The issue under consideration is whether the CIT(E) is correct in rejecting the Application for grant of registration u/s 12AA for mere non-filing of Income Tax Return?
In the present case, the assessee-society earns income by way of a collection of subscriptions from the operation of pre-paid taxi services at Sealdah and Kolkata railway stations. The objectives of the society are to establish, operate, and manage pre-paid taxi booth and providing the facility to passengers at designated stations. The Commissioner of Income Tax (Exemptions) has denied the request for granting registration to the society by observing that they have not filed IT returns for last 2-3 years irrespective of earning income.
ITAT states that, the CIT(Exemption) herein has nowhere recorded a specific finding as to whether the assessee’s dominant activity of providing prepaid taxi booths to railway passengers prima facie involves any profit making or not. In view of the facts and circumstances involved in the instant list that such an establishment of prepaid taxi booths is collaboration with local taxi operators; and that too at the local police level, indeed brings the sense of security amongst the general public. ITAT find no reason to sustain the Revenue’s foregoing objections. ITAT holds that it is the concerned predominant activity that has to be considered as to whether it was in the nature of trade or commerce regarding general public utility limb u/s 2(15) of the Act. Commencement of charitable activities is not a mandatory condition for claiming 12AA registration. ITAT states that the CIT(Exemption) has declined the assessee’s impugned registration on the ground that it has not filed income tax return for four assessment years (Supra). ITAT thus are of the opinion that the CIT (Exemption) needs to examine the entire issue of assessee’s registration afresh as per law. Accordingly, they accept the assessee’s instant sole grievance for statistical purposes.
FULL TEXT OF THE ITAT JUDGEMENT
This assessee’s appeal arises against the order dated 02.05.2018 passed by the Commissioner of Income Tax (Exemptions), Kolkata in Appeal No.10E/567/2017-18/2018-19/368 in proceedings u/s 12AA of the Income tax Act, 1961 (in short “Act”).
Case called twice. None appears on assessee’s behest. It is accordingly proceeded ex-parte. Case file perused.
2. Ld. CIT(DR) submits during the course of hearing that CIT(Exemptions) herein has declined Section 12AA registration to the assessee as follows:
“M/s. KOLKATA POLICE PRE-PAID TAXI BOOTH SOCIETY filed an application in Form 1OA for registration u/s.12AA of the Income Tax Act, 1961 on 24-11-2017.
2. The case was fixed for hearing on 15-01-2018, which was adjourned to 28-02-2018 on request. Another request for adjournment was received on 28-02-2018 and the matter was adjourned to 06-04-2018. Shri Kaustav Chakraborty,
[Dy. Commissioner of Police (Traffic) and Treasurer] attended the hearing on 06-04-2018.
The sole income of the society is by way of collection of subscription from operation of pre-paid taxi services at Sealdah and Kolkata railway stations. The objectives of the society is to establish, operate and manage pre-paid taxi booth and providing the facility to passengers at designated stations. Despite having taxable income in FYs 2013-14, 2014-15, 2015-16 and 2016-17, the Society has neither filed Income tax Return nor has paid the due taxes.
3. There are two issues, which are to be considered before grant of registration u/s 12AA is decided which are namely:-
a. Whether the objectives and activities are charitable in nature?
b. Whether registration u/s 12AA can be granted when Income-tax has not been paid on surplus of income over expenditure?
3A. OBJECTIVES and ACTIVITY
The primary objective of the Society is to establish, operate and manage pre-paid taxi booths opened or to be opened at various places as per order issued by the Transport Department, Govt, of West Bengal vide No. 1481-WT/SM-74/99 Pt. dated 12-04-2013.
The society was formed in pursuance of the order dated 12-04-2013 of the Transport Department of Govt, of West Bengal. Para 2 of the order states as under:-
“The recent months, particularly since early 2012, it is being increasingly decided that Taxi Workers’ Unions (in whatever name called) would not be encouraged to arrange and operate pre-paid taxi booths at these important intersections. It has been increasingly felt that the Commissioners of Police/ Police Authorities would be required to take leading, proactive and managerial role in operating, overseeing, superintending and manning (in different combinations), taxi booths at these important junctions/ stations. In some cases, the Commissioners of Police have been made the superintending officials in this connection while in some other cases, the GRP/SP etc. have been made responsible.”
