2025 (4) TMI 1252 - AT - Income Tax

Trust loses registration after object clause fails section 11(1)(a) compliance requirements under section 12AB

Sila for Change Foundation Versus Commissioner of Income-tax (Exemption), Mumbai

ITAT Mumbai denied registration under section 12AB to a trust after rejecting conversion from provisional to final registration. The trust's object clause ... Denial of registration u/s. 12AB - assessee has not established whether this object is in compliance with any other law for the time being in force as are material for the purposes of achieving its objects - primary contentions of the Ld.AR was that, the assessee was granted provisional registration in Form 10AC, and therefore the assessee may be granted registration u/s. 12AB - HELD THAT:- According to Sub-section 4 and 5 of section 12AB inserted by Finance Act, 2022, with effect from 01/04/2022, Ld.PCIT/CIT may cancel the registration (after providing reasonable opportunity of being heard) if it is found that, the activities are not genuine or are not carried out in accordance with the objects of trust/institution. At this juncture, we note the fact that provisions of sub sections are applicable to the present assessee based on the date of application filed seeking registration under section 12B of the Act. Registration will also stand cancelled u/s 12AB, if the authorities notice that, the activities of the trust or institution are carried out in a manner that the provisions of section 11 and 12 do not apply due to operation of section 13(1), or, the trust or institution has not complied with the requirement of any other law for the time being in force as is material for the purpose of achieving its objects etc. In case there is a specified violation as mentioned in Explanation to sub section 4, the Registration under section 12AB would be denied or stand cancelled, as the case may be. One of the intention of Legislature to introduce sub clause (4) and (5) to the section 12AB is to address the issue related to the process of approval or cancellation or withdrawal thereof. Thus, we do not agree with the argument advanced by the Ld.AR that since provisional registration is granted to the present assessee before u/s.12AB, final registration cannot be denied. In the present facts, the assessee’s objects include clause 12, which is not in consonance with the main purpose to grant exemption u/s 11(1)(a) of the Act for sale of convenience, the relevant portion are excluded as under. As noted that, the assessee was offered opportunity of being heard, is apparent from the paper book filed before us. However, nothing on record is filed, to demonstrate that, the assessee took necessary steps to amend the objects which is in contravention to section 11(1)(a) of the Act. Admittedly it is not the case that, the assessee has already applied its funds as per object clause 12 of the memorandum. By insertion of sub section 4 & 5 inserted by Finance Act, 2022 widened the scope of violations by including violations specified in explanation therein. This was not the legal position u/s. 12A/12AA prior to amendment. The condition to satisfy that the objects of the trust are not in violation to compliance under any other law for time being in force towards achieving the material purposes of the objects is now become necessary to be established by the assessee at the time when its application is scrutinised for converting provisional to final registration. The explanation (f) to sub clause (4) of 12AB mandates compliance with the requirement of any other law as referred to item (B) of sub-clause (i) of clause (b) to subsection (1) of 12AB. With such compliance required at the stage of registration, pertaining clause 12 in the memorandum of the assessee trust will be an hurdle to grant final registration. We therefore do not find any merit in the arguments advanced by AR and the same stands rejected based on the discussions and analysis of the relevant provisions and decisions on the issue. As a consequence, the application seeking 80G also stands rejected. Accordingly, the Grounds raised by the assessee in both appeal stands dismissed. The core legal issues considered by the Tribunal revolve around the eligibility and validity of registration under section 12AB of the Income Tax Act for a charitable trust, specifically:1. Whether the presence of an object clause permitting support and developmental services to organizations outside India violates the requirements of section 11(1)(a) of the Income Tax Act, thus affecting the grant of registration under section 12AB.2. The legal effect and scope of provisional registration granted under section 12AB and whether denial of final registration after provisional registration is permissible.3. The interpretation and application of the amended provisions of section 12AB, particularly subsections (4) and (5), regarding cancellation or denial of registration for non-compliance or non-genuine activities.4. The extent to which activities or application of funds outside India impact the charitable status and exemption eligibility under sections 11 and 12 of the Income Tax Act.Issue-wise Detailed Analysis:Issue 1: Validity of Object Clause Permitting Activities Outside India vis-`a-vis Section 11(1)(a)The legal framework centers on section 11(1)(a) of the Income Tax Act, which exempts income derived from property held under a trust wholly for charitable or religious purposes to the extent such income is applied to such purposes in India. The proviso under section 11(1)(c) allows application of income outside India only for trusts created before 1952 or for international welfare in which India is interested, subject to Board's general or special order.The Tribunal examined the object clause no. 12 of the trust's memorandum, which authorizes providing support and developmental services to organizations both in India and outside India. The CIT (Exemptions) had held that this clause violates section 11 as the activities are not strictly confined to India, and thus denied registration under section 12AB.The Tribunal analyzed judicial precedents including the Delhi High Court's ruling in DIT (E) vs. National Association of Software and Services Companies, which interpreted the phrase 'applied to such purposes in India' in section 11(1)(a) as requiring actual expenditure in India for exemption. The Court noted that allowing application