Rejection of 80G application treating it as 12AB registration violation of natural justice; Matter remanded

“06. Further 2nd proviso to section 80G(5) of the Income Tax Act, 1961 also state that if CIT is not satisfied has to pass order rejecting such application and also cancelling its earlier approval. Thus, it is clarified that applicant’s provisional approval under clause (iv) of first proviso to subsection (5) of section 80G of the Income Tax Act, 1961 dated 10.03.2022 is also being cancelled. Further assessee has failed to give proper justification for regularization of provisional approval, thus with this order provisional approval is also lapsed and cancelled.”

“The applicant filed an online application in Form No. 10AB seeking approval u/s 80G of the Income Tax Act, 1961 was filed on 26.06.2024. A letter/notice No. ITBA/EXM/F/EXM43/2024-25/1066715571(1) dated 15.07.2024 was issued at the email/ address provided in the application requiring the applicant to submit certain documents/explanations by 01.08.2024, in compliance to which the applicant requested to adjourn its case. Thereafter, a reminder letter was issued to the applicant vide this office DIN & Notice No. ITBA/EXM/F/EXM43/2024-25/1069969799(1) dated 26.10.2024 to submit complete details/information by 05.11.2024. In compliance to thereof, the applicant had submitted a reply on 04.11.2024 which was thoroughly examined on record and found various discrepancies. These discrepancies were conveyed to the applicant vide show cause notice dated 08.12.2024 wherein date of hearing was given 12.12.2024. After giving notice, the applicant had submitted its reply on 12.12.2024 which was not found tenable. Reply furnished by the assessee has been examined and applicant not found eligible for the desired registration.”

“04. In view of above discussion assessee’s claim of registration section 12AB is liable to be rejected and thus being rejected on following grounds:

06. Further 12AB (1)(b)(ii)(B) of the Income Tax Act, 1961 also state that if CIT is not satisfiedhas to pass order rejecting such application and also cancelling its earlier registration. Thus, it is clarified that applicant’s provisional registration under clause (vi) of clause (ac) of sub-section (1) of section 12A of the Income Tax Act, 1961 dated 10.03.2022 is also being cancelled. Further assessee has failed to give proper justification for regularisation of provisional registration, thus with this order provisional registration is also lapsed and cancelled.”

“Please refer to this office order No. ITBA/EXM/F/EXM45/2024-25/1071648752(1) dated 28.12.2024. You are requested to ignore the rejection order passed by this office, as there was some mistake & some other order was pasted in your case.”

“In response, vide reply, the applicant stated that it has applied for RPT under DevasthanVibhag.

The above reply of the applicant that it has applied for the Devasthan Department is not tenable as till date they are not registered but only applied for the same. Application to the concerned department is not enough proof whether application has accepted and verified all the formalities at their end. Therefore, in view of the above, contention of the applicant is not tenable that they have applied for the registration under RPT Act, 1959. Thus, it is clear that as on date, trust is not registered under Rajasthan Public Trust Act, 1959. Therefore, in light of above discussion and in the absence of registration under Rajasthan Public Trust Act, 1959, assessee is not eligible for registration u/s 12AB.”

“(B) The compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects;”

“2. The assessee submitted before us the copy of application filed online before the DevasthanVibhag, Rajasthan vides dated: 22.09.2024, as required by the Ld. CIT (E), Jaipur. Although the requirement of obtaining registration with the DevasthanVibhag, Rajasthan as per the Rajasthan Public Trust Act, 1959 is really required or not in the context of section 12AB (1) (b) (ii) (b) of the Act, is a matter raised before us by the counsel of the assessee and certainly a question of law to be decided by us in the coming paras of this order considering the provisions of section 12AB (1) (b) (ii) (B) of the Act, Judicial Pronouncements relied upon by the Ld. CIT(E), Jaipur. For sake of clarity and ready reference we are reproducing herein below the relevant provisions of section 12AB of the Act as under:

Procedure for fresh registration.

