2025 (5) TMI 2041 - AT - Income Tax

Rejection of application u/s. 12AB - rejecting the application u/s 10AB mentioning the wrong section - as argued reasonable opportunity of being heard was denied to the assessee. HELD THAT - No show- cause notice was issued by the CIT(E) highlighting the discrepancy in the application. It is observed that the assessee was in a position to correctly quote the applicable section while submitting the application; however due to technical constraints in the online portal the correct section could not be selected. The application was ultimately rejected by the CIT(E) solely on this procedural ground without adjudicating any substantive issue or issuing a show-cause notice to the assessee in respect thereof. This in our considered opinion renders the rejection order unsustainable in law as it suffers from a violation of the principles of natural justice. DR could not produce any show-cause notice issued by the Ld. CIT(E) for the said error. Furthermore the letter submitted by the assessee to the CPC highlighting the technical difficulty was not addressed. Thus it is evident that reasonable opportunity of being heard was denied to the assessee. Thus we consider it appropriate to remand the matter to the file of the Ld. CIT(E) with a direction to treat the application already filed by the assessee as one made under clause (iii) of Section 12A(1)(ac) of the Act instead of clause (vi) and to adjudicate the same afresh in accordance with law after providing a reasonable opportunity of being heard. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in the appeals were:

• Whether the order passed under section 12AB of the Income Tax Act rejecting the application for registration of the charitable trust was valid and sustainable in law.
• Whether the Learned Commissioner of Income-tax (Exemption) erred in rejecting the application under section 12AB on the ground of a technical defect without granting the assessee an adequate opportunity of being heard, thereby violating principles of natural justice.
• Whether the application for registration under section 80G(5) of the Act, which was rejected consequent to the cancellation of registration under section 12AB, should be restored and reconsidered in light of the issues surrounding the section 12AB application.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the order rejecting registration under section 12AB of the Act

Relevant legal framework and precedents: Section 12AB of the Income Tax Act governs the registration of charitable trusts and institutions for claiming exemption. The registration process requires the applicant to comply with prescribed procedural requirements and to apply under the correct sub-section of section 12A(1)(ac). The principles of natural justice mandate that before rejecting an application on any ground, especially procedural or technical, the applicant must be given an opportunity to rectify or explain the defect.

Precedents relied upon by the assessee included decisions from coordinate benches of the ITAT, such as Torna Rajgad Parisar Samajonnati Nyas vs. CIT, Deodhar Education and Vocational Academy vs. CIT, and Swaminarayan Gadi Trust vs. CIT(E), which held that rejection of registration applications on mere technical grounds without providing an opportunity of hearing is unsustainable.

Court's interpretation and reasoning: The Tribunal observed that the assessee had inadvertently applied for registration under an incorrect provision, namely section 12A(1)(ac)(vi)(B), instead of the correct provision 12A(1)(ac)(iii). This error was due to technical constraints in the online application portal, which did not allow selection of the correct clause. The assessee had informed the tax authorities about this difficulty and sought rectification, but no response or assistance was provided.

Importantly, the Tribunal noted that the Learned CIT(E) rejected the application solely on the ground of quoting the wrong section without issuing any show-cause notice or affording the assessee an opportunity to be heard on this procedural defect. The Tribunal held that such rejection violated the principles of natural justice and was therefore unsustainable in law.

Key evidence and findings: The timeline of events showed the trust's incorporation, commencement of activities, provisional registration, and two attempts at permanent registration. The first application was rejected due to discrepancies in the trust deed, which the assessee amended. The second application was rejected for quoting the wrong section. The assessee submitted correspondence with the CPC highlighting the technical problem, which remained unaddressed.

Application of law to facts: Applying the legal principles and precedents to the facts, the Tribunal found that the rejection on a purely technical ground without hearing was not justified. The assessee's inability to select the correct section was due to system constraints, and the assessee had acted in good faith by informing the authorities and requesting correction.

Treatment of competing arguments: The Department relied solely on the rejection order and did not produce any show-cause notice or evidence of opportunity being granted. The Tribunal gave weight to the assessee's submissions and precedents emphasizing procedural fairness.

Conclusions: The Tribunal concluded that the order rejecting registration under section 12AB was invalid and directed the matter to be remanded to the Learned CIT(E) for fresh adjudication after providing the assessee a reasonable opportunity of hearing. The application filed by the assessee was to be treated as made under the correct clause 12A(1)(ac)(iii).

Issue 2: Rejection of application under section 80G(5) consequent to cancellation under section 12AB

Relevant legal framework: Section 80G(5) provides for registration of charitable entities for the purpose of donors claiming deduction under section 80G. Registration under section 80G is contingent upon valid registration under section 12AB.

Court's interpretation and reasoning: The Tribunal held that since the application under section 12AB was to be reconsidered afresh, the consequential rejection of the application under section 80G(5) also required reconsideration. The principles applicable to section 12AB registration would apply mutatis mutandis to the 80G registration application.

Conclusions: The appeal relating to section 80G(5) registration was also remanded to the Learned CIT(E) with similar directions to provide opportunity and reconsider the application on merits.

3. SIGNIFICANT HOLDINGS

The Tribunal's key legal reasoning is encapsulated in the following verbatim excerpt:

"Despite this error, no show-cause notice was issued by the Ld. CIT(E) highlighting the discrepancy in the application. It is observed that the assessee was in a position to correctly quote the applicable section while submitting the application; however, due to technical constraints in the online portal, the correct section could not be selected. The application was ultimately rejected by the Ld. CIT(E) solely on this procedural ground, without adjudicating any substantive issue or issuing a show-cause notice to the assessee in respect thereof. This, in our considered opinion, renders the rejection order unsustainable in law, as it suffers from a violation of the principles of natural justice."

Core principles established include:

• Rejection of registration applications on mere technical grounds without affording the applicant an opportunity to be heard violates principles of natural justice and is unsustainable.
• Technical difficulties in online application portals, if notified by the applicant, must be addressed by the revenue authorities rather than penalizing the applicant.
• Applications should be adjudicated on substantive merits rather than procedural technicalities, especially when the applicant acts bona fide and seeks to rectify errors.
• Decisions on related registrations (such as under section 80G) must follow the outcome of the principal registration under section 12AB.

Final determinations:

• The appeals filed against the rejection of registration under section 12AB and section 80G(5) were allowed.
• The matter was remanded to the Learned CIT(E) with directions to treat the application as filed under the correct provision, provide reasonable opportunity of hearing, and adjudicate afresh in accordance with law.
• The assessee was directed to comply with any notices and furnish necessary documents diligently.