CIT (Exemptions) Vs Karnataka State Students Welfare Fund (Karnataka High Court)
Summary: The Karnataka High Court, in Commissioner of Income Tax (Exemptions) & Another v. Karnataka State Students Welfare Fund, I.T.A. No. 251/2021, decided on 30 November 2021 for Assessment Year 2010-11, dismissed the Revenue’s appeal against the Income Tax Appellate Tribunal’s order quashing reassessment proceedings initiated against the assessee institution. The central issue was whether reassessment under Section 147 of the Income-tax Act, 1961 could be initiated solely because a charitable institution had not obtained registration under Section 12AA for an earlier assessment year, notwithstanding the registration granted subsequently. The High Court held that the provisos to Section 12A(2), read with CBDT Circular No. 1/2015, protected eligible institutions from reopening merely on the ground of non-registration for earlier assessment years. The Tribunal’s decision was upheld, and the Court found no substantial question of law warranting interference.
The assessee, Karnataka State Students Welfare Fund, claimed to be a charitable trust and was granted registration under Section 12A on 23 September 2014. A survey conducted by the Income Tax Department revealed that the Fund had accumulated substantial income and had not obtained registration under Section 12AA for the relevant earlier assessment years. The Assessing Officer initiated reassessment proceedings for Assessment Year 2010-11 and passed an order under Section 143(3) read with Section 148. The Revenue maintained that the accumulated surplus was taxable because the assessee had not obtained registration during the relevant period. The first appellate authority dismissed the assessee’s challenge, but the ITAT Bangalore, by its order dated 26 November 2020 in ITA No. 1459/Bang/2018, quashed the reassessment.
The Tribunal concluded that the reopening contravened the second and third provisos to Section 12A(2). The Revenue challenged this finding before the Karnataka High Court, contending that the Tribunal had incorrectly relied upon the provisos and CBDT Circular No. 1/2015 without considering the surrounding facts. According to the Department, the circular merely prevented reopening undertaken for its own sake solely on account of absence of registration, whereas the present case involved accumulated taxable surplus. The Revenue argued that subsequent registration could not automatically confer exemption for all preceding assessment years and that the Tribunal’s order was legally unsustainable.
The assessee defended the Tribunal’s decision by relying upon the statutory protection under Section 12A(2). The first proviso extends the benefit of Sections 11 and 12 to certain earlier assessment years where registration is subsequently granted under Section 12AA, the relevant assessment proceedings are pending on the date of registration, and the trust’s objects and activities remain unchanged. The second proviso specifically prohibits reassessment under Section 147 for an earlier assessment year solely because the trust or institution lacked registration in that year. The third proviso excludes institutions whose registration applications were refused or whose registration was subsequently cancelled. The assessee argued that the applicable statutory conditions had been correctly considered by the Tribunal.
The High Court examined the language of Section 12A(2) and reproduced paragraphs 8.1 to 8.5 of CBDT Circular No. 1/2015. The circular explains that the Finance Act, 2014 amended the registration provisions to mitigate hardship faced by charitable institutions which obtained registration after the relevant assessment years but otherwise satisfied the substantive conditions for exemption. It also clarifies that an earlier assessment cannot be reopened merely because registration under Section 12AA had not been obtained for that year. The High Court observed that the assessee had received registration on 23 September 2014 and that the case did not fall within the statutory exceptions concerning refusal or cancellation of registration.
Particular importance was attached to the actual reasons recorded by the Assessing Officer for issuing notice under Section 148. The reasons stated that the Fund was established through proceedings of the Government of Karnataka, had obtained registration effective from financial year 2013-14, and possessed taxable surplus in earlier years. The Assessing Officer accordingly proposed to tax the surplus as income of an association of persons without extending the benefit of Sections 11 and 12. On examining those reasons, the High Court concluded that the only substantive ground for reopening was the absence of registration under Section 12A for the assessment year concerned. The Tribunal had also found that the assessee had not filed a return for that assessment year and that the allegation of improperly claiming exemptions was contrary to the facts on record.
