Trust receiving donations under no obligation to verify source of fund or if it was acquired by unlawful activity

Trust receiving donations under no obligation to verify the source of fund of donor or whether such fund was acquired by any unlawful activity- High Court

ABCAUS Case Law Citation:
ABCAUS 2577 (2018) (10) HC

Important Case Laws Cited/relied upon by the parties:
CIT v. Red Rose School
CIT v. Islamic Academic of Education
CIT v. Apeejay Education Society
CIT v. Mumbai Metropolitan Regional Iron and Steel Market Committee
CIT v. Chaudhary Son Pal Singh
CIT v. S. Khader Khan Son
CIT v. S. Khader Khan Son

The assessee was a charitable trust registered under section 12AA of the Income Tax  Act, 1961 (the Act). The registration of assessee as a trust was cancelled by the Commissioner of Income Tax (CIT) in exercise of powers under section 12AA(3) of the said Act. The appeal of the assessee was dismissed by the Income Tax Appellate Tribunal (the tribunal). The assessee was in appeal before the Hon’ble Supreme Court.

The Hon’ble Supreme Court observed that the provisions of section 12AA provides that before the section can be applied, the Principal Commissioner has to be satisfied that the activities of a trust were not genuine or were not being carried out in accordance with the objects of the trust or institution. In such circumstances, he could cancel its registration.

The Hon’ble Supreme Court opined that the use of the expression “the activities of such trust or institution are not genuine” appearing in the section suggests that the trust, in the opinion of the Commissioner, should be proved to be carrying on some other activity in the garb of a trust with benevolent purposes. That would make the activity not genuine. Or the trust could be involved in any unlawful activity. The second part of the said sub-section could imply that the trust was being utilised for some other purpose than one for which it was created. For example, a religious and charitable trust is found to be operating for the benefit of a particular person.

It was noted that the trust had several donors. The Hon’ble Supreme Court concurred with the argument that when the trust received donations, it was under no obligation to verify the source of the fund of the donor or whether such fund was acquired by performance of any unlawful activity. At least the appellant trust did not make the inquiry and accepted donations innocently.

The assessee also submitted that these donations were applied for the purpose of the trust. There was no evidence to suggest that these funds were applied for any illegal or immoral purpose or that the trust was namesake and that some other activity was carried on with those funds in the garb of the trust. Any such fault could not be established by the commissioner.

However, the Revenue strongly argued that there were many such trusts which have been created to be used for illegal purpose or for money laundering.

The Hon’ble Supreme Court opined that on the basis of the evidence and the authorities cited before the adjudicating bodies below, the Revenue was not able to establish the case so as to warrant cancellation of the registration of the appellant trust under section 12AA(3) of the Act.

The High Court also observed that the Revenue also could not prove any complicity of the appellant trust in any illegal, immoral or irregular activity of the donors.

Accordingly, the order of cancellation of the registration of the trust was set side. The CIT was directed to restore its registration.

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