Registration of Charitable Trust Remanded for Re-evaluation Due to Lack of Confrontation and New Evidence.

Issue:

Whether registration under section 12AB of the Income-tax Act, 1961, should be denied to a charitable trust based on alleged non-utilization of funds for the trust’s objects, particularly when the assessee was not confronted with the adverse findings of the inquiry conducted by the Commissioner (Exemptions) and later presented evidence to substantiate its claims.

Facts:

The assessee-trust, involved in educational welfare for underprivileged sections of society, applied for registration under section 12AB. The Commissioner (Exemptions) observed that the trust received donations used to make payments to a vendor ‘A’ for school uniforms and computer systems. Upon verification, the Commissioner found that vendor ‘A’ did not exist at the provided address, and their GST number was cancelled. Additionally, the assessee reportedly failed to provide information about money spent towards relief for the poor. Based on these findings, the Commissioner denied registration, concluding that the funds were not used for the trust’s objects. However, it was noted that the assessee was not confronted with the findings of the Commissioner’s inquiry. Subsequently, the assessee produced evidence, including photographs of computer and school uniform distribution, evidence of relief for poverty, receipts for computers from various associations, and a utilization certificate.

Decision:

In favor of the assessee (Matter remanded): In the interest of justice, the case was remanded back to the Commissioner (Exemptions). The assessee was directed to substantiate its transactions and comply with any further notices from the Commissioner (Exemptions requiring additional details. This decision was made because the assessee was not confronted with the adverse inquiry findings, and fresh evidence was presented which needed to be considered.

Key Takeaways:

Principle of Natural Justice (Right to Confrontation): Before denying registration or making adverse findings, authorities must confront the assessee with the evidence gathered during inquiries that are detrimental to their case. This allows the assessee an opportunity to explain or rebut the findings.
Opportunity to Substantiate Claims: Even if initial responses are insufficient, if an assessee later provides relevant evidence to support their activities and utilization of funds, the authorities should provide an opportunity to consider such evidence.
Remand for Fair Adjudication: When there are procedural irregularities (like lack of confrontation) or new evidence emerges that could significantly impact the decision, higher appellate authorities often remand the case back to the original authority for a fresh examination, ensuring a fair and just adjudication.
Burden of Proof on Assessee: While the process should be fair, the ultimate burden remains on the assessee to provide comprehensive documentation and substantiation for all transactions and activities claimed to be for charitable purposes to secure and maintain registration under section 12AB.

IN THE ITAT BANGALORE BENCH ‘A’

Happiness Acts Trust

Commissioner of Income-tax (Exemptions)

Prashant Maharishi, Vice President
and Keshav Dubey, Judicial Member

IT Appeal No.380 and 381 (Bang) of 2025
[Assessment Year 2024-25]

APRIL 30, 2025

Pradeep Devaraju for the Appellant. Smt. Srinandini Das, CIT(DR)(ITAT) for the Respondent.

ORDER

Prashant Maharishi, Vice President. – ITA No.381/Bang/2025 filed by Happiness Acts Trust (the assessee/appellant) for the assessment year 2024-25 challenges the order of the Commissioner of Income Tax (Exemptions) [ld. CIT(E)] wherein application made by the assessee in Form 10AB dated 29.6.2024 for registration u/s. 12AB of the Income-tax Act, 1961 [the Act] was rejected. The assessee is aggrieved with that and raised several grounds of appeal which are mainly for granting registration to the assessee u/s. 12AB of the Act.

2. The brief facts of the case show that assessee is a public charitable trust stated to be engaged in educational welfare for under-privileged section of the society. The trust made an application in Form 10AB on 29.6.2024 for registration u/s. 12AB of the Act. On examination of the details submitted by the assessee, a notice dated 14.10.2024 was issued, the assessee appeared and submitted the details called for. The assessee also produced audited financial statement and bank statement.

3. The ld. CIT(E) noted that for the year ended on 31.3.2024 assessee has received a sum of Rs.15 lakhs on 28.3.2024 as donation from one private limited company under the Companies CSR activities. Immediately on 30.3.2024 the assessee has made payment of Rs.7,51,800 and Rs.6,46,050 to one M/s. Alpha Consultancy FZE for purchase of school uniform and computer system. The assessee produced the copies of the invoices. As per invoices, the assessee purchased 15 computers from the above party. For verification of genuineness, an enquiry was made at the address of the supplier wherein it was found that one Mr. Nagarajan occupied that place on rental basis. Further, Mr. Nagarajan has the proprietary concern. The GST authorities have suspended the above supplier from 7.10.2024. Therefore, the ld. CIT(E) was of the view that the purchases of school uniform and computers are not found to be genuine. Further for another sum of Rs.5,55,812 spent by the assessee towards relief to the poor, no information was provided. Based on the above facts, the ld. CIT(E) held that funds received are not used towards the object of the trust and further the assessee seems to be indulging in malpractices and fraudulent activities. He further held that the other expenses such as reimbursement, etc. do not carry any proof. Accordingly, the application was rejected, and registration was cancelled.

