MUMBAI RAILWAY VIKAS CORPN LTD,MUMBAI vs. DIT (E), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “A”, MUMBAI BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI RAM LAL NEGI, JUDICIAL MEMBER

ITA No. 1057/Mum/2014 ITA No.2626/Mum/2014 Mumbai Railway Vikas Corpn. Ltd. 2nd Floor, Churchgate Station Bldg., Churchgate, Mumbai -51 PAN:AACCM1284 B ...... Appellant Vs. The DIT(E), R.No.616, 6th Floor, Piramal Chambers, Lalbaug, Mumbai 400 012. .... Respondent Appellant by : Shri Vipul Joshi Respondent by : S/Shri E. Sankaran/ Shiddaramappa Koppaattanvar Date of hearing : 03/06/2016 Date of pronouncement : 03/08/2016

ORDER PER G.S.PANNU,A.M:

The captioned are two appeals by the assessee, which substantively involve a solitary issue, arising from the action of the Director of Income Tax (Exemption) (in short “the Director”) in cancelling/withdrawing the registration granted to the assessee under section 12A of the Income Tax Act, 1961 ( in short ‘the Act’).

2 Mumbai Railway Vikas Corpn. Ltd

Grounds of appeal in ITA No.1057/Mum/2014: 1. BREACH OF THE PRINCIPLES OF ATURAL JUSTICE 1.1 The Director of Income - tax (Exemption), Mumbai ["the DIT (E)"] erred in not granting proper, sufficient and adequate opportunity of being heard to the Appellant while passing the order cancelling registration u/s 12AA of the Income tax Act, 1961 ["the Act'] of the Appellant. 1.2 It is submitted that in the facts and the circumstances of the case, and in law, the order so passed be held as bad in law, as the same is framed in gross breach of the principles of natural justice. WITHOUT PREJUDICE TO THE ABOVE: 2.1 The DIT (E) erred in cancelling the registration u/s. 12AA of the Income - tax Act, ["the Act"] of the Appellant. 2.2 It is submitted that in the facts and the circumstances of the case, and in law, the order passed by the DIT (E) is bad, illegal and void, as the same is passed - without jurisdiction / in excess of the jurisdiction conferred upon him u/s. - 12AA (3) of the Act. WITHOUTFURTHER PREJUDICE TO THE ABOVE: 3.1 Even on merits, the DIT (E) erred in cancelling the registration u/s. 12AA of the Act, already granted to the Appellant in 2001. 3.2 While doing so, the DIT (E) erred in: (i) Basing his action on suspicious, surmises and conjectures;

3 Mumbai Railway Vikas Corpn. Ltd

(ii) Taking into account irrelevant and extraneous considerations; and (iii) Ignoring relevant material and consideration. 3.3 It is submitted that in the facts and circumstances of the case, and in law, no such cancellation was called for.

Grounds of appeal in ITA No.2626/Mum/2014:- 1.1 The Director of Income - tax (Exemption), Mumbai ["the DIT (E)"] erred in passing the order u/s. 154 of the Income tax Act, 1961 ["the Act']. 1.2 It is submitted that in the facts and the circumstances of the case, and in law, the order so passed is bad, illegal and without jurisdiction as the necessary preconditions for initiating the proceeding and completion thereof were not fulfilled. 1.3 Without prejudice to the generality of the above, it is submitted that in the case of the Appellant, there was no "mistake apparent from the records" within the meaning of section 154 of the Act. WITHOUT PREJUDICE TO THE ABOVE: 2.1 Assuming - but not admitting - that the DIT (E) had necessary jurisdiction, the DIT (E) erred in withdrawing the registration u/s. 12A of the Act granted to the Appellant with effect from the date on which it was granted, that is, 29.10.2001. 2.2 Without prejudice to the generality of the above, it is submitted that the registration could have been withdrawn, if at all, only with effect from the date of his order or, in any case, not earlier to 01.06.2012. 3. Although the assessee has raised multiple Grounds of appeal but the action of the Director in cancelling/withdrawing registration granted under section 12A of the Act has been sought to be challenged on two grounds. Firstly, on the ground that the Director exceeded his jurisdiction by invoking section 12AA(3) of the Act and cancelling the registration on eventualities, which are not specified therein. Secondly, it is also sought to be canvassed that even otherwise, on merits too, the activities being carried out by the assessee are for a ‘charitable purpose’ as defined in section 2(15) of the Act and, there is no

