Exemption from taxation on income generated by charitable institutions is a fundamental draw for many institutions to be incorporated as a charitable institution. Sections 11 to 13 of the Income Tax Act, 1961 ("IT Act") govern the exclusion of income derived by a charitable institution from property held under trust for charitable or religious purposes to the extent such purposes are applied in India. Similarly, Section 80G of the IT Act allows for deduction of donations made by a person to a charitable institution from the computation of the total income of such person. To claim exemption of income under Sections 11 to 13 of the IT Act, the charitable institution needs to be registered under Section 12AA1 of the IT Act. Additionally, the charitable institution also needs to be registered under Section 80G of the IT Act for its donors to avail deductions.
However, many newly incorporated trusts have been facing challenges in seeking registrations under Section 12AA and Section 80G of the IT Act. Non-commencement of charitable activities by these applicant trusts i.e., lack of track record of charitable activities and the inability of the tax department to assess the genuineness of activities undertaken by the trusts, are usually the reasons for rejection of registration to these trusts. In the absence of tax exemption registrations, the charitable institutions are unable to generate donations from donors and commence charitable activities or otherwise grow and expand their genuine charitable activities.
This issue was finally settled in favour of charitable institutions in a recent case of Ananda Social and Educational Trust Vs. The Commissioner of Income Tax & Anr. [in Civil Appeal No.4702/2014], where the Supreme Court held that the purpose of Section 12AA of IT Act is to enable registration of such trusts or institutions whose objects and activities are genuine and not to assess what the trust has actually done. In the aforesaid case, the Supreme Court was considering Section 12AA of the IT Act as it stood prior to its amendment under the Finance (No.2) Act, 2019.
In the aforesaid case, the society applied for registration under Section 12AA of the IT Act within a period of two (2) months from its formation. However, as no activities had been undertaken by the society, its application was rejected by the commissioner on the sole ground that since no activities had been undertaken it was not possible to verify the activities of the society were genuine or not. The order of the commissioner was however reversed by the ITAT, Delhi and subsequently the order of the ITAT, Delhi was upheld by the Delhi High Court which held that in case of a newly registered trust even though there were no activities, it was possible to consider whether the trust can be registered under section 12AA of the Act.
In its appeal before the Supreme Court, the Director of Income Tax argued that the commissioner is required to be satisfied whether the objects and the activities of the trust are genuine. In the event there are no activities, the commissioner would be unable to assess if the activities are genuine and is therefore bound to refuse the registration under Section 12AA.
While dismissing the argument raised by the Director and upholding the judgement passed by the Delhi High Court, the Supreme Court observed that:
"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.
Since 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 proposed to carry on are genuine in the sense that they are in line with the objects of the Trust".
Additionally, the Supreme Court also clarified that the position would be different vis-à-vis a trust which is already registered and whose registration is proposed to be cancelled or where the trust has before applying for registration found to have undertaken activities contrary to the objects of the trust.
The Supreme Court's decision is a welcome clarification and brings relief to many charitable institutions seeking exemption of their income or future income even though no charitable activities may have been undertaken by such institutions. Hopefully, going forward the Income Tax Department would be more forthcoming in granting registrations to charitable institutions who are yet to commence charitable activities at the time of making their application to the Income Tax Department. We may however add that if the Finance Bill, 2020 is passed as it is, then the new charitable institution will be granted provisional registration under section 12AB of the IT Act without seeking an assessment of the previous activities undertaken by the applicant and the genuineness of the activities of the institution will be examined after commencement of activities by such institution.
1 Under the Finance Bill, 2020, Section 12AA of the IT Act will cease to have effect from June 1, 2020 and a new section 12AB of the IT Act will deal with registration of charitable institutions.
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