2025 (6) TMI 1127 - AT - Income Tax

Rejection of application filed u/s 12A(1)(ac)(iii) r.w.s. 12AB as trust is established for the benefit of a particular caste - as per DR dominant character of the trust is targeted at the benefit of Leuva Patidar Samaj which is a specific caste and the use of caste-specific terminology in the trust s object clauses indicates exclusive benefit attracting the bar u/s 13(1)(b) - HELD THAT - In the present case the trust s objects though referring to Leuva Patidar Samaj also include charitable objects of education healthcare women empowerment social development and research and are not confined solely to the benefit of a particular community. The educational object in particular is inclusive in nature. In the present case the CIT(Exemption) has categorically recorded that the trust was registered on 26.02.2019 thus falling squarely within the category of pre-existing institutions governed by clause (ac)(iii) of section 12A(1). However the Commissioner has failed to undertake any examination of the assessee s financial statements or to demonstrate even prima facie that income has been applied in a manner that would attract the mischief of section 13(1)(b). This procedural lapse is not merely technical but goes to the root of the matter as the decision to reject registration rests upon an assumption of exclusive benefit to a religious community without any supporting financial or factual material. Such action is contrary to both the letter and spirit of the law and undermines the staged mechanism of registration assessment and exemption envisaged under the Act. Accordingly it cannot be laid down as a blanket proposition that merely because a trust was registered prior to 1st April 2021 its application under clause (ac)(iii) of section 12A(1) must invariably be accepted without scrutiny. While judicial precedents do emphasize that section 13(1)(b) is not to be applied at the stage of registration for such existing trusts this does not render the statutory safeguards under section 12AB ineffective. The Explanation to section 12AB particularly the specified violations enumerated therein continues to provide the framework for evaluating whether the registration ought to be granted or not. However the satisfaction of the CIT(Exemption) must rest on concrete findings relating to the genuineness of activities the application of income or other violations as defined and not solely on the nomenclature or historical orientation of the trust. In the present case the CIT(Exemption) has neither examined the assessee s financial statements nor recorded any findings on the actual application of income in support of the alleged violation under clause (d) of the Explanation to section 12AB. As discussed the trust was created prior to 1.4.2021 and had already obtained provisional registration and thus the correct approach would have been to evaluate the conduct of the trust through the lens of the statutory mechanism and the financial record available. This assumes greater significance in light of the fact that no assessment has been framed in the case of the assessee after the grant of provisional registration and before consideration of the present application for final registration. In such a situation the rejection of registration based purely on the wording of the trust deed without verifying the nature and application of income is neither statutorily justified nor judicially sustainable. Therefore we are of the considered view that the impugned order passed by the CIT(Exemption) suffers from legal infirmity and procedural inadequacy. The same is accordingly set aside and the matter is restored to the file of the CIT(Exemption) with a direction to decide the issue de novo after duly examining the assessee s submissions financial statements and the applicable statutory framework in accordance with law. Appeal of the assessee is allowed for statistical purposes.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal (AT) in this appeal are:

1. Whether the Commissioner of Income Tax (Exemption) [CIT(E)] was justified in rejecting the application for final registration under section 12AB(1)(ac)(iii) of the Income-tax Act, 1961, and cancelling the provisional registration granted earlier, on the ground that the trust was created for the benefit of a particular religious community or caste, specifically the "Leuva Patidar Samaj," thereby invoking the bar under section 13(1)(b) of the Act.

2. Whether the provisions of section 13(1)(b), which prohibit exemption to trusts established for the benefit of a particular religious community or caste, apply at the stage of registration under section 12AB for trusts created prior to 1st April 2021.

3. The proper interpretation and application of the Explanation to section 12AB, particularly in relation to "specified violations" that justify refusal or cancellation of registration.

4. The extent to which the language of the trust deed's objects can be relied upon at the registration stage, without examination of financial statements or actual application of income, to conclude that the trust benefits a particular community exclusively.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of rejection of registration under section 12AB(1)(ac)(iii) on grounds of benefiting a particular caste

Relevant Legal Framework and Precedents:

Section 12AB governs registration of trusts for exemption purposes. Section 13(1)(b) bars exemption where a trust is established for the benefit of a particular religious community or caste. The Explanation to section 12AB enumerates "specified violations" that justify refusal or cancellation of registration, focusing on post-registration conduct, such as misapplication of income.

Judicial precedents relied upon include CIT (Exemption) v. Jamiatul Banaat Tankaria and CIT (Exemption) v. Bayath Kutchhi Dasha Oswal Jain Mahajan Trust, which hold that section 13(1)(b) is not applicable at the registration stage for trusts created before 1.4.2021. The Co-ordinate Bench decision in Gohilwad Vankar Samaj Seva Trust similarly held that the benefit to a particular community must be established during assessment, not registration.

Court's Interpretation and Reasoning:

The Tribunal noted that the CIT(E) rejected the application solely on the basis that the trust's objects referred to "Leuva Patidar Samaj," a particular caste, and invoked section 13(1)(b). However, the Tribunal emphasized that the trust's objects are mixed and inclusive, covering education, healthcare, women empowerment, and social upliftment, not confined exclusively to the caste.

The Tribunal found the CIT(E)'s reliance on the Supreme Court's decision in CIT v. Dawoodi Bohara Jamat to be selective and misplaced, as that judgment's principles apply at the assessment stage, where actual application of income and dominant objects are examined. The CIT(E) failed to consider the stage of proceedings and the statutory scheme that distinguishes between registration and assessment.

