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H.P. Government Energy Development Agency v. Commissioner of Income -tax

Income Tax Appellate Tribunal
Sep 15, 2010
Smart Summary (Beta)

Factual and Procedural Background

This appeal by the assessee challenges the order dated 15th July, 2009 of the Commissioner of Income-tax (CIT), Shimla, who withdrew registration granted under section 12AA(1)(b) of the Income-tax Act, 1961 (the Act). The appellant is a society registered under the Societies Registration Act, 1860, with the main objective of promoting research, development, and popularization of non-conventional and renewable energy sources. The society comprises members from the Government of Himachal Pradesh and a representative from the Government of India.

The assessee applied for registration under section 12AA on 9th June, 2008. Since the CIT did not pass an order within the prescribed six-month period, registration was deemed granted. However, shortly thereafter, the CIT issued a show-cause notice proposing withdrawal of registration under section 12AA(3), alleging that the activities were not in accordance with the society’s principal objectives and that the activity of harnessing hydro-power was commercial and thus not charitable as per the amended definition in section 2(15) of the Act. After considering the assessee’s explanations, the CIT withdrew the registration with effect from the assessment year 2009-10. The assessee has challenged this withdrawal before the tribunal.

Legal Issues Presented

  1. Whether the Commissioner of Income-tax was justified in invoking section 12AA(3) of the Act to withdraw the registration granted under section 12AA(1)(b) on the grounds that the activities carried out by the society were not in accordance with its objects.
  2. Whether the activity of harnessing hydro-power potential constitutes a commercial activity and thus disqualifies the society from being considered as engaged in a "charitable purpose" under section 2(15) of the Act.
  3. Whether the CIT had jurisdiction to cancel registration on the ground that the objects of the society do not amount to charitable purpose as per the amended section 2(15) of the Act.

Arguments of the Parties

Appellant's Arguments

  • The society is sponsored by the State Government and all activities are carried out in accordance with the memorandum of association’s objectives.
  • The society’s activities are genuine and manned by State Government officials, establishing bona fides.
  • Regarding micro-hydel projects, the society acts only as a nodal agency processing applications on behalf of the State Government and does not engage in commercial operations.
  • Fees and charges collected are mandated by the Government, and any surplus is appropriated to the State Government.
  • The amended definition of "charitable purpose" in section 2(15) does not exclude the society’s activities from being charitable.
  • The activities are neither ingenuine nor violative of the society’s objectives.

Respondent's Arguments

  • The CIT’s order clearly establishes that the activities are not in accordance with the society’s objectives.
  • The income derived from services related to small hydro-power projects is commercial in nature, violating the definition of "charitable purpose" under section 2(15) of the Act.
  • The withdrawal of registration under section 12AA(3) is justified on these grounds.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court examined the powers of the CIT under sections 12AA(1) and 12AA(3) of the Act. Section 12AA(1) empowers the CIT to register an applicant after satisfying himself about the genuineness of activities and that the objects are charitable as per section 2(15). Section 12AA(3) permits the CIT to cancel registration only if satisfied that the activities are either not genuine or not carried out in accordance with the objects of the trust or institution.

The court emphasized that the CIT’s power to cancel registration is circumscribed by these statutory conditions and cannot be exercised for reasons beyond them, such as reassessing whether the objects qualify as charitable under section 2(15), which is not a ground for cancellation under section 12AA(3).

Upon reviewing the CIT’s reasons, the court found the conclusion that activities were not in accordance with the objects to be misdirected. The CIT’s restrictive interpretation of the term "research" within the objective clause was rejected. The court held that promoting development and popularization of renewable energy sources falls within the society’s objects, regardless of whether research is involved.

The court also found that the activities related to distribution of solar devices and setting up micro-hydel generators conducted under government schemes align with the society’s objectives.

Regarding the society’s role as a nodal agency for small hydro projects, the court concluded that the activities are within the scope of its objects as per the memorandum of association and related rules, and thus not contrary to its objectives.

The objection based on the amended definition of "charitable purpose" was held to be beyond the jurisdiction of the CIT under section 12AA(3) and was disregarded.

Consequently, the order of the CIT withdrawing registration was held to be unsustainable.

Holding and Implications

The appeal is allowed and the impugned order withdrawing registration under section 12AA(3) of the Act is set aside.