4 Mumbai Railway Vikas Corpn. Ltd

justification for cancelling/withdrawing the registration, even after the insertion of proviso below section 2(15) by the Finance Act,2008 w.e.f. 01/04/2009.

5 Mumbai Railway Vikas Corpn. Ltd

of the Act and taking into account the objects, assessee is engaged in non-charitable activities. In response, assessee company made detailed submissions, which have also been reproduced by the Director in the impugned order. The assessee made varied submissions, viz. that it was a non-profit making organization financed by the Government of Maharashtra and Ministry of Railways(Government of India), formed with the object of advancing general public utility; that the activities are being carried out as per its objects and it was assisting Indian Railways, and the Government of the State of Maharashtra in executing various projects to improve Sub-urban Railway system alongwith infrastructure required to cater to the Sub-urban needs of the train commuters. It was thus, contended that it was not carrying out any activity of non-charitable or commercial in nature. One pertinent submission put-forth by the assessee was to the effect that on an earlier occasion a notice was issued on 06/02/2002 proposing to withdraw the registration granted under section 12A of the Act by the then Director on the plea that certain clauses of the Memorandum and Articles of Association suggested that the entire income was not wholly meant for the utilization towards the objects of the assessee-company. It was pointed out that the necessary amendments were made to the Memorandum and Articles of Association and on the strength of the same, the then Director dropped the proceedings initiated for withdrawal vide an order dated 15/12/2003, a copy of which has also been placed in the Paper Book filed before us. On the basis of such submissions, assessee contended that the proceedings initiated to cancel/withdraw registration be dropped.

6 Mumbai Railway Vikas Corpn. Ltd

4.1 However, the Director was not impressed with submissions put- forth by the assessee and instead he held that the activities of the assessee were not in accordance with its objects and, therefore, the condition laid down under section 12AA(3) of the Act has been fulfilled; and, hence he cancelled the registration granted under section 12A of the Act. The main points which the Director has noted in order to arrive at aforesaid conclusion can be summarized as follows- that the objects clause contained in the Memorandum and Articles of Association allows the assessee to do business, and that too for profits; that in terms of the amended proviso to section 2(15) of the Act, even if assessee had applied income for ‘general public utility’ it would be deemed to be non-charitable purpose as it involved carrying on of business; that entire expenses were incurred for establishment and administration/ depreciation and it was leveraging its funds to earn income, which was also not being applied for the object for any ‘general public utility’.

4.2 In the above background, the Ld. Representative for the assessee has vehemently pointed out that the Director erred in law as also on facts in invoking the provisions of section 12AA(3) of the Act for cancelling registration originally granted to the assessee under section 12A on 29/10/2001. It is sought to be canvassed that registration was granted after making due enquiries and verification on all aspects, including the objects clause contained in the Memorandum and Articles of Association and that withdrawing/ cancelling of registration already granted was invalid, as there is no change in the activities being carried out. The Ld.Representative for the assessee also emphasized that even after the grant of registration, on 06/02/2002 the then

7 Mumbai Railway Vikas Corpn. Ltd

Director sought to withdraw it in view of certain clauses in the Memorandum and Articles of Association, which were appropriately amended by the assessee and consequently, the proceedings to cancel/withdraw the registration was dropped by way of a written order dated 15/12/2003. It was therefore, contended that on more than one occasion the objects clause and the activities being carried out by the assessee have been examined by the Director and in the absence of any change in either of them, it is not permissible for the Director now to say that the activities are not for ‘charitable purpose’ within the meaning of section 2(15) of the Act. It is also pointed out that even in the scrutiny assessments framed from year to year under section 143(3) of the Act, the objects clause as well as nature of activities were examined and benefit of sections 11/12 of the Act was duly granted for almost ten years.

