2025 (6) TMI 1374 - AT - Income Tax

Trust wins appeal after fund approval wrongly rejected without proper examination of three-year expenditure requirements under Rule 11AA(2)(g)

Shree Surati Modh Ganchi Versus Commissioner of Income-tax (Exemption), Ahmedabad

ITAT Surat allowed the appeal regarding rejection of fund approval under Section 80G(5). The CIT(E) rejected the application without proper examination of ... Rejecting approval of fund u/s 80G(5) - scope of inquiry of trust by the CIT(E) for approval of the institution - HELD THAT:- We find that while considering the application for approval, CIT(E) has to satisfy himself if the condition prescribed under Rule 11AA(2)(g) are fulfilled or not. As per clause (g) of sub-rule (2) of 11AA, CIT(E) has to examines if there is any violation or the assessee has spent any amount for religious purpose in last three financial years. There is no such finding of CIT(E) about such violation of Rule 11AA(2)(g). On perusal of expenditure account, which is part of audit report filed before Charity Commissioner, we find that the assessee-trust has not incurred any expenses for religious purpose in last three financial year. There is no dispute that assessee-trust is an old trust and having provisional approval upto assessment year 2023-24. The assessee is already allowed registration u/s 12A/AB. Thus, in our view the scope of inquiry of trust by the ld CIT(E) for approval of the institution is to be confined only to the finding out whether prescribed conditions are fulfilled. In our view such conditions are primarily fulfilled by the assessee. If the ld CIT(E) intends to travel beyond three years expenditure as prescribed in Rule 11AA(g) he should have issued specific show cause notice to the assessee, which admittedly, is not issued. So far as other observation of ld CIT(E) that on occasion, similar application of assessee was rejected, we find that even for such grounds no specific show cause notice was issued to the assessee. Appeal of the assessee is allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the order passed by the Commissioner of Income-tax (Exemptions) [CIT(E)] under the third proviso clause (b) sub-clause (B)(1) below Section 80G(5) of the Income Tax Act, 1961, rejecting the renewal application and cancelling provisional approval of the trust's fund under Section 80G(5), was legally valid and justified.(b) Whether the CIT(E) erred in invoking sub-section (5B) of Section 80G regarding alleged expenditure of religious nature exceeding 5% of total income, despite the trust's activities being charitable and not religious in nature as per Section 2(15) of the Act.(c) Whether the CIT(E) properly considered and appreciated the documentary evidence, accounts, and information furnished by the trust to establish genuineness and exclusivity of charitable activities as required under Section 80G(5).(d) Whether the CIT(E) was justified in rejecting the renewal application without issuing a show cause notice, thereby violating principles of natural justice.(e) Whether the CIT(E) was empowered to examine expenditure beyond the preceding three financial years as prescribed under Rule 11AA(2)(g) while deciding the approval under Section 80G(5).(f) Whether the fresh application for approval under Section 80G(5) can be rejected based on findings in a previous application without fresh show cause proceedings.2. ISSUE-WISE DETAILED ANALYSIS(a) Validity of CIT(E)'s order rejecting renewal under Section 80G(5)The Income Tax Act, 1961, under Section 80G(5), provides for approval of funds of charitable trusts for donors to claim deductions. The third proviso clause (b) sub-clause (B)(1) empowers the CIT(E) to reject or cancel approval if conditions are not met. The Tribunal examined whether the CIT(E)'s order rejecting renewal was consistent with the legal framework.The Tribunal noted that the trust had valid registration under Section 12A/12AB, a precondition for approval under Section 80G(5). The CIT(E) was required to verify compliance with Rule 11AA(2)(g), which limits scrutiny of religious expenditure to the preceding three financial years. The CIT(E) did not find any violation of this rule in the last three years, nor did the CIT(E) issue any show cause notice to the trust regarding alleged religious expenditure beyond this period.The Tribunal emphasized that the CIT(E) cannot extend inquiry beyond the prescribed period without issuing a specific show cause notice, which was not done. The CIT(E)'s reliance on rejection of an earlier application based on financial years 2017-18 and 2018-19, without fresh notice or opportunity to respond, was held to be legally impermissible.The Tribunal concluded that the CIT(E)'s order was not supported by findings within the permissible scope of inquiry and procedural fairness, rendering the rejection order invalid.(b) Nature of trust's activities-charitable vs religious expenditureSection 2(15) of the Income Tax Act defines charitable purpose, excluding religious activities. Section 80G(5B) restricts expenditure on religious activities to not more than 5% of total income for approval under Section 80G(5).The assessee-trust contended that its objects and activities were purely charitable, supported by registration under Section 12A/12AB and documentary evidence including audited accounts and photographs. The CIT(E) had earlier rejected approval on the ground that religious expenditure exceeded 5% in financial years 2017-18 and 2018-19.The Tribunal examined the accounts for the preceding three financial years as required under Rule 11AA(2)(g) and found no expenditure on religious activities exceeding the prescribed limit. The Tribunal held that the CIT(E) erred in invoking Section 80G(5B) without contemporaneous evidence or specific findings for the relevant period under consideration.The Tribunal underscored that the trust's nature of activities must be assessed on the basis of current and relevant financial data, and the earlier period's alleged violation cannot be the basis for rejection without due process.