The registration granted to the assessee under section 12AA(1)(b) is restored with effect from the application date of 9th June, 2008. This decision directly benefits the assessee by reinstating its registration and eligibility for exemption under sections 11 and 12 of the Act. No broader precedent beyond the facts of this case is established.

Show all summary ...

ORDER

G.S. Pannu, Accountant Member - This appeal by the assessee is directed against the order of the Commissioner of Income-tax, Shimla (in short 'the CIT') dt. 15th July, 2009 passed under s. 12AA(3) of the IT Act, 1961 (in short 'the Act') withdrawing registration granted to the assessee under s. 12AA(1)(b) of the Act. The appellant has challenged the order of the CIT on the grounds that neither in law and nor on facts the impugned order is justified.

2. In brief, the only dispute in this appeal revolves around the justification for invoking the provisions of s. 12AA(3) of the Act by the CIT to withdraw the registration granted to the assessee under s. 12AA(1)(b) of the Act. The facts relevant to the said controversy can be understood as follows. The appellant is a society registered under the Societies Registration Act, 1860. The main objective of the society as per the memorandum of association is to promote the research, development and popularization of non-conventional and renewable sources of energy and thereby to deal with the problems caused on account of the rapid depletion of non-renewable energy sources. The members of the society comprise of people drawn from the Government of Himachal Pradesh, either as ex officio by virtue of offices held in the State Government or other employees/representatives of the State Government, and also include a representative of the Department of Non-Conventional Energy Sources, Government of India. In this background the assessee had applied for registration under s. 12AA on 9th June, 2008 with the CIT. By virtue of s. 12AA(2) of the Act, the CIT was required to pass an order granting or refusing registration before the expiry of six months from the end of the month in which the application was received by him. No such order was passed within the prescribed period, therefore, the registration was deemed to have been granted as confirmed by a letter dt. 22nd May, 2009 issued by the CIT. Almost simultaneously on 25th May, 2009, the CIT issued a show-cause notice requiring the assessee to explain why the registration granted should not be withdrawn in terms of s. 12AA(3) of the Act. In this show-cause notice the CIT has raised two points. Firstly, according to him, the activities being carried out by the assessee are not in accordance with the principal objectives for which it has been set up. Secondly, according to CIT, the activity of harnessing hydro-power potential involved commercial activity and therefore such objects cannot be said to be for "charitable purpose" as defined in s. 2(15) of the Act, as amended by the Finance Act, 2008 w.e.f. 1st April, 2009. After considering the explanations put forth by the assessee, the CIT was not satisfied and by way of the impugned order he has withdrawn the registration granted with effect from the asst. yr. 2009-10. The said order of the CIT is in challenge before us.

3. Before us, the learned counsel for the appellant has contended that the CIT was not justified in withdrawing the registration granted under s. 12AA(1)(b) of the Act on the ground that the assessee was not carrying out activities in accordance with its objects as laid down in the memorandum of association. It is contended that the society is sponsored by the State Government for the purposes of promoting, developing and popularizing non-conventional and renewable sources of energy. All its activities are being carried out as per the objectives contained in the memorandum of association and its bona fides stood established since all its activities are manned by the State Government officials. Secondly, it is contended that with regard to the activity of identifying potential sites for setting up micro-hydel projects, it has been explained that the assessee is the nodal agency appointed by the State Government for receiving and processing the applications received from independent power producers. The assessee was carrying out the task assigned to it by the State Government and it has no role to play in actual running of any such business or commercial activity. The amounts received by way of application fees, sale of brouchers, upfront premium received and additional security charges received, etc. from such prospective power producers are as per the mandate of the State Government and the surplus remaining with assessee, if any, is to be appropriated to the State Government. In this connection, a reference was invited to a letter dt. 1st Jan., 2010 issued by Special Secretary (Power) to the Government of Himachal Pradesh, which is placed on record. On this basis it is contended that the amended definition of "charitable purpose" in s. 2(15) does not disentitle the activities of the assessee from being termed as charitable. It is further contended that the activities of the assessee are neither ingenuine nor in violation of the objectives for which it has been set up by the State Government. A reference was made to the written submission filed before the CIT and other material which has been placed in the paper book filed before us.

