2024 (12) TMI 1599 - AT - Income Tax

Rejecting the application for grant Registration/approval u/s.12AB - charitable purpose or not? - as per revenue Society is not registered under RPT Act 1959 Society meant for benefit of Porwal Samaj Society is running the Business Activity Application of income not for the object of the trust and genuineness of Activities -As submitted trust is meant for the benefit of Porwal Samaj only HELD THAT - As decided in Ujjain vs. Dawoodi Bohra Jamat 2014 (3) TMI 652 - SUPREME COURT the objects of the trust exhibit the dual tenor of religious and charitable purposes and activities. Section 11 shelters such trust with composite objects to claim exemption from tax as a religious and charitable trust subject to provisions of section 13. The activities of the trust under such objects would therefore be entitled to exemption accordingly. Further one has to examine the objects under the provisions of section 13(1)(b) of the Act. It becomes amply clear from the language employed in the provisions that section 13 is in the nature of an exemption from applicability of sections 11 or 12 and the examination of its applicability would only arise at the stage of claim under sections 11 or 12. Thus where the income of a trust is eligible for exemption under section 11 the eligibility for claiming exemption ought to be tested on the touchstone of the provisions of section 13. In the instant case it being established that the respondent-trust is a public charitable and religious trust eligible for claiming exemption under section 11 it becomes relevant to test it on the anvil of section 13. Also the objects of the respondent trust are based on religious tenets under Quran according to religious faith of Islam. As already noticed that the perusal of the objects and purposes of the respondent-trust would clearly demonstrate that the activities of the trust though both charitable and religious are not exclusively meant for a particular religious community. The objects as explained in the preceding paragraphs do not channel the benefits to any community if not the Dawoodi Bohra Community and thus would not fall under the provisions of section 13(1) (b). In that view of the matter it is held that the respondent-trust is a charitable and religious trust which does not benefit any specific religious community and therefore it cannot be held that section 13(1) (b) of the Act would be attracted to the respondent-trust and thereby it would be eligible to claim exemption under section 11. In view of the above ratio laid down by the Hon ble Apex Court and totally misplaced by the Ld. CIT (E) matter is restored back to the file of the Ld. CIT (E) for reconsideration in the light of the decision of the Hon ble Apex Court after giving the assessee a reasonable opportunity of being heard and pass the order strictly in compliance to the decision of the Hon ble Apex Court. Element of business activity involved in the operations of the assessee trust and application of income of the trust - Findings of the Ld. CIT (E) found to be not so specific about the case. Rent receipts if are incidental to and ancillary to the main object of the trust same has to be allowed and so in the case of application of the income of the trust also. In view of the above the matters are restored back to the CIT (E) for reconsideration in the light of the various decisions of the Hon ble Apex Court after giving the assessee a reasonable opportunity of being heard and pass the order strictly in compliance to the decision of the Hon ble Apex Court. Appeal of the assessee is allowed for statistical purposes.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in this matter are:

1. Whether the order passed under section 12AB(1)(b)(i) of the Income Tax Act, 1961 (the Act) rejecting the application for registration/approval of the trust was valid, particularly regarding the procedural fairness and jurisdictional competence of the Commissioner of Income Tax (Exemption) (CIT (E)).

2. Whether the trust is eligible for registration/approval under section 12AB of the Act, specifically addressing:

• Whether the trust's registration under the Rajasthan Public Trust Act, 1959, was properly considered.
• Whether the trust is exclusively for the benefit of the Porwal Samaj community and thus ineligible for exemption.
• Whether the trust is engaged in business activities disqualifying it from exemption.
• Whether the application of income aligns with the objects of the trust.
• The genuineness of the trust's activities.

3. The interpretation and applicability of the provisions of sections 11, 12, 12A, 12AA, and 13 of the Income Tax Act, particularly the scope of charitable and religious purposes and the effect of section 13(1)(b) on trusts benefiting particular communities.

4. Whether the CIT (E) erred in law and on facts in rejecting the registration without giving a reasonable opportunity of hearing and without proper application of legal principles.

5. The correctness of the CIT (E)'s findings regarding alleged business activities and the application of income of the trust.

Issue-wise Detailed Analysis

Issue 1: Validity of the Order Passed Under Section 12AB(1)(b)(i) - Procedural and Jurisdictional Aspects

Legal Framework and Precedents: Section 12AB(1)(b)(i) empowers the CIT (E) to reject registration applications if the trust does not meet prescribed conditions. Principles of natural justice require that an applicant be given adequate and reasonable opportunity of hearing before adverse orders are passed.

Court's Interpretation and Reasoning: The Tribunal observed that the impugned order was passed without providing adequate opportunity of hearing to the assessee. The assessee had challenged the order on grounds of lack of jurisdiction and procedural unfairness.

Application of Law to Facts: The Tribunal found merit in the assessee's contention that the order was passed without proper consideration of submissions and evidence, thus violating principles of natural justice.

Conclusion: The order of the CIT (E) was held to be bad in law and was set aside for reconsideration after providing the assessee a reasonable opportunity of hearing.

Issue 2: Eligibility of the Trust for Registration/Approval Under Section 12AB

Legal Framework and Precedents: Sections 11 and 12 provide substantive provisions for exemption of income of religious or charitable trusts. Sections 12A and 12AA prescribe procedural requirements for registration. Section 13 enumerates circumstances where exemption is denied, including trusts benefiting particular religious communities under section 13(1)(b). The Apex Court's decision in the case concerning Dawoodi Bohra Jamat was heavily relied upon to interpret these provisions.

