No Retrospective Effect: Amendments to Society Bye-laws Only Apply Prospectively for Tax Registration

Get the full picture - access the original judgement of the court order here

Case Name

Commissioner of Income Tax, Salem vs. Young Women’s Christian Association (High Court of Madras)

T.C.A.No.784 of 2010

Date: 18th February 2021

Key Takeaways

• Amendments to bye-laws or trust deeds only operate prospectively—they cannot be applied to the past for the purpose of tax registration under Section 12AA.
• The Supreme Court’s principle in Commissioner of Income-Tax Vs Kamla Town Trust (1996) 84 Taxman 248 (SC) applies to societies as well as trusts.
• The Tribunal’s order granting retrospective registration was set aside; registration can only be from the date of amendment, not before.
• The Revenue (Income Tax Department) won the appeal; the law is now clear that retrospective effect is not allowed in such cases.

Issue

Can amendments or rectifications to the bye-laws of a society be given retrospective effect for the purpose of granting registration under Section 12AA of the Income Tax Act?

Facts

• The Young Women’s Christian Association (the “Society”) applied for registration under Section 12AA of the Income Tax Act in January 2007, but the application was delayed by over five years and lacked key documents, including the instrument of formation and bye-laws.
• The Income Tax Department (the “Revenue”) requested these documents, but the Society did not respond or provide the required information.
• The application was rejected in July 2007 because the bye-laws did not contain mandatory clauses required for registration.
• On appeal, the Tribunal sent the case back to the Commissioner of Income Tax (CIT) for reconsideration.
• The Society then submitted amended bye-laws (effective from June 14, 2009) and sought registration with retrospective effect from its original creation date.
• The Tribunal allowed this, granting registration retrospectively.
• The Revenue appealed, arguing that amendments should only apply prospectively, not retrospectively.

Arguments

Revenue (Income Tax Department)

• Cited the Supreme Court’s decision in Commissioner of Income-Tax Vs Kamla Town Trust (1996) 84 Taxman 248 (SC), which held that amendments to trust deeds/bye-laws only have prospective effect.
• Argued that the Tribunal erred in granting retrospective registration and that the law does not allow for such retrospective application.
• Stated that registration under Section 12AA should only be from the date of amendment, not before.

Society (Young Women’s Christian Association)

• Claimed that the amendments did not alter the core objects of the Society, so retrospective registration should be allowed.
• Relied on an unreported judgment in Commissioner of Income Tax, Salem Vs M/s Vasavi Manikandan Hospital Trust (TCA No. 957 of 2010), where the Tribunal was directed to consider new documents on merits.
• Argued that the Tribunal’s order was proper and should be upheld.

Key Legal Precedents

• Commissioner of Income-Tax Vs Kamla Town Trust (1996) 84 Taxman 248 (SC)
• Held that rectification/amendment of a trust deed or bye-laws is only effective prospectively, not retrospectively.
• The Supreme Court clarified that such changes do not affect past assessment years; they only apply from the date of amendment onwards.
• Commissioner of Income Tax, Salem Vs M/s Vasavi Manikandan Hospital Trust, TCA No. 957 of 2010
• Cited by the Society, but the High Court distinguished this case, noting that the main principle from Kamla Town Trust still applies.

Judgement

• The High Court held that the Tribunal was wrong to grant retrospective registration.
• The principle from Kamla Town Trust applies to societies as well as trusts: amendments to bye-laws only operate prospectively.
• The Tribunal’s order was set aside, and the appeal was allowed in favor of the Revenue.
• The law is now clear: rectification/amendment of bye-laws for registration under Section 12AA only takes effect from the date of amendment, not before.

FAQs

Q1: Can a society get retrospective registration under Section 12AA after amending its bye-laws?

A: No, the court held that amendments to bye-laws only apply from the date they are made. Registration cannot be granted retrospectively based on such amendments.

Q2: Does the Supreme Court’s decision in Kamla Town Trust apply to societies as well as trusts?

A: Yes, the High Court clarified that the principle applies to both societies and trusts.

Q3: What happens if a society’s bye-laws are amended after applying for registration?

A: The registration, if granted, will only be effective from the date of the amendment, not from any earlier date.

Q4: What should societies do to ensure smooth registration under Section 12AA?

A: Societies should ensure their bye-laws contain all mandatory clauses before applying for registration, as amendments will not be considered retrospectively.

Q5: What is the significance of this judgment?

A: It clarifies that the law does not allow for retrospective effect of amendments to bye-laws for tax registration purposes, ensuring consistency and legal certainty.

Challenging the order passed by the Income Tax Appellate Tribunal, Madras "B" Bench in I.T.A.No.1879/Mds/2009, the Revenue has filed the above appeal.

