2024 (2) TMI 1558 - AT - Income Tax

Cancellation of registration granted u/s 12AB - action of assessee in collecting unaccounted capitation fees in cash is violation of The Karnataka Educational Institutions (Prohibition of Capitation Fee) Act 1984 - PCIT cancelling the registration with effect from the previous year 2020-21 relevant to assessment year (AY) 2021-22 - HELD THAT - As per section 12AB(4) of the Act as applicable to assessment year 2021-22 the ld. PCIT if he is satisfied that activities of the Trust or institution are not genuine or 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 after affording reasonable opportunity of being heard. As per section 12AB(5) of the Act when Trust or institution complied wholly or in part of the income of such Trust or institution in violation of section 13(1) of the Act or if they complied with any other law for the time being in force by the Trust or institution as are material for the purpose of achieving its objectives as mentioned in section 12AB(1)(b)(ii)(B) of the Act. In the present case PCIT invoked the provisions of section 12AB(4)(a)(ii) of the Act as stood in the assessment year 2022-23. The objection of the ld. A.R. is that for the cancellation of registration for the assessment year 2021-22 he could not invoke the provisions of section 12AB(4)(ii) of the Act which is introduced by Finance Act 2022 w.e.f. 1.4.2022 and this provisions of section 12AB(4)(ii) of the Act is applicable for the assessment year 2022-23 and onwards and have no retrospective application. It is relevant to place reliance on the judgement of Isthmian Steamship Lines reported in 20 ITR 572 1951 (11) TMI 1 - SUPREME COURT wherein held that it is a cardinal principle of the tax law that law to be applied is that in force in the assessment year unless otherwise provided expressly or by necessary implication . We find force in the additional grounds raised by assessee that in income-tax matters law to be applied is the law in force in the assessment year unless otherwise stated or implied. In the present case ld. PCIT is cancelling the registration granted u/s 12AA/12AB of the Act w.e.f. previous year 2020-21 relevant to assessment year 2021-22. In our opinion the law as stated in the assessment year 2021-22 is to be applied and not the law as stood in the assessment year 2022-23. Thus we are of the view that no retrospective cancellation could be made u/s 12AB(4)(ii) of the Act as it has been provided or is seen to have explicitly provided to have a retrospective character or intended. Therefore without a specific mention of the amended provisions to operate retrospectively no cancellation for the earlier years could be made. In this case the ld. PCIT has cancelled the registration under the new provisions of the Act i.e. 12AB(4)(ii) of the Act which specifically provides that cancellation can be done for such previous year and all subsequent previous years which makes it clear that the cancellation cannot be retrospective therefore in view of the above discussion we are of the opinion that cancellation of registration with retrospective effect is invalid in these cases. Since the ld. PCIT invoked the provisions of section 12AB(4)(ii) of the Act which has been introduced by the Finance Act 2022 w.e.f. 1.4.2022 so as to cancel the registration with retrospective effect from assessment year 2021-22 which is bad in law. We also note that same view has been taken in the case of Heart Foundation of India 2023 (8) TMI 1063 - ITAT MUMBAI wherein held that registration granted u/s 12A of the Act dated 21.7.1989 cannot be cancelled by ld. PCIT (Central) vide order dated 6.3.2023 w.e.f. assessment year 2016-17 by invoking the provisions of section 12AB(4)(ii) of the Act. PCIT has invoked the provisions of section 12AB(4)(ii) of the Act which has been introduced by the Finance Act 2022 w.e.f. 1.4.2022 so as to cancel the registration with retrospective effect from AY 2021-22 and onwards which is bad in law. As such assumption of jurisdiction for cancelling the registration of subsequent to AYs 2021-22 is also bad in law. If there is any specified violation in subsequent assessment years from AY 2021-22 and onwards which could be cancelled by the ld. PCIT on pointing out the specified violation noticed in the subsequent assessment years only and not on the basis of violation in assessment year 2021-22. Appeal of the assessee is allowed.

Summary

The core legal questions considered in this appeal revolve around the validity and applicability of the order passed by the Principal Commissioner of Income Tax (PCIT) cancelling the registration granted under sections 12AA/12AB of the Income Tax Act, 1961 (the Act) to the appellant Trust. Specifically, the Tribunal examined:

1. Whether the PCIT was justified in invoking section 12AB(4)(ii) of the Act for cancelling the registration with effect from the previous year 2020-21 relevant to assessment year (AY) 2021-22 and subsequent years, given that this provision was introduced with effect from 01/04/2022 (AY 2022-23) and thus not applicable retrospectively.

