Commissioner’s cancellation of a long-standing charitable trust’s registration is invalid where no change in activities occurred, specific violations under Section 13/11(5) were unproven, non-registration with charity commissioner was not legally established as a violation, and donations to other trusts or rental income were permissible.
I. Cancellation of Trust Registration Based on Private Trust Status When Established Pre-1961 is Invalid.
Issue:
Whether the Commissioner (Exemption) can cancel the registration of a charitable trust (established in 1930 and registered under Section 12A since 1975) on the ground that it is a private trust for a specific religious community or caste, and thus not eligible for registration, particularly when the trust was formed before the Income-tax Act, 1961, and its activities have been consistently assessed as genuine with no change.
Facts I:
- The assessee-trust was established in 1930.
- It was granted registration under Section 12A on August 25, 1975, and subsequently under Section 12AB(1)(ac)(i) on September 24, 2021.
- The trust was regularly assessed to tax, mostly under Section 143(3), and its activities were never treated as non-genuine.
- There was no change in the trust’s activities from the date of initial registration until the date of cancellation.
- The Commissioner (Exemption) cancelled the registration, alleging that the assessee was a private trust as per its trust deed, for the benefit of a particular religious community or caste, and therefore could not be registered under the Income-tax Act.
- The Commissioner also cited a specific violation under clause (e) of the Explanation to sub-section 12AB(4).
Decision I:
The court held in favor of the assessee. It ruled that since the trust was created in 1930, i.e., much prior to the Income-tax Act, 1961, for the benefit of any particular religious community or caste, the provisions of Section 13(1)(b) would not apply. Furthermore, as there was no change in the objects/activities from the date of grant of registration till the date of cancellation, the Commissioner (Exemption) was not justified in holding that the assessee trust was involved in a specific violation of clause (e) of the Explanation to sub-section 12AB(4).
Key Takeaways I:
- Exception under Section 13(1)(b) for Pre-1961 Trusts: Section 13(1)(b) generally denies exemption if a trust is for the benefit of a particular religious community or caste. However, the proviso to Section 13(1) specifically exempts trusts created before the commencement of the Income-tax Act, 1961, even if they are for the benefit of a specific religious community or caste.
- Consistency of Activities: If a trust’s objects and activities remain unchanged and have been consistently accepted as genuine charitable activities in past assessments, cancellation of registration based on the nature of objects (which existed since inception) is not justified without fresh material demonstrating a change in the nature or application of income.
- Scope of Section 12AB(4): Section 12AB(4) allows cancellation of registration for specific violations. Clause (e) pertains to violation of Section 13(1) (which would include 13(1)(b)). However, if Section 13(1)(b) itself is inapplicable due to the pre-1961 formation of the trust, then clause (e) cannot be invoked on this ground.
II. Non-Registration with Charity Commissioner is Not a Valid Ground for Cancellation Under Section 12AB Without a Specific Order/Decree.
Issue:
Whether the Commissioner (Exemption) can cancel the registration of a trust under Section 12AB on the ground that the trust is not registered with the Charity Commissioner under the Bombay Public Trusts Act, 1950, thereby alleging a specific violation under clause (f) of the Explanation to sub-section (4) of Section 12AB.
Facts II:
- (Same facts as Part I regarding trust formation, income tax registration history, and regular assessments).
- The Commissioner (Exemption) cancelled the registration, citing that the assessee-trust was not registered with the Charity Commissioner under the Bombay Public Trusts Act, 1950.
- This was considered a specific violation under clause (f) of the Explanation to sub-section (4) of Section 12AB.
Decision II:
The court held in favor of the assessee. It ruled that since there was no order or decree holding that such non-compliance (non-registration with Charity Commissioner) had occurred, the registration under Section 12AB could not be cancelled on this ground.
Key Takeaways II:
- Clause (f) of Explanation to Section 12AB(4): This clause refers to situations where the trust is involved in specific violations, including “any other violation that is prejudicial to the interest of the revenue.” Non-registration with a local charity commissioner per se is not automatically a violation that directly leads to the cancellation of income tax registration unless there’s a specific order or decree establishing such non-compliance and its prejudicial nature.
- No Automatic Cancellation for External Non-Compliance: Income tax registration under Section 12A/12AB is governed by the Income-tax Act. While compliance with other laws (like state public trust acts) is generally expected, mere non-registration with a Charity Commissioner, without a specific finding or order from that authority or a court that such non-compliance amounts to a violation under the Income-tax Act, cannot be a standalone ground for cancellation.
- Requirement of Specific Finding/Order: The court emphasizes that there must be a specific “order or decree” establishing such non-compliance before it can be used as a ground for cancellation under the income tax law.
III. Cancellation for Section 11(5) Violation Requires Specific Year-Wise Breach and Cogent Material.
Issue:
Whether the Commissioner (Exemption) can cancel the registration of a trust under Section 12AB on the general ground that the trust had made substantial investment of funds in modes other than those prescribed under Section 11(5) regularly, without pointing out a specific breach for any particular year.
Facts III:
- (Same facts as Part I regarding trust history and assessments).
- The Commissioner (Exemption) cancelled the registration, alleging that the assessee trust had made substantial investment of funds in modes other than those prescribed under Section 11(5) regularly.
- However, the Commissioner (Exemption) had not pointed out any specific breach for any particular year, which is a requirement for applying Section 12AB(4).
Decision III:
The court held in favor of the assessee. It ruled that the onus was on the revenue to bring on record cogent material to establish that the trust was hit by Section 13 (which refers to investments in non-prescribed modes under Section 11(5)). The revenue had not stated that the deposits were not prescribed under Section 11(5) and that income had been earned by the trust on such deposits during the year. Since the Commissioner (Exemption) had proposed to cancel registration relying on Section 12AB(4) without referring to any specific previous year where the assessee had violated the provisions of Section 11(5), he was not justified in cancelling the registration.
Key Takeaways III:
- Specific Violation Under Section 12AB(4): Section 12AB(4) requires a specific violation of the conditions for continuance of registration. For Section 11(5) violations, this implies identifying the precise year(s) and the specific non-prescribed investments.
- Onus on Revenue to Prove Violation: The burden of proof to establish a violation of Section 11(5) (investments in non-prescribed modes) lies with the revenue. They must provide concrete evidence of non-compliance for specific years.
- Mere General Allegation is Insufficient: A general allegation of “substantial investment in non-prescribed modes regularly,” without detailing the specific investments and the corresponding year-wise breaches, is insufficient to justify cancellation.
- Implications of Section 11(5): Section 11(5) lists the permissible modes of investment for charitable trusts to claim exemption. Violation of this can lead to loss of exemption for the year of violation. However, cancellation of registration under Section 12AB(4) requires clear proof of such violation.
IV. Donations to Other Charitable Trusts are Permissible and Not a Ground for Cancellation.
Issue:
Whether the Commissioner (Exemption) can cancel the registration of a trust on the ground that the trust had, over the years, not conducted activities related to its main object directly but donated substantial amounts to other trusts.
