Cancellation of Registration U/s 12AA(3) should be based on activities of Trust and not of Trustees
Case Law citation:-Friends of WWB India Vs Director of Income Tax-Exemption (ITAT Ahmedabad), ITA No. 2076/Ahd/2014, Asstt year 2009-10, Date of decision – 14-08-2015
Appeal is raised by assessee against order of the Director of Income Tax (Exemption) issued u/s 12AA(3).
Brief of the case
ITAT Ahmedabad has held In the case of Friends of WWB India Vs DIT (Exemption) that registration u/s 12AA cannot be cancelled under the provision of section 12AA(3)
unless the activities of trust are not found in accordance with the provision rather than the trustees. Further it is added that if any suspicious activities came into
the knowledge of officer, then same can be taken care at the time of assessment.
Facts of the case
a. The assessee is Trust registered u/s 12AA of the Income Tax Act. It is having main object of poor women welfare, Micro Financing Activities and other related
b.The Assesse trust sold its Micro financing Activities to Ananya Finance for Inclusive Growth Private Limited (Group finance Company).
c. During the assessment proceeding of AY -11-12, it was observed that assessee had transferred its assets amounting Rs. 45 Lacs to it Anaya and whatever amount
receivable from group finance company is transfer to its associates trust (naming Indian foundation of Inclusive Growth as corpus donation. The objects of IFIG &
Appellant are identical.
d. IFIG is a trust registered under the Documents and registration Act, 1908.
e. IFIG got the control of Anaya by procuring 99.98% share holding by utilization of such donation. In such a way, the fund involved in this transaction went back to
the group finance company.
f. Considering this transaction as symphoning of fund, Director of Income Tax (Exemption) pass an order of cancellation of registration U/s 12AA from AY 2009-10.
Contention of Revenue
a. According to Director, the transfer of fund to IFIG by via of corpus donation is not used for the purpose for which it was intended rather fund was used to purchase
shares of Anaya & which cannot be termed as charitable activity. Therefore, fund collected from public as donation and tax exemption gained by the appellant is siphon
b. It is also contended that charitable trust are not authorized to purchase the shares of company. Funds given to IFIG are misused by the purchasing the shares of
Ananya instead of ulitising it for Charitable object.
c. After considering the date of creation of Ananya (i.e. 22/04/2009) and IFIG (i.e. 13/03/2009), director takes the point of view, that creation of both entity is
just to siphon Rs. 45 Lacs and nothing else. Further, this transaction leads to robbing of trust asset by the trustee.
Contention of Assessee
a. Transaction with the Anaya is a constructive receipt. IFIG gain controlling power of Anaya just to keep control over the micro financing Activities. Even after sale
of micro financing activities to Anaya, trust is still in continuation with other charitable activities.
b. Donation of funds from one charitable trust to another having similar object cannot be termed as not fulfilling the object of donee trust and reliance is made on
following case :-
It was held in the Gujarat High Court in CIT vs. Sarladevi Sarabhai Trust (1988) 172 ITR 698, that one charitable trust can give donation to other charitable trust and
that is application of income u/s 11 of the Income Tax Act.
c. According to assessee, while applying the provision of Sec 12AA(3), activities of trust are to be considered and not of Trustees. As director is admitting that
robbing of funds is done by the trustees and not by the trust, then there is no point in cancelling registration on this basis.
As per the provision of Section 12AA(3), registration u/s 12A can be cancelled,
i. if it is observed that activities of the trust are not genuine or
ii. not carried out in accordance with the objects of the trust.
For the reference extract of Section 12AA(3) of the Income Tax Act
(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) [or has obtained registration at any time under section 12A [as
it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)]] and subsequently the [Principal Commissioner or] Commissioner 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:
Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.] Further Reliance is also made on following case law:-
i. CIT Vs. Isalamic Academy of Education – 2015 54 Taxmann.com 255 (Karnataka)
♠ Isalamic academy of Education (Trust) is an educational instituation recognized by the Medical Council of India, state of Karnataka. Its main object is to impart
♠ This trust invested huge amount in construction of building for housing the college, hostel and to provide other facilities to students.
♠ During the period of construction, the activity of imparting education remains active and new admissions are also made by the institute.
In this case it is very clear that trust is working according to its object and till the time it remains working, there is no point in cancelling registration as per
the section 12AA. Therefore, it was held that if the authorized officer is finding misappropriation of funds or opening of false accounts or any suspicious activity,
then he is free to deny the benefit of section 11 of the Act and the same cannot be treated as a ground for cancellation of registration U/s 12AA.
d. If director is considered as right in his approach, then cancellation should be effective from date of order which is 21.04.2014 instead of A Yr. 2009-10.
Held by the Tribunal
In the light of various case laws & on bare reading of the provision prescribed in Act: ITAT held that assessee trust is still carrying on its other charitable
activities and for application of section 12AA(3) activities of trust are to be considered only and not of trustee. On the issue of donation from one trust to another,
officer is free to make take decision regarding its eligibility U/s 11 of the Act, while making the assessment under the provision of the Act and same cannot be
treated as base for the cancellation of registration u/s 12A.
The order of Director of Income Tax (Exemption) is kept set aside by ITAT.