2025 (4) TMI 1449 - AT - Income Tax

Rejection of application for registration u/s 12A - even there is a clause in the Trust deed for paying Honorarium or salary to the trustee against his/her services or involvement in any of the project or programs run by the trust which is in violation of section 13(3) of the Act regardless of the fact that whether any payment in honorarium or salary is made to specified persons the applicant is ineligible for registration u/s 12A HELD THAT - If the functionary is a salaried employee under an employment contract and therefore is being paid salary which is a contractual obligation on the part of the Trust then such remuneration is permissible. There has to be a reason or cause of action to infer and conclude that any benefit was provided to the functionary. A benefit implies payment of anything which is not legally due to a person therefore the salaries paid cannot be treated as a benefit. It may also be noted that payment of salary per se is not a benefit. To establish that some benefit was passed u/s 13(1)(c) of the Act it will be incumbent on the AO to have reasons to believe that the remuneration were legally not due to the employees/functionaries. Once the legal eligibility of the trustees/board members to receive salary as full time employee is not disputed then the only option available is to see the reasonableness of the salaries under section 13(2)(c) of the Act. Therefore we agree with the contention of assessee that the provision of section 13(3) of the Act cannot be pressed into play to decide the eligibility of registration of the Trust. In view of the above discussion we set aside the order of the rejection passed by the ld. CIT(E) Kochi and direct to grant the registration to the assessee as sought vide application in form 10AB dated 30/09/2023. Appeal filed by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

(a) Whether the rejection of the application for registration under section 12A of the Income Tax Act, 1961, on the ground that the trust deed contains a clause permitting payment of honorarium or salary to trustees, is legally sustainable.

(b) Whether the provisions of section 13(3) of the Income Tax Act can be invoked at the stage of registration under section 12A, or whether they apply only at the time of assessment of income under sections 11 and 12.

(c) Whether the presence of a clause in the trust deed allowing payment of honorarium or salary to trustees, without actual payment having been made, constitutes a violation sufficient to reject registration.

(d) Whether the principles of natural justice were violated by the Commissioner of Income Tax (Exemption) in rejecting the application without granting a personal hearing or adequate opportunity to cure alleged defects.

(e) Whether the Commissioner was justified in rejecting the registration application without specific objections being raised in earlier communications and without providing a fair opportunity to address the alleged defects.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (c): Legality of rejection of registration application based on clause permitting payment of honorarium or salary to trustees in the trust deed, without actual payment

Relevant legal framework and precedents: Section 12A of the Income Tax Act governs registration of trusts for claiming exemption under sections 11 and 12. Section 13 of the Act provides exceptions under which income exemption can be denied, particularly section 13(3) which prohibits payment of salary or honorarium to trustees beyond reasonable limits. Section 13(1)(c) prohibits benefits to trustees or specified persons, and section 13(2)(c) allows reasonable remuneration for services rendered. The Supreme Court in CIT Vs Kamala Town Trust established that section 13 carves out exceptions to exemptions and the burden lies on the Revenue to establish contravention.

Court's interpretation and reasoning: The Tribunal held that the mere presence of a clause in the trust deed permitting payment of honorarium or salary to trustees does not render the trust non-genuine or ineligible for registration under section 12A. The Tribunal emphasized that section 13(3) is triggered only when actual payments are made in excess of reasonable remuneration. The Tribunal observed that no actual payment of honorarium or salary to trustees had been made in this case, and thus no violation of section 13(3) had occurred.

Key evidence and findings: The trust deed contained a clause under "Powers of Trustees" allowing payment of honorarium or salary to trustees for services or involvement in projects, subject to approval by the Board. The Revenue relied on this clause to reject registration. The assessee submitted that no payments had been made. The Tribunal noted the absence of evidence of any salary or honorarium payments to trustees.

Application of law to facts: The Tribunal applied the legal principle that section 13(3) applies at the assessment stage to deny exemption if unreasonable payments are made. Since no payments had been made, the clause alone could not justify rejection of registration. The Tribunal further noted that reasonable remuneration is permissible under section 13(2)(c) and that payment of salary per se is not considered a "benefit" under section 13(1)(c).

Treatment of competing arguments: The Revenue argued that the clause itself violated section 13(3) and rendered the trust ineligible for registration. The assessee argued that section 13(3) applies only at assessment and no payments had been made. The Tribunal sided with the assessee, reasoning that the clause without actual payment does not trigger disqualification.

Conclusions: The Tribunal concluded that the impugned order rejecting registration on the sole ground of the clause permitting honorarium or salary payments, without any actual payment, was legally flawed and unsustainable.

Issue (b) and (g): Applicability of section 13(3) at registration stage under section 12A

Relevant legal framework and precedents: Section 12A governs registration of trusts for exemption, while section 13(3) provides exceptions applicable at the assessment stage. The Supreme Court ruling in Kamala Town Trust clarified that section 13 exceptions are to be applied during assessment.

