2016 (8) TMI 257 - AT - Income Tax

Cancelling/withdrawing the registration granted to the assessee under section 12A - Held that - Director erred in not appreciating the difference between the functioning of administrative set-up, which is essential to execute the objects entrusted to the assessee and, the activity of executing the railway component of the MUTP. The administrative set-up and its functions cannot be viewed in isolation to say that assessee company is not carrying out activities in accordance with its objectives, which in the present case is quite clearly being undertaken by the assessee by executing the railway component of the projects under MUTP. Therefore, in our considered opinion, the Director has clearly misdirected himself in coming to conclude that assessee has carried out activities that are not in accordance with its objects. Thus, factually speaking, we find no reason to uphold the inference of the Director that the activities are not in accordance with its objects. Assessee was only leveraging its funds to earn interest income. Before us also, it has been contended that such income cannot be said to be used for a charitable purposes so as to be entitled for exemption under sections 11/12 of the Act. Whether such income is eligible for the benefit of sections 11/12 of the Act or not, in our view, is not a relevant criteria to justify invoking of section 12AA(3) of the Act. Whether or not such incomes are entitled to exemption under section 11 of the Act are matters, which are to be decided in the course of the quantum assessment proceedings by the assessing authorities and do not enter the requisites contained in section 12AA(3) of the Act. Thus, so far as, the present controversy is concerned, in our view, the aforesaid reasons advanced by the Director are extraneous for the purposes of invoking section 12AA(3) of the Act. So, however, we may state here that it would be open for the assessing authorities to examine such aspects in appropriate proceedings, if so advised in law, but certainly the same are outside the purview of the pre-requisites contained in section 12AA(3) of the Act. Another aspect raised by the Director was that some of the clauses in the Memorandum and Articles of Association allowed assessee to do business and, therefore, it is hit by the amended proviso to section 2(15) of the Act. On this point also, it is sufficient to notice that the same is not a relevant criteria for cancellation of registration envisaged in section 12AA(3) of the Act. Of course, as noted earlier, such issues are open for examination by the assessing authority in the quantum assessment proceedings, if so advised in law. Certainly, the same cannot be considered for the purposes of justifying invoking of section 12AA(3) of the Act. Thus, on these aspects also, we find no reason to uphold the finding of the Director. Therefore, we set-aside the order of the Director dated 10/01/2014 and restore the certificate of registration dated 29/10/2001 granted under section 12A of the Act. - Decided in favour of assessee.

Issues Involved:
1. Breach of the principles of natural justice.
2. Jurisdictional error in cancelling registration under section 12AA(3) of the Income Tax Act.
3. Merits of the cancellation of registration under section 12AA.
4. Validity of the order passed under section 154 of the Income Tax Act.

Detailed Analysis:

1. Breach of the Principles of Natural Justice:
The appellant claimed that the Director of Income Tax (Exemption) failed to provide a proper, sufficient, and adequate opportunity of being heard before cancelling the registration under section 12AA of the Income Tax Act. The appellant argued that this constituted a breach of the principles of natural justice, rendering the order bad in law.

2. Jurisdictional Error in Cancelling Registration under Section 12AA(3):
The appellant contended that the Director exceeded his jurisdiction by invoking section 12AA(3) to cancel the registration. The appellant argued that the Director's action was based on reasons not specified in section 12AA(3), which allows cancellation only if the activities are not genuine or not being carried out in accordance with the objects of the institution. The appellant cited various judicial precedents, including the Hon’ble Madras High Court's judgments in CIT Vs. Sarvodaya Ilakkiya Pannai and Tamil Nadu Cricket Association, to support the argument that the Director's power under section 12AA(3) is limited and cannot be exercised beyond the conditions specified therein.

3. Merits of the Cancellation of Registration under Section 12AA:
The appellant argued that the activities carried out were for charitable purposes as defined in section 2(15) of the Act. The appellant, a Government Company, was set up to implement railway infrastructure projects under the Mumbai Urban Transport Project (MUTP) and was not engaged in any profit-making activities. The appellant highlighted that the projects were funded by the Government and the World Bank, and any surplus was used for furthering the MUTP projects. The appellant also pointed out that the activities had been scrutinized in various assessments under section 143(3) without any adverse findings. The Tribunal found that the Director misdirected himself by focusing on administrative expenses and interest income rather than the actual activities undertaken by the appellant, which were in line with its charitable objectives.

4. Validity of the Order Passed under Section 154 of the Income Tax Act:
The appellant challenged the order passed by the Director under section 154, which made the cancellation of registration effective from 29/01/2001. The appellant argued that there was no "mistake apparent from the records" to justify the rectification under section 154. The Tribunal held that since the initial cancellation order was set aside, the subsequent order under section 154 also had to be quashed.

Conclusion:
The Tribunal concluded that the Director exceeded his jurisdiction under section 12AA(3) by cancelling the registration without fulfilling the requisite conditions. The Tribunal restored the appellant's registration under section 12A and quashed the subsequent order under section 154. The appeals were allowed, and the orders of the Director were set aside.

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