Case Details:
Income Tax Appeal No. - 348 of 2008  
Appellant :- Commissioner Income Tax            Respondent :- Muzafar Nagar Development Authority  
Coram: Hon'ble Dr. Dhananjaya Yeshwant Chandrachud,Chief Justice  ; Hon'ble Dilip Gupta,J.  ; Hon'ble Suneet Kumar,J.  

Questions of Law Involved:
(i) Whether the non disposal of an application for registration, by granting or refusing registration, before the expiry of six months as provided under Section 12AA(2) of the Income Tax Act, 1961 would result in deemed grant of registration; and
(ii) Whether the Division Bench judgment of this Court in the case of Society for the Promotion of Education, Adventure Sport & Conservation of Environment vs. Commissioner of Income Tax2 holding that the effect of non consideration of the application for registration within the time fixed by Section 12AA(2) would be deemed grant of registration, is legally correct.  

Case Laws Referred:
Chet Ram Vashist vs. Municipal Corporation of Delhi and and other (SC)
Govindlal Chagganlal Patel v. Agricultural Produce Market Committee Godhra (1976) 1 SCR 451: (AIR 1976 SC 263)
Bhavnagar University vs. Palitana Sugar Mill (P) Ltd. and others (SC)
Commissioner of Income-Tax vs. Ajanta Electricals (SC)
Commissioner of Income-tax vs. Karimangalam Onriya Pengal Semipu Amaipu Ltd Madras High Court
Commissioner of Income-tax-I Salem vs. Sheela Christian Charitable Trust Madras High Court

Facts of the Case:
Section 11 of the Income Tax Act 1961, provides for exemption of the income of charitable and religious trusts. Further, Section 12A related to conditions for applicability of section 11 and 12 provides that to avail the exemption under section 11 or 12, the person in receipt of the income shall make an application for registration of the trust or institution in the prescribed form and manner to the Commissioner within one year of the creation of the trust or the establishment of the institution for registration u/s 12AA. Sub section (2) of Section 12AA provides that the Commissioner shall pass an order granting or refusing registration before the expiry of six months from the end of the month in which the application was received.

Earlier, a Division Bench of Allahabad High Court in Society for the Promotion of Education, Adventure Sport & Conservation of Environment vs. CIT had held that where the Commissioner fails to consider an application for registration within the time fixed by Section 12AA(2), the registration shall be deemed as granted.

When, in the instant case, the said judgment of the Division Bench was relied by the assessee before another Division Bench, the bench casted doubt on the correctness of the judgment of the ealier Division Bench.

The argument advanced on behalf of the assessee were that the procedure for recognition was introduced by Finance Act (No.2) 1996 and the memorandum explaining its provisions indicated that an order granting or refusing permission has to be passed within six months. Also the use of word “shall” in section 12AA(1) makes it obligatory to pass an order and otherwise the assessee would be subject to grave prejudice by an inordinate delay on the part of the Commissioner.

Important Excerpts from the Judgment:

Sub-section (2) of Section 12AA requires that every such order granting or refusing permission under clause (b) of sub-section(1) shall be passed before the expiry of six months from the end of the month in which the application was received. The use of the expression 'shall' in sub-section (2) is, by itself, not dispositive of whether the period of six months is mandatory. The legislature has not imposed a stipulation to the effect that after the expiry of a period of six months, the Commissioner would be rendered functus officio or that he would be disabled from exercising his powers. Similarly, the legislature has not made any provision to the effect that the application for registration should be deemed to have been granted, if it is not disposed of within a period of six months with an order in writing either allowing registration or refusing to grant it. The submission of the assessee essentially requires the Court to read into sub-section (2) a fiction by which an application for registration should be regarded as deemed to be granted, if it is not disposed of within six months. Providing that an application should be disposed of within a period of six months is distinct from stipulating the consequence of a failure to do so. Laying down a consequence that an application would be deemed to be granted upon the expiry of six months can only be by way of a legislative fiction or a deeming definition which the Court, in its interpretative capacity, cannot create. That would be to rewrite the law and to introduce a provision which advisedly the legislature has not adopted.

A legislative provision cannot be rewritten by referring to the notes on clauses which, at the highest, would constitute background material to amplify the meaning and purport of a legislative provision. In the present case, what the Court has been called upon to do is to introduce a legislative fiction which would not be permissible.

