2025 (5) TMI 2199 - AT - Income Tax

Trust registration under s.12AA upheld despite missing certificate; s.11 exemption and s.234E late TDS fee allowed

ITAT JAIPUR allowed the appeal, holding that the trust was registered under s.12AA despite failure to produce the registration certificate; prior AO ... Denial of exemption u/s 11 - assessee has not furnished copy of certificate of registration u/s 12AA and thus computed the total income by considering the corpus donation as part of gross receipt and disallowing the claim of application on account of capital expenditure - Expenditure incidental to the carrying out of the charitable purpose of the trust - CIT(A) has upheld the order of AO for the reason that assessee could not establish whether it is approved for exemption HELD THAT:- We find that assessee could not place on record the registration certificate issued u/s 12AA of the Act but it has placed on record the approval certificate u/s 80G of the Act. Approval u/s 80G cannot be granted unless a trust or institution or society is registered u/s 12AA of the Act as mandated by sub-clause (i) of sub-section 5 of section 80G. We also find that AO in the assessment order passed u/s 143(3) dated 10.2.2014 for AY 2011-12 has accepted that assessee is registered u/s 12AA - Assessee has subsequently been granted fresh registration u/s 12A(1)(ac)(i) of the Act, the precondition of which is that the trust or institution is registered u/s 12AA of the Act. Thus, there is no doubt that the assessee is registered u/s 12AA. In these circumstances, only because assessee could not place on record registration certificate issued u/s 12AA of the Act, the benefit of exemption u/s 11 cannot be denied. Further Rs.1,58,000/- is paid by the assessee is fee for late filing of TDS return u/s 234E of the Act. It is not a penalty hence this amount has to be considered as application of income in view of decision of Trustee of H.E.H. the Nizam`s supplement religious Endowment Trust (1978 (2) TMI 7 - ANDHRA PRADESH HIGH COURT) - In view of above facts, the AO is directed to compute the income of the assessee by allowing exemption u/s 11 of the Act. appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether denial of exemption under section 11 of the Income Tax Act can be sustained where the assessee did not place the registration certificate issued under section 12AA on record but produced other documentary indicia of valid registration (including an 80G approval issued on the same date and prior/fresh registrations accepted by revenue for other years)? 2. Whether payments made under section 234E (fee for late filing of TDS return) constitute an application of income for purposes of section 11 (i.e., allowable as expenditure incidental to carrying out charitable objects) rather than a penalty and therefore are deductible when computing application of income? 3. Whether capital expenditure (here, claimed capital expenditure of Rs.1,39,47,839/-) can be treated as application of income for the purpose of exemption under section 11 when registration under section 12AA is otherwise established by the record available to the revenue. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of denying section 11 exemption for failure to produce the section 12AA registration certificate Legal framework: Exemption under section 11 is available to trusts/institutions that satisfy conditions including registration under section 12AA; proof of registration is a condition precedent to claiming the exemption, but the entitlement depends on whether registration was in existence and in force for the relevant year. Precedent Treatment: The Tribunal relied on the statutory interrelation between section 80G(5)(i) and section 12AA (i.e., approval under section 80G cannot be granted unless registration under section 12AA exists). Prior assessment orders of revenue accepting registration for earlier years and subsequent fresh registration under section 12A(1)(ac)(i) were treated as relevant antecedent findings. Interpretation and reasoning: The Court examined the totality of documentary evidence rather than a hyper-technical requirement of production of the physical 12AA certificate for that assessment year. It found that (a) an 80G approval was produced which, by statutory mandate, presupposes valid 12AA registration at the time of grant; (b) the AO had earlier accepted 12AA registration in an assessment order for AY 2011-12; and (c) a later fresh registration under section 12A(1)(ac)(i) was granted, whose precondition is existing registration under section 12AA. On these combined materials the Tribunal concluded there was no doubt that the assessee was registered under section 12AA for the year under consideration and that mere non-production of the certificate in files did not disentitle the assessee to claim exemption. Ratio vs. Obiter: Ratio - where documentary indicia on record (80G approval issued contemporaneously, earlier acceptance of registration in assessment