2025 (6) TMI 638 - AT - Income Tax

Rejection of application filed u/s 12A(1)(ac)(iii) and consequently denied the exemption u/s 80G - first reason assigned by CIT(E) is that the Assessee has stated in its reply that it has not commenced its activities - HELD THAT - As seen from the financials for F.Y.2021-22 that the Assessee has incurred expenses on medical relief preservation of environment and general public utility. Therefore Assessee has furnished contradictory explanations . Appellant has incurred various expenses in the Financial Year 2021-22 relevant to AY 2021-22 and 2022-23. In both the said Assessment Years the Appellant has not claimed exemption u/s 11 of the Act. Appellant applied for registration for the first time u/s 12A(1)(ac)(vi) of the Act on 21/05/ 2022. Appellant produced the financial statements of both the financial years along with the application to Ld. CIT(E). It is the specific case of the Appellant that the Appellant did not conduct any charitable activities after receiving provisional registration under section 12AB of the Act. During the proceedings before the Ld. CIT(E) the appellant has correctly stated that it had not commenced activities during the provisional registration period. Therefore the above observation/ reason assigned by the Ld. CIT(E) is contrary to the facts. Appellant had not filed any supporting evidences in respect of the charitable expenses incurred during Financial Year 2021-22 - Appellant has not claimed exemption u/s. 11 of the Act for A.Y.2022-23 (F.Y.2021-22) and the application seeking permanent registration was filed for A.Y.2026-27 onwards. In the above peculiar circumstances non-furnishing of details of expenses incurred in F.Y.2021-22 relevant to A.Y. 2022-23 should not have been viewed adversely by the Ld. CIT(E). Appellant is a registered as a company u/s. 8 of the Companies Act 2013 in the State of Haryana - It is a matter of fact that the Appellant indeed purchased land in Mumbai and it was the specific stand of the Appellant that said land will be used in future for achieving object of the trust. It is not the case of Ld. CIT(E) that the land has already been used for purposes which do not fill within the objects of the Assessee. The Ld. CIT(E) has drawn adverse inferences with regard to the future use of land on the basis of surmises and conjectures. Thus Ld. CIT(E) without legal or factual basis doubted the genuineness of activities of the trust on the basis of surmises and conjectures. There is no illegality in the transactions of receipt of donations from and reimbursement of expenses to the related concerns. Hence there was no credible reason available with Ld. CIT(E) to doubt those transactions so as to deny permanent registration u/s. 12AB of the Act. CIT(E) has stated that the Assessee has received donations out of CSR funds of donor companies further observed that the donations given by a trust named DREAM is against its objects. As seen that the Appellant has only received donations and it has also furnished details of all donations to Ld. CIT(E). The CSR Rules notified under the Companies Act 2013 permits donations to eligible charitable institutions. The Appellant being registered for receiving CSR funds received such donations in a lawful and transparent manner. The source of funds or alleged deviation by the donor does not in law impinge upon the genuineness or eligibility of the recipient trust. Appellant has fulfilled all requirements for grant of permanent registration under section 12AB of the Act and the reasons cited by the CIT (E) are either factually incorrect legally untenable or based on mere conjecture. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

- Whether the appellant, a charitable entity incorporated under Section 8 of the Companies Act, 2013, is entitled to permanent registration under Section 12AB of the Income Tax Act, 1961, despite the rejection of its application by the Commissioner of Income Tax (Exemptions) on several grounds.

- Whether the rejection of the appellant's application for exemption under Section 80G of the Income Tax Act, consequent to denial of registration under Section 12AB, was justified.

- Whether the reasons assigned by the Commissioner for rejecting the registration and exemption applications, including alleged contradictions in the appellant's activities, lack of documentary evidence of charitable expenses, purchase of land without clear purpose, and receipt of donations from related entities and CSR funds, are legally sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Eligibility for Permanent Registration under Section 12AB of the Income Tax Act

Relevant legal framework and precedents: Section 12AB of the Income Tax Act governs the registration of charitable entities for claiming exemption under the Act. Registration is a prerequisite for claiming exemption under Section 80G. The Commissioner is empowered to grant, renew, or reject registration based on compliance with statutory requirements and genuineness of activities.

