St. Michaels Educational Association St. Michaels High School, A Societyregistered Under The Societies Act, 1860 v. Commissioner Of Income Tax I,Patna

IN THE HIGH COURT OF JUDICATURE AT PATNAMiscellaneous Appeal No.438 of 2015 ====================================================== St. Michaels Educational Association St. Michaels High School, a Societyregistered under the Societies Act, 1860, having its office at Digha Ghat P.O.Digha Ghat, P.S. Digha, Dist. Patna through its Treasurer, brother Hilarygoveas ... ... Appellant/s Versus Commissioner Of Income Tax I,Patna having its office Revenue Building,Beer Chand Patel Marg, Patna. ... ... Respondent/s ======================================================Appearance :For the Appellant/s: Mr.D.V.Pathy, Advocate Ms. Manju Jha, AdvocateFor the Respondent/s: Ms. Archana Sinha, Sr. SC Mr. Alok Kumar, Jr. S.C Mr. Sanjeev Kumar, Advocate ====================================================== CORAM: HONOURABLE MR. JUSTICE JYOTI SARAN and HONOURABLE MR. JUSTICE PARTHA SARTHYORAL JUDGMENT (Per: HONOURABLE MR. JUSTICE JYOTI SARAN) Date : 13-08-2019 This Miscellaneous Appeal filed under Section 260A ofthe Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) isdirected against the order dated 22.07.2015 passed by theIncome Tax Appellate Tribunal, Patna Bench, Patna in AppealCase No. ITA No. 141/Pat/2012, whereby the appeal of theappellant has been dismissed and the order passed by theCommissioner of Income Tax I, Patna dated 28.06.2012whereby the registration of the appellant under Section 12AA of‘the Act’ has been cancelled, has been confirmed. Facts of the case leading to the impugned orders brieflystated is that the appellant is an educational institution registered under the Societies Registration Act 1860 running in the nameand style of St. Michael’s High School. The educationalactivities of the appellant are regulated under the memorandumof association as well as the rules and regulations framed thereunder and it is bearing consideration of the avowed object forwhich the institution was set up that the appellant was grantedregistration under Section 12AA of ‘the Act’ bearing registrationno. 7/84-85 on 26.04.1985 by the respondent Commissioner.The copies of the memorandum of association as well as therules and regulations framed by the institution together with theregistration so granted under Section 12AA of ‘the Act’ areenclosed at Annexures 1 and 2 respectively to the appeal. It isafter a lapse of more than 26 years that the appellant institutionwas served with a show cause notice issued from the office ofthe Commissioner of Income Tax I, Patna which is dated09.08.2011 putting the appellant on show cause as to why hisregistration under section 12AA be not cancelled. The noticedated 09.08.2011 is issued by the Commissioner of Income TaxI, Patna in purported exercise of powers vested under Section12AA (3) of ‘the Act’ and is impugned at Annexure 3. Theappellant filed an exhaustive reply to the notice, a copy of whichis at Annexure 4 and which has been met by the order impugned dated 28.06.2012 of the Commissioner of Income Tax I, Patnawhereby the registration of the appellant under Section 12AAhas been cancelled in purported exercise of powers vested in theCommissioner of Income Tax under Section 12AA(3) of ‘theAct’ and which has been confirmed by the Tribunal when theappeal of the appellant bearing ITA no. 141/Pat/2012 wasdismissed on 22.04.2015. It is feeling aggrieved by the saidorders that the appellant is before this Court. Mr. D.V. Pathy, learned counsel has appeared for theappellant while the department is represented by their Sr.Standing Counsel, Ms. Archana Sinha. dated 28.06.2012 of the Commissioner of Income Tax I, Patnawhereby the registration of the appellant under Section 12AAhas been cancelled in purported exercise of powers vested in theCommissioner of Income Tax under Section 12AA(3) of ‘theAct’ and which has been confirmed by the Tribunal when theappeal of the appellant bearing ITA no. 141/Pat/2012 wasdismissed on 22.04.2015. It is feeling aggrieved by the saidorders that the appellant is before this Court. Mr. D.V. Pathy, learned counsel has appeared for theappellant while the department is represented by their Sr.Standing Counsel, Ms. Archana Sinha. Mr. Pathy after taking this Court through the sequence ofevents which we have already taken note above has submittedthat the order of cancellation of registration granted to theappellant under Section 12AA of ‘the Act’ is per se illegal andthe order passed by the Commissioner of Income Tax asconfirmed by the Tribunal in purported exercise of powersvested under Section 12AA(3) lacks foundation as the factsaccompanying the present case do not satisfy the prerequisitesfor such exercise. According to Mr. Pathy the registration to theappellant was granted by the Commissioner of Income Tax afterrecording satisfaction as to the eligibility of the appellant for grant of such registration and there has been no change incircumstances in between the date on which such registrationwas granted i.e., 26.04.1985 and the