2025 (4) TMI 1078 - AT - Income Tax

Rejecting the application of appellant for registration u/s 80G(5)(iii) - CIT(E) was of the view that the objects of the trust were composite in nature i.e. were charitable and religious and hence they clearly contravene the main conditions of section under section 80G(5) which is to the effect that none of the objects of the Trust should be religious in nature - CIT(E) was of the view that section 80G(5) of the Act applies to donations made to any institution or fund but only if that institution or fund is established in India for charitable purposes. This means that the institution or fund must have only charitable objectives and religious purposes cannot be included HELD THAT - CIT(E) had cited only two of the objects out of various objects of the assessee/applicant trust come to conclusion that the applicant trust could not be granted registration since two of its objects were of a religious in nature. We observe that there were several other objects of the trust which were not taken into consideration by CIT(E) while dismissing the application of for grant of registration u/s 80G(5). The assessee had also specifically submitted that it s expenditure on religious activities was within the threshold limit of 5% as specified under section 80G(5) however CIT(E) did not call for the necessary details with regards to expenditure incurred by the assessee on religious purposes to ascertain whether the expenditure incurred by the assessee was falling within the 5% exemption limit provided under section 80G(5). The matter is restored to the file of Ld. CIT(E) to consider the grant of registration u/s 80G of the Act afresh and to carry out necessary verification whether the assessee/applicant trust has expended/utilized less than 5% of it s total income towards religious purposes . If that be the case the assessee/applicant trust may be granted registration in accordance with law. Appeal of the assessee / applicant trust is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

- Whether the rejection of the application for registration under Section 80G(5)(iii) of the Income Tax Act on the ground that certain objects of the trust are religious in nature is legally sustainable.

- Whether objects numbered 7 and 8 in the trust deed, described as religious, disqualify the trust from claiming exemption under Section 80G(5) given the statutory provisions and judicial precedents.

- The proper interpretation and application of Section 80G(5), Explanation 3 thereto, and Section 80G(5B) concerning the permissible extent of religious activities or expenditure for a trust to qualify for registration under Section 80G(5).

- Whether the Commissioner of Income Tax (Exemption) erred in not considering the full scope of the trust's objects and activities and in not conducting a detailed inquiry into the quantum of expenditure on religious activities before rejecting the application.

- The applicability of principles of natural justice in the context of the rejection of the registration application without hearing or proper consideration of submissions.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of rejection of 80G(5)(iii) registration on grounds of religious objects in trust deed

Relevant legal framework and precedents: Section 80G(5) provides exemption for donations made to institutions or funds established in India for charitable purposes. Explanation 3 to Section 80G excludes purposes that are wholly or substantially religious from the definition of "charitable purpose." Section 80G(5B) provides a concession allowing trusts to incur religious expenditure not exceeding 5% of their total income without losing eligibility. The Supreme Court in Director of Secondary Education v. Pushpendra Kumar emphasized that an exception (here, Section 80G(5B)) cannot nullify the core provisions (Section 80G(5) and Explanation 3).

Court's interpretation and reasoning: The Tribunal interpreted the provisions harmoniously, holding that the presence of religious objects in the trust deed does not ipso facto disqualify the trust if the religious expenditure is within the 5% threshold. The Tribunal rejected the strict view that even a single religious object precludes registration under Section 80G(5), emphasizing that Explanation 3 excludes only trusts whose objects are wholly or substantially religious.

Key evidence and findings: The CIT(Exemption) relied solely on objects 7 and 8, deemed religious, ignoring the rest of the 22 objects which were charitable. The trust submitted that expenditure on religious activities was less than 5% of total income, but the CIT(E) did not seek details or verify this claim.

Application of law to facts: The Tribunal noted that the statutory scheme permits religious expenditure up to 5% without losing exemption. Since the trust claimed to be within this limit and had multiple charitable objects, the rejection on the sole basis of two religious objects was not justified.

Treatment of competing arguments: The Department argued that any religious object disqualifies the trust, relying on the CIT(E)'s order. The Tribunal countered that the Department ignored Section 80G(5B) and failed to consider the full scope of the trust's activities and expenditure. The Tribunal also relied on judicial precedents supporting nuanced consideration.

