DENIAL OF REGISTRATION UNDER SECTION 12AA OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Trust

The word ‘trust’ is not defined under Income Tax Act, 1961 (‘Act’ for short).  A trust may be formed for charitable purpose or religious purpose.  The trusts which are not intended to do commercial activities are allowed various benefits under the Income-Tax Act, inter-alia, exemption under section 11 of the Act.  The term ‘religious purpose’ is not defined under the Act whereas the expression ‘charitable purpose’ is defined under the Act.

Charitable purpose

Section 2(15) of the Act defines the expression ‘charitable purpose’ as including  relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility.

The advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless-

• such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
• the aggregate receipts from such activity or activities during the previous year do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year.

Registration of trust

Section 12AA of the Act provides the procedure for registration of a Trust up to the period of 31.03.2021.  Section 12AA (1) provides that the Principal Commissioner or Commissioner on receipt of an application for registration of a trust shall-

• call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about,–

• the genuineness of activities of the trust or institution; and
• the compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects,

and may also make such inquiries as he may deem necessary in this behalf; and

• after satisfying himself about the objects of the trust or institution and the genuineness of its activities as required above and compliance of the requirements, he-

• shall pass an order in writing registering the trust or institution;
• shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution,

and a copy of such order shall be sent to the applicant.

No order of rejection shall be passed unless the applicant has been given a reasonable opportunity of being heard.

In M/S. ANANDA SOCIAL AND EDUCATIONAL TRUST VERSUS THE COMMISSIONER OF INCOME TAX & ANOTHER - 2020 (2) TMI 1293 - SUPREME COURT the Supreme Court has laid down the basic principles for allowing registration by observing that Section 12AA 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 said section requires the Commissioner to be so satisfied in order to ensure that the object of the trust and its activities are charitable since the consequence of such registration is that the trust is entitled to claim benefits under sections 11 and 12 of the Act.

Denial of registration

On satisfaction of the Commissioner about the objects of the trust or institution and genuineness of activities he may grant registration or reject registration.  If he intends to reject the registration he shall give a reasonable opportunity to the applicant of being heard.  In this article some case laws are discussed in which the Commissioner of Income Tax (Exemption) rejected the registration.  In all these cases the applicant filed appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short) which either confirm the rejection or set aside the order directing to register the trust.  The various reasons for rejection of registration are discussed along with case laws.

Private religious trust

In ARULMIGU AATHI KARUMAPURAM SELLANDIAMMAN KUDIPAATTUKARAKAL SEVA TRUST, C/O SHRI N. SUBRAMANIYAN VERSUS THE COMMISSIONER OF INCOME TAX (EXEMPTIONS) , CHENNAI - 2023 (5) TMI 785 - ITAT CHENNAI, the assessee trust exists solely for a particular sect of the Hindu religion.   The Commissioner of Income Tax (Exemption) held for provisions of section 11 the beneficiaries of the trust must be public at large and accordingly, private religious trusts are not entitled for exemption of income, thus denied grant of registration under section 12AA.  The ITAT held that in this case, the assessee trust namely, Arulmigu Aathi Karumapuram Sellandiamman Kudipaattukarakal Seva Trust existed for the purpose of Poruleentha Kula Vellala Gounder, which is a sub sect of Vellala Gounder community, established exclusively for them. Therefore, once the assessee trust is established for the purpose of particular sub caste, it is only for the benefit of that sub-caste and thus, it is a private religious trust and registration u/s 12AA of the Act cannot be granted.

Activities on commercial basis

In FERNANDEZ FOUNDATION, HYDERABAD VERSUS COMMISSIONER OF INCOME TAX (EXEMPTION) , HYDERABAD - 2022 (12) TMI 635 - ITAT HYDERABAD, the assessee is running the activities on commercial basis and  is charging on the basis of commercial rates from the patients, either outdoor/indoor.  The registration was rejected.  On appeal by the assessee before ITAT, the Revenue contended that the name of the assessee is different from Registrar of Companies record and PAN to Form 10A/10G and that there was an ambiguity with regard to the name of assessee and its directors and it is evident from the declarations filed by the assessee in Form 11(5) and 13(1) DR of the Income Tax Act.  The ITAT found that the Commissioner of Income Tax (Exemption) in the present case, after analyzing the said documents had recorded the finding mentioned in the impugned order whereby he held that the assessee was running the activities on commercial basis and that the activities of assessee are not of charitable nature.  The assessee can do charity by either bringing down its profit by providing services at reasonable rate or by utilizing the surplus for helping medical aid / facilities to the poor / needy persons at free of cost.  The assessee has failed to demonstrate that the charges / fee charged by it were on a reasonable markup on the cost.  The ITAT did not find any error in the decision of Commissioner of Income Tax (Exemption). Accordingly, the order of Commissioner of Income Tax (Exemption) is upheld by ITAT and the appeal of the assessee is dismissed.