Court's interpretation and reasoning: The Tribunal examined the reasons cited by the Commissioner for rejecting the permanent registration application. The Commissioner noted that the appellant had stated it had not commenced activities, yet financial statements showed expenses on medical relief, environmental preservation, and public utility, which was considered contradictory. The Tribunal found this reasoning factually incorrect because the appellant had not claimed exemption under Section 11 for the relevant assessment years and had correctly stated during proceedings that activities had not commenced during the provisional registration period.

Key evidence and findings: The appellant submitted financial statements for FY 2021-22 and FY 2022-23, showing expenses related to charitable activities. However, the appellant was unable to produce documentary evidence supporting these expenses during the proceedings, citing inability and seeking additional time. The Tribunal noted that since the appellant had not claimed exemption under Section 11 for those years and the application for permanent registration pertained to future assessment years, the non-furnishing of documentary evidence should not have been held against the appellant adversely.

Application of law to facts: The Tribunal emphasized that the appellant's inability to produce documentary evidence for past expenses, given the timing and nature of the application for future registration, did not justify rejection. The Tribunal also rejected the Commissioner's adverse inference drawn from the appellant's purchase of land in Mumbai, which was intended for future use aligned with the appellant's objects. The Commissioner's doubts were based on conjecture without legal or factual foundation.

Treatment of competing arguments: The Departmental Representative argued that the purpose of land purchase was unclear and that the appellant had not disclosed activities to be conducted thereon, justifying rejection. The Tribunal rejected this, holding that mere purchase of land without immediate use does not invalidate the appellant's charitable purpose, especially absent evidence of misuse.

Conclusions: The Tribunal concluded that the appellant fulfilled all statutory requirements for permanent registration under Section 12AB and that the Commissioner's reasons were either factually incorrect, legally untenable, or based on conjecture.

Issue 2: Validity of Rejection of Exemption under Section 80G

Relevant legal framework and precedents: Section 80G provides for exemption on donations made to registered charitable entities. Registration under Section 12AB is a prerequisite for claiming exemption under Section 80G.

Court's interpretation and reasoning: Since the Tribunal directed grant of permanent registration under Section 12AB, it logically followed that the appellant was entitled to renewal of exemption under Section 80G. The rejection of exemption was consequential to denial of registration and thus unsustainable once registration was ordered.

Conclusions: The Tribunal ordered renewal of registration under Section 80G consequent to grant of permanent registration under Section 12AB.

Issue 3: Legitimacy of Transactions with Related Entities and Receipt of CSR Donations

Relevant legal framework and precedents: Charitable entities may receive donations from related parties and CSR funds, provided such transactions are genuine and compliant with applicable laws. The Companies Act, 2013, and CSR Rules permit donations to eligible charitable institutions.

Court's interpretation and reasoning: The Commissioner observed that the appellant received donations from related concerns and CSR funds and questioned the genuineness of these transactions. The Tribunal noted that the Commissioner did not produce any evidence to show that the reimbursed expenses were not genuine or that donations were improper. The Tribunal further held that receipt of CSR funds in a lawful and transparent manner does not affect the eligibility or genuineness of the recipient entity.

Conclusions: The Tribunal found no credible reason to doubt the genuineness of transactions with related entities or receipt of CSR donations and rejected the Commissioner's adverse findings on these grounds.

3. SIGNIFICANT HOLDINGS

- "The reasons cited by the Ld. CIT (E) are either factually incorrect, legally untenable, or based on mere conjecture."

- "Non-furnishing of details of expenses incurred in F.Y.2021-22 relevant to A.Y. 2022-23 should not have been viewed adversely by the Ld. CIT(E) given the timing and nature of the application for permanent registration."

- "The Ld. CIT(E) without legal or factual basis, doubted the genuineness of activities of the trust on the basis of surmises and conjectures."

- "There was no credible reason available with Ld. CIT(E) to doubt those transactions so as to deny permanent registration u/s. 12AB of the Act."

- "The source of funds or alleged deviation by the donor does not, in law, impinge upon the genuineness or eligibility of the recipient trust."

- Final determinations: The Tribunal allowed the appeals, directed the grant of permanent registration under Section 12AB, and consequently ordered renewal of exemption under Section 80G, thereby overturning the Commissioner's rejection orders.