12AB. (1) The Principal Commissioner or Commissioner, on receipt of an application made under clause (ac) of sub-section (1) of section 12A, shall, —

(a) Where the application is made under sub-clause (i) of the said clause, pass an order in writing registering the trust or institution for a period of five years;

(b) Where the application is made under sub-clause (ii) or sub-clause (iii) or sub-clause (iv) or sub-clause (v) [or item (B) of sub-clause (vi)] of the said clause, —

(i) Call for such documents or information from the trust or institution or make such inquiries as he thinks necessary in order to satisfy him about—

(A) The genuineness of activities of the trust or institution; and

(B) the compliance of such requirements of any other law for the time being in

force by the trust or institution as are material for the purpose of achieving its objects;

(ii) after satisfying himself about the objects of the trust or institution and the genuineness of its activities under item (A) and compliance of the requirements under item (B), of sub-clause (i), —

(A) Pass an order in writing registering the trust or institution for a period of five years; or

(B) If he is not so satisfied, pass an order in writing, —

(I) in a case referred to in sub-clause (ii) or sub-clause (iii) or sub-clause (v)

of clause (ac) of subsection (1) of section 12A rejecting such application and also cancelling its registration;

(II) In a case referred to in sub-clause (iv) or in item (B) of sub-clause (vi) of sub-section (1) of section 12A, rejecting such application, after affording a reasonable opportunity of being heard.

4. The relevant provisions reproduced (supra) in bold and underlined, is an attempt by us to analyze the provision in proper perspective of Law in the light of Judicial Pronouncement of Hon’ble Apex Court, specifically the citations being relied upon by the Ld. CIT (E), Jaipur, i.e. (A.P.) Aurora Educational Society v. CCIT, relevant paras are reproduced as under:

“10. The scope and amplitude of section 10(23C) (vi) of the Income-tax Act, the provisos there under and the rules and forms applicable thereto, which were the subject-matter of examination in New Noble Educational Society v. Chief CIT  (AP) and in R. R. M. Educational Society v. Chief CIT [2011] 339 ITR 323 (AP) can, conveniently, be summarized as under:

1. As section 20A of the A. P. Education Act prohibits individuals from establishing educational institutions, it is only societies/associations/ trusts which can establish educational institutions in the State of Andhra Pradesh.”

“19. On a conjoint reading of sub-sections (3) and (4) of section 8 of the A. P. Societies Registration Act, 2001, it is only when the amendment to the objects of a society (educational agency) is intimated and the Registrar, on being satisfied that the amendment is not contrary to the provisions of the Act, registers and certifies such an alteration, would it be a valid alteration under the Act. It is only from the date the Registrar certifies the alteration that the amendment, to the objects of the society, comes into force.”

5.Above discussed, judicial pronouncement is specifically applicable to the educational institutions, where a specific law is there to regulate such type of institutions and are in harmony with the provisions of section 12AB (1) (b) (ii) (B) of the Act, i.e. the compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving itsobjects. In the matter under consideration, the Ld. CIT (E), Jaipur is duty bound to establish that how the compliance with RPT Act, 1959 is material for the purpose of achieving its objects. In our opinion, both the statutes, i.e. The Income Tax Act, 1961 and RPT Act, 1959. All the authorities relied upon by the assessee (Sic- CIT(E)) are w.r.t. educational institutions, where context is different, i.e. students at large and issues like capitation fee, allocation of seats, pay scale of teachers and curriculum of the syllabus etc. are in focus. For public benefit and reasonability, such regulations are there, specifically the states where big institutions are indulged in imparting education in the field of Medical, Engineering and Managements etc.

6.The next judicial pronouncement relied upon by the Ld. CIT (E), Jaipur is from the court of Hon’ble Apex Court as under: (SC) New Noble Educational Society v. CCIT, relevant paras are reproduced as under:

“It is held that wherever registration of trust or charities is obligatory under state or local laws, the concerned trust, society, other institution etc. seeking approval under section 10(23C) should also comply with provisions of such state laws. This would enable the Commissioner or concerned authority to ascertain the genuineness of the trust, society etc. This reasoning is reinforced by the recent insertion of another proviso of section 10(23C) with effect from 1-42021. [Para 76]”

7.Again referring our considered opinion as discussed (supra) vide para 5, this citation relied upon by the Ld. CIT (E), Jaipur is again w.r.t. an educational institution and our findings (supra) again confirmed. It is also observed that in both the citations discussed (supra) also discussed and relied upon the judicial precedents applicable to educational institutions only. None of the precedents discussed in the case of Aurora Educational Society v. CCIT and New Noble Educational Society v. CCIT matches with character of the assessee under consideration, which is being further fortified with the language of the Income Tax Act, 1961 itself as mentioned (supra). Plain reading of section 12AB (1) (b) (ii) (B) of the Act speaks in a way that compliance of requirement of any other law is required if compliance under the Act is material for achieving its objects.