Court's interpretation and reasoning: The Tribunal held that section 13(3) cannot be pressed into service to reject an application for registration under section 12A. The Tribunal emphasized that section 13(3) is designed to be applied at the time of income assessment to determine whether exemption under sections 11 and 12 should be denied due to improper payments.

Key evidence and findings: The Revenue relied on section 13(3) to reject registration based on the trust deed clause. The assessee contended that section 13(3) is irrelevant at the registration stage.

Application of law to facts: The Tribunal applied the statutory scheme and judicial precedents to hold that section 13(3) is not a ground to deny registration under section 12A. Registration is to be granted if the objects and activities are genuine and charitable, and compliance with section 13(3) is to be examined at assessment.

Treatment of competing arguments: The Revenue urged that section 13(3) violation in the trust deed itself disqualifies the trust. The assessee argued that section 13(3) applies only at assessment, not registration. The Tribunal accepted the latter view.

Conclusions: The Tribunal concluded that section 13(3) provisions cannot be invoked to reject registration applications under section 12A.

Issue (d) and (f): Violation of principles of natural justice and denial of personal hearing

Relevant legal framework: Principles of natural justice require that a party be given a fair opportunity to be heard before adverse orders are passed. Section 12AB requires the Commissioner to pass an order after affording reasonable opportunity of being heard.

Court's interpretation and reasoning: The Tribunal noted the appellant's contention that no personal hearing was granted despite a specific request. The Tribunal observed that the Commissioner is required to be satisfied about the genuineness of the trust and must pass an order in writing after affording reasonable opportunity to be heard.

Key evidence and findings: The appellant had requested personal hearing and filed objections. A personal hearing was conducted by the ITO (Exemption), but the appellant contended that the final order was passed arbitrarily without adequate opportunity. The Tribunal noted the communication timeline and the absence of specific objections in earlier notices regarding the clause.

Application of law to facts: The Tribunal emphasized that rejection of registration without affording a fair opportunity to cure defects or explain the clause violates natural justice. The absence of specific objections in earlier notices compounded the unfairness.

Treatment of competing arguments: The Revenue did not dispute the procedural lapse but relied on the clause to justify rejection. The Tribunal found the procedural infirmity significant.

Conclusions: The Tribunal held that the impugned order was passed in haste and without fair opportunity, violating principles of natural justice, thus warranting setting aside the order.

Issue (e): Arbitrary rejection without prior objection and failure to allow curing of defects

Relevant legal framework: The Commissioner must give notice of objections and allow the applicant to rectify defects before rejecting registration under section 12AB.

Court's interpretation and reasoning: The Tribunal noted that the Department's letter dated 25th October 2023, and the notice dated 4th January 2024, did not raise any objection regarding the clause in the trust deed that was ultimately the basis for rejection. The Tribunal found the rejection arbitrary and premature.

Key evidence and findings: The appellant had made amendments to the trust deed per Department instructions and had filed detailed replies and documents. The rejection was based on a new ground not previously communicated.

Application of law to facts: The Tribunal applied the principle that the applicant must be given an opportunity to cure defects once notified. The failure to do so rendered the rejection arbitrary.

Treatment of competing arguments: The Revenue argued that the clause itself was a disqualifying factor. The Tribunal rejected this, emphasizing procedural fairness.

Conclusions: The Tribunal concluded that the rejection was arbitrary and without due procedure, and hence unsustainable.

3. SIGNIFICANT HOLDINGS

"The mere fact that the trust deed is having clause under the head 'Powers of the Trustees' to receive honorarium or salary against the services or involvement by the trustee does not render the trust non-genuine or its activity becomes ineligible for registration u/s 12AB of the Act."

"The provisions of section 13(3) of the Act will trigger only in cases where the amount so paid to the trustee by way of salary or allowance or otherwise out of the resources of the trust or institution for services rendered by that person is in excess of what may be reasonably paid for such services."

"Payment of salary per se is not a benefit. To establish that some benefit was passed under section 13(1)(c) of the Act, it will be incumbent on the AO to have reasons to believe that the remuneration were legally not due to the employees/functionaries."

"Section 13(1)(c) does not prohibit payment of remuneration; it gets attracted if any benefit is provided to interested persons."

"The provision of section 13(3) of the Act cannot be pressed into play to decide the eligibility of registration of the Trust."

"Section 12AB undoubtedly requires the Commissioner to satisfy himself about the objects of the trust or institution and genuineness of its activities and grant a registration only if he is so satisfied."

"The Commissioner shall pass an order in writing either by granting the registration of the trust or cancelling its registration after affording a reasonable opportunity of being heard."

"Rejecting the application without providing such opportunity is unjust and is in violation of principles of natural justice."

The Tribunal set aside the order of rejection and directed the grant of registration under section 12A as sought by the appellant.