1. Background
Section 12AA (3) of the Income-tax Act,
1961 (hereinafter referred to as “the Act”) deals with cancellation of
registration of a charitable institution in circumstances specified in
the said section. The Income-tax Appellate Tribunal [“Tribunal”] has
consistently held in a number of cases that registration of an
institution cannot be cancelled u/s. 12AA (3) merely because section
13(1) of the Act applies to it. [Krupanidhi Educational Trust vs. DIT,
(2012) 27 taxmann.com 11 (Bang); Cancer Aid and Research Foundation vs.
DIT, (2014) 34 ITR (Trib) 56 (Mum); Parkar Medical Foundation vs. DCIT,
(2014) 34 ITR (Trib) 286 (Pune), TS-469-ITAT -2014 (Pune)]. In order to
overcome this position in law, the Finance (No.2) Act, 2014 inserted
section 12AA (4) with effect from 1-10-2014 to provide for cancellation
of registration of a charitable institution upon operation of section
13(1). This article attempts to explain and analyse the provisions of
section 12AA(4).
2. Text
Section 12AA(4) reads as follows:
“(4)
Without prejudice to the provisions of sub-section (3), where a trust
or any institution has been granted registration under clause (b) of
sub-section (1) or has obtained registration at any time under section
12A [as it stood before its amendment by the Finance (No.2) Act, 1996]
and subsequently it is noticed that the activities of the trust or the
institution are being carried out in a manner that the provisions of
section 11 and 12 do not apply to exclude either whole or any part of
the income such trust or institution due to operation of sub-section (1)
of section 13, then, the Principal Commissioner or the Commissioner may
by an order in writing cancel the registration of such trust or
institution:
Provided that the registration shall not be
cancelled under this sub-section, if the trust or institution proves
that there was a reasonable cause for the activities to be carried out
in the said manner.”
3. Summary
Preconditions for applicability of section 12AA(4)
(a) A charitable institution been granted registration u/s. 12AA(1)(b) or section 12A.
(b) After the registration, it is noticed that
(i) section 13(1) applies to the charitable institution;
(ii)
the activities of the charitable institution are being carried out in a
manner that section 11/12 do not apply to whole or any part of the
income due to operation of section 13(1)
(c) The charitable
institution cannot prove that there was reasonable cause for the
activities to be carried out in the said manner.
Consequences of applicability of section 12AA94)
(a) The Principal Commissioner (“PCIT”) or the Commissioner (“CIT”) may cancel the registration of such charitable institution.
(b) Such cancellation shall be done by an order.
(c) Such cancellation order shall be in writing.
4. Rationale/Purpose
4.1 The relevant passage in Memorandum explaining the provisions of the Finance (No. 2) Bill, 2014 reads as follows:
“There
have been cases where trusts, particularly in the year in which they
have substantial income claimed to be exempt under other provisions of
the Act, deliberately violate provisions of section 13 by investing in
prohibited mode etc. Similarly, there have been cases where the income
is not properly applied for charitable purposes or has been diverted for
benefit of certain interested persons. Due to restrictive
interpretation of the powers of the Commissioner under section 12AA,
registration of such trusts or institutions continues to be in force and
these institutions continue to enjoy the beneficial regime of
exemption. …
Therefore, in order to rationalise the provisions
relating to cancellation of registration of a trust, it is proposed to
amend section 12AA of the Act to provide that where a trust or an
institution has been granted registration, and subsequently it is
noticed that its activities are being carried out in such a manner
that,—
(i) its income does not enure for the benefit of general public;
(ii)
it is for benefit of any particular religious community or caste (in
case it is established after commencement of the Act);
(iii) any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or
(iv)
its funds are invested in prohibited modes, then the Principal
Commissioner or the Commissioner may cancel the registration if such
trust or institution does not prove that there was a reasonable cause
for the activities to be carried out in the above manner.”
4.2 The relevant paragraphs in Circular explaining the provisions of the Finance (No.2) Act, 2014 read as follows:
“9.2
There have been cases where trusts, particularly in the year in which
they had substantial income claimed to be exempt under other provisions
of the Income-tax Act though they deliberately violated the provisions
of section 13 of the said Act by investing in prohibited modes other
that specified modes, etc. Similarly, there have been cases where the
income is not properly applied for charitable purposes or is diverted
for the benefit of certain interested persons. However, due to
restrictive interpretation of the powers of the Commissioner under the
said section 12AA, registration of such trusts or institutions continued
to be in force and these institutions continued to enjoy the beneficial
regime of exemption.
