2012 (10) TMI 50 - AT - Income Tax

Withdrawal of registration u/s 12A - twice alteration of objects - engagement in commercial activities - Revenue contended that when the said objects, which formed the basis of the grant of registration, stand altered, the very foundation of the registration stands removed, so that it could not survive - assessee contesting power of the CIT as the competent authority in invoking section 12AA(3) - Held that - CIT as the competent authority, is empowered by law to examine if the activities being actually pursued are genuine or carried out in agreement or in accordance with those objects. Change in the object clause (s) is violative of an implied and fundamental condition for continuation of registration, cognizance of which can be taken of by the income tax authorities even de hors section 12AA(3) as well as u/s 293C. Commercial activities - Held that - Unless the functioning of the assessee, which is stated to be on commercial lines, so as to disqualify it as a charitable entity, is shown to be so with reference to its revised/ amended objects, we are unable to see as to how the same (the changes or the revision of its objects and the rules/regulations) has a bearing on its registration or entitles the Revenue to revisit the same, i.e., considering that it has accepted the assessee s functioning as a charitable entity up to the AY 2007-08. Neither the continuation of registration nor its withdrawal is automatic, and there is or can be no presumption with regard to either. The assessee was bound, notwithstanding the genuineness of the reasons motivating or leading to the changes, i.e., assuming so, to have reported them to the Revenue, in absence of which its claim for continuation of registration cannot hold. The said changes having come to the notice of the Revenue now, i.e., during the course of the assessment proceedings for the AY 2008-09, it is obliged and empowered under law to take cognizance of the same. It shall follow the same procedure, as it would have, had the assessee voluntarily reported those changes in time. And, again, there can be no presumption for consequential cancellation/withdrawal of registration. If on basis of examination of facts, explanations and objections, CIT comes to the conclusion that registration as granted cannot be continued, he shall withdraw the same per a speaking order. The withdrawal could have, even as directed per the impugned order, a retrospective effect, i.e., from the date from which the impugned object(s), i.e., which the Revenue finds as objectionable from the standpoint of the assessee s registration or its continuation as a public charitable institution u/s. 12A of the Act, comes into effect. Matter remanded back for fresh consideration. CIT shall adjudicate per a speaking order; his order being appealable - Decided in favor of assessee for statistical purposes

Issues Involved:
1. Power of CIT to withdraw registration under section 12AA(3) of the Income Tax Act.
2. Impact of amendments to the objects of the assessee on its registration.
3. Whether the activities of the assessee are commercial in nature.
4. Applicability of amended section 2(15) of the Income Tax Act from assessment year 2009-10 onwards.
5. Examination of the rental arrangement of RCA Academy with M/s. Radiant Star Hospitalities (P.) Ltd.
6. Direction by CIT to AO for examining the gain to the Revenue in withdrawing registration retrospectively.

Issue-wise Detailed Analysis:

1. Power of CIT to Withdraw Registration under Section 12AA(3):
The scope of the power under section 12AA(3) was extended by the Finance Act, 2010, effective from 01-06-2010, to include the withdrawal of registration under section 12A, even if obtained prior to the amendment by the Finance (No.2) Act, 1996. The CIT exercised this power on 27-12-2010, making the action legally valid. Section 293C, introduced by the Finance (No.2) Act, 2009, also supports the CIT's power to withdraw registration. The assessee's challenge on this ground fails.

2. Impact of Amendments to Objects on Registration:
The assessee argued that amendments to its objects were not substantial and were made to comply with state regulations. However, the court held that changes in the objects, which form the basis of registration, invalidate the registration. The CIT is empowered to take cognizance of such changes, even de hors section 12AA(3). The withdrawal of registration is justified if the amendments are found to be material and substantial. The CIT must examine the amendments and their impact on the charitable status of the assessee.

3. Commercial Nature of Activities:
The Revenue argued that the assessee's activities were commercial, generating significant surplus, which disqualifies it as a charitable institution. The court noted that the Revenue had accepted the assessee's charitable status in previous years. The CIT must examine if the commercial activities are linked to the amended objects. If the activities are incidental to the charitable purpose, the registration may continue. This issue is remanded back to the CIT for detailed examination.

4. Applicability of Amended Section 2(15) from AY 2009-10:
The amendment to section 2(15) excludes activities in the nature of trade, commerce, or business from the definition of 'charitable purpose' if the gross receipts exceed a specified threshold. The assessee argued that section 12AA(3) does not cover this examination. The court held that the CIT's review of the assessee's entitlement to registration, in light of the amended law, is valid. The CIT must determine if the assessee's activities post-amendment qualify as charitable under the revised definition.

5. Rental Arrangement of RCA Academy:
The court did not dwell on this issue due to lack of primary details and its minimal impact on the overall functioning of the assessee. The nature and purpose of the rental arrangement must be examined to ascertain if it aligns with the charitable objectives.

6. Direction by CIT to AO for Retrospective Examination:
The CIT directed the AO to examine the gain to the Revenue from withdrawing registration retrospectively. The court found this direction to be of no effect, as the AO cannot travel beyond the statutory time limit for issuing notices under section 148. The withdrawal of registration must precede any such notice.

Conclusion:
The impugned order is set aside, and the CIT is directed to re-examine the assessee's case for registration under section 12A, considering the amendments to its objects and the amended law effective from 01-04-2009. The CIT must issue a speaking order, allowing the assessee an opportunity to present its case. The assessee's appeal is allowed for statistical purposes.

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