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Commissioner Of Income-Tax v. Sarvodaya Ilakkiya Pannai

Madras High Court

Jan 25, 2012

Judgment

Subsequent
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Summary of Opinion — D. Murugesan, J.

Factual and Procedural Background

The Commissioner of Income-tax, Madurai, filed this tax appeal challenging the Income-tax Appellate Tribunal's order dated June 30, 2011 (I.T.A. No. 594.Mds/2011). The respondent, Sarvodaya Ilakkiya Pannai (a society), had been registered under section 12A(1)(a) of the Income-tax Act by the Commissioner on November 6, 1989. The society's stated objects included publication, sale and spread of Sarvodaya literature and propagation of Gandhian and Sarvodaya ideologies.

On scrutiny of returns for the assessment years 2008-09 to 2010-11, the department found the society engaged in purchase and sale of books. The Commissioner issued a show-cause notice under section 12AA(3) and then revoked/cancelled the society's registration on the ground that the society did not deserve exemption under section 11(1)(a). The Tribunal allowed the society's appeal, holding the Commissioner's cancellation unjustified because cancellation power is governed by section 12AA(3) and, in the absence of activities carried on by the trust contrary to its objects, registration cannot be revoked. The Commissioner challenged the Tribunal's order before the Court.

Legal Issues Presented

Whether the Tribunal was correct in law in holding that registration under section 12A(1)(a) would remain valid even though the assessee's main activity of publication, purchase and sale of books may not be "definitely charitable" and could be a commercial venture with profit motive.
Whether the Tribunal was correct in law in not considering whether the aggregate value of receipts for assessment years 2008-09, 2009-10 and 2010-11 exceeded the limit specified in the second proviso (and hence whether the first proviso did not apply).

Arguments of the Parties

Appellant's (Commissioner of Income-tax) Arguments

The Commissioner cancelled the registration because, upon scrutiny, the society's activities (purchase and sale of books) were not charitable and thus it was not entitled to exemption under section 11(1)(a).
The Commissioner framed two substantial questions of law challenging the Tribunal's conclusion that registration should be sustained despite the nature of the society's activities and the treatment of aggregate receipts across assessment years.

Respondent's / Tribunal's Position

The Tribunal held that the Commissioner's cancellation was not justified because the power to cancel registration is exercisable under section 12AA(3) only if the Commissioner is subsequently satisfied that the activities are not genuine or are not being carried out in accordance with the objects; no such finding was made.
The Tribunal concluded none of the conditions under section 12AA(3) were violated and therefore the registration could not be cancelled on the grounds relied upon by the Commissioner.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court examined the procedure and scope of section 12AA of the Income-tax Act as reproduced in the opinion. It noted:

Section 12AA(1) requires the Commissioner, upon receipt of an application for registration, to call for documents/information and make inquiries to satisfy himself about the genuineness of the activities and the objects of the trust; if satisfied, he shall pass an order registering the trust; if not satisfied, he shall refuse registration.
Section 12AA(3) permits cancellation of registration only where a trust had been registered under specified provisions and the Commissioner is subsequently satisfied that the activities are not genuine or are not being carried out in accordance with the objects of the trust; then he shall pass an order cancelling registration.

Applying these provisions to the facts, the Court reasoned:

The Commissioner had originally considered the society's objects (which include publication, sale and spread of Sarvodaya literature and propagation of Gandhian ideologies) and was satisfied when granting registration in 1989.
The later cancellation (dated in the opinion as June 31, 2011) treated those same objects as not charitable and cancelled registration on the ground the society was not entitled to exemption under section 11. The Court observed that the cancellation was not based on a finding that the activities were not genuine or were not being carried out in accordance with the objects, but rather on the view that the activities were not charitable (a question of entitlement to exemption under section 11).
The Court held that declaring the activities (publication and sale of the specified literature) to be non-charitable does not, by itself, bring the case within section 12AA(3) where cancellation is permitted only upon a specific satisfaction that activities are not genuine or are not in accordance with the objects. Because the activities in question were within the stated objects, carrying them out would be in conformity with the objects for which registration was granted.
The Court further noted that questions of whether income derived from such transactions should be assessed to tax or exempted under section 11 are matters for the Assessing Officer to decide and are distinct from the section 12AA registration/cancellation exercise.
The Tribunal had found none of the conditions under section 12AA(3) were violated and that the Commissioner's satisfaction to cancel was not justified; the Court found no reason to interfere with that factual and legal conclusion.

Holding and Implications

HOLDING: The tax case appeal filed by the Commissioner is dismissed as devoid of merits; the Court affirmed the Tribunal's order allowing the society's appeal.

Implications:

The Commissioner's cancellation of the society's registration was set aside (the Tribunal's allowance was upheld).
The Court limited the scope of section 12AA(3): cancellation of registration must be grounded on a specific, subsequent satisfaction that activities are not genuine or are not in accordance with the trust's objects; disagreement about entitlement to exemption under section 11 (or a view that an activity is not "charitable") is not by itself a sufficient basis for cancellation under section 12AA(3) where the activities fall within the stated objects.
No broader precedent or new statutory interpretation beyond this application was announced; the direct effect is on the parties (the appeal was dismissed and the Tribunal's decision stands).

Show all summary ...

D. Murugesan, J.:— This tax case appeal is at the instance of the Commissioner of Income-tax, Madurai, questioning the order dated June 30, 2011, passed by the Income-tax Appellate Tribunal in I.T.A No. 594.Mds/2011, by raising the following substantial questions of law.

