2025 (6) TMI 1639 - AT - Income Tax

Cancellation of registration granted to the assessee u/s 12AB - charitable activity u/s 2(15) - as per AO activities of the trust are not genuine - validity of order passed by the Ld. PCIT Central Circle denying exemption - HELD THAT - As order passed by the Ld. PCIT Central Circle is without jurisdiction in to the context of territorial jurisdiction and subject matter as well as not in accordance with law liable to be quashed. Accordingly ground of appeal nos. 2 and 3 of appeal are allowed. PCIT has repeatedly referred to specified violations which was introduced vide Finance Bill 2022 w.e.f. 01.04.2022 could not have been used for assessment years 2019-20 2020-21 and 2021-22. Reference to judgment in the case of Lakhmi Chand Charitable Society 2024 (8) TMI 1297 - ITAT DELHI is important. Therefore it is held that Ld. PCIT erred in applying specified violation clause in section 12AB along with explanation with reference to financial year 2020-21 onwards whereas aforesaid sub section (4) of the Act was introduced by Finance Act 2022 was applicable for financial year 2022-23. Accordingly ground of appeal nos. 4 and 5 are allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the cancellation of registration of the charitable trust under Section 12AB of the Income Tax Act, 1961 (the Act) from the financial year 2021-22 onwards was justified on the grounds of specified violations and non-genuine activities.

2. Whether the Learned Principal Commissioner of Income Tax (PCIT), Central Circle, Delhi had jurisdiction to cancel the registration under Section 12AB, given that the original registration was granted by the Director of Income Tax (Exemption) and the jurisdiction allegedly vested only with the Commissioner of Income Tax (Exemption) (CIT(E)).

3. Whether the invocation of powers under the second proviso to Section 143(2) of the Act by the PCIT was valid, considering that the proviso was introduced by the Finance Act, 2022 with effect from 01.04.2022 and thus not applicable for assessment year (AY) 2021-22.

4. Whether the application of Section 12AB(4), which was introduced by the Finance Act, 2022 and applicable from AY 2022-23 onwards, could be validly applied for AY 2021-22 and earlier years.

5. Whether the allegations of violation of Foreign Contribution Regulation Act (FCRA) norms, misappropriation of funds, receipt of anonymous donations, and non-maintenance of proper books of account were supported by cogent evidence.

6. Whether the activities of the trust were genuine and carried out in accordance with its objects, and whether the trust complied with the conditions subject to which registration was granted.

Issue-wise Detailed Analysis:

1. Justification for Cancellation of Registration under Section 12AB

The legal framework involves Sections 12A, 12AA, and 12AB of the Income Tax Act, which govern the registration of charitable trusts and the conditions for claiming exemption. Section 12AB(4) introduces the concept of "specified violations" which can lead to cancellation of registration.

Precedents such as the Supreme Court judgments in CIT Vs Batanagar Education & Research Trust (2021) and PCIT Vs Singhad Technical Education Society (2025) uphold the cancellation of registration for non-compliance with conditions.

The PCIT's order detailed multiple findings based on evidence collected during a survey under Section 133A, including:

• Receipt of donations in violation of FCRA norms.
• Application of trust income for purposes other than the objects of the trust.
• Mobilization of funds to support farmers' protests, which was outside the trust's stated objects.
• Utilization of funds for the benefit of trustees, violating Section 13(2) of the Act.
• Receipt of unaccounted cash donations and cash payments for land purchases not reflected in books.
• Receipt of anonymous donations liable to be taxed under Section 115BBC.
• Failure to maintain proper stock records and books of account.

The PCIT concluded that these constituted "specified violations" under Section 12AB(4) and that the trust's activities were not genuine nor in accordance with its objects, justifying cancellation of registration from FY 2021-22 onwards.

The trust contested these findings, denying violations and asserting that humanitarian aid to marginal farmers fell within charitable activities. However, the PCIT relied on documentary evidence, emails, and statements recorded during the survey to establish the violations.

