ITAT Cannot Grant Tax Exemption Or Donor Tax Benefit To Charitable Trust Without Proper Inquiry: Delhi High Court

The Delhi High Court has held that the Income Tax Appellate Tribunal (ITAT) cannot direct the grant of registration under Sections 12AB (which grants income tax exemption to charitable trusts) and 80G (which allows donors to claim tax deductions on donations) of the Income Tax Act, 1961 without a proper inquiry into the genuineness of the charitable activities of the applicant trust.

A Division Bench of Justices Dinesh Mehta and Vinod Kumar thus set aside an ITAT order which had directed the Department to grant registration to an assessee-trust, observing that registration under Section 12AB(1)(b), following provisional approval under Section 12AB(1)(c), is not automatic and requires statutory scrutiny by the competent authority.

It observed, “the Tribunal was required to undertake the requisite inquiry and then record a finding about genuineness of activities of the respondent/Trust so also regarding the compliance under other laws to be made by the respondent/Trust in order to achieve its objects. And since such finding has not been recorded by the Tribunal and a sweeping direction granting registration under Section 12AB and 80G of the Act of 1961 has been given, the order impugned cannot be sustained.”

In the case at hand, the Court noted, the respondent/Trust had neglected to respond or rather chose to withhold the information or documents which were called for. Hence, the Commissioner had rejected its application for seeking registration under Section 12AB and 80G.

However, the ITAT permitted registration, holding that Commissioner is required to examine the genuineness of the Trust and not the Income of the trust for charitable/religious purposes.

Finding ITAT's approach to be “surprising” and “erroneous”, the High Court held,

“when the respondent was already having provisional registration for more than 2 years, the inquiry as proposed by the Commissioner was imperative, as the subject application was not for provisional registration but was for registration under Section 12A(1)(ac)(iii), which is filed prior to the period of expiry of the provisional registration.”

That apart, the Court said, that registration under Section 80G entails a benefit of deduction to the extent of 50% of the donation to the payer and for such purpose, the genuineness of the trust's activities is certainly a mandatory requirement and not simply a relevant consideration.

“In absence of an inquiry and finding as to whether the activities being carried out by the Trust are bonafidely charitable, the registration under Section 80G of the Act of 1961 cannot be granted,” the Court said.

As such, the Court remanded the matter back to the Commissioner to decide the application after inquiring into the activities of the Trust.

For Appellant: Gaurav Gupta, SSC with Shivendra Singh, JSC, Yojit Pareek, JSC and Advocate Surya Jindal 

For Respondent: Advocates Naveen Kumar and Mohan Chaudhary