The objectives of the Society are as under:-
a. To establish, operate and manage pre-paid taxi booths opened or to be opened at various places as per order issued by the Transport Department, Govt, of West Bengal vide No. 1481-WT/SM-74/99 Pt. 12-04-2013.
b. To provide pre-paid taxi booth facility to tourists and other passengers availing such facility.
c. To raise funds through charging a service charge from the passengers availing such facility as per rates fixed by the Government of West Bengal.
d. To co-operate with national and international organizations having similar objectives and depute or receive representatives to and from such organization.
e. To publish or cause to be published useful literature, papers, magazines, books and periodicals, etc.
f. To arrange surveys and studies directly or through competent agencies in the field.
g. To engage necessary manpower for manning the functioning of the pre-paid taxi booths.
h. To arrange and organize activities for the awareness and welfare of the prepaid taxi owners, drivers, passengers, police personnel are regulating them and any other work to traffic movement.
i. To promote or assist the establishment or formation of similar associations elsewhere in the state of West Bengal.
j. To do all such things as may be considered necessary by the Society and may be incidental or conductive of its objectives.
Presumably the application has been filed claiming the society as charitable under the limb of advancement of general public utility. A perusal of para above clearly establishes that the society has been set up to discourage the Taxi Workers’ Unions to arrange and operate pre-paid taxi booths at designated stations. The policy of encouraging or discouraging the taxi unions for operating the prepaid taxi booth is beyond the scope of review under the Income-tax Act.
The Constitution of India provides that India is “……..socialistic….democratic……..” The unions are important pillars of a democratic society. Socialism is characterized by social ownership and democratic control of the means of production. The Trade Unions have been traditionally encouraged to promote socialism through the democratic control of the means of production. Any endeavour to discourage these unions apparently in contradiction to the democratic and socialistic principles enshrined in the Constitution, cannot be for the advancement of general public utility. The finding of advancement of General Public Utility is always a question of fact. In my view any initiative which discourages the founding principles of India, as a country, can never be considered as advancement of General Public Utility. Operation of pre-paid taxi booth though for the benefit of passengers cannot be regarded as advancement of General Public Utility if it is done at the cost of Taxi Workers’ Unions.
Further, the activity of the society is nothing but a mercantile activity based on a contract entered into in pursuance of the order issued by the Transport Department, Govt, of West Bengal. It is nothing but a monopolistic trade practice. It is monopolistic as no one but the state has the right to regulate traffic and provide police activities. This fee is collected for a service which the State is bound to deliver even otherwise. This leads to an inevitable conclusion, that the state is allowing the society to collect service charges systematically for providing police at the booths in a commercial manner. This systematic collection of service charges by the society, based on contracts, is nothing but trading of services. Needless to add, that the state is well within its rights to indulge in legitimate trade activities but here the issue is the activity of the society and not the state government.
I am, therefore of the view that the collection of service charges by the society, in pursuance of the order of Transport Department, is in the nature of trade. As per section 2(15) an activity in the nature of trade can be undertaken by a society, if such activity is undertaken in course of actual carrying out of such advancement of General Public Utility provided the aggregate receipts from such activity does not exceed 20% of the total receipts of the Institution.
In the present case, the entire receipt is from service charges which has been held to be in the nature of a trade for reasons mentioned above. Therefore, even if for the sake of argument, it is conceded that the object of the fund is in the nature of advancement of General Public Utility, it ceases to be a charitable activity because of the proviso to Sec. 2(15).
This may be possibly argued that, the receipts from service charges are being utilised for advancement of General Public Utility and there is no profit motive. However, this argument will not hold good in view of the proviso to Section 2(15) which holds that irrespective of the nature of use or application or retention of the income from such business activities it shall not amount to charitable purposes if the receipts exceed more than 20% of the total receipts. Therefore, in view of the proviso to section 2(15) also it is held that the activities of the society are not for charitable purpose.
