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Facts
The assessee filed an application for registration under Section 12A of the Income Tax Act, 1961. The CIT(Exemption) rejected the application and cancelled provisional registration, citing an unregistered lease deed and lack of commencement of charitable activities. The assessee claimed that land acquisition and construction of a compound wall constituted commencement of activities.
Held
The Tribunal held that the lease agreement was crucial and lacked essential clauses for legal and financial security. Furthermore, the lease deed was not registered as required by law. The Tribunal also noted that the assessee had not commenced its core charitable activities, only preparatory steps like land acquisition and construction.
Key Issues
Whether the CIT(E) was justified in rejecting the registration application on grounds of an unregistered lease deed and non-commencement of activities. Whether construction of a compound wall can be considered as commencement of charitable activity.
Sections Cited
12A, 12AB, 12A(1)(ac), 13(1)(c), 17, 55(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & MS. ASTHA CHANDRA
This appeal filed by the assessee is directed against the order dated 11.06.2024 of the Ld. CIT(Exemption), Pune rejecting the application for grant of registration u/s 12A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) and cancelling the provisional registration granted earlier u/s 12AB of the Act.
Facts of the case in brief, are that the assessee filed an application in Form No.10AB on 13.12.2023 for registration of the trust under clause (iii) of section 12A(1)(ac) of the Act. With a view to verify the genuineness of the activities of the assessee and compliance to requirements of any other law for the time being in force by the trust / institution as are material for the purpose of achieving its objects, a notice was issued through ITBA portal on 11.03.2024 requesting the assessee to upload certain information / clarification. However, the Ld. CIT(E) was not satisfied with the details furnished by the assessee. Since the lease agreement was not registered and the assessee has not commenced its activities for which it was created, he rejected the application for grant of registration u/s 12A and also cancelled the provisional registration granted earlier u/s 12AB by observing as under: “5. The assessee furnished response on 15/05/2024. It is stated that out of the expenditure of Rs. 123.65 Lakhs shown in FY 2022-23, Rs.122.18 Lakhs has been incurred on construction of building for old age home. Further, regarding the observation that the application appears to be pre-mature, the assessee admitted the fact. It, however, contended that land acquisition and construction of wall should be considered as an activity.
6. It is noticed that the assessee has lease land for a period of five years for the purpose of constructing an old age home. This land was owned by one of the directors of the organization. According to the terms and conditions of the lease deed, the land is to be used for operating the old age home and conducting the allied activities. The project plan submitted by the assessee outlines the construction of a six-storey building, which will comprise five major blocks: a staff block, three blocks for occupant beneficiaries, and a community hall. The three completed blocks for residents are planned to contain 228 units. Given the scale of the proposed construction, it is evident that this would necessitate a substantial financial investment from the assessee organization. However, there is a conspicuous absence of any mention regarding the construction of the building on the leased land within the terms of the lease deed. Additionally, there are no provisions addressing critical aspects such as the allocation of construction costs, and the rights, obligations, and responsibilities of both the lessee and lessor concerning the constructed property. 6.1 This issue is of utmost importance, particularly since the lease agreement between the assessee and the landlord is limited to a five-year term. Key clauses such as provisions for extending the lease period beyond five years, the disposition of the constructed building upon termination of lease, whether ownership of the building will be transferred to the landlord, and if so, whether the landlord is required to reimburse the assessee for construction costs before taking possession, are all conspicuously absent from the lease deed. The omission of such crucial clauses raises significant concerns regarding the legal and financial security of the assessee's investment and the future operational stability of the old age home. Moreover, the absence of any terms and conditions regarding the reimbursement of construction costs to the assessee creates a potential conflict of interest, as the director, who owns the land, stands to benefit at the expense of the assessee, a non-profit organization. Without clear provisions ensuring that the assessee is reimbursed for the substantial construction costs, the director could gain ownership of a significantly improved property without adequate compensation to the organization. This scenario not only jeopardizes the financial stability of the assessee but also undermines the fiduciary responsibility owed to the organization's mission and its beneficiaries. In such a scenario, the provisions of Section 13(1)(c) of the Income-tax Act, 1961, would clearly be applicable to the instant case.
7. It is also pertinent to note here that the so-called lease deed has not been duly registered with the registering authorities as required by the law. As per section 17 of the Registration Act, 1908, leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent are mandatorily required to be registered. Also, as per section 55(1) of the Maharashtra Rent Control Act, 1999, registration of a leave & license agreement shall be registered under the Registration Act, 1908. The relevant provision is reproduced hereunder for ready reference: "55. Tenancy agreement to be compulsorily registered. (1) Notwithstanding anything contained in this Act or any other law for the time being in force, any agreement for leave and licence or letting of any premises, entered into between the landlord and the tenant or the licensee, as the case may be, after the commencement of this Act, shall be in writing and shall be registered under the Registration Act, 1908." The assessee, however, has failed to comply with the above statutory provisions.