2.The assessee - Society filed an application under Section 10 on 19.01.2007 for registration under Section 12AA of the Income Tax Act with a delay of 5 years and 10 months without any supporting evidence and instrument of formation of the Society and bye-laws. There was no response to the letters issued to the Society for production of the instrument of creation for the Society. The Society also did not file the instrument of creation of Society reflecting the bye-laws. A letter dated 05.04.2007 was sent to the assessee seeking the above details and the activities of Trust, donations, donors, etc. Since there was no response inspite of opportunity, the order dated 24.07.2007 was passed rejecting the application for registration based on the materials available on record as the Deed/Bye-laws did not have the necessary Clauses as enumerated in Page – 1 of the CIT order, which are mandatory for granting registration under Section 12AA. The said Clauses need to be in writing and cannot be left open to assumptions for the purpose of compliance under the Act governing the Trusts. On appeal by the assessee, the Tribunal by order dated 12.09.2012, remitted the case back to the CIT for re-consideration of the application of registration. On remittance, the CIT gave another opportunity to the assessee and the assessee filed an

instrument of amendment containing amended bye-laws with effect from

14.06.2009. On the assessee's appeal, the assessee sought for registration

with retrospective effect being the original date of creation of the assessee - Society by condoning the delay and the Tribunal had granted the same. Aggrieved over the same, the Revenue has filed the above appeal.

3.At the time of admission, the following substantial questions of law arose for consideration:

“1.Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in directing the Commissioner of Income Tax to condone the delay in filing of the application and to grant registration to

the assessee Society with retrospective effect from the date from which it was sought?

2.Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that rectification / amendments made to the bye-laws for the Society would operate retrospectively while granting

registration under Section 12AA of the Income Tax Act?

3.Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the mode of application of income, and funds and the mode of investment for the Society could be locked into only for assessment purposes and not at the time of considering

the application for registration, overlooking the clear mandate provided in Section 12AA of the Income Tax Act?”

4.Mr.J.Narayanasamy, learned Senior Standing Counsel appearing for the appellant – Revenue submitted that the Hon'ble Supreme Court in the judgment reported in (1996) 84 Taxman 248 (SC) [Commissioner of Income-Tax Vs. Kamla Town Trust] held that the amendments to the Bye-laws/Deed will have only prospective effect and cannot have retrospective application for the purpose of any proceedings, including granting registration. Further, the learned Senior Standing Counsel submitted that the Tribunal grossly erred in holding that the said decision does not apply to the Society and the same is not right in law. The learned Standing Counsel further submitted that granting registration under Section 12AA with effect from 12.09.2012 can only be prospective and shall not operate retrospectively as sought for by the assessee.

5.Mr.G.Baskar, learned counsel appearing for the respondent –

assessee submitted that the amendment made by the Society shall not

alternate the objects of the Society, therefore, the order passed by the

Tribunal is proper. In support of his contention, the learned counsel relied

upon an un-reported judgment dated 24.02.2020 made in T.C.A.No.957

of 2010 [Commissioner of Income Tax, Salem Vs. M/s.Vasavi

Manikandan Hospital Trust, No.48, Iyappa Hospital, Andal Street,

Shevapet, Salem 636 002] wherein the Division Bench of this Court

held as follows:

“...

6.We have heard the learned counsels and we are of

the opinion that the learned Tribunal, in these circumstances,

ought to have remanded the case back to the learned

Commissioner of Income Tax, so that the requisite

informations/documents furnished by the Assessee Trust

could be examined and verified by the learned Commissioner

of Income Tax, who was to consider the said application on

merits. However, the fact remains that the Trust stands

registered for the last ten years in pursuance of the impugned

order of the learned Income Tax Appellate Tribunal. It was

also open for the Revenue Authorities to take steps for

cancellation of the registration, if there was any material

against the Assessee Trust or they have violated the

conditions of registration or the provisions of the Act in any

manner. That course is even now open to the Revenue

Authorities. We do not find any useful purpose to be served

by now remanding the case back to the learned

Commissioner of Income Tax to consider the said application

under Section 12A of the Act afresh at this stage, as the said

registration already stands granted about ten years back and

therefore, we dispose of the present appeal filed by the

Revenue only by making an observation that if any breach or

violation on the part of the Respondent/Assessee Trust is

found, they will be free to proceed against the Assessee/Trust

in accordance with law.”

6.On a careful consideration of the materials available on record

and the submissions made by the learned counsel on either side, it could

be seen that the Tribunal, while allowing the appeal filed by the assessee,

held that the ratio laid down by the Hon'ble Supreme Court of India in the

judgment reported in (1996) 84 Taxman 248 (SC) [Commissioner of

Income-Tax Vs. Kamla Town Trust] is not applicable to the case on

hand for the reason that the said case pertains to a Trust and the present

case pertains to a Society. The Hon'ble Supreme Court in the judgment

reported in(1996) 84 Taxman 248 (SC) [Commissioner of Income-Tax

Vs. Kamla Town Trust] held as follows:

“...

The order of rectification of an instrument of trust by

a civil court would not be a judgment in rem. it would be a

judgment in personam binding on the parties to the rectified

instrument, namely, the settlor on the one hand and the

trustees on the other, as well as on the ultimate beneficiaries.