…
9.4 Therefore, in order to
rationalise the provisions relating to cancellation of registration of a
trust, section 12AA of the Income-tax Act has been amended to provide
that where a trust or an institution has been granted registration, and
subsequently it is noticed that its activities are being carried out in
such a manner that,—
(i) its income does not enure for the benefit of general public;
(ii)
it is for benefit of any particular religious community or caste (in
case it is established after commencement of the Income-tax Act, 1961);
(iii)
any income or property of the trust is used or applied directly or
indirectly for benefit of specified persons like author of trust,
trustees etc.; or
(iv) its funds are not invested in specified modes,
then
the Principal Commissioner or the Commissioner may cancel the
registration, if such trust or institution does not prove that there was
a reasonable cause for the activities to be carried out in the above
manner.”
[CBDT Circular No. 1 / 2015, dated 21.01.2015]
5. Violation of section 13 cannot be used as a ground to deny registration
Courts/Tribunal have held that violation of section 13 is not a ground on which registration can be denied to a charitable institution [see CIT vs. Leuva Patel Seva Samaj Trust, (2014) 42 taxmann.com 181 (Guj), (2014) 221 Taxman 75 (Guj); Malik Hasmullah Islamic Educational and Welfare Society vs. CIT, (2012) 24 (taxmann.com 93 (Luck), (2012) 138 ITD 519 (Luck), (2013) 153 TTJ 635 (Luck); PIMS Medical & Education Charitable Society vs. CIT, (2013) 31 taxmann.com 371 (Chd)(Trib), (2013) 56 SOT 522 (Chad)(Trib), (2012) 150 TTJ 891 (Chd)(Trib); Chaudhary Bishambher Singh Education Society vs. CIT, (2014) 48 taxmann.com 152 (Del)(Trib); Kurni Daivachara Sangham vs. DIT, (2014) 50 taxmann.com 53 (Hyd)(Trib); Modern Defence Shikshan Sanstha vs. CIT, (2008) 26 SOT 21 (Joh)(URO); Ashoka Education Foundation vs. CIT, (2014) 42 CCH 0090 (Pune)(Trib)]. On a plain reading, there is no change in this position even after amendment. This is because section 12AA(4) provides that “where a trust or any institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A [asit stood before its amendment by the Finance (No.2) Act, 1996] and subsequently it is noticed that …”. Thus, the section is triggered only subsequent to the registration.
6. Is cancellation independent of assessment? Can CIT suo moto take cognisance of the violation of section 13(1) prior to assessment by AO?
The section states that “if it is noticed that the activities of the trust or the institution are being carried out in a manner …” It does not state that the violation of section 13(1) is noticed only upon assessment. If the CIT can independently come to a conclusion that there has been a default u/s. 13(1) and the provisions of section 11 and 12 do not apply as a result of the default, then, on a literal reading, he can suo moto take cognisance of the violation of section 13(1) prior to assessment by AO. Thus, the action u/s.er section 12AA(4)
a. could precede the assessment; or
b. be concurrent with the assessment; or
c. succeed the assessment.
To illustrate :
Suppose, a search and seizure action u/s. 132 is taken against a charitable institution and during the proceedings, it is found that the Managing Trust has siphoned off certain funds of the institution. In that case, section 13(1)(c) could apply and the PCIT or CIT could initiate proceedings u/s. 12AA(4).
However, it appears that the ultimate outcome of cancellation would, inter alia, depend on the position taken or finally accepted in assessment proceedings vis-à-vis the operation of section 13(1). Hence, if the assessment order is reversed at the appellate stage, then the cancellation order cannot survive.
7. Cancellation only in respect of operation of section 13(1)
7.1 The provision applies pursuant to operation of section 13(1). Thus, it does not apply pursuant to operation of the following sections :
Section 13(7) – anonymous donations
Section 13(8) – exemption not available on account of first proviso to section 2(15) becoming applicable to the institution.
7.2 The position vis-à-vis other sub-sections of sectio 13 is explained in the following paragraphs :
Section 13(2)
The said sub-section provides for situations when the income or property of an institution is deemed to have been used or applied for the benefit of an interested party. This sub-section is an “extension of section 13(1)(c) / (d)” and hence a violation of section 13(2) could also trigger the proceedings for cancellation of registration u/s. 12AA(4).
Section 13(4) and 13(6)
Section 13(4) provides that if the investment in a concern in which an interested person referred to in section 13(3) does not exceed 5% of the capital of that concern, then, subject to its provisions, the exemption u/s. 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such investment.
Section 13(6) provides that if a trust has provided educational or medical facilities to an interested person referred to in section 13(3), the exemption u/s. 11 or 12 shall not be denied in relation to any income other than the income referred to in section 12(2).
