Disallowance under s.80G(5) set aside; remand to examine three preceding years under Rule 11AA(2)(g), approval directed if conditions met

ITAT (Surat) set aside the disallowance of approval under s.80G(5) and remanded to the file of the Ld. CIT(E) to examine only the accounts of the three preceding years under Rule 11AA(2)(g). The Tribunal found no specific show-cause notice to justify extending the inquiry beyond that period, noted the trust's provisional approval to AY 2024-25 and registration under s.12A/AB, and directed that if religious expenditure does not exceed 5% in the three years and other conditions are met, approval under s.80G(5) be granted; appeal allowed for statistical purposes.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the Commissioner of Income-tax (Exemptions) lawfully rejected approval under section 80G(5) by treating the trust as religious in nature without complying with the scope and limits of Rule 11AA(2)(g).

2. What is the permissible scope of inquiry of the CIT(E) under Rule 11AA(2)(g) when deciding an application for approval under section 80G(5), specifically regarding examination of expenditure on religious activities in the three preceding financial years.

3. Whether the CIT(E) may go beyond the three preceding years prescribed in Rule 11AA(2)(g) without issuing a specific show-cause notice to the applicant.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Lawful rejection of 80G(5) approval by characterising the trust as religious

Legal framework: Approval under section 80G(5) requires satisfaction of conditions in Rule 11AA(2) (including clause (g) regarding expenditure on religious activities) and also presupposes registration under section 12A/12AB.

Precedent treatment: No prior judgments or authority were cited or applied by the Court in the decision; the outcome is determined by statutory interpretation and the facts on record.

Interpretation and reasoning: The Court noted there was no dispute that the trust held registration under section 12A/12AB. The Court examined whether the CIT(E) had made findings required by Rule 11AA(2)(g) before rejecting approval. The Tribunal found no express finding that the trust had violated the limitation on religious expenditure for the three preceding years; the CIT(E) referred to alleged religious expenditure for years outside the mandatory three-year scope without establishing the requisite factual basis.

Ratio vs. Obiter: Ratio - A rejection of approval under section 80G(5) grounded on the trust being "religious" must be preceded by the specific factual inquiry required under Rule 11AA(2)(g) where applicable; absent such inquiry or findings, the rejection is not sustainable. (This is the operative holding.)

Conclusion: The Tribunal held that the CIT(E)'s rejection was unsustainable insofar as it did not confine itself to the enquiry mandated by Rule 11AA(2)(g) and did not make the requisite findings about the three preceding years; the matter required reconsideration limited to the statutory parameters.

Issue 2 - Permissible scope of inquiry under Rule 11AA(2)(g): three preceding years limitation

Legal framework: Rule 11AA(2)(g) requires the authority to consider whether the applicant has incurred expenditure on religious activities in the three preceding financial years; the rule thereby circumscribes the temporal scope of inquiry for approval under section 80G(5).

Precedent treatment: Not referenced; the Tribunal's analysis is statutory and fact-driven.

Interpretation and reasoning: The Tribunal interpreted Rule 11AA(2)(g) as mandating examination of expenditure on religious activities limited to the three preceding years. The Court emphasized that the objects of a trust must be read as a whole rather than isolating particular words; however, for approval purposes the mandated three-year account review is the proximate test to determine whether expenditure on religious activities exceeds permissible limits.

Ratio vs. Obiter: Ratio - The enquiry under Rule 11AA(2)(g) is confined to the three preceding financial years and approval should be granted if, on that enquiry, religious expenditure does not exceed the statutory threshold (as applied by the CIT(E)).

Conclusion: The Tribunal directed that the CIT(E) must examine the accounts of the three preceding years and allow approval under section 80G(5) if religious expenditure in that period does not exceed the prescribed limit and all other conditions are satisfied.

Issue 3 - Requirement of show-cause notice before expanding inquiry beyond three years

Legal framework: Principles of fair procedure require that when an authority proposes to make an adverse finding based on material or periods beyond the statutory scope prescribed for initial verification, the affected party be given an opportunity to respond; Rule 11AA(2)(g) prescribes a specific scope of verification.

Precedent treatment: None cited; the Tribunal applied established procedural fairness principles to the statutory scheme.

Interpretation and reasoning: The Tribunal held that if the CIT(E) intended to travel beyond the three preceding years or to treat the institution as religious on a broader factual basis, a specific show-cause notice should have been issued signalling that expanded enquiry and giving the trust an opportunity to meet the allegations. In the absence of any such show-cause notice, an expanded inquiry or adverse finding based on periods beyond those prescribed cannot stand.

Ratio vs. Obiter: Ratio - An assessing authority must issue a specific show-cause notice before relying on material or periods beyond the three preceding years under Rule 11AA(2)(g) to deny approval under section 80G(5).

Conclusion: Because no show-cause notice was issued and no specific findings on the prescribed three-year period were recorded, the Tribunal restored the matter to the CIT(E) for a confined inquiry limited to the three preceding years, subject to the 5% threshold on religious expenditure and other statutory conditions.

Dispositive Conclusion and Direction

Holding: The appeal was allowed for statistical purposes and the matter was remitted to the CIT(E) with directions to examine only the accounts of the three preceding financial years in accordance with Rule 11AA(2)(g); if religious expenditure in that period does not exceed the permissible threshold (5%) and other conditions are met, approval under section 80G(5) is to be granted.

Cross-reference: See Issue 2 and Issue 3 for the Tribunal's interpretation of the temporal limitation in Rule 11AA(2)(g) and the procedural necessity of a show-cause notice before expanding inquiry beyond that limitation.

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