2025 (11) TMI 26 - AT - Income Tax

Trust's objects held charitable under s.2(15); FDs for construction OK under s.11(5)/(2); registration granted under s.12AB

ITAT held that the trust's objects fall within 'charitable purpose' under s.2(15), some bona fide charitable activity was carried out, and receipts parked ... Rejecting the application for regularisation of registration u/s 12AB - Charitable activity u/s 2(15) - assessee was established as charitable trust as on 30th September 2021 with the objective of providing relief to the poor, medical aid and other assistance to needy people such as handicapped and promotes yoga - as per CIT(E) assessee has not carried out any genuine charitable activity, and assessee has not pursued recovery of the outstanding sale consideration from the transfer of shares, thereby treating the entire arrangement as a façade. HELD THAT:- In the present case the trust was established in September 2021 with objects like relief to the poor, medical aid, and promotion of yoga. Hence the objects of the appellant assessee squarely fall within “charitable purpose” as defined under section 2(15) of the Act. Within few months, i.e. for year ending 31st March 2022 it received donation and applied entire receipt towards charitable purpose. As such the assessee in the very first year has carried out a school-support activity (windows, tables, blackboards) on which incurred an amount of Rs. 6,38,910/- only. The assessee further undertakes financial assistance activity of Rs 2 lakh. This can be verified from the income and expenditure account for the period from 30th September 2021 to 31st March 2022 of the appeal set. However, in the subsequent two years, the assessee has not carried out much of activities. The fact that the first two/three years shows modest or uneven activities does not negate genuineness of charitable objects of the assessee. An emerging trust often scales progressively. The Hon’ble Courts and Tribunal including the coordinate benches (in case of Swayam Siddha Foundation Society and Embassy Charitable Trust cited above) have consistently held that the quantum or spread of activity is irrelevant for registration, once it is established that the objects are charitable and some bona fide charitable activity has been carried out. Therefore, in our considered opinion, the conclusion of the ld. CIT(E) that there were “no genuine activities” rests on an incorrect yardstick. CIT(E) was influenced by the fact that donations to the appellant assessee arose from companies in which trustees are interested. That, by itself, does not impeach genuineness. The statute addresses related-party benefits through section 13 of the Act, however, there is no finding of any benefit or diversion of the trust fund to specified persons. Also, there is no finding regarding the use of trust funds for non-charitable purposes, or breach of any other law. Therefore, in absence of cogent material exhibiting a colourable device being adopted, the mere source of donation from entities controlled by the trustees cannot brand the trust’s activities as non-genuine. As such the Act does not prohibit or place restriction on receipt of donations from related concern. Appellant assessee has received shares of private company as a corpus donation which as per the provision of the Act was sold by the assessee. The assessee received only 5% of consideration and parked the same in fixed deposits with a scheduled bank which is a permitted mode under section 11(5) of the Act. The Delay/non-receipt of the balance consideration has been explained as a commercial dispute under pursuit. In our considered opinion such delay/nonreceipt of balance consideration does not bear on the charitable character of the trust or the genuineness of its objects or activities. Regularization of registration cannot hinge upon whether the trust negotiated a “better” commercial bargain or how vigorously it litigates its receivables. In our considered view those are assessment compliance facets, not registration tests. There is no material showing the share arrangement as a sham or that the trust’s corpus was siphoned or misapplied. On the contrary, the monies realised (5%) were not diverted but they were conserved into fixed deposit for the purpose of construction of building. The assessee has placed on record that Form 10 was filed to accumulate funds for constructing a building. Accumulation under section 11(2) of the Act and interim parking in fixed deposits pending application are expressly permitted. It is settled position of law that mere accumulation or conservation for planned projects does not indicate non-genuineness. We are also conscious to the fact that the provision of section 12AB(1)(b)(ii) of the Act also enables examination of “compliance with other laws.” However, the impugned order of learned CIT(E) does not establish any breach of any specified law or any adverse action by a competent authority. In the absence of such material facts, we hold that the refusal of application for the regularisation of the registration is based on conjectures about transactions discussed above but the same cannot be sustained. Assessee has produced its trust deed, evidence of charitable activity being carried out, financials statements, and explanations regarding corpus/accumulation/recovery steps. Therefore, in the given facts, the burden shifts to the Department to arrange concrete material of non-genuineness of the object and activity of the assessee. Merely labelling the arrangement a “façade” without tangible corroboration does not meet the statutory threshold. The record, as brought before us, discloses charitable objects, some charitable activity, compliant investment, and planned application and it does not disclose any misuse, private benefit, or violation of law. Thus, we hold that the assessee’s objects are charitable, and genuineness of activities stands established at this stage. Accordingly, we hereby set aside the order of the ld. CIT(E) rejecting the application for the regularisation of registration under section 12AB and direct the ld. CIT(E) to grant registration under section 12AB of the Act forthwith, and thereafter consider the assessee’s section 80G application in accordance with law - Ground of appeal of the assessee is hereby allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Commissioner (Exemptions) correctly rejected the application for regularisation of provisional registration under section 12AB on the grounds that the trust's activities were not genuine and that the overall arrangement (donation of shares and sale consideration) was a façade. 2. Whether the Commissioner (Exemptions) correctly rejected the application for registration under section 80G on the same factual and legal basis as the section 12AB refusal. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of refusal to regularise registration under section 12AB on grounds of non-genuine activities and alleged façade transactions Legal framework * Statutory test for registration under section 12AB requires satisfaction of (i) charitable nature of objects and (ii) genuineness of activities; verification at the registration stage is limited to whether objects are charitable and proposed/actual activities are in line with objects. * Separate provisions (e.g., section 11(2), section 11(5), and section 13) govern accumulation, permitted investments and related-party benefits; cancellation under the registration provision requires findings based on actual non-genuine activities or breach. Precedent treatment (followed/distinguished/overruled) * Followed precedents holding that registration inquiry is not a full assessment of transactions or quantum of activity and that proposed/early activities may suffice for registration. The Court relied on higher court and tribunal authorities which held that modest or initial activities do not justify refusal of registration and that accumulation/investment in permitted modes is acceptable. Interpretation and reasoning * Scope of inquiry: The Court reiterated that at regularisation stage the authority need only be satisfied that objects are charitable and activities (including proposed/initial activities) are genuine and in accordance with objects; a full forensic assessment of transactions is not permissible. * Facts and documentary evidence: The trust was formed with objects squarely within charitable purpose and carried out identifiable charitable activity in the first year (school-support expenditure and financial assistance) supported by accounts and audited financials. Donations in the first two financial years were quantified and explained, and some expenditure was incurred on charitable activity. * Related-party donations: Receipt of donations from companies in which trustees have an interest, without evidence of diversion, private benefit, or breach of law, does not by itself render activities non-genuine. The Court observed that related-party funding is addressed by separate provisions and that absence of cogent material showing misuse prevents imputing a façade. * Donation of shares and sale proceeds: Corpus donation of private company shares and subsequent sale yielding upfront 5% consideration (deposited in fixed deposits) was held to be consistent with permitted accumulation and investment. Delay/non-receipt of balance consideration was treated as a commercial dispute and not a ground to deny registration, absent material showing sham transaction or misapplication. * Compliance with other laws: The authority must point to breach of any specified law or adverse action by competent authority to sustain rejection on compliance grounds; no such material was shown. Ratio vs. Obiter * Ratio: At the registration/regularisation stage under section 12AB the statutory inquiry is limited to charitable nature of objects and genuineness of activities (including proposed activities); modest or early-stage activity, accumulation in permitted modes, or related-party donations without evidence of misuse cannot sustain refusal of registration. * Obiter: Comments on commercial negotiation dynamics, the prudence of pursuing receivables, and general observations that assessment-type inquiries are distinct from registration proceedings are incidental but consistent with ratio. Conclusions * The refusal to regularise registration under section 12AB was unsustainable on the record: objects were charitable, some bona fide charitable activity was carried out, funds realised were conserved in permitted investments for planned application (construction), and no cogent material demonstrated a façade, diversion or breach of law. The authority's conclusion rested on conjecture and insufficient material. * Direction: The Commissioner (Exemptions) was directed to grant registration under section 12AB forthwith and thereafter consider the section 80G application in accordance with law, bearing in mind findings on genuineness and charitable character. Issue 2 - Applicability of findings for section 12AB to refusal of registration under section 80G Legal framework * Section 80G registration is an ancillary certification concerning tax-deductibility of donations to an eligible trust/organization; eligibility overlaps with section 12AB registration insofar as charitable character and genuineness of activities are relevant. Precedent treatment (followed/distinguished/overruled) * Applied consistent approach that factual and legal determinations supporting section 12AB registration bear directly on section 80G eligibility when rejections are based on the same facts. Interpretation and reasoning * Identity of issues: The facts and reasons for rejection under section 80G were identical to those relied upon in the section 12AB refusal (non-genuine activities; alleged façade transactions). Having found those grounds unsustainable in the section 12AB appeal, the same conclusions logically extend to the section 80G rejection. * Administrative sequencing: The Court observed that section 12AB registration is a necessary antecedent for consideration of 80G, and where the basis for refusal is identical and found lacking, the 80G rejection cannot stand. Ratio vs. Obiter * Ratio: Where rejection of section 80G registration is premised on the same factual and legal infirmities as an unsustainable refusal under section 12AB, the findings favourable to the assessee on section 12AB must apply to section 80G. * Obiter: Procedural guidance that the tax authority should thereafter consider the 80G application consistent with the grant of 12AB registration is ancillary. Conclusions * The refusal of registration under section 80G, being factually and legally coterminous with the section 12AB refusal, was set aside. The matter was remitted for consideration in accordance with law consistent with the Court's findings on charitable objects, genuineness of activities, permitted accumulation and absence of material showing façade or diversion. Cross-references and Practical Implications * Cross-reference: Conclusions on Issue 1 (paragraphs above) directly inform and determine Issue 2; the Court applied the same standards and evidence to both statutory registrations. * Practical implication: At registration stage authorities must confine themselves to the statutory threshold (charitable objects and genuineness of activities/proposed activities) and cannot convert registration enquiries into substantive assessments of commercial transactions or receivable disputes without cogent material of sham or misuse.