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Powers of CIT - Cancellation of: Registration of charitable trust, Cancellation on mere search
May, 07th 2008

Kalinga Institute of Industrial Technology vs CIT
Citation 113 TTJ 906
Powers of CIT - Cancellation of: Registration of charitable trust, Cancellation on mere search

The Registration granted to a charitable trust or institution could not be cancelled for the only reason that there was a search at its premises under s.132. Such an action was premature since the assessment after search was yet to be made. This would interrupt the assessment proceedings. It would amount to hanging a person before pronouncement of judgement.

ITAT, Cuttack ITAT, Cuttack

Kalinga Institute of Industrial Technology vs CIT

ITA No. 86/Ctk/2007

N.L. Dash, J.M and C.D. Rao, A.M

5 October 2007

B. Panda, S.K. Agrawal and C.R. Das, for the Appellant
S.C. Gupta, A.K. Pradhan and S.C. Kanungo, for the Respondent

Order N.L. Dash, J.M :

This appeal is filed by the assessee against the Order of CIT, Bhubaneswar dt. 15th Dec., 2006.

2. In this case the assessee has raised the following grounds of appeal :

"1. That the learned CIT has erred both in law and on facts in cancelling the registration under s. 12AA of the IT Act, to the appellant society. The opinion of the learned CIT as given in his order is totally incorrect, unjustified and against the facts of the case.

2. That, in response to the show-cause notice point No. 2, issued by the learned CIT, the Authorised Representative of the assessee clarified the nature charitable activities carried out by the assessee and also submitted the documentary evidence in support of its claim which was riot disputed by the learned CIT. So the cancellation of registration does not arise and registration under s. 12AA to be restored.

3. That the learned CIT failed to look into the statement of oath recorded under s. 131 (of Financial Advisor) properly in which he (FA) clearly stated that some amount of donation are received from the respected persons of the society which duly reflected in the books of account. The same was also clarified by the Authorised Representative of the assessee in response to the show-cause notice issued by the learned CIT. So the apprehension of the learned CIT that the donations received were not accounted in the books of account is not correct and his findings were to be rejected.

4. That, in clarifying the point No. 4 of the show-cause notice of the learned CIT it is clearly stated in the submission submitted before him that the entries were made in pen not in pencil. So the apprehension of the learned CIT that the entries in the books of account may be changed subsequently is purely baseless and not justified.

5. That the proper books of account are maintained by the appellant assessee in the ordinary course of its activities. Most of the books of account were seized by the IT Department at the time of search operation and those books of account are till now in their custody. So the learned CIT could have verified that whether the assesses maintained the proper books of account or not. Further the learned CIT had also neither asked nor issued any notice to the assessee for the production of books of account which were not seized in the search operation. So on the mere suspicion of the learned CIT that the assessee does not maintain the proper books account is not correct ana not sustainable in law.

6. That, in response to the point No. 6 of the show-cause notice of the learned CIT it was clarified that the cash were kept in the, safe locker for the emergency needs. However, the learned CIT was clarified that the cash were kept in the safe locker for the emergency needs. However, the learned CIT was neither interested to know the nature of emergency needs of the assessee nor asked for the explanation of emergency needs of the assessee. So the assumption of the learned CIT that the explanation is only a made up story is not correct and not proper.

7. That in para 7 of the submission submitted by the learned CIT it was explained that the lockers in the bank were opened to keep the valuable documents of the society which was not rightly rejected by him is not correct and proper in the eyes of law as well as facts of the case.

8. For these among other reasons to be argued at the time of hearing, the order of the Hon'ble CIT is liable to rejected and registration under s. 12AA is to be restored, the end of justice."

3. Learned Authorised Representative of the appellant has filed a voluminous paper book containing 509 pages consisting of so many details in order to prove the genuineness of the objective carried on by the assessee. The assessee in this case is a society charitable trust under the Societies Registration Act. It has been granted registration as a trust under the provision of IT Act since long. It has also, been regularly assessed, for the last so many years. In that impugned, case registration has been cancelled by the CIT (Administration) for. the first time consequent upon the search and seizure proceedings.

4. It will not be out of place to mention here that thisi case has been heard twice-once on 27th Sept., 2007 and again on 3rd Oct., 2007 at the request of the learned .Departmental Representative. We treated the first hearing as partly heard and again have given opportunity to the learned Departmental Representative to appear and argue on 3rd Oct., 2007. Accordingly the hearing was concluded on 3rd Oct., 2007. Learned Departmental Representative besides their counter argument in this appeal have also filed one case law of the Tribunal, Amritsar Bench in the case of J and K Bank Priority Sector vs. CIT, contending that this case is squarely applicable in favour of the Revenue and accordingly this issue is to be decided in favour of the Revenue.

