An 80G application cannot be rejected without considering all relevant evidence and rules.

ORDER

Siddhartha Nautiyal, Judicial Member. – This appeal is filed by the assessee as against the order dated 29/12/2024 passed by the Commissioner of Income Tax (Exemption), Ahmedabad [hereinafter referred to as “CIT(E)”] denying registration under section 80G(5) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).

2. The assessee has raised the following Grounds of Appeal:

Erroneous finding on Benefit to Particular Community

2. Misinterpretation of Charitable and Religious Activities

3. Violation of Principles of Natural Justice

4. Contrary to Judicial Precedents

5. Failure to Consider the Trust’s Activities in Public Interest

6. Failure to Appreciate Compliance with Section 80G(5B)

7. Incorrect Interpretation of Section 80G(5) & Explanation 3

3. The brief facts of the case are that the applicant, a trust, filed an application electronically in Form No. 10AB under clause (iii) of the first proviso to section 80G(5) of the Income Tax Act, 1961 (Act), seeking approval that would enable its donors to claim deductions under section 80G of the Act. The application was supported by necessary documentation as per Rule 11AA of the Income Tax Rules, which governs such applications. After receiving the application, the CIT(Exemptions) issued notices to the trust asking for supporting documents and explanations regarding its objectives and activities. The applicant replied to the initial notice but failed to respond to the subsequent and final show-cause notice dated 17.12.2024, despite being clearly informed by CIT(Exemptions) that it was the final opportunity. Based on the information available on record, the CIT(Exemptions) examined the trust’s founding documents (MOA) and observed that the trust’s main objectives were aimed at benefiting a specific community, namely the Vardhaman Samaj (42 Dasha Dhrumad Digambar Jain Samaj), and included provisions for religious advancement. The CIT(Exemptions) was of the view that these objects were both community-specific and composite in nature, meaning that these objects were a mix of charitable and religious purposes. The CIT(Exemptions) observed that such objects did not serve the public at large, which is a necessary condition under section 80G(5) of the Act. Even if charitable in part, the religious and community-based focus of the trust’s objects disqualified the assessee / applicant trust from approval, since Explanation 3 to section 80G of the Act clearly excludes religious or substantially religious purposes from the definition of “charitable purpose.” Further, CIT(Exemptions) noted that the assessee / applicant trust had violated several key conditions of section 80G(5) of the Act, including clause (ii), which prohibits application of trust income or assets for purposes other than charitable purposes. The CIT(Exemptions) held that even though the law allows religious expenditure up to 5% under section 80G(5B) of the Act, that provision cannot be used to justify the presence of religious objects in the trust’s founding documents. It only permits incidental religious expenses for otherwise fully charitable institutions. This interpretation was supported by judicial precedents, including rulings from the Hon’ble ITAT Ahmedabad and ITAT Agra, in which it was held that trusts must be established solely for charitable purposes and cannot have religious objectives, even partially, if they are seeking benefits under section 80G of the Act. Since the trust had not provided any convincing evidence to show that it was acting solely for charitable purposes, and had not responded to the final notice issued, the CIT(Exemptions) held that the applicant violated the conditions under section 80G(5)(ii), 80G(5)(iii), and Explanation 3 to section 80G of the Act. As a result, the trust was held ineligible for approval under section 80G(5), and its application in Form No. 10AB was rejected. Consequently, the assessee/applicant trust’s provisional approval under section 80G of the Act was also cancelled.

