2025 (6) TMI 1756 - AT - Income Tax

Cancellation of registration u/s 12AB(4) - PCIT (Central) retrospectively cancelling the assessee s registration earlier granted u/s 12AA - HELD THAT - We find that the said CBDT Notification has been deliberated in the decision in the case of Meenakshi Foundation 2025 (6) TMI 1615 - ITAT DELHI wherein it was held that the power to cancel registration vest only with the CIT (Exemptions) and not PCIT (Central). The expression specified violation and consequential withdrawal of registration was introduced in the Finance Act 2022 only with effect from 1.4.2022 and could be made applicable only from Assessment Year 2023-24 and onwards and not retrospectively. This view is also clarified by the CBDT Circular No. 23/2022 dated 15.11.2022 vide para 9.3.3. of the Circular. We hold that the PCIT(Central) was not having jurisdiction to pass the impugned order u/s 12AB(4) of the Act cancelling the registration of assessee society and also with retrospective effect. Accordingly the impugned order of Learned PCIT(Central) is hereby quashed. The grounds raised by the assessee are allowed. PCIT (Central) had passed an identical order and had withdrawn the registration with retrospective effect from Assessment Year 2011-12 onwards in the case of Lala Sher Singh Memorial Jeevan VIgyan Trust Society and from Assessment Year 2014-15 onwards in the case of Florence Nightingale Educational Society. Those orders are also quashed in view of aforesaid decision. Assessee s appeals are allowed.

The core legal questions considered by the Tribunal in this batch of appeals relate primarily to the jurisdiction and authority of the Principal Commissioner of Income Tax (PCIT) (Central) to cancel registration under Sections 12A, 12AA, and 12AB(4) of the Income-tax Act, 1961 ("the Act"), the validity and applicability of retrospective cancellation of registration, and the procedural propriety of the cancellation orders passed by the PCIT. Specifically, the issues are:

1. Whether the PCIT (Central) had lawful jurisdiction to cancel registration under Section 12AB(4) of the Act, particularly in light of CBDT Notification No. 52/2014 dated 22.10.2014, which vests such power exclusively with the Commissioner of Income Tax (Exemptions) ("CIT(E)").

2. Whether the cancellation of registration by the PCIT (Central) was valid when based solely on third-party statements not subjected to cross-examination, and whether such cancellation was arbitrary or mechanical.

3. Whether retrospective cancellation of registration for assessment years prior to the effective date of the relevant statutory provisions (i.e., prior to 01.04.2022) is valid.

4. Whether the reference made by the Assessing Officer (AO) to the PCIT (Central) proposing cancellation under the second proviso to Section 143(3) of the Act was valid, especially when assessment proceedings had concluded prior to the reference.

5. The interpretation and applicability of Section 12AB(4) of the Act and related procedural rules, including Rule 17A, in the context of cancellation of registration for specified violations.

6. The effect and scope of Section 127 of the Act regarding transfer of cases and whether such transfer includes the power to cancel registration under Section 12AB(4).

7. The binding effect of coordinate bench decisions and judicial precedents on the jurisdictional issue and retrospective cancellation.

8. Whether the impugned orders passed by the PCIT (Central) were in accordance with law or constituted a colourable exercise of power.

Issue-wise Detailed Analysis

1. Jurisdiction of PCIT (Central) to Cancel Registration under Section 12AB(4)

Legal Framework and Precedents: Section 12AB(4) of the Act, as substituted by the Finance Act, 2022 effective from 01.04.2022, empowers the Principal Commissioner or Commissioner of Income Tax to cancel registration of trusts or institutions upon specified violations. However, CBDT Notification No. 52/2014 dated 22.10.2014 delineates territorial jurisdiction and vests powers to grant or cancel registration under Sections 12A/12AA with the Commissioner of Income Tax (Exemptions) ("CIT(E)"), not the PCIT (Central).

Coordinate bench decisions, including Lakhmi Chand Charitable Society v. PCIT (Central)-3 and Aggarwal Vidya Pracharni Sabha v. PCIT (Central)-3, have categorically held that PCIT (Central) lacks jurisdiction to cancel registrations under Section 12AB(4). The Tribunal in Meenakshi Foundation vs PCIT reiterated that the PCIT's assumption of jurisdiction based on transfer orders under Section 127 is invalid, as Section 127 only transfers assessment jurisdiction, not powers vested with CIT(E) for exemption matters.

Court's Reasoning and Application: The Tribunal analyzed the CBDT Notification No. 52/2014 and Section 127 of the Act, concluding that the transfer of cases under Section 127 pertains only to assessment proceedings and does not transfer the authority to cancel registration under Section 12AB(4). The PCIT (Central) acted beyond jurisdiction by cancelling registration on the basis of a reference from the AO and transfer orders that did not explicitly transfer exemption jurisdiction.

The Tribunal emphasized that the jurisdiction to grant or cancel registration under Sections 12A/12AA/12AB is statutorily vested with the CIT(E) having territorial jurisdiction as per the CBDT Notification. The PCIT (Central)'s action was thus ultra vires and liable to be quashed.

Treatment of Competing Arguments: The Revenue argued that the Explanation to Section 127 defining "case" includes all proceedings and thus the PCIT (Central) could exercise cancellation powers. The Tribunal rejected this, noting the Explanation pertains to assessment proceedings and does not extend to exemption powers vested exclusively with CIT(E).

2. Validity of Cancellation Based on Third-Party Statements Without Cross-Examination

Legal Framework: Principles of natural justice require that adverse orders should not be based solely on untested third-party statements without affording the affected party an opportunity for cross-examination.

