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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
ORDER PER G.S.PANNU,A.M:
This appeal by the assessee is directed against the order passed by Director of Income Tax (Exemptions) under section 12AA(3) of the Income Tax Act, 1961( in short ‘the Act’) cancelling the earlier registration granted to the assessee under section 12AA of the Act dated 11/11/1982.
Before us, the appellant raised the following Grounds of appeal:-
“1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Exemption) [herein after referred as 'the Ld. CIT(Ex.)'] erred in cancelling the Registration of the Trust u/s. 12AA(3) & 12AA(4) of the Income Tax Act, 1961 [herein after referred as 'the Act'] when the proceedings were initiated only for alleged violation of the provisions of section 12AA(3) as such the order is not in accordance with law.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(Ex.) erred in cancelling the Registration of the Trust u/s. 12AA(3) and 12AA(4) of the Act on surmises and conjectures having not been satisfied about the violation of the particular provisions of section 12AA(3) or 12AA(4).
3. On the facts and in the circumstances of the case and in law, the Id. CIT(Ex.) erred in withdrawing/ cancelling registration u/s 12A of the Act on the assumption that membership fees and entrance fees received from members is considerations received for carrying out of circulation audit which is a business activity and appellant is under an implied contract to carry out the circulation audit in lieu of the annual membership fees and the activities of appellant trust being organized business activity is in violation to the objects of the trust, and doing so is wrong and contrary to the facts of the case, the provisions of the Act and the Rules made thereunder.”
Notably, the appellant before us is a company which was originally registered under the Indian Companies Act, 1913 and subsequently, vide an order dated 25.11.1988 it was granted a licence u/s 25 of the Companies Act, 1956 which postulates that the assessee applies its profits, if any, or other income in promoting its objects and is prohibited to pay any dividend to its Members. The appellant was also registered with the Commissioner of Income Tax, Mumbai City-IV, Mumbai u/s 12A of the Act as a charitable institution on 11.11.1982.
The objects of the assessee are contained in its Memorandum of Association, a copy of which is placed at pages 1 to 17 of the Paper Book, but briefly put, its main objects are to secure accurate circulation figures and data relating to all periodicals and media that sell advertising space and in regard to such publications to obtain information as to the area of distribution and fix standard forms and methods for ascertaining the circulation figures. Assessee also records information and circulates to its Members, which comprises of publishers of newspapers/magazines, advertising and media agencies advertisers and government departments, etc. Assessee distributes such information after certifying the circulation figures of its Members’ publications based on comprehensive audit undertaken by the Auditors drawn from an approved panel. Be that as it may, the dispute before us is arising from a notice dated 07.08.2014 issued by the Director of Income Tax (Exemptions) (in short ‘’the Director’) requiring the assessee to explain as to why the registration granted u/s 12A of the Act be not cancelled. In terms of such notice, a copy of which is placed at pages 19-20 of the Paper Book, the cancellation of registration was proposed on the ground that the activities of the assessee were neither as per its objects and nor genuine. The Director issued another communication dated 30.11.2015 on the same lines as earlier, but supplemented the earlier notice by saying that the activities being carried out by the assessee were on commercial basis. The appellant has resisted the action of the Director by making varied submissions, which we are not detailing presently, but it would suffice to note that the Director considered the submissions put forth by the assessee, but was not satisfied and he has cancelled the registration originally granted to the assessee on 11.11.1982 (supra).
The reasons firmed-up by the Director to cancel the registration are two- fold. Firstly, he has relied upon the proviso to Sec. 2(15) of the Act inserted by the Finance Act, 2010 w.e.f. 1.4.2009 and concluded that the activities carried out by the assessee were on commercial lines and, therefore, not for charitable purposes. Secondly, he has referred to Sec. 12AA(4) of the Act to say that due to the operation of Sec. 13(1) of the Act, the provisions of Sec. 11 & 12 of the Act do not apply to the assessee so as to exclude either wholly or partially the income of the Trust. In sum and substance, the aforesaid two reasons have formed the basis for the Director to cancel the registration granted to the assessee originally on 11.11.1982 (supra).
