Registration of trust us 12A not involve enquiry into actual activities or application of funds, etc. which may be examined at the stage of assessment. High Court
ABCAUS Case Law Citation:
ABCAUS 2149 (2017) (12) HC
This income tax appeal was filed under Section 260-A of the Income Tax Act, 1961 (the Act) by the Commissioner of Income Tax (CIT) against the order passed by the Income Tax Appellate Tribunal (Tribunal/ITAT) in granting registration and exemption u/s 12 AA.
Brief Facts of the Case:
The assessee trust had made an application for registration under Section 12A of the Act. The said application was rejected by the CIT on several grounds which were all concerned with non submission of audit report; alleged discrepancies in donors list; discrepancies noticed in the balance sheet; alleged deficiencies in documentary evidence pertaining to purchase of land; utilisation of funds; etc.
Being aggrieved, the assessee carried the matter in appeal before the Tribunal. The Tribunal allowed the appeal by following the judgment of a division bench of Allahabad High Court in which it was held as under:
“The preponderance of the judicial opinion of all the High Court including this court is that at the time of registration under Section 12AA of the Income Tax Act, which is necessary for claiming exemption under Section 11 & 12 of the Act, the Commissioner of Income Tax is not required to look into the activities, where such activities have not or are in the process of its initiation. Where a trust set up to achieve its objects of establishing educational institution, is in the process of establishing such institutions, and receives donations, the registration under Section 12AA cannot be refused, on the ground that the trust has not yet commenced the charitable or religious activity. Any enquiry of the nature would amount to putting the cart before the horse. At this stage only the genuineness of the objects has to be tasted and not the activities, which have not commenced. The enquiry of the Commissioner of Income Tax at such preliminary stage should be restricted to genuineness of the objects and not the activities unless such activities have commenced. The Trust or society cannot claim exemption, unless it is registered under Section 12AA of the Act and thus at that such initial stage the test of the genuineness of the activity cannot be a ground on which the registration may be refused.
It is not denied that for subsequent year the appellant has been granted exemption under Section 12AA and has also been approved under Section 80G of the Act, subject to certain conditions. If the Commissioner of Income Tax was satisfied with the genuineness of the objects of the trust for the subsequent assessment year, the refusal of the registration for the previous assessment year 2011-12 was not justified.
The question of exemption of the application of income received by way of donation, is a separate issue and which may be required to be considered, when the return is filed by the Trust and is examined by the Income Tax Officer. The question as to whether the donations by the societies was the expenditure of the Trust for charitable and religious purposes will be examined at the time of examining the return.
In the result the income tax appeal is allowed. All the three substantial questions of law formulated as above are decided in favour of the assessee, and against the revenue with a clarification that the registration under Section 12AA and approval under Section 80G would not by itself entitle the Trust for exemption of the income of its donors or of the Trust for the assessment year 2011-12. For claiming such exemption the returns of the donor and the Trust will be examined, for orders to be made in accordance with law.”
The Tribunal found that the objection raised by the CIT were not relevant for the purpose of grant of registration. At that stage, the objection of the trust were required to be examined in the backdrop of the legislative intent to grant exemption to the trust ‘pursuing charitable purpose’ as defined under Section 2(15) of the Act.
Thereafter, the Tribunal found that the assessee was set up to achieve its object of establishing educational institution or trust, which activity per se is a charitable purpose under Section 2(15) of the Act. The Tribunal then reasoned that at this stage the reasons given by the CIT to reject the application for grant of registration are not valid and those issues may arise separately at the stage of assessment proceedings.
The Substantial Questions of Law framed/pressed for determination:
1. Whether the ITAT erred in law in granting registration and exemption u/s 12-AA and 80-G(5) even after the assessee has not spent 85% of its income and furthermore has produced unreliable balance sheet and two separate list of donors which remained un-reconciled and no evidence regarding any charitable activity under taken.
2. Whether the ITAT erred in law in restricting the powers of the CIT as provided u/s 12-AA stepped beyond its jurisdiction as the legislative powers of investigation provided by the legislature cannot be curtailed by judgments.
Observations made by the High Court:
The Hon’ble High Court opined that registration of the trust does not involve enquiry into the actual activities or application of funds, etc. The Tribunal had committed no error in following the earlier order.
The Hon’ble High Court opined that at that stage, the only enquiry required to be conducted was with respect to the object of the trust alone. The objection raised by the Commissioner pertain to matters that may be examined at the stage of assessment. At that stage, if the assessee were to be found to have actually engaged in any non-charitable activity, the benefit of exemption may be denied at that stage in the manner provided by the Act.
The appeal was dismissed as lacking in merit.