2025 (5) TMI 200 - AT - Income Tax

Denial of registration u/s 12A and u/s 12AB r.w.s. 12A(1)(ac)(i) - trust was established for a particular caste Marwari Brahmin and Maheshwari Vaishyas who had belief in Hindu Varnashram which was in direct violation of the provisions of section 13(1) - Charitable activity u/s 2(15) or not? - HELD THAT - The provisions of section 11 not to apply in certain cases if such trust has been created or established before the commencement of this Act to any income thereof if the trust or institution is created or established for the benefit of any particular religious community or caste. Since in the instant case the trust was already created in the year 1930 i.e. much prior to the Income Tax Act 1961 therefore CIT(E) in our opinion was not justified in holding that the assessee has violated the provisions of section 13(1)(b) of the Act. It is also an admitted fact that the trust was granted registration by the Commissioner u/s 12A of the Act on 25.08.1975 and u/s 12AB(1)(ac)(i) of the Act on 24.09.2021. The trust is also regularly assessed to tax with most of the years being assessed u/s 143(3) and nowhere the activities of the trust have been treated as non-genuine. Therefore following the rule of consistency even in tax proceedings would demand that if there are no changes of facts as compared to earlier years a different view cannot be taken. In our opinion adopting a different view inconsistent to the one taken in earlier years on the same set of facts would be merely a change of opinion especially when a particular view has been taken right since inception to date spanning several years. We find the Hon ble Supreme Court in the case of Excel Industries Ltd 2013 (10) TMI 324 - SUPREME COURT has observed that the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers money in pursuing litigation for the sake of it. We hold that the Ld. CIT(E) is not justified in cancelling the registration on the ground that the trust is created for a particular community. Objection of the Ld. CIT(E) that the assessee is a private trust as per the trust deed and therefore the trust cannot be registered under the Income Tax Act and the trust is involved in specific violation under clause e of the Explanation to subsection 12AB(4) - The trust was registered during the year 1930 and was granted registration u/s 12A of the Act on 25.08.1975 and u/s 12AB(1)(ac)(i) of the Act on 24.09.2021. It is also an admitted fact that the trust was being assessed to tax with most of the years being assessed u/s 143(3) and nowhere the activities of the trust have been treated as non-genuine. It is not a case of the Revenue that the assessee has changed its objects / activities from the date of grant of registration till date. Thus as per rule of consistency we are of the considered opinion that the Ld. CIT(E) was not justified in holding that the assessee trust is found to be involved in specific violation of clause (e) of Explanation to subsection 12AB(4) of the Act. Assessee is not registered with the Charity Commissioner under BPT Act - It is an admitted fact that the assessee truest has not been registered under the BPT Act. However it is also an admitted fact that the trust was enjoying the benefits of sections 11 to 13 of the Act in the past years and there was no requirement of registration under that Act. So far as the decision in the case of New Noble 2022 (10) TMI 855 - SUPREME COURT referred to by the Ld. CIT(E) is concerned the same in our opinion is not applicable as that was a case of fresh registration while this is a case of cancellation of registration based on no change in facts. Further that was a case of registration u/s 10(23C) while the instant case is a case of registration u/s 12AB. New Noble and it was a case of a pure educational trust which could have a State law which directly applies to education whereas in the instant case it is not so. We find the question before the Hon HC was whether registration under AP Charities Act was a pre-requisite for registration or approval under the Income Tax Act while the present case is not one of pre-requisite but a post registration alleged imperative. It is not a case of one arm of law being utilized to defeat another arm of law as no advantage is being taken under any other law of the fact that it is registered under Income Tax law. We find Hon ble Supreme Court clearly spelt out that compliance under other laws can weigh in deciding approvals under section 10(23C). In view of the above discussion we are of the considered opinion that the Ld. CIT(E) is not justified in cancelling the registration for not being registered under the Charity Commissioner under the BPT Act. Assessee trust has substantial investment of funds in modes other than prescribed under section 11(5) which is a specific violation under clause (e) and (f) of the Explanation to subsection 12AB(4) of the Act - We find the Ld. CIT(E) has not pointed out the breach for any year specific which is the requirement of the section 12AB(4). In our opinion the onus is on the Revenue to bring on record cogent material to establish that the trust is hit by section 13 of the Act. The Revenue has not stated that the deposits are not prescribed u/s 11(5) of the Act and that income has been earned by the trust on such deposits during the year. A perusal of provisions of section 13(1)(d) of the Act would show that it provides for taxing the non-exempt portion of income to tax. It does not refer to the entire income of the trust. This position has been made clear by the CBDT vide Circular No.387 dated 06.07.1984 where at para 28.6 of the said Circular lays down that maximum marginal rate shall apply only to that part of the income which has forfeited exemption under the said provision and not to the entire income. Since the Ld. CIT(E) in the instant case has proposed to cancel the registration relying on the basis of section 12AB(4) without referring to violation in any specific previous year therefore he is not justified without pointing out as to in which specific previous year the assessee has violated the provisions. Therefore we find merit in the arguments of assessee that there are no tangible reasons for cancelling the registration on this ground. Assessee trust has over the years not conducted activities related to the main object of the trust but donated substantial amount to other trusts and therefore such set up to earn income cannot be said to be inspired by benevolence and raises serious doubt over its genuineness which is a specific violation under clause e of the Explanation to subsection 12AB(4) - We find the Courts have time and again held that it is not necessary for the trust itself to carry out charitable activities and that it is permissible to donate to other charitable trusts. We find in the case of CIT vs. Shri Ram Memorial Foundation 2004 (5) TMI 44 - DELHI HIGH COURT has held that the donation by a charitable trust to another charitable trust with condition that the amount will form part of corpus of the donee trust is application of income by the donor trust within the meaning of section 11(1)(a) eligible for exemption u/s 11 of the Act. We find even the CBDT itself has issued a clear cut guideline vide instruction No. 1132 dt. 5th Jan. 1978 to all the CITs that a charitable trust will not lose exemption under s. 11 if it passes a sum of money to another charitable trust for utilisation by donee trust towards its charitable purposes and that shall be proper utilisation of money by donor trust for charitable purposes. The said instruction squarely covers the facts of the present case. We are of the opinion that the Ld. CIT(E) is not justified in cancelling the registration on this ground. Assessee is found to be involved in activities on commercial basis earning rental income which cannot be said to be incidental to the main objects which is a specific violation under clause b of the Explanation to subsection 12AB(4) of the Act - We do not find any merit in the above allegation of the Ld. CIT(E). A perusal of the Act would shows that it lays emphasis on income derived from property. If rental income is derived from property owned by the Trust there is no reason to call it activity on commercial basis. In our opinion there is no reason to characterize the rental income from property held in trust as income from business and attempt to invoke clause (b) of Explanation to section 12AB(4). In our opinion it is the income derived from property held under trust wholly for charitable purposes. Assessee was getting rental income since past so many years and the registration granted earlier had never been cancelled on this issue. Therefore following the rule of consistency as mentioned in the preceding paragraphs we are of the considered opinion that the Ld. CIT(E) is not justified in cancelling the registration on this ground. Appeal filed by the assessee is allowed.