In view of the above discussion, the undersigned is also not satisfied about the compliance to requirements of any other law for the time being in force by the trust / institution as are material for the purpose of achieving its objects. Therefore, the application filed by the assessee is liable to be rejected and the provisional registration granted on 03/08/2022 under section 12AB read with section 12A(1)(ac)(vi) of the Income Tax Act, 1961 is liable to be cancelled.
Without prejudice to the above, the assessee's contention regarding its activity and the other information furnished by it has been duly examined. It has been observed and admitted by the assessee that except for acquiring land and constructing compound wall, there has not been any activity carried out by the assessee. The contention of the assessee that the acquisition of land and construction of a compound wall should be considered as activities essential in starting an old age home is not sufficient to establish that the organisation has commenced its intended charitable activities. While these preparatory steps are necessary for the future activities of the old age home, they do not constitute the commencement of activities that are directly associated with the charitable purpose of the organization. The core activities of an old age home, such as providing shelter, care, and support to elderly residents, have not yet begun. Therefore, it cannot be held that the organization has initiated its charitable operations. Consequently, the application filed by the organization is premature, as the organization has not demonstrated active engagement in its stated charitable objectives. The mere preparation and construction cannot be considered as commencement of activities required for such applications.
In view of the above discussion, the application filed by the assessee is hereby rejected and the provisional registration granted on 03/08/2022 under section 12AB read with section 12A(1)(ac) (vi) of the Income Tax Act, 1961 is hereby cancelled.”
Aggrieved with such order of Ld. CIT(E), the assessee is in appeal before the Tribunal by raising the following grounds:
1. The Ld. CIT-E Erred in not granting registration u/s 12AB of the IT Act.
2. The Ld. CIT-E ought to have considered / appreciated the fact that the Starting of construction tantamounts to Start of charitable activity.
3. On without prejudice basis, the Ld. CIT-E ought to have considered the fact that, the trust has applied for Final approval u/s 12A of the IT Act, at least 6 months prior to expiry of Provisional approval & thus, he ought to have considered the intent of charitable nature of activity.
4. On without prejudice basis, the Ld. CIT-E ought not to have cancelled the provisional registration u/s 12AB of the IT Act.
The Ld. Counsel for the assessee submitted that the Ld. CIT(E) in his notice has never asked for the registration of lease deed although he has discussed the same in the order. Further, he has also given a finding that the assessee has not started its activities. The Ld. Counsel for the assessee filed certain details in the shape of additional evidences and requested the Bench to admit the same as per Rule 29 of the ITAT Rule. He further submitted that when the assessee has already spent an amount of 122.18 lakhs towards the construction of old age home which is the main object of the assessee and since the various Benches of the Tribunal are considering the capital expenditure as application of income, therefore, it cannot be said that the assessee has not started its activities for which the trust was created. He accordingly submitted that given an opportunity, the assessee is in a position to substantiate its case with evidence before the Ld. CIT(E).
The Ld. DR on the other hand strongly supported the order of the CIT(E).
We have heard the rival arguments made by both the sides, perused the order of the Ld. CIT(E) and the paper book filed on behalf of the assessee. We find Ld. CIT(E) in the instant case rejected the claim of registration u/s 12A of the Act on the ground that the lease deed furnished by the assessee was not registered and the assessee has not started its activities for which it was created. It is the submission of the Ld. Counsel for the assessee that in the show cause notice, the Ld. CIT(E) has never questioned the registration of the lease deed. Further, when the assessee has already started the construction of old age home for which it has already spent Rs.122.18 lakhs and the same has been mentioned in the finding of the Ld. CIT(E) himself, it cannot be said that the assessee has not started its activities. Further, the Ld. Counsel for the assessee has also filed certain evidences including the copy of revised lease deed duly executed on 04.02.2025 which was not available before the Ld. CIT(E) for which the assessee has moved an application under Rule 29 of the ITAT Rules for accepting the additional evidence. After considering the contents of the application for admission of the additional evidences which according to the assessee goes to the root of the matter and after hearing the Ld. DR, we deem it proper to admit the additional evidences. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the CIT(E) with a direction to grant one more opportunity to the assessee to substantiate its case by filing the requisite details to his satisfaction and decide the issue as per fact and law. The assessee is also hereby directed to submit the details as called for by the CIT(E) on the appointed date without seeking any adjournment under any pretext, failing which the CIT(E) is at liberty to pass appropriate order as per law. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed for statistical purposes.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open Court on 5th March, 2025.