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Facts
The assessee, a trust engaged in promoting education and charitable activities, applied for registration under Section 12AB and approval under Section 80G(5) of the Income-tax Act. The CIT(E) rejected both applications, claiming certain trust deed objects related to development works were commercial in nature for 12AB, and consequently denied 80G(5) approval due to the lack of 12AB registration.
Held
The Tribunal condoned a 23-day delay in filing the appeals. It held that the CIT(E)'s rejections were based on a speculative and partial reading of the trust deed and premature assumptions about commercial activities. The Tribunal emphasized that the scope of inquiry at the registration stage is limited to examining the charitable nature of objects and the trust's capacity, not the genuineness of activities or potential future violations, which are to be considered at the assessment stage. Both rejection orders were set aside, and the matters were remanded to the CIT(E) for fresh adjudication.
Key Issues
Whether the CIT(E) can reject registration and approval applications under Sections 12AB and 80G(5) based on a speculative interpretation of a trust's objects as commercial, and the extent of inquiry permitted at the registration stage regarding the genuineness of activities.
Sections Cited
12AB, 80G(5), 80G, 12A, 12A(1)(ac)(iii), 13, 13(1)(c), 13(1)(b), 12AA, 11
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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: MS.SUCHITRA R. KAMBLE & SHRI MAKARAND V.MAHADEOKAR
Act, 1961[hereinafter referred to as “the Act”], and the other rejecting its application for approval under section 80G(5)(iii) of the Act. Since both appeals involve common facts, parties, and legal issues, they are being disposed of by this consolidated order.
Condonation of Delay
It is noted that both appeals were filed with a delay of 23 days. The assessee has filed an application for condonation of delay supported by a sworn affidavit, wherein it is stated that the delay occurred due to illness of the trustee handling tax matters and the subsequent time taken in consulting legal professionals before filing the appeal. The Departmental Representative did not raise any serious objection to the condonation of delay. We find the explanation to be bona fide and supported by reasonable cause. Accordingly, the delay of 23 days in filing both the appeals is condoned, and the appeals are admitted for adjudication on merits.
Brief facts of the case
The assessee is a trust registered vide registration number E/1274/SURENDRANAGAR, under the Gujarat Public Trusts Act, 1950, with the primary object of promoting education and charitable activities. It was granted provisional registration under section 12AB vide order dated 24.03.2023. Subsequently, the assessee filed an application in Form 10AB on 03.01.2024 seeking registration under section 12A(1)(ac)(iii) and approval under section 80G(5)(iii) of the Act. The CIT(E) passed separate orders rejecting both applications. In the 12AB rejection order, the CIT(E) observed that Object Nos. 4 and 7 of the trust deed indicated that the trust intended to carry out development works such as drainage, toilets, road construction, and implementation of government schemes, which were viewed as commercial in nature. In the 80G order, the CIT(E) rejected the application solely on the ground that since registration under section 12A was denied, approval under section 80G could not be granted.
Aggrieved by the order of the CIT(E), the assessee is in appeal before us raising following grounds of appeal:
Grounds of Appeal in ITA No. 2156/Ahd/2024
1. The Ld. CIT(E) has erred in law and on facts of the case in rejecting the application for registration of the trust u/s. 12AB of the Act.
2. The Ld. CIT(E) has passed the order without providing sufficient opportunity of hearing and without appreciating the facts and law in its proper perspective. The action of the CIT(E) is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.
3. The Appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal. Grounds of Appeal in ITA No. 2157/Ahd/2024
The Ld. CIT(E) has erred in law and on facts of the case in rejecting the application of the trust for grant of approval u/s. 80G(5) of the Act.
2. The Ld. CIT(E) has passed the order without providing sufficient opportunity of hearing and without appreciating the facts and law in its proper perspective. The action of the CIT(E) is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.
3. The Appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal
at the time of or before the hearing of the appeal.
