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

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2009, the CIT issued a show-cause notice requiring the assessee to explain why the registration granted should not be withdrawn in terms of s. 12AA(3) of the Act.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 :

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.