8.There is no law which is required to be complied with for achieving the objects of the assessee trust. Section 17 of the RPT Act, 1959 requires that trustees of the trust has to apply for registration of a public trust, however, there is no section in the RPT Act, 1959 which prohibits a trust to carry out its objects if it is not registered under the RPT Act, 1959. In our considered opinion, both the statutes have their own provisions and implications and none of them have overriding effect. Even if, the assessee trust is not registered with the RPT Act, 1959 and the concerned officials under the RPT Act, 1959 deems it necessary to get the entity registered under section 17 of the RPT Act, 1959, appropriate action can be taken and against the trustees of the trust. But this issue can’t be a hurdle in getting registration before the Income Tax Department u/s. 12AB of the Act.

9.In view of discussion (supra), we do not find any force in the findings of the Ld. CIT (E), Jaipur while holding registration application untenable in the absence of registration under the RPT Act, 1959.”

“Without prejudice to anything contained in above paras, analysis was done to understand the actual working of the institution. On perusal of the Income and Expenditure accounts for the F.Y. F.Y. 2023-24 to till date, the applicant has earned huge profits, the data are summarized as under: –

*F.Y. 2023-24

Table

The above analysis shows that the applicant has received enormous markup in year to year on the medical activities undertaken. Therefore, it is deduced that the trust is doing activities of highly profitable nature and cannot be said to be conducting charitable activities. It is important to mention here the decision of Hon’ble apex Court in case of P.A. Inamdar case no. 5041 of 2005, and T.M.A. Pai Foundation 8 SCC 48 (2002) where, it has clearly held that even the formal education cannot be at exorbitant price and for profiteering. Recently Apex Court in case of Baba Banda Singh Bahadur Education Trust in civil appeal no. 10511 of 2013 dated 26.04.2023 and M/s New Noble Education Society in civil appeal no. 3795 of 2014 dated 19.10.2022 has overturned it decision in case of Queen Education, and clearly held that education with substantial margin is not charitable and has to be considered for profit making, not for charity. Hon’ble Apex Court in its decision has done away with the regime of huge profit being ploughed back in system as charitable in the name of dominant objective. Thus, such high margin activities have to be considered trade and commerce only.

5. In the recent decision of this Court in the case of New Noble Educational Society (supra), it is specifically observed and held by the three-Judge Bench of this Court that for claiming the benefit/exemption under Section 10(23C)(iii)(ab) which is para materia to Section 10(23C)(vi) the activity of the assessee must be be solely for educational purposes and if ultimately it is found 7 that the activity is for profits the assessee is not entitled to the exemption under Section 10(23C)(vi) of the Act.

6. Applying the law laid down by this Court in the case of New Noble Educational Society (supra) referred to hereinabove to the facts of the case on hand, the impugned judgment and order passed by the High Court is unsustainable. At this stage, it is required to be noted that taking into consideration the entire material on record, in fact, the Commissioner, while considering the application of the assessee for grant of exemption under Section 10(23C)(vi) specifically observed and held that the activity of the assessee cannot be said to be solely for imparting the education and that the assessee is indulging into the profit which was found to be 67.81% without depreciation and 44.48% with depreciation. The finding of fact recorded by the Commissioner, as such, not been upset by the High Court in the impugned judgment and order. In view of the above and for the reasons stated above, the present Appeal succeeds. The impugned judgment and order passed by the High Court deserves to be quashed and set aside and is, accordingly, quashed and set aside.”

The decision of Hon’ble Apex court is latest decision available on issue and is basically have been given on the basis of finding of Hon’ble Apex Court decision in case of New Noble Education. It is important to mention here that decision of

Hon’ble Apex Court in case of New Noble Education society is very big, detailed judgment, where in Hon’ble Apex court has considered all prior judgment on issue. By these two orders, Hon’ble Apex court has defined the not-for-profit phrase as available in section 10(23C) and cleared that profit is not allowed while doing activities in charity per say also, and is assesse is imparting the education or conducting activity it has to be at cost or at nominal margin, other same would fall from purview of not for profit and thus would fall from applicability of 10(23C). It is also important to mention here that though both decision are specifically for 10(23C), however, if we read the decision of New Noble education, Hon’ble Apex court has discussed the various provision of section 11 and 12 also in this regard, and it became clear that decisions are equally applicable even for registration under 12A also, which itself is available for charity and can no way considered tax exemption to entities which are collecting huge fee with enormous margin. It has also been discussed in this decision that margins are to be taken before depreciation, and other applications, including the application for new building etc. Thus, after this decision, even when the profits are ploughed back for creating another institute or infrastructure or otherwise, will not change the character of being exist for profit.