Omission of dissolution clause

In ROOP V.K JAIN FOUNDATION VERSUS THE CIT (EXEMPTION) , CHANDIGARH - 2023 (7) TMI 675 - ITAT DELHI the present appeal has been filed by the assessee against the order of Commission (Exemption) rejecting the approval of trust under Section 12AA of the Act.  The appellant contended that the order of Commissioner is unjust and arbitrary.  The Commissioner has not considered the information/evidence brought on records in correct perspectives while denying the registration.  Further the Commissioner did not hold that the trust if not for charitable purposes.  The Tribunal found that only the ground for rejection of approval is that the trust deed does not contain dissolution clause in the trust deed which is a mandatory clause for any trust deed.  The Tribunal observed that in absence of the clause of dissolution in the trust deed would in no manner and impediment in the operation of the statue. The appellant is ready to include the dissolution clause in the trust deed and submit the same to the satisfaction of Commissioner.  The Tribunal directed the appellant to submit a copy of amended trust deed before Commissioner of Income Tax (Exemption) clarifying the position in a situation dissolution of trust, complying with the requirements of registration granting authority preferably within two months of receipt of this order.  The Tribunal allowed the appeal filed by the appellant.  

Women’s full participation

In ICRW GROUP GRATUITY TRUST, ICLEI SOUTH ASIA GROUP GRATUITY TRUST VERSUS CIT (EXEMPTIONS) , DELHI - 2023 (6) TMI 178 - ITAT DELHI the assessee is a non-profit organization established with the objective of promoting social and economic development with women’s full participation and is incorporated as a company registered under section 25 of the Companies Act, 1956. On going through the objects of the said trust and the reply given by the assessee before the Commissioner of Income Tax (Exemption), the ITAT was  of the considered opinion that the assessee’s activity falls squarely within the object of ‘advancement of general public utility’ as defined in section 2(15) of the Act. Hence, apparently, the activity carried out by the assessee is a charitable activity as per section 2(15) of the Act. It is not in dispute that the assessee’s case does not fall within the ambit of proviso to section 2(15) of the Act, which provides a restriction, if the charitable purpose is not for advancement of general public utility. Hence, the assessee’s case does not fall within the ambit of proviso to section 2(15) of the Act. The Tribunal directed the Commissioner to register the trust.

Discharging the obligation of another trust

In ICRW GROUP GRATUITY TRUST, ICLEI SOUTH ASIA GROUP GRATUITY TRUST VERSUS CIT (EXEMPTIONS) , DELHI - 2023 (6) TMI 178 - ITAT DELHI, the ITAT held that any trust that has been created for the purpose of managing the statutory obligations of employees of the parent trust would certainly fall within the ambit of advancement of general public utility and, hence, to be considered as a charitable activity as defined u/s 2(15) of the Act.

Application to be filed within the time

In MUKESH PATEL CHARITABLE TRUST, C/O SHRI BHUPESH RASIKLAL PATEL VERSUS CIT, EXEMPTION, PUNE - 2023 (6) TMI 120 - ITAT PUNE the assessee filed Form No. 10AB electronically on 28.09.2022 seeking registration under section 12AA of the Act. The Commissioner of Income Tax (Exemption) with a view to verify the genuineness of the activities of the assessee, a notice was issued through ITBA portal on 13.01.2023 requesting the assessee to upload certain information/clarification i.e. date of commencement of activity, date of expiry of provisional registration, details of any other law applicable for achievement of objectives and the proof of compliance of said law, proof of identity of main trustees/directors, year-wise list of donations received, list of donors, note on activities along with supporting credible evidence, details of business undertakings etc. It was stated that the assessee has to submit the said details by 27.01.2023. According to Commissioner of Income Tax (Exemption) no compliance was made by the assessee. In order to give another opportunity another notice dated 02.02.2023 issued to the assessee why application filed seeking registration under section 12AA of the Act should not be rejected, for which it is noted from para No. 2.1 of the impugned order, no compliance was made by the assessee. Therefore, the Commissioner of Income Tax (Exemption) rejected the application seeking registration under section 12AA of the Act by holding that the assessee failed to furnish the details as called for under the provisions of the Act.  The ITAT observed that the CBDT vide circular No. 6 of 2023 clarified the time for filing Form 10AB was further extended to 30.09.2023.  The ITAT remanded the matter to the Commissioner of Income Tax (Exemption) who will give an opportunity to the assessee to furnish all the required documents as called by the Commissioner of Income Tax (Exemption) in the interest of justice.  The assessee was directed to file evidences, if any, in support of his claim. 

Non verification of documents

In DIVINE EDUCATION TRUST VERSUS THE CIT (EXEMPTION) AHMEDABAD - 2023 (5) TMI 415 - ITAT AHMEDABAD, the assessee is a Public Charitable Trust registered under the Bombay Public Trust Act, 1950 having registration number from 28.06.2018, with the object to run educational institutions such as Pre-primary, Junior KG, Senior KG, Graduation and Master Degree, Old-age Coaching classes, Night coaching classes, Ashrum school and Army school. The Trust is having object which is covered as charitable as per section 2(15) of the Act. Thus the assessee Trust filed application for registration under section 12AA of the Act, in Form No. 10A along with details and documents on 18.07.2019.  The assessee further submitted the documents as directed by the Commissioner of Income Tax (Exemption).  Without considering the document he rejected the application.  On appeal the ITAT held that the Commissioner of Income Tax (Exemption) erred in not considering the submissions, documents and details furnished by the assessee trust. Therefore to meet the ends of justice and also in the Principle of Natural Justice, the ITAT deem it fit to set aside impugned order and remit the matter back to the file of Commissioner of Income Tax (Exemption) with a direction to reconsider the application filed by the assessee in Form No. 10A along with all the documents and evidences filed by the assessee trust by giving one more opportunity to the assessee to submit its case.