date on which it had beencancelled i.e. 28.06.2012 inasmuch as the petitioner continues toabide by the prescription present in the memorandum ofassociation and the rules and regulations governing the schoolwhich was taken into consideration by the Commissioner ofIncome Tax at the stage of grant of such registration. He furthersubmits that the power vested in the Commissioner of IncomeTax to cancel such registration can be found in the provisions ofSection 12AA(3) but it is only where the PrincipalCommissioner or Commissioner is satisfed that the activities ofsuch trust or the institution are not genuine or are not beingcarried out in accordance with the objects of the trust orinstitution that such an order can be passed and not in any othercircumstance. In reference to the orders put to challenge it issubmitted by Mr. Pathy that no such instance has been laiddown in the orders impugned of the appellant either of theactivities of the institution being not genuine or not beingcarried out in accordance with the objects for which it had beenset up rather it is bearing note of certain decisions taken in theboard meeting and forming an opinion as to the eligibility of the appellant to the exceptions present in Section 13 (1) (b) that theregistration itself has been canceled. According, to Mr. Pathy, the foundation for the exerciseunder Section 12AA (3) of ‘the Act’ is entirely distinct with thescope and extent of exercise under Section 13(1) (b) of ‘the act’inasmuch as even if any part of the income of the institutionenjoying the registration under Section 12AA of ‘the act’ is notfound eligible from exemption, such instance ipso facto is notsufficient to warrant a cancellation of the registration itself untilthere is a satisfaction recorded by the Commissioner or thePrincipal Commissioner of Income Tax that the activities of theinstitution are not genuine or are not being carried out inaccordance with the objects for which it had been established,which is not the case in hand. Learned counsel in support has relied upon a judgment ofthe Bombay High Court in Income Tax Appeal no. 43 of 2015(Commissioner of Income Tax II vs. The Mumbai MetropolitanRegional Iron and steel Market Committee). It is after hearing Mr. Pathy on the issue raised that thisCourt by order dated 25.07.2019 has recorded the substantialquestions of law which arises in the present appeal and whichruns as follows : Learned counsel in support has relied upon a judgment ofthe Bombay High Court in Income Tax Appeal no. 43 of 2015(Commissioner of Income Tax II vs. The Mumbai MetropolitanRegional Iron and steel Market Committee). It is after hearing Mr. Pathy on the issue raised that thisCourt by order dated 25.07.2019 has recorded the substantialquestions of law which arises in the present appeal and whichruns as follows : “(A) Whether the registration granted to theappellant under Section 12AA of the IncomeTax Act, 1961 (hereinafter referred to as ‘theAct’) could be cancelled by the Commissionerin purported exercise of power vested in himunder Section 12AA(3) of the Act for allegedviolation of the provisions of Section 13(1)(b)of the act? (B) Whether the purported action satisfiesthe conditions precedent for such cancellationas present in Section 12AA(3), in absence ofsatisfaction recorded by the Commissioner onsuch violation. (C) Whether the dis-allowance of any incomefrom exemption for reasons present in Section13(1) (b) of the Act, can be a circumstance toinvite a cancellation of registration underSection 12AA(3) of the Act.” Since the respondent department was represented by their Sr. Standing Counsel that we posted the matter for final hearingand disposal on 01.08.2019 and while Mr. Pathy reiterated thesubmissions which we have already taken note above, the issuewas contested by Ms. Sinha to canvass in defence of theimpugned action by submitting that the action impugned is inaccordance with the statutory provisions and that there is noinfirmity attached to it. According to Ms. Sinha, sufficientpower is vested in the Commissioner of Income Tax to cancel a registration granted to any trust or any institution under Section12AA of ‘the Act’ in case, the activities are found not inaccordance with the objects for which it had been set up andsince the decision of the governing body of the institution whichhas been taken note of by the Commissioner in his orderreflected that the appellant institution was in fact espousing thecause of a religion in particular and not open for the benefit ofthe other communities that the Commissioner bearing note ofthe resolutions so present, has canceled the registration whichorder suffers no infirmity. Learned counsel has made reference to the provision ofSection 2(15) of ‘the Act’ to submit that it explains the term‘charitable purpose’ and it is every activity which is to thebenefit of the public in general which comes within its fold. Inreference to the show cause notice at Annexure 3 it is submittedby learned counsel for the department that since it was notedthat the appellant was espousing the cause of a religion inparticular