In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Pune has overturned the order of the Principal Commissioner of Income Tax (PCIT), which had canceled the registration of M.M. Patel Public Charitable Trust under Sections 12A and 12AB of the Income Tax Act, 1961. The decision provides a major relief to charitable institutions by reaffirming that tax exemptions cannot be withdrawn without strong and conclusive evidence of misconduct.

Background of the Case:
M.M. Patel Public Charitable Trust, which operates a medical college and hospital, was subjected to a search and seizure operation conducted by the Income Tax Department under Section 132 on August 25, 2022. During the search, authorities found incriminating documents and recorded statements of employees alleging that:

The trust was receiving capitation fees in cash from students.
It was involved in cashback transactions, where a portion of salaries paid to doctors and staff was allegedly refunded to the trust.
The trustees were misusing funds for personal gains rather than applying them solely for charitable purposes.
Based on these findings, the PCIT (Central), Pune issued a show cause notice and subsequently canceled the trust’s tax exemption status by withdrawing its registration under Section 12A (for the period FY 2019-20 to FY 2020-21) and under Section 12AB (from FY 2021-22 onwards).

Key Arguments Raised by the Trust:
The trust challenged the cancellation order before ITAT Pune, presenting the following key arguments:

Jurisdictional Overreach: The trust argued that PCIT (Central) lacked the jurisdiction to cancel its 12A registration, as such powers rested solely with CIT (Exemptions).

Lack of Conclusive Evidence: The cancellation was based on documents (such as Excel sheets and diary entries) found at the residences of third parties, with no direct evidence linking the trust to financial misconduct.

Retraction of Statements: Several employees retracted their statements, stating that they had been made under coercion. The tribunal had to consider whether retracted statements could form the basis for cancellation.

Genuineness of Activities: The trust provided extensive documentation proving that it continued to operate as a bona fide charitable institution, running a medical college and hospital as per its stated objectives.

Premature Action: The income tax assessments for the disputed period were still pending, and cancellation of registration before completing the assessment was an arbitrary move.
No Retrospective Cancellation: The trust emphasized that Section 12AB(4) did not allow for retrospective cancellation, and applying it to past years was legally untenable.
ITAT Pune’s Key Observations & Ruling:
After carefully examining the case, ITAT Pune ruled in favor of the trust, making the following key observations:

Cancellation Cannot Be Based on Mere Suspicion

The tribunal found that the evidence relied upon by PCIT was not conclusive.
The Excel sheets and diary pages used as primary evidence were recovered from third-party locations, and there was no direct documentary evidence proving that the trust had engaged in financial malpractice.
Retraction of Statements Undermines the Allegations

ITAT noted that many employees had retracted their search statements, undermining the reliability of the allegations.
The department failed to corroborate the allegations with independent evidence beyond the initial statements.
The Trust’s Charitable Activities Were Not in Doubt

The tribunal observed that the trust was actively running a medical college and hospital, thereby fulfilling its charitable objectives.
Even if certain financial discrepancies were found, they should have been addressed through assessment proceedings, rather than by outright cancellation of registration.
Retrospective Cancellation Not Permitted

ITAT rejected the retrospective cancellation of registration under Section 12AA and 12AB, emphasizing that such cancellation could only apply prospectively and not for past financial years.
Tax Exemption Restored

Based on these findings, ITAT Pune reinstated the trust’s registration under Sections 12A and 12AB, ensuring the trust’s eligibility for tax exemption.
Implications of the ITAT Ruling:
This ruling sets a crucial precedent for charitable institutions, reinforcing that:

✔ Tax exemption cannot be revoked solely based on suspicion or unverified allegations.
✔ Retrospective cancellation of 12A/12AB registration is not permitted under the law.
✔ The burden of proof lies with the Income Tax Department to establish financial misconduct conclusively.
✔ Assessment proceedings should be completed before taking extreme actions like cancellation of registration.

This judgment serves as a landmark decision for trusts and charitable institutions, highlighting the importance of due process and protection against arbitrary cancellation of tax exemptions.

The case was represented by CA Kishor Phadke (Assisted by CA Saurabh Jadhav