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Cancellation of tax exemption - Dos and Donts

Before you get into these points, we suggest reading 1st part of the series here, which gives a background of cancellation situations and possible consequences and analysis of these provisions.


Some points to keep in mind

With a view to mitigate the exposure of cancellation, a charity should keep the following points in mind vis-à-vis some of the common situations-


(a) Utilisation of income for an object which is outside the objects as contained in its constitution document


Recently, the tax department has already used this ground for cancelling tax registration of certain NGOs [see News Article].


Before undertaking any activity/project, the charity should do a detailed analysis of whether such activity/project is expressly covered within the objects as contained in its constitution document. In case of a doubt, it is strongly advisable to consult an expert and obtain an opinion.


Also, where possible, in MOUs and agreements with third parties/donors, please consider mentioning the relevant object(s) from your constitution document.


(b) Earning income from business which is not incidental to the attainment of its objects


In the case of every revenue-generating activity carried on by a charity, it should be examined whether –

(i) such an activity can be regarded as “business” [Courts, including recently the Supreme Court in Ahmedabad Urban Development Authority, (2022) 143 taxmann.com 278 (SC), have interpreted this term]; and

(ii) the activity is incidental to the attainment of objects of the institution.


Please note that unlike proviso to section 2(15), this ground for cancellation does not have a de-minimus clause and therefore, even if the business receipt is less than 20% of the total receipts, if the business is not incidental to the attainment of the object, the registration can be cancelled. For instance, suppose a school is also running a restaurant business. Such business may not be regarded as incidental and tax department can cancel registration on this ground. On the other hand, if a vocational institute is running a restaurant to train its students, then such business could be regarded as incidental business.


(c) Non-maintenance of separate books of accounts in respect of an incidental business


Please note that even if a charity is able to show that the business is incidental to the attainment of objects, its registration can still be cancelled if it does not maintain separate books of accounts in respect of each of such business activities.


It should also be considered whether it is possible to maintain separate books of accounts in respect of each separate revenue-generating activity, to avoid falling foul on this ground in case of litigation on “business” aspect in the future.


(d) Carrying on an activity which is not genuine


The term “genuine” is not defined in the IT Act.


Courts have interpreted it to mean an activity which is not a mere camouflage or bogus but is real, pure and sincere [see CIT(E) v. Nawal Kishore Kejriwal Charity Trust and Ors, 2022 (2) TMI 534 (Cal HC); CIT v. Red Rose School, (2007) 163 Taxman 19 (All)].


(e) Carrying on an activity in violation of the conditions subject to which registration under section 12AB was granted


Registration orders are now issued in Form No. 10AC. Such an order usually lists the conditions on the basis of which registration is granted. Please ensure that these conditions are satisfied by the charity while undertaking any activity.


Kindly note that the erstwhile conditions mentioned in the Form No. 10ACs have now been substituted by CBDT vide its Circular No. 11 of 2022 dated June 03, 2022.


(f) Non-compliance with the requirements of any other law


At times, a charity may involuntarily violate some other law. For example, the FCRA registration of an institution may be cancelled for violation of some condition under that law. In such cases, now, the tax department is empowered to take cognizance of such adverse action under the other law and attempt to cancel the tax registration.


However, please note that the provision requires that this ground can be invoked by the tax department only when the order for non-compliance under the other law has not been disputed or has attained finality; thus, if the violation order under the other law is disputed by the charity before any Court / authorities, then the tax department is not permitted to cancel the registration until the matter has reached finality.

(g) Application for registration was found to be not complete or contained false or incorrect information


This ground has been recently added vide Finance Act, 2023.


On account of automatic registration under the newly introduced procedure under section 12AB, often times, a charity is granted registration / provisional registration even though its application was incomplete/incorrect or contained false information.


The tax department is now empowered to cancel the registration retrospectively if it is subsequently noticed that the original application for registration was not complete or contained false or incorrect information.


Therefore, please fill your application for registration or re-registration very carefully, after being certain of all the declarations / documents furnished therein.


 

Related posts

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

2. A detailed analysis of the cancellation provision 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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