Charitable institutions under section 12A must file income tax returns to claim exemptions under sections 11 and 12

Kerala HC held that charitable institutions registered under section 12A were required to file income tax returns for assessment years 2015-16 and 2016-17 to claim exemptions under sections 11 and 12. The court ruled that filing returns was mandatory under section 12A(b) as it existed then, and exemption eligibility could only be determined after relevant materials were submitted through returns. The petitioner's argument that return filing obligation under section 139(4A) arose only upon assessment was rejected. Without filing returns, the charitable institution cannot claim exemption benefits.

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The core legal question considered is whether a charitable institution registered under section 12A of the Income Tax Act, 1961, was required to file a return of income for the assessment years prior to 2018 in order to claim exemption benefits under sections 11 and 12 of the Act.

Another related issue is whether non-filing of such returns justifies denial of exemption and imposition of penalty under section 272A(2)(e) of the Act for the relevant years 2015-16 and 2016-17.

Additionally, the interpretation of section 139(4A) concerning the obligation to file returns by charitable trusts and representative assessees was examined.

Under section 12A of the Act as it stood before 2018, the conditions for claiming exemption under sections 11 and 12 included that if the total income of the trust, computed without giving effect to the exemptions, exceeded the maximum amount not chargeable to income tax, the trust was required to furnish a return of income along with an audit report for the relevant assessment year.

The Court analyzed section 139 which mandates that every person other than a company or firm with total income exceeding the maximum non-taxable limit must file a return of income. Sections 11 and 12 exempt income derived from property held under a charitable trust and voluntary contributions respectively, but section 12A imposes conditions for these exemptions to apply.

The Court emphasized that the statutory language of section 12A(1)(b) clearly mandates a composite requirement: the filing of a return of income together with an audit report if the income exceeds the threshold. This requirement was not merely procedural but a condition precedent to claim exemption.

Judicial precedents were considered, including the decision in Commissioner of Income Tax v. Sharzedanand Charity Trust, which supports the necessity of filing a return to claim exemption. The Court rejected the petitioner's contention that filing returns was unnecessary before the introduction of section 12A(1)(ba) in 2018, noting that prior to this amendment, filing returns was mandatory when income crossed the exemption threshold.

The petitioner's argument relying on section 139(4A) - that the obligation to file returns applies only to representative assessees and not the trust itself - was found untenable. The Court interpreted section 139(4A) as obligating both the trust and the representative trustee, whoever is in receipt of the income, to file returns. Thus, the obligation cannot be limited to representative trustees alone.

The Court also referred to the decision in The Director of Income Tax (Exemptions) v. Malad Jain Yuvak Mandal Medical Relief Centre, where it was held that a charitable trust claiming exemption must file returns if its total income, ignoring exemptions, exceeds the prescribed limit. The ruling stated:

"Section 139(4A) enjoins upon every person who is in receipt of income derived from property held under trust for charitable or religious purposes, to file a return, if the total income in respect of which he is assessable exceeds the maximum amount which is not chargeable to Income Tax. The total income for this purpose is to be computed without giving effect to the provisions of section 11 and section 12 of the Act."

"Therefore, if an assessee who claims exemption under section 11 and section 12 is required to file the return, as stated above, then we do not see any reason as to why an assessee who claims exemption of income under section 10(22) should not file the return because ultimately the assessee's claim for exemption has to be decided by the Department only after the relevant materials is placed before it by filing the returns."

Applying these principles, the Court found that the petitioner, having failed to file returns for the years 2015-16 and 2016-17 despite income exceeding the non-taxable limit, was not entitled to claim exemption under sections 11 and 12 of the Act for those years.

The Court held that without the filing of returns, the department cannot evaluate the claim for exemption. The assessment order treating the petitioner as an 'association of persons' and denying exemption due to non-filing was legally justified. Similarly, imposition of penalty under section 272A(2)(e) for non-filing of returns was upheld.

In conclusion, the Court stated: "for the years 2015-16 and 2016-17, a charitable institution registered under section 12A of the Act was bound to file a return of income for the purpose of claiming exemption under sections 11 and 12 of the Act. Without such a return having been filed, petitioner cannot claim the benefit of the exemptions."

The writ petition challenging the assessment and penalty orders was dismissed.

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