Key Evidence and Findings:

The trust was created before 1.4.2021 and had provisional registration. The trust deed includes broad charitable objects beyond caste-specific benefits. There was no examination of the trust's financial statements or actual application of income by the CIT(E).

Application of Law to Facts:

The Tribunal applied the statutory framework and binding precedents to conclude that section 13(1)(b) cannot be invoked at the registration stage to deny registration solely on the basis of the trust deed's language. The actual application of income and dominant character of activities must be assessed later.

Treatment of Competing Arguments:

The Revenue argued that the use of caste-specific terminology in the trust's objects indicated exclusive benefit, justifying rejection. The Tribunal rejected this, holding that mere reference to a particular community does not ipso facto attract section 13(1)(b) at registration, particularly for pre-1.4.2021 trusts.

Conclusions:

The CIT(E)'s rejection of registration on this ground was premature and legally unsustainable.

Issue 2: Applicability and interpretation of the Explanation to section 12AB in the context of refusal or cancellation of registration

Relevant Legal Framework:

The Explanation to section 12AB lists "specified violations" that justify refusal or cancellation of registration, including misapplication of income to benefit a particular religious community or caste. It focuses on conduct after registration and actual application of income, not merely the trust's objects.

Court's Interpretation and Reasoning:

The Tribunal emphasized that the Explanation is a compliance mechanism ensuring registration is not misused. It does not authorize pre-emptive denial of registration based solely on the trust deed's wording. The statutory scheme contemplates a staged inquiry: registration assesses genuineness of objects and activities in principle, while exemption and section 13 violations are determined during assessment based on actual facts.

Key Evidence and Findings:

No findings or examination of financial statements or application of income were made by the CIT(E) to support refusal under the Explanation.

Application of Law to Facts:

The Tribunal held that the CIT(E) failed to apply the Explanation properly, as no post-registration conduct or misapplication of income was demonstrated.

Treatment of Competing Arguments:

The Revenue's argument that the trust's caste-specific objects amounted to a specified violation under the Explanation was rejected as it ignored the requirement of factual and financial verification.

Conclusions:

The Explanation to section 12AB does not support refusal of registration without concrete findings of violation.

Issue 3: Role of trust deed language versus financial and factual examination at registration stage

Relevant Legal Framework and Precedents:

Judicial authorities have held that the language of the trust deed alone cannot be determinative of registration eligibility, especially for trusts created before 1.4.2021. The dominant object and actual application of income must be examined during assessment.

Court's Interpretation and Reasoning:

The Tribunal observed that the CIT(E) relied exclusively on the trust deed's reference to "Leuva Patidar Samaj" without examining income application or activities. This approach was held to be procedurally flawed and legally incorrect.

Key Evidence and Findings:

The trust's objects include broad charitable purposes. No financial scrutiny or assessment proceedings had taken place to establish exclusive benefit to a caste.

Application of Law to Facts:

The Tribunal concluded that the CIT(E) erred in treating the trust deed's language as conclusive evidence of exclusive benefit and rejecting registration without further inquiry.

Treatment of Competing Arguments:

The Revenue's reliance on nomenclature was rejected in favor of a holistic examination of facts and conduct.

Conclusions:

Registration decisions must be based on comprehensive evaluation, not presumptions from trust deed language alone.

SIGNIFICANT HOLDINGS

"From the phraseology in clause (b) of section 13(1), it could be inferred that the Legislature intended to include only the trusts established for charitable purposes. That however does not mean that if a trust is a composite one, that is one for both religious and charitable purposes, then it would not be covered by clause (b). What is intended to be excluded from being eligible for exemption under section 11 is a trust for charitable purpose which is established for the benefit of any particular religious community or caste." (Supreme Court in CIT v. Dawoodi Bohara Jamat, para 45)

The Tribunal held that this principle applies at the assessment stage and not at the registration stage for trusts created prior to 1.4.2021.

Core principles established include:

o Section 13(1)(b) bars exemption for trusts benefiting a particular religious community or caste, but this bar is to be applied at the assessment stage, not at registration for trusts created before 1.4.2021.

o The Explanation to section 12AB enumerates specified violations justifying refusal or cancellation of registration, focusing on post-registration conduct and actual application of income, not the trust deed's language alone.

o Registration under section 12AB is a preliminary inquiry into genuineness of objects and activities, while exemption and application of section 13(1)(b) require detailed factual and financial examination during assessment.

o Mere reference to a particular community or caste in the trust deed does not ipso facto disqualify registration; the dominant object and actual application of income must be considered.

o The CIT(E) must examine financial statements and other relevant material before rejecting registration on grounds of benefit to a particular community.

Final determinations on each issue:

1. The CIT(E)'s rejection of the application for registration under section 12AB(1)(ac)(iii) and cancellation of provisional registration was legally unsustainable and procedurally flawed.

2. Section 13(1)(b) is not applicable at the registration stage for trusts created prior to 1.4.2021; it is to be considered during assessment based on actual application of income.

3. The Explanation to section 12AB does not authorize refusal of registration solely on the basis of trust deed language without factual and financial verification.

4. The matter is remanded to the CIT(E) for de novo consideration after examining the assessee's submissions, financial statements, and applicable statutory provisions in accordance with law.