Facts IV:
- (Same facts as Part I regarding trust history and assessments).
- The Commissioner (Exemption) considered it a ground for cancellation that the assessee-trust had not directly conducted activities related to its main object over the years but had instead donated substantial amounts to other trusts.
Decision IV:
The court held in favor of the assessee. It ruled that it was permissible for the assessee-trust to donate to other charitable trusts, and thus, cancellation of registration on this ground was not justified.
Key Takeaways IV:
- Application of Income through Donations: Charitable trusts are permitted under the Income-tax Act to apply their income by way of donations to other registered charitable trusts/institutions, provided such donations are for charitable purposes.
- Not a Violation of Main Object: Donating to other trusts does not necessarily mean the donating trust is not carrying out its main objects. It is a recognized mode of application of income for charitable purposes.
- Circulars Supporting Donations: CBDT Circulars (like Circular No. 387 dated 6-7-1984 and Instruction No. 1132 dated 5-1-1978, as might be relevant to the period in question) have historically clarified that donations from one trust to another registered trust, for purposes falling within the purview of Section 11, constitute valid application of income.
V. Rental Income from Trust Property is Not Necessarily Commercial Activity for Cancellation.
Issue:
Whether the Commissioner (Exemption) can cancel the registration of a trust on the ground that it was involved in activities on a commercial basis by earning rental income, which was deemed not incidental to its main objects, thereby attempting to invoke clause (b) of the Explanation to Section 12AB(4).
Facts V:
- (Same facts as Part I regarding trust history and assessments).
- The Commissioner (Exemption) cancelled registration, alleging that the assessee was involved in commercial activities by earning rental income, which could not be said to be incidental to its main objects. This was an attempt to invoke clause (b) of the Explanation to Section 12AB(4).
- It was noted that the rental income was derived from property owned by the trust.
Decision V:
The court held in favor of the assessee. It ruled that since the rental income was derived from property owned by the trust, there was no reason to characterize rental income from property held in trust as income from business and attempt to invoke clause (b) of the Explanation to Section 12AB(4). Therefore, the Commissioner (Exemption) was not justified in cancelling registration on this ground.
Key Takeaways V:
- Income from Property (Section 11(1)(a)): Income derived from property held under trust wholly for charitable or religious purposes is exempt under Section 11(1)(a). Rental income from trust property is typically classified as “Income from House Property” under the Income-tax Act, not “Profits and Gains of Business or Profession.”
- Rental Income Not Inherently “Commercial Activity”: Earning rental income from trust-owned property is a common and legitimate way for trusts to generate funds for their charitable activities. It is generally not considered a “business” or “commercial” activity for the purpose of denying exemption or cancelling registration, unless the property is actively used in a commercial venture.
- Clause (b) of Explanation to Section 12AB(4): This clause pertains to situations where the trust is involved in activities which are “not genuine” or “are not being carried out in accordance with the objects for which it is established.” Characterizing passive rental income as a non-incidental commercial activity for this purpose is generally incorrect.
- “Incidental” Test: The “incidental” test usually applies to business income derived from an activity that is connected to the main charitable objects. Passive rental income from property held by the trust to generate funds is different.
- Presumption of Genuineness: If the trust has consistently shown rental income in its returns and has been assessed, without this being challenged as non-charitable income in previous years, the sudden re-characterization as commercial activity for cancellation purposes is often unsustainable.
IN THE ITAT PUNE BENCH ‘B’
Mukund Bhavan Trust
v.
Commissioner of Income-tax (Exemption)
R.K. PANDA, Vice President
and Ms. Astha Chandra, Judicial Member
and Ms. Astha Chandra, Judicial Member
IT Appeal No.1552 (PUNE) of 2024
APRIL 29, 2025
V.L. Jain for the Appellant. Mallikarjun Utture, CIT for the Respondent.
ORDER
R.K. PANDA, Vice President.- This appeal filed by the assessee is directed against the order dated 30.06.2024 of the Ld. CIT(Exemption), Pune cancelling the registration granted u/s 12AB(4) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
2. Facts of the case, in brief, are that the assessee Shree Mukund Bhawan Trust was formed in 1930. On verification of various documents viz. income tax returns, financial statements, trust deed etc. available on record, the Ld. CIT(E) noted that in the trust deed it has been categorically mentioned that the trust is a private trust and is set up to impart religious education to a particular caste i.e. Marwari Brahmin and Maheshwari Vaishyas who accept the principle of Varnashrama Dharma. The deed further states that the trust will not benefit any other caste or individual. He analyzed the trust deed and noted certain crucial provisions of trust deed which are as under:
| (i) | Para 2: The trustee and his legal heirs shall be allowed to use the property of the Trust without any payment of rent |
| (ii) | Para 4: Benefit of the Trust is to be given only to Marwari Brahmin and Maheshwari Vaishyas and, in their absence, other Brahmins and Vaishyas may be benefitted. |
| (iii) | Para 7: The Trustees in future shall be a Brahmin or a Vaishya and at least one of the Trustees shall be the legal heir of the settlor. |
| (iv) | Para 9: The trust is a Private Trust” |
3. In view of the above explicit provisions in the trust deed he was of the opinion that the trust is not a public charitable trust established with an aim / object of conducting charitable activities for the welfare of the people at large but is a private trust established for the benefit of a particular caste / community. Therefore, he was of the opinion that prima facie the provisions of section 13(1)(a) and 13(1)(b) of the Act applies to the case of the assessee.
4. He, therefore, issued a show cause notice asking the assessee to explain as to why the registration u/s 12A granted on 25.08.1975 in assessee’s case should not be cancelled and consequently why the registration granted u/s 12AB r.w.s. 12A(1)(ac)(i) of the Act on 24.09.2021 should also not be cancelled. The relevant part of the notice reads as under:
“5. Accordingly, a notice was issued to the assessee requiring it to show cause as to why the registration u/s 12A of the Income-tax Act, 1961 granted on 25/08/1975 in the assessee’s case should not be cancelled and consequently why the registration granted u/s 12AB rw.s 12A(1)(ac)(i) of the Act dated 24/09/2021 should also not be cancelled. The relevant part of the notice is reproduced hereunder for ready reference:
“On verification of documents viz ITRs, financial statements, trust deed etc. available on record in your case, the following facts are revealed.
1. It has been explicitly mentioned in the Trust Deed that the main purpose of creation of the trust as per the preface mentioned in the initial paragraphs of the trust deed is to facilitate Vedic and religious education to such students who accept the elements of Vamashram.
In general terms the four Varnas are Brahmins (priests and teachers), Kshatriyas (rulers and warriors). Vaishyas (farmers and merchants), and Shudras (laborers and artisans) The four ashramas are Brahmacharya (student), Grihasthashram (householder) Vanaprasthashram (retirement from house hold activities), and Sannyasashram (renouncing material world), which is a materialistic arrangement for one social group to dominate another, and by reinforcing identity based on bodily categories. Thus, the entire concept itself is against the social development and not for any charity of the people at large at all.