4. On the other hand, learned Departmental Representative vehemently defended the order of the CIT withdrawing registration under s. 12AA(3) of the Act. According to the learned Departmental Representative, the discussion made by the CIT in paras 5 to 5.5 of the impugned order clearly establishes that the activities carried out by the assessee are not in accordance with its objectives. Therefore, the said aspect satisfies the requirement of s. 12AA(3) of the Act. Further, it is submitted by the learned Departmental Representative that the CIT is justified in inferring that the income derived from services rendered in relation to setting up of small hydro-power projects by the independent power producers is commercial in nature and therefore, it violates the provisions of s. 2(15) of the Act. In this manner the impugned order passed by the CIT is sought to be defended.

5. We have carefully considered the rival submissions. We have also perused the order passed by the CIT, the relevant material placed in the paper book and also the relevant provisions of the Act, which have a bearing on the issue before us. In nutshell, the dispute revolves around the eligibility of the assessee for registration under s. 12AA of the Act. The significance of registration under s. 12AA is with respect to the claim of exemption under ss. 11 and 12 of the Act. As per s. 12A of the Act, one of the requirements for availing exemption in ss. 11 and 12 of the Act is the registration under s. 12AA of the Act. In other words, registration of an assessee under s. 12AA makes it eligible for exemption under ss. 11 and 12 of the Act, subject to the fulfilment of other conditions prescribed in the relevant sections.

6. Sec. 12AA(1) of the Act prescribes the procedure for registration. In terms thereof, the CIT is empowered to call for such documents or information from the applicant and make such enquiries as may be deemed necessary in this behalf. It is quite clear from the said section that the CIT is to satisfy himself about the genuineness of the activities and the objects of the applicant, before he passes an order registering or refusing to register an applicant. As per the said scheme of the Act, at the time of registration the main ingredients required to be seen by the CIT are two-folds— firstly, that the objects of the applicant are for "charitable purpose" within the meaning of s. 2(15) of the Act; and, secondly, that the activities of the applicant are genuine.

7. Sub-s. (3) of s. 12AA permits the CIT to cancel the registration granted in terms of s. 12AA(1) (b) of the Act. In order to do so, sub-s. (3) mandates that the CIT ought to be satisfied on two counts,—firstly, that the activities of the trust or institution are not genuine; and, secondly, that the activities are not being carried out in accordance with the objects of the trust or institution, as the case may be. Notably, the CIT is empowered to invoke s. 12AA(3) of the Act on being satisfied about either of the two ingredients mentioned therein. Proviso below sub-s. (3) of s. 12AA of the Act further prescribes that no order cancelling the registration shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.

8. In view of aforesaid discussion, it is evident that the power of the CIT to cancel the registration is not unfettered. It is circumscribed by the conditions prescribed in s. 12AA(3) of the Act. It is also clear that such power does not permit wholesale review of the ingredients which have been considered by the CIT while granting registration under s. 12AA of the Act. To illustrate, we may point out that at the time of evaluating the application of registration under s. 12AA(1) of the Act, the CIT is to satisfy himself on two conditions i.e., that the activities are genuine and, that the objects of the applicant fall within the meaning of "charitable purpose" as per s. 2(15) of the Act. In contrast, at the time of cancelling of registration under s. 12AA(3) of the Act, the CIT has to satisfy himself about either of the two conditions prescribed therein, namely, that the activities are not genuine or that the activities are not being carried out in accordance with the objects of the trust or institution, as the case may be. Pertinently, the satisfaction about the objects of the trust or institution being as per s. 2(15) of the Act, is not a condition mentioned in s. 12AA(3) of the Act to cancel the registration already granted under s. 12AA(3) of the Act. The only ground available with the CIT to cancel the registration is to either establish that the activities of the trust or institution are not genuine or that the same are not being carried out in accordance with the objects of the trust or institution, as the case may be. In our considered opinion, the CIT is bound to function strictly in accordance with the provisions of the Act. A statutory authority has no power, jurisdiction or discretion to go beyond the statutory provisions. No power can be assumed in the absence of any specific provision. It is quite clear that as per sub-s. (3) of s. 12AA of the Act, CIT has power to rescind the registration only on being satisfied about either of the two points mentioned therein, and not for any other reason. We may conclude here that the registration already granted under s. 12AA(1)(b) of the Act can be cancelled only on the fulfilment of the conditions mentioned in s. 12AA(3) of the Act and not for any other reasons.

