Deemed Registration and Time Limit for Disposal of Application for Registration of Charitable Trusts u/s.12AA

Since the section does not specifically mention the consequences of non-disposal of the application by the Commissioner within the specified time limit, a controversy has arisen as to what would be the consequences in such a situation. One view is that the trust shall not be made to suffer for the inaction of the Commissioner and the registration shall be deemed to have been granted. The other view is that the trust shall not be granted the exemption from tax, since the same is not registered. One more view is that the time limit prescribed in section 12AA is not mandatory and the Commissioner can and should proceed with the application and take appropriate decision even after the expiry of the time limit and such decision shall have retrospective effect. While the Allahabad High Court has taken the view that in the event of such failure to pass an order, within the specified time by the Commissioner, registration shall be deemed to have been granted u/s. 12AA, as the time limit provided in the section is mandatory and no decision on the application can be taken on expiry of the time limit thereafter, a contrary view has been taken by the Madras and Orissa High Courts to the effect that such a time limit is not mandatory, and that non-disposal of the application shall not result in the deemed registration of the trust and till such time as registration is granted, the trust shall be treated as not registered and non-registration of the trust shall result in denial of the exemption from tax so however the Commissioner shall pass the appropriate orders on the application of the assessee at the earliest though after the expiry of the prescribed time. In short, according to the latest view, the registration cannot be deemed to have been granted and the Commissioner is empowered to deal with and should deal with the application even after the expiry of the time specified in section 12AA.

Society for the Promotion of Education Adventure Sport’s case:

The issue came up before the Allahabad High Court in the case of Society for the Promotion of Education Adventure Sport & Conservation of Environment vs. CIT 216 CTR (All) 167.

The assessee was a society running a school, whose income was entitled to exemption u/s. 10(22). On omission of section 10(22), it applied for registration u/s. 12A. No decision however was taken by the Commissioner on its application within the time limit of 6 months fixed by section 12AA (2), and in fact, no decision was taken, even after a lapse of almost 5 years. On account of such delay, large tax demands were raised on the assessee. The assessee filed a writ petition in the Allahabad High Court challenging the tax demands.

On behalf of the assessee, it was contended that the registration
should be deemed to have been granted after the expiry of the period
prescribed u/s. 12AA(2), if no decision had been taken on the
application for registration. Reliance was placed on various decisions
of the Allahabad High Court, which had held that where an application
for extension of time was moved, but was not decided, it would be deemed
to have been allowed; that given the fact that the CIT was required to
give an opportunity to the applicant before refusing registration and
that reasons for refusal were required to be given by the CIT in his
order, the absence of any such opportunity and the order of the CIT
should be taken to mean that he had not found any reason for refusing
registration;, that the legislative intent wasevident by the fact that the order of the CIT granting registration, was not appealable by the Income Tax Department and that the laches and lapses on the part of the Income tax Department could not be to its own advantage by treating the application for registration as rejected.

On behalf of the Department, reliance was placed on a decision of the Supreme Court in the case of Chet Ram Vashisht vs. Municipal Corporation AIR 1981 SC 653, where the Court examined the effect of the failure on the part of the Delhi Municipal Corporation to decide an application for sanction to a layout plan within the period specified in section 313(3) of the Delhi Municipal Corporation Act, 1957.

The Allahabad High Court observed that what had to be examined was the consequence of such a long delay on the part of the Income tax authorities in not deciding the assesssee’s application for registration. It noted that admittedly after the statutory limitation, the CIT would become functus officio, and he could not, on expiry of the time limit, thereafter pass any order either allowing or rejecting the registration. Obviously, the application could not be allowed to be treated as perpetually undecided. Therefore, the key question, in the opinion of the court, was whether upon lapse of the six-month period without any decision, the application for registration should be treated as rejected or it should be treated as allowed.

