2022 (2) TMI 534 - HC - Income Tax

Exemption u/s 11 - registration u/s 12A withdrawn - entitlement of the donor trust for exemption u/s 11(1) - HELD THAT - It is settled legal principle that Section 12AA of the Act lays down procedure for registration and does not state that CIT while considering the application for registration shall also see that the income derived by the trust is either not being spent for charitable purpose or such trust is earning profit. The provision requires that the activities of the trust or the institution must be genuine which would mean that they are in consonance with the object of the trust and are not mere camouflage of the proposed objects. Bearing the legal principle in mind, the tribunal once again examined the facts of the case and pointed out that the activities of the assessee have not been doubted in all these years. The activities were duly accepted to be charitable by the revenue and the revenue failed to bring anything on record to controvert the submission made by the assessee. In Sarladevi Sarabhai Trust 1988 (3) TMI 53 - GUJARAT HIGH COURT as pointed out that when a donor trust which is a charitable trust donates its income to another trust, the provisions of Section 11(1)(a) can be said to have been met by such donor trust and the donor trust can be said to have applied its income for religious and charitable purposes notwithstanding the fact that the donation is subjected to any conditions that the donee trust will treat the donation as towards its corpus and can only utilise the accruing income from the donated corpus for religious and charitable purposes, and that the question whether the gifted income is to be utilised by the donee trust fully for its religious and charitable purposes or whether the donee trust had to keep intact the corpus of the donation and has to utilise only the income therefrom for its religious and charitable purposes, would not make the slightest difference so far as entitlement of the donor trust for exemption under Section 11(1) - Decided against revenue.

Summary

Issues:
- Appeal filed by revenue challenging a common order passed by the Income Tax Appellate Tribunal
- Substantial questions of law raised by the revenue for consideration
- Cancellation of registration under Section 12AA(3) of the Income Tax Act
- Allegations of circuitous transactions and cancellation of registration by the Commissioner of Income Tax
- Assessee's response and contentions against cancellation of registration
- Tribunal's examination of facts and legal principles
- Application of legal principles from the case of Commissioner of Income Tax vs. Sarladevi Sarabhai Trust
- Tribunal's decision and dismissal of appeals

Detailed Analysis:
The High Court of Calcutta heard appeals filed by the revenue challenging a common order passed by the Income Tax Appellate Tribunal for the assessment year 2006-07. The revenue raised substantial questions of law, including the genuineness of the assessee's activities, reversal of registration cancellation under Section 12AA(3), and the applicability of Section 12AA(3) considering the Finance Act, 2010. The court considered arguments from both sides, with Mr. Tilak Mitra representing the revenue and Mr. J. P. Khaitan representing the assessee.

The case revolved around the cancellation of registration granted under Section 12A of the Income Tax Act due to allegations of circuitous transactions by the assessee trust. The Commissioner of Income Tax issued a show cause notice proposing cancellation based on findings of circuitous donations. The assessee contested the cancellation, arguing that the assessing officer's findings were incorrect and lacked evidence. Despite denial of exemption for one year, the assessee had been recognized as a charitable trust in subsequent assessments. The CIT(E) cancelled the registration, leading to appeals before the Tribunal.

The Tribunal examined the facts and legal principles, emphasizing the genuineness of the assessee's activities and the lack of evidence disputing them. It referenced the case of Commissioner of Income Tax vs. Sarladevi Sarabhai Trust to support the assessee's position. The Tribunal criticized the CIT(E) for canceling registration with retrospective effect and found no grounds for cancellation. It highlighted that the activities of the assessee were accepted as charitable by the revenue, and there was no evidence to the contrary.

Referring to the Sarladevi Sarabhai Trust case, the Tribunal concluded that the donor trust could be exempt under Section 11(1) of the Act even if the donation was earmarked for the donee trust's corpus. The Tribunal dismissed the revenue's appeals, upholding the assessee's contentions and legal position. Consequently, the appeals were dismissed, and the substantial questions of law were answered against the revenue. The connected applications for stay were also dismissed by the Court.