In the above background, the appellant is in appeal before us canvassing various Grounds in law and on facts, assailing the order of the Director. So however, at the time of hearing, a preliminary argument has been adverted to, contending that the requisite jurisdiction was absent in the present case for the Director to have cancelled the registration u/s 12AA(3) of the Act. More particularly, the point raised by the assessee is in terms of the ratio of the judgment of the Hon'ble Bombay High Court in the case of DIT(E) vs. Khar Gymkhana, 385 ITR 162 (Bom.), wherein the scope and ambit of the Circular of CBDT no. 21/2016 dated 27.05.2016 has been explained. Pertinently, the preliminary point sought to be raised is only on the issue of infirmity in invoking of Sec. 12AA(3) of the Act by the Commissioner to cancel the registration. We may clarify here that the said plea has been raised, assuming that the activities of the assessee are on commercial lines; and the plea set-up is that the basis adopted to cancel the registration is otiose to the requirements of Sec. 12AA(3) of the Act, read with the Circular of CBDT dated 27.05.2016 (supra). Since the said issue goes to the root of the matter, it was deemed appropriate to consider and decide the same at the threshold and accordingly, the rival counsels have been heard thereof.
Notably, the phraseology of Sec. 12AA(3) of the Act shows that the Director is empowered to cancel the registration already granted on satisfaction of conditions stipulated therein, namely, that the activities of the institution are not genuine or are not being carried out in accordance with its objects. In the instant case, the first charge made by the Director is that due to the insertion of the proviso to Sec. 2(15) of the Act w.e.f. 01.04.2009, the registration is liable to be cancelled since the activities of the assessee involve carrying out of activities in the nature of trade, commerce or business, etc. for financial consideration. On this aspect, the plea set-up by the assessee is that the CBDT Circular dated 27.05.2016 (supra) prescribes that the registration granted u/s 12A of the Act cannot be cancelled merely because the proviso to Sec. 2(15) of the Act comes into play and that the process of cancellation of registration is to be initiated strictly in accordance with Sections 12AA(3) and/or 12AA(4) of the Act. In this regard, we may refer to the following observations of the Hon'ble Bombay High Court in the case of DIT(E) vs. Khar Gymkhana (supra) also :-
“It is evident from the aforesaid Circular No.21 of 2016 that the amendment to the definition of charitable purpose by adding of the proviso, would not ipso facto give jurisdiction to the Commission of Income-tax to cancel the registration under section 12AA(3) of the Act.”
From the aforesaid, it is quite clear that the amendment to the definition of the expression “charitable expression” contained in Sec. 2(15) of the Act effectuated by the insertion of proviso w.e.f. 1.4.2009 cannot ipso facto empower the Director to cancel the registration u/s 12AA(3) of the Act. In this context, we may also reproduce the following discussion contained in the order of the Hon'ble Bombay High Court in the case of DIT(E) vs. Khar Gymkhana (supra), which was a case where the Tribunal had set-aside the action of the Commissioner cancelling the registration u/s 12AA(3) of the Act :-
“The impugned order has held that cancellation of a Registration under Section 12AA(3) of the Act, can only take place in case where the activities of trust or institution are not genuine and/or not carried on in accordance with its objects. The aforesaid Circular No.21 of 2016 is in line of the finding of the Tribunal in the impugned order. The submission on behalf of the Revenue that the Trust is not genuine because it is hit by proviso to Section 2(15) of the Act, is in fact, negatived by Circular No.21 of 2016. In fact, the above Circular No.21 of 2016 clearly provides that mere receipts on account of business being in excess of the limits in the proviso would not result in cancellation of Registration granted under Section 12AA of the Act unless there is a change in nature of activities of the institution. Admittedly, there is no change in nature of activities of the institution during the subject Assessment Year. The further submission on behalf of the Revenue that looking at the quantum of receipts on account of commercial activities, it is unlikely/ improbable that in the subsequent Assessment Years, the receipts would fall below Rs.25 lakhs and therefore, the Commissioner is entitled to cancel the Registration. The aforesaid submission made on behalf of the Revenue is based not on facts as existing but on probability of future events. We are unable to accept the submission based on clairvoyance. Further, we are unable to understand what prejudice is caused to the Revenue since whenever the receipts on account of commercial activities is in excess of the limits provided in proviso to Section 2(15) of the Act, the Assessing Officer is mandated/ required to deny exemption under Section 11 of the Act as provided in Circular No.21 of 2016 dated 27th May, 2016. Accordingly, the issue stands covered in favour of the Revenue by virtue of Circular No.21 of 2016.”
