2025 (5) TMI 695 - AT - Income Tax

Rejection of application for approval u/s 80G - non-approval u/s 12A of the Act as has been done in one of the orders of CIT (Exemption) - technical errors in filing applications under incorrect clauses - HELD THAT - There was a technical error in mentioning the correct clause while making the application which error ought to have been considered and the application ought not have been rejected on mere technicality as the provisions and the system put in place for filing the online application were new to the applicant as well as to the Department. Directions of the Hon ble Tribunal have also been complied by rejecting the application. Therefore in view of the totality of facts and as the incorrect provisional approval u/s 12A granted was valid till AY 2026-27 the application for approval u/s 80G of the Act ought not to have been rejected on account of non-approval u/s 12A of the Act as has been done in one of the orders of the CIT (Exemption). Therefore it was considered imperative that the assessee may be granted another opportunity to file its submission in response to the notice issued by the CIT (Exemption) for justifying the genuineness of the activities and claim of exemption. Hence in the interest of justice and fair play since the assessee is an old Society/Trust and in view of the decision in the case of North East Social Research Centre 2024 (7) TMI 890 - ITAT KOLKATA the order of the Ld. CIT (Exemption) is liable to be set aside to consider the totality of facts of the case and grant final approval to the assessee under clause (i) to the first proviso to sub-section (5) of section 80G of the Act for which it is entitled as the assessee is an old Society/Trust and the application was separately filed in time but under the wrong section and the same shall be deemed to be filed under the relevant clause (i) of the first proviso to sub-section (5) of section 80G of the Act and the Ld. CIT(E) shall consider the same for grant of approval if the assessee is otherwise eligible and the application is in accordance with the provisions of the Act. Appeal filed by the assessee is allowed for statistical purposes.

Summary

The core legal questions considered by the Tribunal in this appeal revolve around the interpretation and applicability of various clauses under sub-section (5) of section 80G of the Income Tax Act, 1961, particularly concerning the eligibility and procedure for grant or rejection of exemption approvals to charitable institutions. The primary issues are:

1. Whether the rejection of the assessee's application for approval under sub-clause (B) of clause (iv) of the first proviso to sub-section (5) of section 80G was legally justified, considering the assessee is an old and established trust already registered under section 12A of the Act.

2. Whether the assessee, being an old institution with prior registration and exemption under section 80G(5)(vi), was required to apply afresh under clause (i) of the first proviso to sub-section (5) of section 80G or whether it could validly apply under clause (iv) as a newly established trust.

3. The validity and maintainability of applications filed by the assessee under different clauses of section 80G(5) and section 12A(1)(ac), including the timing and procedural requirements for provisional and final approvals.

4. The legal consequences of technical errors in filing applications under incorrect clauses and whether such errors justify rejection of exemption applications.

5. The interpretation of statutory amendments introduced by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, particularly the transitional provisions for entities registered under pre-amended law.

6. The applicability of principles established in relevant precedents concerning the grant of provisional and final approvals under section 80G(5) and section 12A(1)(ac).

Issue-wise Detailed Analysis:

Issue 1: Legality of rejection under sub-clause (B) of clause (iv) of first proviso to sub-section (5) of section 80G

Legal Framework and Precedents: Section 80G(5) prescribes conditions and procedural requirements for approval of institutions for exemption on donations. The first proviso to sub-section (5) contains clauses (i) to (iv) specifying different categories and timelines for applications depending on the status of the institution (existing or new). The relevant clause (iv)(B) applies to newly established trusts not registered under section 12A or 12AB.

Court's Interpretation and Reasoning: The Ld. CIT (Exemption) rejected the application under clause (iv)(B) on the ground that the assessee is an old, established trust already registered under section 12A and claiming exemptions under section 11, and hence the clause was not applicable. The Tribunal agreed with this interpretation, holding that clause (iv)(B) is meant for newly established trusts without prior registration, and thus the assessee's filing under this clause was incorrect.

Application of Law to Facts: The assessee was registered under section 12A since 1999 and had prior approval under section 80G(5)(vi) granted in perpetuity in 2016. Therefore, the rejection on the ground of non-applicability of clause (iv)(B) was legally sound.