But a trust deed rectified pursuant to the order of the court

would make the rectification order relevant under the

provisions of section 11 of the Indian Evidence Act, as the

fact in issue in an enquiry before the Income-tax Officer

would be whether on the basis of the rectified trust

instrument the assessee-trust is entitled to get its income

exempted from tax under the relevant provisions of the

Income-tax Act. In such proceedings, therefore, the order

granting rectification of such instrument of trust would

remain relevant. The Income-tax Officer will have to take the

instrument as it exists in its amended form when it is pressed

in service for framing the assessment concerning the relevant

assessment year in which such rectified instrument holds the

field.

The assessee was a trust created by a trust deed dated

October 27, 1941, executed by a company which had its

registered office at Kanpur. The objects of the trust deed

were to construct a settlement or colony for their workmen

together with amenities in the shape of hospitals, schools,

temples, mosques, recreation places and for such other works

directly concerning the amenities of workmen. On

application by the company to the Town Improvement Trust

two plots had been demised to the company at concessional

rates for the welfare of its workmen by two deeds of

indenture in 1936 and 1938. The company transferred both

the plots by the trust deed of October 27, 1941, to the

trustees for effectuating its object of settling these plots upon

the charitable trust thereinafter mentioned in the deed. In

1945, the company filed a suit for rectification of the trust

deed, and the deed was rectified. Clause 2(b)(i) of the deed

as rectified laid down that the object of the trust was to

construct “residential quarters, chawls or buildings for the

workmen in general and in particular for the workmen, staff

and other employees of the company or other allied concerns

under the management of or in which the directors of the

company may for the time being be interested”. The High

Court while interpreting the deed in another case [(1971) 81

ITR 557] held that the objects of the trust deed as rectified in

1945 did not create a public charitable trust. There was a

further rectification of the trust deed in 1955, Clause (b)(i) of

the deed rectified in 1955 provided for construction of

residential quarters, chawls or buildings for the workmen in

the town of Kanpur and the surrounding areas and

extensions, and for their respective families and dependents.

Clause 2(b)(iv) empowered the trustees to erect such other

works, building and installations as the trustees may in their

discretion think fit to provide for the advancement of any

other similar object of general public utility. The Income-tax

Officer issued notices to the assessee under section 34 of the

Indian Income-tax Act, 1922, and section 148 of the Income-

tax Act, 1961, for the assessment years 1949-50 to 1965-66.

The assessments were completed. On appeal, the Tribunal

dismissed the assessee's appeals for the assessment years

1949-50 to 1955-56 but allowed those for the assessment

years 1956-57 to 1965-66 subject to the rider that the income

derived from the trust property by the assessee would be

exempt only within the limit permissible under Section

11(1)(a) of the Income-tax Act, 1961. On a reference of the

questions, inter alia, whether the assessee was not a public

charitable trust and its income was not exempt under section

4(3)(i) of the Indian Income-tax Act, 1922, for the

assessment years 1949-50 to 1955-56; whether the second

rectification decree dated May 10, 1955, operated

prospectively from the assessment years 1956-57 and did not

have effect of rectifying the deed of trust dated October 27,

1942, as from the date of its execution and whether the

objects and activities of the trust fell within the first limb of

the definition of charitable purpose in section 2(15) of the

1961 Act and the residuary clause thereof was not attracted

for the assessment years 1962-63 to 1965-66 and whether

the Income-tax Officer was entitled to adjudge the validity of

the rectification, the High Court answered all the referred

questions in favour of the assessee and against the Revenue.

On appeal to the Supreme Court:

Held, (i) upon a concession by the assessee, that the

rectification brought about by the order of the civil court in

1955, namely, the second rectification, had no retrospective

effect and would operate prospectively from the date on

which such rectification was effected and would cover

assessment years 1956-57 onwards up to the assessment

years 1965-66 and would not have effect for the assessment

years 1949-50 to 1955-56.”

7.The CIT, after remand, after taking into consideration the case of

both sides, rejected the case of the assessee following the judgment of the

Hon'ble Supreme Court of India in the case of Commissioner of Income-

Tax Vs. Kamla Town Trust reported in (1996) 84 Taxman 248 (SC)

and held that the rectification shall not have retrospective effect and

would operate prospectively from the date when the rectification saw the

light of the day. However, the Tribunal erroneously allowed the appeal

observing that the order passed by the Hon'ble Supreme Court pertains to

a Trust and the same is not applicable to the assessee's case which is a

Society. The finding of the Tribunal cannot be sustained for the reason

that the Tribunal should have only followed the principle laid down by

the Hon'ble Supreme Court to the effect that the rectification shall not

have retrospective effect and would operate prospectively from the date

on which such rectification saw the light of the day.

8.The ratio laid down by the Hon'ble Supreme Court squarely

applies to the facts and circumstances of the present case. The

rectification/amendments made to the bye-laws of the Society would only

operate prospectively while granting registration under Section 12AA of

the Income Tax Act.

9.Following the ratio laid down by the Hon'ble Supreme Court in

the judgment reported in (1996) 84 Taxman 248 (SC) [Commissioner

of Income-Tax Vs. Kamla Town Trust], cited supra, the order passed

by the Income Tax Appellate Tribunal is liable to be set aside and the

questions of law 1 and 2 are decided in favour of the Revenue –

appellant. The appeal is allowed. No costs.