It appears that the above sections are not independent sections : both are in connection with violation u/s. 13(1)(c) or section 13(1)(d). They merely give a concession and relax the rigors of section 13(1)(c) and section 13(1)(d) apply. Income is not excluded from section 11 by reason of application of section 13(4) or (6), The breach would be only be on account of section 13(1)(c) or (d). Hence, it appears that, on a literal interpretation, the provision covers cases where section 13(4) and section 13(6) are applicable.
8. General principles for interpretation of section 12AA(4)
Section 186 (1) of the Act, prior to its omission with effect from 01.04.1993, read as follows:
“(1) If, where a firm has been registered or is deemed to have been registered, or its registration has effect under sub-section (7) of section 184 for an assessment year, the Assessing Officer is of opinion that there was during the previous year no genuine firm in existence as registered, he may, after giving the firm a reasonable opportunity of being heard cancel the registration of the firm for that assessment year:”
It is noticed that both, section 186(1) and section 12AA(4), refer to cancellation of registration and both use the term ‘may’, that is, the Assessing Officer (in section 186) and the PCIT or CIT [in section 12AA(4)] may cancel the registration.
Hence, the principles laid down by Courts in section 186 could be applied for interpreting section 12AA(4), to the extent applicable. Now, in the context of section 186, it has been held that withdrawal of the benefit of registration in respect of an assessment year results in serious consequences; it is penal in nature in that the consequences are very serious to the assessee and that is why discretion is conferred on the authority by requiring him to give a second opportunity [CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP)]. Likewise, it is submitted that section 12AA(4) is also a penal provision and the principles applicable in interpretation of penal proceedings, including the following, could ordinarily apply in interpreting section 12AA(4):
A penal provision must be interpreted strictly and in favour of the assessee [CIT vs. Sundaram Iyengar & Sons (P) Ltd. (TV), (1975) 101 ITR 764 (SC); Jain (NK) vs. Shah (CK), AIR 1991 SC 1289 and CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 186 of the Act)]
If two views are possible, the benefit should go to the assessee. [CIT vs. Vegetable Products Ltd., (1973) 88 ITR 192 (SC) (in the context of section 271 of the Income-tax Act); CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 186 of the Act)]. In other words if two possible and reasonable constructions can be put upon a penal provision, the court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty. A court is not competent to stretch the meaning of an expression used by the Legislature in order to carry out the intention of the Legislature. [Associated Tubewells Ltd. vs. Gujarmal Modi (RB), AIR 1957 SC 742]
9. Does a default u/s. 13 automatically lead to cancellation of registration?
For the following reasons, it appears that a mere default u/s. 13(1) would not automatically result in cancellation of registration:
Section 12AA(4) provides that the PCIT/CIT may by an order in writing cancel the registration. The use of the word “may” shows that it is discretionary, and the PCIT/CIT has a discretion not to cancel registration even in spite of the default of the assessee. [see J. M. Sheth vs. CIT, (1965) 56 ITR 293 (Mad); CIT vs. Standard Mercantile Co., (1986) 157 ITR 139 (Pat), (1985) 49 CTR 139 (Pat), (1985) 23 TAXMAN 452 (Pat) (both in the context of section 186)].
A similar term is used in section 271(1)(c), where the AO “may” levy penalty on an assessee upon the assessee furnishing inaccurate particulars of income or concealing income. Courts have held that in view of the word “may”, the penalty is not automatic [Dilip N. Shroff vs. JCIT, (2007) 161 Taxman 218 (SC), (2007) 191 ITR 519 (SC)]. Now, section 12AA(4) is also a penal provision. Hence, applying the same principle, the cancellation u/s. 12AA(4) is also not automatic.
Section 12AA(3) provides that if the Commissioner is satisfied that the activities of trusts are not genuine, he shall pass an order in writing cancelling the registration. The use of the word “may” in section 12AA(4) as against “shall” in section 12AA(3) clearly shows that the power in section 12AA(4) is discretionary.
The proviso to section 12AA(4) states that the registration shall not be cancelled if the charitable institution proves that there was a reasonable cause for the activities to be carried out in the manner provided in the section. Hence, a mere default does not trigger cancellation, if there is a reasonable cause for the default.
The relevant passage in section 12AA(4) reads as follows:
“… it is noticed that the activities of the trust or the institution are being carried out in a manner that the provisions of section 11 and 12 do not apply to exclude either whole or any part of the income such trust or institution due to operation of sub-section (1) of section 13, then, the Principle Commissioner or the Commissioner may by an order in writing cancel the registration …”
Suppose the expression “the activities of the trust or the institution are being carried out in a manner” (hereinafter referred to as “the relevant expression”) is removed from the language. In that case, the provision (hereinafter referred to as “modified provision”) would read as follows:
“It is noticed that … the provisions of section 11 and 12 do not apply to exclude either whole or any part of the income such trust or institution due to operation of sub-section (1) of section 13, then, the Principal Commissioner or the Commissioner may by an order in writing cancel the registration.”