and was using its income for benefit of a particularreligious community that in view of the provisions so presentin Section 13(1) (b) of ‘the Act’ the appellant was put on noticeand since the reply present at Annexure 4 failed to satisfy theCommissioner of Income Tax, the impugned order was passed which has been confirmed by the Tribunal. According to Ms.Sinha even if the appellant institution was set up with abenevolent object, in case it deviates from its object, there issufficient power vested in the Commissioner of Income Taxunder Section 12AA (3) to cancel such registration and it isbearing note of the deviation in the activities of the appellantinstitution to espouse the cause of a religious community inparticular which has pursueded the Commissioner of IncomeTax to pass the order impugned. Learned counsel for the Department has in support of hersubmission that where an institution or trust would fail in itsobject for which it was set up or is found to be espousing thecause of a particular religious community, the institution/trustwould lose the eligibility for exemption of its income andconsequently invite cancellation of registration to derive suchbenefit, relied on the following judgments: Learned counsel for the Department has in support of hersubmission that where an institution or trust would fail in itsobject for which it was set up or is found to be espousing thecause of a particular religious community, the institution/trustwould lose the eligibility for exemption of its income andconsequently invite cancellation of registration to derive suchbenefit, relied on the following judgments: 1. (2001) 248 ITR 587 (Ghulam Mohidin Trust vs.Commissioner of Income Tax) (J& K)Commissioner of Income Tax) (J& K) 2. (2002) 254 ITR 2012 (Commissioner of IncomeTax v. Palghat Shadi Mahal Trust) (SC)Tax v. Palghat Shadi Mahal Trust) (SC) 3. Civil Appeal No. 1381 of 2019 (Commissioner ofIncome Tax (Exemption) vs. Jagannath Gupta FamilyTrust)Income Tax (Exemption) vs. Jagannath Gupta FamilyTrust) Mr. Pathy in his short reply has submitted that in the entire order passed by the Commissioner of Income Tax asaffirmed by the Tribunal, there is no whisper regarding theaffairs of the appellant institution not being genuine or that theinstitution is failing on its object for which it was set up rather itis hiding behind the provisions of section 13 (1) (b) of ‘the Act’that the registration is being canceled which is not one of theprerequisites present in Section 12AA(3) of ‘the Act’ to invitesuch cancellation even if this objection may be a matter forconsideration at the time of assessment. We have heard learned counsel for the parties and wehave perused the record. Ms. Sinha is absolutely correct when she submits that aregistration under Section 12AA is not so sacrosanct that oncegranted it can never be interfered. In fact the parliament hasbeen conscious to vest jurisdiction in the Commissioner ofIncome Tax under Section 12AA (3) to exercise suchjurisdiction as canvassed by Ms. Sinha provided theprerequisites to such exercise is present. We would straight away advert our attention to the showcause served on the appellant which lies at the foundation of theexercise and a copy of which is at Annexure 3 to the appeal. TheCommissioner of Income Tax I, Patna after taking note of the registration granted to the appellant more than 26 years agoback has after taking notice of certain decisions taken in thegoverning body meeting which in the opinion of theCommissioner of Income Tax was taken was for the benefit of aparticular religious community, and which in turn made theappellant institution ineligible for exclusion of his total incomeunder sections 11 and 12 of ‘the Act’ in view of the provisionspresent in Section 13(1) (b) of ‘the Act’. It is drawing suchpremise that the notice was served on the appellant on theproposed action for cancellation of registration granted underSection 12AA of ‘the Act’. Although exhaustive arguments have been advanced byMr. Pathy, for the petitioner as well as Ms. Sinha, learnedcounsel appearing for the Income Tax Department but in ouropinion the entire issue revolves around the question, whether ornot, the power has been exercised by the Commissioner, IncomeTax in accordance with the provisions of Section 12AA(3) ofthe Act or he has overstepped his jurisdiction in the process andwhich illegality, if any, has been perpetuated in the confirmationorder passed by the tribunal. The show cause notice issued under Section 12AA(3) of‘the Act’ as noted above, takes notice of the resolutions passed Although exhaustive arguments have been advanced byMr. Pathy, for the petitioner as well as Ms. Sinha, learnedcounsel appearing for the Income Tax Department but in ouropinion the entire issue revolves around the question, whether ornot, the power has been exercised by the Commissioner, IncomeTax in accordance with the provisions of Section 12AA(3) ofthe Act or he has overstepped his jurisdiction in the process andwhich illegality, if any, has been perpetuated in the confirmationorder passed by the tribunal. The show