order, and subsequent fresh registration) establish that registration under section 12AA existed and was in force, the revenue cannot deny exemption under section 11 solely for non-production of the section 12AA certificate. Obiter - observations on administrative practice of requiring physical production of certificates in scrutiny proceedings (if any) are ancillary. Conclusion: The Court held that denial of exemption under section 11 for non-production of the 12AA certificate was not justified on the facts; the AO must allow exemption where registration is otherwise established by documentary evidence on record. Issue 2 - Allowability of fee under section 234E as application of income Legal framework: Section 11 permits deduction of income applied to charitable purposes; expenses incidental to carrying out charitable objects can be treated as application of income. Distinction exists between penal payments (which are not deductible as applications of income) and fees/charges that are incidental/outgoings of the charitable activity. Precedent Treatment: The Tribunal followed earlier judicial authority which held that payments of income tax/wealth tax (and similar outgoings) incurred during the year were incidental to carrying out charitable purpose and therefore constituted application of income. That precedent was applied to characterize the fee under section 234E as a non-penal outgoing. Interpretation and reasoning: The Tribunal reasoned that fee under section 234E is described as a fee for late filing of TDS return and not expressly as a penalty for violation; therefore it is analogous to other statutory outgoings previously held to be incidental to the administration of charitable objects. Given that characterization, the amount paid under section 234E falls within application of income for the year and must be allowed when computing exemption under section 11. Ratio vs. Obiter: Ratio - payment characterised as fee under section 234E (late filing fee) is deductible as application of income where it is not punitive in nature but is an incidental outgoing necessary for carrying on charitable activities. Obiter - any general remark on policy considerations of categorizing statutory fees versus penalties. Conclusion: The Tribunal directed that the Rs.1,58,000 paid under section 234E be treated as application of income and allowed for computing exemption under section 11. Issue 3 - Treatment of capital expenditure as application of income once registration is established Legal framework: Expenditure that is application of income in the relevant year may include capital expenditure to extent it falls within permissible objects and purpose of the charitable institution and satisfies statutory conditions; the availability of section 11 exemption is a precondition for treating such expenditures as application of income. Precedent Treatment: The Tribunal relied on the principle that if exemption under section 11 is available (i.e., registration established), amounts expended on charitable activities, including capital outlays that further the objects, can be treated as application of income subject to facts and records substantiating the expenditure. Interpretation and reasoning: Having concluded that registration under section 12AA existed and was in force, the Tribunal held that the AO must consider the claim of capital expenditure of Rs.1,39,47,839/- as application of income in computing exemption under section 11. The Tribunal's direction implicitly requires the AO to examine the nature and application of the capital expenditure against the objects and records rather than disallowing it categorically on the ground of missing registration certificate. Ratio vs. Obiter: Ratio - once registration is established, capital expenditure legitimately incurred in furtherance of charitable objects must be considered for application of income subject to verification; disallowance solely for non-production of 12AA certificate is not permissible. Obiter - specifics of apportionment or capital/revenue classification left to assessment proceedings on remand. Conclusion: The Tribunal directed the AO to recompute the assessee's income allowing exemption under section 11 and to treat the claimed capital expenditure as application of income (subject to verification), resulting in allowance of the appeal. Interrelationship and Final Disposition The Tribunal treated the issues as interrelated: establishment of valid section 12AA registration (Issue 1) was a prerequisite to allow treatment of capital expenditure and section 234E fee as application of income (Issues 2 and 3). Applying statutory cross-references (notably the requirement in section 80G(5)(i)) and antecedent administrative findings, the Tribunal concluded registration was established and therefore directed recomputation of income allowing the challenged items as applications of income. The appeal was allowed and the matter remitted to the AO for recomputation consistent with these findings.