Charitable Trust Cannot Be Denied Income-Tax Registration For Lack of Irrevocability Clause In Trust Deed: Bombay High Court

The Bombay High Court has held that the absence of an explicit irrevocability clause in a trust deed cannot be a ground to reject the application of a charitable trust for registration or renewal under Section 12AB of the Income Tax Act, 1961.

Section 12AB governs the grant and renewal of registration to charitable and religious trusts for the purpose of claiming tax exemption, and the Court observed that the statute does not require such a clause and that a trust is ordinarily irrevocable unless the instrument expressly provides for revocation.

“The statute does not enact that the mere absence of an irrevocability clause makes a trust revocable. On the contrary, it implies that a trust is irrevocable (which is the normal principle in all transfers) unless it is expressly made revocable. Silence in the deed implies irrevocability, not revocability," a division bench of Justices B. P. Colabawalla and Firdosh P. Pooniwalla observed.

The court made the observation while allowing a writ petition filed by The Chamber of Tax Consultants, the Bombay Chartered Accountants' Society, Mahesh J. Parikh Charitable Trust, Dadar Bhagini Samaj, Dr. Y. N. Ajinkya East Bombay Lion's Hospital Society Trust, Dilasa Medical Trust and Rehabilitation Centre, Gaud Brahman Samaj, and Gavankar Education Trust Saraswati High School, who had challenged the rejection of their applications for renewal of registration under Section 12AB.

The petitioners approached the Court after the Commissioner of Income Tax (Exemptions) rejected the renewal applications of the charitable trusts primarily on the ground that their trust deeds did not contain an express clause stating that the trusts were irrevocable and on the allegation that incorrect information had been furnished in Form 10AB while seeking renewal.

The Revenue contended that the authority must be satisfied that the trust is irrevocable before granting registration and argued that the absence of an express irrevocability clause could indicate potential revocability, thereby attracting the provisions of Sections 60 to 63 of the Act relating to revocable transfers. It was further argued that since exemption under Section 11 is subject to Sections 60 to 63, the issue of revocability could be examined even at the stage of registration under Section 12AB.

Rejecting this approach, the court held that Section 12AB does not require a trust deed to contain an express clause declaring the trust to be irrevocable, and such a condition cannot be read into the statute.

The bench noted that the legislature had consciously made exemption under Section 11 subject to Sections 60 to 63, but had not imposed any similar requirement in Section 12AB dealing with registration.

“The entire case of Respondent No.1 is built on the premise that section 11 is 'subject to sections 60 to 63'. This approach overlooks the fact that the Legislature in its wisdom only made the grant of exemption under section 11 subject to sections 60 to 63 and did not provide for any such similar provision in section 12AB of the Act,” the Court observed.

Interpreting Section 63, the Court held that a transfer can be treated as revocable only if the instrument contains a specific provision for re-transfer of assets or for re-assumption of control by the transferor and that the absence of an irrevocability clause does not make the trust revocable.

The Court also examined the legal framework under the Maharashtra Public Trusts Act, 1950, and held that once property is dedicated to a public charitable trust, the settlor is divested of ownership and the assets cannot revert back. Even where a trust is deregistered, the statutory scheme requires that the property be dealt with in accordance with the Act and not returned to the settlor, the Court noted.

The bench further observed that the Income Tax Act itself contains safeguards against misuse of trust property, including Section 13, which denies exemption where income is used for the benefit of specified persons, and Section 115TD, which provides for taxation of accreted income in certain cases. These safeguards, the court said, address the Revenue's concerns and do not justify imposing additional conditions not found in the statute.

Holding that the Commissioner had misapplied the law by insisting on a requirement not contemplated under Section 12AB, the Court quashed the rejection orders and directed the authorities to process the petitioners' applications for registration and renewal in accordance with law.

For Respondents: Advocate Arjun Gupta