5. Learned Authorised Representative on the other hand while arguing on behalf of the assessee has filed a number of case laws in the form of a paper book regarding the power of cancellation of registration by the CIT.

6. We have heard both the vociferous argument arid counter argument of both the sides for a longtime for two days. We have gone through the case laws cited by both the sides. We have perused the record and the paper book filed. It is a fact that the appellant society has been registered as a charitable trust under the Societies Registration Act; since 30th June, 1992. It is also a fact that regular assessment has been made in the case of the assessee. There is no dispute or rebuttal of the same by the Revenue. For the first time a search was conducted on 9th Aug., 2005 under s. 132 of the Act and thereafter a show-cause notice was issued by the CIT for cancellation of registration as per the provision of s. 12AA(3). The allegation of the CIT in his order is with regard to diversion of funds of the institution for personal benefits of the founder members of the trust. The CIT cast doubt for maintenance of locker in Allahabad Bank, Nayapalli Branch to which the assessee's representative replied in the questionnaire. It had taken the plea of safe custody of papers and documents belonging to the institution. Learned Authorised Representative has cited the following case laws :

1. Sri Chaitanya Educational Committee vs. CIT (2007) 109 TTJ (Hyd) 359 : (2007) 106 ITD 256 (Hyd)

1. CIT has no power to cancel the registration under s. 12A earlier granted.
2. Welham Boys' School Society vs. CBDT (2006) 206 CTR (Uttaranchal) 56 : (2006) 285 ITR 74 (Uttaranchal) 2. Incorporation of s. 12AA(3) from 1st Oct., 2004 and grant of registration made under s. 12AA had not extended inherent power to revoke/withdraw.
3. Kailashanand Mission Trust vs. Asstt. CIT (2004) 83 TTJ (Del) 418 : (2004) 88 ITD 125 (Del)

The exercise of power of review can not be made when the registration had been, granted under s. 12A.

4. Sanjeevamma Hanumanthe Gowda Charitable Trust vs. Director of IT (Exemption) (2006) 203 CTR (Kar) 533 : (2006) 285 ITR 327 (Kar)

The authorities for the purpose of s. 12A have to satisfy the genuineness of the activities of the trust regarding the application of income for charitable and religious purposes and not the nature of activities.
5. St. Don Bosco Educational Society vs. CIT (2004) 84 TTJ (Luck) 805 : (2004) 90 ITD 477 (Luck) Scope of power of CIT under s. 12AA. Once the CIT not doubted about the genuineness and also not doubted the charitable activities then cancellation of continuation of registration under s. 12AA(3) is unwarranted.
6. Sonepat Hindu Educational and Charitable Society vs. CIT (2005) 196 CTR (PandH) 623 : (2005) 278 ITR 262 (PandH) Registration of institution under s. 12A is sufficient proof that it has been established for charitable and religious activities.
7. Jyoti Prabha Society vs. CIT (2003) 81 TTJ (Del) 942 : (2003) 87 ITD 126 (Del) Having utilized the whole income for educational purpose as per its objects without having any profit motive, is entitled to hold registration.
8. St. George Educational Trust vs. Director of IT (Exemption) (2006) 9 SOT 636 (Bang) The objects of the trust having accepted as charitable and genuine for grant of registration under s. 12A, shall not be refused that the trustee contributed money or TDS was not deducted.
9. Sikshya O Anusandhan vs. CIT (ITA No. 351 /Ctk/2006) Mere irregular in maintenance of accounts cannot be ground for cancellation of registration under s. 12AA particularly when the aims and objects of the society have never been alleged to have been flouted.

7. On the other hand learned Departmental Representative has cited the case law of Amritsar Bench of Tribunal (supra), wherein the Hon'ble Tribunal have gone into the issues groundwise and have partly allowed the assessee's appeal giving a detailed descriptive order of 39 pp. But the facts of the cited case and the present case are not similar or akin to each other although it is a case after insertion of s. 12AA(3). It is because the cited case of the learned Departmental Representative is not a case of search and seizure whereas the present case relates to search and seizure. Even what the learned Authorised Representative has cited are not at all applicable to the present set of facts and circumstances of the case.

