2012 (5) TMI 478 - AT - Income Tax

Registration u/s 12AA - Assessee-Society had earlier been granted registration u/s 12AA by the then CIT, Madurai, vide his order in C.No.464/24/07- 08/CIT-I dated 12.10.2007, for the assessment year 2007-08 and onwards, but the application for recognition u/s 80G was rejected by the same CIT vide his order dated 24.12.2008 - It is clear that the ld. CIT has been empowered to either continue registration, once granted u/s 12A(a) or else, he can cancel the same if the requisite conditions are no longer found to be fulfilled - From the Income and Expenditure Account of these years, it is clearly seen that the Society was receiving income from laces and embroidery articles, income from coconut shell, SHGs contribution, own contribution, grants received, donations received, interest received, etc. The financing activities undertaken by the Society is clearly evidenced from these facts - It is true that certain amount of commercial activity is permitted under the provisions of the Act, but this has to be only a by-product of charitable activities with a certitude that surplus so generated out of commercial activity are utilized for the charitable objects of the Trust/Society and not for personal use of settlers/beneficiaries - commercial activity in such cases is permissible as per the requirement of section 11(4)/11(4A) and not as per the provisions of section 11(1)(a) of the Act. The commercial activity should aim at achieving end of the trust which is furtherance of its objects and it should not be the motive of the Trust to work for profit - Under these circumstances, we are also satisfied that the Society has ceased to be a genuine Society to be eligible for registration u/s 12AA - Decided against the assessee

Summary

Issues Involved:
1. Withdrawal of registration under Section 12AA of the Income Tax Act.
2. Determination of whether the Assessee-Society's activities are charitable or commercial.
3. Compliance with procedural requirements and principles of natural justice.

Issue-wise Detailed Analysis:

1. Withdrawal of registration under Section 12AA of the Income Tax Act:
The Assessee-Society's appeal is against the order of the CIT, Madurai, dated 16.5.2011, which refused to grant registration under Section 12AA of the Income Tax Act. Initially, the Society was granted registration under Section 12AA for the assessment year 2007-08 onwards, but the application for recognition under Section 80G was rejected. The ITAT reversed the CIT's order, leading to the approval under Section 80G for a specified period. However, a show cause notice under Section 12AA(3) was issued as the CIT found the Society engaged in business activities.

2. Determination of whether the Assessee-Society's activities are charitable or commercial:
The Society claimed to engage only in charitable activities, but the CIT found it involved in microfinance activities, which were deemed commercial. The Society's main objects included economic development of the downtrodden, social awareness, charity, and social service. The CIT concluded that the Society was engaged in microfinance on a commercial basis, evidenced by income from various sources like laces, embroidery, coconut shell, and interest received. The CIT's analysis indicated that the Society's activities did not align with the definition of 'charity' under Section 2(15) of the Act, as they involved commercial transactions under the guise of charity.

3. Compliance with procedural requirements and principles of natural justice:
The Society raised multiple grounds, arguing that the CIT's order was contrary to law, lacked proper reasons, and failed to justify the application of Section 12AA(3). They contended that the microfinance activities should not be construed as commercial and that the order was passed without proper opportunity and in violation of natural justice principles. The Tribunal examined whether the CIT's satisfaction regarding the Society's non-genuine activities was justified. The CIT's satisfaction must be based on objective material, not merely subjective. The Tribunal found that the Society's Income and Expenditure Account indicated commercial activities, and the surplus was not utilized for genuine charitable activities. Therefore, the CIT's cancellation of registration was upheld.

Conclusion:
The Tribunal dismissed the appeal, supporting the CIT's decision to withdraw the Society's registration under Section 12AA. The Tribunal found that the Society engaged in commercial activities under the guise of charity, violating the provisions of Section 12AA(3). The order was pronounced in the open court on 13.10.2011.