2025 (9) TMI 1121 - AT - Income Tax

Registration denial under s.12AB(4) set aside; Clause (d) requires proof income benefited specific caste or community

ITAT (Ahmedabad) allowed the trust's appeal against CIT(E)'s refusal of registration under s.12AB. The Tribunal held that Clause (d) of Explanation 2 to ... Rejecting application for registration of the trust u/s.12AB - objects of the appellant are restricted to benefit of a particular religious community or caste i.e., “Lunawada Nagar caste” - HELD THAT:- As is evident from a bare reading of Section 12AB(4) of the Act, where a trust which has been granted registration in terms of Section 12AA of the Act or has been granted provisional registration and it is subsequently found that a specified violation has occurred, then in terms of the provisions of the Section 12AB(4) PCIT/CIT after verifying the occurrence of such specified violation can cancel the registration/provisional registration granted to the trust. The specified violation defined in the Explanation 2 to Section 12AB(4) mentions six violations. The violation which has been invoked in the present case is Clause (d). On reading Clause (d) of the Explanation what emerges is that the specified violation occurs only when the income of the trust is “applied” for the benefit for a particular religious caste or community. Specified violations in Clause (d) uses the word “ applied “,which means that only when a trust is found to have utilized its income for the benefit of particular religious caste or community, then only it can be said that there is a specified violation which has occurred for cancelling the provisional registration/registration of the Trust. Section 12AB(4) of the Act requires the PCIT/CIT to verify the occurrence of such violation by calling for necessary records/details from the assessee and after granting necessary opportunity of hearing to the assessee to pass order cancelling registration/provisional registration granted. CIT(E), we find, has not found any application of income of the trust for the benefit of any particular religious case or community. In fact, no inquiry has been conducted by him regarding the occurrence of the specified violation of application of income for benefit of specific caste /community. He has only noted the objects of the trust to benefit a particular religious caste or community. Therefore his finding of there being a specified violation occurred in the case of the assessee, in terms of Explanation to section 12AB(4) of the Act, is we hold, incorrect. The LD. CIT(E)’s denial of registration on account of the occurrence of specified violation, is therefore, we hold, incorrect and not in accordance with law. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether registration under Section 12AB can be refused/cancelled on the basis that the objects of a trust 'cater to the benefit of a particular religious caste or community' absent any finding or enquiry that the trust has 'applied' its income for the benefit of that caste or community (Explanation to Section 12AB(4)(d)). 2. Whether the requirement of verification, calling for documents/inquiry and affording an opportunity of hearing under Section 12AB(1)(b) and Section 12AB(4) was complied with before rejecting the applicant's Form 10AB seeking registration. 3. Whether a finding limited to the trust's objects, without evidence of application of income, constitutes a 'specified violation' as defined in the Explanation to Section 12AB(4) permitting refusal or cancellation of registration. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework governing refusal/cancellation under Section 12AB and the scope of 'specified violation' (Explanation to Section 12AB(4)(d)) Legal framework: Section 12AB prescribes the procedure for registration of trusts/institutions, including (i) verification of genuineness of activities and compliance with other laws (clause (b)(i)), (ii) power to call for documents and make inquiries, (iii) authority to register or, if not satisfied, reject applications (clause (b)(ii)), and (iv) power to cancel registration if one or more 'specified violations' have occurred (sub-section (4)). The Explanation defines 'specified violation', including clause (d): where a trust established for charitable purpose has 'applied any part of its income for the benefit of any particular religious community or caste.' Precedent Treatment: The Tribunal's reasoning proceeds from the statutory text; no earlier decisions were relied upon or distinguished in the text of the judgment. Interpretation and reasoning: The Court interprets the phrase 'applied any part of its income' in clause (d) as a material and operative requirement. The term 'applied' denotes actual utilisation or disbursement of income for the benefit of a specified caste or community. A mere recital of objects in the trust deed indicating a focus on a particular community/caste does not, by itself, demonstrate that the trust has applied income for that community. Therefore the statutory threshold for a specified violation under clause (d) is the application/utilisation of income in the specified manner, not the mere existence of objects directed at a particular community. Ratio vs. Obiter: Ratio - The statutory phrase 'applied any part of its income' requires evidence of application/utilisation of income for the benefit of a particular religious community or caste before a specified violation under clause (d) can be found and registration refused/cancelled. Obiter - Observations on the general procedure under Section 12AB are explanatory but support the core ratio. Conclusions: Registration cannot be refused or cancelled under Explanation to Section 12AB(4)(d) solely on the basis that the object clauses indicate benefit to a particular community; there must be a finding that income has actually been applied for that benefit. Issue 2 - Requirement of inquiry, document call and opportunity of hearing under Section 12AB(1)(b) and Section 12AB(4) Legal framework: Section 12AB(1)(b)(i) empowers the PCIT/CIT to call for documents and make such inquiries as he thinks necessary to satisfy himself about genuineness of activities and compliance with other laws. Section 12AB(4)(i) similarly requires calling for documents or making inquiries to verify occurrence of specified violations; clause (ii) mandates passing an order cancelling registration only after affording a reasonable opportunity of being heard. Precedent Treatment: No authority was cited; the Court applies the statutory language and procedural prerequisites directly. Interpretation and reasoning: The Court emphasises that a finding of specified violation must be preceded by verification - i.e., calling for records and conducting inquiries - and by affording hearing. In the present case the CIT(E) did not undertake any inquiry into the application of income; rather, the CIT(E) based the rejection on the trust objects alone. The absence of inquiry and evidence that income was applied for the benefit of a particular caste/community renders the rejection procedurally and substantively unsound. Ratio vs. Obiter: Ratio - The procedural safeguards in Section 12AB are mandatory; refusal/cancellation based on specified violation cannot be sustained without the statutorily required document calls, inquiries and opportunity of hearing. Obiter - Remarks on practical consequences of conflating objects and application are explanatory. Conclusions: The PCIT/CIT must verify occurrence of specified violations by calling for necessary records and making inquiries, and must afford a reasonable opportunity of hearing before passing an order refusing or cancelling registration. Failure to do so invalidates a rejection based solely on the trust's objects. Issue 3 - Distinction between trust 'objects' and 'application of income'; consequences for grant of registration Legal framework: The Explanation to Section 12AB(4) differentiates between the content of objects and the actual application of income; clause (d) focuses on the latter. Section 12AB(1)(b) contemplates satisfaction about objects and genuineness of activities but requires inquiry before adverse action. Precedent Treatment: The Court did not rely on external precedents but used textual interpretation to distinguish objects from application of income. Interpretation and reasoning: The Court finds that noting trust objects that refer to the benefit of a particular caste/community is not equivalent to finding that the trust has applied income for that caste/community. The CIT(E)'s action amounted to treating the presence of such objects as a de facto specified violation; however, the statutory scheme requires evidence of application of income. Because no inquiry was made and no evidence produced showing application of income, the rejection is incorrect. Where no other ground for denial is shown, the proper remedy is to grant registration. Ratio vs. Obiter: Ratio - A trust is entitled to registration where the only asserted ground is the nature of its objects and there is no evidence of application of income in contravention of clause (d); registration cannot be denied on that basis alone. Obiter - Observations on the interplay between Section 12AB(1)(b)'s inquiry power and Section 12AB(4)'s post-registration cancellation regime are explanatory support. Conclusions: Where the authority has not demonstrated application of income to a particular caste/community and has not conducted the statutory verification/inquiry, registration must be granted. In the present matter the absence of any other legal ground for denial leads to direction to grant registration under Section 12A (as applied under the Section 12AB scheme). Cross-references See Issue 1 and Issue 2: The interpretation of 'applied any part of its income' (Issue 1) is directly linked to the mandatory verification and hearing requirements (Issue 2); both together determine the correctness of any refusal/cancellation under Section 12AB(4)(d). Final Disposition (Court's Conclusion) The Court concluded that the CIT(E)'s rejection of the registration application was incorrect because it rested solely on the trust's objects without any inquiry or finding that the trust had applied its income for the benefit of a particular religious caste or community as required by Explanation to Section 12AB(4)(d). Consequently, with no other reason to deny registration, the Court directed grant of registration and allowed the appeal.