2025 (4) TMI 898 - AT - Income Tax

Trust registration under section 12AB cannot be denied for potential commercial activities not yet undertaken

Aruva Foundation Versus Commissioner of Income-tax, Exemption Circle, Bhopal

ITAT Indore held that CIT(E) cannot deny registration under section 12AB solely based on potential commercial activities mentioned in trust objects that ... Denial of final registration u/s 12AB / final approval u/s 80G(5) - HELD THAT:-Provisions of law clearly show that even if any object or activity of assessee, out of various multiple objects and activities, has element of commerciality, that would result in denial of exemption u/s 11/12 to that extent and in that particular previous year only but the CIT(E) in exercise of power u/s 12AB, cannot deny registration to assessee. The decisions in East India Industries (Madras) Pvt. Ltd. [1967 (4) TMI 2 - SUPREME COURT] and Yogiraj Charity Trust [1976 (3) TMI 5 - SUPREME COURT] relied by Ld. CIT(E) are not related to grant of registration but are for computation of total income by Assessing Authority. In present case, we are concerned with grant of registration by CIT(E), therefore those decisions are not relevant. It also remains a fact, as shown by AR with reference to the documents in Paper-Book, that the assessee has done only charitable activities till now and not undertaken any activity contemplated by object No. 2 & 3. Therefore, as and when the activity of Object No. 2 & 3 is actually undertaken by assessee in future, it would be a prerogative of Assessing Authority in that particular year, to ascertain the quantum of exemption u/s 11/12 available to assessee. Being so, we are inclined to hold that the CIT(E) is not justified in denying registration to assessee on the footing that by means of object No. 2 & 3, the assessee had intention to carry out commercial activity. Consequently, we direct the CIT(E) to grant registration u/s 12AB to assessee as applied. Denial of approval u/s 80G - In so far as first reasoning for denial of approval u/s 80G is concerned, we have already directed the CIT(E) to grant registration u/s 12AB to assessee in foregoing part of this order. Therefore, the first reasoning for denial of approval u/s 80G does not survive. The second reasoning that the application filed by assessee was belated, is already addressed by CBDT Circular No. 7/2024 and the Ld. AR has also informed that the assessee has already filed a fresh application to CIT(E) before the designated deadline of 30.06.2024 which is pending before CIT(E). In that view of matter, we remand this matter back to the file of CIT(E) for an appropriate adjudication ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment were:1. Whether the assessee is entitled to final registration under section 12AB of the Income-tax Act, 1961, considering the nature of its objects as defined in its Memorandum of Association (MOA).2. Whether the assessee is entitled to final approval under section 80G of the Income-tax Act, 1961, in light of the denial of registration under section 12AB and the timing of its application.ISSUE-WISE DETAILED ANALYSISIssue 1: Registration under Section 12ABRelevant legal framework and precedents:The legal framework involves section 12AB of the Income-tax Act, 1961, which pertains to the registration of entities for charitable purposes. The proviso to section 2(15) allows for commercial activities up to a ceiling of 20%. Section 11(4A) provides exemptions for commercial activities under certain conditions. The CIT(E) relied on precedents such as East India Industries (Madras) Pvt. Ltd. Vs. CIT and Yogiraj Charity Trust Vs. CIT, which discuss the application of income for charitable purposes.Court's interpretation and reasoning:The Tribunal found merit in the assessee's argument that the objects in question (Nos. 2 and 3) were charitable, aiming to benefit disabled, women, and economically weaker sections. The Tribunal noted that the proviso to section 2(15) and section 11(4A) allow for some commercial activity without affecting the charitable status, provided certain conditions are met. The Tribunal emphasized that the CIT(E) should not deny registration based on potential commerciality that might affect exemptions in future assessments.Key evidence and findings:The Tribunal considered the assessee's amended MOA and the evidence presented showing its activities, which included educational and health camps, among others. The Tribunal noted that the assessee had not yet engaged in activities described in objects 2 and 3, which were deemed commercial by the CIT(E).Application of law to facts:The Tribunal applied the legal provisions to the facts, concluding that the CIT(E) should not have denied registration based solely on the potential for commercial activities in the future. The Tribunal found that the current activities were charitable and that any future commercial activities should be assessed by the Assessing Authority in the relevant year.Treatment of competing arguments:The Tribunal considered the CIT(E)'s reliance on case law concerning the application of income to charitable purposes but distinguished these cases as not directly relevant to the registration process under section 12AB.Conclusions:The Tribunal directed the CIT(E) to grant registration under section 12AB, as the denial was not justified based on the current evidence and applicable legal provisions.Issue 2: Approval under Section 80GRelevant legal framework and precedents:Section 80G of the Income-tax Act provides for approval of entities for donations to be tax-deductible. The CIT(E) initially denied approval based on the denial of section 12AB registration and the late application for final approval.Court's interpretation and reasoning:The Tribunal noted that the denial of section 12AB registration was no longer valid, as it had directed the CIT(E) to grant such registration. Additionally, a new CBDT Circular extended the time limit for section 80G applications, which the assessee had complied with by filing a fresh application.Key evidence and findings:The Tribunal considered the new CBDT Circular and the fact that the assessee had filed a fresh application within the extended deadline.Application of law to facts:With the new CBDT Circular in place, the Tribunal found that the timing of the application was no longer a valid reason for denial, and the matter should be reconsidered by the CIT(E).Treatment of competing arguments:The Tribunal acknowledged the CIT(E)'s initial reasoning but found it moot in light of the new developments and the Tribunal's decision on section 12AB registration.Conclusions:The Tribunal remanded the matter back to the CIT(E) for reconsideration, taking into account the fresh application and the extended deadline.SIGNIFICANT HOLDINGSThe Tribunal established that:- The proviso to section 2(15) and section 11(4A) allow for some commercial activities within charitable entities, and potential commercial activities should not preclude registration under section 12AB.- Denial of registration under section 12AB based on potential future commercial activities is not justified if current activities are charitable.- The Tribunal directed the CIT(E) to grant registration under section 12AB.- The Tribunal remanded the issue of section 80G approval back to the CIT(E) for reconsideration, given the new CBDT Circular and the fresh application filed by the assessee.