Wednesday, 3 January 2018

Registration u/s 12A essential for tax exemption

Income Tax Appellate Tribunal (ITAT) in the case of ‘Bulandshahr Development Authority Vs Addl. Commissioner of Income tax’ (Appeal No. 2686/Del/2016) has held in a recent order dated 4th December 2017 that exemption under sections 11 to 13 cannot be claimed by the Assessee in absence of Registration u/s 12AA.
In other words, unless a public charitable trust, a society registered under the Act of 1860 or a company registered u/s 8 (formerly u/s 25) of the Indian companies Act has registration with the Income tax u/s 12A, it cannot claim tax exemption and in the absence of such registration it would be assessed as an Association of Persons (AoP) at the Maximum Marginal Rate (MMR) of tax.

Section 12A of the Income tax Act 1961 deals with registration while section 12AA deals with the procedure for registration. 

Once registration is granted, it would hold good till such time that it may be either suspended or cancelled. In other words Registration u/s 12A does not require periodic renewal.

Procedure for applying for registration
The application for registration should be filed with the jurisdictional commissioner of Income tax (exemptions) as prescribed under Rule 17A of Income Tax Rules 1962, in Form 10A together with documents evidencing creation of trust or the establishment (copy of the trust deed or Memorandum of Association & Rules, registration certificate issued by charity commissioner or registrar of societies or registrar of companies).

Copy of the NGO’s PAN should also be submitted along with the audited financial statements accounts, if any.

Procedure for granting registration
Upon the receipt of application for registration u/s 12A of the Income Tax Act, the income tax commissioner has to be satisfied about the genuineness of the activities of trust and may call for various documents and information as he may consider necessary to satisfy himself about the genuineness of the activities of trust.

After satisfying himself about the objects of the trust or institution, the commissioner may pass an order granting registration u/s 12A. If he is not satisfied, he is required to issue an order in writing refusing to register the trust. Applicant would, however, be given an opportunity to be heard before passing the order of refusal.

Deemed Registration
As per Section 12AA(2), every order granting or refusing registration shall be passed before the expiry of six months from the end of the month in which the application was received.

The Supreme Court on February 16, 2016 held in the case of CIT vs. Society for the Promotion of Education, Adventure Sport & Conservation of Environment that non-disposal of an application for registration before the expiry of six months as provided u/s 12AA (2) results in deemed grant of registration.

CBDT’s Instruction regarding speedy disposal of applications
The Central Board of Direct Taxes (CBDT) too has issued Instruction (No. 16 of 2015 dated 06.11.2015) in which it has taken a stern view of the fact that the time limit of six months specified in section 12AA(2) of the Income-tax Act 1961 for passing an order granting or refusing registration u/s 12AA are not being adhered to by the Commissioners of Income Tax (Exemptions). 

The CBDT has directed the Chief Commissioners to monitor that the Commissioners adhere to the time limit and to take suitable administrative action in case of laxity.

Cancellation of Registration granted u/s 12A
Registration granted u/s 12A can be cancelled under the following circumstances:
  • The activities of such trust or institution are not genuine.
  • The activities are not being carried out in accordance with the objects of the trust or institution.
  • The trust's income does not enure for the benefit of the general public.
  • It is for the benefit of any particular religious community or caste.
  • Any income or property of the trust is applied for the benefit of specified persons like author of trust, trustees etc.
  • Its funds are invested in prohibited modes.

It is however provided that registration will not be cancelled if the trust or institution proves that there was reasonable cause for carrying out activities in said manner.

Amendment under Finance Act 2017
Clause (ab) has be inserted after clause (aa) of sub-section (1) of section 12A vide Finance Act 2017, to the effect that where a trust or an institution has been granted registration and subsequently it has adopted or undertaken modifications of the objects which do not conform to the conditions of registration, the trust or institution shall be required to obtain fresh registration by making an application within a period of thirty days from the date of such adoption or modifications of the objects in the prescribed form and manner.

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