4B. NON-PAYMENT OF INCOME TAX
As per audited Financial statements, the Society has Surplus of income over expenditure as mentioned in the table below:-
Despite having Surplus of income over expenditure, the Society has not filed Income Tax Returns for the respective Assessment Years. As per Section 139(1)(b) of the Income-tax Act, 1961; it was obligatory on the part of the Society to file Income Tax Returns, as the income exceeded the maximum amount which was not chargeable to income tax.
During the course of hearing, it was observed that the applicant was legally obliged to pay tax on the surplus amount as per provisions of the Income-tax Act, 1961 and the same was brought to the notice of Shri Kaustav Chakraborty, [Dy. Commissioner of Police (Traffic) and Treasurer] vide noting dated 06-04-2018. Opportunity was provided to pay taxes voluntarily but the applicant society failed to do so.
Hence it is to be decided whether the applicant society is still eligible for grant of registration u/s 12AA even if it does not pay tax on surplus of income, merely because it has applied for registration u/s 12AA.
The procedure for registration envisaged in Section 12AA prescribes (1) satisfaction of the Commissioner about the objects of the trust or institution and (2) Genuineness of the activities.
Similarly the procedure for cancellation of registration u/s 12AA(3) also empowers the Commissioner to cancel the registration under two circumstances-
(1) When the activities are not being carried out in accordance with the objectives of the Trust or institution: and
(2) When the activities of the Trust are not ‘Genuine’. Therefore, the procedure for grant of registration and cancellation thereof mandates that not only the object of the trust should be charitable, its activities should also be genuine
This clearly means that an applicant whose objects are charitable in nature ipso facto will not be eligible for registration u/s 12AA unless its activities are also genuine.
The word ‘Genuineness’ has not been defined in the Income-tax Act and, therefore, as per rule of interpretation of statutes, literal meaning of the word ‘genuineness’ has to be taken. According to Oxford Dictionary, the meaning of ‘Genuineness’ is-
“the quality of being sincere and honest and able to be trusted”
In my view, non-payment of taxes cannot qualify as genuine because it is not honest.
Now, let us proceed to examine the consequences of grant of registration is this scenario. Section 12A which precedes Section 12AA defines the conditions for applicability of Section 11 and 12. The grant of registration u/s I2AA brings the assessee in the ambit of Sections 11 and 12. The first proviso to Sub-section 2 of Section 12A reads as under:-
“Provided that where registration has been granted to the trust or institution under section 12AA, then the provisions of section 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 and the objects and activities of such trust or institution remain the same for such preceding assessment year”
The first proviso states that the provision of section 11 and 12 shall apply to any assessment which is pending on the date of grant of registration. It does not state that the provision of section 11 and 12 will be applicable to all income right from the inception of the trust whose objects are charitable in nature. The benefit of grant of registration u/s 12AA is, therefore, applicable only in case of pending assessments.
The 2nd proviso further states 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’
Thus, if registration u/s 12AA is granted in this scenario, the AO will be precluded from taking any action u/s 147. Therefore, in such case registration has to be denied to bring the admitted income within the purview of taxation. In my view, any interpretation of the Act which takes away the right to collect legitimate taxes has to be inconsistent with the Act itself.
Since, grant of registration u/s 12AA takes away the right of the AO to bring to tax any income by issuing notice u/s 147, the only logical recourse for the CIT is to refuse registration u/s 12AA so that admitted tax liability is recovered as per the provisions of law.
If the provisos are interpreted to mean that after the grant of registration, the income of the trust or institution becomes exempt or eligible for the benefit of section 11 and 12 since its inception and not only in cases of pending assessment proceedings, the then the registration u/s 12AA becomes redundant. No additional benefit will be available to the applicant in case the registration is granted now, even though, no admitted taxes are paid. The conclusion is based on the premise that if the stand of the applicant is correct then irrespective of whether it pays taxes or not and also irrespective of whether it is registered u/s 12AA or not, no tax is payable by it. No entity except those mentioned in Section 10 or otherwise specifically exempted is eligible for de facto exemption.
A hypothetical situation will make the understanding of the issue better. Suppose there are two Charitable trusts-A and B. They have same credentials like date of creation, objectives, turn over etc. Let us further assume that both the trusts have surplus at the end of the FYs regularly. Trust A pays tax regularly on its Surplus of income. Trust B does not pay tax on its Surplus of income.