8. Further in order to make the issue concise one, reframe the issue to be decided by the Bench the issue involved pertains to the fact as, to whether the CIT can utilize its power under s. 12AA(3) of the Act after a search and seizure proceeding before completion of the search and seizure assessment. When an assessment proceeding after the search and seizure operation is continuing whether the CIT can utilize his power under s. 12AA(3) for cancellation of registration. This is the crux of the issue in our considered view. Therefore, we outright reject of the case laws cited by both the parties in their favour with all respect to the orders decided by different Benches of the Tribunal. In our view those orders are in different context altogether which do not have a particular bearing in the present context of the situation. It is a case of search and seizure. The search and seizure proceeding has not yet been completed. It is still continuing on one hand. On the other hand the CIT issued shbw-cause notice under s. 12AA(3) proposing for cancellation of registration and proceeded on the same apprehending that if the registration is continued there will be mis-utilisation of funds further. Prior to insertion of s. 12AA(3) there was no power of cancellation in the hands of the CIT. Sec. 12AA(3) w.e.f. 1st Oct., 2004 has given an unbridled power of cancellation of registration in the hands of the CIT. The CIT is empowered to do so as and when he feels so or is satisfied that as per the provision of s. 12AA(3) things are not going in consonance with the said provision. For better appreciation of facts and law s. 12AA(3) is quoted below :

"Sec. 12AA(3) : Where a trust or an institution has been granted registration under cl. (b) of sub-s. (1) and subsequently the CIT is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution."

9. In the present case certain papers and documents have been impounded. Assessment proceedings after the search is in process. The CIT in his show-cause notice under s. 12AA(3) has mentioned as follows vide paras 2 and 9 as follows :

"Para 2. From the following findings of the search and seizure operation conducted in your case on 9th Aug., 2005, it appears that the activities of your institution are not genuinely charitable and are not being carried out in accordance with the objects of the institution. Specific instances of diversion of funds of the institution for the personal benefits of the founder members have been found.

Para 9. In view of the above please explain as to why the registration of the society should not be cancelled under the provisions of s. 12AA(3) of the IT Act, 1961. You are requested to appear for a hearing before the undersigned at 11 A.M. on 28th Nov., 2006 to explain your position which will be considered before passing any order."

10. In our considered opinion paras 2 and 9 are most relevant while considering the issue in hand. From the aforesaid two paras as it appears the CIT has passed the order of cancellation utilizing his administrative power without looking into the quasi-judicial aspect of the same.

11. Registration of a trust and cancellation of the same are administrative functions. Whereas assessment of the trust is a quasi judicial function. Administrative function and quasi judicial functions cannot be mixed up together. We do not have any objection to the power entrusted on the CIT for cancellation of registration, but it should be in consonance with the provisions. In the present case as it appears, as per para 2 of the show-cause notice, the CIT (Administration) has proposed the cancellation proceeding on the basis of the finding of the search and seizure operation. No doubt search and seizure operation is the basis for conclusion of the final assessment proceedings. Whether the CIT should have waited till the final assessment is completed or not that is the crux of the issue before us. As a judicial body we are to look into the interest of both the parties.

12. The apprehension of the Department regarding continuance of registration to be against the interest of the Revenue is correct in one hand. On the other hand it is also pertinent to note that cancellation of registration means a great stumbling block on the society/trust to continue its activities. Therefore, in the present case in our considered view despite the facts that the assessee has disclosed a sizeable amount for reasons best known to them, simply should not be a basis for immediate cancellation of registration without final determination/ assessment in the search and seizure proceedings. We consider the same to be premature and in clear cut judicial terms it is like hanging a person before pronouncement of a judgment. Even otherwise going through the cancellation order of the CIT it transpires that the basis of cancellation as has been adopted by the CIT is on the search and seizure assessment proceeding alone. No other finding have been depicted in his order. His apprehension and argument that continuance of registration will have a bearing on the search and seizure assessment proceedings is equally vital as on the other hand cancellation of registration will also have a bearing to the assessment proceeding.

13. In our considered opinion both the cancellation as well as continuance of registration will have an effect and a bearing on the assessment proceeding. It does not mean that the assessment proceeding being a quasi judicial proceeding should be interfered like the present one. Rather in all fairness the CIT should have taken precaution to complete the assessment expeditiously and then should have arrived at the conclusion of proposed cancellation of registration. The present act of the CIT amounts to interruption in the assessment proceeding. The power under s. 12AA{3) has been enunciated under the Act is an unbridled power in the hands of CIT to safeguard the interest of Revenue as and when he is satisfied to do so. It does not mean that this unbridled power given by the Act after much deliberation in the Parliament should be utilized without clear cut satisfaction. As per strict judicial discipline we consider that power of punishment is a unbridled power like the present power of cancellation envisaged under s. 12AA(3). But such unbridled power should be utilized quite cautiously and consciously. With the aforesaid findings we are of the considered opinion that the order of the CIT is a prematured one which has been utilized at a prematured stage in haste. Accordingly the assessee succeeds in its appeal regarding continuance of registration. Before parting with our order it will not be out of place to mention here that our order has nothing to do with the search and seizure assessment proceedings. The concluding finding in the search and seizure assessment proceeding may be utilized by the Revenue or by the assessee in their respective favour accordingly. Again we reiterate that this order is given considering the present facts and circumstances of the case in cancellation of registration only and it has got no bearing to any other activity arising out of said proceedings

14. In the result, the appeal filed by the assessee is allowed as stated above.

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