4.3 On the point of jurisdiction, it was sought to be canvassed that the power of withdrawal under section 12AA(3)of the Act, as it stood for the relevant period under consideration, was restrictive and limited only in a situation where the Director was satisfied, (a) that the activities are not genuine; or (b) that the activities are not being carried on in accordance with the Objects of the assessee. It was pointed out that both the aspects are missing in the present case, inasmuch as, the reasons advanced by the Director to cancel the registration are other than those specified in section 12AA(3) of the Act.

8 Mumbai Railway Vikas Corpn. Ltd

the Revenue. The Ld. Departmental Representative pointed out that the activities of the assessee cannot be said to be for ‘charitable purpose’ as the assessee could not substantiate before the Director that its activities are for ‘general public utility’. It was also pointed out that the Director has brought out in the impugned order that the income being earned was by way of interest on fixed deposits with banks, etc. and, therefore, it could be said that assessee was only leveraging its funds to earn income, and such income was being used to defray establishment and administrative expenses only and not objects of any general public utility. It was, therefore, contended that its activities could not be said to be being carried out for any ‘charitable purpose’, and the Director was justified in cancelling the registration for the reasons contained in the order.

9 Mumbai Railway Vikas Corpn. Ltd

with its objects. So far as the aforesaid legal position is concerned, it is supported by the phraseology of section 12AA(3) of the Act itself. Before us, the Ld. Representative for the assessee has relied upon the judgment of the Hon’ble Madras High Court in the case of CIT Vs. Sarvodaya Ilakkiya Pannai. 343 ITR 300(Mad) in support of the aforesaid premise. In the case before Hon’ble Madras High Court, the assessee was granted registration under section 12A(1)(a) of the Act and later, it was revoked by invoking section 12AA(3) of the Act on the ground that the assessee was not entitled to exemption under section 11(1)(a) of the Act. The Tribunal noted that the activities being carried out by the assessee were not contrary to its objects and therefore, it was held that the power under section 12AA(3) was not properly exercised and it restored the registration already granted. The Hon’ble High Court of Madras affirmed the order of the Tribunal by noticing that the power to cancel registration enshrined under section 12AA(3) of the Act can be exercised only on existence of the two conditions contained therein. According to the Hon’ble High Court, whether an income derived by the assessee is assessable to tax or is entitled to exemption under section 11 is a matter entirely left to the Assessing Officer and the same is not relevant for the purposes of applying section 12AA(3) of the Act. To the similar effect is the subsequent judgment of the Hon’ble Madras High Court in the case of Tamil Nadu Cricket Association .v. DDIT(E) (2014) 360 ITR 633 (Mad.). In the said judgment also, the Hon’ble High Court re-affirmed the proposition that the cancellation of registration is permissible only under circumstances contained in section 12AA(3) of the Act. Similarly, in the case of CIT vs.

10 Mumbai Railway Vikas Corpn. Ltd

Ved Niketan Dham, Public Charitable Trust, 219 Taxman 115(P&H), the Hon’ble High Court set-aside the cancellation of registration effected by the Commissioner under section 12AA(3) of the Act on the ground that there was no satisfaction recorded by the Commissioner as to how the two conditions specified in section 12AA(3) were fulfilled. Apart from the aforesaid decisions of the Hon’ble High Courts, there are a plethora of decisions of various Benches of the Tribunal on the said proposition which are not being detailed herein for the sake of brevity. Be that as it may, the phraseology of section 12AA(3) of the Act as well as aforesaid judgments justify an inference that the power of cancellation contained in section 12AA(3) is not unfettered. It is circumscribed by the conditions prescribed in section 12AA(3) of the Act. It is also clear that such power does not permit a wholesale review of the ingredients which have been considered by the Director while granting registration under section 12A of the Act. To illustrate, we may point out that at the time of evaluating the application of registration under section 12AA (1) of the Act, the Director is mandated 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 section 2(15) of the Act. In contrast, at the time of cancelling of registration under section 12AA (3) of the Act, the Director has to be satisfied about either or both of the 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 in accordance with section

