By TIOL News Service

AMRITSAR, JUNE 29, 2015: THE issue before the Bench is - Whether the fact that the objects of the assessee may be hit by the proviso to section 2(15), can have any bearing on the grant, denial or withdrawal of the registration u/s 12AA. NO is the answer.

Facts of the case

The assessee was a body set up under the Punjab Towns Improvement Act, 1922 had filed an application seeking registration u/s 12AA. However, the same was rejected by CIT on the ground that the activities of the trust as spelt out in Punjab Town Improvement Act 1922 were clearly in the nature of commercial activities, intended to earn profit and not of charitable nature.

Having heard the parties, the Tribunal held that,

++ it is rightly pointed out by the counsel that the scope of powers of the Commissioner u/s 12AA(3) for cancellation of registration already granted is very limited in scope inasmuch as it can only be invoked when the activities of the trust are not genuine and the activities of the trust or the institution are not being carried out in accordance with the objects of the trust or the institution. Section 12AA(3) specifically provides that when the CIT "is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution". It is not the case of CIT that the activities of present assessee trust are "not genuine" or that the "activities of the assessee are not being carried out in accordance with the objects” of the assessee trust. The case of the CIT rests on the first proviso to Section 2(15) coming into play on the facts of this case but then such a factor cannot warrant or justify the powers under section 12AA(3) being invoked. This Tribunal, therefore, upholds the grievance of the assessee that the action of CIT in withdrawing the registration u/s 12AA(3), was well beyond the limited scope of the powers conferred on him by the statute;

++ in the considered view of this Tribunal, the considerations with respect to the first proviso to Section 2(15) coming into the play and, for that reason, the objects of an assessee trust or institution being held to be not covered by the definition of 'charitable purposes', have no role to play in the matters relating to registration of a trust or institution u/s 12A or 12AA, either in respect of granting or declining of a registration or in respect of cancellation, even if otherwise permissible, of a registration. A closer look at the scheme of the Act would unambiguously show this aspect of the matter. The rider set out therein, under first proviso to Section 2(15), can only come into play on year to year basis and not in absolute terms. The same activity can be hit by this rider in one year and thus the assessee trust may not qualify to be existing for 'charitable purposes', and that very activity of the assessee trust may remain unaffected by the same disabling provision for another year. The reason is that it is not only the nature of the activity but also thelevel of activity which, taken together, determine whether this disabling clause can come into play. The safeguard against the objects of the trust being vitiated insofar as their character of 'charitable activities' is concerned, is inbuilt in the provisions of Section 13(8) which was brought into effect with effect from the same point of time when proviso to Section 2(15) was introduced. It is thus clear that the impact of the proviso to Section 2(15) being hit by the assessee will be that, to that extent, the assessee will not be eligible for exemption u/s 11. The mere fact that the assessee is granted registration u/s 12A or 12AA as a charitable institution will have no bearing on this denial of registration. As a corollary to this legal position, the fact that the objects of the assessee may be hit by the proviso to section 2(15) cannot have any bearing on the grant, denial or withdrawal of the registration under section 12AA;

++ in order that the benefits u/s 11 are declined to the assessee on the ground that it is engaged in such activities as may be hit by the first proviso to Section 2(15), not only the assessee must be engaged in carrying out such activities as may hit the first proviso to Section 2(15) but also the receipts of the assessee from such activities must exceed a specified limit. The second limb of this disability clause needs to be satisfied with respect to each assessment year. Obviously, therefore, this aspect of the matter cannot be examined at the stage of the grant or withdrawal of registration since the registration exercise is a one time exercise and not something which must be done for each assessment year separately. That is precisely the reason, as noted in the Explanatory Memorandum, as to why the remedy for the activities being hit by the first proviso to Section 2(15) lies not in grant, decline or withdrawal of registration but in declining the benefits of exemption under section 11 on that count, on year to year basis, notwithstanding the status of registration. If the status of registration is to be declined to an assessee only on the ground that some of the objects may be hit by the first proviso to Section 2(15) but the assessee's receipts from such activities donot exceed specified threshold limit in a particular A.Y, the assessee will be subjected to undue hardship in the sense that while the assessee will be disentitled to exemption u/s 11 due to denial of registration u/s 12 A or 12AA which is sine qua non for admissibility of exemption u/s 11. On the other hand, if the status of registration is granted to the assessee even when some of the objects may be hit by the first proviso to Section 2(15) and the assessee's receipts from such activities do exceed specified threshold, no prejudice will be caused to the legitimate interests of the revenue because, notwithstanding the status of registration and by the virtue of section 13(8), the assessee will not be eligible for exemption u/s 11 in respect of such income;

++ the considerations about the possibilities of the first proviso to Section 2(15) coming into play affecting the grant, decline or withdrawal of registration u/s 12AA will thus lead to wholly avoidable undue hardships to the assessee, will be unworkable in practice and be contrary to the scheme of the Act. It was viewed that the considerations about the possibilities of first proviso to Section2(15) into play are wholly extraneous in the present context. As the withdrawal of registration is solely based on these considerations, the very foundation of the Commissioner's action was unsustainable in law and consists of reasons which are not at all relevant in the context of registration status u/s 12A or 12AA . For this reason also, the action of the CIT is wholly devoid of any legally sustainable merits.

(See 2015-TIOL-945-ITAT-AMRITSAR)