2025 (5) TMI 677 - AT - Income Tax

Rejecting the application u/s 12AB - there were discrepancies in the Article of Association - HELD THAT - As registration of the Trust or Institution under section 12AB AB is not merely a formality and the CIT(E) may go through the relevant financials as regards the past activities of the applicant trust so that he may satisfy himself about the genuineness of activities the trust or institution and also about compliance of such material requirements of any other law for the purpose of achieving its objects. But here we find that CIT(E) while dealing with the issue of grant or refusal of registration went on even to satisfy if the applicant had or had not availed of benefit of provisions of section 11 or 12 of the Act in the previous period and thereby appears to have exceeded the scope of satisfaction. Benefit to interested person - DR has rightly pointed out that Ld. CIT(E) asked the applicant to explain about various payments made to the said three persons for the purpose for which same were made as to whether the said payments were shown or not in the books of accounts whether any such payment was by way of reimbursement but the applicant did not furnish any reply. AR has sought another opportunity before Learned CIT(E) to produce all the relevant documents but the fact remains that the applicant should have made available entire relevant information and evidence to the Learned CIT(E) so that same could be scrutinized for the purposes of registration. From the above discussion we find that in the interest of justice one more opportunity of being heard be granted to the assessee with a chance to produce all the material documents before Learned CIT(E).

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this matter include:

• Whether the application for registration under section 12AB of the Income Tax Act is maintainable given the appellant's prior claim of exemption under sections 11 or 12.
• Whether discrepancies in the Articles of Association (AOA), specifically clauses permitting share buyback and asset distribution upon winding up, render the appellant ineligible for registration under section 12AB.
• Whether the appellant's objects and activities constitute charitable purposes within the meaning of the Act or amount to carrying on business activities inconsistent with such charitable status.
• Whether the appellant has violated provisions relating to benefit to interested persons under section 13(3) and clause (a) of explanations below section 12AB(iv) of the Act by payments to directors and trustees.
• Whether the genuineness of the appellant's activities and transactions, including payments of salary, rent, and expenses, is satisfactorily established to warrant registration.
• Whether the application for approval under section 80G is maintainable without registration under section 12AB.
• The procedural propriety and scope of inquiry by the Commissioner of Income Tax (Exemptions) [CIT(E)] in dealing with applications under sections 12AB and 80G, including the extent to which past benefits availed under sections 11 or 12 can be examined.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Maintainability of Application under Section 12AB in Light of Prior Benefits Claimed under Sections 11 or 12

Relevant Legal Framework and Precedents: Section 12AB(1)(ac)(vib) restricts the registration to institutions that have commenced activities but have not excluded any income from total income on account of applicability of sections 10(23C)(iv), (v), (vi), (via), or sections 11 or 12 for any previous year ending before the date of application. The applicant must therefore not have availed of such benefits previously.

Court's Interpretation and Reasoning: The CIT(E) observed that although the appellant declared in Form 10AB and affidavit that it had not availed benefits under sections 11 or 12 previously, the Income Tax Return (ITR) for Assessment Year 2023-24 showed income claimed as exempt under section 11. The Income and Expenditure Account reflected income of Rs. 19.66 lakhs claimed as exempt, indicating prior benefit availed. The appellant also held provisional registration under section 12A(1)(ac)(vi) and filed returns accordingly.

Key Evidence and Findings: The ITR and financial statements contradicted the appellant's declaration. The appellant failed to submit an affidavit clarifying non-availment of benefits despite repeated requests.

Application of Law to Facts: The Tribunal found that the appellant's application under section 12AB was non-maintainable as it had already availed benefits under sections 11 and 12, violating the statutory requirement under section 12AB(1)(ac)(vib).

Treatment of Competing Arguments: The appellant contended that CIT(E) was not required to verify prior benefits while dealing with applications under sections 12AB or 80G. The Tribunal, however, held that CIT(E) was entitled to satisfy himself regarding genuineness and compliance, including past benefits, as part of the registration process.

