2025 (7) TMI 812 - AT - Income Tax

Rejecting registration application made by the assessee u/s 12AB - Charitable activity or not? - application rejected on Discrepancies in dissolution clause Object for the benefit of particular community and Non Genuineness of Activities HELD THAT - On the basis of the details available on record it is noted that the assessee much before changed that clause but could not so demonstrate before the ld. CIT(E) and the assessee has placed on record the modified trust deed. Based on this aspect of the matter we feel that the observation so made is curable in nature and since the assessee admitted that in the last letter it could not file the complete details and that the assessee be given a chance to rectify that observation. As regards the other two observations of ld. CIT(E) that the assessee works for the benefit of particular community and that its activities are not genuine we find force that the assessee trust is working as a charitable trust since 1963 and has been assessed as such taking the benefit of sections 11 and 12 of the Act and therefore the observations of the ld. CIT(E) that assessee works for a particular community and activities were not genuine come to be made as the assessee could not supply complete details in response to the letter issued on 29.06.2024. Thus the said observations also are curable in nature. Therefore considering the reasons advanced the defects being curable in nature we are of the considered view that the assessee applicant needs one chance to establish its stand on merits. Based on the overall facts as discussed herein above bench adopts a lenient view and feels that the assessee should be given one more chance to produce documents before the ld. CIT(E) as regards application for registration u/s 12AB - Appeal of the assessee is disposed off for statistical purposes.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in these appeals pertain to the rejection of registration applications filed by a charitable trust under sections 12AB and 80G of the Income Tax Act, 1961. Specifically, the issues include:

1. Whether the order of the Commissioner of Income Tax (Exemption) [CIT(E)] rejecting the registration application under section 12AB is legally valid and justified on facts.

2. Whether the CIT(E) erred in rejecting the registration application under section 80G, consequent to the rejection under section 12AB.

3. Whether the assessee was denied adequate opportunity of hearing before rejection of the applications, thereby violating principles of natural justice.

4. Whether the objects of the trust are charitable and not restricted to the benefit of a particular community, as alleged by the CIT(E).

5. Whether the activities of the trust are genuine and carried out in accordance with its objects.

6. Whether the dissolution clause of the trust deed is in conformity with the requirements for charitable trusts, or whether it renders the trust revocable and thus not charitable.

Issue-wise Detailed Analysis:

1. Validity of Rejection of Registration under Section 12AB

Legal Framework and Precedents: Registration under section 12AB is a prerequisite for claiming exemption under sections 11 and 12 of the Act. The provisions require that the trust must have charitable objects and comply with conditions including an irrevocable dissolution clause. Section 13(1)(b) disqualifies trusts benefiting a particular religious community from exemption, but this applies at the stage of exemption and not registration. The Supreme Court decisions cited by the CIT(E) (Dawoodi Bohara Jamat and Palghat Shadi Mahal Trust) relate to exemption eligibility, not registration. The Gujarat High Court decision in CIT(Exemption) vs. Jamiatul Banaat Tankaria (2024) clarifies that section 13(1)(b) is not to be applied at registration stage under section 12AB.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee trust is an old charitable trust established in 1963 and has been enjoying registration under section 12A since 2002. The trust filed application under the new regime section 12AB but the CIT(E) rejected it on three grounds: (a) discrepancy in dissolution clause, (b) objects benefiting a particular community (Pareek Samaj), and (c) non-genuineness of activities.

The Tribunal carefully examined the trust deed, including the modified deed of 2018, and found that the dissolution clause clearly provides that on dissolution, the remaining assets shall be transferred to other Pareek Samaj trusts and not to founders or trustees, contradicting the CIT(E)'s conclusion that the trust is revocable. The Tribunal held that this discrepancy is curable and the assessee should be given opportunity to clarify.

Regarding the objects, the Tribunal analyzed the trust deed clauses and found that while clause 3(1) refers to Pareek Samaj, other clauses (3(4), 3(7)) demonstrate activities for the broader society, including free medical camps, hospitality to pilgrims, and assistance to poor and needy irrespective of caste. The Tribunal observed that the CIT(E) failed to consider these clauses and incorrectly concluded that the trust benefits only a particular community.

As for genuineness of activities, the assessee submitted detailed evidence including bills, vouchers, photographs, and lists of beneficiaries covering diverse social welfare activities. The CIT(E)'s observation that activities were unverifiable was found incorrect, as the assessee had furnished substantial proof. The Tribunal noted that the CIT(E) himself acknowledged submission of bills and vouchers in the order under section 80G.

Application of Law to Facts: The Tribunal emphasized that the trust's long-standing registration and consistent charitable activities negate the CIT(E)'s adverse findings. The provisions of section 13(1)(b) are not applicable at the registration stage. The dissolution clause issue and other objections are curable and require opportunity for the assessee to furnish clarifications.

Treatment of Competing Arguments: The Revenue relied on the CIT(E) order and Supreme Court precedents to support rejection. The Tribunal distinguished these precedents as relating to exemption, not registration. The Revenue argued non-submission of complete details, but the Tribunal found that substantial information was on record and the omission to reply to the show cause notice was due to consultant's oversight, which should not be fatal.

