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Cancellation of tax exemption - Analysis

Before you get into the analysis, we suggest reading 1st part of the "Cancellation of tax registration" series here, which gives a background of cancellation situations under section 12AB and possible consequences.


Analysis of cancellation provisions

(a) Exhaustive list of situations


The language used in section 12AB (4) shows that the situations mentioned are therein exhaustive. Therefore, the tax department cannot cancel the registration on any other grounds not covered by the prescribed list of “specified violations”.


For instance,

(i) merely because a business of a charity is covered by the proviso to section 2(15) (say, for exceeding 20% business receipt threshold) and therefore, it loses exemption under section 11, the tax department cannot cancel its tax registration on the ground of such violation of the proviso to section 2(15).

(ii) while benefit to an interested party under section 13(3) could lead to loss of exemption to the extent of such benefit, violation of section 13 cannot be a ground for invoking cancellation of registration.


(b) Limitation for taking cognizance of violation


The section does not specify the time limit within which the tax department can invoke the power of cancellation. For instance, a charity spends outside its objects in FY 2022-23. In such a case, can the tax department notice this violation in FY 2030-31 and cancel the registration with retrospective effect from FY 2022-23?


It could be argued that every authority is required to exercise the power within a reasonable period. What would constitute a reasonable period would depend upon the facts of each case [GOI v. Citedal Fine Pharmaceuticals, 1989(3) SCC 483].


(c) Whether “reasonable cause” for violation is an exception?


Unlike the power of cancellation under old section 12AA(4), “reasonable cause” for violation is not expressly spelt out as a ground to not cancel the registration. Therefore, a question may arise whether the tax department should refrain from cancelling the registration if the charity is able to demonstrate that there was a reasonable cause (such as wrong advice, etc.) for the violation.


For instance, if the charity spends its income on an activity which it feels is within its objects, based on an expert’s opinion. Can the assessee argue that the expert’s opinion was “reasonable cause” for it to spend on a particular activity and the tax department cannot cancel the registration if subsequently it is held that the activity was outside the objects?


(d) Will the cancellation be with retrospective effect?


After examining the documents or information and making enquiries, the PCIT/CIT may pass an order cancelling the registration for the previous year in which a specified violation has taken place “and all subsequent previous years” [section 12AB(4)(ii)]. This suggests that the cancellation can be made with retrospective effect for the year of violation as well as all the subsequent years, even if no specified violation has occurred in those years, leading to reassessment of those years as well.


To illustrate, a charity having only educational objects has applied some of its income for “medical relief” in FY 2023-24. Subsequently, it realises that such application is outside the objects, and it does not apply any part of its income to the object of medical relief from FY 2024-25 onwards. In FY 2026-27, the PCIT/CIT notices that the violation had occurred in FY 2023-24. In such circumstances, the PCIT/CIT may cancel the registration with effect from 1st April 2023. Consequently, the charity will lose its registration and exemption for the years FY 2024-25 to 2025-26 also, although no specified violation has occurred in those years.


(e) Time limit of 6 months to pass the cancellation order


The section requires that the cancellation order has to be passed before the expiry of a period of six months calculated from the end of the quarter in which the first notice is issued by the tax department [section 12AB(5)].


(f) Appeal to ITAT against the cancellation order


A charity aggrieved by the order passed by PCIT/CIT, may appeal to the Appellate Tribunal against such order within sixty [60] days from the date of such order [see section 253(1)(c)].


 

Related posts

1. Some points to keep in mind for each of situations is given here.

2. Background of cancellation of tax registration is given here.


Disclaimer

This article is intended for general information only and does not constitute legal or other advice, and you acknowledge that there is no relationship (implied, legal or fiduciary) between you and the author and Aria CFO Services LLP. Aria CFO Services LLP and the author does not claim that the article's content or information is accurate, correct or complete, and disclaims all liability for any loss or damage caused through error or omission.

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