2 Further verification shows that the Trust Deed contains the following conditions/provisions
| (i). | While creating the trust, vide Para 2 of the Deed, the settlor has imposed restrictions on the trust properties transferred by him to the trust for donating the same to any other person and has further imposed a condition that some part of these trust properties are to be allowed to be utilized by the settlor and his heirs without any rent or other charges for such use of the trust properties. |
| (ii). | The objects viz. 4(a) provides for vedic and religious education only to such students who accept the elements of Varnashram as per their rights specified under Varnasharam. Object 4(b) further provides for religious education of such students through the daily pooja and other religious celebrations of Shri Mukund Bhagwanta. Object No.4(d) provides for library of books, daily, weekly, monthly magazines etc but with a restriction that they should be religious one. |
The note extended to the objects from 4(a) to 4(e) further specifically provides that the beneficiaries shall be with preference to Marwadi Brahmins and then to Vaishyas of Maheshwari Caste and if none from these castes is available, to other brahmin and Vaishya castes
| (iii) | Further, Para 5 of the trust deed provides that the balance out of the income after expenditure on the above objects shall be expended for: |
To help other educational institutions who accept the Varnashrama elements and give religious and vedic education
| (iv) | Para 6 of the Deed provides that students so admitted for vedic and religious education shall carry out the daily pooja and other religious rituals/celebrations of the deity of Shri Mukund Bhagwanta of the temple which has been transferred by the settlor to the trust |
| (v) | Para 7 of the Deed provides that amongst all the trustees, there shall always be a trustee the heirs of the settlor Thus, the purpose of the trust seems to be for private purposes and is created as a private trust and therefore not an eligible entity to be registered u/s 12AA/ 12AB of the Income Tax Act, 1961. Moreover, it has also been provided vide Para 7 of the trust deed that the present trustees and future trustees of the trust shall always be a Brahmin or Vaishya who should be having full faith on Vedic and Vamashrama |
| (vi) | In Para 9 of the trust deed dated 10/02/1930, it has been categorically mentioned that the trust is a private trust Further, it prima facie appears that the trust is not registered under the B.PT. Act. 1950 |
| (vii) | in Para (10) of the trust deed it has been categorically stated that the institution is established only for the benefit of a specific religious community i.e. for such Brahmins and Vaishyas who accept the elements of varnashrama dharma and benefits will not be available to persons belonging to any other castes. The clause further underlines that the institution is not a public institution and if anyone insists for the benefit under the impression that the institution is a public institution, the trustees should oppose such efforts and the trust funds shall be utilized for such opposition. |
3 The above provisions prima facie makes it clear that
| (a) | The trust is not a public charitable trust but is a private religious trust |
| (b) | The trust has been created for the benefit of a particular religious community/caste viz Brahmins and Vaishyas with further preference to Marwari Brahmins and Vaishyas and not for general public irrespective of their caste, creed, religion, community etc. It is also observed from the financial statements available on record that substantial amounts have expended for the above purposes. |
4 In view of the above, it appears that the provisions of section 13(1)(a) and 13(1)(b) of the Income-tax Act, 1961 applies to your case. For ready reference, said provisions are reproduced hereunder
“13 (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof-
| (a) | any part of the income from the property held under a trust for private religious purposes which does not enure for the benefit of the public |
| (b) | in the case of a trust for charitable purposes or a charitable institution created or established after the commencement of this Act, |
| any | income thereof if the trust or institution is created or established for the benefit of any particular religious community or caste. |
5 In view of the above, prima facie it is seen that the activities of the trust are not genuine charitable activities and if at all they are considered to be genuine, the trust deed itself provides for application of its income for private religious purposes, which does not enure for the benefit of the people at large and also that the trust has applied its income for the benefit of a particular religious community/caste. Therefore, it is noticed that specified violation in terms of provisions of section 12AB(4) of the Income Tax Act, 1961 is occurred in your case
6. Without prejudice to the above, it further observed from the financial statements that the trust has made huge investments in various companies for eg. Indi Swift Ltd, Plethico Pharmaceuticals, Elder Pharmaceuticals, Net 4 India Ltd Network 18, Microtech Technologies Said investments are not in the forms and modes of investing or depositing the money as provided in Section 11(5) of the Income-tax Act, 1961. Thus, the trust has also violated provisions of section 11(5) of the Act as well.
7 In view of the above, you are hereby requested to show cause as to why the registration u/s 12A of the Income-tax Act, 1961 granted on 25/08/1975 in your case should not be cancelled and consequently why the registration granted u/s 12AB r.w.s. 124(1)(ac) (i) of the Act dated 24/09/2021 should not be cancelled.”
5. The assessee in response to the same filed a detailed reply on each of the issues on 26.12.2023. However, the Ld. CIT(E) was not satisfied with the arguments advanced by the assessee. Relying on various decisions including the decision of Hon’ble Supreme Court in the case of New Noble Educational Society v. Chief CIT ITR 594 (SC) he cancelled the registration granted earlier u/s 12A on 25.08.1975 and consequent registration u/s 12AB r.w.s. 12A(1)(ac)(i) of the Act dt 24.09.2021 for the reasons which have been summarized by him and which read as under:
“15. Now, I proceed to conclude the discussion made above I find it appropriate to re-iterate that while doing so I find force from the decision of Hon’ble Apex court in the case of Dilip Kumar(supra) wherein the Hon’ble Court has propounded the idea of strict interpretation of statute Further, in order to benchmark the scope of genuineness, I have derived inspiration from the decision of the Hon’ble Supreme Court in the case of Andhra Chamber of Commerce in1965) 55 ITR 722 (SC) wherein their lordships have found that “The word charity connotes altruism in thought and action. It involves an idea of benefiting others rather than oneself.
16. The registration u/s. 12A granted on 25/08/1975 and consequent registration u/s. 12AB r.w.s. 12A(1)(ac)(i) of the Act dated 25/08/1975 is cancelled on following grounds. All the grounds are severally sufficient to get the registration cancelled.
1. The assessee was established for particular caste ie the Maheshwari Brahmin and Maheshwari caste, who had belief in ‘Hindu Varnashram, as such the assessee trust is in direct violation of the provisions of section 13(1). The trust having been inspired by particular religions seeks to apply its income or part thereof for the benefits of particular cast and sub-cast and therefore, is not eligible for registration as charitable trust under the IT Act. For provisioning such preferential treatment the trust is found to be involved in specific violation under clause ‘e’ of explanation to sub-section 12AB(4)
……….As per discussions in para 6.2.23
1. The assessee is a private trust as per the trust deed. Therefore, the trust cannot registered under the IT Act. As such the trust is found to be involved in specific violation under clause ‘e’ of explanation to subsection 12AB(4).