11 Mumbai Railway Vikas Corpn. Ltd

2(15) of the Act, is not a condition mentioned in section 12AA(3) of the Act to cancel the registration already granted under section 12A of the Act. The ground available with the Director to cancel the registration is to either establish that the activities are not genuine or that the same are not being carried out in accordance with the objects of the institution. In our considered opinion, the Director, who is a statutory authority under the Act, is bound to function strictly in accordance with the provisions of the Act, and has no power, jurisdiction or discretion to go beyond the statutory provisions. It is quite well settled that no power can be assumed in the absence of any specific provision. Therefore, we may proceed further on the premise that the registration already granted under section 12A of the Act could have been cancelled by the Director only on the fulfilment of the conditions mentioned in section 12AA (3) of the Act and not for any other reasons.

6.1 In the above background, we may now examine the impugned order of the Director as to whether the conditions prescribed in section 12AA(3) of the Act are satisfied. Before we proceed further, we find it appropriate to briefly touch upon the peculiar features of the appellant before us. As noted earlier, the appellant before us is a Government Company incorporated on 12/07/1999 under section 617 of the Companies Act, 1956. It’s shareholding is owned by the Ministry of Railways (Government of India) and the State Government of Maharashtra. At certain point of time, before appellant company was incorporated, certain projects relating to the transport needs of Mumbai Metropolitan Region (MMR) commuters were identified under MUTP. Such projects related to the urban transport infrastructure in

12 Mumbai Railway Vikas Corpn. Ltd

MMR, which included the Sub-urban Rail Net Work of Mumbai also. Such projects involved huge financial resources, and the Railways were already facing severe operational problems in MMR, the Government at the Centre and in the State of Maharashtra found a resolution by setting-up a Special Purpose Vehicle(SPV) for speedy and efficient implementation of railway component of MUTP. Accordingly, assessee company was set-up as a SPV for taking up projects concerning Mumbai Sub-urban Rail Network. In fact, a perusal of the Main Objects clause in the Memorandum and Articles of Association of the assessee- company bears testimony to the above, and it reads as under:-

“A. MAIN OBJECTS OF THE COMPANY TO BE PURSUED ON ITS INCORPORATION: (i) To develop coordinated plans and implement the rail infrastructure projects, integrate urban development plan for Mumbai with rail capacity and purpose investments, undertake commercial development Railway land and air space, coordinate and facilitate improvements of track, drainage and removal of encroachments and trespassers and coordinate with organizations operating the train services and responsible for protection of Railway’s right of way and urban development for purposeful resolution of allied issues and problems, and discharge its liabilities arising due to such projects and action.” Before us, it has been elaborately brought out that under the first phase of MUTP (at a cost of Rs.4501 crores) 101 EMU rakes have been procured, which have made 418 additional train services possible and generated an additional 33% carrying capacity in local trains in Mumbai. It has also been pointed out that a state of the art EMU maintenance car shed has been set up at Virar and additional 93 track kilometres have been added, which has facilitated segregating mainline operations from suburban operations. It was extended further to

13 Mumbai Railway Vikas Corpn. Ltd

network expansion, service efficiency improvement, rolling stock procurement, institutional strengthening and R&R is under progress under MUTP-II at approximate cost of Rs.7000 crore. Although detailed written submissions have been filed pointing out various activities undertaken, but we do not dilate further on it; it would suffice to notice that the projects which are being undertaken by the assessee company are in public interest with the ultimate aim of improving transportation infrastructure in MMR. It was also emphazised before us, with reference to the material on record, that the projects undertaken by the assessee company were being earlier executed by Ministry of Railways itself departmentally. It has also been pointed out that the work undertaken by the assessee company is treated at par with Railways and reference has been made to the Memorandum of Understanding between the Government of India (Ministry of Railways) and assessee in this regard, a copy of which is placed in the Paper Book at pages 13-18. It is also clear that the funds for such projects are disbursed to the assessee out of budgetary allocation of Indian Railways, including the specific funds received from the World Bank. The Ld. Representative for the assessee had emphasized that all operating assets created under MUTP, through assessee are transferred to / retained by the Railways for operations, maintenance and replacement.

