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Attorney(S)
  • V.B. SrivastavaVivek Mehrotra
Judges
  • H.L. KARWAN.K. Saini
Acts
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Attorney(S)
  • V.B. SrivastavaVivek Mehrotra
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  • H.L. KARWAN.K. Saini
Acts
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Smart Summary

Court Opinion — Structured Summary

Factual and Procedural Background

The assessee is a society registered under the Societies Registration Act, 1860, which runs a school named Modern School offering education from Class 1 to Class 12. Registration under s.12A of the Income-tax Act, 1961 was granted to the assessee society by the learned CIT, Lucknow by an order dated 1 March 1999, effective from 1 April 1998.

In the assessment for assessment year 2007-08 the Assessing Officer (AO), in an order dated 18 December 2009 under s.143(3), held that the society had paid excessive lease rent to its founder-President and had passed resolutions benefitting him, and denied exemption under s.11. Relying on the AO's findings, the learned CIT issued a notice dated 18 March 2010 proposing to withdraw the society's registration under s.12AA(3), and after considering responses, passed an order dated 6 May 2010 cancelling the registration w.e.f. 1 April 1998.

The assessee appealed to this tribunal challenging (inter alia) the jurisdiction of the learned CIT to cancel a registration originally granted on 1 March 1999. The tribunal heard submissions from both sides and considered statutory amendments and precedent.

Legal Issues Presented

  1. Whether the learned CIT had jurisdiction under s.12AA(3) of the Income-tax Act, 1961 to cancel the registration of a trust/institution which was granted prior to the insertion of s.12AA(3) (i.e., registration granted on 1 March 1999, whereas s.12AA(3) was introduced and made effective on 1 October 2004)?
  2. Whether the order of the CIT under s.12AA(3) contains sufficient findings to hold that the activities of the assessee society were not genuine or were not being carried out in accordance with the objects of the society (i.e., whether the cancellation was justified on the merits)?

Arguments of the Parties

Appellant's (Assessee's) Arguments

  • The learned CIT, Lucknow, had no jurisdiction to pass an order under s.12AA(3) cancelling the registration that was granted on 1 March 1999 (i.e., prior to 1 October 2004 when s.12AA(3) became effective).
  • The assessee emphasized that it runs a school and that the assessment order did not dispute that the society imparts academic education; it asserted charitable status as defined in s.2(15).
  • The assessee pointed out that the AO's reasons for denying s.11 were limited to alleged excess lease rent and a resolution concerning transfer of the school building; an appeal against the assessment order for AY 2007-08 was pending before the CIT(A).
  • The assessee relied on the decision of the Hon'ble High Court, Lucknow Bench, in Oxford Academy for Career Development v. Chief CIT [2009] 315 ITR 382 (All.) to support the contention that s.12AA(3) is not retrospective and the CIT lacked power to cancel registrations granted before 1 October 2004.

Respondent's (Revenue's) Arguments

  • The Departmental Representative relied on the order of the learned CIT that had cancelled the registration, supporting the cancellation based on the AO's findings regarding diversion of income/assets and benefit to the society's president.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Oxford Academy for Career Development v. Chief CIT, [2009] 315 ITR 382 (All.) Held that s.12AA(3), as inserted w.e.f. 1 Oct 2004, is not retrospective; the power to cancel a registration granted earlier was not available before the insertion of s.12AA(3); s.21 of the General Clauses Act, 1897 does not entitle the CIT to rescind a quasi-judicial registration order. The tribunal applied the ratio of Oxford Academy to conclude that s.12AA(3) has no retrospective effect and hence the CIT had no jurisdiction to cancel registrations granted prior to 1 Oct 2004; accordingly the impugned cancellation order was quashed.

Court's Reasoning and Analysis

The tribunal recited the statutory and factual matrix: registration under s.12A was granted to the assessee on 1 March 1999 (effective 1 April 1998). The tribunal noted that s.12AA had been introduced by Finance (No.2) Act, 1996 effective from 1 April 1997, and observed that at the time the 1999 registration was granted the CIT had only the option to register or to refuse registration; there was no statutory power then to cancel a registration once granted.

The tribunal acknowledged that s.12AA(3) was inserted by the Finance Act, 2004 and made effective from 1 October 2004, thereafter empowering the CIT to cancel registration where satisfied that activities are not genuine or not in accordance with objects. The tribunal relied on the Lucknow High Court decision in Oxford Academy which held that s.12AA(3) is not clarificatory or explanatory and therefore does not operate retrospectively; prior to 1 October 2004 the authorities granting registration had no inherent power to rescind or cancel registrations already granted.

The tribunal also noted a later amendment to s.12AA(3) by the Finance Act, 2010 (effective 1 June 2010) which inserted the phrase "or has obtained registration at any time under s.12A". Taking into account the High Court ratio in Oxford Academy and the 2010 amendment, the tribunal concluded that s.12AA(3) is prospective in nature and that the CIT had no jurisdiction to cancel registrations granted prior to 1 October 2004.

Applying this legal position to the facts, since the assessee's registration was granted on 1 March 1999 (well prior to 1 October 2004), the tribunal held that the learned CIT's order dated 6 May 2010 under s.12AA(3) was passed without jurisdiction and was therefore bad in law.