……….As per discussions in para 7.3
1. The assessee is not registered with charity commissioner under the BPT Act. Further, it is not even registered under any other Act relevant to Public Charitable activities. Therefore, the same is violation of section 12AB(1)(b)(i)(B) By not registering itself with the Charity Commissioner or any other relevant law applicable to the Public Trust, the assessee is found to be involved in specific violation under clause ‘f of explanation to sub-section 12AB(4)
..As per discussions in para 8.7
1. The assessee is found to have substantial investment of funds in modes other than prescribed under section 11(5) regularly. The trust has further made such investment without receiving permission from Charity Commissioner. As such the trust is found to be involved in specific violation under clause ‘e’ and ‘f of explanation to sub-section 12AB(4).
……….As per discussions in para 9.6
1. The assessee is found to be involved in activities on commercial basis earning rental income which cannot be said to be incidental to the main objects and therefore, the trust is found to be involved in specific violation under clause ‘b’ of explanation to sub-section 12AB(4)
……….As per discussions in para 10.16
1. The assessee has over the years not conducted activities related to main object of the trust but donated substantial amount to other trust, needless to mention, the income, therefore, has been derived from other commercial basis and not from the main activities of the trust. Therefore, such set up to earn income cannot be inspired by benevolence and raises serious doubt over its genuineness and therefore, the trust is found to be involved in specific violation under clause ‘e’ of explanation to sub-section 12AB(4).
……….As per discussions in para 14.2
For the above stated reasons, the registration granted to the assessee stands cancelled.”
6. Aggrieved with such order of Ld. CIT(E), the assessee is in appeal before the Tribunal by raising the following grounds:
1. (a) The learned CIT(E) erred on law and on facts in not granting sufficient opportunity of hearing and thus violating the principle of natural justice.
(b) In so doing, the learned CIT(E) erred in law and on facts
| – | in not considering the entire submissions as provided in response to the show cause notice issued. |
| – | in not dealing with the judicial precedents cited before him. |
| – | in considering issues which were never put to the appellant in the show cause notice. |
2. (a)The learned CIT(E) further erred in law and on fact in cancelling u/s 12AB(4) the registration granted to the appellant trust under the Income Tax Act, 1961.
(b)In so doing, the learned CIT(E) erred in law and on facts –
| – | in observing that the trust was established for a particular caste who had belief in Hindu Varnashram, which was in direct violation of the provisions of section 13(1) of the Income Tax Act, 1961. |
| – | As a sequel, in observing that there is a specific violation under clause (e) of Explanation to sub section 12AB(4) of the Income Tax Act, 1961. |
| – | in observing that the appellant is a private trust. |
| – | in observing that the appellant trust not being registered under the Bombay Public Trust Act is violation of section 12AB(1)(b)(i)(B) of the Income Tax Act, 1961 thereby constituting a specific violation under clause “f” of the Explanation to subsection 12AB(4) of the Income Tax Act, 1961. |
| – | in observing that the appellant trust has made substantial investment of funds in modes other than prescribed under section 11(5) which is a specific violation under clause “e” and “f” of the Explanation to subsection 12AB(4) of the Income Tax Act, 1961. |
| – | in observing that the appellant trust is involved in activities on commercial basis earning rental income which cannot be said to be incidental to the main objects which is a specific violation under clause “b” of the Explanation to subsection 12AB(4) of the Income Tax Act, 1961. |
| – | in observing that the appellant trust has over the years not conducted activities related to the main object of the trust but donated substantial amount to other trust and therefore such set up to earn income cannot be said to be inspired by benevolence and raises serious doubt over its genuineness which is a specific violation under clause “e” of the Explanation to subsection 12AB(4) of the Income Tax Act, 1961. |
3. The appellant craves leave to add to or alter the ground of appeal, if deemed necessary.
7. The Ld. Counsel for the assessee at the outset submitted that the trust was established in the year 1930 and was granted registration u/s 12A on 25.08.1975 and u/s 12AB(1)(ac)(i) of the Act on 24.09.2021. He submitted that the trust is regularly assessed to tax with most of the years being assessed u/s 143(3) and nowhere the activities of the trust have been treated as non-genuine. Further, there is no change in the trust deed since 1930 and the assessee has not taken any donation from the public. He submitted that the notice for cancellation was issued on 05.12.2023 in response to which the assessee made its submissions on 10.12.2023 (received by the CIT(E) on 26.12.2023) and the Ld. CIT(E) passed the order on 30.06.2024 cancelling the registration without giving any further opportunity of hearing to the assessee in between the period from 05.12.2023 to 30.06.2024. The Ld. Counsel for the assessee submitted that though the principle of res judicata does not apply to tax proceedings, however, the rule of consistency is well accepted in various judicial precedents. Since in the instant case there is no change in the trust deed or the activities of the trust and the registration was granted twice and in none of the years activities have been changed, therefore, to re-examine the same trust deed by the Ld. CIT(E) is not justified.
8. The Ld. Counsel for the assessee referring to the copy of notice dated 05.12.2023 and the impugned order cancelling the registration submitted that a reading of the notice vis-a-vis the order of the Ld. CIT(E) makes it evident that he has raised the issues in the order at paras 10 to 10.16 regarding the income and expenditure of the assessee and at paras 14 to 14.2 regarding donating to other trusts and not carrying out charitable activity itself, which were not even put to the assessee. Therefore, this being not a part of the show cause notice the assessee had not replied to the same. Referring to the order of the Ld. CIT(E), he submitted that a reading of the said order makes it clear that the Ld. CIT(E) has not even considered the submissions of the assessee nor dealt with the judicial precedents. Referring to para 7(c) of the submissions at page 12 of the paper book and para 5(b) and 5(c), he submitted that the Ld. CIT(E) has not even dealt with the judicial precedents relied on by the assessee. This clearly shows the lack of any opportunity of hearing given by the Ld. CIT(E).
9. So far as the allegation of the Ld. CIT(E) that the trust was established for a particular caste who had belief in Hindu Varnashram, which was in direct violation of the provisions of section 13(1) of the Act considered to be a violation of clause (e) of section 12AB(4) is concerned, he drew the attention of the Bench to provisions of section 13(1)(b) which reads as under:
“13(1)…
(b) in the case of a trust for charitable purposes or a charitable institution created or established after the commencement of this Act, any income thereof if the trust or institution is created or established for the benefit of any particular religious community or caste”
10. He submitted that the Ld. CIT(E) conveniently ignored this provision. Since the assessee in the instant case was established in 1930 which is much prior to the commencement of this Act i.e. 1961 Act, therefore, the allegation of the Ld. CIT(E) that the assessee has violated the provisions of section 13(1)(a) r.w.s. 12AB(4)(e) is not in accordance with law.
11. He submitted that the Ld. CIT(E) has not examined any activity but made out a case based on the objects of the trust deed which is a fatal flaw in the conclusion. Further there is no specific previous year referred to by the Ld. CIT(E) which is an imperative for the purposes of section 12AB(4). The Ld. Counsel for the assessee relying on various decisions placed in the case law compilation submitted that the reason for rejection of registration on account of establishment of the trust for a particular caste who had belief in Hindu Varnashram is not justified.
