2025 (6) TMI 1129 - AT - Income Tax

Section 80G(5)(iii) approval rejection overturned due to mechanical application without examining trust's actual activities and evidence

Shri Umedkumari Mandir Trust Samadi Chakla Versus The Commissioner of Income Tax (Exemption) Ahmedabad

ITAT Ahmedabad set aside CIT(Exemption)'s rejection of section 80G(5)(iii) approval application. The tribunal found the rejection order legally ... Rejection of approval u/s 80G(5)(iii) - certain object clauses in the trust deed were indicative of a religious purpose - HELD THAT:- While the order reproduces the statutory provisions of section 80G(5), Explanation 3, and section 80G(5B), as well as references to certain judicial decisions, there is no attempt to correlate these legal provisions with the facts of the case, particularly the financial data and actual activities of the trust. CIT(Exemption) has not dealt with the judicial precedents relied upon by the assessee. The entire decision-making appears to rest on a mechanical application of legal text without factual evaluation. In our considered view, such an approach renders the order legally unsustainable. The role of the CIT(Exemption) u/s 80G(5) is not limited to a textual reading of the trust deed, but extends to verifying the genuineness of activities, the manner in which the funds are applied, and whether the institution is established solely for charitable purposes in substance. In the present case, the CIT(Exemption) has failed to discharge this statutory responsibility by not dealing with the material placed on record by the assessee. We therefore find that the impugned order suffers from serious procedural and factual inadequacies, and the rejection of the application u/s 80G(5)(iii) cannot be sustained in its present form. We are of the considered opinion that the impugned order dated 14.12.2024 passed by the CIT(E) is liable to be set aside, as it suffers from lack of proper examination of facts, absence of reasoned consideration of the assessee’s reply, and failure to deal with the documentary evidence placed on record. Accordingly, the matter is restored to the file of the CIT(Exemption) with a direction to examine the assessee’s application afresh in accordance with law. Issues Presented and Considered1. Whether the rejection of the application for approval under section 80G(5)(iii) of the Income-tax Act, 1961, by the Commissioner of Income Tax (Exemption) (CIT(E)) was justified on the ground that the trust was not established solely for charitable purposes due to the presence of religious objects in the trust deed.2. Whether the CIT(E) erred in interpreting certain terms in the trust deed's object clause as indicative of religious activity, thereby disqualifying the trust from approval under section 80G(5)(iii).3. Whether Explanation 3 to section 80G(5), which excludes institutions having religious objects from approval, was correctly applied by the CIT(E) without considering the actual activities and expenditure of the trust.4. Whether the CIT(E) failed to comply with principles of natural justice and procedural fairness by summarily rejecting the assessee's detailed reply and supporting evidence without reasoned consideration.5. Whether the CIT(E) was correct in relying solely on the literal reading of the object clause of the trust deed without examining the trust's actual activities, financial statements, and reports to determine the genuineness of charitable purposes.Issue-wise Detailed Analysis1. Interpretation of Object Clause and Religious vs. Charitable PurposeThe legal framework under section 80G(5)(iii) mandates that approval for exemption be granted only if the institution is established solely for charitable purposes. Explanation 3 to section 80G(5) excludes institutions having religious objects from such approval. The CIT(E) relied on a literal reading of terms such as 'katha', 'shastri', 'vedic', 'puranic', and 'aitihasik' appearing in the trust deed's object clause, interpreting them as indicative of religious purposes, thus disqualifying the trust.The assessee argued that these terms pertain to Indian knowledge systems, culture, literature, and historical narration rather than religious rituals or worship. The trust's activities, including public libraries, literary programs titled 'Granth No Panth', and educational lectures, were contended to be charitable and cultural rather than religious in nature. The word 'Mandir' in the trust's name was explained to mean 'Sahitya Mandir' or Literary Temple, not a religious temple, with no idols, pooja, or religious ceremonies conducted.The Court observed that the CIT(E) erred in adopting an isolated and literal interpretation of the object clause without appreciating the context or the actual nature of the trust's activities. The Court emphasized that the role of the CIT(E) extends beyond textual analysis to examining the substance and genuineness of the institution's purposes and activities.2. Application of Explanation 3 and Section 80G(5B)Explanation 3 to section 