2020 (2) TMI 329 - HC - Income Tax

Exemption u/s 11 - cancellation of registration of the respondent by the Director of Income Tax (Exemptions) under Section 12AA(3) - Charitable objects of the assessee - Tribunal quashing the order passed by the Director of Income Tax (Exemptions) cancelling the registration under Section 12AA(3) - HELD THAT - Tribunal recorded the finding that order of the Director of Income Tax (Exemptions) did not disclose which activity of the respondent was not genuine or that the respondent was not genuine. Tribunal also recorded that there was no material in the said order explaining that activities of the respondent are not being carried out in accordance with its objects. On careful reading of the order passed by the Director of Income Tax (Exemptions) as well as the order passed by the Tribunal, we do not find any error or infirmity in the view taken by the Tribunal. In so far the view taken by the Director is concerned that respondent is directly hit by the proviso to Section 2(15) of the Act, we are of the view that such satisfaction may lead to denial of exemption to the respondent in the assessment proceeding for the relevant assessment year but certainly cannot be a ground for cancellation of registration under Section 12AA(3). The competent authority under Section 12AA(3) must be satisfied that the activities of the Trust are not genuine or that the activities are not being carried out in accordance with the objects of the Trust or the Institution. Such satisfaction must be recorded as a matter of fact on the basis of specific materials on record. Merely saying that the activities of the respondent is hit by the proviso to Section 2(15) of the Act, would not lead to automatic cancellation of registration as that is not a ground provided under Section 12AA(3) of the Act for cancellation of registration. A perusal of the order passed by the Director would go to show that no such finding was recorded by the Director that the activities of the respondent Trust are not genuine or that the activities are not being carried out in accordance with the objects of the respondent Trust. What the Director had done was that he took the view that the respondent was hit by the proviso to Section 2(15) of the Act and therefore, it was deemed that respondent Trust had become non-genuine. Such a view is wholly untenable being contrary to the mandate of Section 12AA(3) of the Act and was rightly interfered with by the Tribunal. There is no error or infirmity in the order passed by the Tribunal. - Decided against revenue.

Summary

Issues Involved:
1. Cancellation of registration under Section 12AA(3) of the Income Tax Act, 1961.
2. Application of proviso to Section 2(15) of the Income Tax Act, 1961.
3. Tribunal's findings on interest income and leasing activity income.

Issue-wise Detailed Analysis:

1. Cancellation of Registration under Section 12AA(3):
The central issue in this appeal was the cancellation of the respondent's registration by the Director of Income Tax (Exemptions) under Section 12AA(3) of the Income Tax Act, 1961. The respondent was initially granted registration as a Trust under Section 12AA(1). A proposal suggested that the registration should be canceled because the respondent's activities were in the nature of trade, commerce, or business, and their gross receipts exceeded ?10 lakhs, invoking the proviso to Section 2(15). The Director issued a show-cause notice and subsequently canceled the registration, deeming the Trust non-genuine for the purpose of Section 11. The Tribunal set aside this cancellation, stating there was no evidence that the respondent's activities were not genuine or not in accordance with its objects. The High Court upheld the Tribunal's decision, emphasizing that the Director must record specific findings that the Trust's activities are not genuine or not carried out according to its objects to invoke Section 12AA(3).

2. Application of Proviso to Section 2(15):
The proviso to Section 2(15) of the Income Tax Act was a significant point of contention. This proviso states that the advancement of any other object of general public utility shall not be considered a charitable purpose if it involves trade, commerce, or business activities, unless the receipts from such activities are ?25 lakhs or less. The Director argued that the respondent's activities fell under this proviso, thereby making it non-charitable. However, the Tribunal and the High Court clarified that while this proviso might affect the exemption status of income under Section 11 during assessment, it does not automatically lead to cancellation of registration under Section 12AA(3). The High Court cited previous judgments, including North Indian Association and Khar Gymkhana, to support this distinction between exemption and registration.

3. Tribunal's Findings on Interest Income and Leasing Activity Income:
The Tribunal found that since the registration was allowed, no disallowance could be made concerning the interest income and leasing activity income (rent and other fees) as these fell under the objects of the respondent's institution. The Tribunal held that on merits, the assessee had a case. The High Court upheld this finding, noting that the Director's order did not provide any material evidence that the respondent's activities were not genuine or not carried out in accordance with its objects. The High Court reiterated that the Director's satisfaction that the activities were hit by the proviso to Section 2(15) could not be a ground for cancellation of registration under Section 12AA(3).

Conclusion:
The High Court dismissed the appeal, affirming the Tribunal's decision to restore the respondent's registration. It concluded that the Director of Income Tax (Exemptions) had not satisfied the conditions required under Section 12AA(3) to cancel the registration, and merely being hit by the proviso to Section 2(15) was insufficient for such cancellation. The appeal was dismissed with no order as to costs.