Registration u/s 12AA is condition precedent to claim exemption under Sections 11 to 13 of the IT Act and charitable institutions also need to be registered u/s 80G of the IT Act for its donors to avail deductions. At the stage of granting registration, objects of trust / institution, purported utilization of its income, application of funds for charitable purposes, actually commenced etc usually form the grounds of consideration for grant of registration to these trusts. Recently in the case of Ananda Social & Educational Trust reported in [TS-5038-SC-2020-O] SC finally provided relief to those Charitable Trusts that have been denied registrations until now, solely for not undertaking any activities prior to applying for registration, SC held that “a newly registered Trust is entitled for registration u/s. 12AA on the basis of its objects, without any activity having been undertaken”.   

In this regard Jatin Proothi (Chartered Accountant) in his article highlights that in many cases it was not possible to satisfy the CIT(E)s about whether the activities of the trust are genuine or not as required by sub clause (i) of clause (a) of sub section (1) of Section 12AA. The author examines the SC judgment to opine that it will save many newly registered public charitable or religious trust on the issue of grant of registration u/s 12A without any activities carried on by them.   

“‘Activities’ includes ‘proposed activities’ - a sigh of relief to newly formed Trusts

INTRODUCTION

Section 11, 12 & 13 deals with the provisions of Income Tax Act, 1961 (herein referred to as "Act"). These are the special provisions and are complete code for public charitable or religious trust (herein referred to as "Trust"). In order to enjoy the exemption/benefits as provided by the Legislature in these sections, such trust is required to obtain registration u/s 12A of the Act and the procedure for obtaining such registration is provided u/s 12AA of the Act.

In brief, section 12AA of the Act empowers the Principal Commissioner or the Commissioner of the Income-tax on receipt of an application for registration of a trust to call for such documents as may be necessary to satisfy himself about the genuineness of activities of the trust or institution and make inquiries in that behalf; it empowers the Commissioner to thereupon register the trust if he is satisfied about the objects of the trust or institution and genuineness of its activities.

Section 12AA undoubtedly requires the Commissioner of Income Tax (Exemptions) [herein referred to as "CIT(E)"] to satisfy himself about the objects of the trust or institution and genuineness of its activities and grant a registration only if he is so satisfied.

ISSUE INVOLVED

The challenges was with the newly registered trusts which were registered as trust just say few months before making an application u/s 12A of the Act for grant of registration. In case of those trusts, their applications were rejected by the jurisdictional CIT(E)'s on the sole ground that since no activities have been undertaken by those trust before the registration application u/s 12A was made, therefore it is not possible to grant them registration because it was not possible to be satisfied by the CIT(E)'s about whether the activities of the trust are genuine or not as required by sub clause (i) of clause (a) of sub section (1) of Section 12AA. The revenue authorities interpreted this provision that since this test has not been passed by those newly registered trust who didn't commence charitable activities before making application u/s 12AA of the Act, therefore there applications were rejected by quoting this requirement of Section 12AA of the Act causing genuine hardship for the newly registered trust.

Revenue Authorities while issuing order of cancellation were also taking support of SLPs which were filed by the revenue with Hon'ble Apex Court and those were being granted by Hon'ble Apex Court against the order of Hon'ble High Court which was passed in favour of assessee's. Few of them are listed below;

i. Commissioner of Income-tax v Sree Anjaneya Medical [TS-5178-SC-2016-O]; SLP granted against High Court's ruling that while granting registration to a trust, authorities is empowered to examine only genuineness of trust and its activities and that only during assessment eligibility in terms of sections 10, 11 and 12 is to be verified as to whether or not what was professed in Deed of trust

ii. Commissioner of Income-tax v Babu Ram Education Society [TS-5414-SC-2018-O]; Registration of a trust does not involve enquiry into actual activities or application of funds, etc. and at that stage, only enquiry required to be conducted is with respect to object of trust alone; SLP granted

iii. Commissioner of Income Tax (Exemption), Jaipur v Dali Bai Sewa Sansthan [TS-5466-SC-2018-O]; Where High Court upheld order passed by Tribunal allowing assessee's claim for registration under sec. 12AA on ground that at time of registration, what has to be looked into is whether trust is a genuine one or it is a sham institution floated only to avail benefits of exemption under Act; SLP filed against said order was to be granted

This issue gave rise to litigation on this aspect and matter went to Hon'ble Apex Court in case of Ananda Social & Educational Trust v Commissioner of Income tax [TS-5038-SC-2020-O]. The judgement was given by three member bench including Hon'ble Chief Justice of India, Sh S.A Bobde.