2. Jurisdiction of PCIT to Cancel Registration

The appellant argued that only the CIT(E) had jurisdiction to grant or cancel registration under Sections 12A, 12AA, and 12AB, and that the PCIT, Central Circle, Delhi had no such power. The appellant relied on a coordinate bench decision and the principle that transfer of jurisdiction under Section 127 of the Act did not confer powers beyond assessment proceedings.

The Department relied on binding precedents from the jurisdictional High Court and Supreme Court, including CIT Vs Sahara India Financial Corp Ltd (2007) and PCIT Vs ABC Papers Ltd (2022), which clarify that once a case is transferred under Section 127, all proceedings relating to that case transfer to the transferee officer, including powers to act for assessment and related matters.

The Department further contended that the transfer order dated 09.11.2021 was valid, having obtained concurrence from higher authorities exercising administrative control over the transferee AO, and that intra-city transfers under Section 127(3) do not require prior notice to the assessee.

The Tribunal examined the issue in light of the coordinate bench decision in Aggarwal Vidya Pracharni Sabha Vs PCIT, which held that the PCIT lacked jurisdiction to cancel registration under Section 12AB(4) as the power to grant or cancel registration vests exclusively with the CIT(E). The Tribunal found that the PCIT had not identified the specified violation prior to issuing the notice and had acted without jurisdiction.

The Tribunal also noted that the invocation of Section 12AB(4) requires that the authority first form an opinion of a specified violation before issuing a show cause notice, which was not done here.

3. Application of Second Proviso to Section 143(2)

The appellant contended that the PCIT's reliance on the second proviso to Section 143(2), introduced by Finance Act, 2022 effective 01.04.2022, was invalid for AY 2021-22 as the proviso was not applicable then.

The Tribunal agreed with this contention, referencing the decision in Lakhmi Chand Charitable Society Vs PCIT, which held that the proviso could not be applied retrospectively to assessment years prior to its effective date.

4. Applicability of Section 12AB(4) for Prior Years

The appellant argued that Section 12AB(4), introduced by Finance Act, 2022, was applicable only from FY 2022-23 onwards and could not be invoked for earlier years.

The Department contended that Section 12AA was invoked for AY 2021-22 and prior years, while Section 12AB(4) was invoked only for AY 2022-23, consistent with the law's applicability from 01.04.2022.

The Tribunal found that the PCIT erred in applying Section 12AB(4) to FY 2020-21 and earlier years, which was not legally tenable.

5. Allegations of FCRA Violations, Misappropriation, and Anonymous Donations

The PCIT found that the trust had received foreign donations in violation of FCRA norms and had applied funds for trustees' benefit, which was prohibited under Section 13(2). The trust denied these allegations, stating no foreign inward remittances occurred and no FCRA order had been passed against it.

The Tribunal did not adjudicate these factual contentions due to the findings on jurisdiction and applicability of law, rendering these issues academic.

6. Genuine Activities and Compliance with Objects of Trust

The PCIT held that the trust's activities were not genuine and not in consonance with its objects, citing evidence of fund mobilization for farmers' protests and cash transactions outside books of account.

The trust argued that humanitarian aid to marginal farmers was charitable and that explanations and evidence submitted were not properly considered.

Given the Tribunal's findings on jurisdiction and procedural errors, it did not delve into the merits of these contentions.

Significant Holdings:

The Tribunal held that:

"The order passed by the Ld. PCIT, Central Circle is without jurisdiction in the context of territorial jurisdiction and subject matter as well as not in accordance with law, liable to be quashed."

It emphasized that the power to grant or cancel registration under Sections 12A, 12AA, and 12AB vests exclusively with the CIT(E), and transfer of assessment proceedings under Section 127 does not confer such jurisdiction to the PCIT.

It further held:

"The invocation of 'specified violation' clause in Section 12AB along with explanation with reference to financial year 2020-21 onwards whereas sub-section (4) of the Act was introduced by Finance Act, 2022 and is applicable from financial year 2022-23 is erroneous."

The Tribunal allowed the appeal on grounds of lack of jurisdiction and incorrect application of law, leaving the adjudication of substantive issues regarding genuineness of activities and violations open and academic.

Accordingly, the cancellation order dated 28.12.2023 was set aside, and the stay application filed by the appellant was dismissed as infructuous.