High Court upholds trust’s tax exemption despite overseas donations without CBDT approval

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Case Name

Commissioner of Income Tax (Exemption) vs Govardhan Foundation (High Court of Calcutta)

ITAT/226/2018 IA No: GA/2/2018 (OLD No.2064/2018)

Date: 10th November 2021

Key Takeaways

• Trust registration protection: Once a trust gets registered under Section 12A and its activities are found genuine at the time of registration, those same activities cannot later be used as grounds for cancellation
• Scope of cancellation powers: Issues related to how trust funds are used should be dealt with during regular tax assessments, not through cancellation of registration
• Tribunal’s authority: The High Court reinforced that the Income Tax Appellate Tribunal is the final fact-finding authority, and higher courts should not re-examine factual findings unless substantial legal questions arise
• Procedural fairness: The trust’s failure to respond to show-cause notices doesn’t automatically justify cancellation if the underlying grounds are legally insufficient

Issue

The central legal question was: Can a trust’s tax-exempt registration be cancelled solely because it made overseas donations without prior CBDT approval, when such activities were contemplated in the original trust deed that was approved during registration?

Facts

Background: Govardhan Foundation has been a registered charitable trust since 1995, enjoying tax exemption under Section 12A of the Income Tax Act.

The Problem: The Commissioner discovered that the trust had been making donations to a school in Nepal. Here’s what concerned the tax authorities:

• The recipient organization wasn’t registered under Section 12A in India
• It was located outside India
• The trust hadn’t obtained prior approval from CBDT before making these overseas donations

Trust’s Response: In April 2016, the trust submitted written explanations arguing that:

• The donations were made according to Clause 4(A) of their Trust Deed
• Their Trust Deed (which was approved during registration) didn’t prohibit such donations
• They provided supporting documents including receipts, balance sheets, and the Nepal institution’s trust deed

Commissioner’s Action: Despite the trust’s explanations, the Commissioner:

• Issued a show-cause notice in October 2016
• Concluded that the trust’s activities weren’t genuine
• Cancelled the registration in February 2017 with retrospective effect from April 1, 2011

Arguments

Revenue Department’s Position:

The tax authorities argued on three main grounds:

1. The Tribunal was wrong to overturn the Commissioner’s cancellation order
2. The trust violated Sections 11(1)(a) and 11(1)© by making overseas donations without CBDT permission
3. The Tribunal shouldn’t have relied on the Tamil Nadu Cricket Association case since the revenue department had challenged it in the Supreme Court

Trust’s Position:

The trust defended itself by arguing that:

• Their overseas donations were permitted under Clause 4(A) of their Trust Deed
• The same Trust Deed was examined and approved when they got registration in 1995
• Section 11 restrictions shouldn’t apply to their specific situation

Key Legal Precedents

The most important precedent cited was:

Tamil Nadu Cricket Association, 368 ITR 633 (Madras)

This Madras High Court decision established that “issues relating to how the funds of the Trust were employed is not germane for considering the question as to whether the activities were genuinely carried out or not”.

The Tribunal relied on this precedent to distinguish between:

• Questions about genuine charitable activities (relevant for registration cancellation)
• Questions about fund utilization (should be handled during regular assessments)

Legal Sections Referenced:

• Section 12A: Original registration provision
• Section 12AA(3): Cancellation of registration provision
• Section 11(1)(a) and 11(1)©: Restrictions on trust fund utilization
• Section 260A: High Court’s appellate jurisdiction

Judgement

Winner: Govardhan Foundation (the trust) won completely.

Court’s Reasoning:

The High Court agreed with the Tribunal’s decision based on several key points:

1. Fundamental Error by Commissioner: The court found that the Commissioner made a “fundamental error” by cancelling registration based on activities that were already contemplated in the original trust deed
2. Registration Logic: Since the trust deed was examined and approved in 1995, the same activities mentioned in that deed cannot later become grounds for cancellation
3. Wrong Forum: The court emphasized that issues about fund utilization should be handled by the Assessing Officer during regular tax assessments, not through registration cancellation
4. Factual Findings: The Tribunal, being the final fact-finding authority, had properly examined all facts and made findings in favor of the trust
5. No Substantial Legal Question: The High Court concluded that no substantial question of law arose that would justify their intervention

Final Order: The appeal was dismissed, and the connected stay application was also dismissed.

FAQs

Q1: Does this mean trusts can now make overseas donations without CBDT approval?

A: Not exactly. This case is very specific to situations where the trust deed already contemplated such activities at the time of registration. The court didn’t create a blanket exemption from CBDT approval requirements.

Q2: What’s the difference between registration cancellation and assessment issues?

A: Registration cancellation questions whether the trust’s activities are genuinely charitable. Assessment issues deal with whether specific expenditures qualify for tax exemption. This case clarifies that fund utilization questions belong in assessments, not cancellation proceedings.

Q3: Why didn’t the trust’s failure to respond to the show-cause notice matter?

A: While the trust didn’t respond to the final show-cause notice, they had already provided detailed written submissions earlier. More importantly, the court found that the underlying legal grounds for cancellation were insufficient regardless of the procedural response.

Q4: What does this mean for the Tamil Nadu Cricket Association precedent?

A: Even though the revenue department challenged that case in the Supreme Court, the High Court still found it persuasive and applicable. The precedent remains good law until the Supreme Court rules otherwise.

Q5: Can the revenue department still pursue this matter?

A: They could potentially file a Special Leave Petition with the Supreme Court, but given that the High Court found no substantial question of law, such an appeal would face significant hurdles.

This appeal by the revenue has been filed under Section 260A of the Income Tax Act, 1961, (the Act in brevity) regarding correctness of the order dated 29th November 2017 passed by the Income Tax Appellate Tribunal, Kolkata “A” Bench in I.T.A. No. 767/Kol/2017.

