Budget Amendments – 12A to be cancelled in case of non-compliance with all laws

Finance Bill has now empowered Income Tax authorities to not grant 12A registration of a Charitable Entity or cancel the same, if already granted, in case it transpires that the entity has not complied with any specific law which is considered material for it to achieve its objective. There is certain perceptible anxiety among the non-profit organizations that the law can be misused to harass genuine charitable entities, which is understandable in the current environment where FCRA has been selectively used for this purpose only.

However let us understand actual provision and the genesis of the same.

Before this amendment, the relevant clause limited the officer concerned to call for such documents or information from a Trust as he thinks necessary in order to satisfy himself about the genuineness of activities of the Trust or Institution, for which he was also empowered to make such inquiries as he may deem necessary in this behalf.

However the amendment in S.12AA (1) now requires him in addition to above to satisfy himself about–

 (ii) the compliance of such requirements of any other law for the time being in force by the

Trust or Institution as are material for the purpose of achieving its objects,

Similarly the amendment in sub-section (4) of S.12AA requires, if the officer is satisfied that such non-compliance as referred to above has taken place and is not disputed or has reached finality, then the Pr. Commissioner / Commissioner may cancel the registration of the charitable entity.

Genesis of such amendment lies in various judicial precedents, which may have compelled Govt to make law more rigorous. A couple of recent decisions, which may have contributed to such changes in the law are shared in this post.

First one (Indian Medical Trust vs. Principal Commissioner of Income Tax (Central) Jaipur 2018) relates to denial of registration on grounds of non-availability of land required for setting up of a college faculty. The Applicant was found to be violating certain necessary provisions of Rajasthan Universities Act, under which the applicant Trust was falling and was proposing to carry on medical courses. The Applicant Trust did not have enough piece of land which was necessary to establish a medical college. CIT (Exemption) did not grant the applicant Trust 12AA registration. During the appeal, ITAT remanded back the case to CIT (Exemption) on the ground that the CIT’s powers are limited under the provision to ‘only ensure that activities of the Trust are charitable in nature and genuine’.

The Govt has now amended the Act to empower the Pr CIT / CIT to examine & enquire into such compliances, before granting 12AA exemption.

The other one relates to a judgement in case of CIT, Kolkatta vs Jagannath Gupta Family Trust (SC ) 2019. In this case, it was established that a Kolkata based charitable Trust was found to be involved in money laundering i.e. taking cheques in donation and refunding the amount in cash. The Case went thru a number of stages of judicial machinery and High Court of Kolkata finally upheld that one transaction is not enough to prove that the appellant Trust is not genuine and held that such money laundering transaction did not amount to sufficient ground of cancellation of Trust registration u/s 12A. Finally, Apex court was approached by IT department and SC made critical remarks against the High Court judgement and held that money laundering transaction is enough ground to invoke cancellation action.

Government has now amended the law to ensure that during assessment, Income Tax authorities have sufficient power to enquire into compliance with various laws. And if once so established, Principal Commissioner / Commissioner has sufficient power to cancel the registration of such entity.

Will this power to tax officials lead to unwarranted actions against non-profit entities? This is a major risk that charitable entities fear, knowing fully well that if the officials decide to use such vast discretionary powers, it could result in harassments of the entities. However while examining the amendment, one key phrase ‘material enough for achievement of its objects’ seems key to deciding if any cancellation that a tax official initiates is warranted. There is sufficient ground for courts to interpret this law as not just of compliance but more for the purpose of achievement of its objects. Thus FCRA non-compliance or delayed filing of returns may not be sufficient ground for cancellation. In the given case it was non-acquiring of stipulated land, without which medical college cannot be established, seem to be sufficient reason for cancellation of the S.12AA registration. However it is not clear, what happens, if the Trust subsequently complies with the requirement.

Giving such vast powers in the hands of officers does seem out of proportion, however let’s hope that the courts will again provide checks & balances to any unbridled and unreasonable execution of powers by the income tax officials.

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