The Division Bench held that the Tribunal had correctly applied the provisos to Section 12A(2) and that the Revenue’s interpretation of CBDT Circular No. 1/2015 was not justified. It found no perversity or arbitrariness in the Tribunal’s factual and legal conclusions. Consequently, no substantial question of law arose for consideration, and the Revenue’s appeal was dismissed. The decision reinforces the statutory distinction between reopening an assessment solely because registration was unavailable in an earlier year and assessing other independently established grounds of taxable income. The judgment is also referred to in subsequent TaxGuru-reported tribunal proceedings concerning earlier-year Section 11 exemptions.
FULL TEXT OF THE JUDGMENT OF KARNATAKA HIGH COURT
This appeal is filed by the Revenue under Section 260A of the Income Tax Act, 1961 (‘Act’ for short) challenging the order dated 26.11.2020 passed in ITA No.1459/Bang/2018 by the Income Tax Appellate Tribunal, “C” Bench, Bangalore (‘Tribunal’ for short) relating to the assessment year 2010-11, raising the following substantial questions of law:-
1. Whether on the facts and circumstances of the case, the Tribunal’s order can be said as perverse in law in quashing re-assessment order by merely relied upon proviso to Section 12A(2) of the Act and Circular No.1 of 2015 to quash the re-assessment order ignoring materials on record and factual matrix of the case?
2. Whether on the facts and circumstances of the case, the Tribunal is right in law in quashing re-assessment order by relying on proviso to Section 12(2) of the Act coupled with Circular No.1 of 2015 issued by CBDT which only clarifies that no case of earlier years should be re-opened merely for sake of re-opening on the ground that the assessee Trust had accumulated surplus and same becomes taxable on account of non-availability of approval under Section 12AA for earlier years whereas the said proviso and Circular cannot be considered as a bar for such cases of re-opening where the cases of earlier years have been re-opened on account of surplus even after allowing the claim of exemptions under Sections 11 and 12 of the Act and when Section 12A registration is granted in subsequent years only?
2. The assessee claims to be a Trust and re-assessment order under Section 143(3) read with Section 148 of the Act came to be passed for the assessment year under consideration whereby the Assessing Officer held that the assessee has not applied income for charitable purpose as required under Sections 11 and 12 of the Act from 2014-15 onwards i.e., after 23.09.2014. A survey conducted in the case of assessee revealed that the assessee has accumulated huge income and was claiming exemption under the Act without obtaining registration under Section 12AA of the Act. Being aggrieved, the assessee preferred an appeal before the First Appellate Authority which came to be dismissed. Against which, further appeal was preferred before the Tribunal. The Tribunal allowed the appeal and quashed the re-assessment order holding that the same is bad in law for being in violation of the second and third proviso to Section 12A(2) of the Act. Hence, this appeal by the Revenue.
3. Learned counsel for the Revenue argued that the order passed by the Tribunal is not in conformity with the provisions of Sections 11 and 12 of the Act. Reopening of assessments on noticing that no registration was obtained by the Trust under Section 12A of the Act for the assessment year in question is in accordance with law. Merely placing reliance on the proviso to Section 12A(2) and Circular No.1/2015, the Tribunal proceeded to pass the re-assessment orders ignoring the materials on record.
4. Learned Senior counsel representing the respondent – assessee justifying the impugned order submitted that the provisos to Section 12A(2) of the Act is attracted in the present case. As per the first proviso, where registration has been granted to the Trust under Section 12AA, the provisions of Sections 11 and 12 shall apply. Further, as per the second proviso, no action under Section 147 shall be taken by the Assessing Officer only for non-registration of such Trust for the said assessment year. The Tribunal having considered these provisions has rightly allowed the appeal setting aside the re-assessment order. As such, no interference is warranted by this Court. Accordingly, learned Senior counsel argued that no substantial question of law would arise for consideration in this appeal.