cause notice issued under Section 12AA(3) of‘the Act’ as noted above, takes notice of the resolutions passed by the governing body in its meeting held from time to time andthere is nothing left for speculating that some of the resolutionsdo canvass the interest of a community in particular. It is findinginfirmity in the resolutions so passed by the general body whichaccording to the Commissioner professed the cause of aparticular religious community i.e. Christians that he put thepetitioner on notice as according to him the petitioner was noteligible for exclusion of the total income under Sections 11 and12 of ‘the Act’ in view of the provisions of Section 13(1)(b) of‘the Act’ thus sufficient to invite a cancellation of theregistration of the petitioner granted under Section 12AA of ‘theAct’. The exhaustive explanation given by the petitioner to theshow cause at Annexure 4 series is met with the order impugneddated 28.06. 2012 Annexure 5, which in fact is a reiteration ofthe observations present in the show cause notice to conclude atparagraph 4 that since the activities of the petitioner-institutionis for furthering the interest of a religious community inparticular i.e. Christians, it was not entitiled to a registrationunder Section 12AA of ‘the Act’. Surprisingly, even when theCommissioner has noted that more than 95 % of the studentsadmitted in the school are non Christians yet, according to himit does not change the situation. In fact simply because in the Board’s meeting the association reiterated its emphasis on theundisputed fact that being a catholic school run by the assesseeassociation, the members of which are Christians, it hasconcern towards the Christians of Patna, according to theCommissioner these aspects were sufficient to make the schoolineligible for the benefit under Sections 11 & 12 of ‘the Act’ inview of the provisions of Section 13(1) (b) of ‘the Act’ andresultantly has led to the cancellation of the registration whichorder has been affirmed by the Tribunal vide its order dated22.07.2015. While Section 11 deals with income from property heldfor charitable or religious purpose which would not be includedin the total income of the previous year of the person in receiptof such income, Section 12 deals with the voluntarilycontributions received by a trust created wholly for charitableor religious purpose to be dealt in a like manner. Section 12A of‘the Act’ lays down the condition for applicability of Sections 11and 12. Annexure 2 to the appeal is a confirmation of the factthat the Commissioner of Income Tax on being satisfied that thepetitioner was entitled to a registration for exemption underSections 11 and 12 of ‘the Act’ was granted registration underthe existing provisions of Section 12A(a) of ‘the Act’ on 26.04.1985 as a charitable institution thus, eligible forexemptions so provided under ‘the Act’. Section 12AA wasincorporated in the Act by the Finance (2) Act, 1996 layingdown the procedure for registration and Section 12AA (3) inter-alia laid down the procedure for cancellation of suchregistration granted to any charitable institution under Section12A of ‘the Act’ as it stood before the amendment, undercertain conditions which are eloquent from the provisions itselfand is reproduced herein below for ready reference : 26.04.1985 as a charitable institution thus, eligible forexemptions so provided under ‘the Act’. Section 12AA wasincorporated in the Act by the Finance (2) Act, 1996 layingdown the procedure for registration and Section 12AA (3) inter-alia laid down the procedure for cancellation of suchregistration granted to any charitable institution under Section12A of ‘the Act’ as it stood before the amendment, undercertain conditions which are eloquent from the provisions itselfand is reproduced herein below for ready reference : “(3) Where a trust or an institution has beengranted registration under Clause (b) of Sub-Section 1 or has obtained a registration at anytime under Section 12A as it stood before itsamendment by the Finance (No. 2) Act, (33 of1996) and subsequently the PrincipalCommissioner or Commissioner is satisfiedthat the activities of such trust or institutionare not genuine or are not being carried out inaccordance with the objects of the trust orinstitution,as the case may be, he shall pass anorder in writing canceling the registration ofsuch trust or institution; Provided that no order under this sub-section shall be passed unless such trust orinstitution has been given a reasonableopportunity of being heard.” (Emphasis is supplied) It is in purported exercise under this provision that theshow cause notice was issued to the petitioner and the order ofcancellation of registration has been passed. A plain reading of the enabling power vested in theCommissioner as present in sub-section 3 of Section 12AAwould confirm that it is only in two circumstances that suchpower can be exercised by the Principal Commissioner or theCommissioner and i.e (a) if the activities of such trust orinstitution are not found genuine ; or (b) the activities of suchtrust or institution are not