CIT(E) Must Verify 5% Religious Spending Limit Before Denying 80G Approval on Objects.

ORDER

Siddhartha Nautiyal, Judicial Member.- The captioned appeal has been preferred by the assessee-trust against the order dated 17/12/2024 passed by the Learned Commissioner of Income Tax (Exemption), Ahmedabad [hereinafter referred to as ‘Ld.CIT(Exemptions)’], rejecting the application of the assessee for registration under section 80G of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).

2. The brief facts of the case are that the assessee, Jayashree Gopallalji Haveli Charitable Trust, Ujalvav, filed an application in Form No. 10AB on 09.06.2024 before the Commissioner of Income Tax (Exemptions), Ahmedabad, seeking approval under clause (iii) of the first proviso to subsection (5) of section 80G of the Income-tax Act, 1961 (the “Act”). During the course of proceedings, the CIT (Exemptions) observed that, as per section 80G(5) of the Act, approval can be granted only to institutions or funds established in India for charitable purposes, and Explanation 3 specifically excludes any institution or fund whose purpose or object is wholly or substantially of a religious nature. The CIT (Exemptions) placed reliance on the decision of the Hon’ble Supreme Court in Upper Ganges Sugar Mills Ltd. v. CIT  (SC)/[1997] 227 ITR 578 (SC), wherein it was held that if any one of the purposes of the trust is wholly or substantially religious, the trust would fall outside the scope of section 80G. On examination of the trust deed and the objectives contained therein, the CIT (Exemptions) found that several of the objects, including the construction and maintenance of Shri Gopallalji Haveli, performance of religious rituals according to the Pushtimargiya Vaishnav sect, propagation of the said faith, and service to ascetics and pilgrims of the sect, were religious in nature. Accordingly, CIT (Exemptions) held the trust to be of a composite nature — both religious and charitable — and therefore not eligible for approval under section 80G(5) of the Act. Before CIT (Exemptions), the assessee contended that no religious activity had been carried out since inception and that its expenditure on religious purposes was nil and, in any case, within the permissible limit of five percent as prescribed under section 80G(5B). It was argued that, as per the proviso to sub-section (5B), incurring minimal religious expenditure does not disentitle an institution from approval under section 80G. The assessee also relied on the decision of the Hon’ble Andhra Pradesh High Court in Tirumala Tirupati Devasthanam v. Chief Commissioner of Income Tax  (Andhra Pradesh)/[2001] 251 ITR 849 (Andhra Pradesh) to support its claim. The CIT (Exemptions), however, rejected the contention of the assessee holding that sub-section (5B) of section 80G merely clarifies that an institution established solely for charitable purposes may incur religious expenditure not exceeding five percent of its total income, but it does not authorize the existence of religious objects in the trust deed itself. It was further held that the decision relied upon by the assessee stood overruled by the Supreme Court in Upper Ganges Sugar Mills Ltd. (supra). Reliance was also placed on the decisions of Yug Chetna Parmarth Trust v. CIT (Exemptions)  (Agra – Trib.)/[2014] 148 ITD 90 (Agra – Trib.) and Om Tapovan Charitable Trust v. CIT (Exemptions) [IT Appeal No. 175(Ahd) of 2023, dated 17-5-2024], wherein it was held that the presence of even a single religious object in the trust deed disentitles an institution from approval under section 80G(5) of the Act. In view of the above findings, the CIT (Exemptions) held that the assessee trust was not established wholly for charitable purposes as required under section 80G(5) of the Act. Since the trust deed contained religious objects and was thus of a religious-cum-charitable nature, it violated clause (ii) of section 80G(5). Accordingly, the application filed in Form No. 10AB seeking approval under section 80G(5) of the Act was rejected, and the provisional approval earlier granted was also cancelled.