Summary

The primary legal issues considered in this appeal pertain to the validity of cancellation of registration granted under sections 12A and 12AB of the Income Tax Act, 1961 to a trust established in 1930. The core questions are:

1. Whether the trust, being established for the benefit of a particular caste/community (Marwari Brahmins and Maheshwari Vaishyas) and adhering to the principles of Hindu Varnashrama Dharma, violates the provisions of section 13(1)(a) and 13(1)(b) of the Income Tax Act, thereby justifying cancellation of registration under section 12AB(4).

2. Whether the trust qualifies as a private trust as per its deed, and if so, whether this precludes registration under the Income Tax Act.

3. Whether the trust's failure to register under the Bombay Public Trust Act (BPT Act), 1950, constitutes a violation under section 12AB(1)(b)(i)(B) and the Explanation to section 12AB(4).

4. Whether the trust's investments in companies in modes other than those prescribed under section 11(5) amount to a specified violation under section 12AB(4).

5. Whether the trust's earning of rental income on a commercial basis, not incidental to its main objects, violates section 12AB(4).

6. Whether the trust's practice of donating substantial amounts to other trusts instead of conducting activities related to its main object raises doubts about its genuineness and justifies cancellation.

7. Whether the principles of natural justice and consistency in tax proceedings were observed in the cancellation process.

Issue-wise Detailed Analysis:

1. Alleged Violation of Section 13(1) due to Benefit to Particular Caste/Community:

Legal Framework and Precedents: Section 13(1)(a) and (b) exclude from exemption income of trusts created for private religious purposes or for the benefit of particular religious communities or castes, but subsection (b) applies only to trusts created after the commencement of the Income Tax Act, 1961.

Court's Interpretation and Reasoning: The trust was established in 1930, well before the Act commenced. Therefore, section 13(1)(b) does not apply. The Tribunal emphasized that the trust's registration under section 12A was granted in 1975 and renewed in 2021 without objection. The principle of consistency in tax proceedings was invoked, citing Supreme Court decisions, notably Radhasoami Satsang vs. CIT, which held that fundamental aspects sustained over years should not be reopened without material change.

Key Findings and Application: The Tribunal found no material change in the trust's objects or activities since registration. The trust's focus on particular castes, though explicit in the deed, does not attract section 13(1)(b) since the trust predates the Act. The Revenue's reliance on this provision was held to be legally incorrect.

Competing Arguments: The Department argued that the trust's caste-based benefits violated section 13(1) and justified cancellation under section 12AB(4)(e). The assessee countered with the timing of establishment and prior registration history.

Conclusion: The Tribunal held the cancellation on this ground unjustified, affirming that the trust's pre-1961 establishment exempts it from section 13(1)(b).

2. Characterization of the Trust as Private and Its Effect on Registration:

Legal Framework: Section 12AB(4)(e) allows cancellation if activities are not genuine or not carried out per registration conditions. The trust deed labels it a "private" trust.