being carried out in accordance withthe objects of the trust or institution. The legislative intent of theprovision of sub-section 3 of Section 12AA is loud and clearand it is if and only if, the institution in question is foundviolating either of the two conditions that the PrincipalCommissioner or the Commissioner can exercise such power tocancel the registration and in no other circumstance. In so far as the case in hand is concerned, it is bearingnote of the aims and objects as present in the memorandum ofassociation which also contains the rules and regulations toregulate the activities of the institution that the thenCommissioner, on being satisfied, had granted registration to thepetitioner institution under the then existing provisions of Section 12 A (a) of ‘the Act’ on 26.04.1985, which entitled theinstitution to the benefits of such registration including thosepresent in Section 11 and 12 of ‘the Act’. What we find from the show cause notice and the order ofcancellation impugned in this appeal is that it is the very samememorandum of association and the objects present thereinwhich has laid the foundation for the cancellation proceedingsand since in some of the subsequent governing body meetingssome resolutions were passed in benefit of the Christiancommunity, which has been found sufficient for cancellation ofthe registration itself, without even a whisper on the mandatoryrecording of satisfaction on the two essential prerequisites forsuch an order of cancellation i.e. whether or not the resolutionso passed demonstrated that the activities of the institution wasnot genuine ; or whether the institution had violated its object.The show cause notice as well as the order is absolutely silenton this score for there is no finding of any such violation by thepetitioner institution. Law in this regard is too well settled and where a statuteprovides an act to be done in a particular manner it has to bedone in that manner alone and every other mode of discharge isclearly forbidden. It is unfortunate that the statutory authorities, Law in this regard is too well settled and where a statuteprovides an act to be done in a particular manner it has to bedone in that manner alone and every other mode of discharge isclearly forbidden. It is unfortunate that the statutory authorities, performing quasi judicial functions have kept themselvesoblivious of such settled legal position. Applying the doctrine tothe case in hand, it is seen that it is on being swayed by theresolution of the governing body that the order of cancellationhas been passed by the Commissioner without recording anysatisfaction, either on the issue that, the activities of the schoolare not genuine and /or that it is not being carried out inaccordance with the objects for which the institution had beenset up. In such eloquent circumstances we are in no confusionto hold that it is only on fulfillment of such condition and onrecording of satisfaction that an order of cancellation could havebeen passed but which discharge is completely missing either inthe show cause notice or in the final order passed which has alsogot the confirmation by the tribunal. A plain reading of the order impugned would confirm thatthe Commissioner has got mixed up in between the stipulationswarranting exercise under Section 12AA(3) and Section 13(1)(b) in so far as it dis-entitles a trust or a charitable institution tothe exclusion from the total income of the previous year, anyincome, if the same is used for benefit of any particularreligious community or caste. It is correctly canvassed by Mr.Pathy that any such issue can be a subject matter of assessment proceeding but certainly cannot lay a foundation forcancellation of registration of the institution altogether unlessthe two prerequisites as present in sub-Section 3 of Section12AA are satisfied. Having considered the matter in its entirety we are in nodoubt to hold that the order dated 22.07.2015 of the Tribunal inconfirming the order dated 28.06.2012 of the Commissioner,Income Tax to cancel the registration of the petitioner grantedunder Section 12AA of ‘the Act’ is an order passed de-hors, thestatutory provisions of Section 12AA(3) and since there is nosatisfaction recorded by the Commissioner Income Tax eitherthat the activities of the petitioner was not genuine or that it wasnot being carried in accordance with the objects for which it wasset up, the conclusion drawn by the authorities in the orderimpugned in reference to the provision of Section 13(1) (b), is aconfirmation of perversity. The substantial questions of law so framed, are answerredaccordingly. In result, the order dated 22.07.2015 of the Income TaxAppellate Tribunal in ITA No. 141/Pat/ 2012 together with theorder dated 28.06.2012 of the Commissioner, Income Tax in sofar as it purports to cancel the registration of the petitioner under Section 12 AA of ‘the Act’ is quashed and set aside. The Miscellaneous Appeal is allowed but with no order as to costs. (Jyoti Saran, J) Prakash/- ( Partha Sarthy, J) AFR/NAFRAFRCAV DATENAUploading Date16.08.2019Transmission DateNA