Richmond Educational Society Vs DCIT/ ACIT (ITAT Delhi)
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) allowed the appeal of Richmond Educational Society and quashed the order of the Principal Commissioner of Income Tax (Central), Kanpur cancelling the Society’s registration under Sections 12AA/12AB of the Income-tax Act. The Tribunal held that the conditions prescribed under Section 12AB(4) for cancellation of registration were not satisfied and that the impugned order also suffered from jurisdictional and procedural defects.
The assessee is a charitable society established for imparting education and has been operating educational institutions in Noida and Meerut. Following a search under Section 132 conducted in the PTC Group, a consequential search was also carried out on the Society. Although the assessee asserted that no incriminating material questioning the genuineness of its educational activities was found, the PCIT invoked Section 12AB(4) and cancelled its registration for Assessment Years 2019-20 onwards on allegations including payment of salary to a trustee’s relative, bogus expenditure, advance for purchase of school buildings, and alleged off-the-books cash transactions.
The Tribunal first examined the statutory framework of Section 12AB(4). It observed that cancellation of registration can be ordered only upon the occurrence of a “specified violation” as defined in the Explanation to that provision. The Tribunal emphasised that the power to cancel registration is an exceptional one and must be exercised strictly within the limits prescribed by the statute.
One of the principal findings of the Tribunal was that the PCIT had wrongly equated disputed financial transactions with the charitable activities of the Society. The Tribunal accepted the distinction between “activities” and “transactions”, observing that charitable activities must be examined holistically. Individual financial transactions or alleged irregularities cannot by themselves establish that the activities of a trust are not genuine or are not being carried out in accordance with its objects. Such issues are ordinarily matters for assessment proceedings under Sections 11, 13 or 115BBI and do not automatically justify cancellation of registration.
The Tribunal noted that the predominant activity of the Society—imparting education—had never been doubted by the Revenue. The schools continued to function, there was no allegation that the Society had abandoned or deviated from its educational objects, and no material suggested that its charitable activities were sham or fictitious. Consequently, neither limb of clause (e) of the Explanation to Section 12AB(4), dealing with non-genuine activities or violation of registration conditions, was attracted.
The Tribunal further held that clause (a) of the Explanation to Section 12AB(4), concerning application of income for purposes other than the charitable objects, must also be interpreted narrowly. The provision is intended to cover situations where the trust diverts its income away from its principal charitable purpose. Since there was no finding that the Society had ceased to impart education or applied its funds towards non-educational objects, the jurisdictional requirement for invoking clause (a) was absent. Alleged financial irregularities involving particular transactions could not substitute for proof that the Society’s principal charitable purpose had been abandoned.
The Tribunal also dealt with the Revenue’s allegations individually. In respect of remuneration paid to Ms. Jasmine Gandhi, the Society produced appointment letters, reports prepared by her, attendance records, and evidence of her educational qualifications and professional achievements to demonstrate that she had rendered genuine services. Regarding the alleged bogus expenditure, WhatsApp chats and unsigned invoices were held to be insufficient to establish diversion of funds. As regards the advance of ₹20 crore for purchase of school buildings, the Tribunal noted that the transaction arose out of a commercial arrangement under an approved insolvency resolution process, part of the advance had been refunded, and the balance was adjusted against the purchase consideration. Similarly, allegations relating to off-the-books cash transactions were disputed by producing affidavits stating that the seized diaries related to the transport business of an employee’s father and not to the Society. In any event, these allegations related to assessment issues and did not undermine the Society’s educational activities.
The Tribunal also analysed the legislative changes introduced by the Finance Act, 2022. It observed that the amended statutory scheme consciously distinguished cancellation of registration from denial of exemption. Violations involving benefit to specified persons under Section 13(1)(c) no longer automatically justify cancellation of registration. Instead, the Act now provides a separate consequence through Section 115BBI by taxing only the diverted income. The Tribunal held that if Parliament intended every alleged violation of Section 13(1)(c) to result in cancellation of registration, there would have been no necessity to introduce this separate taxation mechanism. Accordingly, alleged diversion of funds to related parties could not by itself constitute a “specified violation” warranting cancellation under Section 12AB(4).
The Tribunal further found serious procedural defects. The show-cause notices did not specify which clause of the Explanation to Section 12AB(4) was allegedly violated, thereby denying the assessee a proper opportunity to meet the statutory charge. Such vague notices were held to be jurisdictionally defective.
Another significant ground accepted by the Tribunal was lack of jurisdiction. It held that the power to cancel registration vested in the Commissioner of Income Tax (Exemptions), who had granted the registration, and not in the PCIT (Central). Transfer of assessment jurisdiction under Section 127 did not automatically transfer statutory powers relating to grant or cancellation of registration under Section 12AB. Relying on earlier Tribunal decisions and the CBDT notification allocating jurisdiction over exempt entities, the Tribunal held that the impugned order had been passed by an authority lacking jurisdiction.
The Tribunal also held that the concept of “specified violation” introduced by the Finance Act, 2022 could not be applied retrospectively to earlier assessment years. Accordingly, cancellation of registration for years prior to the introduction of the amended provisions was held to be without authority of law.
Accordingly, the ITAT quashed the cancellation of registration under Section 12AB, holding that the assessee had committed no specified violation within the meaning of the Act, the proceedings suffered from jurisdictional and procedural infirmities, and the Society’s genuine educational activities remained undisputed throughout.
FULL TEXT OF THE ORDER OF ITAT DELHI