The Allahabad High Court distinguished the Supreme Court decision cited on behalf of the revenue, in Chet Ram Vashist’s case (supra), by pointing out that the said decision dealt with a different statute and that one of the important aspects considered by the Supreme Court for taking view in that case that the sanction of the layout was mandatory and could not be deemed to have been granted on expiry of the time limit, was the purpose and objective behind of the provision requiring sanction of the layout plans. The High Court noted that under the relevant provision of the said statute, there was involved an element of public interest, namely, to prevent unplanned and haphazard development or construction to the detriment of the public and any sanction or deemed sanction of a layout plan entailing constructions being carried out, would create an irreversible situation. The Allahabad High Court noted that in the case before it, there was no such element of public interest in the case before it under the provisions of section 12A; that taking a view that non-consideration of the registration application within the time limit would result in deemed registration might, at the worst, cause loss of some revenue or income tax, payable by that individual trust.

The Allahabad High Court compared the act of non-disposal of an application with a situation where the assessing authority failed to make assessment or reassessment within the prescribed limitation, which also led occasionally to loss of revenue from that individual assessee. It observed that taking the contrary view and holding that not taking of a decision within the time limit was of no consequence would leave the assessee totally at the mercy of the tax authorities, as the assessee had not been provided any remedy under the Act against non-decision by the Commissioner on an application by the assessee.

The Allahabad High Court observed that taking the view of deemed registration did not create any irreversible situation, because the CIT had the power to cancel registration u/s. 12AA(3) if he was satisfied that the objects of such trust were not genuine or the activities were not being carried out in accordance with its objects and the only drawback might be that such cancellation would operate only prospectively. The deemed registration, in the court’s view, furthered the object and purpose of the statutory provision.

Considering the pros and cons of the two views, the Allahabad High Court held that the non-consideration of the application for registration within the time fixed by section 12AA(2) led to the deemed grant of registration as there was no good reason to make the assessee suffer merely because the Income Tax Department was not able to keep its officers under check and control and take timely decisions in such simple matters such as consideration of applications for registration, even within the long six-month period provided by section 12AA(2).

The Allahabad High Court therefore directed the Commissioner to treat the assessee as an institution approved and registered u/s. 12AA, to recompute its income by applying the provisions of section 11, and to issue a formal certificate of approval forthwith.

Sheela Christian Charitable Trust’s case:
The issue later also came up before the Madras High Court in the case of CIT vs. Sheela Christian Charitable Trust 354 ITR 478 (Mad).

In this case, the trust created in August 2003, made a delayed application for registration u/s. 12AA in August 2005 without a specific request for condonation of delay being filed. It had not filed the accounts since its inception along with the application. Since details of activities and copy of accounts were not filed with the Commissioner, he merely lodged the application and did not process the same. A second application was made in April 2007, seeking retrospective registration from April 2005. This application was rejected by the Commissioner. On appeal, the Tribunal set aside the order of the Commissioner and remitted the matter back to the Commissioner to decide the matter afresh, after giving opportunity to the assessee.

The Commissioner, as directed by the tribunal, gave an opportunity to the assessee and considered the matter afresh. This time the Commissioner granted the registration to the trust but with prospective effect. He rejected the assessee’s request to grant registration with effect from April 2005, holding that there was no just and reasonable cause for delay in filing the application.

On appeal to the Tribunal, the Tribunal held that so far as condonation of delay was concerned, a pragmatic approach should be adopted and substantial cause of justice should not be denied merely on pedantic reasons. The Tribunal noted that the order granting or refusing registration should have been passed before the expiry of 6 months from the end of the month in which the application was received, and since the Commissioner kept the application pending beyond the permitted time, and it was neither accepted nor rejected within the period of 6 months, the registration should be assumed to have been granted. Reliance was placed by the Tribunal on the decision of the Allahabad High Court in the case of Society for Promo-tion of Education Adventure Sport and Conservation of Environment (supra). It therefore held that the original application of August 2005 was to be treated as accepted, and registration u/s. 12AA should be deemed to have been granted to the trust.

On behalf of the Department, on appeal against the said order of the tribunal, it was argued before the Madras High Court that the Tribunal ought to have held that the trust could not agitate the inaction of the Commissioner on its earlier application in a subsequent application filed by it for registration u/s. 12AA. It was further contended that the tribunal erred in holding that there was a deemed registration by relying on the decisions of the Orissa High Court in the case of Srikhetra, A. C. Bhakti-Vedanta Swami Charitable Trust vs. Asst. CIT (2006) 2 OLR 75 and of the Madras High Court in the case of Anjuman-E-Khyrkhah-E-Aam 354 ITR 474, for the proposition that there was no concept of deemed registration u/s. 12AA(2).