2. Whether the alleged specified violations under clauses (a), (e), and (f) of the Explanation to section 12AB(4) of the Act were established on facts and law to justify cancellation of registration.

3. Whether the Trust's activities, including collection of capitation fees, diversion of funds, and involvement in merit seat blocking, violated the conditions for maintaining registration under the Act and other applicable laws, including the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984 (KEIPCF Act).

4. Whether the PCIT had jurisdiction and followed the correct legal procedure, including reliance on references under section 143(3) of the Act, for cancelling the registration for AY 2021-22.

Issue-wise Detailed Analysis:

1. Applicability and Retrospective Effect of Section 12AB(4)(ii) of the Act

Legal Framework and Precedents: Section 12AB(4)(ii) was introduced by the Finance Act, 2022, effective from 01/04/2022 (AY 2022-23). Prior to this amendment, section 12AB(4) provided for cancellation of registration only if the PCIT was satisfied that the activities of the trust were not genuine or not carried out in accordance with its objects. The amended provision expanded grounds for cancellation to include specified violations and references from Assessing Officers under section 143(3).

Judicial precedents, including the Supreme Court's decisions in Isthmian Steamship Lines and Karimtharuvi Tea Estate Ltd., establish the cardinal principle that tax laws applicable to an assessment year are those in force on the first day of that assessment year, barring express retrospective intent. The Madras High Court in Auro Lab Ltd. held that amendments to section 12AA(3) are prospective, not retrospective, and cancellation orders operate only from the date of the order.

Court's Interpretation and Reasoning: The Tribunal held that the PCIT erred in applying section 12AB(4)(ii) retrospectively to AY 2021-22, as this provision was not in force during that year. The law applicable to AY 2021-22 was the pre-amendment section 12AB(4), which did not contemplate cancellation based on specified violations as defined in the amended Explanation. The Tribunal relied on authoritative case law emphasizing that cancellation of registration, being penal in nature, must be governed by the law prevailing in the relevant assessment year.

Application of Law to Facts: The PCIT's order dated 27/09/2023 cancelled the registration effective from previous year 2020-21 (AY 2021-22) and subsequent years, invoking section 12AB(4)(ii). The Tribunal found this to be legally impermissible and quashed the order on this ground alone, without delving into the merits of the alleged violations.

Treatment of Competing Arguments: The appellant argued that the PCIT lacked jurisdiction to cancel registration retrospectively under the amended provision and that the cancellation should be governed by the law in force for AY 2021-22. The Revenue contended that the PCIT had power to cancel registration under section 12AB(4)(ii). The Tribunal sided with the appellant, emphasizing the settled legal principle against retrospective application of penal provisions.

Conclusion: The cancellation order invoking section 12AB(4)(ii) for AY 2021-22 and prior years is invalid and quashed.

2. Alleged Specified Violations Under Clauses (a), (e), and (f) of Explanation to Section 12AB(4)

Relevant Legal Framework: Explanation to section 12AB(4) defines specified violations including application of income for non-charitable purposes (clause a), carrying out activities not genuine or not in accordance with conditions of registration (clause e), and non-compliance with other laws (clause f).

Key Evidence and Findings: The PCIT's order was based on findings from a search under section 132 of the Act, which revealed:

• Collection of capitation fees (excess fees over prescribed amounts) in cash, unaccounted in books.
• Diversion of funds for personal expenses of trustees, including purchase of jewellery and property, repayment of loans, and payments to commercial entities owned by trustees.
• Involvement in merit seat blocking in medical college admissions, facilitating collection of higher management fees from less meritorious students.
• Admissions on oath by trustees and CFO confirming unaccounted cash receipts and payments.
• Violation of KEIPCF Act provisions prohibiting collection of capitation fees, with no valid exemption applicable.

Court's Interpretation and Reasoning: The PCIT concluded that these activities violated the conditions of registration and constituted specified violations under clauses (a), (e), and (f). However, since the cancellation order was quashed on jurisdictional grounds, the Tribunal refrained from adjudicating these issues on merits.

