M/S KARNATAKA STATE STUDENTS WELFARE FUND ,BANGALORE vs. THE INCOME TAX OFFICER (EXEMPTIONS) WARD-1 , BANGALORE

The facts relating to the case are stated in brief. The assessee herein was established by the Education Department of Government

The assessee applied for registration u/s 12AA of the Income- tax Act,1961 ['the Act' for short] as a charitable organisation in prescribed Form 10A on 28-03-2014. The assessee was accorded registration u/s 12AA of the Act on 23-09-2014 w.e.f. AY 2014-15.

The revenue carried out Survey operations u/s 133A of the Act on 22-09-2015 upon getting information that the assessee was accumulating huge income year after year and was claiming exemption u/s 11 of the Act without having registration u/s 12AA of the Act. During the course of Survey operations, a statement was recorded from Smt. Syed Ruksana Bulquees, Programme Implementation Officer & In charge – Jt. Director of Public Instructions. In the statement, she clearly stated that the fund does not have registration for the earlier years and further confessed that the fund has not filed the returns of income for earlier years.

Accordingly, the AO reopened the assessments of the years under consideration by issuing notices us 148 of the Act on 30-09- 2015. The assessee sought reasons for reopening of assessment from the AO and the same was supplied. The assessee objected to reopening of assessments by placing reliance on the second proviso to sec.12A(2) of the Act. The AO, however, expressed the view that the second proviso to sec.12A(2) will not apply to the assessee. The observations made by the AO in this regard are extracted below:-

Before Ld CIT(A) also, the assessee challenged the validity of reopening of assessment by advancing arguments made before the AO. The assessee also placed its reliance on the Circular No.1 dated 21-01-2015 issued by CBDT explaining the provisos inserted in sec.12A(2) of the Act. The Ld CIT(A), however, took the view that the AO has reopened the assessment not on account of the reason that the fund was not registered u/s 12AA of the Act, but because the assessee has claimed deduction u/s 11 and 12 of the Act. Further the assessee was having huge surplus in all these years. Accordingly, he upheld the validity of reopening of assessment.

Before us, the Ld A.R advanced his arguments on the legal issue of validity of reopening of assessment. We also heard Ld D.R on this preliminary issue.

The reasons recorded by the AO for reopening of assessment of impugned assessment years are identical in all the years. The reasons recorded by the AO reads as under:- REASONS FOR ISSUE OF NOTICE U/S 148 “The Fund was established by virtue of a proceedings of the Government of Karnataka (the then Mysore Govt.). The said fund, was granted registration u/s 12A w.e.f. financial year 2013-14. Information was gathered revealed that the said fund is having taxable surplus/income since quite a number of years.

It can be noticed that the AO has specifically mentioned in the third paragraph that the surplus of earlier years are to be taxed as AOP without extending the benefits of sec.11 and 12. In the final paragraph, the AO specifically states that surplus needs to be assessed to tax, since the fund does not have registration u/s 12A of the Act. Thus, in our view, the only reason for reopening of assessment is to assess the surplus earned during the years under consideration in the absence of registration u/s 12A of the Act. We have noticed that the Ld CIT(A) has expressed the view the AO has reopened the assessment, not on account of the reason that the fund was not registered u/s 12AA of the Act, but because the assessee has claimed deduction u/s 11 and 12 of the Act. It is a fact that the assessee has not filed returns of income earlier for the years under consideration and hence the allegation that the assessee was claiming deduction u/s 11 & 12 of the Act for these years is against the facts available on record. It can be noticed that the AO himself has recorded in the reasons for reopening that the assessee has not filed returns of income for the financial years 2008-09 to 2013-14,

