2025 (9) TMI 640 - AT - Income Tax

Section 12AB registration set aside after finding rejection rested on suspicion; remitted for fresh examination of activities

RKM Social Welfare Foundation Versus The Commissioner of Income Tax (Exemption), Chennai

ITAT Chennai - AT set aside the CIT(E)'s rejection of the application for registration under section 12AB, finding the CIT(E)'s conclusion-that the ... Rejection of application filed for registration u/s.12AB - Appellant does not carry on charitable activities -as per revenue - assessee is a section 8 company - HELD THAT:- CIT(E) has analysed the objects and activities of the assessee along with the nature of expenditure debited by the assessee to the income and expenditure account, project report submitted to the state by the CSR contributing company, common directors in the company and the assessee, came to conclusion that the assessee has engaged in providing the required employees to the CSR contributed company in exchange of contributions. There is no evidence to draw such conclusions by the ld.CIT(E) and it is merely based on suspicion and surmises. On perusal of the paper book we find that the assessee has submitted the certain details of the activities carried out in respect of village concrete road construction, school building construction etc. and provided the supporting documents for the same. CIT(E) has erred in drawing such conclusion to reject the application for registration u/s. 12AB of the Act for the reason that the activities carried out is not in accordance with section 2(15) of the Act, and hence we are setting aside the order of ld.CIT(E) and remit the issue back to the files of the ld.CIT(E) for examination of the issues. ISSUES PRESENTED AND CONSIDERED 1. Whether the rejection of registration under section 12AB was maintainable where the applicant is a Section 8 company carrying out activities funded by corporate CSR contributions. 2. Whether the activities undertaken by the applicant fall within the definition of 'charitable purpose' in section 2(15) - specifically: relief of the poor; education; medical relief; preservation of environment; and advancement of any other object of general public utility. 3. Whether expenditure characterized as salaries (employee costs) can be treated as project expenditure (and thus supportive of charitable activity) rather than administrative overheads, in the context of CSR-funded rural development projects. 4. Whether the Commissioner's finding that the applicant was acting as a recruiting/training agency for the funding company (a quid pro quo) was supported by evidence sufficient to displace the applicant's documentary material and prevent registration under section 12AB. 5. Whether, in the absence of proof beyond suspicion and surmise, the matter should be remitted for fresh consideration by the tax authority. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of rejection of registration under section 12AB Legal framework: The statutory power under section 12AB permits registration of trusts/institutions claiming charitable status; procedural and substantive satisfaction is required before rejection. Section 12AB(1)(b) clause (ii)(B) permits rejection where the Commissioner is not satisfied when certain subclauses apply. Precedent treatment: The Tribunal referred to judicial standards requiring evidence-based findings rather than conclusions based on conjecture; the order under challenge cites judicial authority on the meaning of 'education' under section 2(15) (see Municipal Corporation of Delhi v. Children Book Trust) to the extent that education must be for public benefit to qualify. Interpretation and reasoning: The Tribunal examined the Commissioner's order and the documentary record submitted by the applicant (objects, audited financials, project details, annexures of works executed). The Commissioner concluded the application was not maintainable because the applicant allegedly acted as a recruiting agency for the funding company; the Tribunal found that conclusion rested on suspicion and surmise without evidential foundation in the record. Ratio vs. Obiter: Ratio - A rejection under section 12AB must be grounded in evidence; speculative inferences are insufficient to justify refusal. Obiter - Procedural consequences under clause (ii)(B) are noted but not determinative absent evidence. Conclusions: The rejection was not sustainable on the record; matter remitted for fresh, evidence-based examination by the tax authority in accordance with law. Issue 2 - Whether activities fall within 'charitable purpose' under section 2(15) (general public utility, environment, education, relief of poor) Legal framework: Section 2(15) defines 'charitable purpose' to include relief of the poor, education, medical relief, preservation of environment and advancement of any other object of general public utility; provisos exclude activities in the nature of trade/business or rendering services for fee unless conditions (i) and (ii) are satisfied. Precedent treatment: The Tribunal acknowledged the Supreme Court principle that 'education' must be for public benefit and not confined to a few specific persons; that principle was relied on by the Commissioner in his analysis. Interpretation and reasoning: The applicant asserted rural development projects (afforestation, water conservation, desilting, repairs to schools/dispensaries, women self-empowerment trainings) undertaken for village communities and funded through CSR. The Commissioner treated the predominance of salary