A plain reading of modified provision shows that if provisions of section 11 and 12 do not apply due to operation of section 13(1), then it could trigger cancellation of registration. Thus, if mere default in section 13(1) triggered cancellation, then the modified provision without the relevant expression would have been sufficient and the relevant expression would be superfluous!
It is now very well settled that redundancy should not be attributed to the legislature and no part of a statute should be read in a manner that it becomes superfluous. [CWT vs. Kripashankar Dayashanker Worah, (1971) 81 ITR 763 (SC)] If a mere default in section 13(1) could result in the CIT exercising his power, then the entire expression “the activities of the trust or the institution are being carried out in a manner ” would not have been required and it would have been sufficient if the section had been worded as “it is noticed that the provisions of section 11 and 12 …”. In view of this, some meaning has to be attributed to the relevant expression. The point for consideration is what meaning should be attributed to the said phrase? It is submitted as follows:
i)“Activities”
The relevant expression refers to “activities”. Now ordinarily, section 13 of General Clauses Act, 1897, provides that singular includes plural and vice versa, unless the context otherwise requires. It could be argued that in this case, depending on facts, the expression “activities” in plural may not include singular “activity” especially because cancellation of registration is an onerous provision and a single default should not result in such harsh consequences.
ii)“Are being carried out”
The relevant expression uses the phrase “are being carried out”. The terms ‘is’ (singular of ‘are’) and “being” have been judicially interpreted as follows:
In F. S. Gandhi vs. CWT, (1990) 51 Taxman 15 (SC), (1990) 184 ITR 34 (SC), (1990) 84 CTR 35 (SC), the Supreme Court had to interpret the expression “any interest in property where the interest is available to an assesssee for a period not exceeding six years…” The Court observed as follows:
The word ‘available’ is preceded by the word ‘is’ and is followed by the words ‘for a period not exceeding six years’. The word ‘is’, although normally referring to the present often has a future meaning. It may also have a past signification as in the sense of ‘has been’ (See Black’s Law Dictionary, 5th edn., p. 745). We are of the view that in view of the words ‘for a period not exceeding six years’ which follow the word ‘available’ the word ‘is’ must be construed as referring to the present and the future. In that sense it would mean that the interest is presently available and is to be available in future for a period not exceeding six years.
The term “being” has been interpreted as follows:
“In Stroud’s Judicial Dictionary (fourth edition) the expression “being” is explained thus at page 267 of volume I:
“Being — ‘Being as used in a sense similar to that of the ablative absolute, has sometimes been translated as, ‘having been’; but it properly denotes a state or condition existent at the time when the conclusion of law or fact has to be ascertained.”
In other words, it is clear that the phrase “the business of such company is not being continued” must be interpreted to mean the company whose business is non-existent at a time when the requisite opinion contemplated by the section is formed by the Central Government and if at such time the business is not continued or has stopped, the case would fall within that phrase.”
[UOI vs. Seksaria Cotton Mills Ltd., (1975) 45 Comp. Cas 613 (Bom)] [for the purpose of: section 15A of the Industries (Development & Regulation) Act, 1951] In Harbhajan Singh vs. Press Council of India, AIR 2002 SC 135, the Supreme Court observed as follows :
“In Maradana Mosque (Board of Trustees) vs. Badi-ud-Din Mahmud and Anr.- (1966) 1 All ER 545, under the relevant Statute the Minister was empowered to declare that the school should cease to be an unaided school and that the Director should be the Manager of it, if the Minister was satisfied that an unaided school “is being administered” in contravention of any provisions of the Act. Their Lordships opined, “Before the Minister had jurisdiction to make the order he must be satisfied that ‘any school. is being so administered in contravention of any of the provisions of this Act’. The present tense is clear. It would have been easy to say ‘has been administered’ or ‘in the administration of the school any breach of any of the provisions of this Act has been committed’, if such was the intention of the legislature; but for reasons which common sense may easily supply, it was enacted that the Minister should concern himself with the present conduct of the school, not the past, when making the order.
This does not mean, of course, that a school may habitually misconduct itself and yet repeatedly save itself from any order of the Minister by correcting its faults as soon as they are called to its attention. Such behaviour might well bring it within the words ‘is being administered’ but in the present case no such situation arose. There was, therefore, no ground on which the Minister could be
‘satisfied’ at the time of making the order. As appears from the passages of his broadcast statement which are cited above, he failed to consider the right question. He considered
only whether a breach had been committed, and not whether the school was at the time of his order being carried on in contravention of any of the provisions of the Act. Thus he had no jurisdiction to make the order at the date on which he made it”.