4. The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee. Before us, the counsel for the assessee submitted that the order passed by the CIT(Exemptions) rejecting the application for approval under section 80G(5)(iii) of the Act is factually incorrect, legally unsustainable, and deserves to be set aside. It was argued that the CIT(Exemptions) erred in concluding that the trust was formed for the benefit of a particular community or for religious purposes. The assessee clarified that its activities are purely charitable in nature and open to all sections of society, without any discrimination based on religion, caste, or community. The counsel pointed out that the donations received have been used for public welfare purposes, and the financial statements and audit reports clearly support this fact. The counsel for the assessee drew our attention to the audit reports filed in Form 10B for the financial years 202223 and 2023-24 (AY 2023-24 and AY 2024-25), wherein in para 30 clauses (d) and (e), it has been explicitly stated by the Chartered Accountant that no expenditure was incurred either for private religious purposes or for the benefit of any particular religious community or caste. The counsel for the assessee further submitted that the CIT(Exemptions) has misinterpreted the nature of the trust’s objectives by branding them as “composite,” suggesting a mix of religious and charitable purposes. It was submitted that any minor religious activity undertaken is merely incidental and falls well within the 5% threshold allowed under section 80G(5B) of the Act. The core activities of the trust, such as providing scholarships and financial aid, are meant for the public at large and not confined to any specific group. Therefore, the invocation of Explanation 3 to section 80G is misplaced in this context. Further, the counsel submitted that the principles of natural justice were violated in the present case. The assessee was not afforded a fair or adequate opportunity to explain its position, and the final order was passed in undue haste, without fully considering the submissions already placed on record. The appellant should have been given an opportunity to provide clarifications or additional documents, which was unjustly denied by CIT(Exemptions). The counsel for the assessee also submitted that the rejection order runs contrary to several judicial precedents wherein approval under section 80G has been granted to charitable institutions despite the presence of incidental religious activities. In support of this, reliance was placed on several decisions in which it was held that the presence of minor or incidental religious activity does not disqualify a trust from getting 80G approval, so long as its primary purpose remains charitable. It was also submitted that the trust has been active in public welfare since 1954, helping students and needy individuals without bias. The rejection order has ignored this long-standing track record and CIT(Exemptions) erred in overlooking substantial documentation showing the trust’s charitable intent and activities. The assessee submitted that there has been full compliance with section 80G(5B) of the Act and that the trust has not spent more than the permissible 5% limit on any religious activity. The trust’s foundational objects, while including cultural or traditional references, do not make it a religious trust per se, and any such interpretation by the CIT(Exemptions) is unsupported by facts or law. Finally, the counsel contended that the Explanation 3 to section 80G does not impose a blanket ban on any religious activity but merely restricts it. The trust’s religious involvement, if any, is incidental, minimal, and compliant within legal limits. Therefore, rejection of the application on this basis alone is unjustified.

5. In response, the Ld. DR placed reliance on the observations made by CIT(Exemptions) in his order.

6. We have heard the rival contentions and perused the material on record. In view of the above factual background, we note that the CIT(Exemptions) rejected the application for approval under section 80G(5)(iii) of the Act primarily on the ground that the trust’s objectives are allegedly community-specific and include religious purposes, thereby treating the trust as not established wholly for charitable purposes. However, the assessee has placed on record audit reports in Form 10B for FYs 2022-23 and 2023-24, duly certified by a Chartered Accountant, which categorically state that no part of the expenditure was incurred for private religious purposes or for the benefit of any particular religious community or caste, as per clause (d) and (e) of para 30 of the said reports. Further, we note that the assessee has contended that any religious activity, if undertaken, is incidental and falls within the permissible limit of 5% as provided under section 80G(5B) of the Act. This aspect, which is a factual matter requiring computation of religious versus charitable expenditure, has not been properly examined or verified by the CIT(Exemptions) while passing the impugned order. We note that CIT(Exemptions) passed the rejection order without quantifying such expenditure or verifying whether the 5% threshold under section 80G(5B) of the Act has indeed been breached in the instant facts. Moreover, we observe that assessee did not get an opportunity to explain its position or to provide additional documentation in response to the final show cause notice. Given the above, we are of the considered opinion that the matter requires a fresh examination, particularly to verify the nature and quantum of expenditure incurred on religious activities, if any, in the light of section 80G(5B) of the Act. The CIT(Exemptions) shall also consider the assessee’s compliance with other conditions under section 80G(5), including whether the trust’s activities are indeed directed at the general public and not confined to a specific religious community. Accordingly, we set aside the impugned order passed by the CIT(Exemptions) and restore the matter to his file for denovo adjudication in accordance with law, after affording a reasonable opportunity to the assessee to present all relevant materials and explanations. The CIT(Exemptions) is directed to re-examine the trust’s application for approval under section 80G(5)(iii), particularly in light of the audit reports, factual records, and judicial precedents cited, and pass a reasoned order after proper verification.

7. In the result, the appeal filed by the assessee is allowed for statistical purposes.