In Chet Ram Vashist vs. Municipal Corporation of Delhi and and other, the Supreme Court construed the provisions of Section 313(3) of the Delhi Municipal Corporation Act 1957 under which it was stipulated that within sixty days after the receipt of an application..... The observations of the Supreme Court in that regard were as follows ....... . They are two distinct things, the failure of the Standing Committee to deal with the application within sixty days and that the failure should give rise to a right in the applicant to claim that sanction has been accorded. The second does not necessarily follow from the first. A right created by legal fiction is ordinarily the product of express legislation...

The mere fact that in sub-section (1) of Section 12AA, the legislature has used the expression 'may' while providing that the Commissioner may make such inquiry as he may deem necessary to satisfy himself about the genuineness of the activities of the trust or institution, is not by itself reason enough to hold that the use of the expression 'shall' in sub-section(2) must, as a necessary consequence or corollary, be regarded as mandatory in nature. In Ganesh Prasad Sah Kesari and another vs. Lakshmi Narayan Gupta5, the Supreme Court held as follows:

"...Obviously where thelegislature uses two words 'may' and 'shall' in two different parts of the  
same provision prima facie it would appear that the legislature manifested its intention to make one part directory and another mandatory. But that by itself is not decisive. The power of the court still to ascertain the real intention of the Legislature by carefully examining the scope of the statute to find out whether the provision is directory or mandatory remains unimpaired even where both the words are used in the same provision. In Govindlal Chagganlal Patel v. Agricultural Produce Market Committee Godhra (1976) 1 SCR 451: (AIR 1976 SC 263)

A considerable amount of reliance was placed on behalf of the assessee in the present case on a judgement of the Supreme Court in Commissioner of Income-Tax vs. Ajanta Electricals. In that case, the Supreme Court construed the provisions of Section 139(2) of the Act prior to its deletion with effect from 1989. The proviso to Section 139(2) conferred a discretion on the Income Tax Officer to extend the date for the furnishing of a return. The revenue had relied upon a judgement of the Andhra Pradesh High Court in which it had been held that there was no provision in the Act or the Rules requiring an Income Tax Officer to pass an order on an application filed by the assessee subsequent to the time given to him for filing his return pursuant to a notice under sub-section (2) of Section 139. The Supreme Court held that merely because a specific provision was absent for authorising an Income Tax Officer to entertain an application made beyond time, it was not proper to hold that it was not open to the assessee to make an application under Section 139(2) for extension of time, after the time allowed had expired. In consequence, the Supreme Court held that the application made by the assessee under Section 139(2) for extension of time after the expiry of the time allowed was maintainable and therefore valid. That was the point which was decided by the Supreme Court. This decision would be of no assistance to the assessee.  

We may also note at this stage, that the provisions of sub-section (2) of Section 12AA of the Act have been construed in a judgment of a Division Bench of the Madras High Court in Commissioner of Income-tax-I Salem vs. Sheela Christian Charitable Trust. The Division Bench in that case has held that the Tribunal was not right in holding that the failure to pass an order in an application under Section 12AA within the stipulated period of six months would automatically result in granting registration to the trust. The same view has been reiterated by a Division Bench of the Madras High Court in Commissioner of Income-tax vs. Karimangalam Onriya Pengal Semipu Amaipu Ltd.12.  

There can be no dispute about the basic principle of law that where a legal fiction has been created, it must be given full force and effect. As Lord Asquith,J observed in East End Dwellings Co. Ltd. vs. Finsbury Borough Council13, "where the statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs". The point, however, in this matter is that Section 12AA(2) does not provide for a legal fiction at all. Parliament has carefully and advisedly not provided for a deeming fiction to the effect that an application for registration would be deemed to have been granted, if it is not disposed of within six months. Legislative fictions are what they purport to be : acts of the legislating body. The Court cannot create one, where the legislature has not provided a deeming fiction.  

In Bhavnagar University vs. Palitana Sugar Mill (P) Ltd. and others, the Apex Court held as follows:  
"We are not oblivious of the law that when a public functionary is required to do a certain thing within a specified time, the same is ordinarily directory but it is equally when settled that when consequence for inaction on the part of the statutory authorities within such specified time is expressly provided, it must be held to be imperative."  

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