ITAT Quashes PCIT’s Registration Cancellation Order Due to AO’s Borrowed Satisfaction

The Income Tax Appellate Tribunal (ITAT) has recently restored the registration under section 12AA of the Income Tax Act, 1961, which was earlier cancelled by the Assessing Officer (AO), based on the findings and evidence found during a search operation.

The assessed trust, Rukmini Educational Charitable Trust, was established to offer educational and charitable activities. A search and seizure operation was conducted under section 132 of the Income Tax Act on 23.06.2022 on the Trust and some other linked entities, such as Divyasree Infrastructure Projects Pvt. Ltd, Shyamarju & Company (India) Pvt. Ltd, etc. During this search operation, the tax authorities found and seized many documents and recorded the statements under section 132(4) of the Act of the directors, trustees and other key employees of the finance department.

During this search, the authorities found documents suggesting that Trust funds were diverted to trustees to buy land in their personal names and that there were bogus expenditures debited by the trust for generating cash through bogus billing and invoices, including unaccounted and unexplained cash transactions.

Based on this, the Principal CIT (Central) issued a notice and cancelled the Trust’s registration under Section 12AB(4) on 30.09.2024. Therefore, the assessee filed an appeal before the Income Tax Appellant Tribunal (ITAT), Bangalore.

The assessee argued that PCIT (Central) does not have jurisdiction to cancel the registration of the assessee’s trust and that they ignored the fact that no new material was found during the search operation. The assessee contended that the registration was cancelled based on the reference made by the AO, which is illegal, and was issued without sending a prior show cause notice. The trust further submitted that the registration was cancelled without stating the specified violation as required under section 12AB(4) of the Act.

The ITAT observed that the AO did not give any evidence of his own satisfaction. Instead, he copied the findings from the DDIT, including the amounts related to the violation, without doing his own search. The Tribunal believed that it was a case of borrowed satisfaction, as AO did do his own investigation and just relied on the DDIT statement. The case of Sri Srinivasa Educational & Charitable Trust (supra) was cited, where it was ruled that relying only on search material without conducting an inquiry appears to be the case of borrowed satisfaction.

The Tribunal quashed the PCIT’s order and restored the assessee’s registration under Section 12AA of the Act. The Tribunal did not rule on the other merits of the case, as those will be dealt with in a separate assessment proceeding.