2025 (7) TMI 972 - AT - Income Tax

Registration cannot be denied under Section 12AB merely for potential foreign expenditure concerns

ITAT Mumbai allowed assessee's appeal against CIT(E)'s rejection of registration u/s 12AB. CIT(E) had denied registration citing potential foreign ... Registration u/s 12AB - CIT(E) had rejected the said registration on the ground that the assessee has executed foreign expenses for running the trust which is contravening the provisions of section 11 - HELD THAT:- Only basis for rejection of registration by CIT(E) is the possibility of the assessee incurring expenditure outside India in furtherance of its objects, which, according to the Ld. CIT(E), contravenes the provisions of Section 11 does not find support either in the statutory scheme of Section 12AB or in judicial precedents. As in the case of N.K. Nambyar Saarf Law Charitable Trust [2004 (5) TMI 51 - DELHI HIGH COURT] has categorically held that the scope of Section 12AA (now Section 12AB) is limited to examining the genuineness of activities and the objects of the trust, and not the place of application of income. The Hon’ble Court observed that the fact that the trust may apply income outside India does not constitute a valid ground for denial of registration, since Section 11 itself provides a framework for allowing or disallowing exemption based on application of income in or outside India. Thus, this objection, being premature and irrelevant at the stage of registration, cannot be sustained. Similarly in Dedhia Music Foundation [2025 (4) TMI 592 - ITAT MUMBAI] has held that the mere existence of an object permitting application of income outside India does not amount to a “specified violation” under Explanation to Section 12AB(4) of the Act. The Tribunal concluded that unless and until the income is actually applied outside India in violation of the conditions of Section 11, it cannot be construed as a ground for cancellation or denial of registration under Section 12AB. Application of income outside India, even if made, would only affect the exemption u/s 11(1), but cannot be construed as a contravention of law attracting rejection of registration. In the present case, the assessee has neither undertaken any impermissible application of income nor has the Ld. CIT(E) brought on record any specific violation of conditions prescribed under Section 12AB(1)(b) or Explanation to Section 12AB(4). The objects of the assessee are in line with the mission of the Central Government under the NM-ICPS initiative, and the activities are genuine and aimed at technological development in public interest. We direct the Ld. CIT(E) to grant registration to the assessee under Section 12AB - Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal are:(a) Whether the Commissioner of Income-tax (Exemption) was justified in rejecting the assessee's application for registration under section 12AB of the Income Tax Act, 1961, solely on the ground that the assessee's objects and activities may involve expenditure outside India, which purportedly contravenes section 11 of the Act.(b) Whether the existence of objects in the Memorandum of Association (MOA) permitting international collaboration and application of income outside India is a valid ground for denial or cancellation of registration under section 12AB.(c) The scope and ambit of section 12AB(1)(b) and Explanation to section 12AB(4) regarding 'specified violations' that may justify rejection of registration.(d) The interplay between section 11 (which governs exemption of income applied for charitable purposes) and section 12AB (which governs registration of charitable trusts or institutions) in the context of application of income outside India.(e) Whether the assessee's activities and objects, in light of the statutory framework and judicial precedents, satisfy the conditions for registration under section 12AB.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Validity of rejection of registration on ground of expenditure outside IndiaRelevant legal framework and precedents: Section 12AB(1)(b) mandates that registration can be granted only if the Commissioner is satisfied about the objects of the trust or institution, genuineness of activities, and compliance with any other law material for achieving its objects. The Explanation to section 12AB(4) lists 'specified violations' which may justify cancellation or rejection of registration, including application of income for objects other than those of the trust.The Hon'ble Delhi High Court in N.K. Nambyar Saarf Law Charitable Trust vs Union of India clarified that section 12AA (now section 12AB) does not distinguish between activities carried out in India or outside India. The Court held that the fact that income may be applied outside India is not a ground for denial of registration. The Court emphasized that exemption under section 11 is restricted to income applied for charitable purposes in India, but registration under section 12AB is concerned with genuineness of activities and objects, not the place of application of income.The Coordinate Bench of ITAT Mumbai in Dedhia Music Foundation vs CIT(Exemption) further elucidated that the presence of objects permitting application of income outside India does not constitute a 'specified violation' under Explanation to section 12AB(4). The Tribunal held that clauses (a), (c), (d), and (e) of the Explanation require actual impermissible application of income or non-genuine activities, not merely the possibility of expenditure outside India. Section 11(1) provisions are computational and do not impose compliance obligations material to achieving objects under section 12AB(1)(b).Court's interpretation and reasoning: The Tribunal noted that the CIT(E) rejected the application solely on the apprehension that future activities might involve expenditure outside India, which allegedly violates section 11. However, this reasoning was found to be legally unsound as section 12AB does not restrict objects or activities based on geographic location. The Tribunal emphasized that the statutory framework