Charitable activities

In DHARAM CHANDAN CHARITABLE TRUST VERSUS CIT (EXEMPTION) CHANDIGARH - 2023 (4) TMI 1211 - ITAT AMRITSAR, the assessee is a charitable trust, and the application was made under section 12AA for registration. The dispute was raised by the Commissioner of Income Tax (Exemption) related to payment to the party. As per revenue, the assessee was unable to substantiate and to recognize the payment in relation to the activities. The assessee filed a detailed submission before the revenue. The application of registration was rejected by the Commissioner of Income Tax (Exemption).  Against this order the assessee filed an appeal before the ITAT.  The Commissioner of Income Tax (Exemption) alleged that the payment made by the assessee to Bharat Timber Store, amounting to Rs.22,500/- and Jai Maa Enterprises & Platinum Health Care, amounting to Rs.3,68,761/- were failed to explain related to the purpose of payment, identity, and relationship with the assessee-trust.    The payment made to Shree Gau Sewa Society (Regd), and payment to Sh. Ram Pratap Yadav and to Sh. Vimal Yadav, two children for their education are also unexplained before the authority. The ITAT observed that the assessee submitted an explanation to these payments.  The ITAT found that the said payment was related to the charitable activities of the trust. For registration under Section 12AA it is clearly stipulating that the Commissioner of Income Tax (Exemption) shall satisfy himself about the objects and the genuineness of its activities. The assessee made the payments in relation to charitable activities of trust. The Department had not made any strong objection related to submission of the assessee and the evidence which are filed before the bench. The ITAT set aside the order of the Commissioner of Income Tax (Exemption) and directed to grant the registration of the assessee.

In B.M.L. WELFARE TRUST VERSUS COMMISSIONER OF INCOME TAX (EXEMPTIONS) , CHANDIGARH - 2023 (3) TMI 429 - ITAT AMRITSAR, the application for registration under section 12AA was denied. The objection of Commissioner of Income Tax (Exemption) was that an arrangement was made by a group of persons who own the land and had given this land on lease to their partnership firm which subsequently given to their trust at an exorbitant rent. As the trust has paid a huge rent, it becomes clear that these persons are diverting funds of the trust to a partnership firm which is nothing but an entity controlled by trustee/members of the appellant trust.  The ITAT held that merely questioning the purpose of creation of Trust without disputing the charitable nature of objects, genuineness of activities and the manner of carrying out the activities of the trust in consonance to its objectives renders the impugned order of the Commissioner of Income Tax (Exemption) is perverse to the facts on record. Further, the only requirement for granting the registration is that the object of the society should be charitable in nature and its activities were genuine.  The ITAT directed the Commissioner of Income Tax (Exemption) to grant registration to the appellant.

In M/S SAIN MIRAN BABA DARVESH GHULAM QUADIR TRUST VERSUS COMMISSIONER OF INCOME TAX (EXEMPTIONS) , CHANDIGARH - 2022 (12) TMI 737 - ITAT AMRITSAR, the application of the  assessee for registration of their trust under Section 12AA was rejected by the Commissioner of Income Tax (Exemption) holding that the activities of the trust are not charitable but commercial.  The ITAT held that from conjoint reading of the Trust Deed, it is axiomatic that primary purpose/objects of the assessee enumerated in the Trust Deed are charitable in nature. The other clauses of the Trust Deed had to be necessarily read in the context of the aforesaid clauses. Even otherwise, the activities of the assessee as set out in the Trust Deed are covered within the ambit of charitable purpose being primarily for medical help and relief to poor besides imparting value addition to general public through spiritual teaching and education from madrasa and masjids.  The aforesaid activities in consonant to objectives of the trust have not been disproved by the Commissioner of Income Tax (Exemption). Therefore, the issue with regard to the activity of the assessee being not that of commercial or business in nature, the issue of cash transaction cannot be gone into at the time of consideration of the application under section 12AA of the Act.  The ITAT held that the order of the Commissioner of Income Tax (E) is perverse to the facts on record. We further hold that there was no material on record to hold that objects of the trust were either not charitable in nature or its activities were not genuine. Therefore, the Commissioner of Income Tax (Exemption), Chandigarh is directed to grant the registration u/s. 12AA of the Act to the appellant trust from the date of application. Appeal filed by the assessee is allowed.

Conclusion

We can infer from the above said case laws that for registration of a trust the object of the trust shall be charitable and genuine.  The Commissioner of Income Tax (Exemption) is to satisfy that the objects of the trust are charitable in nature and genuine and not for commercial purposes.  Any trust wants to be registered under the Act has to comply with the above.  With effect from 01.04.2021 Section 12AB prescribes the procedure for registration of a trust.