3. The assessee is in appeal before us against the order passed by CIT (Exemptions).

4. Before us, the counsel for the assessee submitted that the appellant is a registered public charitable trust which has already been granted registration under section 12A(1)(ac) of the Act, thereby confirming that its objects are charitable in nature and its activities are genuine in accordance with the statutory mandate. It was submitted that pursuant to such registration, the appellant had duly filed an application in Form No. 10AB for approval under section 80G within the prescribed time limit. However, the learned Commissioner of Income-tax (Exemptions), Ahmedabad, rejected the said application, primarily on the ground that two of the objects of the trust, namely Clauses 1 and 2, were religious in nature. The learned counsel for the assessee contended that this finding of the learned CIT(E) is wholly misconceived and contrary to the material on record. It was pointed out that Object No. 1 merely refers to the construction of a haveli in accordance with a particular architectural pattern and does not involve or propagate any particular faith, belief, or ritualistic practice. Object No. 2, on the other hand, relates to the carrying out of charitable activities for the general welfare of society. Neither of the two objects makes any reference to the promotion or advancement of a specific religion. The inclusion of a culturally inspired or spiritually motivated objective does not by itself render the trust a religious one. The ld. counsel for the assessee placed reliance on the decision of the Hon’ble ITAT Ahmedabad Bench in Gurukrupa Foundation v. CIT (Exemptions)  (Ahmedabad – Trib.), wherein it was held that even if certain objects of a trust contain elements of religious nature, the same would not disentitle it from approval under section 80G so long as its predominant purpose remains charitable. In that case, it was observed that the statute itself under section 80G(5B) of the Act permits the expenditure of up to 5% of the total income on religious purposes, and, therefore, the mere presence of one or two religiously inclined objects cannot convert a public charitable trust into a wholly religious one. The Tribunal further held that unless it is demonstrated that the assessee has spent more than the prescribed 5% of its income on religious purposes, approval under section 80G cannot be denied merely on theoretical or speculative grounds. The learned counsel also placed reliance on the coordinate bench decisions of the Ahmedabad Tribunal in Shree Sattavis Kadva Patidar Pargati Mandal v. CIT (Exemptions) [IT Appeal No. 414(Ahd) of 2023, dated 8-5-2024] and Rajnibhai Kanada Memorial Foundation v. Commissioner of Income-tax (Exemption)  (Ahmedabad – Trib.)/(ITA No. 1810/Ahd/2024), wherein it was held that the presence of an isolated religious object does not vitiate the charitable character of a trust, particularly when the overall aims and activities are directed toward public utility and social welfare. The ld. counsel for the assessee further contended that the learned CIT(E) failed to appreciate that the registration under section 12A(1)(ac) continues to operate as valid evidence of the charitable nature of the appellant’s objects and activities. Once such registration has been granted, the CIT(E) cannot, at the stage of considering an application under section 80G, sit in judgment over the same set of objects and activities to hold that they are religious in nature, unless there is specific evidence to that effect. The action of the CIT(E) in rejecting the application without issuing any specific show-cause notice on the classification of expenses or providing a reasonable opportunity to the appellant to respond to the proposed grounds of rejection amounts to a violation of the principles of natural justice.

5. In response, 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 available on record. The undisputed facts are that the assessee filed an application in Form No. 10AB seeking approval under clause (iii) of the first proviso to section 80G(5) of the Act. The learned Commissioner of Income-tax (Exemptions), Ahmedabad, rejected the said application primarily on the ground that certain objects of the trust deed were of a religious nature and, therefore, the trust was not established wholly for charitable purposes as required under section 80G(5) of the Act. We find merit in the submissions made by the learned counsel for the assessee that the mere presence of an object having spiritual or cultural undertones does not, by itself, render a trust religious in nature, especially when the predominant purpose and actual activities are charitable. We further observe that section 80G(5B) of the Act permits an institution established for charitable purposes to incur expenditure up to five percent of its total income on religious purposes. Thus, the statutory framework itself recognizes that minor or incidental religious expenditure does not vitiate the charitable character of the institution. The determining factor, therefore, is not the mere existence of religiously worded objects in the trust deed but whether the assessee has actually expended more than the permissible five percent of its total income on religious purposes. In this regard, we find guidance from the coordinate bench decisions of the Ahmedabad Tribunal in Shree Smasta Gurjar Kshatriya Kadiya Samaj Navsari v. CIT (Exemptions) 1117 (Ahmedabad – Trib.) [26-05-2025], wherein it was held that before rejecting an application for approval under section 80G on the ground that certain activities are religious, the Commissioner (Exemptions) must first examine whether the assessee has breached the five percent threshold prescribed under section 80G(5B). In the absence of such verification, the matter deserves to be remanded for fresh consideration. Similarly, in Prayatna Charitable Trust v. CIT (Exemptions)  (Ahmedabad – Trib.) [16-09-2025], the Tribunal held that where the Commissioner (Exemptions) rejected registration under section 80G on the ground that an object was religious in nature, but the assessee explained that the object was actually intended to promote moral and educational values rather than ritualistic practices, the matter should be remanded back for proper re-examination after affording opportunity of being heard. Further, in Shree Vardhman Samaj Utkarsh Fund v. CIT (Exemptions)  (Ahmedabad – Trib.) [23-092025], ITAT categorically held that unless the Commissioner (Exemptions) verifies and records a finding that the assessee has in fact incurred religious expenditure exceeding the five percent limit under section 80G(5B), approval under section 80G cannot be denied merely because the objects appear to be community-specific or culturally oriented. In the present case, the learned CIT (Exemptions) has not carried out any examination or given any categorical finding regarding the applicability of section 80G(5B) or whether the assessee’s expenditure on religious activities exceeded the permissible threshold. The rejection of the application merely on the basis of certain textual references in the trust deed, without such verification, is not sustainable in law.

7. In view of the above legal position and consistent judicial precedents, we deem it appropriate to set aside the impugned order passed by the learned CIT (Exemptions), Ahmedabad. The matter is restored to the file of the learned CIT (Exemptions) with a direction to verify and record a categorical finding as to whether the assessee has incurred expenditure exceeding five percent of its total income on religious purposes within the meaning of section 80G(5B) of the Act and thereafter decide the assessee’s application for approval under section 80G(5) afresh on merits in accordance with law after providing due opportunity of hearing to the assessee.

8. In the result, the appeal of the assessee is allowed for statistical purposes.