2019 (7) TMI 2061 - AT - Income Tax

Cancellation of Trust registration u/s 12AA(3) - main reason for cancellation of registration u/s 12A as per CIT-Central is violations of provisions of section 11 and 13 - AO rejected exemption claimed by the assessee u/s 11 and treated assessee as an association of person and accordingly the excess of income over expenditure has been assessed under the head income from business or profession. HELD THAT - Entitlement of exemption should be considered in light of violation referred to u/s 11 and 13 of the I.T. Act 1961. Although the Ld. AR for the assessee pointed out that there is no specific instances of violations referred to u/s 11 and 13 was brought out by the lower authorities in their orders but keeping in view of the fact that reasons for cancellation of registration u/s 12A was solely on the basis of violations referred to u/s 11 and 13 we are of the considered view that the issue needs to be re-examined by the Ld. CIT(A) in light of order of the ITAT 2019 (6) TMI 781 - ITAT MUMBAI and provision of section 11 and 13 of I.T. Act 1961. Hence we set aside both appeals to the file of the Ld. CIT (A) and direct him to reconsider the issue in light of objects of the assessee and activities carried out during the year to decide the eligibility of exemption u/s 11 of the I.T. Act 1961 - Appeals filed by the assessee allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

• Whether the Commissioner of Income Tax (Appeals) erred in dismissing the assessee's appeals pending disposal of the appeal against cancellation of trust registration under section 12AA(3) of the Income-Tax Act, thereby violating principles of natural justice.
• Whether the Assessing Officer was justified in denying the benefit of exemption under section 11 of the Income-Tax Act to the assessee on the basis of cancellation of registration under section 12A of the Act.
• Whether the levy of interest under section 234C of the Income-Tax Act by the Assessing Officer was justified.
• Whether the restoration of registration by the ITAT affects the entitlement of exemption under section 11 for the relevant assessment years.
• Whether the eligibility for exemption under section 11 should be examined independently for each assessment year, notwithstanding the registration status under section 12A.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of CIT(A)'s order dismissing appeals pending disposal of appeal against cancellation of registration under section 12AA(3)

Relevant legal framework and precedents: Section 12AA(3) empowers the Commissioner to cancel registration of a trust if conditions for registration are contravened. Principles of natural justice require that a party should have an opportunity to be heard before adverse orders are passed. The appellate process under the Income-Tax Act allows for appeals against such cancellation.

Court's interpretation and reasoning: The CIT(A) dismissed the appeals filed by the assessee on the ground that the registration under section 12A stood cancelled by the CIT-Central and the appeal against cancellation was pending before the ITAT. The CIT(A) held that since the registration was cancelled as on the date of hearing, there was no reason to interfere with the AO's assessment denying exemption under section 11.

Treatment of competing arguments: The assessee argued that the appeal against cancellation was pending and thus the CIT(A) should have awaited the ITAT's decision before dismissing the appeals. The CIT(A) rejected this, noting that the assessee had sought multiple adjournments without substantive details, and the cancellation order was valid at the time.

Conclusions: The Tribunal found that the CIT(A) erred in dismissing the appeals solely on the basis of cancellation of registration without considering the merits of exemption under section 11. The pendency of the appeal against cancellation before the ITAT was material and should have been considered.

Issue 2: Denial of exemption under section 11 based on cancellation of registration under section 12A

Relevant legal framework and precedents: Section 11 provides exemption to income of charitable or religious trusts, subject to compliance with conditions including registration under section 12A. However, registration under section 12A is a prerequisite but not the sole determinant of exemption; the activities and compliance with sections 11 and 13 must be examined for each assessment year.

Court's interpretation and reasoning: The AO denied exemption under section 11 relying on the cancellation of registration under section 12A by the CIT-Central. However, the ITAT had subsequently restored the registration with effect from the date of original approval. The Tribunal emphasized that registration under section 12A entitles the trust to claim exemption, but eligibility must be examined annually in light of the trust's activities and compliance with sections 11 and 13.

Key evidence and findings: The CIT-Central had cancelled registration citing violations of sections 11 and 13. The AO did not specify any violations in the assessment order but denied exemption based on the cancellation order. The ITAT restored registration, but the CIT(A) did not re-examine exemption on merits.

Treatment of competing arguments: The assessee argued that since registration was restored by the ITAT, exemption under section 11 should be granted. The Revenue contended that the CIT(A) had not examined the issue on merits and the matter should be remanded for examination of violations under sections 11 and 13 for each year.

Application of law to facts: The Tribunal held that exemption under section 11 must be considered on the basis of the trust's activities and compliance with sections 11 and 13, irrespective of registration status. Since the CIT-Central's cancellation was based on alleged violations under these sections, the issue requires detailed examination.

Conclusions: The Tribunal set aside the CIT(A)'s order and remanded the matter for reconsideration of exemption under section 11 in light of the ITAT's restoration of registration and the trust's activities during the relevant years.

Issue 3: Levy of interest under section 234C

Relevant legal framework: Section 234C imposes interest for deferment of advance tax installments. This levy is independent of exemption claims and depends on payment of advance tax.

Court's reasoning and findings: The grounds relating to levy of interest under section 234C were raised but were not specifically addressed in the Tribunal's order. The primary focus was on exemption and registration issues.

Conclusions: No specific determination was made on this issue; it remains subject to the outcome of reassessment and reconsideration of exemption claims.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Once the assessee is registered u/s 12A of the Act, 1961, then it is entitled for exemption u/s 11 of the I.T. Act, 1961, but entitlement of exemption u/s 11 should be examined for each assessment year in light of activities of the assessee and provisions of section 11 and 13 of the Act, 1961, irrespective of the fact that the trust is registered u/s 12A of the I.T. Act, 1961."

"In our considered view, the issue needs to be re-examined by the Ld. CIT(A), in light of order of the ITAT... and provision of section 11 and 13 of I.T. Act, 1961."

"The CIT(A) has dismissed the appeal filed by the assessee on the sole basis of cancellation of registration granted u/s 12A... but keeping in view the fact that reasons for cancellation of registration u/s 12A was solely on the basis of violations referred to u/s 11 and 13, we are of the considered view that the issue needs to be re-examined."

Core principles established include:

• Cancellation of registration under section 12A affects exemption claims but does not conclusively determine eligibility under section 11, which must be examined annually.
• Pending appeals against cancellation orders are material and should be considered before dismissing related appeals on exemption claims.
• Exemption under section 11 is contingent upon compliance with conditions under sections 11 and 13, including the nature of activities carried out by the trust.

Final determinations:

• The appeals were set aside and remanded to the CIT(A) for fresh consideration of exemption claims under section 11, taking into account the restoration of registration by the ITAT and compliance with sections 11 and 13.
• The dismissal of appeals by CIT(A) solely on the basis of cancellation of registration was held to be erroneous.
• The issue of interest under section 234C was not adjudicated and remains open.