2025 (5) TMI 1303 - AT - Income Tax

Cancellation of registration granted u/s 12A and u/s 12AB(4) - registration granted u/s 12A cancelled with retrospective effect or not? - HELD THAT - As observed that the PCIT has invoked the explanation to section 12AB(4) to hold the assessee committed specified violations particularly in terms of application of income and genuineness of the activities. As the Finance Act 2022 introduced the concept of specified violations u/s 12AB(4) became effective only from April 1 2022. Accordingly order of CIT(E) in cancelling the registration granted u/s 12A to the assessee society from AY 2018-19 is set aside and registration u/s 12A to the assessee is restored. The ground of appeal No. 1 of the assessee is allowed. Withdrawal/cancellation of the registration w.e.f. Asst. Year 2022-23 granted u/s 12A(1)(ac)(i) vide Unique Registration Number - allegations of the Ld. CIT(E) that the income of the assessee was mainly applied for a particular religious community which is in contraventions to provisions of clause (a) (d) and (e) of Explanation to Section 12AB(4) - HELD THAT - Appellant society is engaged in the providing charitable activities as defined in section 2(15) of the Act. It is also seen that that the assessee society is providing education where the schools are being run by adopting the existing facility and further developing by getting lease and constructing building. The assessee society having CBSE affiliated school where students from all the sections of society irrespective of their caste and creed are admitted and getting education. It is also seen that assessee society has been able to demonstrate that the registration process for getting admission in these schools is not restricted to the students of a particular community. Likewise assessee has been able to demonstrate that it is providing scholarship to the student coming from all the communities and only criteria is weak financial background with promising results. Merely because the schools are situated in the area where dominant population is of a particular religious community majority of the students getting admission are from that particular community however it is an admitted fact that the assessee society is not running Madrassa. Since main object of assessee society is to provide quality of life to the weaker sections of the society it always tried hard to provide benefit to the poor and in order to achieve these objects schools were opened in the area where economically weaker sections of society are main residents. As the assessee society is working for a public at large it cannot be said that it had applied its income for the benefit of a particular community. It is further seen that not only education but also the free medical facilities drinking water child support distribution of free food low cost housing etc. were also provided where all the weaker sections of the society got benefited. Once it is established that the main object is of charitable in nature and objects are for the benefit for the whole mankind and for all the citizens of county benefit of exemption u/s 12A cannot be withdrawn. The assessee society never restricted its benefit to any caste or community in other words it never intended to serve a particular caste or community rather the assessee society is working for the benefit of mainly for weaker sections of the society. Looking to the facts that assessee society is providing education medical facility relief to poor as defined in section 2(15) of the Act which has not been doubted by the Ld. CIT(E) who merely for the reason that major beneficiaries are from a particular religious community has cancelled the registration which is contrary to the facts of the present case as discussed above. The assessee society never intended to restrict the benefits to a particular religious community and the beneficiaries includes all the sections of the society irrespective of their casts and creed and therefore the action of the Ld. CIT(E) in withdrawing registration granted u/s 12A w.e.f. AY 2018-19 and further registration granted in 12A(1)(ac)(i) of the Act w.e.f. AY 2022-23 is not in accordance with law. Appeal of assessee allowed.

Summary

The core legal questions considered in this appeal revolve around the validity and legality of the cancellation of registration granted under section 12A and section 12A(1)(ac)(i) of the Income Tax Act, 1961. Specifically, the issues are:

(i) Whether the registration granted under section 12A can be withdrawn with retrospective effect from Assessment Year (AY) 2018-19, given that the power to cancel registration on specified violations under section 12AB(4) was introduced only with effect from 1.4.2022;

(ii) Whether the cancellation of registration granted under section 12A(1)(ac)(i) with effect from AY 2022-23 and onwards is justified on the grounds that the assessee society committed specified violations, particularly by applying its income for the benefit of a particular religious community, in contravention of clause (a), (d), and (e) of the Explanation to section 12AB(4) and section 13(3) of the Act.

Regarding the first issue of retrospective cancellation of registration under section 12A, the legal framework is grounded in the amendments brought by the Finance Act, 2021 and Finance Act, 2022. These amendments introduced section 12AB(4), effective from 1.4.2022, empowering the Principal Commissioner or Commissioner to cancel registration of trusts or institutions upon noticing specified violations during any previous year or on receipt of references from the Assessing Officer, subject to a fair hearing.

The specified violations include, inter alia, application of income for objects other than the trust's objectives, income applied for benefit of a particular religious community or caste, and activities not genuine or not carried out per registration conditions.

