2025 (6) TMI 1378 - AT - Income Tax

Rejection of application u/s 80G(5)(iii) and cancelled the provisional registration - CIT(A) observed that one of the objects is religious in nature which contravenes main condition of section 80G(5) and is not established only for charitable purposes - AR submitted that only part of the objects was religious teaching but no expenditure whatsoever was incurred on such object HELD THAT - As relying on Shree Bhandari Gnyati Mandal 2024 (12) TMI 1587 - ITAT AHMEDABAD the matter is restored to the file of CIT(E) to carry out verification as to whether 5% of the total income of the assessee-trust was spent for religious purpose and thereafter to consider the grant of registration in accordance with law. The appellant should be granted adequate opportunity of hearing before deciding the issue. For statistical purposes the appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the assessee-trust is entitled to approval under clause (iii) of the first proviso to subsection (5) of section 80G of the Income-tax Act, despite having an object that includes religious purposes.

(b) Whether the presence of a religious object in the trust's constitution automatically disqualifies it from registration under section 80G(5) of the Act.

(c) Whether the CIT(E) was justified in rejecting the application and cancelling the provisional registration without conducting adequate enquiry or verification regarding the extent of expenditure on religious purposes by the trust.

(d) The applicability and interpretation of Explanation 3 to section 80G(5) and the proviso introduced by section 80G(5B), particularly the threshold of 5% expenditure on religious purposes and its impact on eligibility for registration.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Eligibility for approval under section 80G(5) despite religious object in trust's constitution

The relevant legal framework includes section 80G(5) of the Income-tax Act, which allows deduction for donations to institutions established for charitable purposes. Explanation 3 to section 80G clarifies that "charitable purpose" excludes purposes that are wholly or substantially of a religious nature. However, section 80G(5B) provides a proviso that if an institution incurs expenditure on religious purposes not exceeding 5% of its total income, it shall still be deemed eligible under section 80G.

The Tribunal referred extensively to a precedent from a coordinate bench involving similar facts, where the presence of a religious object in the trust's constitution was not held to be a bar to registration if the expenditure on religious purposes was below the statutory 5% threshold. The Tribunal emphasized that the statutory scheme contemplates that a trust may have some religious objectives but still qualify as charitable if the religious activities are not substantial or are within the 5% expenditure limit.

The Court reasoned that the mere inclusion of the word "religious" in the objects does not ipso facto disqualify the trust. The test is the extent and nature of activities and expenditure. The Court noted that the trust's main activities were social, educational, and medical welfare aimed at underprivileged sections, and no religious practices or expenditure were demonstrated.

Issue (c): Whether CIT(E) erred in rejecting the application without adequate enquiry

The Tribunal found that the CIT(E) rejected the application and cancelled provisional registration summarily, without conducting any enquiry or verification into the actual expenditure incurred by the trust on religious purposes. This was held to be contrary to the principles of natural justice and procedural fairness.

The Tribunal relied on the precedent where it was held that the CIT(E) must verify whether the trust's expenditure on religious purposes exceeds the 5% threshold before denying registration. The failure to consider the assessee's submissions and the lack of enquiry into the material facts was a significant procedural lapse.

Issue (d): Interpretation and application of Explanation 3 and section 80G(5B)

The Tribunal analyzed the combined reading of Explanation 3 and section 80G(5B). Explanation 3 excludes trusts whose whole or substantially whole purpose is religious from qualifying as charitable. Section 80G(5B) creates an exception allowing trusts to qualify if religious expenditure is within 5% of total income.

The Court interpreted these provisions harmoniously to mean that the presence of some religious object or activity is permissible, provided it is not substantial or excessive. The Court underscored that the statutory scheme intends to balance the exclusion of purely religious trusts with the recognition of trusts that primarily serve charitable purposes but incidentally engage in limited religious activity.

The Tribunal directed that the CIT(E) must verify the actual expenditure figures to determine compliance with the 5% threshold before granting or denying registration.

3. SIGNIFICANT HOLDINGS

"In view of the statutory provisions quoted above, we are of the considered view that the application for grant of deduction under Section 80G cannot be denied to the assessee only on the ground that one of the objects contain the term 'religious'."

"The purpose of Trust should not be one which is wholly or substantially wholly of a religious nature."

"Any institution or fund which incurs expenditure which is of a religious nature for an amount not exceeding 5% of its total income for that previous year shall be deemed to be an institution or fund to which the provisions of Section 80G shall apply."

"Ld. CIT(E), while rejecting the application for grant of registration under Section 80G of the Act has not dealt with any of the submissions / contentions of the assessee / applicant trust submitted during the course of hearing, which in our view is against the principles of natural justice."

"The matter is restored to the file of Ld. CIT(E) to consider the grant of registration under Section 80G of the Act afresh and to carry out necessary verification whether the assessee / applicant trust has expended / utilized less than 5% of its total income towards religious purposes."

The Tribunal concluded that the presence of a religious object in the trust's constitution is not determinative of disqualification under section 80G(5). The key is whether the religious activities are substantial or exceed the 5% expenditure limit. The CIT(E) must conduct a proper enquiry and verify the facts before deciding on registration. The appeal was allowed for statistical purposes and the matter remanded for fresh adjudication in accordance with law after affording the assessee a fair opportunity of hearing.