Trust registration and tax exemption granted despite loan clause concerns under sections 12AB and 80G(5)

ITAT Indore allowed the appeal where CIT(E) denied registration u/s 12AB and approval u/s 80G(5) based on clause 4(p) of the trust deed. CIT(E) objected that trustees had unlimited authority to divert funds through loans without accountability. ITAT held that the clause must be read in entirety, noting it permitted loans only "for any of the above charitable purposes." The revenue's apprehension of loans to related parties was unfounded as audited statements showed no such transactions. ITAT directed CIT(E) to grant registration u/s 12AB and 80G approval after limited verification.

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Issues Involved:
1. Registration under Section 12AB.
2. Approval under Section 80G.

Summary:

Issue 1: Registration under Section 12AB

The appeal concerning registration under Section 12AB was filed by the assessee against the order of the Commissioner of Income-Tax (Exemption) [CIT(E)], Bhopal. The CIT(E) initially raised multiple objections but ultimately rejected the application based solely on an objection in Para No. 3 of the show-cause notice. This objection pertained to Clause 4(p) of the trust-deed, which allowed trustees to give loans "without being responsible or accountable for any loss caused thereby." The CIT(E) interpreted this clause as permitting trustees to divert funds without accountability, thus not qualifying for exemption under Section 11 of the Income-tax Act, 1961.

The assessee's representative argued that the clause allowed loans strictly for charitable purposes and that no loans had been given to any party. The Tribunal found merit in the assessee's argument, emphasizing that the clause must be read in its entirety, which specifies that loans are for charitable purposes only. The Tribunal concluded that the CIT(E)'s objection was unfounded and directed the CIT(E) to grant the registration under Section 12AB.

Issue 2: Approval under Section 80G

The appeal concerning approval under Section 80G was similarly filed against the CIT(E)'s order. The CIT(E) had rejected the application based on objections in Para Nos. 3 and 6 of the show-cause notice. The objection in Para No. 3 was identical to that in the Section 12AB appeal and was dissolved for the same reasons.

The second objection pertained to Clauses 4(r) and 4(s) of the trust-deed, which involved establishing prayer halls and aiding in the renovation of religious places. The CIT(E) viewed these objects as religious in nature, violating Section 80G(5)(ii) and Explanation 3 to Section 80G, which exclude purposes of a religious nature from charitable purposes. The assessee argued that these objects did not imply religious activity and that no funds had been spent on these objects. Furthermore, Section 80G(5B) allows religious expenditure up to 5% of total income without affecting approval under Section 80G.

The Tribunal found the assessee's case covered by precedents, including the ITAT Chennai and Rajasthan High Court decisions, which supported approval under Section 80G despite minor religious objects. The Tribunal directed the CIT(E) to grant approval under Section 80G after verifying compliance with Section 80G(5B).

Conclusion:

Both appeals were allowed, directing the CIT(E) to grant registration under Section 12AB and approval under Section 80G, subject to necessary verifications.

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