Now suppose in FY 2017-18, both the Trusts get registration u/s 12AA.
Then trust B does not need to pay tax for the earlier years’ surplus amount any more. But the Trust A will not receive refund, paid as taxes in earlier years.
Here even though both the trusts worked in the same field and did same kind of charitable activity, Trust A will be at disadvantageous position even though it abided by the provisions of the Income-tax Act and is genuine. Any interpretation which denies premium on compliance of law has to be shunned.
Therefore it is seen from the above that if the proviso to Section 12A is interpreted in a way to mean that the income of the Trust or institution becomes exempt or eligible for the benefit of section 11 and 12 since its inception and in all cases, not only in the pending assessment proceedings, then the violators of the Act will get more benefit than the one who complied with it. This can never be the intention of any statute.
Grant of registration will be an exercise in futility if neither the CIT nor the AO will have jurisdiction in such type of cases. The Act, specifically excludes the jurisdiction of the AO to issue notice u/s 147. Therefore the C1T has to consider non-payment of taxes on admitted surplus as non-genuine and consequently deny registration as per the statute. The stand of the applicant that department cannot take any action in such cases of blatant violation cannot be accepted. This act has to be considered as not genuine. Failure to do so shall be a certificate to the applicant for non-payment of taxes on admitted surplus. As stated above, the law only provides that the benefits of Section 11 and 12 shall be available to the applicant is cases of pending assessments. Registration u/s 12AA in such cases will be a carte blanche for the applicant to flout the law with impunity.
Thus non-payment of tax is not a genuine activity, since it is clear infarction of law.
5. On perusal of the submitted documents and the discussions mentioned above, I am of the opinion that, the applicant society is not eligible for registration u/s 12AA. In view of the above, registration u/s 12AA is rejected.”
3. After giving a thoughtful consideration to the CIT(Exemption)’s detailed discussion extracted herein paragraph, we find no merit to express our agreement with the same in entirety. Ld. CIT(DR) fails to dispute that the CIT(Exemption) herein has nowhere recorded a specific finding as to whether the assessee’s dominant activity of providing prepaid taxi booths to railway passengers prima facie involves any profit making or not. We observe in view of the facts and circumstances involved in the instant list that such an establishment of prepaid taxi booths is collaboration with local taxi operators; and that too at the local police level, indeed brings the sense of security amongst the general public. Mr. Meena has sought to highlight the ld. CIT (Exemption)’s findings that the setting up of prepaid taxi booths in the name of assessee society amounts to violation of the scheme of the constitution (supra). And also the assessee’s aggregate receipts indicate its profit motive whilst earning surplus of income over expenditure right from assessment year 2013-14 to 2016-17. We find no reason to sustain the Revenue’s foregoing objections. We make it clear that Hon’ble Gujarat high court’s decision in DIT(E) vs. Sabarmati Ashram Gaushala Trust Tax Appeal No. 1162 of 2013 dated 15.01.2014 holds that it is the concerned predominant activity that has to be considered as to whether it was in the nature of trade or commerce regarding general public utility limb u/s 2(15) of the Act. Hon’ble apex court’s latest decision in M/s. Ananda Social and Educational Trust vs. CIT Civil Appeal No. 5437 and 5438 of 2012 dated 19.12.2020 holds that commencement of charitable activities is not a mandatory condition for claiming 12AA registration. We have quoted the lordship’s decision keeping in mind the fact that the CIT(Exemption) has declined the assessee’s impugned registration on the ground that it has not filed income tax return for four assessment years (Supra). We thus are of the opinion that the CIT(Exemption) needs to examine the entire issue of assessee’s registration afresh as per law. We accept the assessee’s instant sole grievance for statistical purposes and restore the instant lis back to the CIT(Exemption) for his fresh adjudication within three effective opportunities of hearing.
4. Before parting, it is noted that the order is being pronounced after ninety (90) days of hearing. However, taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, we rely upon the decision of the Co-ordinate Bench of the Mumbai Tribunal in the case of DCIT vs. JSW Limited in ITA No. 6264/Mum/2018 & 6103/Mum/2018, Assessment Year 2013-14, order dated 14th May, 2020.
5. This assessee’s appeal is allowed for statistical purposes in above terms.