The revenue has raised the following substantial questions of

law for consideration :-

a) Whether on the facts and in the circumstances of the case

and in law, the Learned Income Tax Appellate Tribunal is not

correct in opining that the cancellation of the registration of

the assessee by the Commissioner of Income Tax

(Exemptions) by exercising jurisdiction under sub-section 3

of Section 12AA of the Income Tax Act, was not maintainable

thereby wrongly set aside the order of the Commissioner of

Income Tax (Exemptions) ?

b) Whether on the facts and in the circumstances of the case

and in law, the order passed by the Learned Income Tax

Appellate Tribunal is not justified in setting aside the order

of the Commissioner of Income Tax (Exemptions) by ignoring

the fact that the assessee trust had made donations outside

India without taking prior permission of the CBDT by

violating provisions of sections 11(1)(a) and 11(1)(c) of the

Income Tax Act ?

c) Whether on the facts and in the circumstances of the case

and in law, the Learned Income Tax Appellate Tribunal is not

justified in setting aside the order of cancellation of

registration of the assessee as passed by the Commissioner

of Income Tax (Exemptions) under section 12AA on relying

upon the decision of Hon’ble Madras High Court in the case

of Tamil Nadu Cricket Association Vs. DIT, ignoring the fact

that the said decision has not been accepted by the revenue

and SLP has been filed before Hon’ble Supreme Court which

is pending for adjudication?

We have elaborately heard Mr. Bhowmick, learned Senior

Counsel appearing for the appellant/revenue. The assessee is a

registered Trust and enjoyed a registration under Section 12A of the Act

eversince 1995. The Commissioner of Income Tax (Exemptions), Kolkata

had opined that the assessee Trust had made donations to an

organisation which is not registered under Section 12A of the Act and is

also situated outside India. Further, it was observed that to make

donation beyond the border of India, the assessee Trust was required to

take prior approval from the Central Board Direct Taxes (CBDT). In this

regard, the Commissioner referred to proviso to Section 11(1)(c) of the

Act. The assessee filed their written submissions on 25th April, 2016,

inter alia, contending that the donations were made to a school in Nepal

in terms of the Clause 4(A) of the Trust Deed which does not prohibit the

Assessee Trust from making such donations and Trust Deed is a

registered Deed under Section 12A of the Act. Further certain factual

details were also given to justify the stand that Section 11 of the Act shall not apply to the assessee’s Trust. The copies of the Trust Deed, the

receipts for the donation paid, balance sheet and income and

expenditure account for the relevant years and the Trust Deed of the

institution in Nepal were also appended with the submissions dated 24th

April, 2016. The Commissioner thereafter issued show-cause notice

dated 31st October, 2016 calling upon the assessee to explain as to why

the registration granted under Section 12A of the Act should not be

cancelled under Section 12AA(3) of the Act. The Commissioner was also

of the opinion that the activities of the Assessee Trust were not genuine.

The assessee did not submit a reply and, therefore, the Commissioner

proceeded to pass the order during February 2017 holding that the

activities of the assessee are not genuine and are not being carried out in

accordance with the objects of the Trust and registration granted under

Section 12A of the Act on 14th December 1995 was cancelled with

retrospective effect from 1st April, 2011 i.e. from the financial year 2011-

12 relevant to the assessment year 2012-13.

Aggrieved by such an order the assessee preferred appeal before

the Tribunal. The Tribunal has allowed the appeal and set aside the

order passed by the Commissioner and this is how the revenue is before

us by way of this appeal raising the aforementioned substantial

questions of law.

After elaborately hearing the learned standing Counsel for the

appellant/revenue we find that Commissioner had committed a

fundamental error in cancelling the registration granted to the assessee

Trust under Section 12A of the Act as far back as during the year 1995

by taking note of the activity of the Trust, which according to the

assessee was in consonance with Clause 4(A) of the Deed of Trust. Thus

it goes without saying that at the time when the registration was granted

at the first instance by the then Commissioner on 14th December, 1995,

the clauses and covenants as contained in the Deed of Trust were

examined and the activities of the trust were found to be genuine and

after recording satisfaction, registration has been granted. Therefore,

such an issue could not have given rise to a cause of action for

cancellation of the registration. The Tribunal had followed the decision of

the High Court of Madras in the case of Tamil Nadu Cricket Association,

368 ITR 633 (Madras) to hold that the issues relating to how the funds of

the Trust were employed is not germane for considering the question as

to whether the activities were genuinely carried out or not. The learned

Senior Standing Counsel for revenue submitted that revenue has not

accepted the decision in the case of Tamil Nadu Cricket Association and a

Special Leave Petition has been filed before the Hon’ble Supreme Court.

Be that as it may, on facts we are convinced that the reason cited by the

Commissioner for cancellation of the registration could not be a ground

to do so as it is admittedly an issue which could be dealt with by the

Assessing Officer, during the course of assessment. That apart we find

that the Tribunal, which is the final fact finding authority, had examined

the entire facts including the conditions contained in the Deed of Trust

and recorded a findings in favour of the Assessee Trust. While we

exercise jurisdiction under Section 260A of the Income Tax Act we are

required to consider as to whether any substantial question of law arises

for consideration and not to re-appreciate the factual position. Thus we

find that there is no error in the approach of the Tribunal nor the

conclusion arrived at by the Tribunal. We also find that there is no

substantial question of law arising for consideration in this appeal.

Accordingly, the appeal fails and the same stands dismissed, so

also the connected stay application.

(T.S. SIVAGNANAM, J.)

(HIRANMAY BHATTACHARYYA, J.)