The aforesaid ratio of the judgment shows that the cancellation of registration envisaged u/s 12AA(3) of the Act has to be on the basis of the parameters contained therein, and the same are not triggered by the proviso to Sec. 2(15) of the Act. Notably, the Hon'ble High Court noted that unless there is a change in the nature of the activity of the institution, the provisions of Sec. 12AA(3) of the Act could not be invoked merely on account of the newly inserted proviso to Sec. 2(15) of the Act coming into play. Therefore, without going into the aspect whether or not assessee’s activities amount to be in the nature of trade, commerce or business, on the preliminary point itself, the order of the Director is untenable because the cancellation has been resorted merely because of proviso to Sec. 2(15) of the Act coming into play.
The second aspect relied by the Director is Sec. 12AA(4) of the Act, which has been inserted w.e.f. 1.10.2014. Sub-section (4) of Sec. 12AA of the Act empowers the Director to cancel the registration of a Trust or institution if the activities of the Trust or institution are being carried out in a manner that the provisions of section 11 and 12 of the Act do not apply to exclude either wholly or in part of the income of such Trust or institution due to operation of section 13(1) of the Act. In support of invoking Sec. 12AA(4) of the Act, in para 4 of his order the Commissioner observes that assessee has violated the provisions of Sec. 13(1) of the Act as its activities are not charitable in nature. Pertinently, apart from a bland assertion, there is no other discussion or material relied upon by the Director to say as to why and how the provisions of Sec. 13(1) of the Act have been violated in the present case. Even before us, no specific point has been brought out except the fact that activities are in the nature of trade, commerce or business. So however, there is no assertion in the impugned order or even before us that any of the activities undertaken by the assessee are different in nature to what was being carried out in the past. Therefore, on this aspect also, we find no justifiable reason with the Director to invoke Sec. 12AA(4) of the Act.
Before parting, we may clarify that the captioned appeal is being disposed off by adverting to the preliminary point relating to the scope and ambit of the jurisdiction of the Director to cancel registration u/s 12AA(3) of the Act in the light of the CBDT Circular dated 27.05.2016 (supra) and the judgment of the Hon'ble Bombay High Court in the case of DIT(E) vs. Khar Gymkhana (supra), but our decision should not be taken as any reflection on the merits of the dispute as to whether nor not the activities in question are entitled to exemption u/s 11 & 12 of the Act, an arena which deserves to be separately dealt with by the assessing authorities in the assessment proceedings.
Resultantly, in view of the aforesaid discussion, since the dispute in the preliminary point raised by the assessee is covered by the decision of Hon'ble Bombay High Court in the case of Khar Gymkhana (supra), we find no reason to sustain the impugned order passed by the Director cancelling the registration granted to the assessee earlier on 11/11/1982. Accordingly, the impugned order of the Director is set-aside and the registration earlier granted to the assessee is hereby restored.
In the result, appeal of the assessee is allowed, as above.
Order pronounced in the open court on 08/11/2017.