80G(5) excludes institutions with religious objects from approval. Section 80G(5B) allows a 5% tolerance for religious expenditure only if the institution is otherwise established solely for charitable purposes.The CIT(E) applied Explanation 3 on the basis of the trust deed's object clause, concluding that the trust was not solely charitable. The assessee submitted audited financial statements and activity reports demonstrating no religious activities or expenditure, thereby negating the applicability of Explanation 3 and section 80G(5B).The Court found that the CIT(E) failed to consider the financial data and activity reports, which were critical to determine whether any religious expenditure was incurred. The absence of such examination rendered the application of Explanation 3 and section 80G(5B) improper. The Court noted that the CIT(E) did not correlate the legal provisions with the facts, which is essential for a valid conclusion.3. Procedural Fairness and Natural JusticeThe assessee submitted a detailed reply dated 27.11.2024, explaining the nature of the trust's activities and enclosing supporting documents, including audited financial statements and reports. The CIT(E) summarily rejected this reply as 'not acceptable' without assigning any reasons or engaging with the evidence.The Court held that such summary rejection violates the principles of natural justice and judicial discipline. A quasi-judicial authority must provide a reasoned order dealing with the explanations and evidence submitted. The absence of analytical reasoning or discussion of the reply constituted a procedural lapse and rendered the order unsustainable.4. Role and Duty of the CIT(Exemption) under Section 80G(5)The Court reiterated that the CIT(E) is required to verify the genuineness of the institution's activities, the manner of application of funds, and whether the institution is established solely for charitable purposes in substance. The CIT(E) must examine the totality of evidence, including financial statements and activity reports, rather than relying solely on the trust deed's object clause.In the present case, the CIT(E) failed to discharge this duty by ignoring the material evidence and relying on a mechanical application of legal text. This approach was found to be legally unsustainable.5. Treatment of Competing Judicial PrecedentsThe CIT(E) relied on precedents where trusts with explicit religious objects or expenditure were denied approval. The assessee distinguished these cases by highlighting the absence of religious expenditure or activity in the present case and cited a recent decision holding that Vedic knowledge is not religious but a source of knowledge qualifying as charitable.The Court observed that the CIT(E) did not deal with or analyze the precedents relied upon by the assessee, further undermining the reasoned basis of the impugned order.Significant Holdings'The CIT(Exemption) has merely recorded in the impugned order that the reply was 'not acceptable' without assigning any reasons as to why the explanations and evidence furnished by the assessee were found unsatisfactory. There is a complete absence of analytical reasoning or discussion of the reply dated 27.11.2024, which is a clear violation of the principles of natural justice.''The CIT(Exemption) has proceeded to form his conclusions solely on the basis of an isolated and literal reading of certain terms used in the object clause of the trust deed. No effort has been made to appreciate the object clause holistically or to examine the actual nature of the trust's functioning.''The role of the CIT(Exemption) under section 80G(5) is not limited to a textual reading of the trust deed, but extends to verifying the genuineness of activities, the manner in which the funds are applied, and whether the institution is established solely for charitable purposes in substance.''The impugned order suffers from serious procedural and factual inadequacies, and the rejection of the application under section 80G(5)(iii) cannot be sustained in its present form.''The matter is restored to the file of the CIT(Exemption) with a direction to examine the assessee's application afresh in accordance with law, considering the written reply, all material placed on record, audited financial statements, activity reports, and to record a reasoned and speaking order.'The Court established the core principle that approval under section 80G(5)(iii) requires a holistic examination of both the trust deed and the actual activities and expenditure of the institution. Mere literal interpretation of object clauses without factual scrutiny is insufficient and legally unsustainable. Additionally, the principles of natural justice mandate reasoned consideration of the assessee's submissions and evidence.Final determination was to set aside the impugned order and remit the matter to the CIT(Exemption) for fresh adjudication in accordance with law, ensuring compliance with procedural fairness and proper evaluation of all relevant facts and legal contentions.