Withdrawal of registration u/s. 12-A of the Income Tax Act, 1961

February 8, 2010

The Chairman

Central Board of Direct Taxes

Department of Revenue

Ministry of Finance

Government of India

North Block

Delhi-110 001

Dear Sir,

Up to 1st June 2007, the registering authority, which is
either the Commissioner or Director of Income Tax (Exemptions) had a power to
condone the delay in making such an application. Finance Act 2007 has withdrawn
that power from the date aforesaid.

Section 12AA of the Act prescribes the procedure for
registration, under which, the registering authority is required to be satisfied
about the genuineness of activities of the trust or institution. The section was
inserted from 1.04.1997.

The registration procedure is prescribed by rule 17A and the
form in which the application is to be furnished is Form 10A. Form 10A, contains
an undertaking by the applicant as follows:

"I undertake to communicate forth with any alteration in the
terms of the trust or in the rules governing the institution made at any time
hereafter."

However neither the governing sections nor the rules contain
any similar condition or the consequence of the non-furnishing of such a change.

As stated aforesaid, the governing sections and the rules are
silent about the intimation in change of objects / rules being given to the
registering authority. Prior to 1997, even the certificate issued in response to
the application did not contain any such condition.

We have been informed by our members that the assessing
officers are now calling for details of any change in objects and rules and in
case of such a change and the absence of intimation thereof to the registering
authority, proceeding to deny exemption under section 11. The view being taken
is that on such a change occurring and the same not being intimated to the
registering authority, the registration is treated as withdrawn.

For this we understand that reliance is being placed on the
following three decisions.

We now understand that, such a stand is being taken by the
registering authority in Mumbai i.e. Director of Income Tax (Exemptions). In
some cases, a communication is being sent that the registration is treated as
withdrawn while in some cases, show cause notices are being issued with similar
result.

Without going into the rationale of these decisions, merits
thereof, and the peculiar facts on the basis of which they have been rendered,
we submit that the stand taken by the Department will cause untold hardship.

It must be borne in mind that many registrations under
section 12A are more than three decades old and without any specific provision
or rule, it is virtually impossible that trustees or persons in management of
these charitable institutions would have been aware of the existence of such an
undertaking which was given at the time of application. This must be viewed in
light of the fact that most charitable institutions are run by persons working
on an honorary basis, and they rarely have professional help on a regular basis.
In any event, even those professionals would not be aware of the undertakings,
particularly when there is no express provision.

If the assessing officers deny exemption under section 11,
based on the interpretation aforesaid (many have already completed that
process), genuine charitable trusts / institutions will face huge tax arrears,
and the work of charity will suffer substantially. Moreover, even if these
trusts apply for registration again, such a registration will, be available only
from the year in which the application is made (the power of condonation having
been withdrawn)

We appreciate that it is necessary to ensure that the
exemption is granted to only deserving institutions. It is also accepted that
institutions claiming these exemptions must submit themselves to the scrutiny of
the registering authority, in case of change in objects. However, relying on a
technical interpretation to deny an exemption of this nature should be avoided.

We therefore feel that-

a) In case of change in objects being noticed, the trust /
institution be issued a show cause notice.

b) The trust be asked to explain the rationale behind the
change and if the objects are still charitable, the registration be continued.

c) If the objects are not charitable then the registration be
withdrawn by a specific order, so that the remedy of appeal is available to the
trust / institution by way of an appeal to the tribunal.

d) During the time that the proceedings in which the impact
of the change is being verified by the D.I.(Exemptions) / Commissioner, the
assessing authority be restrained from assuming / presuming that the 12A
registration is cancelled.

e) This fact of 12A registration being conditional, and the
fact of change of objects being required to be intimated to the registering
authority be given widest publicity

f) A suitable amendment be recommended in the Act, so that in
future, the trusts are suitably forewarned.

We hope quick action is taken in this regard so that genuine
trusts do not suffer on account of technical lapses. If any assistance is
required from the Bombay Chartered Accountants Society, we will be glad to
provide the same.

Yours faithfully,