4. The assessee also made an application for recognition u/s. 80G of the Act which was also rejected on the similar grounds, as the assessee could not obtain registration u/s. 12AB of the Act. This order of rejection of recognition u/s. 80G is also under challenge in ITA No.380/Bang/2025.

5. Before us, the founder of the trust, Mr. Pradeep Devaraju appeared and submitted the written submission on behalf of the assessee as well as the copies of the trust deed. He further submitted a detailed note on activities of the trust giving the photograph of the activities of relief to poverty. He further submitted that CSR donation was received from a private limited company for supplying computer systems to advocates associations and providing uniform for children in Govt. schools. He also produced the utilization certificate wherein the CSR donation is utilized. He also produced the invoices along with a bank statement. He further submitted that 15 computers were provided to Chikmagalur Bar Association and other such associations for which certificate of that Bar Associations along with photograph was furnished. For distribution of the uniform also, he submitted the photograph. Thus, he submitted that all 15 computers are provided for legal cell of various courts and uniforms are provided to the children of schools. Thus, the activities of the trust are genuine. He further submitted that with respect to the non-availability of the vendor at the given address and cancellation of GST, the trust was never confronted, otherwise it would have produced the relevant details. He further stated with respect to relief to poverty that no evidence was asked for. Had it been asked, the same would have been provided immediately. He further brought at the time of hearing various evidences of expenses. His contention was that assessee is carrying on genuine activities and observations made by the ld. CIT(E) that assessee is indulging in malpractices is devoid of any merit. There is no basis to say so. However, he assured that given an opportunity of hearing, all this evidence can be produced before the ld. CIT(E).

6. The ld. CIT(DR) vehemently supported the order of the ld. CIT(E) in rejecting the application u/s. 12AB as well as recognition u/s. 80G of the Act.

7. We have heard the rival contentions and carefully perused the order of the ld. CIT(E) in not granting the registration u/s. 12AB as well as not granting recognition u/s. 80G of the Act. On examination of the details submitted by the assessee, the ld. CIT(E) came to the conclusion that assessee received donation of Rs.15 lakhs from a private limited company out of CSR fund and immediately within 2 days, the assessee purchased 15 computers and school uniform from a vendor who was not available at the address given by the assessee and on verification of the bill, the ld. CIT(E) found that GST number of that particular vendor is also cancelled. Based on this, he denied registration u/s. 12AB as well as recognition u/s. 80G of the Act. We find that the enquiries conducted by the ld. CIT(E) were not confronted to the assessee. Without confronting the finding of the enquiry that the vendor who supplied the computers as well as school uniform did not exist at the address and further his GST number is also cancelled, the assessee did not have any opportunity to show with alternative evidence that the activities of the assessee are genuine and charitable in nature. Before us, the founder of the trust has submitted a detailed note which shows various photographs of distribution of computers, school uniforms as well as relief to poverty. In the paper book the assessee has also submitted the receipt of 15 computers by various bar associations. The utilization certificate was also produced in the paperbook wherein it is submitted that the assessee trust has utilized the donation for the purpose of which it is granted. However, on a plain reading of the order of the ld. CIT(E), we find that assessee has not at all been confronted with the enquiries conducted. Therefore, the finding of the ld. CIT(E) is based on enquiries conducted by him result of which is not confronted to the assessee. Before us, the assessee has produced overwhelming evidence. However, it needs verification. Therefore, in the interest of justice, we restore the whole issue back to the file of the ld. CIT(E) with a direction to the assessee to substantiate the transaction with the vendor, expenditure incurred with evidence and certificate before the ld. CIT(E). The assessee is further directed to comply with the notices of the ld. CIT(E), if any further details are required. Accordingly, we restore ITA No.381/Bang/2025 back to the file of the ld. CIT(E) to consider all the details and give an opportunity of hearing to the assessee and then decide the issue of registration u/s. 12AB to the assessee trust afresh. Accordingly, all the grounds of appeal of the assessee are allowed with the above directions.

8. Thus, the appeal is allowed for statistical purposes.

9. ITA No.380/Bang/2025 is solely dependent on whether the assessee trust gets registration u/s. 12AB of the Act or not. Therefore, this appeal is also restored back to the file of ld. CIT(E) with a direction that if the activities of the assessee trust are found to be genuine, application for recognition u/s. 80G of the Act may be considered on merits of the case in accordance with law, after giving proper opportunity of hearing to the assessee. Therefore, ITA No.380/Bang/2025 is also allowed for statistical purposes.

10. In the result, both the appeals by the assessee are allowed for statistical purposes.