12. So far as the allegation of the Ld. CIT(E) that the assessee is a private trust is concerned, he submitted that the Ld. CIT(E) picks out a statement out of clause 9 of the trust deed without reading the entire clause and context. He drew the attention of the Bench to clause 9 of the trust deed (page 83 of paper book) which reads as under:
“(9) Trustees should make expenditure for the work of the Institute proportionately to the Income of the Institute. No expenditure should be made out of permanent funds. Trustees do not have right to take loan. This Institute is private. I do not have any objection if anybody helping Institute considering my objective as mentioned above or for any specific work. Trustees can take such help or there is not any objection in co operating with any Institute which is taking into consideration my objectives. I will do every possible help from my side time to time, for the progress of the institute.”
13. He submitted that in the context of funds for the trust, the author says that there has to be no borrowing and that how support can be selectively taken reminding that the trust is otherwise to be operating on its own steam. Referring to the submissions made before Ld. CIT(E), the Ld. Counsel for the assessee drew the attention of the Bench to para 7(b) and 7(c) of the submissions made before the Ld. CIT(E) at page 12 of the paper book which read as under:
“7.(b) Nothing could be further from the truth. There is nothing either in the trust deed nor in the activities of the trust that can lead us to this inference.
7.(c)The distinction between a private & public endowment is that whereas in the former, the beneficiaries are specific individuals, in the latter they are the general public or a class thereof. (Deokinandan V. Murlidhar (SC) 1957 AIR 133 (04.10.1956) (while deciding whether a Thakurdwara of Sri Radheshyamji is a private temple or public one in which all Hindus are entitled to worship) For a trust to be considered public, they should be constituted for the benefit of the public. A trust would be private if the beneficial interest in vested in absolutely one or more individual who are uncertain and who will be competent to control, modify or determine that trust. A public trust is for the benefit of the members of an uncertain & fluctuating body and the trust itself in of permanent and indefinite character. (Farman All Khan v Mohd. Raja Khan (ALC) AIR1950 All 62 Para 18).”
14. He submitted that the Ld. CIT(E) does not controvert the above submissions of the assessee. The reasoning by the Ld. CIT(E) is fraught with numerous flaws. He submitted that the objects of the trust deed have to be read as a whole and the Ld. CIT(E) cannot engage in cherry-picking to suit his observation and conclusion.
15. Referring to the decision of Hon’ble Gauhati High Court in the case of Arunachal Pradesh Forest Corporation Ltd. v. Asstt. CIT ITR 139 (Gauhati), he submitted that a literal interpretation of the objects, as has been attempted by the Ld. CIT(E), is not a judicial approach.
16. So far as the allegation of the Ld. CIT(E) that the assessee true was not registered under the Bombay Public Trust Act and therefore, is in violation of provisions of section 12AB(1)(b)(1)(B) of the Act thereby constituting a specific violation under clause (f) of the Explanation to subsection 12AB(4) of the Act is concerned, he submitted that if this was a mandate u/s 12A, then it would have been so specified as is the case u/s 80G(5)(v) which requires a mandate of constituting as a public charitable trust registered under Society Regulation Act. He submitted that the procedure for fresh registration introduced w.e.f. 01.04.2021 for applications made under section 12A(1)(ac) is provided in section 12AB. He submitted that sub section 12AB(4), inter alia, provides for noticing of specific violations during any previous year. The Explanation thereunder defines specified violation which means, inter alia, under clause (f) the trust or institution has not complied with the requirements of any other law as referred to in 12AB(1)(b)(i)(B) (which is 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).
17. Referring to the budget speech of the Hon’ble Finance Minister in 2019, he submitted that the Hon’ble Finance Minister also spells out the intent by stating that it is proposed to provide for cancellation of registration of the trust or institution under the Act for violation of such provision of any other law, where an order holding that such violation has occurred is either not contested or has become final. In the present case, there is no such order against the assessee for such noncompliance.
18. He submitted that the present trust has been a trust in operation since 1930 and has been registered under the Income Tax Act since 25.08.1975 and never has this issue been questioned including while granting registration on 24.09.2021. He submitted that the case of New Noble referred to by the Ld. CIT(E) is not applicable as it was a case of fresh registration while in the case of the assessee it is a case of cancellation of registration based on no change in facts. Further, in the case of New Noble (supra) it was a case of registration u/s 10(23C) of the Act whereas in the case of the assessee it was a case of registration u/s 12AB. Further, the case of the New Noble was a pure educational trust, which could have a State law which directly applies to education. He submitted that the question before the Hon’ble High Court was “whether registration under AP Charities Act was a prerequisite for registration or approval under the Income Tax Act” while the present case is not one of pre-requisite but a post registration alleged imperative. Referring to the decision of the Hon’ble Supreme Court in the said case, he submitted that the Hon’ble Supreme Court has clearly spelt out that compliance under other laws can weigh in deciding approvals under section 10(23C). Referring to various decisions, he submitted that the Ld. CIT(E) is not correct in cancelling the registration on this issue.
19. So far as the allegation of the Ld. CIT(E) that the assessee trust has made substantial investment of funds in modes other than prescribed under section 11(5) which is a specific violation under clause “e” and “f” of the Explanation to subsection 12AB(4) of the Act is concerned, he submitted that the investment is only specific to section 11(2), which fact is neither examined nor ascertained nor any finding given on that count. He submitted that the breach is also not pointed out as any year specific, which is the requirement of the section 12AB(4). He submitted that the breach is not fatal to registration. Referring to various decisions including the decision of Hon’ble Bombay High Court in the case of DIT (Exemptions) v. Sheth Mafatlal Gagalbhai Foundation Trust 249 ITR 533 (Bom) and the CBDT Circular No.387, dated 07.06.1984 copy of which is placed at pages 58 to 59 of the paper book, he submitted that only that part of income can be taxed at maximum marginal rate.
20. So far as the allegation of the Ld. CIT(E) that the assessee trust is involved in activities on commercial basis earning rental income which cannot be said to be incidental to the main objects which is a specific violation under clause “b” of the Explanation to subsection 12AB(4) of the Act is concerned, he submitted that the Act lays emphasis on income derived from property. If rental income is derived from property owned by the Trust, there is no reason to call it activity on commercial basis. He submitted that the Ld. CIT(E) has incorrectly appreciated the principle of computing income on commercial basis with that of commercial activity. Referring to the assessee’s own case for assessment year 2012-13, he submitted that similar issue was raised in assessment year 2012-13 and the Tribunal negated the contention of the Revenue, copy of which is placed at pages 19 to 29 of the paper book. He submitted that there is no reason to characterize the rental income from property held in trust as income from business and attempt to invoke clause (b) of Explanation to section 12AB(4). He submitted that it is income derived from property held under trust wholly for charitable purposes.