The Madras High Court analysed the provisions of section 12AA(2) and the decision of the Orissa High Court referred to above. It agreed with the Orissa High Court that the time frame laid down u/s. 12AA(2) was only directory and not mandatory and that the Commissioner could pass an order even after the expiry of the statutory time limit. It observed that section 12AA(1)(b)(i) and (ii) made it clear that there was a statutory mandate imposed on the Commissioner to pass an order in writing either registering the trust or refusing to register the trust. It noted that the Madras high court in Anjuman’s case (supra), where the Commissioner had passed an order on the last day of the time limit neither accepting nor rejecting the application but lodging the complaint instead, had rejected the concept of deemed registration and remitted the matter back to the Commissioner to afford an opportunity of hearing to the trust and to decide the matter afresh.

In view of the above, and noting that the counsel for the trust also fairly submitted to the Court that there was no question of “deemed registration” and that the matter be remitted back to the Commissioner for consideration of the matter afresh, the Madras High Court held that non-consideration of the registration application, within the prescribed time, did not amount to “deemed registration” of the trust. The Madras High Court therefore set aside the matter and remitted it back to the Commissioner for consideration of the application afresh, to pass orders after affording sufficient opportunity to the trust.

This decision of the Madras High Court was also followed by it in a subsequent decision in the case of CIT vs. Karimangalam Onriya Pengal Semipu Amaipu Ltd 354 ITR 483, where also a similar concession was given by the counsel for the trust and there also, the Madras High Court remitted the matter back to the Commissioner for consideration afresh.

Observations

The decisions of the Madras High Court seem to have been significantly influenced by the decision of the Orissa High Court in Bhakti-Vedanta Swami Charitable Trust’s case. In that case, the delayed application was made in August 2004, but was claimed to have been misplaced by the tax authorities and was made significantly without a request for condonation of delay. The Orissa High Court observed in that case, as under:

“In our view, the period of 6 months as provided in s/s. (2) of section 12AA is not mandatory. Though the word “shall” has been used, but it is well known that to ascertain whether a provision is mandatory or not, the expression “shall” is not always decisive. It is also well known that whether a statutory provision is mandatory or directory has to be ascertained not only from the wording of the statute, but also from the nature and design of the statute and the purpose which it seeks to achieve. Herein the time-frame under s/s. (2) of section 12AA of the Act has been so provided to exclude any delay or lethargic approach in the matter of dealing with such appli-cation. Since the consequence for non-compliance with the said timeframe has not been spelt out in the statute, this Court cannot hold that the said time limit is mandatory in nature, nor the period of six months has been couched in negative words. Most of the time, negative words indicate a mandatory intent. This Court is also of the opinion that when public duty is to be performed by the public authorities, the time limit which is granted by the statute is normally not mandatory but is directory in the absence of any clear statutory intent to the contrary. See Montréal Street Railway Company vs. Normandin AIR 1917 PC 142. Here, there is no such express statutory intent, nor does it follow from necessary implication.”

In this case, the Orissa High Court directed the authorities to complete the statutory exercise of deciding on the application within a period of six months from the date of the court order, and that if the registration was granted, it would relate back to the date of application. The court also levied costs on the officer for his careless attitude taken and the misleading stand taken before the court by the Department.

The Orissa High Court proceeded on the basis that the task being performed by the Commissioner was a public duty, and therefore took the view that it did that no time limit could be laid down in such a situation. On the other hand, the Allahabad High Court rightly distinguished the process of registration for a trust and noted that in such process, there was merely a tax liability of an individual trust involved, and no public element or public interest involved.

If one would take the decision of the Orissa High Court to its logical conclusion, it would mean that in every case where the time limit was exceeded, the trust would have to approach the High Courts for extending the time limits, since the Commissioner would take the stand that he cannot pass an order once the time limit has expired under the law. This would create untold difficulty for such trusts, for no fault of theirs.

The Orissa High Court decision also ignores the fact that the statute has expressly laid down a time limit for disposal of the application for registration — whereas the High Court’s view seems to be that such a time limit cannot be laid down, but is merely a guidance. As against this, the Allahabad High Court has rightly tried to sub- serve the purpose of laying down the time limit by the legislature, which is to avoid undue delays in processing of applications, which was the norm earlier.