9. In this background, we may now examine the reasons put forth by the CIT in this case to cancel the registration already granted to the assessee under s. 12AA(1)(b) of the Act. The first premise drawn by the CIT is that the activities carried out by the assessee are not in accordance with its objects. The discussion in this regard is contained in paras 4.1 to 5.5 of the impugned order. The CIT has noted the objective of the assessee per its memorandum of association in para 4.1 of the order which is as under :

"The objective of the agency is to promote the research, development and popularization of non-conventional and renewable sources of energy and thereby to deal with the problems caused on account of rapid depletion of non-renewable energy sources."

10. The CIT further noticed the functions which are to be carried out by the society as per cl. 2(b) of the memorandum of association. Such functions have been enumerated by the CIT in para 4.2 of his order. In para 4.3 of the impugned order the CIT has noticed the activities being carried by the assessee over the years, which are as under :

  • "(a) Various energy saving devices like solar cookers, photo voltaic lamps etc. are provided at subsidized prices to various persons resident in the State, who are identified under different rural development programmes such as the IRDP. The subsidy involved is met from grants received from the Government.
  • (b) Photo-voltaic street lights are provided in various remote localities under special component plans and other special plans of the Central and State Governments. Such lights are also provided in some other places at subsidized rates.
  • (c) Portable micro-hydel generator sets are set up in certain remote areas of the State under specific schemes of the Central Government and nominal user charges are recovered from the beneficiaries.
  • (d) The agency also acts as a nodal agency of the State Government for harnessing small hydro potential upto 5ME capacity, by itself and through private sector participation.
  • The brochure brought out by the agency in this regard, which is sold at a price, states that such projects are being implemented under UNDP and other programmes by Himurja itself and 5 such projects have been commissioned upto 31st Dec., 2006 in the State sector. In the area of private sector participation, 299 MoUs had been signed upto 31st Dec., 2006. In this area of work, Himurja identifies potential sites for setting up small hydro projects through preliminary surveys and thereafter invites applications from private investors. The investors are required to carry out detailed surveys and submit project proposals along with applications. A fee of Rs. 5,000 is charged by the agency for each such application. The applications are assessed on the basis of various parameters like financial and technical strength, project development experience of the bidders and fulfilment of documentation requirements. A processing fee ranging from Rs. 25,000 to Rs. 2 lacs is charged by the agency for each application. Security deposits of amounts ranging from Rs. 50,000 to Rs. 75,000 are also obtained by the agency from the investors. Such security is liable to be forfeited in future if the project is not approved by the Government for any reason. After processing, the applications are submitted to the State Government for consideration. In respect of projects that are approved by the Government, MoU is signed by the State Government with the concerned investor. At this stage, an upfront premium is collected by the agency for projects above 2 MW and the amount of such premium is at Rs. 45,000 per MW. Thereafter the investor is required to submit a detailed project report and if the same is approved by the Government an implementation agreement is signed by the Government with the investor. Thereafter the agency monitors the implementation of the project. In cases where the generating capacity is enhanced, additional security charges are levied by the agency. The Central Government provides a capital subsidy in respect of such hydro-power projects approved. This subsidy is routed through the agency. Thus, the entire functions relating to the setting up of the small hydro projects with private sector participation are carried out by the agency, even though the final approvals are given by the State Government and agreements are signed by the State Government."
  • 11. In the context of the aforesaid activities, the conclusion of the CIT is that the same are not as per the objects of the society. The CIT has made the relevant discussion in para 5.2 of the impugned order. We have carefully examined the same. In our considered opinion the CIT has misdirected himself in reaching to the aforesaid conclusion. As per the CIT, none of the activities involved an element of research. According to him, all the activities to be undertaken by the assessee, including development and popularization of the non-conventional and renewable source of energy, ought to be preceded by an element of research and it is only then, it shall be regarded to be in accordance with the objects of the appellant society. The reason advanced by the CIT is that the expression "research, development and popularization" appearing in the object clause of the assessee's memorandum of association is to be read together. According to the CIT, 'research' means exploration of new areas of knowledge, which is thereafter developed and popularized. According to him, the activities of the assessee do not involve 'research'. In our view the CIT has erred in understanding and interpreting the contents of the memorandum of association as if it was a statute. The assessee has been set up under the aegis of the Government of Himachal Pradesh to promote research, development and popularization of non-conventional and renewable sources of energy. A simple reading of cl. 2(a) of memorandum of association would reveal that the primary purpose of setting up the society is to promote the activities of research, development and popularization of non-conventional and renewable sources of energy. We find no reason to infer that activities to promote development of non-conventional and renewable sources of energy, cannot be considered as an objective of the appellant society merely because such activity may not involve an element of research. Similarly, popularization of non-conventional and renewable sources of energy is very much an objective of the appellant, notwithstanding that such an activity may or may not involve an element of research. To give a restrictive interpretation to the object clause of the assessee's memorandum of association, as done by the CIT, is not only unjustified but is completely unwarranted. Therefore, activities enumerated by the CIT in points (a) to (c) in para 4.3 of his order cannot be considered as activities not in accordance with the objects of the appellant society. The activity enumerated in point (d) shall be dealt with by us a little later.