21. So far as the allegation of the Ld. CIT(E) that the assessee trust has not conducted activities over the years related to the main object of the trust but donated substantial amount to other trusts and therefore such set up to earn income cannot be said to be inspired by benevolence and raises serious doubt over its genuineness which is a specific violation under clause “e” of the Explanation to subsection 12AB(4) of the Act is concerned, he submitted that the Courts have time and again held that it is not necessary for the trust itself to carry out charitable activities and that it is permissible to donate to other charitable trusts. He submitted that in any case breach of trust which does not affect the vires of validity of the trust cannot lead to denial of benefits of section 11 and cancellation of registration. For the above proposition, he relied on the decision of the Hon’ble Jharkhand High Court in the case of CIT v. Karimia Trust [2008] 302 ITR 57 (Jhar.) where it has been held that the breach of the conditions of the trust deed, if any, committed by the assessee trust will not disentitle it from getting the benefits which it has been getting in the past, exemption u/s 11 cannot be denied to the assessee trust on the part of alleged violation of provisions of section 13(1)(bb).
22. The Ld. Counsel for the assessee while concluding his arguments submitted that the assessee has been granted approval and recognition u/s 12A which has not been usurped in any of the years of its existence. He submitted that though the principle of res judicata does not apply to tax matter, in questions of fundamental nature or questions which do not vary each year or questions on which the right of parties to be taxed are based, the principle of res judicata to that extent would apply. He submitted that in any case, rules of finality and rule of consistency do apply to tax proceedings. For the above proposition, he relied on the following decisions:
| (i) | South India Trust Association v. Telugu Church Council (1996) 2 SCC 520 |
| (ii) | Radhasoami Satsang v. CIT) |
| (iii) | Parashuram Pottery Works Ltd. v. ITO [1977] 106 ITR 1 (SC) |
| (iv) | CIT v. Excel Industries Ltd. ITR 295 (SC). |
23. He submitted that once registration has been granted after satisfying about the genuineness of the activities of the trust, the same cannot be cancelled on the basis of the same set of provisions of the trust deed which were examined earlier. For the above proposition, he relied on the decisions of Hon’ble Madras High Court in the case of CIT v. Sarvodaya Ilakkiya Pannal reported inITR 300 (Madras) and Hon’ble Jharkhand High Court in the case of Sri Ramjanki Tapovan Mandir v. CIT & Anr. reported in2022] ITR 458 (Jharkhand). He also relied on the following decisions:
| (i) | Dy. CIT v. M.P. Madhyam (2009) 31 DTR 15 (MP) |
| (ii) | Samaj Kalyan Parishad v. ITO |
| (iii) | Gestetner Duplicators (P.) Ltd. v. CIT |
| (iv) | CIT v. Shri Maheshwari Agrawal Maryari Panchayat(Madhya Pradesh) |
| (v) | Sony Nyat Samast Vadi Dwarka v. CIT (Exemption/ITA No. 277/RJT/2019, order dated 09.07.2024 |
| (vi) | CIT(E) v. Mukund Bhavan Trust [IT Appeal No.683 of 2018, dated 05-08-2022] |
| (vii) | CIT v. Paramhans Ashram Trust reported in [1993] 203 ITR 711 (Rajasthan) |
| (viii) | Farman Ali Khan v. Mohd. Raza Khan and Anr. AIR 1950 ALL 62 |
| (ix) | Deokinandan v. Murlidhar 1957 AIR SC 133 |
| (x) | CWT v. H.E.H. The Nizam’s Supp. & Religious Endow. Trust [1973] 89 ITR 80 (Andhra Pradesh) |
| (xi) | DIT (Exemptions) v. Sheth Mafatlal Gagalbhai Foundation Trust |
| (xii) | CBDT Circular No.387, dated 07.06.1984 |
| (xiii) | CIT v. ST. George Forana Church [1988] 36 (Kerala) |
| (xiv) | CIT v. Karimia Trust [2008] 302 ITR 57 (Jharkhand) |
| (xv) | CIT v. Birla Janahit Trust [1994]) |
| (xvi) | CIT v. Ganga Charity Trust Fund ) |
| (xvii) | CIT v. Trustees of the Jadi Trust |
| (xviii) | CIT v. Hindusthan Charity Trust |
| (xix) | CIT v. Sarladevi Sarabhai Trustrat) |
| (xx) | CIT v. Shri Ram Memorial Foundation |
| (xxi) | CIT v. Agricultural Produce and Market Committee |
| (xxii) | CIT v. Sun Engineering Works (P) Ltd. |
| (xxiii) | CIT v. Arya Vysya Kalyana Nilaya Sangam |
| (xxiv) | Ramjanki Tapovan Mandir(supra) |
| (xxv) | Sarvodaya Ilakkiya Pannai (supra) |
24. He accordingly submitted that the Ld. CIT(E) was not justified in cancelling the registration of the trust u/s 12A of the Act.
25. The Ld. DR on the other hand heavily relied on the order of the Ld. CIT(E). He submitted that the Assessing Officer has no power to verify the objects / genuineness and the power vests only with the CIT(E). He submitted that the Ld. CIT(E) has considered each and every aspect of the submissions made by the assessee and has passed a speaking order. Therefore, the same should be upheld and the grounds raised by the assessee be dismissed.
26. We have heard the rival arguments made by both the sides, perused the order of the Ld. CIT(E) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case is a trust registered in the year 1930 and was granted registration u/s 12A on 25.08.1975 and u/s 12AB(1)(ac)(i) of the Act on 24.09.2021. The trust is regularly assessed to tax with most of the years being assessed u/s 143(3) and in none of the years, the activities of the trust have been treated as non-genuine and there is no change in the activities of the trust from the date of grant of registration till now. We find the Ld. CIT(E) issued a notice for cancellation on 05.12.2023 asking the assessee to explain as to why the registration of the trust should not be cancelled, the contents of which have already been reproduced at para 5 of this order. We find the assessee made its submissions dated 10.12.2023 received by the Ld. CIT(E) on 26.12.2023 and the Ld. CIT(E) passed the order on 30.06.2024 cancelling the registration granted u/s 12A on 25.08.1975 and consequent registration u/s 12AB(1)(ac)(i) of the Act on 24.09.2021.
27. It is the submission of the Ld. Counsel for the assessee that the trust was registered in the year 1930 and has been granted the approval and recognition u/s 12A which has not been usurped in any of the years of its existence. It is his submission that once registration has been granted after satisfying about the genuineness of the activities of the trust, the same cannot be cancelled on the basis of the same set of provisions of the trust which were examined earlier. It is also his submission that the trust is regularly assessed to tax with most of the years being assessed u/s 143(3) and nowhere the activities of the trust have been treated as non-genuine. It is his submission that the Ld. CIT(E) without calling for certain details has passed the order doubting the activities of the trust as non-genuine which is not justified. Further, it is also his submission that the Ld. CIT(E) without appreciating the submissions made by the assessee and the relevant provisions of the Statute has cancelled the registration which is not in accordance with law.