Court's Interpretation and Reasoning: The CIT (E) rejected the application on several grounds: absence of registration under the Rajasthan Public Trust Act, 1959; the trust's objects benefiting only the Porwal Samaj community; engagement in business activities; misapplication of income; and doubts about genuineness of activities.

The Tribunal noted that the assessee had submitted the registration certificate under the Rajasthan Public Trust Act, 1959, negating the first objection.

Regarding the second objection, the Tribunal analyzed the Apex Court's ruling which clarified that the nature of the trust (religious, charitable, or both) is a legal question determined by the objects in the trust deed, not merely a question of fact. The Apex Court held that charitable purpose includes relief to the poor, education, medical relief, and advancement of any object of general public utility, which is broadly construed to include benefits to a section of the public, not merely individuals or narrow groups.

The Tribunal emphasized that trusts with composite objects (both religious and charitable) are entitled to exemption under section 11, subject to the provisions of section 13.

Regarding section 13(1)(b), the Tribunal explained that this provision excludes exemption for trusts established for charitable purposes benefiting a particular religious community or caste. However, trusts with composite religious and charitable objects are not automatically excluded. The key test is whether the charitable activities benefit only a particular community or a broader public.

In the present case, the Tribunal found that the trust's objects, though based on religious tenets of Islam and the Dawoodi Bohra community, extended benefits beyond the community, for example, through free food distribution on religious occasions to the public at large. Hence, the trust was not confined to benefiting a particular religious community exclusively.

Application of Law to Facts: The Tribunal held that the CIT (E)'s reliance on the Dawoodi Bohra Jamat decision was misplaced as the facts and objects of the present trust differ. The trust's activities qualify as both religious and charitable and are not restricted to a specific community, thus not attracting the disqualification under section 13(1)(b).

Treatment of Competing Arguments: The Tribunal rejected the CIT (E)'s view that the trust was solely for the benefit of the Porwal Samaj and that such benefit disqualified the trust from exemption. It relied on the Apex Court's expansive interpretation of charitable purpose and the requirement that the benefit must be to a sufficiently defined or identifiable class of the public.

Conclusion: The trust is eligible for registration/approval under section 12AB and exemption under section 11, subject to compliance with other provisions.

Issue 3: Business Activity and Application of Income of the Trust

Legal Framework and Precedents: Section 2(15) of the Act defines "charitable purpose" and excludes activities involving trade, commerce, or business carried out for a fee or consideration unless such activities are incidental to the advancement of charitable objects and do not exceed 20% of total receipts.

Court's Interpretation and Reasoning: The CIT (E) alleged that the trust was engaged in business activities and that the application of income was not in accordance with the trust's objects. However, the Tribunal found the CIT (E)'s findings to be vague and lacking specificity.

The Tribunal noted that incidental rent receipts or ancillary business activities incidental to the main objects of the trust are permissible under section 2(15) and do not disqualify exemption if they meet the prescribed conditions.

Application of Law to Facts: The Tribunal found no clear evidence that the trust's income was applied contrary to its objects or that business activities were carried out beyond permissible limits.

Conclusion: The matter was remanded to the CIT (E) for reconsideration of these issues in light of the correct legal principles and after providing the assessee a reasonable opportunity of hearing.

Issue 4: Procedural Compliance and Opportunity of Hearing

The Tribunal emphasized that the CIT (E) must comply strictly with the principles of natural justice, providing the assessee reasonable opportunity to present its case before passing any adverse order. The impugned order was set aside on this ground as well.

Significant Holdings

"Under the scheme of the Act, sections 11 and 12 are substantive provisions which provide for exemptions available to a religious or charitable trust. Income derived from property held by such public trust as well as voluntary contributions received by the said trust are the subject-matter of exemptions from the taxation under the Act. Sections 12A and 12AA detail the procedural requirements for making an application to claim exemption under sections 11 or 12 by the assessee and the grant or rejection of such application by the Commissioner."

"Determination of nature of trust as wholly religious or wholly charitable or both charitable and religious under the Act is not a question of fact. It is a question which requires examination of legal effects of the proven facts and documents, that is, the legal implication of the objects of the respondent-trust as contained in the trust deed."

"The phrase charitable purpose is expansive and inclusive. The expression 'charitable purpose' is defined in the dictionary clause of the Act under section 2(15). According to section 2(15), the expression 'charitable purpose' has been defined by way of an inclusive definition so as to include relief to the poor, education, medical relief and advancement of any other object of general public utility."

"Advancement of any object of benefit to the public or a section of the public as distinguished from benefit to an individual or a group of individuals would be a charitable purpose."

"The trusts with composite objects would not be expelled out of the purview of section 13(1)(b) per se. The Section requires it to be established that such charitable purpose is not for the benefit of a particular religious community or caste."

"In the present case, the objects of the respondent trust are based on religious tenets under Quran according to religious faith of Islam. As already noticed that the perusal of the objects and purposes of the respondent-trust would clearly demonstrate that the activities of the trust though both charitable and religious are not exclusively meant for a particular religious community."

"Rent receipts if are incidental to and ancillary to the main object of the trust same has to be allowed and so in the case of application of the income of the trust also."

The Tribunal's final determinations are:

• The impugned order rejecting registration under section 12AB is quashed for being without jurisdiction and for violation of natural justice.
• The trust is eligible for registration and exemption under sections 11 and 12 of the Act, as its objects are charitable and religious and not confined to benefit of a particular religious community within the meaning of section 13(1)(b).
• The CIT (E) is directed to reconsider the application afresh in light of the Apex Court's binding precedents, after affording a reasonable opportunity of hearing to the assessee.
• Allegations of business activity and misapplication of income are to be examined afresh with proper application of section 2(15) and related provisions.