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Registration as a charitable institution cannot be made subject to conditions not prescribed under the IT Act


The Income Tax Act, 1961 (“IT Act”) prescribes a special taxation regime for charitable trusts and institutions which are registered under the said Act. Sections 11-13 of the IT Act enable the income of a charitable trust or institution to be exempt from tax, subject to the satisfaction of certain prescribed conditions. Before such exemption can be claimed, the charitable trust or institution needs to make an application before the Commissioner of Income Tax (“CIT”) or the Principal Commissioner of Income Tax (“PCIT”), seeking registration as a charitable trust or institution under the IT Act. The CIT or PCIT can then pass an order accepting or rejecting the application for registration.

Recently, an issue arose in the case of Bai Navajbai Tata Zoroastrian Girls School v. CIT[1] (“Bai Navajbai”), regarding the scope of power of the CIT/ PCIT in granting conditional registration to a taxpayer.

Brief Facts in Bai Navajbai  

In the said case, the taxpayer was a charitable institution which sought registration under section 12A of the IT Act. The CIT, vide an order dated September 24, 2021, granted registration, subject to several conditions such as quoting the taxpayer’s PAN on all communications with the Income Tax Department (“ITD”). If the prescribed conditions were not adhered to, the registration could be cancelled.

The taxpayer appealed before the Mumbai ITAT and argued that granting a conditional registration was antithetic to the scheme of the IT Act. According to the taxpayer, the CIT lacked the authority to impose restrictions while granting registration and any future cancellation of the registration could only be made in accordance with the provisions of the IT Act. The ITD on the other hand argued that the grant of registration under section 12A cannot be unconditional. Form No. 10AC, as prescribed under the Income-tax Rules, 1962, specifically provides for conditions, if any, subject to which registration may be granted. Thus, the law visualises conditional registrations.

Decision of the ITAT

The Mumbai ITAT analysed the plain language of section 12AB (which provides the procedure for applying for fresh registration as a charitable institution) and stated that the CIT or PCIT, as the case may be, was required to satisfy itself about (i) the genuineness of the activities of the trust or institution; and (ii) compliance with applicable law. While (i) may be an objective satisfaction based on the materials provided, (ii) was subjective inasmuch additional registrations may be required by the trust or institution to undertake activities in accordance with its objectives. This may include compliances such as registration under the Foreign Contribution Regulation Act, 2010. Thus, the registration under section 12A can be made conditional under the scheme of the IT Act.

However, in the instant case, the conditions prescribed have the effect of cancelling the taxpayer’s registration, if not complied with. Cancellation of registration is regulated by specific provisions of the IT Act. The order of the CIT cannot expand the scope of the law if the provisions governing cancellation do not recognise such conditions. The power of the CIT/ PCIT under section 12AB is limited to seeking additional documents and/ or making inquiries to satisfy itself with respect to the activities highlighted above. Consequently, the CIT/ PCIT can proceed to take a call on whether a registration should be granted or not under section 12A. But, determining the events of cancellation of registration is not within the purview of the CIT/ PCIT at the time of grant of registration.

Accordingly, the taxpayer’s appeal was allowed, and the conditional grant of registration was vacated.

Significant Takeaways

Bai Navajbai clarifies the scope of the power of the CIT/ PCIT and provides respite to taxpayers who may have similarly been made subject to cancellation of their registration due to the imposition of conditions not otherwise prescribed under the IT Act. The position prior to this ruling also has been that while the IT Act prescribes several conditions that a registered trust or institution needs to comply with in order to claim exemptions under the provisions of the IT Act, non-compliance with such conditions may not necessarily make the registration of the trust or institution invalid. Unless specifically mentioned as a ground for cancellation of registration under the IT Act, the same may only make the trust or institution ineligible for claiming exemptions under the IT Act during the relevant financial year.[2] Thus, any tendency of the ITD to travel beyond the parameters set out by the law, by imposing any additional conditions, should be avoided or it may be reversed by the judiciary.

It must be noted that the Finance Act, 2022 (“FA 2022”) has recently amended section 12AB to rationalise the provisions relating to charitable trusts and institutions and ensure non-genuine trusts or institutions do not get the benefit of the exemption provisions under the IT Act. Amended sections 12AB(4) and 12AB(5) provide for an expanded list of instances where an order may be passed by the CIT/ PCIT, cancelling the registration given under section 12A (“Specified Violations”). These, inter alia, include application of income for non-charitable purposes, application of income for the benefit of any particular religious community or caste, engaging in non-genuine activities, non-compliance with applicable law, etc. It is relevant to note that pursuant to the amendment, instances where any activity of the trust or institution is not being carried out in accordance with all or any of the conditions subject to which it was approved/ provisionally approved or registered/ provisionally registered, is also considered a valid ground which can invite cancellation of the registration of the trust or institution. Thus, with effect from FY 2021-22, the amended section 12AB permits registration to be cancelled, if any of the conditions prescribed by the CIT/ PCIT while granting the registration are not complied with.

However, it is pertinent to note that the amended list of Specified Violations is exhaustive and the CIT/ PCIT still cannot impose any additional conditions as they may please while granting the registration.[3] As mentioned by the Mumbai ITAT in Bai Navajbai, there are certain aspects which need to be verified by the CIT/ PCIT based on the existing operations of the charitable trust/ institution, while the trust/ institution needs to adhere to certain other conditions on a going-forward basis. For instance, under the Specified Violations, the requirement to maintain separate books of accounts, not apply income for purposes other than the objects of the trust/ institution, etc., need to be generally complied with by the trust/ institution as part of its operations. The amendments introduced by the FA, 2022 should not be interpreted in a manner that has the effect of widening the powers given to the CIT/ PCIT under section 12AB. A contrary interpretation would allow the CIT/ PCIT to interfere with the activities of charitable trusts/ institutions and impose such restrictions that are otherwise not required to be adhered to in order to enjoy available exemptions under the IT Act.

[1] [TS-608-ITAT-2022(Mum)].  

[2] See e.g., Ghatkopar Jolly Gymkhana v. DIT [TS-546-ITAT-2013(Mum)].

[3] The CBDT has issued circular No. 11 of 2022 dated June 3, 2022 (“Circular”) to clarify the effect of the aforementioned amendments for registrations granted between April 1, 2021 till the date of issuance of the Circular. It provides that the conditions imposed under such registrations stand substituted with the Specified Violations. No additional conditions have been introduced under the said Circular as well.