4. During the course of hearing, the learned Authorised Representative (AR) submitted that the CIT(E) has erred in law and on facts in rejecting the applications based solely on selective reading of two clauses of the trust deed (Object Nos. 4 and 7), ignoring the dominant and primary charitable objects such as advancement of education and relief to the poor. The AR contended that the trust had not yet commenced any activities under the impugned clauses, and the financial statements submitted along with the application did not reflect any commercial activity. No correlation was drawn by the CIT(E) between the financials and the objected clauses. Therefore, the conclusion that the trust intends to undertake commercial or contractual work is purely speculative and contrary to settled legal principles. The AR further submitted that at the stage of granting registration under section 12AB, the competent authority is required to verify whether the objects are charitable in nature and whether the trust genuinely intends to carry out charitable activities. The genuineness of activities and application of income may be examined at the time of assessment, not at the stage of registration. The CIT(E)’s premature reliance on assumptions regarding commercial activity is legally unsustainable. In support of these contentions, the AR placed reliance on following judicial precedents: a. Jito Bhavnagar Chapter Foundation v. CIT(E) [ITA No. 102/Ahd/2024, dated 03.10.2024] The Co-ordinate Bench in this case held that the CIT(E) cannot reject registration merely because certain incidental objects appear to benefit members. The proper approach is to read the objects as a whole, and if the dominant intent is charitable, registration should not be denied. Further, the invocation of section 13(1)(c) was held to be premature at the registration stage and is a matter to be examined during assessment. b. CIT(E) v. Embassy Charitable Trust [ITA No. 458/2019, Karnataka High Court, dated 27.01.2022] In this case the Hon’ble High Court affirmed that at the stage of registration under section 12AA, the Commissioner cannot go into the genuineness of activities or draw adverse inference merely because one of the objects involves infrastructure development. The Hon’ble High Court reiterated that the scope of inquiry is limited to the nature of the objects and the capacity of the trust to pursue them, not whether they result in profit.
The learned Departmental Representative (DR) relied on the reasoning of the CIT(E) as contained in the respective orders. However, the DR did not raise any serious objection to restoring the matter to the file of the CIT(E) for fresh adjudication after considering the assessee’s submissions in entirety.
We have carefully considered the rival submissions, examined the impugned orders passed by the CIT(Exemption), perused the trust deed, financial statements, affidavit, and written submissions furnished by the assessee, and also taken into account the binding judicial precedents cited during the hearing. On a comprehensive evaluation, we find that the CIT(E) has primarily relied on Object Nos. 4 and 7 of the trust deed relating to implementation of government schemes and infrastructure activities, to infer a purported commercial intent behind the trust’s functioning. However, this inference has been drawn in isolation, without considering the trust deed in its entirety or evaluating whether such objects were ever acted upon by the assessee. Significantly, there is no finding recorded by the CIT(E) to show that the financial statements of the trust reflect any activity undertaken under the objected clauses. In fact, the material on record does not disclose any deviation from the declared charitable purpose or any application of funds inconsistent with section 11.
It is a settled position of law that registration under section 12AB cannot be denied merely on apprehension that the trust may engage in non-charitable or commercial activities in future. The proper stage for examining the application of income or potential violation of section 13 is during assessment, and not while considering the application for registration. This legal principle stands fortified by the judgment of the Hon’ble Karnataka High Court in CIT (Exemptions) v. Embassy Charitable Trust (supra), where the Court held that the scope of enquiry at the stage of registration under section 12AA (now 12AB) is confined to examining the charitable nature of the objects and the capacity of the trust to pursue them. The Court categorically held that the Commissioner is not empowered to adjudicate the genuineness of activities or invoke section 13 unless the trust has actually commenced operations and misapplied its income.
The same legal position was reiterated by the Co-ordinate Bench in the case of Jito Bhavnagar Chapter Foundation v. CIT(E) (supra), wherein the Tribunal held that a trust having dominant charitable objects cannot be denied registration merely because a few ancillary clauses may incidentally benefit members or enable participation in government schemes. It was further held that the invocation of section 13(1)(c) or 13(1)(b) is premature at the registration stage and cannot be used as a ground to reject registration in the absence of any corresponding financial activity or misuse of funds.
In the present case, the CIT(E) has neither established any nexus between the financial statements and the objected clauses, nor demonstrated any actual deviation from the charitable purpose. The rejection of registration is therefore based on a speculative and partial reading of the trust deed, contrary to the principle that the objects must be read holistically and in context.
As regards the rejection of the application under section 80G(5), we note that the CIT(E) has rejected the same solely on the ground that registration under section 12AB was not granted. Since we are setting aside the order denying registration, the rejection of the 80G approval is also rendered unsustainable and requires reconsideration.
In light of the above discussion and the authoritative legal position emerging from judicial precedents, we are of the considered opinion that both the impugned orders passed by the CIT(E) under section 12AB and section 80G of the Act suffer from material legal infirmities and cannot be sustained. We accordingly set aside both orders and restore the matters to the file of the CIT(Exemption), Ahmedabad, for fresh adjudication. While doing so, the CIT(E) shall examine the assessee’s applications de novo, taking into consideration the trust deed, financial records, and all supporting submissions in a comprehensive and holistic manner. The CIT(E) shall refrain from invoking the provisions of section 13 or drawing adverse conclusions based on hypothetical or unsubstantiated apprehensions. The assessee shall also be afforded a reasonable and effective opportunity of being heard before passing fresh orders in accordance with law.
In the result, both the appeals filed by the assessee are allowed for statistical purposes. Order pronounced in the Court on 19th June, 2025 at Ahmedabad.