(c) Consideration of documentary evidence and compliance with Section 80G(5)The trust submitted detailed documentary evidence, including audited accounts, photographs, and statements of activities, to demonstrate exclusive charitable purposes as required under Section 80G(5). The CIT(E) was required to examine these materials to satisfy himself about genuineness and compliance.The Tribunal found that the CIT(E) failed to properly appreciate the evidence furnished by the trust. There was no adverse finding on the genuineness of activities or compliance with Section 80G(5) conditions for the last three years. The Tribunal noted that the CIT(E)'s rejection was arbitrary and subjective, lacking a reasoned consideration of the material on record.The Tribunal held that the CIT(E) must base his decision on the evidence for the prescribed period and cannot rely on conjecture or past rejections without fresh inquiry.(d) Violation of principles of natural justice due to non-issuance of show cause noticeThe CIT(E) passed the rejection order without issuing a show cause notice specifically addressing the alleged violations or grounds for rejection. The trust contended this violated principles of natural justice.The Tribunal agreed, emphasizing that before rejecting approval under Section 80G(5), the CIT(E) must provide the trust an opportunity to explain and rectify alleged non-compliance by issuing a show cause notice. The absence of such notice rendered the proceedings and order invalid.(e) Scope of inquiry under Rule 11AA(2)(g) regarding preceding three years' expenditureRule 11AA(2)(g) prescribes that the CIT(E) shall examine the accounts of the trust for the three preceding financial years to determine compliance with conditions for approval under Section 80G(5). The Tribunal held that the CIT(E) is bound to confine his inquiry to this period.The CIT(E)'s reliance on expenditure beyond this period without issuing a show cause notice was held to be beyond jurisdiction. The Tribunal clarified that the CIT(E) cannot travel beyond three years' accounts unless the trust is given a chance to respond through proper notice.(f) Legality of rejection of fresh application based on earlier rejection without fresh show cause noticeThe trust filed a fresh application for approval under Section 80G(5) after obtaining registration under Section 12AB. The CIT(E) rejected this application citing earlier rejection due to religious expenditure exceeding limits in prior years.The Tribunal held that there is no legal bar to filing a fresh application if the trust subsequently fulfills the conditions for approval. The CIT(E) cannot reject a fresh application solely on the basis of earlier rejection without fresh inquiry and notice.The Tribunal restored the matter to the file of the CIT(E) with directions to consider the fresh application on merits and grant approval if all conditions are met.3. SIGNIFICANT HOLDINGS'The scope of inquiry of trust by the ld CIT(E) for approval of the institution is to be confined only to the finding out whether prescribed conditions are fulfilled. In our view such conditions are primarily fulfilled by the assessee. If the ld CIT(E) intends to travel beyond three years expenditure as prescribed in Rule 11AA(g) he should have issued specific show cause notice to the assessee, which admittedly, is not issued.''There is no dispute that assessee-trust is an old trust and having provisional approval upto assessment year 2023-24. The assessee is already allowed registration under section 12A/AB. Thus, in our view the scope of inquiry of trust by the ld CIT(E) for approval of the institution is to be confined only to the finding out whether prescribed conditions are fulfilled.''Considering the aforesaid discussions, restore the matter back to the file of the ld CIT(E) to allow approval under section 80G(5) to the assessee, if the assessee fulfilled all other conditions.'Core principles established include:The CIT(E) must confine inquiry for approval under Section 80G(5) to the preceding three financial years as per Rule 11AA(2)(g).Rejection or cancellation of approval requires issuance of a show cause notice to the trust, ensuring principles of natural justice.Fresh applications for approval can be considered afresh, notwithstanding earlier rejections, if conditions are subsequently fulfilled.Expenditure on religious activities exceeding 5% of total income in past years cannot be the sole ground for rejection without contemporaneous evidence and due process.Final determinations:The Tribunal allowed the appeal for statistical purposes, set aside the CIT(E)'s order rejecting renewal of approval under Section 80G(5), and remanded the matter for fresh consideration in accordance with law and procedure. The trust was directed to be granted approval if it satisfies all prescribed conditions within the scope of inquiry limited to the last three financial years and after issuance of appropriate show cause notice if required.