On a combined reading of the term “are” as a plural of “is” and “being”, as interpreted above, it could be argued that the defaulting activities should continue to be carried out or at least they have been carried out in near past. The CIT cannot invoke the provision for a default committed before many years and especially in a re-assessment when the default u/s. 13 was completed much earlier and was not detected or was held as not being applicable in the original assessment.
10. Proceedings before PCIT/CIT
10.1 Cancellation of the registration should only be after complying with the principles of natural justice, which necessarily implies that –
if the PCIT/CIT is satisfied with the explanation offered by the assessee, he must drop the proposal to cancel the registration. [see CIT vs. Pandurang Engg. Co., (1997) 223 ITR 400 (AP) (in the context of section 185)]
a reasonable opportunity of being heard shall be given to the assessee;
the PCIT/CIT shall not use any material without giving an opportunity to the assessee to rebut such material.
10.2 The PCIT/CIT should exercise his power not arbitrarily or capriciously but judicially in a manner consistent with judicial standards and after a consideration of all relevant circumstances. [see Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 11 (SC), (1972) 83 ITR 26 (SC); J.M Sheth vs. CIT, (1965) 56 ITR 293 (Mad) (in the context of section 186)].
10.3 For the purpose of section 271(1) it has been held that the regular assessment order is not the final word upon the pleas which can be taken at the penalty stage. The assessee is entitled to show-cause in penalty proceedings and to establish by the material and relevant facts which may go to affect his liability or the quantum of penalty. He cannot be debarred from taking appropriate pleas simply on the ground that such a plea was not taken in the regular assessment proceedings. [Jaidayal Pyarelal vs. CIT, (1973) Tax LR 880 (All)]
Applying the same principle an assessee cannot be debarred from taking appropriate pleas in the cancellation proceedings simply on the ground that such a plea was not taken in the regular assessment proceedings.
10.4 For the purpose of section 271 it has been held that the findings given in assessment proceedings, though relevant and admissible material in penalty proceedings, cannot operate as res judicata. [CIT vs. Gurudayalram Mukhlal, (1991) 95 CTR 198 (Gau), (1992) 60 Taxman 313 (Gau), (1991) 190 ITR 39 (Gau).] Similarly, the findings in respect of section 13(1) given in assessment proceedings cannot operate as res judicata.
10.5 It has been held that additional evidence is admissible in penalty proceedings and it is possible for the parties to bring on record additional material for determining if the penalty should be imposed. [CIT vs. Babu Ram Chander Bhan, (1973) 90 ITR 230 (All)]. Applying the same principle it appears that additional evidence is admissible in the cancellation proceedings.
11. Order passed by CIT/PCIT
Section 12AA(4) requires the CIT/PCIT to pass an order ‘in writing’.
It is now well settled that a quasi-judicial order has to be a speaking order containing
a) submissions of the assessee;
b) detailed reasons why the submissions are not acceptable. [Associated Tubewells Ltd. vs. Gujarmal Modi (RB), AIR 1957 SC 742; Travancore Rayons vs. UOI, AIR 1971 SC 862; Appropriate Authority vs. Hindumal Balmukand Investment Co. P. Ltd., (2001) 251 ITR 660 (SC)] or a mere statement that after hearing the assessee and perusing the record, he did not find any substance in the submissions is not enough [see Sanju Prasad Singh vs. Chotanagpur Regional Transport Authority, AIR 1970 Pat 288 explaining the meaning of “speaking order”].
12. Reasonable cause
12.1 Registration cannot be cancelled if the assessee proves that there was reasonable cause for the activities to be carried out in a particular manner.
12.2 Institution to prove reasonable cause
The institution has to prove that a reasonable cause existed for the activities being carried out in the particular manner. The term “proved” is defined in section 3 of the Indian Evidence Act, 1872 as follows:
“A fact is said to be ‘proved’ when after considering the matters before it, the Court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists.”
In view of the above, the test of proof is that there is such a high degree of probability that a prudent man would act on the assumption that the thing is true. [Pyare Lal Bhargava vs. State of Rajasthan, AIR 1963 SC 1094, (1963) 1 SCR Supl. 689 (SC)]
12.3 Reasonable cause – meaning
Courts have explained the term “reasonable cause” as follows:
‘Reasonable cause’ as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as a probable cause. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which, assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do. The cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, the prescribed consequences will follow. [Woodward Governors India (P.) Ltd. vs. CIT, (2002) 253 ITR 745 (Del) (For the purpose of section 273B of the Income-tax Act, 1961)]
In Oxford English Dictionary (first edn. published in 1933 and reprinted in 1961, Volume VIII), the expression ‘reasonable’ has been defined to mean ‘fair, not absurd, not irrational and not ridiculous’. Likewise, the expression ‘good’ has been defined in the said Dictionary in Volume IV to mean ‘adequate, reliable, sound’. Similarly, the expression ‘sufficient’ has been defined under the same very Dictionary in Volume X to mean ‘substantial, of a good standard’.