Conclusion: The Tribunal held that the rejection was premature and based on incomplete consideration. The matter was remanded to the CIT(E) for fresh adjudication after providing adequate opportunity to the assessee.

2. Rejection of Registration under Section 80G

Legal Framework: Section 80G registration is contingent upon registration under section 12AB. The CIT(E) rejected the 80G application on the ground that 12AB registration was denied and the trust's activities were religious in nature.

Court's Reasoning: Since the 12AB registration issue was restored for fresh consideration, the Tribunal directed that the 80G application also be restored to the file of the CIT(E) for reconsideration in light of the outcome on 12AB registration.

Conclusion: The 80G appeal was disposed of for statistical purposes along with the 12AB appeal, pending fresh adjudication.

3. Adequacy of Opportunity of Hearing

Legal Framework: Principles of natural justice require that an assessee be given a fair opportunity to respond to show cause notices before adverse orders are passed.

Court's Reasoning: The assessee failed to file reply to the last show cause notice due to omission by its consultant. The CIT(E) did not grant further opportunity despite the case not being time-barred. The Tribunal observed that the omission was genuine and the assessee had forwarded the notice to its consultant. Considering that all facts and evidences were largely on record, the Tribunal held that the failure to reply was not fatal and the assessee deserved an opportunity to cure the defects.

Conclusion: The Tribunal directed that the assessee be afforded adequate opportunity of hearing during fresh adjudication.

4. Charitable Nature of Objects and Benefit to Particular Community

Legal Framework: For registration under section 12AB, the objects must be charitable and not confined solely to a particular caste or religious community. Section 13(1)(b) disqualifies trusts benefiting a particular community from exemption but applies at exemption stage.

Court's Reasoning: The Tribunal analyzed the trust deed and found that the objects include social, cultural, educational, economic, and moral upliftment of the Pareek Samaj but also extend to the broader society, including the poor, helpless, and general public. The Tribunal noted that the CIT(E) selectively omitted consideration of some clauses which clearly benefit the general public. The Tribunal also reviewed the list of charitable activities and beneficiaries, which included persons from other communities.

Application of Law to Facts: The Tribunal held that the trust's objects are not restricted to a particular community and thus the CIT(E)'s conclusion was incorrect. The reliance on section 13(1)(b) at registration stage was misplaced.

Conclusion: The trust's objects qualify as charitable for registration purposes.

5. Genuineness of Activities

Legal Framework: Genuine charitable activities consistent with the objects are necessary for registration.

Court's Reasoning: The assessee submitted detailed evidence of activities including free boarding and lodging, medical camps, educational assistance, donations to other charitable trusts, and cultural events. The CIT(E) initially held that activities were not verifiable, but the Tribunal found that substantial documentary and photographic evidence was on record. The Tribunal also noted that the CIT(E) acknowledged receipt of bills and vouchers in the 80G proceedings.

Conclusion: The Tribunal found the activities genuine and the CIT(E)'s adverse finding was not sustainable.

6. Dissolution Clause and Revocability of Trust

Legal Framework: For a trust to be charitable, the dissolution clause must ensure that assets are not revertible to founders or trustees but transferred to other charitable institutions with similar objects.

Court's Reasoning: The dissolution clause in the trust deed states that on dissolution, remaining assets shall be transferred to other Pareek Samaj trusts and shall not revert to founders or trustees. The CIT(E) misconstrued this clause, incorrectly holding that assets would revert to founders, rendering the trust revocable.

Application of Law to Facts: The Tribunal found this to be a factual error and held that the dissolution clause complies with legal requirements. The defect, if any, was curable and the assessee should be given opportunity to clarify.

Conclusion: The trust's dissolution clause is valid and does not disqualify it from registration.

Significant Holdings:

"The provisions of section 13(1)(b) will come into picture only when determining issue of allowing exemption u/s 11 r/w 12 of the Act and not at the time of registration."

"The dissolution clause of the assessee is appearing at PB 69 ... it is clear that on dissolution of the trust the assets will not go back to the founders or trustees of the trust."

"The objects of the assessee trust are not limited to the welfare of Pareek samaj but the trust is meant for activities for the entire society including the poor and helpless people."

"The assessee trust carried out activities for the entire society as well as needy and helpless and not just for Pareek Samaj and the observation of the Id. CIT is incorrect and unjustified."

"The assessee has duly provided the details, information and books of accounts extracts as and when desired and its incorrect observation of the ld. CIT as is explained below."

"The defects being curable in nature, we are of the considered view that the assessee applicant needs one chance to establish its stand on merits."

"The matter is restored to the file of ld. CIT(E) for afresh adjudication by providing by adequate opportunity of being heard to the assessee regarding the registration of the trust u/s 12AB of the Act."

The Tribunal's final determinations are that the rejection of registration applications under sections 12AB and 80G was premature and based on incorrect findings regarding the dissolution clause, objects, and genuineness of activities. The provisions of section 13(1)(b) are not applicable at the registration stage. The assessee was not given adequate opportunity to respond to show cause notices. Therefore, the appeals are disposed of by restoring the matters to the CIT(E) for fresh adjudication after affording the assessee proper opportunity to cure defects and clarify issues.