    12. In paras 5.3 and 5.4 of the impugned order the activities of distributing solar energy devices and setting up micro-hydel generator sets have been wrongly held by the CIT as activities not in accordance with the objects of the appellant society. Quite clearly, such activities which are carried out by the assessee in terms of the Government mandated schemes in the field of non-conventional and renewal sources of energy qualify to be the activities in accordance with the objectives for which the appellant society has been set up by the Government of Himachal Pradesh.

    13. Now, we may discuss the activity noted by the CIT in point (d) of para 4.3 of his order. In this regard, the assessee is designated as a nodal agency by the State Government for harnessing small hydel potential upto 5 MW capacity. In this connection, assessee is mandated by the Government of Himachal Pradesh to receive and process proposals from independent power producers and thereafter make its recommendation to the Government of Himachal Pradesh. It is also permitted to receive income in relation to such activities on account of application fee, sales of brouchers, processing fee, security deposits, upfront premium, etc. The assessee is incurring expenditures out of such receipts. Whether or not such activities are as per its objects is required to be analyzed in the context of the objectives and functions formulated in the memorandum of association and the rules and regulations of the appellant society, a copy of which has been placed in the paper book at pp. 29 to 49. The functions of the society are listed at points 1 to 17 in cl. 2 (b) of the memorandum of association, which are partly listed out by the CIT also in para 4.2 of his order. A perusal of the same reveals that the appellant society is expected to identify, formulate proposals and set up units (including demonstration projects) of non-conventional and renewable energy requirements of remote villages and other selective habitation centres. The society is also empowered to sponsor, co-ordinate or promote research programmes of developmental nature in the areas of new sources of alternate energy. As per sub-cl. (7), the society is empowered to advise the State Government, other local bodies and interested parties on all such matters pertaining to alternate energy resources, as may be referred to it from time to time. Likewise, other sub-clauses also reveal that the activities of the assessee extend to all facets of development of non-conventional and renewable sources of energy. Therefore, to say that the activities carried out by the assessee as a nodal agency appointed by the Government of Himachal Pradesh with predetermined scope of work in the area of hydel projects of small capacity as being not in accordance with its objects, is factually untenable. Therefore, on this aspect also we find no weight in the conclusion of the CIT that the said activity is not in accordance with the objects of the appellant society.

    14. The other objection taken by the CIT to cancel the registration is that the objects of the society do not qualify to be for "charitable purpose" as per s. 2(15) of the Act. On this aspect we have already observed that such an objection cannot be a basis to cancel registration in terms of s. 12AA (3) of the Act. Therefore, we find the action of the CIT on this aspect, as beyond jurisdiction in terms of s. 12AA(3) of the Act. On this aspect, we may also notice that it is not the case of the CIT that the registration granted earlier was on the basis of any fraud or misrepresentation on the part of the assessee. Therefore, the said objection taken by the CIT is liable to be ignored without going into the merits of the same.

    15. In the result, in the absence of any other objection raised by the CIT, and in terms of our aforesaid discussion, the order of the CIT is unsustainable. We hold so. In the final analysis, we set aside the impugned order and the registration granted to the assessee, in terms of its application dt. 9th June, 2008, is hereby restored.

    16. Resultantly, the appeal of the assessee is allowed.