From the definitions referred to above, it would appear that reasonable cause or excuse is that which is fair, not absurd, not irrational and not ridiculous … if a reason is good and sufficient, the same would necessarily be a reasonable cause. [Banwarilal Satyanarain vs. State of Bihar, (1989) 46 TAXMAN 289 (Pat), (1989) 179 ITR 387 (Pat), (1989) 80 CTR 31 (Pat) (for the purpose of section 278AA of the Income-tax Act, 1961)]
Reasonable cause, as correctly observed by the Administrative Tribunal, is a cause that a prudent man accepts as reasonable. The test to assess the reasonableness of the cause for default is, therefore, to find whether in the judgment of a common prudent man the cause is such that any normal man would, in the same or similar circumstances be also a defaulter. [Eknath Kira Akhadkar vs. Administrative Tribunal, AIR 1984 Bom 144 [for the purpose of section 22(2)(a) and section 32(4) of the Goa, Daman and Diu Buildings (Lease , Rent and Eviction) Control Act, 19968]]
The Bombay High Court has held that the expression ‘reasonable cause’ in section 273B for non-imposition of penalty u/s. 271E would have to be construed liberally depending upon the facts of each case. [CIT vs. Triumph International Finance (India) Ltd., (2012) 22 taxmann. com 138 (Bom), (2012) 208 TAXMAN 299 (Bom), (2012) 345 ITR 270 (Bom), (2012) 251 CTR 253 (Bom)]
12.4 Some illustrations/principles regarding reasonable cause
a) Ignorance of law
It has been held that ignorance of law can constitute a reasonable cause [see ACIT vs. Vinman Finance & Leasing Ltd., (2008) 115 ITD 115 (Visk)(TM), para 13; Kaushal Diwan vs. ITO (1983) 3 ITD 432 (Del)(TM) (in the context of 285A of the Income-tax Act, 1961)]. Hence, in a given situation, the ignorance of the provisions of section 13(1) may constitute a reasonable cause.
b) Bonafide belief
It has been held that penalty is not justified where the breach flows from a bonafide belief of the offender that he is not liable to act in the manner prescribed by the statute. [see
Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 211 (SC), (1972) 83 ITR 26 (SC);
DCIT vs. Dasari Narayana Rao, (2011) 15 taxmann.com 208 (Chennai Trib) (in the context of section 272A of the Income-tax Act, 1971);
ACIT vs. Dargapandarinath Tuljayya & Co. (1977) 107 ITR 850 (AP) followed in Thomas Muthoot vs. ACIT, (2014) 52 taxmann.com 114 (Coch Trib) (in the context of section 271C of the Income-tax Act, 1961);
IL & FS Maritime Infrastructure Co. Ltd. vs. ACIT, (2013) 37 taxmann.com 297 (Mum Trib), para 8 (in the context of section 271BA of the Income-tax Act, 1961)].
Applying the aforesaid principle, a mistaken bonafide belief that section 13(1) is not applicable can constitute a reasonable cause.
(c) Expert opinion
It has been held that if a particular action is bonafide taken on the basis of an opinion from a senior counsel, then, it constitutes a reasonable cause and merely because it turns out to be wrong, a penalty cannot be levied on the assessee. [CIT vs. Viswapriya Financial Services & Securities Ltd., (2008) 303 ITR 122 (Mad)] Applying the same principle, if a charitable institution has relied upon an expert opinion, then, merely because the expert had held a different view, it does not mean that there is no reasonable cause for the default.
(d) Bonafide mistake
It has been held that registration of an assessee firm cannot be cancelled upon a bonafide mistake which was not intentional.[see CIT vs. Pawan Sut Rice Mill, (2004) 136 Taxman 640 (Pat) (in the context of section 186 of the Act)]. Applying the principle, the registration may not be cancelled if there is unintentional, bonafide mistake as a result of which section 13(1) became applicable to an assessee.
13. No penalty upon technical or venial breach
It has been held that the authority competent to impose the penalty will be justified in refusing to impose the penalty when there is a technical or venial breach of the provisions of the Act. [Hindustan Steel Ltd. vs. State of Orissa, (1970) 25 STC 211 (SC), (1972) 83 ITR 26 (SC)]. Applying the same principle, the registration may not be cancelled when there is technical or venial breach upon application of section 13(1).