Facts in case of Ananda Social & Educational Trust (supra) is as below;

The trust was formed as a society on 30-5-2008 and it applied for registration on 10-7-2008 i.e. within a period of about two months. No activities had been undertaken by the Trust before the application was made. The Commissioner rejected the application on the sole ground that since no activities have been undertaken by the trust, it was not possible to register it, presumably because it was not possible to be satisfied about whether the activities of the trust are genuine. The Income-tax Appellate Tribunal, Delhi (for short, the 'Tribunal') reversed the orders of the Commissioner. The Revenue Department approached the High Court by way of filing an appeal. The High Court upheld the order of the Tribunal and came to the conclusion that in case of a newly registered trust even though there was no activities, it was possible to consider whether the trust can be registered under section 12AA of the Act.

Against the judgement of Hon'ble Delhi High Court which went in favour of the assessee, the revenue filed an appeal before Hon'ble Apex Court.
Argument before Hon'ble Apex Court by the revenue;

Commissioner is required to be satisfied about two things - firstly that the objects of the trust and secondly, its activities are genuine. If there have been no activities undertaken by the trust then the Commissioner cannot assess whether such activities are genuine and therefore, the Commissioner is bound to refuse the registration of such a trust.

Reasoning given by Hon'ble Apex Court for not agreeing with the argument of revenue;

i. The purpose of section 12AA of the Act is to enable registration only of such trust or institution whose objects and activities are genuine. In other words, the Commissioner is bound to satisfy himself that the object of the Trust are genuine and that its activities are in furtherance of the objects of the Trust, that is equally genuine.

ii. Section 12AA pertains to the registration of the Trust and not to assess of what a trust has actually done, we are of the view that the term 'activities' in the provision includes 'proposed activities'. That is to say, a Commissioner is bound to consider whether the objects of the Trust are genuinely charitable in nature and whether the activities which the Trust is proposed to carry on are genuine in the sense that they are in line with the objects of the Trust.

iii. In contrast, the position would be different where the Commissioner proposes to cancel the registration of a Trust under sub-section (3) of section 12AA of the Act. There the Commissioner would be bound to record the finding that an activity or activities actually carried on by the Trust are not genuine being not in accordance with the objects of the Trust.

iv. Similarly, the situation would be different where the trust has before applying for registration found to have undertaken activities contrary to the objects of the Trust.

With above reasoning, the Highest Court affirmed the view of the Hon'ble Delhi High Court in the impugned judgment as correct and liable to be upheld.

From the judgement of Ananda Social & Educational Trust (supra), the Hon'ble Apex Court has settled the unsettled issue of Registration u/s 12AA of Income Tax Act, 1961 in case of newly registered public charitable or religious trust. Following are my key take aways from the said judgement;

i. Section 12AA provides for registration of a trust. Such registration can be applied for by a trust which has been in existence for some time and also by a newly registered trust. There is no stipulation that trust should have already been in existence and should have undertaken any activities before making application for registration

ii. Since section 12AA pertains to registration of Trust and not to assess of what a trust has actually done, it is viewed that term 'activities' in provision includes 'proposed activities'. That is to say, a Commissioner is bound to consider whether objects of Trust are genuinely charitable in nature and whether activities which Trust proposed to carry on are genuine in sense that they are in line with objects of Trust.

iii. There are sufficient safeguards given by the legislature in Section 12AA to cancel the registrations of the trusts. Sub section (3) of Section 12AA empowers Commissioner to cancel the registration u/s 12A of a Trust. There the Commissioner would be bound to record the finding that an activity or activities actually carried on by the Trust are not genuine being not in accordance with the objects of the Trust.

iv. The object of the provision in Section 12AA is to ensure that the activities undertaken by the Trust are not contrary to its objects and that a Commissioner is entitled to refuse registration if the activities are found contrary to the objects of the Trust.

v. The case that the Trust had not spent any amount of its income for charitable purposes is a case of not carrying out the objects of the Trust and not carrying on activities contrary to its object. These circumstances may arise for many reasons including not finding suitable circumstances for carrying on activities.