2025 (7) TMI 16 - AT - Income Tax

Rejection of application for registration u/s 12AB - discrepancies were noticed including that the application is not under appropriate clause - HELD THAT - Admittedly the assessee trust was required to obtain permission from Charity Commissioner regarding loans but the same was not obtained timely. However we also find that the assessee has already applied before Charity Commissioner for post facto approval of such loans. Considering the totality of the facts of the case in the interest of justice and without going into merits of the case we deem it proper to setaside the order passed by Ld. CIT Exemption Pune and remand the matter back to him with a direction to decide the application afresh Thus the grounds of appeal filed by the assessee are partly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

• Whether the rejection of the application for registration under section 12AB of the Income Tax Act, 1961, on grounds of non-compliance with procedural and substantive requirements, was justified.
• Whether the assessee trust was required to obtain prior sanction from the Charity Commissioner under section 36A of the Maharashtra Public Trust Act, 1950, for loans raised, and whether failure to obtain such sanction justified rejection of registration.
• Whether the regular registration granted under section 12AB read with clause (i) of section 12A(1)(ac) was valid or liable to be cancelled on the basis of alleged misrepresentation and non-compliance.
• Whether the assessee was afforded adequate opportunity of hearing and an opportunity to furnish clarifications before rejection of the registration application.
• Whether the delay of 110 days in filing the appeal before the Tribunal was liable to be condoned.

2. ISSUE-WISE DETAILED ANALYSIS

Delay in Filing Appeal

The Tribunal considered the delay of 110 days in filing the appeal against the order rejecting registration. The assessee submitted an application for condonation of delay supported by an affidavit explaining the reasonable cause for the delay. The Revenue raised no serious objection to the condonation request. The Tribunal found the explanation satisfactory and accordingly condoned the delay. This is consistent with established principles that delay caused by reasonable cause should be condoned unless prejudice is shown.

Validity of Rejection of Application for Registration under Section 12AB

The assessee's application for registration under section 12AB was rejected by the Ld. CIT, Exemption, Pune on multiple grounds:

• Failure to furnish copy of order or registration under section 12A or 12AA prior to 01/04/2021, suggesting that the earlier registration was obtained by misrepresentation and was invalid.
• Failure to furnish copy of provisional registration under section 12AB, which was a prerequisite under clause (i) of section 12A(1)(ac).
• Raising of loans without obtaining prior sanction from the Charity Commissioner under section 36A of the Maharashtra Public Trust Act, 1950.

The Tribunal examined these grounds in light of the legal framework and facts.

Legal Framework and Precedents

Section 12AB of the Income Tax Act governs the registration of charitable trusts and institutions, conferring exemption benefits. Registration requires compliance with procedural mandates and genuineness of activities. Clause (i) of section 12A(1)(ac) mandates that an application for registration must be accompanied by requisite documents including prior registration orders if applicable.

Section 36A of the Maharashtra Public Trust Act, 1950, mandates that no trustee shall borrow money on behalf of the trust without prior sanction of the Charity Commissioner. This provision is intended to protect trust assets and ensure lawful management.

Court's Interpretation and Reasoning

The Tribunal noted that the Ld. CIT, Exemption, Pune found discrepancies in the application, particularly the absence of prior registration documentation and failure to obtain prior sanction for loans. The Tribunal acknowledged that the assessee did not furnish the required prior registration orders and that the regular registration granted in 2021 was declared invalid by the Ld. CIT.

Regarding loans, the assessee contended that loans were taken from trustees and not financial institutions, thus no sanction was required. The Tribunal referred to section 36A(3) of the Maharashtra Public Trust Act, which clearly states that any borrowing by trustees requires prior approval from the Charity Commissioner regardless of the source of the loan. Therefore, the assessee's contention was rejected as legally untenable.

Key Evidence and Findings

The Ld. CIT's order highlighted that the assessee failed to provide the copy of prior registration orders and did not obtain prior sanction for loans. The assessee's submission that post facto approval was sought from the Charity Commissioner was noted by the Tribunal. The Tribunal also observed that most loans were taken prior to 2019, which complicated the issue of sanction.

Application of Law to Facts

The Tribunal applied the statutory provisions strictly, recognizing the mandatory nature of prior sanction under section 36A of the MPT Act and the requirement of proper documentation for registration under the IT Act. However, it balanced this strict approach with principles of natural justice and fairness.

Treatment of Competing Arguments

The assessee argued that the rejection was harsh and that at least one last opportunity to clarify should have been granted before rejecting the application. The Tribunal agreed with this contention, emphasizing that the Ld. CIT did not provide an opportunity for further clarification after noticing discrepancies. The assessee also highlighted that post facto approval applications were pending before the Charity Commissioner, which the Tribunal took into account.

The Revenue relied on the Ld. CIT's order and urged confirmation of rejection, emphasizing non-compliance with statutory requirements.

Conclusions

The Tribunal concluded that while the assessee failed to comply with mandatory requirements, the principles of natural justice required that the assessee be given a reasonable opportunity to respond and clarify. The Tribunal found it appropriate to set aside the rejection order and remand the matter to the Ld. CIT, Exemption, Pune for fresh adjudication after providing a reasonable opportunity of hearing.

The Tribunal also directed the assessee to respond to notices and produce all supporting documents without seeking adjournments, warning that failure to comply would entitle the Ld. CIT to pass an appropriate order as per law.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Section 36A(3) of the MPT Act, 1950 provides that no trustee shall borrow moneys (whether by way of mortgage or otherwise) for the purpose of or on behalf of the trust of which he is a trustee, except with the previous sanction of the Charity Commissioner, and subject to such conditions and limitations as may be imposed by him in the interest or protection of the trust."

"Considering the totality of the facts of the case & in the interest of justice and without going into merits of the case, we deem it proper to setaside the order passed by Ld. CIT, Exemption, Pune and remand the matter back to him with a direction to decide the application afresh as per fact and law after providing reasonable opportunity of hearing to the assessee."

The core principles established include:

• Strict compliance with statutory requirements under the Income Tax Act and Maharashtra Public Trust Act is mandatory for registration and maintenance of trust status.
• Prior sanction from the Charity Commissioner is mandatory for any borrowing by trustees, irrespective of the lender's identity.
• Natural justice requires that before rejecting an application on grounds of non-compliance or discrepancies, the applicant must be given reasonable opportunity to clarify or rectify defects.
• Post facto approval applications pending before competent authorities can be a relevant factor in deciding registration applications.
• Delay in filing appeals can be condoned if reasonable cause is shown and no prejudice is caused to the Revenue.

Final determinations:

• The delay of 110 days in filing the appeal was condoned.
• The rejection of the registration application by Ld. CIT, Exemption, Pune was set aside.
• The matter was remanded to Ld. CIT, Exemption, Pune for fresh adjudication after affording reasonable opportunity of hearing and considering all relevant documents and submissions.
• The regular registration granted in 2021 was cancelled by the Ld. CIT, but the Tribunal did not expressly uphold or reverse this cancellation, focusing instead on the fresh adjudication of the current application.