Conclusion: The application under section 12AB was rightly rejected on grounds of non-maintainability due to prior benefit availed under sections 11 and 12.

Issue 2: Discrepancies in Articles of Association Affecting Charitable Status

Relevant Legal Framework and Precedents: For registration under section 12AB, the institution must be established for charitable purposes and comply with relevant company law provisions. Section 8 of the Companies Act governs companies formed for charitable objects, prescribing irrevocability of trust and restrictions on profit distribution and asset transfer upon winding up.

Court's Interpretation and Reasoning: The CIT(E) identified two problematic clauses in the appellant's AOA:

• Clause 35: Permitting the company to buy back its own shares, which could enable profit distribution, violating the irrevocable nature required for charitable institutions.
• Clause 65: Allowing distribution of assets among members upon winding up, contrary to section 8(9) of the Companies Act, which mandates transfer of residual assets to another section 8 company with similar objects or to the Insolvency and Bankruptcy Fund.

The appellant failed to provide any explanation or clarification despite being given opportunities to do so.

Key Evidence and Findings: The AOA clauses themselves and the absence of any satisfactory explanation or amendment at the time of the CIT(E)'s order.

Application of Law to Facts: The Tribunal agreed that these clauses violated the fundamental principles of charitable institutions, rendering the appellant ineligible for registration under section 12AB.

Treatment of Competing Arguments: The appellant subsequently applied for amendment of the AOA to rectify these clauses, and the Tribunal allowed remand for fresh consideration after approval of amendments.

Conclusion: The presence of such clauses in the AOA was a valid ground for rejection of registration; however, the matter was remanded to consider the effect of proposed amendments.

Issue 3: Business Objects and Activities

Relevant Legal Framework and Precedents: Charitable institutions must have exclusively charitable objects and not engage in business activities for profit.

Court's Interpretation and Reasoning: CIT(E) observed that the appellant's objects and activities indicated involvement in business, which is inconsistent with charitable status.

Key Evidence and Findings: The trust deed and observed activities suggested commercial undertakings.

Application of Law to Facts: Such business activities violated the law governing charitable institutions and justified rejection of registration.

Treatment of Competing Arguments: The appellant sought to amend the object clause, and the Tribunal allowed remand for reconsideration post amendment approval.

Conclusion: The business nature of objects was a valid ground for rejection but subject to reconsideration after amendment.

Issue 4: Benefit to Interested Persons under Section 13(3) and Clause (a) of Explanations Below Section 12AB(iv)

Relevant Legal Framework and Precedents: Section 13(3) prohibits payment of income or assets to trustees, directors, or other specified persons except as reasonable remuneration.

Court's Interpretation and Reasoning: CIT(E) found that certain directors and trustees received substantial payments from the trust's accounts, which were not satisfactorily explained as reasonable remuneration or reimbursements.

Key Evidence and Findings: Bank statements showed payments totaling several lakhs to specified persons; no adequate explanation or documentation was furnished.

Application of Law to Facts: The payments were prima facie in violation of the provisions preventing benefit to interested persons, undermining the charitable character.

Treatment of Competing Arguments: The appellant contended these were lawful salaries; however, failure to provide supporting evidence led to adverse inference.

Conclusion: The appellant failed to establish that payments were reasonable and permissible, supporting rejection of registration.

Issue 5: Genuineness of Activities

Relevant Legal Framework and Precedents: Registration under section 12AB requires demonstration of genuine charitable activities and proper application of funds.

Court's Interpretation and Reasoning: CIT(E) found lack of evidence regarding beneficiaries of funds spent, justification for expenses like salary, rent, and travel, and overall genuineness of activities.

Key Evidence and Findings: Absence of supporting documents and explanations despite requests.

Application of Law to Facts: The appellant's failure to establish genuineness undermined the eligibility for registration.

Treatment of Competing Arguments: The appellant sought further opportunity to produce documents, which the Tribunal allowed by remanding the matter.

