2022 (5) TMI 1384 - AT - Income Tax

Exemption u/s 11 - grant of registration u/s 12A - CIT(E) has rejected the application of assessee for grant of registration u/s 12A on four grounds, firstly that the assessee s constitution(MOA) does not have irrevocability clause, secondly that the constitution of the assessee also does not provide that in case of winding up/dissolution of the assessee, its funds /property will be transferred to another charitable entity, thirdly that the constitution of the assessee does not have a clause that the beneficiaries are a section of public and not specific individuals, and fourthly that the assessee will use its funds/property for its objects - HELD THAT - CIT(E) asked assessee to incorporate these clauses in its constitution/MOA, but the assessee did not produce amended constitution(MOA), neither before the ld. CIT(E) and nor even before us. The primary condition for grant of registration u/s 12A is that the assessee is a public charitable trust and is required to fulfill the conditions as are mandated under the 1961 Act for grant of exemption from tax. In the instant case, the assessee constitution/MOA clearly provides that in case of winding up/dissolution of the assessee, the proceeds of assets /property shall be distributed amongst the members, which clearly militate against the charitable nature of the trust - there is no irrevocability clause, that the creation of the charitable entity is irrevocable and all the funds/ property which become part of the assessee shall not revert back to the contributories/members. The constitution/MOA of the assessee does not have a clause that property/funds of the assessee shall be used solely for the charitable objects of the assessee. Further the constitution/MOA does not have a clause that the beneficiaries of the assessee shall be public atlarge, and not specific individuals. The assessee has not produced amended constitution/MOA even before tribunal, and since the assessee is claiming itself to be charitable entity seeking exemption of its income u/s 11 and 12, the onus is on the assessee to prove that it is a charitable entity fulfilling all the statutory requirements. Under these circumstances, we do not find any merit in the appeal filed by the assessee, which stood dismissed.

Issues Involved:
1. Rejection of application for registration u/s 12A(1) of the Income-tax Act, 1961.
2. Compliance with statutory requirements for charitable institution registration.
3. Lack of irrevocability clause in the constitution/MOA.
4. Failure to incorporate necessary clauses in the constitution/MOA.
5. Distribution of assets among members in case of winding up.
6. Beneficiaries not being a section of the public.
7. Use of funds/property for charitable objects.
8. Non-appearance and lack of interest by the assessee in pursuing the appeal.

Detailed Analysis:

1. The appeal was filed against the order under Section 12AA(1)(b)(ii) of the Income-tax Act, 1961, rejecting the application for registration u/s 12A(1) by the Commissioner of Income-tax (Exemptions). The grounds of appeal highlighted the fulfillment of terms for registration as a charitable institution and challenges faced during the process.

2. The Division Bench noted the non-appearance of the assessee during the hearing and the lack of vigilance in pursuing the appeal. Despite multiple opportunities and notices, the assessee did not show interest in the proceedings, leading to the decision to proceed with the appeal hearing.

3. The Commissioner observed deficiencies in the constitution/MOA of the assessee, including the absence of an irrevocability clause, no provision for transfer of funds/property to another charitable entity upon dissolution, and the lack of clauses ensuring assets are used solely for charitable purposes. The assessee was directed to incorporate these clauses but failed to do so.

4. The specific clause in the constitution/MOA allowing distribution of assets among members in case of winding up was highlighted as contradictory to the charitable nature of the trust. This provision indicated that proceeds would benefit members rather than being used for charitable purposes, which was a key requirement for registration.

5. The failure to demonstrate that the beneficiaries were a section of the public, as opposed to specific individuals, further raised concerns about the charitable nature of the entity. Additionally, the absence of a clause ensuring funds/property are solely used for charitable objects contributed to the rejection of the registration application.

6. Despite opportunities to present an amended constitution/MOA, the assessee did not provide the necessary documentation to address the deficiencies highlighted by the Commissioner. As the burden of proof lies with the assessee to establish charitable status and compliance with statutory requirements, the appeal was dismissed due to the lack of merit.

7. The judgment emphasized the importance of meeting statutory conditions for registration as a charitable entity under the Income-tax Act, with a focus on ensuring the charitable nature of the trust, proper utilization of assets, and clarity in the constitution/MOA regarding beneficiaries and dissolution procedures.

8. Ultimately, the appeal filed by the assessee was dismissed, highlighting the critical role of fulfilling statutory requirements and incorporating necessary clauses in the constitution/MOA to obtain registration as a charitable institution under the Income-tax Act, 1961.

This detailed analysis of the judgment provides a comprehensive overview of the issues involved, the reasons for rejection of the registration application, and the significance of meeting statutory requirements for charitable institutions under the Income-tax Act, 1961.

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