Court's Reasoning: The assessee contended that the cancellation order was passed in a predetermined, arbitrary, and mechanical manner relying exclusively on third-party statements not subjected to cross-examination. The Tribunal observed that such reliance renders the order non est and void ab initio, violating principles of natural justice.

Conclusion: The Tribunal found this procedural lapse as a significant infirmity, contributing to the quashing of the impugned order.

3. Retrospective Cancellation of Registration

Legal Framework: The concept of "specified violations" enabling cancellation under Section 12AB(4) was introduced by the Finance Act, 2022, effective from 01.04.2022. Section 12AA(5) provides that provisions of Section 12AA shall not apply on or after 01.04.2021. CBDT Circular No. 23/2022 clarifies that these provisions apply prospectively.

Judicial precedents, including Human Welfare Foundation vs DCIT (Exemptions), have held that cancellation of registration cannot be applied retrospectively to assessment years prior to the effective date of the relevant statutory provisions.

Court's Reasoning and Application: The Tribunal held that cancellation orders applying Section 12AB(4) retrospectively to assessment years before 01.04.2022 are erroneous and bad in law. The impugned orders cancelling registration from AY 2015-16 onwards were thus unsustainable. The Tribunal also noted that show cause notices issued under Section 12AA post 01.04.2021 were invalid as Section 12AA provisions ceased to apply after that date.

4. Validity of Reference by Assessing Officer to PCIT Under Second Proviso to Section 143(3)

Legal Framework: The second proviso to Section 143(3), substituted by the Finance Act, 2022, empowers the AO to refer cases to PCIT or Commissioner for cancellation of registration under Section 12AB(4) during the pendency of assessment proceedings.

Court's Reasoning: The Tribunal observed that in the present case, the assessment proceedings had concluded prior to the reference made by the AO to the PCIT. Consequently, the reference was invalid as the proviso contemplates such reference only during the pendency of assessment proceedings to enable the AO to give effect to the cancellation order in the assessment order itself.

Moreover, the Tribunal held that the AO should have referred the matter to the CIT(E) having territorial jurisdiction, not the PCIT (Central) to whom the AO was subordinate.

5. Interpretation and Applicability of Section 12AB(4) and Rule 17A

Legal Framework: Section 12AB(4) provides a procedural code for inquiry and cancellation of registration upon specified violations. Rule 17A prescribes the manner and form for registration and cancellation. Circular No. 11 of 2022 clarifies the scope and procedural aspects of cancellation powers vested with the Principal Commissioner or Commissioner authorized by the Board.

Court's Reasoning: The Tribunal noted that the cancellation powers under Section 12AB(4) and Rule 17A are new and self-contained, effective from 01.04.2022. It emphasized that these provisions cannot be invoked retrospectively for violations prior to their effective date. The Tribunal also highlighted that the PCIT (Central) was not specifically authorized by any subsequent CBDT notification or circular to exercise cancellation powers under Section 12AB(4), reinforcing the jurisdictional infirmity.

6. Effect and Scope of Section 127 of the Act Regarding Transfer of Cases

Legal Framework: Section 127 empowers the Principal Commissioner or Commissioner to transfer cases between Assessing Officers for coordinated assessment. The Explanation defines "case" broadly but is limited to proceedings under the Act.

Court's Reasoning: The Tribunal held that Section 127 transfers assessment jurisdiction only and does not transfer powers vested with CIT(E) to cancel registration under Sections 12A/12AA/12AB. The transfer orders under Section 127 did not explicitly transfer exemption jurisdiction to the PCIT (Central). Therefore, the PCIT's assumption of jurisdiction based on Section 127 was invalid.

7. Binding Effect of Coordinate Bench Decisions and Judicial Precedents

The Tribunal extensively relied on coordinate bench decisions, including Meenakshi Foundation vs PCIT, Lakhmi Chand Charitable Society, Aggarwal Vidya Pracharni Sabha, and Human Welfare Foundation vs DCIT (Exemptions), which consistently held that:

PCIT (Central) lacks jurisdiction to cancel registration under Section 12AB(4).
Cancellation cannot be retrospective prior to 01.04.2022.
Reference under Section 143(3) proviso must be during pendency of assessment and to the proper authority (CIT(E)).

The Tribunal followed these precedents to quash the impugned cancellation orders.

8. Colourable Exercise of Power and Procedural Irregularities

The Tribunal observed that the PCIT's order contained observations indicating a predetermined intent to cancel registration "by hook or crook," reflecting bias and a colourable exercise of power. The order was passed without due application of mind, relying on invalid references and ignoring binding precedents, rendering the order arbitrary and unsustainable.

Significant Holdings

"The power to cancel registration vest only with the CIT (Exemptions) and not PCIT (Central). The order passed by the PCIT cancelling the registration passed on the reference of the Assessing Officer purportedly under 2nd proviso to Section 143(3) is without jurisdiction and therefore liable to be quashed."

"The reference in terms of 2nd proviso to Section 143(3) of the Act is to be made to the CIT(E) and not to the PCIT or Commissioner, to whom the assessing officer would be subordinate."

"The cancellation of registration under Section 12AB(4) of the Act cannot be made retrospectively for periods prior to 01.04.2022 when the said provision came into effect."

"The transfer of cases under Section 127 of the Act does not include transfer of powers vested with CIT(E) for exemption matters; hence, the PCIT cannot assume such jurisdiction."

"The impugned order passed by the PCIT is a colourable exercise of power, arbitrary, and passed without due application of mind, rendering it liable to be quashed."

The Tribunal's final determination was to allow the appeals, quash the impugned orders passed by the PCIT (Central) cancelling registration under Sections 12A/12AA/12AB(4), and restore the registration of the assessees. The Tribunal also held that the procedural requirements and jurisdictional limits must be strictly adhered to, and retrospective cancellation is impermissible.

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