expenditure and corporate nexus as indicia of non-charitable activity. The Tribunal observed that documentary project evidence and annexures were on record and that the Commissioner did not adequately test those materials before drawing adverse inferences. Ratio vs. Obiter: Ratio - The classification of activities under section 2(15) requires a fact-based inquiry into the nature, beneficiaries and mode of implementation; mere affiliation with a corporate donor or prevalence of salary costs does not ipso facto exclude charitable character. Obiter - Specific assessment of each limb (education, environment etc.) should be undertaken by the authority on remand. Conclusions: The Tribunal did not finally decide whether the activities qualify under section 2(15); it held that the Commissioner's contrary finding was not supported by the record and directed fresh determination of whether the activities constitute charitable purposes in light of the applicant's submissions and supporting documents. Issue 3 - Characterisation of salaries as project expenditure versus administrative overheads Legal framework: Distinction between administrative overheads and project implementation costs is relevant to determining whether activities are charitable and whether any proviso to section 2(15) is triggered (i.e., activities in nature of trade/services for fee). Guidance from administrative sources (MCA FAQ on CSR) recognizes that salaries of personnel directly engaged in project implementation may be project cost rather than administrative overhead. Precedent treatment: The Commissioner treated salary expenditure as indicia of administrative or non-charitable activity; the applicant relied on administrative guidance and project documentation to show salaries were incurred for project implementation. Interpretation and reasoning: The Tribunal noted the applicant's reliance on documentary materials and MCA guidance explaining that salaries of persons directly engaged in CSR projects (e.g., school teachers) are project expenditure. The Tribunal found the Commissioner did not properly evaluate these materials and instead presumed that salary payments indicated a recruiting function for the donor company. Ratio vs. Obiter: Ratio - Proper characterisation of employee costs requires examination of job functions, project role and supporting documentation; it cannot be assumed to be administrative merely because it is recorded as salaries. Obiter - Reference to MCA FAQs is persuasive for practical classification but final legal effect depends on statutory tests under the Act. Conclusions: Salaries may be project expenditure supporting charitable activity where evidenced; the Commissioner must re-examine the nature of salary costs on remand with reference to documentary proof of project roles. Issue 4 - Sufficiency of evidence for finding of quid pro quo/recruiting-agency role Legal framework: Administrative findings that negate charitable character must be supported by cogent evidence; inferences adverse to the applicant require probative material rather than conjecture. Precedent treatment: The Commissioner relied on corporate nexus and timing/nature of expenditures to infer a quid pro quo; the Tribunal applied the evidential standard for administrative fact-finding and the principle that suspicion cannot substitute for proof. Interpretation and reasoning: The Tribunal reviewed the record and found the Commissioner's conclusion that the applicant functioned primarily to provide employees to the funding company was not substantiated by contemporaneous evidence. The applicant had produced project reports, annexures of works executed and audited accounts which the Commissioner did not adequately confront before reaching an adverse finding. Ratio vs. Obiter: Ratio - Adverse inferences of quid pro quo require evidential support; absence of such support mandates reopening or remittal rather than confirmation of rejection. Obiter - Common directorship or donor-donee nexus is a permissible factor to examine but is not determinative without supporting facts. Conclusions: The Commissioner's quid pro quo finding was unsupported; the matter must be re-examined on the basis of the applicant's documentary record and, if necessary, additional evidence. Issue 5 - Appropriate relief where rejection is unsupported Legal framework: Where administrative fact-finding is flawed, appellate forums may set aside the order and remit for fresh consideration in accordance with law and after affording opportunity to the parties. Precedent treatment: The Tribunal exercised remedial power to remit rather than to grant registration itself when further fact-finding was necessary. Interpretation and reasoning: Given the presence of documentary material on projects, accounts and annexures, and the absence of convincing contrary evidence, the Tribunal concluded that the proper course was to set aside the rejection and remit to the Commissioner for a fresh, evidence-based decision. Ratio vs. Obiter: Ratio - Remittal is appropriate where the authority's decision rests on unsupported inferences and a fresh examination of materials will determine the statutory entitlement. Obiter - No final adjudication on the charitable status was made by the Tribunal. Conclusions: The Tribunal set aside the rejection of registration and remitted the matter to the Commissioner for reconsideration of the application under section 12AB in accordance with law and on the basis of evidence already on record and any further material as may be required.