Now the question would arise that what margin can be considered nominal. Though Hon’ble apex court is silent in these two cases on this issue, however, as thesedecisionshas overturned the decision of Hon’ble Apex Court in case of Queens Education are important to be considered. Regarding issue of surplus, also the Hon’ble Uttarakhand High Court in the case of CIT v. Queens Educational Society considered the below financials and notfound assessee eligible for exemption.

TABLE

If we see that in that case the margin from activities were about as low as 0.84% in 2001-02 & only about 18% in 1999-2000. In fact, the year involved in that case were only 2001-02 & 2000-01, which were having margin on 0.84% and 7.5% only. Even otherwise, margin of 5-10% in any business is considered a good margin (that too being tax free). Section 44AD consider net profit of 8%. Thus, in my view the nominal margin may be taken at about 8% only.

In present case too applicant is generating huge surplus and profit that further is being applied in construction of hospital building and plant & machinery (and benefit is going in the hands of land owners.

Hence, the application of the applicant for registration u/s 12AB is liable to be rejected on the ground of profitability and benefit to members and related persons which is also non genuine activity.”

“Hence from the above it is clear that the activities are not verifiable and it could not be determined whether the applicant is genuinely carrying out charitable activity.Therefore, the applicant claim of registration u/s 12AB is also liable to be rejected on ground of not proving its genuineness of activity.”

“‘8. The term ‘genuine’ as per the New Collins Concise English Dictionary is defined as under:

“”Genuine’ means not fake or counterfeit, real, not pretending (not bogus or merely a ruse).”

For interpretation of the aforementioned provision, the principle of purposive construction should be resorted to. Levy of interest although is statutory in nature, inter alia for recompensating the Revenue from loss suffered by nondeposit of tax by the assessee within the time specified therefor. The said principle should also be applied for the purpose of determining as to whether any hardship had been caused or not. A genuine hardship would, inter alia, mean a genuine difficulty. That per se would not lead to a conclusion that a person having large assets would never be in difficulty as he can sell those assets and pay the amount of interest levied.

The ingredients of genuine hardship must be determined keeping in view the dictionary meaning thereof and the legal conspectus attending thereto. For the said purpose, another well-known principle, namely, a person cannot take advantage of his own wrong, may also have to be borne in mind. The said principle, it is conceded, has not been applied by the Courts below in this case, but we may take note of a few precedents operating in the field to highlight the aforementioned proposition of law. (See Priyanka Overseas (P.) Ltd.&Anr. v. Union of India & Ors. 1991 Suppl. (1) SCC 102, para 39, Union of India & Ors. v. Maj. Gen. (Retd.) Madan Lal Yadav (1996) 4 SCC 127 at 142, paras 28 and 29, Ashok Kapil v. Sana Ullah (dead) & Ors. (1996) 6 SCC 342 at 345, para 7, Sushil Kumar v. Rakesh Kumar (2003) 8 SCC 673 at 692, para 65, first sentence, Kusheshwar Prasad Singh v. State of Bihar & Ors. (2007) 11 SCC 447, paras 13, 14 and 16).’

5. Yet however, in the entire order the ld. CIT(E) has not demonstrated how he could find such activities to be sham or fake or made-up affair. It is not his case that some of the expenditures were found bogus/ sham or the claimed activity were found nonexistent. Therefore, this allegation holds no water and deserves to be quashed. He wrongly alleged (PB 16-17) of non-submitting certain details which were submitted to the extent practicable. But he could have asked the appellant.

Other Supporting case laws:CIT v/s Shyam Mandir Committee CIT v. Shyam Mandir Committee (2018) 400 ITR 466 (Raj)(DC 33-53)andCIT v. D.N. Memorial Trust CIT v. D.N Memorial Trust (Jammu & Kashmir and Ladakh) (Jammu & Kashmir and Ladakh)/ (Jammu & Kashmir and Ladakh) (DC 5456).

At the end thus, it is prayed that registration u/s 12AB and provisional registration u/s 12A may be restored. Further the approval denied u/s 80G(5) be also granted and the ld. CIT(E) be directed accordingly and oblige.

The above submissions have been made based on the instructions and the information provided of/by the client.”