6.2 It was also pointed out that the Direction & General (D&G) charges being received by the assessee are nothing but inter- departmental allocations to cover administrative overheads. It has been explained that the D&G charges for work under MUTP is based on

14 Mumbai Railway Vikas Corpn. Ltd

the quantum of work to be carried out by the assessee and are determined in terms of a standard policy of the Railways. It is also clear that assessee company functions under complete superintendence and control of Government of India, exercised through the Ministry of Railways. It is also asserted before us, and without any controvertion, that assessee has not undertaken any activity for any party other than the Government of India, and that the projects being undertaken by the assessee company are funded by the World Bank and/or by the budgetary support provided by the State Exchequer, and no funds are received from any outside party. All the aforesaid features do show that the task of the assessee is to act as an overall co-ordination and implementing agency for the railway component of MUTP works.

6.3 Be that as it may, in the background of the aforesaid features of assessee company, we now refer to the specific points raised by the Director to say that the activities of the assessee are not being carried out in accordance with its objects in order to justify his invoking of section 12AA(3) of the Act. As per the Director, the activities carried on by the assessee are not in accordance with the objects because – (i)assessee is only leveraging its funds to earn interest income and the same is not applied for its objects; and (ii) the expenses are incurred for establishment, administrative functions and not for any charitable or general public utility purpose. On both the aspects, Ld. Representative for the assessee pointed out that the activities of assessee are totally controlled/managed by Government of India and subject to review by the Comptroller and Auditor General of India. It

15 Mumbai Railway Vikas Corpn. Ltd

has also been pointed out that the activities of the assessee have been scrutinized by the Assessing Officer in the course of scrutiny assessments made under section 143(3) of the Act for various assessment years starting from 2003-04 to 2010-11 without any adverse findings, and copies of such assessment orders have been placed in the Paper Book at pages 399 to 472. Ld. Representative for the assessee explained that no profits are earned from the activity of executing projects of MUTP and the inflow by way of D&G charges is an inter-departmental allocation to meet the administrative costs. It was pointed out that such charges are not even sufficient to cover the entire administrative cost, and the only other source of income is interest earnings on bank deposits, which is being earned from a permitted mode of investment. It was pointed out that even interest income is utilized towards the objects of the assessee company and in support reference has been made to a communication from Railway Board, a copy of which is placed at page 53 of the Paper Book titled ‘INDEX of NOTES filed before us. It is also prescribed therein that any surplus with the assessee is also to be ploughed for funding of the MUTP projects. It is also pointed out that no commercial activity has been carried out and that all its activities are for the purpose for which assessee was set-up. In this context, we have carefully perused the impugned order of the Director and find that his averment in the concluding paragraph “ that the activities of the trust are not in accordance with the objects” is only a bald assertion, devoid of any factual support. In fact, the main object of the assessee, as reproduced earlier, is to develop coordinated plans and the railway

16 Mumbai Railway Vikas Corpn. Ltd

infrastructure projects, integrate urban development plan for Mumbai with rail capacity, etc. In order to achieve the aforesaid, assessee company is an SPV tasked to execute the Sub-urban rail projects identified under MUTP. In our considered opinion, the Director has completely misdirected himself in construing the activities of the assessee. The various projects being undertaken by the assessee have been completely lost sight of and rather much has been made of the items of receipts by way of D&G charges, interest incomes and expenses on administrative and establishment overheads. Quite clearly, any organization would require to spend on administrative overheads in order to carry out its objectives. So however, the function of maintaining an administrative set-up cannot be confused with the objects for which the assessee company has been set-up, and which it has been undertaking ever since namely, the execution of the railway component of the MUTP. In fact, at no stage has Revenue disputed the fact that the assessee company is executing rail projects identified under the MUTP. In our considered opinion, the Director erred in not appreciating the difference between the functioning of administrative set-up, which is essential to execute the objects entrusted to the assessee and, the activity of executing the railway component of the MUTP. The administrative set-up and its functions cannot be viewed in isolation to say that assessee company is not carrying out activities in accordance with its objectives, which in the present case is quite clearly being undertaken by the assessee by executing the railway component of the projects under MUTP. Therefore, in our considered opinion, the Director has clearly misdirected himself in coming to conclude that