Conclusions: The Tribunal concluded that the CIT(E) erred in law by rejecting the application without proper inquiry into expenditure and by applying an overly rigid interpretation of the law.

Issue 2: Proper interpretation and interplay of Section 80G(5), Explanation 3, and Section 80G(5B)

Relevant legal framework and precedents: Explanation 3 excludes trusts whose objects are wholly or substantially religious from the definition of charitable purpose. Section 80G(5B) allows trusts incurring religious expenditure up to 5% of total income to qualify for exemption. The Supreme Court in Pushpendra Kumar clarified that exceptions cannot override the core provisions.

Court's interpretation and reasoning: The Tribunal held that these provisions must be read together. Explanation 3's bar applies only if religious purposes are whole or substantially whole. Section 80G(5B) permits minor religious expenditure within a threshold. The Tribunal emphasized that Section 80G(5B) does not override Section 80G(5) but clarifies permissible limits on religious expenditure within charitable trusts.

Key evidence and findings: The trust claimed religious expenditure below 5%. CIT(E) did not verify this and rejected the application solely on the presence of religious objects.

Application of law to facts: The Tribunal found that the trust's claim, if verified, would entitle it to exemption under Section 80G(5B). The presence of some religious objects does not automatically negate charitable status if expenditure limits are respected.

Treatment of competing arguments: The Department's strict interpretation was rejected as inconsistent with the statutory scheme and judicial pronouncements.

Conclusions: The Tribunal held that the trust could not be denied exemption merely for having religious objects if religious expenditure is within the statutory limit.

Issue 3: Failure of CIT(Exemption) to consider full scope of trust's objects and to conduct inquiry on expenditure

Relevant legal framework and precedents: Principles of natural justice require that the authority consider all relevant facts and submissions before passing an order. Recent Tribunal decisions have held that rejection without inquiry into religious expenditure is improper.

Court's interpretation and reasoning: The Tribunal observed that the CIT(E) considered only two out of 22 objects and did not verify the trust's claim regarding religious expenditure. The CIT(E) also failed to address the trust's submissions made during hearings.

Key evidence and findings: The trust's submission that religious expenditure was below 5% was not examined. The CIT(E) did not seek details or conduct any verification.

Application of law to facts: The Tribunal found that the CIT(E)'s summary rejection without inquiry violated natural justice and statutory requirements.

Treatment of competing arguments: The Department relied on the CIT(E)'s order without addressing the procedural lapses.

Conclusions: The Tribunal held that the matter must be remanded for de novo consideration with proper inquiry into expenditure and full consideration of all objects and submissions.

3. SIGNIFICANT HOLDINGS

"It is apparent that in case any trust applies expends less than 5% of its income towards religious purposes, then it cannot be denied benefit of deduction under Section 80G of the Act on this basis alone."

"Even as per Explanation 3, in order to qualify as 'charitable purpose', the only qualification is that the activities should not be wholly or substantially religious."

"The application for grant of deduction under Section 80G cannot be denied to the assessee only on the ground that one of the objects contain the term 'religious'."

"The Commissioner (Exemption) erred in summarily rejecting the application without making any enquiry or verification of the expenditure incurred on religious activities and without considering the submissions of the assessee, which is against the principles of natural justice."

"The matter is restored to the file of the Commissioner (Exemption) to consider the grant of registration under Section 80G afresh and to carry out necessary verification whether the assessee has expended less than 5% of its total income towards religious purposes. If that be the case, registration may be granted in accordance with law."

Core principles established include:

- The presence of some religious objects in a trust deed does not automatically disqualify the trust from Section 80G(5) registration if religious expenditure is within the 5% limit.

- Explanation 3 excludes trusts whose objects are wholly or substantially religious, but minor religious expenditure is permissible under Section 80G(5B).

- Authorities must conduct proper inquiry into the quantum of religious expenditure before rejecting registration applications.

- Principles of natural justice require that all submissions and relevant facts be considered before adverse orders are passed.

Final determinations:

The appeal was allowed for statistical purposes, and the matter was remanded to the CIT(Exemption) for fresh consideration in light of the above principles, with directions to verify the religious expenditure and consider the entire scope of the trust's objects and activities before deciding on registration under Section 80G(5).