2025 (6) TMI 1120 - AT - Income Tax

Charitable Trust Wins Appeal: Minimal Spending Doesn't Negate Nonprofit Status Under Section 12A

The Tribunal allowed an appeal challenging the denial of registration under section 12A of the Income-tax Act. The HC ruled that meagre expenditure does ... Denying grant of regular registration u/s.12A - as per CIT(E) expenditure on objects is very meager as compared to the funds available and very limited activities have been carried out - HELD THAT:- We fail to find any merit in such observation of the ld.CIT(E) because the assessee has been registered during the year and has also commenced the activity. It is nowhere written in the relevant provisions for registration about any minimum amount which has to be spent in order to become eligible for registration u/s.12A of the Act. Relevant provision only provides that assessee should commence the charitable activity and the same has to be proved with documentary evidence. CIT(E) has alleged that when the assessee was having funds to the tune of Rs. 4.00 lakhs approx, it has incurred very less expenditure. It seems that ld.CIT(E) has not examined the balance sheet properly because the assessee has also purchased the land at Rahataghar for a sum of Rs. 4,00,700/- and fixed deposit with Janata Sahakari Bank at Rs. 3,36,148/-. Assessee has also received the building funds as part of the corpus donation which shows that the assessee trust is in the process of constructing building in the time to come. So far as the income for the year under consideration is concerned, against the gross receipt of Rs. 48,336/- which is inclusive of fixed deposit interest, membership fees and savings bank interest assessee has incurred the expenditure of Rs. 22,943/- which includes the expenditure for charitable activities, i.e. medical aid. Thus, since the assessee has fulfilled all the conditions required for registration u/s.12A of the Act and has commenced charitable activities, ld.CIT(E) has grossly erred in rejecting the application filed by the assessee u/s.12A(1)(ac)(vi). Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the denial of registration under section 12A of the Income-tax Act, 1961, on the ground of meagre expenditure incurred by the charitable trust, is legally justifiedRs.(b) Whether the assessee trust has fulfilled the conditions prescribed under section 12A(1)(ac)(vi) of the Income-tax Act for obtaining registration, particularly with respect to commencement and genuineness of charitable activitiesRs.(c) Whether the authorities below were correct in rejecting the application for registration solely on the basis of limited expenditure vis-`a-vis available funds, without considering other relevant factors such as corpus donations, fixed deposits, and asset acquisitionsRs.2. ISSUE-WISE DETAILED ANALYSISIssue (a) - Legality of denial of registration under section 12A on the ground of meagre expenditureRelevant legal framework and precedents: Section 12A of the Income-tax Act provides for registration of charitable or religious trusts, which is a prerequisite for claiming exemption under the Act. The statute requires that the trust must be engaged in charitable activities and must have commenced such activities. There is no statutory or judicially mandated minimum amount of expenditure required for registration under section 12A.Court's interpretation and reasoning: The Tribunal observed that the Assessing Officer (CIT(Exemption)) rejected the application solely on the ground that the expenditure incurred on charitable objects was very meagre compared to the funds available with the trust. The Tribunal held that such a ground is not tenable since the law does not prescribe any minimum threshold of expenditure for registration under section 12A.Key evidence and findings: The assessee had submitted various documents including registration certificate, ledger details, bills for medical aid, bank statements, trust deed, and details of donations and expenditures. The Tribunal noted that the assessee commenced activities in the financial year 2023-24 and had incurred expenditure of Rs. 22,943 against gross receipts of Rs. 48,336, which included interest and membership fees.Application of law to facts: The Tribunal applied the statutory requirement that the trust must have commenced charitable activities and produced documentary evidence thereof. The mere fact that expenditure was comparatively low was not a valid ground for denial of registration.Treatment of competing arguments: The Departmental Representative supported the denial based on limited expenditure. However, the Tribunal rejected this argument, emphasizing that the law does not mandate minimum spending for registration and that the assessee had demonstrated commencement of charitable