Treatment of Competing Arguments: The assessee argued that the rejection lacked specific grounds or evidentiary basis such as non-genuineness of activities or breach of conditions. However, the Tribunal noted that the rejection was based on the legal inapplicability of the clause, not on substantive grounds related to activities or compliance.

Conclusion: The rejection under sub-clause (B) of clause (iv) was justified on legal grounds due to misclassification of the application.

Issue 2: Correct clause for application and effect of technical error in filing under wrong clause

Legal Framework and Precedents: The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 introduced amendments requiring all entities registered under pre-amended provisions to apply afresh for registration under section 12AB and approval under section 80G(5). Clause (i) of the first proviso to section 80G(5) applies to institutions approved under clause (vi) before amendment, requiring fresh application within prescribed timelines for a five-year approval without enquiry. Clause (iv) applies to new institutions requiring provisional approval after enquiry.

Coordinate Bench precedents, including North Eastern Social Research Centre vs. CIT(Exemption) and Vivekananda Mission Asram vs. CIT, clarified that institutions granted provisional approval under clause (iv) are entitled to apply for final approval under clause (iii) within prescribed timelines, irrespective of prior commencement of activities. These decisions emphasized that procedural timelines and application categories should be interpreted to avoid rendering provisions otiose.

Court's Interpretation and Reasoning: The Tribunal observed that the assessee, being an old society with prior perpetual approval, ought to have applied under clause (i) for final approval valid for five years without enquiry. The application under clause (iv) was a technical error. The Tribunal held that such technical errors should not result in outright rejection, especially when the system and provisions were new and confusing to both the applicant and the Department.

Application of Law to Facts: The assessee's provisional approval under clause (iv) was valid till AY 2026-27. The Tribunal directed that the application filed under the wrong clause be deemed to have been filed under the correct clause (i) and the Ld. CIT (Exemption) should consider the application on merits.

Treatment of Competing Arguments: The Department relied on strict procedural compliance and applicability of clauses, while the assessee emphasized the absence of substantive violations and the need for liberal construction to prevent hardship due to technical errors. The Tribunal sided with the assessee's position, supported by precedents.

Conclusion: Technical errors in choosing the applicable clause for application under section 80G(5) should not lead to rejection if the applicant is otherwise eligible. The application should be treated as filed under the correct clause and considered accordingly.

Issue 3: Maintainability and timing of applications under section 12A(1)(ac) and section 80G(5)

Legal Framework and Precedents: The amended provisions require fresh applications for registration under section 12AB and approval under section 80G(5), with prescribed timelines and conditions for provisional and final approvals. Applications filed prematurely or without requisite prior approvals are liable to be treated as non-maintainable or rejected.

Court's Interpretation and Reasoning: The Tribunal referred to prior orders where applications under section 12A(1)(ac)(iii) were rejected as premature because the provisional approval under Form No. 10AC was valid till AY 2026-27. The Tribunal directed reconsideration of such applications after expiry of provisional approvals or commencement of activities, as per statutory timelines.

Application of Law to Facts: The assessee's applications under section 12A and section 80G(5) were filed at different times; some were rejected as premature or non-maintainable, others provisionally approved. The Tribunal's directions ensured that applications are considered in accordance with statutory timelines and eligibility criteria.

Treatment of Competing Arguments: The Department emphasized procedural compliance and timelines, while the assessee sought liberal interpretation to avoid denial of benefits due to technical or timing issues. The Tribunal balanced these by directing reconsideration with opportunity to be heard.

Conclusion: Applications under section 12A and section 80G(5) must comply with prescribed timelines and procedural requirements, but premature applications should be reconsidered once conditions are met.

Issue 4: Effect of statutory amendments and transitional provisions on existing approvals

Legal Framework and Precedents: The 2020 Amendment mandated fresh applications for entities registered under pre-amended law. The CBDT issued circulars extending timelines for such applications. Precedents clarify that benefits under prior approvals continue during transitional periods if final approvals are granted subsequently.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee's prior perpetual approval under section 80G(5)(vi) should not be deemed to have lapsed due to procedural technicalities. If final approval is granted under the amended provisions, the benefit should be deemed continuous without break, covering the interim period.