The tribunal expressly treated the second ground (challenge to the sufficiency of factual findings in the CIT's order) as academic because the jurisdictional issue was determinative; accordingly no findings were given on the merits of whether the society's activities were genuine.

Holding and Implications

APPEAL ALLOWED; THE IMPUGNED ORDER CANCELLING REGISTRATION QUASHED.

Direct effect on the parties: the tribunal quashed the learned CIT's order dated 6 May 2010 made under s.12AA(3) cancelling the assessee society's registration granted on 1 March 1999, and allowed the appeal.

Legal implication as stated by the tribunal: s.12AA(3), as originally inserted w.e.f. 1 October 2004, does not operate retrospectively to empower the CIT to cancel registrations granted prior to that date. The tribunal applied the ratio in Oxford Academy and observed the subsequent amendment by the Finance Act, 2010 (effective 1 June 2010). The tribunal did not decide the merits on whether the society's activities were genuine because the lack of jurisdiction rendered that issue academic in this appeal.

Note: This summary is based exclusively on the contents of the provided opinion. No information beyond the opinion's text has been added.

Show full summary ...

    Kapoor Educational Society v. Commissioner of Income-tax

    ORDER

    H.L. Karwa, Vice-President - This appeal filed by the assessee is directed against the order of the learned CIT(A)-I, Lucknow, dt. 6th May, 2010 passed under s. 12AA(3) of the IT Act, 1961 (In short "the Act") whereby the learned CIT has withdrawn the registration granted to the assessee society on 1st March, 1999 w.e.f. 1st April, 1998.

    2. Vide ground No. 1 of the appeal, the assessee society has challenged the jurisdiction of the learned CIT in cancelling the registration. The ground of appeal reads as under :

    "On the facts and circumstances of the case and in law, the CIT, Lucknow had no jurisdiction to pass the order under s. 12AA(3) dt. 16th May, 2010 cancelling the registration of the appellant under s. 12A granted to it on 1st March, 1999 w.e.f. 1st April, 1998. The order of the CIT, Lucknow, being devoid of proper jurisdiction, needs to be cancelled and the registration of the appellant under s. 12A must be restored."

    3. Briefly stated the facts of the case are that the assessee is a society registered under the Societies Registration Act, 1860. The registration under s. 12A of the Act was granted to the assessee society by the learned CIT, Lucknow w.e.f. 1st April, 1998 vide his order dt. 1st March, 1999. The main object of the assessee society is to impart systematic education to the students and in accordance with the main object, the assessee runs a school for the students of Class 1st to Class 12th in the name of Modern School. In its assessment order for asst. yr. 2007-08, the AO, for the reasons given in the assessment order, has held that the assessee has paid excessive lease rent to its founder-President and has also passed some resolution to benefit the founder-President. In the above premises, the AO has denied the benefit of tax exemption to the assessee under s. 11 of the Act. On the basis of findings given by the AO in the assessment order, the learned CIT came to the conclusion that the assessee was making over a large part of its income and even assets to Shri Rakesh Kapoor, the society's President for his personal consumption. The entire set up was so devised as to benefit Shri Rakesh Kapoor and his family. The inescapable conclusion that followed was that the object of the society, having been sullied by profit motive, could not be charitable. For this reason, the learned CIT proposed to withdraw the registration granted to the society under s. 12A of the Act. Accordingly, on 18th March, 2010 a notice was issued by the learned CIT. The main contents of the notice read as under :

    'The assessee society was granted registration under s. 12A of the IT Act, 1961 bearing No. 146 of 1999 on 1st April, 1998. In view of the findings of fact recorded in the assessment order of the assessee society dt. 18th Dec, 2009 for asst. yr. 2007-08 made under s. 143(3) of the IT Act, 1961, it appears that the activities of the assessee society are not genuine insofar as these are not for charitable purposes. Accordingly, the assessee society is required to explain as to why the registration granted under s. 12A should not be withdrawn. Hearing for the purpose is fixed on 26th March, 2010 at 11 a.m. at the office of the undersigned at Aayakar Bhawan, Ashok Marg, Lucknow."

    The assessee submitted its reply on 21st April, 2010 stating that the society is engaged in running a school, viz. Modern School, which imparts academic education from Class 1st to Class 12th. Nowhere in the assessment order, the AO has disputed the fact that the assessee society is engaged in the above activity of running school and imparting academic education to students. It was also stated that the society is charitable in nature as defined in s. 2(15). The assessee also submitted that the only reason given by the AO for refusing benefit of s. 11 is that the society has paid excess lease rent to its founder-President and/or it has passed a resolution to transfer the school building to the founder-President in the year 2010. It was also submitted by the assessee that an appeal has been filed before the learned CIT(A) against the assessment order of asst. yr. 2007-08 and is still pending for disposal. In view of the above, it was submitted by the assessee before the learned CIT that the notice dt. 18th March, 2010 may be withdrawn or the matter may be kept in abeyance till the decision of the learned CIT(A) /Tribunal in the quantum appeal.