28. We find some force in the above arguments of the Ld. Counsel for the assessee. The first issue i.e. the assessee was established for a particular caste i.e. Marwari Brahmin and Maheshwari Vaishyas who had belief in Hindu Varnashram, as such the assessee trust is in direct violation of the provisions of section 13(1) of the Income Tax Act, 1961 considered to be a violation of clause (e) of section 12AB(4) is concerned, we find it is an admitted fact that the trust came into being in the year 1930 and was granted approval on 25.08.1975 and again on 24.09.2021. We find the provisions of section 13(1)(b) of the Act read as under:
“13(1)-
(b) in the case of a trust for charitable purposes or a charitable institution created or established after the commencement of this Act, any income thereof if the trust or institution is created or established for the benefit of any particular religious community or caste”
29. A perusal of the same would show that the provisions of section 11 not to apply in certain cases if such trust has been created or established before the commencement of this Act to any income thereof, if the trust or institution is created or established for the benefit of any particular religious community or caste. Since in the instant case the trust was already created in the year 1930 i.e. much prior to the Income Tax Act, 1961, therefore, the Ld. CIT(E) in our opinion was not justified in holding that the assessee has violated the provisions of section 13(1)(b) of the Act. Further, it is also an admitted fact that the trust was granted registration by the Commissioner u/s 12A of the Act on 25.08.1975 and u/s 12AB(1)(ac)(i) of the Act on 24.09.2021. The trust is also regularly assessed to tax with most of the years being assessed u/s 143(3) and nowhere the activities of the trust have been treated as non-genuine. Therefore, following the rule of consistency even in tax proceedings would demand that if there are no changes of facts as compared to earlier years, a different view cannot be taken. In our opinion, adopting a different view inconsistent to the one taken in earlier years on the same set of facts would be merely a change of opinion, especially when a particular view has been taken right since inception to date spanning several years. For the above proposition, we rely on the decision of Hon’ble Supreme Court in the case of Radhasoami Satsang (supra) wherein the Hon’ble Supreme Court has observed as under:
“16. We are aware of the fact that strictly speaking res judicata does not apply to Income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year”.
……
Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the Judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.”
30. We find the Hon’ble Supreme Court in Parashuram Pottery Works Ltd. (supra) has held as under:
“We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
“On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter and if there was no change it was in support of the assessee we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income Tax in the earlier proceedings, a different and contradictory stand should have been taken”.
31. We find the Hon’ble Supreme Court in the case of Excel Industries Ltd. (supra) has observed that “the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers’ money in pursuing litigation for the sake of it.”
32. In view of the above discussion, we hold that the Ld. CIT(E) is not justified in cancelling the registration on the ground that the trust is created for a particular community.
33. So far as the objection of the Ld. CIT(E) that the assessee is a private trust as per the trust deed and therefore, the trust cannot be registered under the Income Tax Act and the trust is involved in specific violation under clause “e” of the Explanation to subsection 12AB(4) of the Act is concerned, we find the provisions of section 12AB(4)(e) read as under:
“12AB(1).
…..
(4)….
Explanation.-
(a)….
……
(e) any activity being carried out by the trust or institution,—
| (i) | is not genuine; or |
| (ii) | is not being carried out in accordance with all or any of the conditions subject to which it was registered. |
34. As mentioned earlier, the trust was registered during the year 1930 and was granted registration u/s 12A of the Act on 25.08.1975 and u/s 12AB(1)(ac)(i) of the Act on 24.09.2021. It is also an admitted fact that the trust was being assessed to tax with most of the years being assessed u/s 143(3) and nowhere the activities of the trust have been treated as non-genuine. It is not a case of the Revenue that the assessee has changed its objects / activities from the date of grant of registration till date. Under these circumstances and in view of the decisions relied in the preceding paragraphs relating to rule of consistency, we are of the considered opinion that the Ld. CIT(E) was not justified in holding that the assessee trust is found to be involved in specific violation of clause (e) of Explanation to subsection 12AB(4) of the Act.
35. So far as the next objection of the Ld. CIT(E) that the assessee is not registered with the Charity Commissioner under BPT Act is concerned, it is an admitted fact that the assessee truest has not been registered under the BPT Act. However, it is also an admitted fact that the trust was enjoying the benefits of sections 11 to 13 of the Act in the past years and there was no requirement of registration under that Act. We find the Hon’ble Bombay High Court in the case of Agricultural Produce and Market Committee, Hinganghat (supra) has held as under:
“24….
The contention of the Revenue that the assessees are not registered as trust and hence not entitled for registration is also without any merit, because, there is no requirement under the Act that an institution constituted for advancement of any object of general public utility must be registered as a trust.”
36. We further find merit in the submissions of the Ld. Counsel for the assessee that if this was a mandate u/s 12A, then it would have been so specified as is the case u/s 80G(5)(v). We find the provisions of section 80G(5)(v) read as under:
“80G(1)….
…..
(. 5)…..
(i)……
……..
(v) the institution or fund is either constituted as a public charitable trust or is registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India or under section 2571 of the Companies Act, 1956 (1 of 1956), or is a University established by law, or is any other educational institution recognised by the Government or by a University established by law, or affiliated to any University established by law, or is an institution financed wholly or in part by the Government or a local authority.”
37. We find the procedure for fresh registration (introduced w.e.f. 01.04.2021) for applications made under section 12A(1)(ac) is provided in section 12AB. We find sub-section 12AB(4), inter alia, provides for noticing of specific violations during any previous year. The Explanation thereunder defines specified violation which means, inter alia, under clause (f) – the trust or institution has not complied with the requirements of any other law as referred to in 12AB(1)(b)(i)(B)- (which is 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) and the order, direction or decree, by whatever name called, holding that such noncompliance has occurred, has either not been disputed or has attained finality. In the present case, there is no such order or decree.
38. We find the Budget speech of Hon’ble Finance Minister in 2019 also spells out the intent by stating that it is proposed to provide for cancellation of registration of the trust or institution under the Act for violation of such provision of any other law, where an order holding that such violation has occurred is either not contested or has become final. In the present case, there is no such order.
39. We further find the word used is “such requirements”. The requirements have to be material for the purpose of achieving its objects. “Material” has been defined in the Legal Glossary as of such significance as to be likely to influence the determination of a cause. Registration under BPT Act is not material. If the mandate was as considered by the CIT(E), then the trust shall operate in breach as there would be a number of statutes whether Central, State or Local where the trust may never be registered. Further, a trust operating in multiple States may find itself liable to register in each such State. This in our opinion is not envisaged by the provisions. The present trust has been a trust in operation since 1930 and has been registered under the Income Tax Act since 25.08.1975 and never has this issue been questioned including while granting registration on 24.09.2021.
40. So far as the decision in the case of New Noble (supra) referred to by the Ld. CIT(E) is concerned, the same in our opinion is not applicable as that was a case of fresh registration while this is a case of cancellation of registration based on no change in facts. Further, that was a case of registration u/s 10(23C) while the instant case is a case of registration u/s 12AB. New Noble and it was a case of a pure educational trust which could have a State law which directly applies to education whereas in the instant case it is not so. We find the question before the Hon HC was “whether registration under AP Charities Act was a pre-requisite for registration or approval under the Income Tax Act” while the present case is not one of pre-requisite but a post registration alleged imperative. It is not a case of one arm of law being utilized to defeat another arm of law as no advantage is being taken under any other law of the fact that it is registered under Income Tax law. We find Hon’ble Supreme Court clearly spelt out that compliance under other laws can weigh in deciding approvals under section 10(23C). In view of the above discussion, we are of the considered opinion that the Ld. CIT(E) is not justified in cancelling the registration for not being registered under the Charity Commissioner under the BPT Act.