Before us, the Ld A.R placed his reliance on the second proviso to sec.12A(2) of the Act. The provisos below sec.12A(2)were brought in section 12A by Finance Act 2014 with effect from 1.10.2014. For the sake of convenience, we extract below Section 12A(2) along with the provisos:- “Section 12 A (2) Where an application has been made on or after the 1st day of June 2007, the provisions of section 11 and 12 shall apply in relation to the income of such trust or institution from the assessment year immediately following the financial year in which such application is made: Provided that where registration has been granted to the trust or institution under section 12AA, then, the provisions of sections 11 and 12 shall apply in respect of any income derived from property held under trust of any assessment year preceding the aforesaid assessment year, for which assessment proceedings are pending before the Assessing Officer as on date of such registration and the objects and activities of such trust or institution remain the same for such preceding assessment year: Provided further that no action under section 147 shall be taken by the Assessing Officer in case of such trust or institution for any assessment year preceding the aforesaid assessment year only for non-registration of such trust or institution for the said assessment year: Provided also that provisions contained in the first and second proviso shall not apply in case of any trust or institution which was refused registration or the registration granted to it was cancelled at any time under section 12AA.”

In the instant case, the registration u/s 12A of the Act was granted to the assessee on 23-09-2014. As per the first proviso, where the registration has been granted to the trust u/s 12AA, then the provisions of sec.11 and 12 shall apply in respect of any income

It can be noticed that the second proviso to sec.12A(2) specifically bars the AO from taking action u/s 147 of the Act only for the reason of non-registration of such trust or institution for the said assessment year. However, in the instant case, the AO has reopened the assessment only for the reason of non-registration the assessee u/s 12A of the Act and consequently to tax the surplus earned by the assessee during the years under consideration.

The AO has taken a view that the second proviso to sec.12A(2) shall not apply to the assessee, since it has got prospective effect. Though the view of the AO was not happily worded, it appears that the AO has taken note that the provisos were inserted w.e.f. 01-10-

We are unable to agree with the view so entertained by the AO. The AO has reopened the assessment by issuing notices u/s 148 of the Act on 30-09-2015. It is well settled proposition of law that the provisions of the Act, which are in operation on the date of issue of notice u/s 148 of the Act, should apply for the initiation of proceedings. In any case, we notice that the Rajasthan High Court has held in the case of CIT vs. Shree Shyam Mandir Committee (2018)(400 ITR 466)(Raj) that the provisos inserted in Sec.12A(2) are declaratory and hence shall have retrospective effect. We notice that the Hon’ble Rajasthan High Court has approved the view so expressed by the Tribunal in the following cases:- (1) Sree Sree Ramkrishna Samity vs. Deputy CIT (2016)(156 ITD 0646)(Kol) (2) SNDP Yogam vs. Asst. DIT (Exemption) (2016)(161 ITD 1)(Cochin)

In all the above said cases, the Circular No.1 of 2015 issued by CBDT was referred in order to find out the intention of the Government in introducing the impugned provisos. The said Circular reads as under:- “8.1 The provisions of Section 12A of the Income tax Act, before amendment by the Act, provided that a trust or an institution can claim exemption under sections 11 and 12 only after registration under section 12AA of the said Act has been granted. In case of trusts or institutions which apply for

The co-ordinate Bangalore benches of Tribunal has also considered an identical issue in the case of Bantanthamma Mathu Kalamma Trust vs. ITO (ITA No.1761 – 1766/Bang/2018 dated 26- 02-2020) and has expressed the view that no action u/s 147 shall be taken by the AO in case of a trust for any assessment year preceding the year of registration only on account of “non-registration of such trust for the said assessment year, in view of the second proviso to sec.12A(2) of the Act.

In the instant cases, we have noticed from the reasons recorded by the AO that the assessing officer has reopened the assessments of the years under consideration only for the reason that the assessee does not have registration for the years under consideration, even though the assessee had been granted registration from AY 2014-15 and further the registration certificate was in operation at the time the notices u/s 148 were issued. Accordingly, we are of the view that the action of the AO is in violation of the second proviso to sec.12A(2) of the Act. Accordingly, we are unable with the view expressed by Ld CIT(A).

In view of the foregoing discussions, we are of the view that the reopening of assessments of the years under consideration is bad in law, as the same is in violation of the second proviso to sec.12A(2)

Since we have quashed the assessment orders on the basis of legal issue contested by the assessee, the issues urged on merits do not require adjudication.

In the result, all the appeals of the assessee are treated as allowed.