2019 (11) TMI 1840 - HC - Income Tax

Exemption u/s 11 - Assessment of trust - acceptance of foreign contribution by an association having definite cultural, economic, educational religion or social programme - as submitted entire account of the Trust is being regularly audited and the same is being approved by the Income Tax Authorities for Tax exemption considering the status of the Trust as a public religious Trust -Trust's registration u/s 12AA of the Income Tax Act was relevant to the FCRA application or not? - HELD THAT - HELD THAT - Appellant Trust has desperately failed to carry out the real object, for which the Trust has been created. Under these circumstances, the appellants' contention that they have filed the application for the purpose of obtaining the Foreign Contribution to carry out the welfare activities of the public, is only with a view to get the money under the umbrella of welfare activities. Therefore, this court is of the view that the contention of the appellant Trust that the respondent has mechanically rejected their application has no merits. The respondent has considered the aims and services rendered by the appellant Trust and also the welfare activities and thereafter, passed the order rejecting the application of the appellant. As stated by this Court above, the appellant Trust has been spending very meagre amount to the welfare activities, when the main intention for the constitution of the Trust is only for welfare activities and on perusal of the balance sheet, it clearly appears that they are not on the welfare activities, on the other hand it shows that there are lot of income out of the rental income and through other modes, which appears that they are more involved in commercial activities than the welfare activities. The revenue of the appellant Trust for the year ending of 31.03.2019 is more than Rs. 8 Crores. When the revenue was Rs. 8 Crores and the Trust was created for the purpose of welfare activities, not only for the particular religion, but also for all the religion, here towards the welfare activities, the amount spent by the appellant Trust was very meagre, which clearly shows the intention of the Management, not much on the welfare activities, but on the other activities including in the commercial activities. Even on the mere perusal of the balance sheet, it appears that the involvement of the appellant association in the welfare activities is very very meagre even less than 1%. But on the other hand, on perusal of Trust deed it appears that the appellant association going to involve completely in the welfare activities. Therefore, the acts performed by the appellant association so far, is not in accordance with the Constitution of the Trust and hence, this Court is of the view that the rejection of the application of the appellant Trust by the respondent is genuine and with the proper reason. This Court would like to observe that as stated above, the object of the Trust and the welfare activities of the Trust is very meagre, which is less than 1% and therefore, this Court is of the opinion that the exemption granted by the Income Tax authorities also requires to be reviewed, apart from taking appropriate action for failure on the part of the appellant association to carry out the object of the creation of the Trust, through the appropriate authorities, who granted permission for Trust.

Issues Involved:

1. Whether the order passed by the respondent was a non-speaking order.
2. Whether the respondent failed to consider the aims and services rendered by the appellant Trust.
3. Whether the rejection of the application was justified based on the financial activities of the Trust.
4. Whether the Trust's registration under Section 12AA of the Income Tax Act was relevant to the FCRA application.
5. Whether the appellant was given an opportunity to present their case.

Issue-wise Detailed Analysis:

1. Non-speaking Order:
The appellant contended that the rejection of their application for foreign contribution was a non-speaking order, implying that the decision lacked detailed reasoning. The court, however, found that the respondent had indeed provided reasons for the rejection, specifically referencing the financial discrepancies and the potential misuse of funds as outlined in Section 12(4)(a)(vi) of the FCRA, 2010. The court concluded that the order was not mechanical and had substantive grounds.

2. Consideration of Aims and Services:
The appellant argued that the respondent did not consider the historical and ongoing welfare activities of the Trust. The court examined the financial records and found that the Trust had spent a very small portion of its income on welfare activities, contrary to its stated objectives. The court observed that the Trust's activities did not align with its declared purpose of public welfare, which justified the respondent's decision to reject the application.

3. Justification of Application Rejection:
The respondent's decision was based on findings that the Trust was operating on a commercial basis, with a significant gap between income and expenditure on welfare activities. The court reviewed the financial statements, noting that the Trust's expenditure on charity was minimal compared to its income, which exceeded Rs. 8 Crores. The court agreed with the respondent's assessment that the Trust was likely to use foreign contributions for personal gains rather than for the intended welfare purposes.

4. Relevance of Section 12AA Registration:
The appellant highlighted its registration under Section 12AA of the Income Tax Act for tax exemption as evidence of its legitimacy. However, the court clarified that such registration was not directly relevant to the FCRA application. The FCRA has its own criteria and conditions, which focus on the actual use of foreign contributions. The court found that the Trust's financial activities did not meet these criteria, justifying the respondent's decision.

5. Opportunity to Present Case:
The appellant claimed they were not given a chance to present their case. The court noted that the respondent had communicated the decision and the reasons for rejection via email and SMS, as per the contact details provided by the appellant. The court did not find any procedural lapses in how the respondent handled the application process.

Conclusion:
The court dismissed the appeal, upholding the respondent's decision to reject the application for foreign contribution. It found that the Trust's financial practices did not align with its stated welfare objectives and that the rejection was based on valid concerns about the potential misuse of funds. The court also suggested a review of the Trust's tax exemption status, given the discrepancies in its financial activities.

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