Treatment of Competing Arguments: The appellant contended that:

• The payments alleged as diversion were repayments of loans advanced by trustees, properly accounted by debiting trustees' accounts.
• The capitation fees were corpus donations collected partly in cash and partly by cheque, duly recorded in books.
• The merit seat blocking was conducted by statutory authorities (KEA and DME), not the Trust.
• The KEIPCF Act's prohibition did not apply to the Trust as a linguistic and religious minority institution under Article 30 of the Constitution.

The PCIT rejected these contentions, relying on documentary evidence, statements on oath, and legal provisions. The Tribunal did not express a final view on these contentions due to quashing of the cancellation order on procedural grounds.

Conclusion: The Tribunal did not adjudicate the merits of specified violations due to jurisdictional infirmity but noted the PCIT's detailed findings and evidences.

3. Jurisdiction and Legal Procedure Under Section 143(3) of the Act

Legal Framework: The second proviso to section 143(3) of the Act, as amended by Finance Act, 2022, empowers the Assessing Officer (AO) to refer cases involving specified violations to the PCIT for cancellation of registration. Prior to this amendment, such referral was limited to universities and certain institutions.

Court's Reasoning: The Tribunal noted that for AY 2021-22, the amended proviso was not in force, and thus the AO had no jurisdiction to refer the matter to PCIT under this provision. The PCIT's reliance on such a reference for cancellation was therefore legally untenable.

Conclusion: The PCIT lacked jurisdiction to act on the AO's reference under the substituted proviso to section 143(3) for AY 2021-22.

4. Application of KEIPCF Act and Minority Institution Exemption

Legal Framework: The KEIPCF Act prohibits collection of capitation fees by educational institutions, with exemptions only for institutions established before the Act's commencement. Section 10 exempts minority institutions only to the extent provisions conflict with Article 30 of the Constitution.

Findings: The Trust was established post commencement of the KEIPCF Act and thus not entitled to exemption under section 3. The PCIT found no inconsistency between section 3 of the KEIPCF Act and Article 30 in this case, rejecting the Trust's claim of exemption.

Conclusion: The Trust violated the KEIPCF Act by collecting capitation fees in cash and failing to account for them, which constituted a specified violation under section 12AB(4)(f).

5. Diversion of Funds and Application of Income

Evidence and Findings: The PCIT's detailed examination of accounts revealed payments for personal expenses of trustees and family members, including EMI payments, college fees abroad, purchase of jewellery and property, and transfers to commercial entities owned by trustees. Trustees admitted these payments but claimed they were repayments of loans advanced by them. However, no verifiable evidence was furnished to substantiate these claims.

Legal Interpretation: Application of income for private benefit violates the charitable purpose and constitutes a specified violation under clause (a) of Explanation to section 12AB(4).

Conclusion: The PCIT concluded that diversion of funds occurred, but the Tribunal did not decide on merits due to quashing of the cancellation order on procedural grounds.

Significant Holdings:

"It is a cardinal principle of the tax law that law to be applied is that in force in the assessment year unless otherwise provided expressly or by necessary implication."

"No retrospective cancellation could be made u/s 12AB(4)(ii) of the Act as it has been provided or is seen to have explicitly provided to have a retrospective character or intended."

"The cancellation will take effect only from the date of the order/notice of cancellation of registration. Since the act of cancellation of registration has serious civil consequences and the amended provision is held to have only a prospective effect the effect of cancellation, in the event the pending tax appeal is decided in favour of the Revenue, will operate only from the date of the cancellation order."

"The PCIT lacked jurisdiction to cancel registration for AY 2021-22 under section 12AB(4)(ii) as the provision was not in force for that year."

"The provisions of the KEIPCF Act prohibiting collection of capitation fees apply to the Trust as it was established after the commencement of the Act and no exemption under Article 30 was made out."

"The Trust's admission of receipt of unaccounted capitation fees and diversion of funds for personal benefit constitute specified violations under section 12AB(4) of the Act."

Final determinations:

The Tribunal allowed the appeal, quashing the PCIT's cancellation order dated 27/09/2023 on the ground that the PCIT wrongly invoked section 12AB(4)(ii) of the Act retrospectively for AY 2021-22, which is impermissible. Consequently, the cancellation of registration with effect from previous year 2020-21 and subsequent years was held to be invalid. The Tribunal refrained from adjudicating the substantive allegations of specified violations due to the procedural infirmity in the cancellation order.