Conclusion: The appellant must substantiate genuineness of activities for registration; failure to do so justifies rejection.

Issue 6: Registration under Section 80G Without Registration under Section 12AB

Relevant Legal Framework and Precedents: Section 80G approval is contingent upon registration under section 12AB.

Court's Interpretation and Reasoning: The CIT(E) rejected the section 80G application on grounds that registration under section 12AB was not granted.

Key Evidence and Findings: The section 80G application was linked to the section 12AB registration status.

Application of Law to Facts: The Tribunal set aside the rejection of the section 80G application and remanded it for fresh consideration after the section 12AB application is decided.

Conclusion: The section 80G application is dependent on section 12AB registration and must be considered afresh post that decision.

Issue 7: Scope and Procedural Aspects of CIT(E)'s Inquiry

Relevant Legal Framework and Precedents: CIT(E) is empowered to scrutinize applications under sections 12AB and 80G to ensure compliance with statutory requirements and genuineness of charitable activities.

Court's Interpretation and Reasoning: The Tribunal acknowledged that CIT(E)'s inquiry into prior benefits availed, genuineness of activities, and compliance with other laws is within the scope of registration proceedings.

Key Evidence and Findings: CIT(E) sought clarifications and documents, but the appellant failed to provide adequate responses.

Application of Law to Facts: The appellant's failure to cooperate justified adverse findings; however, the Tribunal allowed remand to afford a final opportunity to produce evidence.

Conclusion: CIT(E) acted within jurisdiction; the appellant must fully cooperate to establish eligibility.

3. SIGNIFICANT HOLDINGS

"A buyback, also known as a share repurchase, is when a company buys its own outstanding shares to reduce the number of shares available on the open market at a rate decided by the management. Thus, in the guise of this clause, the institution can go for earning & distribution of profits which clearly violates the spirit of charitability and also the condition that any institution claiming to be a public religious or public charitable or both should be irrevocable in nature."

"Upon dissolution and after settlement of all debts and liabilities, the funds and property of the company cannot be distributed among the members of the company. Rather, the remaining funds, property must be given or transferred to some other sec. 8 company preferably one having similar objects as the dissolved/wound up entity."

"From the plain reading of section 12AB(1)(ac)(vib), it is evident that the applicant can apply only if it has commenced activities and not taken benefit of section 10, 11 & 12 in earlier years."

"Registration of the Trust or Institution under section 12AB is not merely a formality, and the CIT(E) may go through the relevant financials as regards the past activities of the applicant trust, so that he may satisfy himself about the genuineness of activities of the trust or institution, and also about compliance of such material requirements of any other law for the purpose of achieving its objects."

"The payments made to persons specified in section 13(3) (3A) of the Act from the trust's funds for their personal use and not for charitable purposes violate clause (a) of explanations below section 12AB(iv) of the Act."

"The activities of the applicant trust are not genuine as the applicant failed to lead any evidence to prove genuineness of transactions, justification regarding payments of salary, rent and travelling expense, and evidence as to who were the beneficiaries of funds spent."

Final determinations:

• The application under section 12AB was rightly rejected on grounds of non-maintainability due to prior benefit availed under sections 11 and 12.
• Discrepancies in the Articles of Association, particularly clauses permitting share buyback and asset distribution upon winding up, contravene the requirements for charitable institutions and justify rejection.
• The appellant's objects and activities indicated business undertakings inconsistent with charitable status.
• Payments to directors and trustees without adequate explanation violated provisions preventing benefit to interested persons.
• The appellant failed to establish genuineness of activities and proper application of funds.
• The section 80G application was dependent on section 12AB registration and must be reconsidered after the latter's decision.
• The matter was remanded to the CIT(E) for fresh adjudication after providing the appellant an opportunity to produce relevant documents and evidence, including consideration of amendments to the Articles of Association.
• The appellant was burdened with costs for failure to produce relevant documents initially, with costs directed to the Prime Minister's National Relief Fund.