17 Mumbai Railway Vikas Corpn. Ltd

assessee has carried out activities that are not in accordance with its objects. Thus, factually speaking, we find no reason to uphold the inference of the Director that the activities are not in accordance with its objects.

6.4 Secondly, in so far as, the other condition in section 12AA(3) of the Act regarding genuineness of the activities is concerned, there is no adverse finding on this aspect by the Director in the impugned order. Thus, having regard to the material and evidence on record there is no ground to infer that the two eventualities mentioned in section 12AA(3) of the Act are met, namely, activities not being genuine or that the same are not carried out in accordance with its objects. Thus, invoking of section 12AA(3) by the Director has to fail in the present case. Therefore, on this preliminary aspect itself we find that the Director exceeded his jurisdiction prescribed in section 12AA(3) by cancelling the registration originally granted to the assessee under section 12A of the Act dated 29/10/2001.

6.5 Before parting, we may also refer to the discussion made by the Director in para-15 of his order to say that the major income being earned by the assessee is on account of interest and miscellaneous receipts. On this basis, it is sought to be inferred that assessee was only leveraging its funds to earn interest income. Before us also, it has been contended that such income cannot be said to be used for a charitable purposes so as to be entitled for exemption under sections 11/12 of the Act. Whether such income is eligible for the benefit of sections 11/12 of the Act or not, in our view, is not a relevant criteria to justify invoking of section 12AA(3) of the Act. Whether or not such incomes are

18 Mumbai Railway Vikas Corpn. Ltd

entitled to exemption under section 11 of the Act are matters, which are to be decided in the course of the quantum assessment proceedings by the assessing authorities and do not enter the requisites contained in section 12AA(3) of the Act. Thus, so far as, the present controversy is concerned, in our view, the aforesaid reasons advanced by the Director are extraneous for the purposes of invoking section 12AA(3) of the Act. So, however, we may state here that it would be open for the assessing authorities to examine such aspects in appropriate proceedings, if so advised in law, but certainly the same are outside the purview of the pre-requisites contained in section 12AA(3) of the Act. Another aspect raised by the Director was that some of the clauses in the Memorandum and Articles of Association allowed assessee to do business and, therefore, it is hit by the amended proviso to section 2(15) of the Act. On this point also, it is sufficient to notice that the same is not a relevant criteria for cancellation of registration envisaged in section 12AA(3) of the Act. Of course, as noted earlier, such issues are open for examination by the assessing authority in the quantum assessment proceedings, if so advised in law. Certainly, the same cannot be considered for the purposes of justifying invoking of section 12AA(3) of the Act. Thus, on these aspects also, we find no reason to uphold the finding of the Director. Therefore, we set-aside the order of the Director dated 10/01/2014 and restore the certificate of registration dated 29/10/2001 granted under section 12A of the Act.

19 Mumbai Railway Vikas Corpn. Ltd

6.6 As a consequence, the order of the Director dated 24/03/2014, which is the subject matter of appeal in ITA No.2626/Mum/2014 is also liable to be quashed. We hold so.

Order pronounced in the open court on 03/08/2016

Sd/- Sd/- (RAM LAL NEGI) (G.S. PANNU) JUDICIAL MEMBER ACCOCUNTANT MEMBER

Mumbai, Dated 03/08/2016 Vm, Sr. PS Copy of the Order forwarded to : 1. The Appellant , 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai