that incidental activities necessary for achieving charitable objectives do not negate the charitable nature, even if they involve some commercial aspects. The court concluded that the assessee's activities, including construction and partnerships for medical education, were aligned with charitable purposes, thereby entitling it to the claimed exemptions.

Conclusion:

The judgment favored the assessee-society, allowing its appeals and dismissing those filed by the Revenue. The court upheld the society's entitlement to registration and exemptions under the Income Tax Act, affirming that the activities were conducted in line with its charitable objectives. The retrospective cancellation of registration and the denial of exemptions were deemed unjustified, and penalties imposed were found to have no basis.

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