The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has clarified that the cancellation of a trust’s registration under Section 12AB(4) of the Income Tax Act, is legally unsustainable if it is based on an alleged violation of Section 13(1)(c) of the Act. Following the amendments introduced by the Finance Act, 2022, the application of a trust’s income for the benefit of specified persons does not constitute a ‘specified violation’ under the Explanation to Section 12AB(4).
The ITAT explained that the legislative scheme now provides a specific consequence for such a violation, which is limited to the taxation of the diverted portion of the income at a special rate under Section 115BBI, while the registration of the trust remains intact.
The Tribunal held that the power to cancel registration under Section 12AB is a special jurisdiction vested with the Commissioner (Exemptions) and cannot be exercised by a PCIT (Central) merely on the basis of a Section 127 order transferring assessment jurisdiction. Further, the provisions of Section 12AB(4) cannot be applied retrospectively to cancel registration for assessment years prior to its effective date of April 01, 2022.
The Tribunal also held that the disputed financial transactions do not render the ‘activities’ of a trust non-genuine under Clause (e) of the Explanation to Section 12AB(4), so long as the core charitable activities of the trust are real and ongoing. Such transactions are a matter for consideration during assessment, not for cancellation of registration.
The Division Bench comprising Challa Nagendra Prasad (Judicial Member) and M. Balaganesh (Accountant Member) observed that the power to grant, cancel, or withdraw registration under Sections 12A/12AA/12AB is a special jurisdiction vested with the Commissioner of Income Tax (Exemptions) as per CBDT Notification No. 52 of 2014. The Bench held that an order under Section 127 of the Income Tax Act only transfers the ‘case’ for assessment jurisdiction from one Assessing Officer to another. It does not transfer the original jurisdiction for registration matters from the CIT (Exemptions) to a PCIT (Central).
The Tribunal noted that the concept of ‘specified violation’ and the power to cancel registration on that basis were introduced by the Finance Act, 2022, with effect from 01-04-2022. It is a settled principle that fiscal statutes creating new liabilities must be applied prospectively unless specified otherwise. Therefore, the PCIT’s action of cancelling registration for AYs 2019-20, 2020-21, 2021-22, and 2022-23 based on alleged acts that occurred before this provision came into force was held to be without authority of law and arbitrary.
Further, the Tribunal found that the show-cause notices issued by the PCIT were vague and did not specify the particular clause of the Explanation to Section 12AB(4) under which the alleged ‘specified violation’ was supposed to fall. This failure to disclose the precise statutory charge left the appellant/society unable to properly respond, constituting a breach of natural justice and a fundamental jurisdictional defect that vitiated the entire proceedings.
The Tribunal made a clear distinction between the ‘activities’ of a trust (its overall, substantive charitable functions) and its ‘transactions’ (incidental acts to carry out activities). It held that Clause (e) of the Explanation to Section 12AB(4), which allows cancellation if activities are ‘not genuine’, can only be invoked if the predominant charitable activities themselves are sham or a facade. In this case, the society’s core activity of imparting education was real and ongoing. Alleged financial irregularities in individual transactions are matters to be examined at the assessment stage and do not render the trust’s activities non-genuine.
As far as the consequence of Violation of Section 13(1)(c) is concerned, the Tribunal observed that after the amendments by the Finance Act, 2022, the statutory framework has been rationalized. A violation of Section 13(1)(c) (application of income for the benefit of specified persons) is consciously excluded from the definition of ‘specified violation’ in the Explanation to Section 12AB(4). The legislative intent, as evident from the amended Section 13(1)(c), the introduction of Section 115BBI, and the Memorandum to the Finance Bill 2022, is that such a violation no longer leads to cancellation of registration.
Instead, the consequence is limited to the denial of exemption only for that part of the income which has been diverted, and this income is to be taxed at a special rate of 30%. Therefore, invoking cancellation of registration for an alleged violation of Section 13(1)(c) is contrary to the current statutory scheme, added the Bench.
Briefly, the appellant, a charitable society established with the primary object of imparting education, was granted registration under Section 12AA of the Income Tax Act in 2009, and subsequently under Section 12AB in 2022, valid for assessment years 2022-23 to 2026-27. The society operated three educational institutions.
A search and seizure operation under Section 132 was conducted on the PTC group of companies, which led to a consequential search on the appellant society. Following this, the Principal Commissioner of Income Tax (PCIT) issued a show-cause notice under Section 12AB(4) and subsequently passed an order cancelling the society’s registration for Assessment Years (AYs) 2019-20 to 2023-24 and for all subsequent years.
The cancellation was based on four primary allegations which, according to the PCIT, resulted in benefits to related parties under Section 13(3) of the Act, thereby constituting a ‘specified violation’ under Clauses (a) and (e) of the Explanation to Section 12AB(4). The allegations were: (a) bogus salary of Rs. 16 lakhs per month paid to Jasmine Gandhi; (b) cash receipts in lieu of alleged bogus expenditure/billing, based on WhatsApp chats and blank invoices found during the search; (c) advance of Rs. 20 crores paid to Shri Paramjit Gandhi for the purchase of a school building; and (d) off-the-books cash transactions based on diaries seized from an employee.
Appearances:
Advocates Gaurav Jain and Tarun Channa, for the Appellant/ Taxpayer
CIT-DR Kranti, for the Respondent/ Revenue