    4. The learned CIT did not agree with the submissions of the assessee and the registration granted to the assessee society on 1st March, 1999 w.e.f. 1st April, 1998 was withdrawn under s. 12AA(3) of the Act.

    5. Before us, Shri V.B. Srivastava, learned Authorised Representative appearing for the assessee vehemently argued that the learned CIT, Lucknow had no jurisdiction to pass order under s. 12AA(3) of the Act. He also relied on the decision of the Hon'ble jurisdictional High Court-Lucknow Bench in the case of, Oxford Academy for Career Development v. Chief CIT [2009] 315 ITR 382 (All.) .

    6. Shri Alok Mitra, learned Departmental Representative, on the other hand, heavily relied on the order of the learned CIT.

    7. We have heard the rival submissions and have also perused the materials available on record. It is an admitted fact that the assessee society was granted registration under s. 12A of the Act by the learned CIT, Lucknow on 1st March, 1999 and the said order was effective from 1st April, 1998. Sec. 12AA was introduced in the Act by the Finance (No. 2) Act, 1996 w.e.f. 1st April, 1997 and when the said order under s. 12A was passed in the assessee's case on 1st March, 1999, the learned CIT had only two options under this section i.e., either he would register the trust/institution or he would refuse registration for the reasons given in his order. It is observed that there was no power with the CIT at the relevant time to cancel the registration after having once granted it. Now, the power has been given to the CIT by inserting s. 12AA(3) by Finance Act, 2004 and the newly inserted section was made effective from 1st Oct., 2004. Sec. 12AA(3) reads as under :

    "Sec. 12AA …………

    (3) Where a trust or an institution has been granted registration under cl. (b) of sub-s. (1) or has obtained registration at any time under s. 12A as it stood before its amendment by Finance (No. 2) Act, 1996 (33 of 1996) and subsequently the CIT 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."

    8. In the case of Oxford Academy for Career Development (supra), a dispute arose whether s. 12AA(3) has retrospective effect and whether the CIT could cancel the registration granted to a trust/institution prior to 1st Oct., 2004. The Hon'ble jurisdictional High Court-Lucknow Bench in the case of Oxford Academy for Career Development (supra) held (headnotes) as under :

    "The order cancelling the registration granted to a trust or institution under s. 12AA being a quasi judicial order does not fall within the category of orders mentioned under s. 21 of the General Clauses Act, 1897, which provides that the power conferred on an authority to issue orders includes the power to rescind such orders, and the CIT would not have power to rescind the order passed by the CIT earlier granting the registration to a trust or institution. Sec. 12AA(3) was incorporated w.e.f. 1st Oct., 2004, to empower the CIT to cancel the registration granted to a trust or institution. The object of this provision is not clarificatory or explanatory. So prior to that date, the authorities granting registration had no inherent power to withdraw or revoke the registration already granted."

    9. In the above decision, the Hon'ble High Court has clearly held that s. 12AA(3) has no retrospective effect as it is neither explanatory nor clarificatory in nature and the CIT has no power to rescind the order passed by the CIT prior to 1st Oct., 2004 . Now there is an amendment to s. 12AA(3) by the Finance Act, 2010, which has inserted the phrase "or has obtained registration at any time under s. 12A" after the words "sub-s. (1)" as appearing in s. 12AA(3). This amendment has been made applicable and effective from 1st June, 2010. Keeping in view the ratio laid down by the Hon'ble High Court in the case of Oxford Academy for Career Development (supra) and also the amendment of s. 12AA(3) by the Finance Act, 2010 w.e.f. 1st June, 2010, it is amply clear that 12AA(3) is prospective in nature and if any trust/institution has been registered prior to 1st Oct., 2004 either under s. 12A or 12AA, the CIT has no power to cancel the registration under s. 12AA(3). In the instant case, registration to the assessee society was granted on lst March, 1999 i.e., much prior to 1st Oct., 2004 when s. 12AA(3) was introduced and made effective from 1st Oct., 2004 and the CIT had no jurisdiction to cancel the registration granted to the assessee society under s. 12A and that the order passed by the CIT under s. 12AA(3) without jurisdiction, bad in law and liable to be quashed. We accordingly quash the impugned order of the learned CIT cancelling the registration granted to the assessee society under s. 12A of the Act on 1st March, 1999. The appeal of the assessee stands allowed.

    10. Ground No. 2 of the appeal reads as under :

    "2. On the facts and circumstances of the case and in law and without prejudice to the ground No. 1 above, there is nothing in the order of CIT, Lucknow under s. 12AA(3) to hold that the activities of the appellant are not genuine or its activities are not carried out in accordance with the objects of the appellant. The order of the CIT, Lucknow under s. 12AA(3) needs to be cancelled on this ground also."

    11. Since we have held that the order of the learned CIT passed under s. 12AA(3) dt. 6th May, 2010 is without jurisdiction and therefore, the issue raised by the assessee vide ground No. 2 of the appeal is only of academic interest and hence no findings are being given.

    12. In the result, the appeal is allowed.

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    Comments

    Kapoor Educational Society v. Commissioner of Income-tax
    (Sep 6, 2010)