14. Whether registration can be cancelled in certain situations involving quantum assessment
For the purpose of section 271(1)(c), it has been held that penalty cannot be levied in the following situations :
a. the assessee’s appeal against the quantum assessment has been admitted as substantial question of law (because this shows that the issue is debatable) [CIT vs. Liquid Investment and Trading Co., ITA No. 240/Del/2009, dated 05.10.2010].
b. where two views are possible in respect of a particular addition in the quantum assessment and the issue is debatable.
c. where the position adopted by the assessee is supported by a Tribunal or High Court judgment in another case.
Likewise, if the applicability of section 13(1) has been admitted by the High Court as a substantial question of law or if two views are possible regarding operation of section 13(1) or there is a case u/s. 13(1) supporting the view adopted by the assessee, it is a point for consideration as to whether the PCIT/CIT should not cancel the registration on the ground that the discretionary power u/s. 12AA(4) entails him to use the discretion in favour of the assessee in such matters and/or their exists a reasonable cause for the activity to be carried out by the assessee in the manner it has done.
15. Wilful default
The registration can be cancelled if the default is a wilful default. [See CIT vs. Standard Mercantile Co., (1986) 157 ITR 139 (Pat), (1985) 49 CTR 139 (Pat), (1985) 23 TAXMAN 452 (Pat) (in the context of section 186)]
16. Cancellation – whether with retrospective effect?
16.2 There are two views on the issue :
a. Registration cannot be cancelled retrospectively
b. Registration can be cancelled retrospectively
16.3 Registration cannot be cancelled retrospectively
For the purpose of section 35CC/CCA, Courts have held that an approval granted could not be withdrawn with retrospective effect.
[see B. P. Agarwalla & Sons Ltd. vs. CIT, (1993) 71 Taxman 361 (Cal), (1994) 208 ITR 863 (Cal)
CIT vs. Bachraj Dugar, (1998) 232 ITR 290 (Gau), (1999) 152 CTR 367 (Gau)
Jai Kumar Kankaria vs. CIT, (2002) 120 Taxman 810 (Cal)]
Applying the aforesaid principle, registration cannot be cancelled with retrospective effect.
For the purpose of sales tax, it has been held that the registration certificate of a dealer could not be cancelled with retrospective effect. [M. C. Agarwal vs. STO, (1986) 11 TMI 372 (Ori), (1987) 64 STC 298 (Ori)]
Section 12AA(4) does not refer to cancellation with retrospective effect. In the absence of such specific provision, registration cannot be cancelled with retrospective effect.
16.4 Registration can be cancelled retrospectively
In Mumbai Cricket Association vs. DIT, (2012) 24 taxmann.com 99 (Mum), the Tribunal held that registration of a charitable institution could be cancelled u/s. 12AA(3) with retrospective effect. Applying the same principle, registration could be cancelled u/s. 12AA(4) with retrospective effect.
The judgments for section 35C/CCA and under sales tax are distinguishable since a retrospective cancellation in those cases prejudicially affected the counterparty. However, in retrospective cancellation of certificate u/s. 12AA(4), it is primarily the charitable institution which is affected.
16.5 Even if registration can be cancelled retrospectively it can not be before 1st October 2014
Even if registration could be cancelled with retrospective effect, it could not be retrospective before 1st October, 2014 being the date of insertion of section 12AA(4). This is supported by the following arguments:
In Mumbai Cricket Association vs. DIT, (2012) 24 taxmann.com 99 (Mum), it was held that the registration to a charitable institution could not be cancelled beyond 1st October, 2010, being the date on which the provision became applicable.
It is now well settled that law that a person, who has complied with the law as it exists, cannot be penalised by reason of the amendment to the law effected subsequently, unless such intention is expressly stated and the imposition of such penalty is not contrary to any of the provisions of the Constitution.[CIT vs. Kumudam Endowments, (2001) 117 Taxman 716 (Mad)]
Again, it is now well settled that unless the terms of a statute expressly so provide or necessarily imply, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure. [CED vs. Merchant (MA), (1989) 177 ITR 490 (SC); CWT vs. Hira Lal Mehra, (1994) 205 ITR 122 (P&H); A fiscal statute will not therefore be regarded as retrospective by implication, particularly a penal provision therein. [CWT vs. Ram Narain Agarwal, 1976 TLR 1074 (All); Thangalakshmi vs. ITO, (1994) 205 ITR 176 (Mad)]
16.6 Summary
The matter is not free from doubt. However, even if it is held that the registration can be cancelled with retrospective effect, the retrospectivity cannot be prior to 1.10.2014.
To illustrate, suppose an assessee commits a default in financial year 2013-14; the CIT notices the default in June 2015 and cancels the registration in July 2015. In this case, the cancellation can have effect from 1st October 2014, and not for the period prior to 1st October, 2014.