41. So far as the allegation of the Ld. CIT(E) that the assessee trust has substantial investment of funds in modes other than prescribed under section 11(5) which is a specific violation under clause (e) and (f) of the Explanation to subsection 12AB(4) of the Act is concerned, we find the Ld. CIT(E) has not pointed out the breach for any year specific, which is the requirement of the section 12AB(4). In our opinion, the onus is on the Revenue to bring on record cogent material to establish that the trust is hit by section 13 of the Act. The Revenue has not stated that the deposits are not prescribed u/s 11(5) of the Act and that income has been earned by the trust on such deposits during the year. A perusal of provisions of section 13(1)(d) of the Act would show that it provides for taxing the non-exempt portion of income to tax. It does not refer to the entire income of the trust. This position has been made clear by the CBDT vide Circular No.387 dated 06.07.1984 where at para 28.6 of the said Circular lays down that maximum marginal rate shall apply only to that part of the income which has forfeited exemption under the said provision and not to the entire income.
42. We find a similar issue had come up before the Hon’ble Bombay High Court in the case of Sheth Mafatlal Gagalbhai Foundation Trust (supra) wherein the Hon’ble Bombay High Court held that in case of contravention of section 13(1)(d) maximum marginal rate of tax u/s 164(2), proviso is applicable only to that part of income of the trust which has forfeited exemption and not to the entire income. The relevant observations of the Hon’ble High Court read as under:
“Conclusion:
In case of contravention of s. 13(1)(d), maximum marginal rate of tax under s. 164(2), proviso is applicable only to that part of income of the trust which has forfeited exemption and not to the entire income.”
43. Since the Ld. CIT(E) in the instant case has proposed to cancel the registration relying on the basis of section 12AB(4) without referring to violation in any specific previous year, therefore, he is not justified without pointing out as to in which specific previous year the assessee has violated the provisions. Therefore, we find merit in the arguments of the Ld. Counsel for the assessee that there are no tangible reasons for cancelling the registration on this ground.
44. So far as the next allegation of the Ld. CIT(E) that the assessee truest has over the years not conducted activities related to the main object of the trust but donated substantial amount to other trusts and therefore such set up to earn income cannot be said to be inspired by benevolence and raises serious doubt over its genuineness which is a specific violation under clause “e” of the Explanation to subsection 12AB(4) of the Act is concerned, we find the Courts have time and again held that it is not necessary for the trust itself to carry out charitable activities and that it is permissible to donate to other charitable trusts.
45. We find the Hon’ble Delhi High Court in the case of Shri Ram Memorial Foundation (supra) has held that the donation by a charitable trust to another charitable trust with condition that the amount will form part of corpus of the donee trust is application of income by the donor trust within the meaning of section 11(1)(a) eligible for exemption u/s 11 of the Act.
46. We find the Hon’ble Gujarat High Court in the case of Sarladevi Sarabhai Trust (supra) has held that when a donor trust which is itself a charitable and religious trust donates its income to another trust, provisions of section 11(1)(a) can be said to have been met by such donor trust and the donor trust can be said to have applied its income for religious and charitable purposes, notwithstanding the fact that donation is subjected to any conditions that donee trust will treat the donation as to its corpus and can only utilise the accrued income from the donated corpus for religious and charitable purposes, and that the question whether gifted income is to be utilised by donee trust fully for its religious and charitable purposes or whether donee trust had to keep intact that corpus of the donation and has to utilise only the income therefrom for its religious and charitable purposes, would not make the slightest difference, so far as entitlement of the donor trust for exemption under section 11(1) goes.
47. We find even the CBDT itself has issued a clear cut guideline vide instruction No. 1132 dt. 5th Jan., 1978 to all the CITs that a charitable trust will not lose exemption under s. 11 if it passes a sum of money to another charitable trust for utilisation by donee trust towards its charitable purposes and that shall be proper utilisation of money by donor trust for charitable purposes. The said instruction squarely covers the facts of the present case.
48. We find the Hon’ble Calcutta High Court in the case of Hindusthan Charity Trust (supra) has held that the donation made to another trust which was charitable was eligible for exemption u/s 4(3)(i) (1922 Act).
49. We find the Hon’ble Bombay High Court in the case of Trustees of the Jadi Trust (supra) has held that handing over of income of charitable trust to another charitable trust is application for charitable purposes eligible for exemption u/s 11. We find para 16 of the order reads as under:
“16. So far as the provision of s. 11 of the Act which was in force at the material time is concerned, we do not think that the legal position is in any way different. As already pointed out when a trust which holds property for charitable or religious purposes hands over a donation to another trust which is also a trust made for the application of its funds for charitable or religious purposes there can hardly be any doubt that it would amount to an application of income for charitable or religious purposes by the donor trust. As already pointed out it would be permissible for a trust either to directly apply the income for charitable purposes or to a charitable work in the field as put by Slade J., or the same funds or income could be utilised through the medium of another charitable institution which applies its funds or income to charitable purposes. The Tribunal is, in our view, right in holding that the assessee was entitled to the relief under s. 11 (1)(a) of the IT. Act, but the propriety of the direction given by the Tribunal need not be dealt with in this reference.”
50. In view of the above discussion and decisions cited (supra), we are of the opinion that the Ld. CIT(E) is not justified in cancelling the registration on this ground.
51. So far as the objection of the Ld. CIT(E) that the assessee is found to be involved in activities on commercial basis earning rental income which cannot be said to be incidental to the main objects which is a specific violation under clause “b” of the Explanation to subsection 12AB(4) of the Act is concerned, we do not find any merit in the above allegation of the Ld. CIT(E). A perusal of the Act would shows that it lays emphasis on income derived from property. If rental income is derived from property owned by the Trust, there is no reason to call it activity on commercial basis. In our opinion, there is no reason to characterize the rental income from property held in trust as income from business and attempt to invoke clause (b) of Explanation to section 12AB(4). In our opinion, it is the income derived from property held under trust wholly for charitable purposes. Further, as mentioned earlier, the assessee was getting rental income since past so many years and the registration granted earlier had never been cancelled on this issue. Therefore, following the rule of consistency as mentioned in the preceding paragraphs, we are of the considered opinion that the Ld. CIT(E) is not justified in cancelling the registration on this ground.
52. In view of the above discussion, we are of the considered opinion that the Ld. CIT(E) is not justified in cancelling the registration u/s 12A and 12AB(1)(ac)(i) of the Act. We, therefore, set aside the order of the Ld. CIT(E) and direct him to grant registration u/s 12A and 12AB(1)(ac)(i) of the Act. The grounds raised by the assessee are accordingly allowed.
53. In the result, the appeal filed by the assessee is allowed.