Supreme Court clarifies the criteria for registration of new charitable trusts under Section 12AA of the Income Tax Act, 1961

Introduction

Date of the Judgment: 19 February 2020

Citation: 2020 INSC 161

Judges: S.A. Bobde, CJI, B.R. Gavai, J. and Surya Kant, J.

Can a newly formed charitable trust be registered under the Income Tax Act, 1961, even if it hasn’t started any activities yet? The Supreme Court of India recently addressed this question, clarifying the requirements for registration under Section 12AA of the Income Tax Act. This judgment provides important guidance on how tax authorities should assess applications from new trusts seeking tax exemptions.

The core issue was whether the Commissioner of Income Tax could deny registration to a newly formed trust simply because it had not yet undertaken any charitable activities. The court considered whether the “genuineness of activities” under Section 12AA could be assessed based on proposed activities, rather than past actions. The judgment was delivered by a three-judge bench comprising Chief Justice S.A. Bobde, Justice B.R. Gavai, and Justice Surya Kant.

Case Background

The case involves multiple appeals concerning the registration of charitable trusts under Section 12AA of the Income Tax Act, 1961. One of the key cases involves a trust formed as a society on 30 May 2008, which applied for registration on 10 July 2008. At the time of application, the trust had not undertaken any activities. The Commissioner of Income Tax rejected the application on the grounds that the genuineness of the trust’s activities could not be verified without any actual activities. The Income Tax Appellate Tribunal reversed this decision, and the High Court upheld the Tribunal’s order. The Revenue Department then appealed to the Supreme Court.

The other appeal was regarding a Trust which applied for registration under Section 12AA of the Income Tax Act, 1961, was found not to have spent any part of its income on charitable activities. The Commissioner of Income Tax, therefore, refused the registration of Trust. The Income Tax Appellate Tribunal reversed the decision of the Commissioner of income Tax on the basis of the judgment of the Delhi High Court.

Timeline

Legal Framework

The core of this case revolves around Section 12AA of the Income Tax Act, 1961, which outlines the procedure for registering a charitable trust or institution. This section empowers the Commissioner of Income Tax to assess the genuineness of a trust’s objects and activities before granting registration, which is essential for availing tax benefits under Sections 11 and 12 of the Act.

Section 12AA of the Income Tax Act, 1961 states:

“12AA. Procedure for registration. – (1) The [Principal Commissioner or] Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) or clause (ab) of sub-section (1) of section 12A, shall-
(a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and
(b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he-
(i) shall pass an order in writing registering the trust or institution;
(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution,
and a copy of such order shall be sent to the applicant :
Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.”

This section allows the Commissioner to call for documents and make inquiries to ensure that the trust’s activities are genuine and in line with its charitable objectives. The Commissioner must be satisfied about both the objects of the trust and the genuineness of its activities before granting registration.

Arguments

The Director of Income Tax argued that the Commissioner is required to be satisfied about two aspects: the genuineness of the trust’s objects and the genuineness of its activities. They contended that if a trust has not undertaken any activities, it is impossible for the Commissioner to assess the genuineness of those activities, thus justifying the refusal of registration.

The trust, on the other hand, argued that the Commissioner should consider the proposed activities of the trust and whether they align with its charitable objectives. They argued that the term ‘activities’ in Section 12AA should include ‘proposed activities’ for newly registered trusts.

The core of the argument was whether the Commissioner could deny registration to a newly formed trust simply because it had not yet undertaken any charitable activities. The Revenue Department contended that the Commissioner cannot assess whether the activities of the trust are genuine if there are no activities.

The trust argued that the Commissioner should consider the proposed activities of the trust and whether they align with its charitable objectives.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether a newly registered trust can be granted registration under Section 12AA of the Income Tax Act, 1961, based solely on its objects, without having undertaken any activities.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court analyzed the submissions of both parties and the authorities cited.

