Cancellation of registration of a Trust or Institution under section 12AA/AB of Income-tax Act 1961 – latest Supreme Court decision and legal ramifications
Registration of trust or institution
Income of a Trust created wholly for charitable or religious purposes or an institution established wholly for such purposes is exempt from income tax if granted registration under the Income-tax Act 1961 (the Act) vide Section 12A read with 12AA/AB of the Act. Similar benefits are available to such entities (eg. hospitals, educational institutions etc.) under the relevant provisions of Section 10(23C) of the Act.
In addition, such exempt entities if approved under section 80G of the Act, entitle the concerned assesse to a deduction under the said provision for donations made to them.
Statutory grounds for cancellation of registration
Section 12AA(3) and (4) of the Act, and with effect from 1 April 2021, Section 12AB(4) and (5) of the Act, provide the statutory grounds for cancelling the registration of such trust or institution (whilst similar grounds are also provided with respect to entities notified by the Central Government or is approved by the prescribed authority under Section 10(23C) of the Act and relevant provisos thereto).
These grounds for cancellation of registration under Section 12AB can be summarily and broadly classified as follows –
1. Principal Commissioner or Commissioner is satisfied that the activities of the Trust or Institution are not genuine or are not being carried out in accordance with the objects of the Trust or Institution;
2. Where it is noticed that—
(a) the activities of the Trust or Institution are being carried out in a manner that statutory exemption is not available as per the relevant provisions of the Act to the whole or any part of the income of the Trust or Institution; or
(b) the Trust or Institution has not complied with the requirement of any other law material for the purpose of achieving its objects, and the order, direction or decree, by whatever name called, holding that such non-compliance has occurred, has either not been disputed or has attained finality.
Non-genuine activities (“bogus donations”) – Supreme Court decision in Batanagar Education and Research Trust
In the case of CIT (Exemptions), Kolkata v. Batanagar Education and Research Trust [Civil Appeal No.4451 of 2021 decided by the Hon’ble Supreme Court of India on 02.08.2021], the Supreme Court has overturned the decision of the High Court and confirmed the cancellation of registration of the respondent Trust under Sections 12AA(3) and 80G of the Act, by upholding the adverse findings and decisions of the CIT (Exemptions) and Income Tax Appellate Tribunal (ITAT) i.e. activities of the Trust were not genuine and consequently its registration was correctly cancelled under section 12AA(3) of the Act by the CIT(E).
The admissions of the Managing Trustee pursuant to survey action under Section 133A of the Act had earlier formed the principal basis of such adverse findings and decisions, whereby it was admitted that the major part of the donations received in two financial years, shown as Corpus Donation, were in the nature of “accommodation entries” and a part of the donation received was returned back to the donors through intermediaries.
In Batanagar Education and Research Trust (supra), the Supreme Court has reasoned in support of the orders of the CIT(E) and ITAT in the following manner–
“11. The answers given to the questionnaire by the Managing Trustee of the Trust show the extent of misuse of the status enjoyed by the Trust by virtue of registration under Section 12AA of the Act.
These answers also show that donations were received by way of cheques out of which substantial money was ploughed back or returned to the donors in cash. The facts thus clearly show that those were bogus donations and that the registration conferred upon it under Sections 12AA and 80G of the Act was completely being misused by the Trust. An entity which is misusing the status conferred upon it by Section 12AA of the Act is not entitled to retain and enjoy said status. The authorities were therefore, right and justified in cancelling the registration under Sections 12AA and 80G of the Act.
12 The High Court completely erred in entertaining the appeal under Section 260A of the Act. It did not even attempt to deal with the answers to the questions as aforesaid and whether the conclusions drawn by the CIT and the Tribunal were in any way incorrect or invalid.”
The above cited decision of the Supreme Court may have significant ramifications for such exempt entities, even under Section 12AB(4) and (5) of the Act, since the language of the provision for such purpose is near identical to that of Section 12AA(3) and (4) of the Act. Further, the decision of the Supreme Court against the Trust has been based solely based on the adverse statements made by the Managing Trustee under Section 133A of the Act, without a discussion or finding on the legal effect and evidentiary value of such statement not made under oath, unlike a statement made under Section 132(4) of the Act during search/seizure action, and concludes as non-genuine the activities of the Trust warranting cancellation of registration merely on account of one purported donation (“bogus donation”) from a single donor in a financial year.
(Author was previously a junior to a Senior Standing Counsel (Income Tax Department) before the Hon’ble Delhi High Court and associate to a Senior Advocate specialising in income tax matters before the Hon’ble Delhi High Court).
Author: Anand Chaudhuri | Advocate @Legalrisk | JD (UNSW) LL.B (CLC, Faculty of Law, University of Delhi) | Website: https://legalrisk.in/. | Email: [email protected]
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