A note may also be taken of the following observations in the decision of the Special Bench of the Income Tax Appellate Tribunal in the case of Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust vs. Commissioner of Income Tax 111 ITD 175, while upholding the concept of deemed registration on failure to pass an order within the specified period:

“If the application for registration is to abate because the CIT did not pass an order thereon and the assessee is asked to file another application again that would be putting, the assessee to the grind all over again for no fault of his. That consequence should be avoided. If the application is to be treated as pending, then again the CIT would be getting an extended period of limitation which the section does not allow. Further, it would be uncertain as to how long the period can be extended. The assessee cannot be kept waiting to the end of time. If it is held that the application must be deemed to have been refused, obviously the assessee must be in a position to file an appeal against the refusal to the Tribunal but it will not be able to do so in the absence of a written order containing the reasons for refusal; the appeal remedy would be rendered illusory. That consequence cannot be countenanced. Therefore by a process of exclusion, the conclusion is that the CIT must be deemed to have allowed the registration if he has not passed any order within the time prescribed. That way, the rights of the Department are also protected in the sense that it would be open to the CIT to cancel the deemed registration by invoking s/s. (3) to section 12AA, if it is otherwise permitted and the procedure prescribed therefor is followed. The assessee, if aggrieved by the cancellation of registration, has a right to appeal to the Tribunal u/s. 253(1)(c)…..

It would be incongruous to hold that while the condition that the trust or charitable institution must be registered with the CIT is mandatory or absolute, the provision that the CIT shall pass an order thereon within six months from the end of

the month in which the application was filed is merely directory, leaving it to the convenience of the CIT to pass the order at any time he likes disregarding the time-limit prescribed. That would introduce an element of uncertainty and con-fusion in the administration of the Act and may even compel trusts or institutions claiming exemption u/s. 11 to invoke Art. 226 of the Constitution. Such consequences have to be avoided. The assessments of the trust or charitable institution may in the meantime be completed rejecting the claim for exemption on the ground that it is not registered, even though the trust/charitable institution is found by the AO to satisfy the other conditions such as application of income, investment of the funds and so on. In other words, by not passing the order within the time-limit, the claim of the trust/charitable institution can be frustrated, albeit unintentionally. There is no good ground shown, nor does any appear to exist in the scheme of the Act, to hold that the time-limit within which the CIT has to pass an order on the application for registration of the trust or institution is merely directory. It is not merely a question of prejudice being caused to the assessee, but it is something which goes to the very root of good administration and obedience to the law. It could not have been the intention of the law that the CIT could pass the order granting or refusing registration at any time. Any provision has to be so interpreted as to advance the cause and suppress the mischief.”

The one thing that is clear is that an assessee cannot be altogether denied the benefit of tax exemption on account of the laches of the Commissioner in dealing with the assessee’s application in time; he also cannot refuse to pass an order on the application on the ground that the law prevents him in doing so after the statutorily prescribed time. In short he cannot take benefit of his lapses by inflicting punishment on the assessee. Even under the view of the Orissa and Madras High Courts, not so favourable to the assessees, the need for the Commissioner to dispose the application remaining undisposed, is not dispensed with. The courts have clearly hauled up the authorities for their inaction by awarding the costs and have directed the authorities to dispose the application within the extended time after affording opportunity to the assessee. Importantly, the courts have held that the decision of the authorities when taken shall have retrospective effect, thereby ensuring that no undue harm is caused to the assessee for no fault of his. What perhaps remains to be ensured is that the tax demand, if any, in the intervening period is not pursued and enforced and the assessee is saved the trouble of moving the courts to make the Commissioner act on his application.

The purposive interpretation adopted by the Allahabad High Court, that registration should be deemed to have been granted, however, seems to be the far better and practical view of the matter, fulfilling both the requirements of the provision and its intention. The view is strengthened by the presence of the Proviso to section 12AA(1) which provides for giving an opportunity of hearing to the assesseee, by the Commissioner, before rejecting his application for registration which in turn clearly conveys that the denial of registration on account of non disposal of application is altogether ruled out. This view has the effect of satisfying the law abiding assessee who has made the application in time and is otherwise equitous in as much as the law provides for no condonation of delay in application of the assessee.