activities.Conclusion: The Tribunal concluded that the denial of registration on the basis of meagre expenditure was erroneous and not supported by the law.Issue (b) - Fulfillment of conditions under section 12A(1)(ac)(vi) regarding commencement and genuineness of charitable activitiesRelevant legal framework and precedents: Section 12A(1)(ac)(vi) requires that the trust must be engaged exclusively in charitable activities and must have commenced such activities. The genuineness of activities is to be established through documentary evidence.Court's interpretation and reasoning: The Tribunal found that the assessee had submitted all relevant documents as called for by the CIT(Exemption), including details of donations, expenditure ledgers, bills, bank statements, and trust deed, which collectively established the commencement and genuineness of charitable activities.Key evidence and findings: The assessee trust was registered under the Mumbai Public Trust Act, 1950, with main objects including medical aid, educational facilities, and health awareness. The Tribunal noted the submission of bills for medical aid, payments to other charitable organizations, and bank statements showing receipt of donations and expenditure.Application of law to facts: Considering the documentary evidence, the Tribunal held that the assessee had fulfilled the statutory conditions under section 12A(1)(ac)(vi) for registration.Treatment of competing arguments: The CIT(Exemption) did not dispute the genuineness of activities but focused solely on the quantum of expenditure. The Tribunal rejected this narrow approach, emphasizing the sufficiency of evidence showing commencement and genuine charitable activity.Conclusion: The Tribunal concluded that the assessee had met all conditions under section 12A(1)(ac)(vi) and was entitled to registration.Issue (c) - Consideration of corpus donations, fixed deposits, and asset acquisition in assessing eligibility for registrationRelevant legal framework and precedents: The Income-tax Act and related jurisprudence recognize that charitable trusts may accumulate funds for future projects and that corpus donations and fixed deposits are legitimate components of trust finances. Registration under section 12A does not require immediate expenditure of all funds.Court's interpretation and reasoning: The Tribunal observed that the CIT(Exemption) failed to properly consider that the assessee had invested Rs. 4,00,700 in land acquisition and held fixed deposits of Rs. 3,36,148. These facts indicated that the trust was in the process of infrastructure development, consistent with its charitable objectives.Key evidence and findings: The balance sheet showed significant funds held as fixed deposits and land purchase. The assessee also received building funds as part of corpus donations, signaling planned future charitable activity expansion.Application of law to facts: The Tribunal applied the principle that accumulation of funds and acquisition of assets for charitable purposes is permissible and does not negate the commencement or genuineness of charitable activities.Treatment of competing arguments: The CIT(Exemption) argued that low expenditure despite available funds indicated lack of genuine activity. The Tribunal rejected this, emphasizing the legitimate accumulation and utilization of funds for future charitable purposes.Conclusion: The Tribunal held that the assessee's corpus donations, fixed deposits, and asset acquisitions were consistent with charitable objectives and did not justify denial of registration.3. SIGNIFICANT HOLDINGSThe Tribunal held:'It is nowhere written in the relevant provisions for registration about any minimum amount which has to be spent in order to become eligible for registration u/s.12A of the Act. Relevant provision only provides that assessee should commence the charitable activity and the same has to be proved with documentary evidence.''Ld.CIT(E) has grossly erred in rejecting the application filed by the assessee u/s.12A(1)(ac)(vi).''The assessee trust is in the process of constructing building in the time to come.'Core principles established include:Registration under section 12A requires commencement and genuineness of charitable activities, not a minimum quantum of expenditure.Accumulation of funds, corpus donations, fixed deposits, and acquisition of assets for charitable purposes are legitimate and do not defeat the eligibility for registration.Documentary evidence establishing commencement of charitable activities suffices for registration under section 12A.Final determinations:The Tribunal allowed the appeal, set aside the order denying registration, and directed the CIT(Exemption) to grant registration under section 12A of the Income-tax Act to the assessee trust.