2019 (8) TMI 233 - AT - Income Tax

Exemption u/s 11 - withdrawal of registration u/s 12AA from AY 2009-10 - allegation of no charitable activities and is carrying out commercial activities - payment to specified person - whether the assessee is holding the benefit of registration u/s 12A of the income tax act or not? - HELD THAT - Merely submissions of the agreement by the assessee did not prove that the services are at fair market value and no benefit of accrued to the specified persons. For the CIT exemption, merely reproducing the clauses of the agreement also does not justify that there is any benefit accrued to the specified persons. There is no reason to hold that in absence of any benefit to the specified persons, the registration granted to the assessee trust can be withdrawn. Further if the benefit is granted to the specified persons, then after 01/10/2014, the CIT exemption is empowered to withdraw the registration u/s 12 AA. We set aside the whole issue back to the file of the learned CIT exemption with a direction to the assessee to substantiate before him that by making such a huge payment to the specified persons from assessment year 2009 10, no benefit has accrued to the specified persons as envisaged u/s 13 (1) - set aside to the file of the learned CIT exemption for fresh determination about withdrawal of registration u/s 12 AA (3) r.w.s. 12 AA (4) with effect from assessment year 2009 10. Appeal of the assessee partly allowed for statistical purposes.

Issues Involved:
1. Timeliness of the proceedings for withdrawal of registration under Section 12AA(3).
2. Validity of the cancellation of registration under Section 12AA(3) and (4) with retrospective effect.
3. Determination of whether the activities of the trust are charitable under Section 2(15).
4. Examination of payments to related parties and their impact on the trust's eligibility for exemptions under Sections 11 and 12.
5. Impact of the withdrawal of registration on the assessment years 2010-11 and 2011-12.

Issue-wise Detailed Analysis:

1. Timeliness of the Proceedings for Withdrawal of Registration under Section 12AA(3):
The assessee argued that the proceedings initiated on 13/05/2010 should have been concluded within a reasonable time and that the order passed on 19/05/2015 after almost five years was unlawful. The Revenue contended that the delay was attributable to the assessee's non-compliance and requests for postponements. The Tribunal found that the delay was indeed due to the assessee's actions and upheld the validity of the order despite the extended duration.

2. Validity of the Cancellation of Registration under Section 12AA(3) and (4) with Retrospective Effect:
The assessee contended that cancellation under Section 12AA(4) could only be prospective from 1/10/2014. The Revenue argued that cancellation could be retrospective if the trust's activities were found to be non-genuine. The Tribunal held that the amendment effective from 1/10/2014 did not preclude retrospective application if violations occurred before that date. Thus, the Tribunal dismissed the argument that cancellation could only be prospective and upheld the retrospective cancellation from the assessment year 2009-10.

3. Determination of Whether the Activities of the Trust are Charitable under Section 2(15):
The Commissioner of Income Tax (Exemption) found that the trust was engaged in commercial activities and not genuine charitable activities, as it charged substantial fees and made payments to related entities. The Tribunal noted that the trust's activities needed to be examined in light of the proviso to Section 2(15), which limits charitable status if commercial activities exceed a specified threshold. The Tribunal remanded the issue to the CIT (Exemption) to reassess whether the trust's activities were genuinely charitable.

4. Examination of Payments to Related Parties and Their Impact on the Trust's Eligibility for Exemptions under Sections 11 and 12:
The Commissioner found that payments to related entities were in violation of Section 13(1)(c), which disallows benefits if income is diverted to specified persons. The Tribunal emphasized the need to ascertain the fair market value of services rendered by related parties to determine if payments were excessive. The Tribunal remanded the issue to the CIT (Exemption) to allow the assessee to substantiate that the payments were at market value and did not confer undue benefits to related parties.

5. Impact of the Withdrawal of Registration on the Assessment Years 2010-11 and 2011-12:
For the assessment years 2010-11 and 2011-12, the Tribunal noted that the fate of the appeals depended on the outcome of the reassessment of the trust's registration status. The Tribunal remanded the assessment orders to the Assessing Officer to be reconsidered following the CIT (Exemption)'s determination on the registration issue. The Tribunal directed the assessee to provide detailed information on the fair market value of services rendered by related parties within three months.

Conclusion:
The Tribunal's order addressed multiple issues regarding the timeliness and validity of the withdrawal of the trust's registration, the nature of its activities, and the payments to related parties. The Tribunal remanded several issues for further examination by the CIT (Exemption) and the Assessing Officer, emphasizing the need for detailed substantiation of the trust's claims regarding the market value of services and the charitable nature of its activities. The appeals were allowed for statistical purposes, pending further determinations.

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