Kerala HC Directs CIT To Reconsider Registration Of Trust From 2021, Examines CBDT Circular 7/2024

On 4 June, the Kerala High Court directed the Commissioner of Income Tax (Exemptions) to reconsider a Atma Bodhodaya Sangham Sree Subhananda Trust's claim for registration under Section 12A of the Income Tax Act with effect from 1 April 2021, after examining the applicability of CBDT Circular No. 7/2024 on rectification of defective exemption applications.

A Division Bench of Justices Devan Ramachandran and Basant Balaji set aside the orders of the Income Tax Appellate Tribunal (ITAT) and the Commissioner of Income Tax (Exemptions), which had denied retrospective registration to the Trust, and remitted the matter for fresh consideration with a direction to complete the exercise within three months. The held:

“the competent Authority – which is the Commissioner of Income Tax (Exemptions) – must reconsider the request of the appellant for registration from the year 2021, adverting to the ambit of the Circular No.7/2024 dated 25.04.2024.”

The Trust, based in Alappuzha district, originally held registration under Section 12A since 1988 to claim exemptions under Sections 11 and 12 of the Income Tax Act. It filed a provisional registration application for the assessment year 2020–21.

It stated that it inadvertently selected Section 10(23) instead of Section 12A while filing the application due to a system error. Section 10(23) provides exemption for specified funds, institutions and educational entities.

The authorities processed and accepted the application under Section 10(23), and granted provisional and later final registration under that provision until March 2024. After the Trust discovered the error, it surrendered the registration and filed a fresh application under Section 12A, relying on CBDT Circular No. 7/2024, which allows rectification of certain defective or delayed applications.

However, the authorities granted provisional registration only from 2023–24 onwards and denied retrospective benefit for assessment years 2021–22 and 2022–23. The ITAT upheld this view, holding that registration under Section 12A cannot operate retrospectively.

Before the High Court, the Trust argued that its case falls within the scope of the CBDT circular since it filed the original application under the wrong statutory provision due to a system error. The Income Tax Department opposed this contention, arguing that the circular applies only where authorities reject applications, whereas they accepted the application under Section 10(23).

The Court noted that the ITAT did not properly examine the applicability of CBDT Circular No. 7/2024. It further observed that if authorities had rejected the original application for quoting the wrong provision, the benefit of the circular “may have been available” to the Trust.

The Bench also observed that the Trust surrendered the registration obtained under Section 10(23), and it required the authorities to examine whether the original application should be treated as defective and eligible for regularisation.

Accordingly, the High Court allowed the appeal, set aside the ITAT and CIT (Exemptions) orders, and remitted the matter to the Commissioner of Income Tax (Exemptions) for fresh consideration after granting the Trust an opportunity of hearing. It directed completion of the exercise within three months and left all substantial questions of law open.