contemplates the genuineness of objects and activities, and compliance with laws material to achieving objects, but does not prohibit international collaboration or expenditure outside India per se.Key evidence and findings: The assessee is a not-for-profit company under section 8 of the Companies Act, formed pursuant to directions of the Ministry of Science and Technology and hosted by IIT Bombay. It has registration under section 12AB for prior assessment years. The MOA includes objects related to international collaboration for technology research and development under a Central Government grant scheme (NM-ICPS). The assessee's activities are aligned with government missions and are genuine and public-spirited.Application of law to facts: The Tribunal applied the legal principles from the Delhi High Court and ITAT precedents to conclude that the mere inclusion of objects permitting activities and expenditure outside India does not violate the conditions for registration. The assessee's genuine activities and alignment with government objectives further support eligibility for registration.Treatment of competing arguments: The CIT(E) relied on section 11 and the MOA's reference to activities 'abroad' to deny registration. The Tribunal rejected this as premature and irrelevant at the registration stage, noting that section 11 governs exemption of income based on application, but does not restrict registration. The Tribunal also rejected the argument that the assessee failed to amend its MOA to exclude foreign activities, emphasizing that no law mandates such amendment for registration.Conclusion: The Tribunal held that the CIT(E)'s rejection based on possible foreign expenditure is legally untenable and directed grant of registration under section 12AB.Issue (c) and (d): Interpretation of 'specified violations' under Explanation to section 12AB(4) and interplay with section 11Relevant legal framework and precedents: Explanation to section 12AB(4) enumerates grounds for cancellation of registration, including application of income for objects other than those of the trust, carrying on business in violation of conditions, non-genuine activities, and failure to comply with any other law material for achieving objects.The Tribunal in Dedhia Music Foundation clarified that clauses (a), (c), (d), and (e) require actual impermissible application or non-genuine activities. Clause (f) relates to compliance with laws other than the Income Tax Act. Section 11(1) is a computation provision and does not impose compliance obligations material to objects under section 12AB.Court's interpretation and reasoning: The Tribunal interpreted the statutory provisions harmoniously, concluding that mere objects permitting foreign activities or possible application of income outside India do not amount to 'specified violations.' Actual breach or non-genuine activities are necessary to attract cancellation or rejection under section 12AB.Application of law to facts: The assessee has not applied income outside India in violation of conditions, nor has the CIT(E) demonstrated any non-genuine activity or breach of conditions. Hence, no 'specified violation' under Explanation to section 12AB(4) is made out.Conclusion: The provisions of section 11 do not constitute 'any other law' for the purpose of section 12AB(1)(b), and foreign application of income, if any, affects exemption under section 11 but not registration under section 12AB.Issue (e): Genuineness of activities and compliance with conditions for registrationRelevant legal framework and precedents: Section 12AB(1)(b) requires satisfaction about genuineness of activities and compliance with laws material to achieving objects. The assessee's objects relate to technological research and development under government schemes, with international collaboration as a deliverable.Court's interpretation and reasoning: The Tribunal found that the assessee's activities are genuine, aligned with government objectives, and supported by documentary evidence including sanction orders and tripartite agreements. The assessee has complied with procedural requirements and has no adverse findings against it.Application of law to facts: The assessee's prior registration and ongoing activities demonstrate compliance and genuineness. No evidence was presented to show non-compliance or non-genuine activities.Conclusion: The assessee fulfills the conditions for registration under section 12AB.3. SIGNIFICANT HOLDINGS'The fact that the trust may apply income outside India does not constitute a valid ground for denial of registration, since Section 11 itself provides a framework for allowing or disallowing exemption based on application of income in or outside India. Thus, this objection, being premature and irrelevant at the stage of registration, cannot be sustained.''Existence of any object for carrying out any activity outside India will not enable the Ld CIT(E) to deny registration u/s 12AB of the Act. Such kind of application of income outside India (unless it is permitted by the CBDT) will not be exempted u/s 11 of the Act.''The provisions of sec.11(1) would not fall under the category of 'any other law', since it is only a computation provision. The provisions of sec.11(1) do not require the charitable trust or institution to comply with any requirements, which are essential to achieve the objects of the trust.''The mere existence of an object permitting application of income outside India does not amount to a 'specified violation' under Explanation to Section 12AB(4) of the Act.''The application of income of a charitable trust or institution outside India for carrying out its objects will not fall under any of the categories of 'specified violation' as mentioned in the Explanation to sec.12AB(4) of the Act.'Final determinations:- The rejection of registration under section 12AB solely on the ground of possible expenditure outside India is unsustainable.- The assessee's objects and activities are genuine and in compliance with statutory requirements.- Registration under section 12AB must be granted to the assessee.