Application of Law to Facts: The assessee's provisional approval under section 12A and section 80G(5) was valid till AY 2026-27. The Tribunal directed that if final approval is granted, the benefit available prior to amendment shall continue uninterrupted.

Treatment of Competing Arguments: The Department's strict approach was moderated by the Tribunal's emphasis on fairness and continuity of benefits, preventing hardship due to transitional procedural changes.

Conclusion: Transitional provisions and circulars ensure continuity of exemption benefits during procedural transitions, preventing denial due to technical or timing issues.

Issue 5: Opportunity of hearing and reconsideration of applications on merits

Legal Framework and Precedents: Principles of natural justice require that an applicant be given an opportunity to respond to queries and justify the genuineness of activities before rejection. The Tribunal has consistently held that rejection on mere technical grounds without hearing is improper.

Court's Interpretation and Reasoning: The Tribunal set aside the impugned order rejecting the application on technical grounds and remanded the matter to the Ld. CIT (Exemption) for fresh consideration after affording the assessee an opportunity to be heard and to submit explanations regarding genuineness and compliance.

Application of Law to Facts: The assessee was directed to file submissions in response to notices and justify the claim for exemption. The Tribunal emphasized fair play and justice in the reconsideration process.

Treatment of Competing Arguments: The Department's reliance on procedural bars was balanced by the Tribunal's insistence on hearing and merit-based decision-making.

Conclusion: Fair opportunity to be heard is essential before rejecting exemption applications, especially where technical or procedural errors are involved.

Significant Holdings:

"Section 80G(5)(iv)(B) of the Act is for newly established trusts or institutions that are not yet registered under section 12A or 12AB of the Act. As assessee trust is an old and established trust already registered under section 12A and claiming exemptions u/s. 11 of the Act, the provision of the section 80G(5)(iv)(B) are not applicable."

"An application for final registration cannot be filed until and unless an assessee/trust has been given provisional approval u/s 80G(5)(iv) of the Act. The assessee was granted provisional approval on 30.11.2022 only, and within a few days i.e. on 03.12.2022, the assessee applied for final registration u/s Clause (iii) of 1st Proviso to section 80G(5) of the Act. Though the assessee might have commenced its activities prior to grant of provisional registration but that does not mean that the assessee in that event will be precluded from applying for final registration even after the grant of provisional registration."

"If the view of the ld. CIT(Exemption) is accepted to be correct, then no institution which has already been into charitable activities before seeking provisional approval under Clause (iv) to First Proviso to section 80G(5) of the Act would ever be entitled to grant of final registration under Clause (iii) to First Proviso to section 80G(5) of the Act even after grant of provisional approval, which would make the relevant provisions of section 80G(5) otiose and defeat the object and purpose of these statutory provisions."

"The benefit of approval u/s 80G of the Act, available to the assessee prior to the Amendment brought vide Amending Act of 2020, will be deemed to be continued without any break. The assessee will not be deprived of the benefit during the time period falling between 31/03/2021 and the date of grant of provisional approval under clause (iv) due to technical errors occurred in making the application under the relevant provisions of the Act because of the confusion and misunderstanding on part of the assessee as well as on part of the ld. CIT(Exemption) in properly interpreting the relevant provisions."

The Tribunal's final determination was to set aside the impugned order of the Ld. CIT (Exemption) rejecting the application under sub-clause (B) of clause (iv) of the first proviso to sub-section (5) of section 80G and to remand the matter for fresh consideration under the correct clause (i) of the first proviso to sub-section (5) of section 80G, treating the application as duly filed under that clause. The Ld. CIT (Exemption) was directed to grant final approval if the assessee is otherwise eligible, after affording an opportunity of hearing and considering the genuineness of activities and compliance with conditions. The Tribunal emphasized continuity of exemption benefits and fairness in procedural compliance, overruling rigid technical rejections.