(i) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the registration granted to the assessee under section 12A(1)(a) would hold good, even though the assessee's main object in publication, purchase and sale of books which are not definitely charitable activity and the activities are purely a commercial venture with profit motive is valid?

(ii) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in not considering the aggregate value of the receipts for the assessment years 2008-09, 2009-10 and 2010-11 exceeds the limit specified in the second proviso and, hence, the first proviso does not apply to the facts of the case is valid?

2. The respondent, Sarvodaya Ilakkiya Pannai, is a society and was granted registration by the Commissioner of Income-tax, Madurai, vide his order dated November 6, 1989, under section 12A(1)(a) of the Income-tax Act. The object for which the trust was registered was to effect publication and sale of Sarvodaya Literature as also the Gandhian and Sarvodaya Ideologies. When the returns filed for the assessment years 2008-09 to 2010-11 were scrutinised, it was found that the society was engaged in purchase and sale of books. On the ground that the above activities of the trust cannot be considered to be charitable activities, a show-cause notice was issued by the Commissioner of Income-tax under section 12AA(3) of the Act before an order of rejection was made. Thereafter, the Commissioner of Income-tax revoked the registration on the ground that the society did not deserve exemption under section 11(1)(a) of the Act and, accordingly, the registration granted under section 12A(1)(a) was cancelled. On a challenge to the said order, the Appellate Tribunal has found that the order of the Commissioner was not justified as the power to cancel could be only traced out to section 12AA(3) and in the absence of any activity carried on by the trust contrary to the objects/the registration cannot be revoked. With that finding, the Tribunal has allowed the appeal filed by the society. Challenging the said order, the present appeal has been filed.

3. The relevant provisions of section 12AA of the Income-tax Act read as under:

“12AA. Procedure for registration.—(1) The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) of sub-section (1) of section 12A, shall—

(a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and

(b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he—

(i) shall pass an order in writing registering the trust or institution;

(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution,

and a copy of such order shall be sent to the applicant:..

(3) Where a trust or an 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 (33 of 1996)), and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution.”

4. In order to avail of the benefit of exemption under section 11 of the Act, a trust can make an application to the Commissioner for registration under section 12A of the Act. On receipt of the said application for registration of a trust or institution, the Commissioner should satisfy himself about the genuineness of the activities of the trust or institution. In order to satisfy himself, the Commissioner may also make such enquiry as he may deem necessary in that behalf. In the event the Commissioner satisfies himself that the trust is entitled to registration keeping in mind the objects, shall grant, registration in writing in terms of section 12AA(1)(b)(i) of the Act. In the event the Commissioner is not satisfied, he shall refuse such registration in terms of section 12AA(1)(b)(ii) of the Act. Once such a satisfaction is arrived at by the Commissioner to grant such registration cannot be cancelled by following the very, same provision of section 12AA(1)(b)(i) of the Act to go into the genuineness of the activities of the trust. However, the Commissioner is empowered to revoke the certificate in terms of section 12AA(3) of the Act. As per the said provision, in the event the Commissioner is satisfied subsequently, i.e, after registration that the activities of such trust or institution are not genuine or not being carried out in accordance with the objects of the trust or the institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution.

5. In order to apply the above provision, there must be a specific finding by the Commissioner that the activities of the trust or institution are not genuine or not being carried out in accordance with the objects of the trust or institution, as the case may be. The question is, whether the order of the Commissioner of Income-tax could fall under the powers conferred on him under section 12AA(3) of the Act. The only reason given by the Commissioner of Income-tax to cancel the registration is that the activities of the trust were not charitable and, therefore, the trust is not entitled to exemption under section 11 and, consequently, cancelled the registration granted under section 12AA.

6. It is not as if that the registration was granted without considering the objects of the trust in question, namely:—

“(a) The publication, sale and spread of Sarvodaya Literature.

(b) To support all activities connected with the constructive programmes of the father of the nation, Mahatma Gandhi.

(d) To do all other acts and things incidental to and necessary in the furtherance of the said objects.

(e) To apply the profit derived by the society to the activities connected with spreading and propagating of Gandhian and Sarvodaya Ideologies and to help the Sarvodaya movement.”

7. The Commissioner of Income-tax, before granting the registration, had gone into the above objects and satisfied himself for grant, of registration. Subsequently, by the order of the Commissioner of Income-tax dated June 31, 2011, the very same objects were considered and were found not to be the activities which are charitable in nature. While carrying on the activities of publication and sale of Sarvodaya Literature and Gandhian Ideologies as charitable activities, referring the same objects as not charity, it cannot be brought under the provisions of section 12AA(3) of the Act. The cancellation was made not on the ground that the activities of the trust were not genuine but the activities of the trust were not in accordance with the objects of the trust. When the trust was registered with the definite objects, carrying on such activities would be in terms of the objects for which the registration was made. In fact, if those activities are not carried on, the trust may violate the objects for which the registration was granted.

8. Under section 12AA, the Commissioner is empowered to grant or refuse the registration and after granting registration, would be empowered to cancel and that too, only on two conditions laid down under section 12AA(3) of the Act. Whether the income derived from such transaction would be assessed for tax and also whether the trust would be entitled to exemption under section 11 are entirely the matters left to the Assessing Officer to decide as to whether it should be assessed or exempted. The Tribunal had allowed the case of the assessee with the finding that none of the conditions under section 12AA(3) were violated and, therefore, the satisfaction which was arrived at by the Commissioner of Income-tax was not justified. In that view of the matter, we find no reason to interfere with the order of the Tribunal and, accordingly, both the questions require no further consideration.

9. The tax case appeal is dismissed as devoid of merits.