Court's Reasoning: The Tribunal examined the trust deed's clause stating the trust is "private" in the context of fund management and operation, not to exclude public charitable status. It cited judicial precedents distinguishing private trusts (beneficiaries are specific individuals) from public trusts (benefit general or fluctuating classes). The Tribunal noted no change in activities or objects and no prior adverse findings on genuineness.

Findings and Application: The trust's longstanding registration and assessments without challenge to genuineness weighed against the Revenue's view. The Tribunal found no evidence of non-genuine activities or breach of registration conditions justifying cancellation.

Competing Arguments: The Department relied on the private trust label and caste-based restrictions. The assessee highlighted the context and prior acceptance of the trust's status.

Conclusion: The Tribunal held that the private trust characterization did not justify cancellation under section 12AB(4)(e).

3. Non-registration under Bombay Public Trust Act (BPT Act) and Its Consequences:

Legal Framework: Section 12AB(1)(b)(i)(B) requires compliance with other laws material to achieving the trust's objects. Explanation to section 12AB(4)(f) contemplates cancellation for non-compliance where a final order exists.

Court's Reasoning: The Tribunal noted no statutory mandate under the Income Tax Act requiring registration under the BPT Act for eligibility. It distinguished section 80G(5)(v), which explicitly requires registration under certain laws, unlike section 12A/12AB. The Tribunal emphasized that no final order or decree holding non-compliance existed against the trust.

Findings: The trust's non-registration under the BPT Act was not material or fatal to its registration under the Income Tax Act. The Tribunal also reasoned that requiring registration under multiple state laws would be impractical and not envisaged by the statute.

Conclusion: The cancellation on this ground was unwarranted.

4. Investments in Modes Other than Prescribed under Section 11(5):

Legal Framework: Section 11(5) restricts modes of investment for trusts claiming exemption. Violation can attract taxation of income under section 13(1)(d).

Court's Analysis: The Tribunal observed that the Revenue did not specify any particular previous year when the violation occurred, nor did it establish that income was earned on such investments. It relied on CBDT Circular No.387/1984 and judicial decisions holding that only the income attributable to such violations is taxable at maximum marginal rate, not the entire income.

Conclusion: Without year-specific findings and evidence, cancellation on this ground was unjustified.

5. Rental Income on Commercial Basis:

Legal Framework: Explanation to section 12AB(4)(b) contemplates cancellation if the trust is engaged in commercial activities not incidental to its objects.

Court's Reasoning: The Tribunal held that rental income from trust-owned property is income derived from property, not commercial activity. Prior assessments treated such income consistently without adverse findings. The Tribunal rejected the Revenue's attempt to equate rental income with business income.

Conclusion: Cancellation on this ground was not justified.

6. Donations to Other Trusts and Genuineness of Activities:

Legal Framework and Precedents: Courts have consistently held that a trust need not directly conduct all charitable activities; it may donate to other charitable trusts and still qualify under section 11. The Hon'ble Delhi, Gujarat, Calcutta, Bombay, and Jharkhand High Courts have affirmed this principle.

Court's Findings: The Tribunal noted that the trust's donations to other trusts are valid applications of income for charitable purposes. It cited CBDT Instruction No.1132/1978 supporting this view.

Conclusion: The Revenue's contention that donations to other trusts undermine genuineness was rejected.

7. Compliance with Principles of Natural Justice and Consistency:

Legal Framework: Principles of natural justice require adequate opportunity to respond to allegations. The rule of consistency in tax matters, though res judicata does not strictly apply, prevents reopening settled issues without material change.

Court's Reasoning: The Tribunal found that the show cause notice did not include certain allegations considered in the cancellation order, such as donations to other trusts and income-expenditure analysis. The assessee's submissions and judicial precedents were not adequately addressed. The Tribunal emphasized the trust's long history of registration and assessments without challenge to genuineness.

Conclusion: The cancellation order violated principles of natural justice and disregarded consistency, rendering it unsustainable.

Significant Holdings:

"The provisions of section 13(1)(b) of the Income Tax Act do not apply to trusts created before the commencement of the Act. Since the trust was established in 1930, the cancellation of registration on the ground of benefit to particular caste/community is not justified."

"Once registration has been granted after satisfying the genuineness of the activities of the trust, the same cannot be cancelled on the basis of the same set of provisions of the trust deed which were examined earlier, especially where there has been no change in facts or activities."

"Non-registration under the Bombay Public Trust Act is not a material requirement for registration under the Income Tax Act unless there is a final order of non-compliance, which is absent in this case."

"Rental income derived from property held by the trust is not commercial income and cannot be a ground for cancellation under clause (b) of Explanation to section 12AB(4)."

"A charitable trust may apply its income by donating to other charitable trusts; this does not affect its genuineness or entitlement to exemption."

"The principle of consistency in tax proceedings requires that settled positions on fundamental aspects should not be disturbed without material change."

"The cancellation order failed to observe the principles of natural justice by considering issues not raised in the show cause notice and not addressing the assessee's submissions and judicial precedents."

The Tribunal ultimately set aside the cancellation order and directed the grant of registration under sections 12A and 12AB(1)(ac)(i) of the Income Tax Act, 1961, thereby allowing the appeal filed by the assessee trust.