The Supreme Court considered the following authorities:

• Commissioner of Income Tax-II vs. R.S. Bajaj Society, Allahabad High Court: The Court noted that the Allahabad High Court had taken the same view as the Delhi High Court, supporting the idea that a new trust could be registered based on its proposed activities.
• Self Employers Service Society vs. Commissioner of Income Tax – (2001) Vol.247 ITR 18, Kerala High Court: The Court acknowledged that the Kerala High Court had taken a contrary view, but disagreed with it. The Court noted that the facts of this case were different as the Commissioner of Income Tax had observed that the applicant for registration as a Trust had undertaken activities which were contrary to the objects of the Trust.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the term “activities” in Section 12AA of the Income Tax Act. The Court emphasized that for newly registered trusts, the term should include “proposed activities.” This interpretation was crucial in allowing new trusts to be registered based on their intended charitable objectives, rather than requiring a history of past activities. The Court also gave importance to the fact that section 12AA pertains to the registration of the Trust and not to assess of what a trust has actually done.

The Court’s reasoning also focused on the purpose of Section 12AA, which is to ensure that only genuine charitable trusts are registered. The Court noted that this purpose could be achieved by assessing the proposed activities of a new trust, thereby allowing such trusts to obtain the necessary registration to avail tax benefits under Sections 11 and 12 of the Act.

The analysis shows that the legal interpretation of Section 12AA was the primary driver for the court’s decision, with a strong emphasis on the purpose of the provision and the need to allow new trusts to register.

Logical Reasoning

Key Takeaways

• ✓ Newly registered trusts can apply for registration under Section 12AA of the Income Tax Act, 1961, without having undertaken any prior activities.
• ✓ The Commissioner of Income Tax must consider the “proposed activities” of a new trust when assessing the genuineness of its activities.
• ✓ The primary focus should be on whether the trust’s proposed activities align with its stated charitable objectives.
• ✓ This judgment clarifies that the term “activities” in Section 12AA includes both past and proposed activities, especially for new trusts.
• ✓ The Commissioner can refuse registration if the activities undertaken are contrary to the objects of the trust.
• ✓ The judgment provides clarity on the interpretation of Section 12AA and ensures that genuine charitable trusts are not unfairly denied registration.
• ✓ The Commissioner of Income Tax can cancel the registration of a trust if the activities undertaken are not in accordance with the objects of the trust.

Directions

The Supreme Court directed that in the case where the Trust had not spent any amount of its income for charitable purposes, the Commissioner of Income Tax can consider the issue by exercising his powers under sub-section (3) of section 12AA, if the facts justify such actions.

Specific Amendments Analysis

There is no specific amendment discussed in the judgment.

Development of Law

The ratio decidendi of this case is that for the purpose of registration of a new trust under Section 12AA of the Income Tax Act, 1961, the term “activities” includes “proposed activities.” This means that a newly registered trust can be granted registration based on its proposed activities and their alignment with its charitable objectives, without the need for a history of past activities. This judgment clarifies the interpretation of Section 12AA and provides a more inclusive approach to the registration of charitable trusts.

The Supreme Court clarified that the term “activities” under Section 12AA of the Income Tax Act, 1961, includes “proposed activities” for newly registered trusts. This interpretation is a shift from a strict requirement of past activities, allowing new trusts to be registered based on their intended charitable objectives.

Conclusion

The Supreme Court’s judgment clarifies that a newly registered trust can be granted registration under Section 12AA of the Income Tax Act, 1961, based on its proposed activities, without having undertaken any prior activities. This decision ensures that new charitable trusts are not unfairly denied registration and can avail tax benefits under Sections 11 and 12 of the Act. The Court emphasized that the Commissioner of Income Tax must assess the genuineness of the trust’s objects and the alignment of its proposed activities with its charitable objectives. The judgment provides a balanced approach, allowing new trusts to operate while ensuring that only genuine charitable activities are supported.