2025 (11) TMI 1247 - AT - Income Tax

Exemption u/s 11 denial set aside; matter remanded as CIT(E) ignored activities, Form 10BB and amended deed under s.12AB(4)

ITAT Ahmedabad set aside the order denying exemption u/s 11 to the assessee trust and remanded the matter to CIT(E) for fresh adjudication. The Tribunal ... Denial of exemption u/s 11 - objects were explicitly confined to the benefit of a particular caste, namely Karadiya Rajput Samaj - HELD THAT:- CIT(E) did not verify or examine the assessee’s actual activities or financial records to determine whether, in practice, the trust had applied its income for the benefit of a particular caste or religious community. The audited financial statements and the audit report in Form No. 10BB, which were admittedly filed before the CIT(E), have not been analysed or discussed in the order. Before concluding that there was a violation falling within clause (d) of the Explanation below section 12AB(4), the CIT(E) was required to record a clear finding based on factual verification that the income or property of the trust was so applied. The absence of such finding renders the order factually incomplete. We also note the contention of the AR that the same CIT(E), Ahmedabad, on identical facts, had granted registration under section 12A(1)(ac) to Shree Kshatriya Rajput Samaj Trust vide order dated 25.12.2024, subject to a condition that the assessee shall not undertake activities relating to community-based objects until approval of the amended deed by the Charity Commissioner. In the present case, the CIT(E) has adopted a different approach without any distinguishing reasoning, resulting in inconsistency in the application of the law. Thus, we are of the considered view that the impugned order suffers from lack of factual verification and non-consideration of subsequent developments, including the amendment to the trust deed. Therefore, in the interest of substantial justice, the matter is required to be restored to the file of the learned CIT(Exemption) for fresh adjudication. ISSUES PRESENTED AND CONSIDERED 1. Whether a trust whose trust deed originally specified beneficiaries as a particular caste or religious community falls outside the definition of 'charitable purpose' under section 2(15) and therefore merits rejection of registration under section 12A(1)(ac)(iii) and cancellation of provisional registration under section 12A(1)(ac)(vi). 2. Whether the presence of a reference to a particular caste in the trust deed constitutes a 'specified violation' under clause (d) of the Explanation to section 12AB(4) such that registration can be refused or provisional registration cancelled without factual verification of actual application of income. 3. Whether subsequent amendment of the trust objects (removing caste/community restriction) filed with the Charity Commissioner and contemporaneous records (audited financial statements and Form No.10BB) must be considered by the CIT(E) before deciding on registration under section 12A(1)(ac). 4. Whether inconsistency in administrative action (granting registration in a factually similar case subject to conditions while rejecting the present application) requires restoration for reconsideration to ensure consistent application of law. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework: The meaning of 'charitable purpose' is governed by section 2(15). Registration under sections 12A(1)(ac)(iii) (regular) and 12A(1)(ac)(vi) (provisional) depends on the trust's objects and application of income for charitable purposes. Precedent treatment: The Court noted and relied upon an ITAT Rajkot Bench decision in factually similar circumstances directing grant of registration after verification of amended trust deed and activities; that decision was followed as a relevant precedent for procedure but not as a binding finding on merits here. Interpretation and reasoning: The CIT(E) based rejection on the literal content of the original trust deed which referred to a specific caste, concluding exclusion from section 2(15)'s charitable ambit because the benefit was not to the public at large. The Tribunal reasoned that while an object confining benefit to a caste/community raises a prima facie issue concerning charitable status, a conclusive determination requires factual verification of whether income/property was in fact applied for that restricted benefit. Ratio vs. Obiter: Ratio - a mere recital of caste/community in the trust deed does not automatically suffice for rejection of registration; factual application of income must be verified. Obiter - observations on the charitable nature of amended objects pending approval. Conclusions: The Court held that material showing actual activities (audited accounts, Form No.10BB) must be examined before concluding that the trust is non-charitable solely because of original deed language; therefore, the CIT(E)'s order rejecting registration on deed language alone was factually incomplete. Issue 2 - Legal framework: Clause (d) of the Explanation to section 12AB(4) treats as a 'specified violation' the application of income for the benefit of any particular religious community or caste; cancellation/refusal under section 12AB(1)(b)(ii) follows if such violation is established. Precedent treatment: The Tribunal relied on the principle that invocation of a specified violation requires a finding based on evidence that income/property was actually applied for the restricted class; an allegation based solely on deed language without evidentiary foundation is insufficient. Interpretation and reasoning: The Court emphasized that clause (d) targets actual application of income/property. Therefore, before holding that a specified violation occurred, the tax authority must examine books, audit reports, and activity records; a showcause premised only on deed translation and without analysis of financial/activity evidence does not meet the required standard of factual determination. Ratio vs. Obiter: Ratio - invocation of clause (d) requires factual findings supported by verification of activities/expenditures; failure to conduct such verification renders a cancellation/rejection unsustainable. Obiter - suggested safeguards for conditional registration. Conclusions: The CIT(E)'s cancellation and rejection premised on clause (d) were set aside for lack of factual verification that income/property had in fact been applied for the benefit of a particular caste/community. Issue 3 - Legal framework: Administrative consideration of registration under section 12A(1)(ac) must take into account the trust deed (as approved), any amendments approved by the Charity Commissioner, and contemporaneous evidence of activities contained in audited financial statements and Form No.10BB. Precedent treatment: The Tribunal cited the Rajkot Bench direction that registration may be granted after verifying amended deed and activities; the present Court applied that direction as persuasive authority on process of adjudication. Interpretation and reasoning: The Court found the amended trust deed (Change Report) removing caste-specific language had been filed with the Charity Commissioner but was not before the CIT(E) when the impugned order was passed. The Tribunal reasoned that subsequent material altering objects is relevant and must be considered; denial of registration without considering such development contravenes the requirement for a reasoned, fact-based adjudication and risks depriving bona fide entities of relief on procedural grounds. Ratio vs. Obiter: Ratio - subsequent approved or pending amendments to trust objects and contemporaneous activity records are material and must be considered before deciding registration; failure to do so necessitates restoration for fresh adjudication. Obiter - guidance on conditional registration pending formal approval. Conclusions: The matter was restored for de novo consideration with directions to verify (i) approval status of the amended deed by the Charity Commissioner, (ii) conformity of activities with section 2(15) via audited statements and Form No.10BB, and (iii) whether any expenditure has actually benefited a particular community. Issue 4 - Legal framework: Administrative consistency and reasoned orders are part of lawful exercise of discretion; like cases should be treated alike or differences explained. Precedent treatment: The Tribunal relied on the existence of an earlier decision by the same CIT(E) granting registration in a similar factual matrix subject to conditions as a basis to require explanation for differing treatment. Interpretation and reasoning: The Court observed that the CIT(E) granted registration in a similar case subject to a conditional restraint pending amendment approval but adopted a different approach in the present matter without distinguishing reasons. The Tribunal concluded that inconsistent application without explanation undermines fairness and necessitates reconsideration to ensure uniform application of law and appropriate safeguards. Ratio vs. Obiter: Ratio - inconsistent administrative action on materially similar facts requires re-examination and reasoned reconciliation; failure to provide distinguishing reasons justifies restoration for fresh consideration. Obiter - suggested safeguards that may be imposed when granting conditional registration. Conclusions: The impugned order was set aside and remitted for reconsideration to the CIT(E) with directions to adopt a reasoned approach, permit hearing, verify amendments and activities, and consider conditional registration with appropriate safeguards consistent with similar cases.