2025 (4) TMI 1029 - AT - Income Tax

Rejection of application for grant of registration u/s 12A and cancelling the provisional registration granted earlier u/s 12AB - as argued adequate opportunity was not granted to the assessee by the CIT(E) - HELD THAT - Considering the totality of the facts of the case and in the interest of justice we deem it proper to restore the issue to the file of the CIT(Exemption) with a direction to grant one final opportunity to the assessee to substantiate its case by filing the requisite details to his satisfaction and decide the issue as per fact and law. Appeals filed by the assessee are allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

- Whether the rejection of the application for registration under section 12A(1)(ac)(vi) read with section 12AB of the Income Tax Act, 1961, and cancellation of provisional registration granted earlier, was legally justified.

- Whether the assessee was afforded a reasonable opportunity of being heard before the rejection and cancellation orders were passed.

- Whether the assessee's activities were genuine and aligned with the charitable objects as required under the relevant provisions of the Act.

- Whether the finding that the trust was serving a specific community, thereby defeating the concept of charity and rendering it ineligible for registration, was legally sustainable.

- Whether the CIT(Exemption) acted within the scope of his powers and followed the proper legal procedure in rejecting the application and cancelling registration.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of rejection of registration application and cancellation of provisional registration under sections 12A(1)(ac)(vi) and 12AB of the Income Tax Act

Relevant legal framework includes the provisions of section 12A and 12AB of the Income Tax Act, which govern the registration of trusts/institutions for charitable purposes and the conditions for such registration. Section 12A(1)(ac)(vi) specifically empowers the CIT to reject applications if the activities of the trust are not genuine or not in conformity with the objects stated.

The CIT (Exemption) issued notices to the assessee seeking clarifications regarding discrepancies noticed in the application and supporting documents. The assessee failed to respond to these notices. Consequently, the CIT rejected the application and cancelled the provisional registration.

The Tribunal noted that the CIT's action was based on the assessee's non-compliance with the notices and failure to provide clarifications. The court acknowledged that the CIT has the authority to verify the genuineness of activities and compliance with other laws material to the objects of the trust.

The assessee's counsel argued that the rejection was premature and that the assessee was not given a reasonable opportunity to substantiate the case. The Tribunal found merit in this argument, emphasizing the principle of natural justice requiring a fair chance to be heard before adverse orders are passed.

Accordingly, the Tribunal directed the CIT to grant one final opportunity to the assessee to furnish the requisite details and clarifications to satisfy the CIT regarding genuineness and eligibility for registration. The Tribunal also cautioned the assessee to comply without seeking adjournments.

Issue 2: Whether the assessee's trust activities were genuine and aligned with charitable objects

The CIT questioned the genuineness of the activities on the ground that the assessee did not provide valid evidence supporting the activities and remained silent on the issue of serving a 'specific community'. The CIT concluded that this defeated the charitable nature required for registration.

The Tribunal observed that the genuineness of activities is a critical requirement under section 12A/12AB and must be supported by valid evidence. However, since the assessee was not given a final opportunity to submit such evidence and clarify the issue of 'specific community', the Tribunal refrained from making a conclusive finding on this aspect.

The Tribunal's direction to the CIT to allow the assessee to substantiate its activities reflects the legal principle that registration should not be denied without giving the assessee a chance to prove compliance with the statutory requirements.

Issue 3: Whether the CIT's conclusion regarding 'specific community' and its impact on eligibility was justified

The CIT held that the trust's object clause relating to a particular community defeated the concept of charity and rendered the trust ineligible for registration. This is based on the legal principle that charitable trusts must not be for the benefit of a specific community unless it qualifies under recognized charitable purposes.

The assessee contended that the CIT exceeded his powers by rejecting the application on this ground without proper consideration of facts and law.

The Tribunal noted that the issue of 'specific community' was not adequately addressed by the assessee in response to the notices, and the CIT's conclusion was based on this silence. However, since the assessee was not given a final hearing opportunity, the Tribunal found it appropriate to remit the matter for reconsideration.

This approach aligns with the principle that adverse findings on eligibility criteria must be based on a full and fair examination of evidence and submissions.

Issue 4: Procedural compliance and adherence to principles of natural justice

The assessee argued that the rejection order was passed without considering its submissions and without affording an adequate opportunity of hearing. The CIT's notice specified a compliance date, but the assessee did not respond.

The Tribunal emphasized that while the CIT is empowered to reject applications for non-compliance, the principles of natural justice require that the assessee be given a reasonable opportunity to present its case before final adverse orders. The Tribunal found that the assessee was not given such a final opportunity.

Therefore, the Tribunal directed the CIT to provide one last chance to the assessee to submit clarifications and evidence, thereby ensuring procedural fairness.

Issue 5: Scope of CIT's powers in rejecting application and cancelling registration

The CIT's power to reject registration applications and cancel provisional registrations is derived from sections 12A and 12AB of the Act, subject to compliance with prescribed procedures and legal safeguards.

The Tribunal held that the CIT acted within his powers in issuing notices and seeking clarifications. However, the rejection and cancellation orders must be preceded by adequate opportunity to the assessee to respond. The Tribunal's direction to remit the matter for fresh consideration ensures that the CIT exercises his powers in accordance with law.

3. SIGNIFICANT HOLDINGS

"The assessee was specifically informed that in the event of failure to comply by the due date the application shall be liable to be rejected and the registration shall also be liable to be cancelled."

"The assessee has not dealt with the issue of 'Specific Community' in its response and has remained silent. Also, the activity is not supported by any valid evidence. So, the genuineness is also questionable."

"In view of these shortcomings with respect to various aspects of being eligible for registration under section 12AB of the Act, especially with respect to genuineness and alignment with the objects of the trust/institution, the said application filed by the assessee is hereby rejected and the provisional registration granted on 27/05/2021 under section 12AB read with section 12A(1)(ac)(vi) of the Income Tax Act, 1961 is hereby cancelled."

"Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the CIT(Exemption) with a direction to grant one final opportunity to the assessee to substantiate its case by filing the requisite details to his satisfaction and decide the issue as per fact and law."

Core principles established include the necessity of adherence to natural justice by affording reasonable opportunity of hearing before rejecting registration applications, the requirement of genuineness and alignment of activities with charitable objects for eligibility under section 12A/12AB, and the limits on the CIT's powers to ensure fair procedure.

Final determinations:

- The rejection of the registration application and cancellation of provisional registration was premature due to the absence of a final opportunity to the assessee to clarify and substantiate its case.

- The issue of serving a 'specific community' and genuineness of activities requires fresh consideration based on complete evidence and submissions.

- The matter is remitted to the CIT(Exemption) with directions to grant one final opportunity to the assessee and decide the application in accordance with law and facts.