5. We have carefully considered the rival submissions of the learned counsel appearing for the parties and perused the material on record.
6. Section 12A(2) of the Act reads thus:-
“12A(1) xxxx
(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.”
7. It is not in dispute that the registration under Section 12A of the Act was granted to the assessee on 23.09.2014. In terms of the first proviso, where the registration has been granted to the Trust 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 the date of such registration. The objects and activities of such Trust remain the same for such preceding assessment year. As per the second proviso, it is clear that no action under Section 147 shall be initiated by the Assessing Officer in case of such Trust for any assessment year preceding such assessment year, only for non-registration of such Trust for the said assessment year. However, these two provisos would not be applicable where Trust was refused registration or the registration granted to it was cancelled at any time under Section 12AA of the Act.
8. Circular No.1/2015 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 registration after June 1, 2007, the registration shall be effective only prospectively.
8.2 Non-application of registration for the period prior to the year of registration caused genuine hardship to charitable organisations. Due to absence of registration, tax liability is fastened even though they may otherwise be eligible for exemption and fulfil other substantive conditions. However, the power of condonation of delay in seeking registration was not available.
8.3 In order to provide relief to such trusts and remove hardship in genuine cases, section 12A of the Income tax Act has been amended to provide that in a case where a trust or institution has been granted registration under section 12AA of the Income tax Act, the benefit of sections 11 and 12 of the said Act shall be available in respect of any income derived from property held under trust in any assessment proceeding for an earlier assessment year which is pending before the Assessing Officer as on the date of such registration, if the objects and activities of such trust or institution in the relevant earlier assessment year are the same as those on the basis of which such registration has been granted.
8.4 Further, it has been provided that no action for reopening of an assessment under section 147 of the Income tax Act shall be taken by the Assessing Officer in the case of such trust or institution for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not been obtained the registration under section 12AA for the said assessment year.
8.5 However, the above benefits would not be available in case of any trust or institution which at any time had applied for registration and the same was refused under section 12AA of the Income tax Act or a registration once granted was cancelled.”
9. On combined reading of the aforesaid provisions with the Circular vis-à-vis the material facts of the case, it cannot be gainsaid that the case on hand would not fall under any of the exceptions carved out in the provisos as contemplated under Section 12A(2) of the Act. Moreover, the interpretation given by the authorities to the Circular issued by the CBDT not being justifiable, the Tribunal has rightly held that the provisos to Section 12A(2) of the Act are applicable to the case on hand.
10. As could be seen from the material on record, the reasons assigned by the Assessing Officer for reopening the assessment is 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 is also verified from the AST that the said fund had not filed return of income except for the financial year 2008-09 to 2013-14.
As the registration was granted only from the assessment year 2014-15 i.e., for the financial year 2013-14, the surplus of earlier years are to be taxed as AOP without extending the benefits of sec. 11 and 12.
The present jurisdiction over the case vests within the Charge of CIT(E), Bengaluru since fund has been granted 12-A registration.
As the fund do not have registration u/s 12A, the taxable surplus for the financial years 2008-09 to 2013-14 the taxable surplus needs to be assessed to tax.”
11. The aforesaid reasons would indicate that the only reason for reopening of assessment is the absence of registration under Section 12A of the Act. Further, the assessee has not filed return of income for the assessment year in question. A finding has been recorded on the facts of the case by the Tribunal on this aspect and the allegation that the assessee was claiming deductions under Sections 11 and 12 of the Act is held to be against the facts available on record. Having regard to these factual aspects and the provisos to Section 12A(2) of the Act, we are of the considered view that the findings recorded by the Tribunal cannot be held to be perverse or arbitrary. We find no substantial questions of law arising for our consideration.
For the reasons aforesaid, the appeal stands dismissed.
