2025 (5) TMI 1868 - AT - Income Tax

Rejection of registration u/s 12A - failure to comply by the due date i.e. 18.07.2024 - CIT (Exemption) therefore concluded that the activities of the assessee trust are conducted on commercial basis and are not charitable in nature HELD THAT - It is the submission of assessee that given an opportunity the assessee is in a position to explain and substantiate its case by filing all the relevant details before the Ld. CIT (Exemption) for which additional evidence(s) have been filed before us. We find some force in the arguments furnished by the Ld. AR that the additional evidence filed by the assessee goes to the root of the matter and these documents should be considered by the Ld. CIT (Exemption) for deciding the impugned issue. The assessee is hereby directed to submit any further details/ information/ documents as may be called for by the Ld. CIT (Exemption) on the appointed date without seeking any adjournment. Appeal filed by the assessee is allowed for statistical purposes.

Summary

The core legal questions considered in this appeal revolve around the eligibility and compliance requirements for registration of a trust under section 12A of the Income Tax Act, 1961. Specifically, the issues are:

1. Whether the trust complied with the statutory requirement under section 36A(3) of the Maharashtra Public Trust Act, 1950, mandating prior sanction from the Charity Commissioner before borrowing money.

2. Whether the activities of the trust are genuinely charitable in nature and not commercial, as required under section 12AB(1)(b)(i) of the Income Tax Act, 1961.

3. Whether the assessee adequately substantiated its claim of charitable activities through documentary evidence such as bills, vouchers, and details of beneficiaries.

4. Whether the provisional registration granted under section 12AB could be validly cancelled based on the alleged non-compliance and lack of genuineness of activities.

Issue 1: Compliance with Section 36A(3) of the Maharashtra Public Trust Act, 1950 regarding borrowing money

The relevant legal framework is section 36A(3) of the Maharashtra Public Trust Act, which prohibits trustees from borrowing money on behalf of the trust without prior approval from the Charity Commissioner. The proviso requires that the Charity Commissioner decide loan applications promptly if provisional sanction by a bank or financial institution exists.

The Court noted that the trust had borrowed unsecured loans during FY 2019-2020 to meet routine operational expenses but did not obtain prior approval from the Charity Commissioner. The assessee contended that due to the COVID-19 pandemic and closure of the Charity Commissioner's office, formal approval could not be obtained, and that the loans were exclusively used for charitable purposes without personal benefit.

The Tribunal rejected this contention, emphasizing the mandatory nature of the statutory requirement. It held that non-compliance with section 36A(3) amounted to a failure to satisfy the conditions under section 12AB(1) of the Income Tax Act, which requires compliance with other applicable laws material to achieving the trust's objects. The Court underscored that the pandemic or office closure did not absolve the trust of its statutory obligation to obtain prior sanction.

Issue 2: Nature of activities - charitable or commercial

Section 12AB(1)(b)(i) mandates that the Commissioner be satisfied about the genuineness of the activities and their charitable nature. The CIT (Exemption) observed that the trust's financial statements indicated expenditure primarily on establishment expenses rather than charitable activities. Additionally, the trust failed to provide evidence of free or concessional services to financially weaker beneficiaries, which is a key indicator of charitable intent.

The assessee submitted photographs and asserted charitable activities but failed to produce bills, vouchers, or beneficiary details despite specific requests. The Tribunal agreed with the CIT (Exemption) that the absence of documentary evidence and the nature of expenses suggested the activities were commercial rather than charitable.

Issue 3: Adequacy of documentary evidence supporting charitable activities

The assessee was specifically asked to submit detailed evidence such as bills, vouchers, and details of beneficiaries receiving free or concessional services. The failure to furnish this information led to doubts about the genuineness of charitable activities.

In appeal, the assessee argued that additional documentary evidence was available but had not been submitted earlier as it was not called for. The assessee sought to file this additional evidence before the Tribunal and requested an opportunity to present the same before the CIT (Exemption) for fresh consideration.

The Tribunal found merit in this argument, noting that the additional evidence went to the root of the matter and should be admitted. It directed the CIT (Exemption) to grant the assessee an opportunity to substantiate its case with all relevant documents and to adjudicate the matter afresh.

Issue 4: Validity of cancellation of provisional registration under section 12AB

The CIT (Exemption) cancelled the provisional registration granted earlier under section 12AB on grounds of non-compliance with statutory requirements and doubts about the charitable nature of activities. The assessee challenged this cancellation, contending that the provisional registration should be restored for the period granted.

The Tribunal did not directly reverse the cancellation but restored the matter to the file of the CIT (Exemption) for fresh adjudication after considering the additional evidence and explanations to be submitted by the assessee. This approach preserves procedural fairness and allows the trust to establish compliance and genuineness before a final decision is taken.

The Court's reasoning reflects a strict adherence to statutory mandates, particularly the requirement for prior approval of loans under the Maharashtra Public Trust Act and the need for clear documentary proof of charitable activities under the Income Tax Act. The Tribunal balanced this with procedural fairness by permitting the assessee to furnish additional evidence and have the matter reconsidered.

In addressing competing arguments, the Tribunal rejected the assessee's claim that the Charity Commissioner's silence amounted to implied approval of loans, emphasizing the express statutory requirement of prior sanction. It also did not accept the mere submission of photographs as sufficient proof of charitable activities without corroborating documentary evidence. However, the Tribunal was sympathetic to the assessee's request to introduce additional evidence and remanded the matter for fresh consideration rather than dismissing the appeal outright.

Significant holdings include the following verbatim excerpts:

"Section 36A(3) of the BPT Act, 1950 provides that no trustee shall borrow moneys (whether by way of mortgage or otherwise) for the purpose of or on behalf of the trust of which he is a trustee, except with the previous sanction of the Charity Commissioner... The assessee has, however, failed to comply with this statutory requirement."

"The undersigned is unable to draw any satisfactory conclusion about the genuineness of activities of the assessee and compliance of requirements of any other law for the time being in force by the assessee as are material for the purpose of achieving its objects."

"Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the Ld. CIT (Exemption) with a direction to grant an opportunity to the assessee to substantiate its case by filing the requisite details/ explanation to his satisfaction and admit the additional evidence furnished by the assessee in support of its claim and thereafter adjudicate the issue afresh on merits as per fact and law."

Core principles established include:

- Strict compliance with statutory requirements under the Maharashtra Public Trust Act is essential for registration under section 12A/12AB of the Income Tax Act.

- The genuineness and charitable nature of activities must be demonstrated with credible documentary evidence, including financial records and beneficiary details.

- Procedural fairness mandates that an assessee be given an opportunity to present additional evidence before adverse conclusions are finalized.

- Silence or inaction by regulatory authorities does not amount to approval where prior sanction is statutorily mandated.

Final determinations are that the application for registration under section 12A was rightly rejected on the grounds of non-compliance and lack of evidence; however, the matter is remanded for fresh consideration after allowing the assessee to submit additional evidence and explanations. The provisional registration cancellation is not upheld outright but is subject to reconsideration by the CIT (Exemption) in light of the fresh submissions.