Prior to these amendments, cancellation was limited to cases where activities were not genuine or not in accordance with the objects.

The Court relied on authoritative precedents including the Supreme Court ruling that tax laws apply prospectively unless expressly stated otherwise, and the Madras High Court's decision emphasizing that a person complying with the law as it existed cannot be penalized retrospectively. The Rajasthan High Court similarly held retrospective cancellation of registration to be arbitrary and invalid.

The CBDT Circular No. 11/2022 clarified that the amendments to section 12AB(4) apply from 1.4.2022 onwards.

Applying this legal framework, the Court held that cancellation of registration under section 12A with retrospective effect from AY 2018-19 is not permissible, as the power to cancel on specified violations under section 12AB(4) was introduced only from 1.4.2022. Therefore, the cancellation of registration granted under section 12A with effect from AY 2018-19 was set aside, and the registration restored.

The second issue concerns the cancellation of registration granted under section 12A(1)(ac)(i) effective from AY 2022-23, based on allegations that the assessee society applied its income for the benefit of a particular religious community, violating clause (a), (d), and (e) of Explanation to section 12AB(4) and section 13(3) of the Act.

The Assessing Officer's proposal and the CIT(E)'s order alleged that the society's activities, including scholarships, medical camps, housing projects, orphan care, and educational institutions, primarily benefited members of a particular religious community, namely Muslims. It was further contended that details such as Aadhar/PAN of beneficiaries were not fully maintained, and that the genuineness of activities was doubtful.

In response, the assessee submitted extensive and detailed rebuttals, including:

• Demonstrations that the objects of the society are for the benefit of the public at large, irrespective of caste, creed, or religion;
• Evidence of activities and beneficiaries from multiple communities, supported by lists, ID proofs, photographs, and financial documents;
• Explanation that the predominance of beneficiaries from a particular community was due to the geographical location of the society's activities in areas with a majority population of that community;
• Clarifications that admissions to schools and scholarships were open to all and based on merit and financial need, with no discrimination;
• Details of transparent accounting, audited financial statements, and compliance with all statutory requirements;
• Clarification that the society is not registered under FCRA and has not received foreign contributions;
• Reference to similar organizations with similar names to explain possible misconceptions;
• Reliance on judicial precedents stating that application of income for the benefit of a particular community is not established merely because beneficiaries belong predominantly to that community if the institution's objects and activities are charitable and open to all.

The Court examined the objects of the society, which include all-round development of the impoverished irrespective of caste, creed or religion, establishment and maintenance of educational and medical institutions, relief to the poor, and general public utility.

The Court noted that the society's activities align with charitable purposes as defined under section 2(15) of the Act, including education, medical relief, and relief to the poor.

It was observed that the society's schools admit students from all communities, scholarships are awarded on merit and need, and other charitable activities such as medical camps, housing, and relief programs benefit all sections of society.

The Court found that the predominance of beneficiaries from a particular community was attributable to the demography of the areas served and not to any restrictive or discriminatory policy by the society.

The Court also relied on the Supreme Court decision holding that charitable purposes include advancement of any object of general public utility and that benefit to a section of the public, as opposed to individuals or groups, qualifies as charitable.

The Court rejected the contention that the society applied its income for the benefit of a particular religious community in violation of the Act.

Accordingly, the Court concluded that the cancellation of registration granted under section 12A(1)(ac)(i) from AY 2022-23 was not justified.

In summary, the significant holdings are:

"The registration granted u/s 12A cannot be cancelled with retrospective effect from AY 2018-19 when the power to cancel registration on specified violations under section 12AB(4) was introduced only w.e.f. 1.4.2022."

"Where the objects of the trust or institution are charitable and for the benefit of the public at large, and the activities are genuinely carried out in accordance with such objects, mere predominance of beneficiaries from a particular religious community due to demographic factors does not attract the provisions of section 13(1)(b) or specified violations under section 12AB(4)."

"The assessee society's activities including education, medical relief, scholarships, housing, and relief to the poor are charitable in nature as defined under section 2(15) of the Act and are open to all communities without discrimination."

"The cancellation of registration granted under section 12A(1)(ac)(i) from AY 2022-23 on the ground of application of income for a particular religious community is unsustainable where the society has demonstrated compliance with statutory conditions and bona fide charitable activities."

"The order of the CIT(E) cancelling the registrations granted under section 12A and section 12A(1)(ac)(i) is set aside and the registrations are restored."