of funds abroad without restriction would render section 11(1)(c) redundant.Further, coordinate bench decisions such as Jamsetji Tata Trust held that education grants to Indian students studying abroad qualify for exemption if the charitable purpose is in India, even if the final execution occurs outside India. The Bombay High Court in CIT v. State Bank of India also held that a trust with discretion to apply income abroad remains eligible for exemption for the portion applied in India.The Tribunal emphasized that the presence of a clause permitting activities outside India in the trust deed does not ipso facto disqualify the trust from exemption, provided the actual application of income is in India. However, the object clause must not contravene the statutory requirement that funds be applied primarily within India, unless permitted otherwise.Issue 2: Effect of Provisional Registration and Denial of Final RegistrationThe amended registration scheme under section 12AB effective from 01.04.2021 introduces a two-step process: provisional registration followed by final registration. Provisional registration is granted automatically upon application in Form 10A without detailed verification, valid for three years. Final registration requires submission of Form 10AB and satisfaction of the CIT about genuineness of activities and compliance with other laws.The Tribunal clarified that provisional registration does not guarantee final registration. The CIT is empowered to deny final registration if the trust fails to satisfy conditions under section 12AB(1)(b)(i), including genuineness of activities and compliance with other laws. The Tribunal rejected the argument that denial of final registration after provisional registration is impermissible, noting legislative intent to prevent non-genuine trusts from obtaining permanent exemption.The Tribunal referred to the Finance Act, 2022 amendments introducing subsections (4) and (5) to section 12AB, which broaden the grounds for cancellation or denial of registration, including non-compliance with other laws and non-genuine activities. This legislative change underscores the need for thorough scrutiny at the final registration stage.Issue 3: Interpretation of Section 12AB(4) and (5) Regarding Cancellation or Denial of RegistrationThe Tribunal examined the expanded scope of specified violations under section 12AB(4), which include:Application of income for purposes other than the objects of the trust;Non-genuine activities;Non-compliance with other laws material for achieving the objects;Activities not carried out in accordance with registration conditions.The Tribunal noted that these provisions empower the CIT to cancel or refuse registration upon reasonable satisfaction of violations, after affording opportunity of hearing, within a prescribed time frame.This framework was intended to curb misuse of charitable exemptions and ensure trusts adhere strictly to their declared objects and legal requirements. The Tribunal observed that the assessee failed to demonstrate compliance with other laws relevant to object clause no. 12, which authorizes activities outside India, thus justifying denial of final registration.Issue 4: Application of Funds Outside India and Impact on Charitable StatusThe Tribunal analyzed whether the mere presence of an object permitting support to organizations outside India disqualifies the trust from exemption, absent actual application of funds abroad.It was noted that the assessee did not establish any application of income outside India in contravention of section 11(1)(a). The Tribunal relied on precedents holding that exemption is not forfeited solely due to the power to apply funds abroad if actual application is within India.However, the object clause itself must not be inconsistent with the statutory scheme. The Tribunal emphasized that the assessee failed to amend the object clause to remove the non-compliant provision, and thus the CIT was justified in rejecting the application for final registration.The Tribunal distinguished the present case from precedents cited by the assessee where genuineness of activities was established and no objectionable object clause existed.Conclusions on Issues:The Tribunal concluded that the object clause no. 12 permitting support to organizations outside India contravenes the requirement under section 11(1)(a) that income be applied to charitable purposes in India, in the absence of a special order permitting such application.Provisional registration granted automatically does not preclude denial of final registration upon scrutiny.The amended provisions of section 12AB empower the CIT to refuse or cancel registration for non-genuine activities or non-compliance with other laws, including object clauses inconsistent with section 11.The assessee failed to establish compliance with these requirements or amend its memorandum accordingly, justifying rejection of registration and consequent denial of 80G approval.Significant Holdings:'Upon filing application in Form 10A (for Provisional registration) the concerned Income-tax Authority (CIT or PCIT) has to issue provisional registration certificate without any further verification or examination.''Once the Ld.PCIT/CIT is satisfied about genuineness of activities and compliance with other laws, then registration shall be granted in Form 10AD. Otherwise, the application will stand rejected after granting an opportunity of being heard.''The object clause no.12 of the memorandum of association providing support to other organisations outside India is not in consonance with the main purpose to grant exemption under section 11(1)(a) of the Act.''The amended provisions of section 12AB(4) and (5) introduced by Finance Act, 2022, widen the scope of violations for cancellation or denial of registration, including non-genuine activities and non-compliance with other laws.''The presence of a clause permitting activities outside India does not ipso facto disqualify the trust from exemption, provided actual application of income is in India and no contravention of section 11(1)(a) occurs.''The assessee's failure to amend the memorandum of objects to remove the non-compliant clause justifies rejection of final registration.'The Tribunal dismissed the appeals and granted liberty to the assessee to amend its memorandum of association and reapply for registration in accordance with law.