2025 (6) TMI 639 - AT - Income Tax

Rejection of application u/s 80G(5) - two of the objects of the assessee were religious in nature - assessee has contended that no opportunity was provided to explain the nature of expense for religious purpose and the Ld. CIT(E) had suo moto presumed that the entire event expense was for religious purpose only. HELD THAT - A copy of income and expenditure account for the Financial Year 2022-23 has been brought on record. It is found therefrom that no expense in the nature of any religious nature is debited in the accounts. The assessee had claimed expense of Rs. 2, 20, 617/- on account of event expense which was considered by the Ld. CIT(E) as religious nature. However no opportunity was provided to the assessee to explain the nature of event expense as debited to the account. In the income and expenditure account for Financial Year 2021-22 as well as in the Financial Year 2023-24 also no expense of religious nature is found debited. The s uo moto conclusion of the Ld. CIT(E) that entire event expense was incurred for religious purpose is found to be without any basis. There was no material on record to conclude that the entire event expense was incurred in connection with religious activities. Since the Ld. CIT(E) had not provided any opportunity to the assessee to explain the nature of event expense we deem it proper to set aside the matter to the file of the Ld. CIT(E) with a direction to allow another opportunity to the assessee to explain the nature of event expense and thereafter re-decide the matter. Appeal of the assessee is allowed for statistical purpose.

Summary

The core legal questions considered in this appeal are:

1. Whether the Commissioner of Income Tax (Exemption) was correct in rejecting the application for registration under Section 80G(5) of the Income Tax Act, 1961, on the ground that certain objects of the trust were religious in nature, thereby disqualifying it from charitable status under Section 80G.

2. Whether the rejection of the application was in violation of the principles of natural justice, specifically regarding the denial of opportunity to the assessee to explain or furnish classification of expenses alleged to be religious in nature.

3. Whether the expenditure incurred by the trust on religious activities exceeded the permissible limit of 5% under Section 80G(5B), justifying denial of registration.

Issue-wise detailed analysis:

1. Nature of Objects of the Trust and Eligibility under Section 80G

The relevant legal framework is Section 80G of the Income Tax Act, which provides for tax deduction on donations made to entities registered under this section. Explanation 3 to Section 80G defines "charitable purpose" and expressly excludes any purpose that is wholly or substantially religious in nature. The Tribunal referred to a precedent from a Co-ordinate Bench (Gurukrupa Foundation) which clarified that some religious elements may be present but the overall purpose should not be substantially religious to qualify.

The Commissioner of Income Tax (Exemption) had held that two objects of the trust-object no.14 relating to spiritual teachings and establishment of prayer and meditation centres, and object no.18 relating to promotion of Indian traditional music and arts-were religious in nature. This formed the basis for rejecting the application under Section 80G(5).

The Tribunal analyzed the objects in detail and noted that object no.14 focused on promoting spiritual and cultural spirit among people, including activities like Navratri Mahotsav and Shivaratri Mahotsav, which are cultural festivals with religious undertones. Object no.18 involved promotion of folk arts, music, drama, and cultural festivals rooted in Indian tradition.

The Tribunal held that mere presence of spiritual or cultural activities, even if associated with festivals of religious origin, does not render the objects substantially religious in nature. The activities aimed at propagation of Indian culture and spiritual teachings without denominational or ritualistic practices. The Tribunal relied on the Gurukrupa Foundation decision which recognized that some religious activities are permissible up to the statutory limit of 5%, and their presence does not disqualify the trust.

Accordingly, the Tribunal concluded that the CIT(E) erred in holding these objects as religious in nature to the extent of denying registration under Section 80G(5).

2. Compliance with Principles of Natural Justice Regarding Classification of Expenses

The CIT(E) had further rejected the application on the ground that during the financial year 2022-23, the trust incurred Rs. 2,20,617/- (33.52% of total receipts) on religious activities, exceeding the 5% limit prescribed under Section 80G(5B). This conclusion was based on the classification of "event expenses" as religious expenditure.

The assessee contended that no specific show cause notice was issued regarding the classification of these expenses and no opportunity was given to explain or provide event-wise bifurcation. The Tribunal examined the income and expenditure accounts for the relevant and adjacent years and found no explicit debits for religious expenses. The classification of the entire event expense as religious was suo moto by the CIT(E) without any material basis.

The Tribunal emphasized the principle of natural justice that the assessee must be given an opportunity to explain and furnish evidence before adverse conclusions are drawn. Since no such opportunity was provided, the Tribunal found the CIT(E)'s conclusion to be without basis and procedurally improper.

The matter was therefore remanded to the CIT(E) with directions to issue a specific show cause notice regarding the classification of event expenses and to allow the assessee to explain the nature of these expenses before a fresh decision is taken.

3. Application of Section 80G(5B) Limit on Religious Expenditure

Section 80G(5B) permits the trust to spend up to 5% of its total income on religious purposes without losing eligibility for registration under Section 80G(5). Exceeding this limit can lead to denial of registration.

The CIT(E) found that the trust spent 33.52% of its receipts on religious activities, which, if correct, would justify rejection. However, as discussed above, the classification of these expenses as religious was not substantiated or explained by the assessee due to lack of opportunity.

The Tribunal noted that the statutory provision allows some religious expenditure, and the presence of certain religious elements in the objects is not fatal. The key is whether the actual expenditure on religious activities exceeds the statutory threshold. Since the CIT(E) did not provide the assessee a chance to clarify, the finding on excess religious expenditure could not be sustained without further inquiry.

Significant holdings include:

"The objective of the trust to establish, run and maintain prayer centres, meditation centres, spiritual buildings, ashrams, gurukulas and other similar institutions for the development of spiritual and cultural spirit among the people cannot be held as religious in nature."

"Even if certain tenets of religious activity is embedded in organising Navratri Mahotsav, Shivaratri Mahotsav, Ganesh Utsav etc., this does not make the overall objects of the trust as substantially religious in nature."

"The suo moto conclusion of the Ld. CIT(E) that entire event expense was incurred for religious purpose is found to be without any basis."

"Since the Ld. CIT(E) had not provided any opportunity to the assessee to explain the nature of event expense, we deem it proper to set aside the matter to the file of the Ld. CIT(E) with a direction to allow another opportunity to the assessee to explain the nature of event expense and thereafter re-decide the matter."

The Tribunal established the principle that the presence of some religious or spiritual objects in a charitable trust's objectives does not automatically render the trust's purpose substantially religious and disqualify it from registration under Section 80G(5). It also reinforced the requirement of adherence to natural justice by mandating that the assessee must be given a fair opportunity to explain and classify expenses before adverse conclusions are drawn.

Finally, the Tribunal allowed the appeal for statistical purposes and remanded the matter for fresh consideration after providing the assessee an opportunity to clarify the nature of the disputed expenses. The rejection of the application under Section 80G(5) was set aside subject to this further inquiry.