16.7 Impact of cancellation of registration upon past years if registration cannot be cancelled with retrospective effect. (view 1)
Suppose a charitable institution violates section 13(1) during financial year 2015-16 and its registration is cancelled in financial year 2018-19. If there is no default u/s. 13(1) in financial year 2016-17 and 2017-18, can it avail of the benefit of section 11 and 12 during these years?
Section 12A(1)(a)/(aa) provide that the provisions of section 11 and 12 shall not apply in relation to the income of a charitable institution unless such trust is registered u/s. 12AA. Thus, in order to avail of the benefit of exemption, an institution is required to be registered u/s. 12AA. It appears that if the registration is valid throughout the previous year and if it is cancelled after 31st March of the relevant previous year, then, so far as the said previous year is concerned, it ought to be regarded as registered u/s. 12AA for the purposes of aforesaid section 12A(1) (a)/(aa). Thus, in the aforesaid illustration, the institution should be regarded as registered for financial year 2016-17 and financial year 2017-18, that is, assessment years 2017-18 and 2018-19; the registration should be regarded as cancelled only from financial year 2018-19 onwards.
17 Writ
Like any other order, in an appropriate case, a writ under Article 226 of the Constitution would lie against the cancellation order before the jurisdictional High Court and the Court may stay the operation of the cancellation order; or quash the cancellation order; or set aside the order directing the PCIT/CIT to pass a fresh order after complying with the directions of the Court.
18 Appeal against the cancellation order
An assessee aggrieved by the order passed by PCIT or CIT, may appeal to the Appellate Tribunal against such order. [see section 253(1)(c)]
Dual appeal
An assessee whose registration has cancelled will now have to pursue two appeals, one against the assessment order with the CIT(A) and another against the cancellation order with the Tribunal.
19.On cancellation, whether the charitable institution is debarred from making fresh application for registration?
Suppose the registration is cancelled for a default which no longer exists. To illustrate, an institution made an investment contrary to the mode specified in section 11(5). It has liquidated the investment and there is no continuing default u/s. 11(5). In such circumstances, even if the CIT cancels the registration, it appears that the institution can immediately reapply for fresh registration and the CIT has to deal with such application in accordance with the provisions of section 12AA(1).
20. Impact on cancellation order upon deletion of operation of section 13(1) in merits
The Supreme Court has authoritatively laid down that where the additions made in the assessment order, on the basis of which penalty for concealment was levied, are deleted, there remains no basis at all for levying the penalty for concealment and, therefore, in such a case no such penalty can survive and the same is liable to be cancelled. [K. C. Builders vs. ACIT, (2004) 265 ITR 562 (SC)]
Likewise, if it is held in the appellate proceedings that there is no violation of section 13(1) then, the cancellation order cannot survive. Further, such reversal of the cancellation order should be regarded to have retrospective effect ab initio and all the actions taken on the basis of the cancellation order would no longer survive.
21 Implications under other sections
21.2 Section 56(2)(vii)
Section 56(2)(vii) provides that if an individual or HUF receives any sum of money or property without consideration, then, the sum of money so received or the value of property so received shall be regarded as income
of the individual. The proviso to the said section provides that the provision will not apply in respect of any sum of money or property received from a charitable institution registered u/s. 12AA. Hence, if the institution supports any individual after the cancellation of registration, then such donation or contribution/aid would be regarded as income of the individual and shall be taxable beyond the basic exemption of Rs.50,000.
21.3 Section 80G
Section 80G(5)(i) provides that an institution is eligible for approval u/s. 80G if its income is not liable to inclusion in its total income under the provisions of sections 11 and
Now, if the registration is cancelled, the exemption u/s. 11 and 12 would not be available to the institution and the income would be liable to inclusion in total income. In such circumstances, the institution would not be eligible to obtain an approval u/s. 80G(5) or its existing approval would be liable for cancellation.
21.4 Exemption u/s. 10
Where an institution has been granted registration u/s. 12AA or 12A and the said registration is in force for any previous year, then the assessee is not eligible for exemption u/s. 10 except exemption in respect of agricultural income or u/s. 10(23C) [section 11(7)]. By implication once the registration is cancelled, the assessee would be entitled to claim exemption under section 10 e.g. dividend income u/s. 10(34) or long term gains u/s. 10(38).
22 Conclusion
Section 12AA(4) is another measure by the Government to tighten the law relating with charitable institutions. While the tax department may invoke it in many cases involving operation of section 13(1), it is felt that the ultimate cancellation of registration hinges on fulfilment of many conditions and restrictions and would lead to protracted litigation.
