ITAT allows appeal against registration rejection under section 12AB, directs re-examination of trust activities

ITAT Delhi allowed the appeal against CIT(E)'s rejection of Form 10AB application for registration under section 12AB(1)(ac)(iii). The tribunal held that CIT(E) erred in applying section 115BBC provisions to deny registration and questioning donation genuineness was beyond enquiry scope. Regarding composite trust objects having both religious and charitable activities, ITAT relied on Dawoodi Bohara Jamat SC precedent to hold registration cannot be denied for composite objects. The tribunal found trust's charitable activities were non-discriminatory across religions. However, ITAT set aside the order directing CIT(E) to re-examine the genuineness of activities with proper enquiry and substantive evidence before determining any specified violation under section 12AB(4).

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The core legal questions considered by the Appellate Tribunal (AT) in the present appeal arise from the order dated 18.03.2024 passed by the Commissioner of Income Tax (Exemption) [CIT(E)] rejecting the registration application filed under Section 12AB(1)(ac)(iii) of the Income Tax Act, 1961 (the Act). The principal issues are:

(i) Whether the provisional registration granted under Section 12A(1)(ac)(vi) can be regularized under Section 12AB(1)(ac)(iii) when the conditions of Section 12AB(1)(b) are allegedly not met, particularly concerning the genuineness of activities and compliance with trust objectives;

(ii) Whether the provisional registration granted under Section 12A(1)(ac)(vi) can be canceled on the ground of a "specified violation" under Explanation (d) to sub-section (4) of Section 12AB, specifically the application of income for the benefit of a particular religious community or caste;

(iii) The applicability and scope of Section 115BBC of the Act and Section 13(1)(b) in the context of registration and the genuineness of donations;

(iv) The evidentiary requirements and procedural fairness in assessing the genuineness of the trust's activities, donations, and compliance with statutory requirements;

(v) The interpretation and application of the public trust doctrine in relation to charitable trusts with composite objects involving both religious and charitable activities.

Regarding the first issue, the relevant legal framework includes Section 12AB(1)(b) of the Act, which mandates that registration can be granted only if the genuineness of the activities and compliance with the trust's objectives are established. The Tribunal noted that the appellant trust was formed by a duly registered trust deed with stated religious and charitable objects, including education, medical relief, and community development. The appellant had obtained provisional registration under Section 12A(1)(ac)(vi) and subsequently applied for regularization under Section 12AB(1)(ac)(iii).

The Court examined the submissions and evidences filed by the appellant, including the trust deed, audited financial statements, activity reports, bills, vouchers, photographs, and lists of beneficiaries. The appellant contended that it had responded to all queries raised by CIT(E) and that the trust's activities were genuinely charitable and religious in nature.

The Tribunal observed that the CIT(E) rejected the regularization application primarily on the ground that the appellant failed to furnish satisfactory details about donors, including PAN and identity proofs for 93% of donors, and failed to substantiate donations exceeding Rs. 8.5 crore. The CIT(E) also relied on Section 115BBC, which mandates maintenance of records for donations, especially anonymous donations.

The Court held that while genuineness of donations is an important consideration, the applicability of Section 115BBC and the requirement to maintain donor details is more appropriately examined at the assessment stage rather than at the registration stage. The Tribunal stated, "the rejection of regularization ... on the ground that conditions of section 12AB(1)(b) are not met by questioning genuineness of donation by recourse to section 115BBC, are held to be beyond the scope of enquiry."

However, the Tribunal emphasized that genuineness of claimed religious and charitable activities must be "through and through genuine." Mere recital of objects or superficial performance of activities is insufficient if the source of funds is illegal or tainted. The Court refrained from expressing any opinion on the genuineness of the source of funds, leaving that to be examined at the appropriate stage.

On the second issue concerning cancellation of provisional registration on account of a specified violation under Explanation (d) to sub-section (4) of Section 12AB, the Tribunal analyzed the trust deed and found that the objects included both religious and charitable purposes. Importantly, the charitable objects such as education and relief to the poor were not restricted to any particular religion, caste, or creed. The Tribunal relied on the Supreme Court decision in CIT vs. Dawoodi Bohara Jamat, which held that for composite trusts with both religious and charitable objects, registration cannot be denied merely because some activities are religious in nature.

The Tribunal further noted that if the charitable activities are not genuinely for the benefit of all sections of society but are in fact restricted to a particular religious community or caste, then a specified violation under Section 12AB(4) may be found after adequate enquiry and evidence. Since no such enquiry or reasoned findings were made by CIT(E) in the present case, the cancellation of provisional registration on this ground was not justified.

Regarding Section 13(1)(b), which restricts exemption where income is applied for the benefit of a particular religious community or caste, the Tribunal held that this provision applies equally to composite trusts and is relevant at the assessment stage. The appellant's reliance on judicial precedents was acknowledged, which support the principle that benefits must be for the public at large and not confined to a particular community.

The Tribunal also addressed the procedural and evidentiary aspects. It found that the appellant had made bona fide efforts to comply with the CIT(E)'s queries by submitting multiple documents, explanations, and clarifications. The repeated delays and partial submissions alleged by the revenue were not sufficient to conclude a lack of bona fide effort. The Tribunal emphasized the need for natural justice and adequate opportunity before adverse conclusions are drawn.

In considering competing arguments, the Tribunal rejected the revenue's contention that the appellant's failure to maintain complete donor details and the alleged targeting of a particular community justified denial or cancellation of registration without a thorough enquiry. It acknowledged that the activity reports and financial statements filed showed charitable activities, and the trust deed's objects were not discriminatory.

The Tribunal also rejected the application of Section 115BBC at the registration stage, noting that it is not a ground for rejection under Section 12AB(1)(b). However, it upheld the principle that genuineness of activities and compliance with the trust's objectives remain essential.

In conclusion, the Tribunal set aside the impugned order and directed the CIT(E) to reconsider the application afresh, keeping in view the observations made, including:

• Examination of genuineness of activities and compliance with trust objectives under Section 12AB(1)(b) without undue reliance on Section 115BBC;
• Proper enquiry into whether charitable activities genuinely benefit all sections and are not confined to any particular religious community or caste;
• Affording adequate opportunity to the appellant before any adverse order is passed;
• Consideration of composite nature of the trust's objects in line with judicial precedents.

The appeal was allowed for statistical purposes, with no final determination on the genuineness of donations or specified violations, leaving these issues to be decided after proper enquiry.

Significant holdings and core principles established include:

"The rejection of regularization ... on the ground that conditions of section 12AB(1)(b) are not met by questioning genuineness of donation by recourse to section 115BBC, are held to be beyond the scope of enquiry."

"Genuineness of claimed religious and charitable activity has to be one which, through and through is genuine. Mere recital clauses or performance of such activity is not sufficient if the source of funds are illegal or otherwise tainted."

"For composite trusts having both religious and charitable objects, registration under section 12AB cannot be denied merely because some activities are religious in nature, provided charitable activities genuinely benefit all sections without discrimination."

"If charitable activities are not genuinely for the benefit of all faiths but restricted to a particular community, then after adequate enquiry and reasoned findings, a specified violation under Section 12AB(4) may be found."

"Section 115BBC and Section 13(1)(b) are more appropriately considered at the assessment stage and not at the stage of registration under Section 12AB."

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