CA. Ashok Mehta

Charitable trust registration

The benefits under section 11 for charitable trust is available only if the trust is registered under Section 12A r.w.s section 12AB.

History

The provisions applicable to charitable trusts have seen drastic changes since last few budgets.

The trust registration initially was a permanent registration and the same could be cancelled in only certain special circumstances under section 12AA (3) of the Act (cancellation now covered by section 12AB (4)). The registering authority had the power to cancel the registration when the activities of the trust or institution was contrary to the objects or fictitious or fraudulent or not genuine or not within the scope of the object clause, the registering authority was vested with the power of cancellation. The registration once granted was held to be permanent and only in rare cases the registration was cancelled. There was no comprehensive list with the department of all trust registrations granted under section 12AA. Therefore the Finance Act 2020 was amended and all charitable trusts were asked to re-register themselves. The department initiated an online process of re-registration.

The due date for getting the registration done was three months from 1st April 2021. However the due date was regularly extended due to covid and the fact that the charitable trust were not organised to do the new registration process.

The new section was added as 12A (1) (ac) with six sub-clauses. The said sub-clauses provided for different situations for registration of trusts.

Selection of Right clause :- The clause and its applicability is very important to be checked before application is made by the trust, as wrong selection of clause while making application by the trust will lead to rejection of the application. The Commissioner of Income Tax Exemption to whom application is made is not allowed to change the clause as per the department IT system.  The trust have to apply again in fresh form in case of mistake. This has led to a situation where for certain period the trust will be unregistered and could lead to taxation of income, due to non-granting of benefits of section 11.

S 12A(1) (ac) sub- clause	Explanation
(i)	Those trust who are already registered under the earlier provisions and intending to re- register themselves (due date now extended to 30-6-2024)
(ii)	Trust or institution which is registered under section 12AB and the period of the said registration (five years) is due to expire, at least six months prior to expiry.
(iii)	Trust or institution which is registered under section 12AB on provisional basis and the period of the said registration (three years) is due to expire, at least six months prior to expiry.
(iv)	Where a trust is granted registration under section 10 (23C) or 10(46) then the registration under section 12A becomes inoperative. However if the trust is seeking to re-register itself under section 11 and give back registration under section 10(23C) or 10(46) or the period of such registration is over, then the trust has to apply six months prior to the commencement of the assessment year from which the said registration is to be made operative.
(v)	Where a trust has modified its objects which do not confirm with the condition of registration. The said trust has to apply for fresh registration within a period of thirty days
(vi)	The clause is applicable to new trusts who have not started activities or have started activities recently but has not claimed section 11 benefit till date. Such trust are granted provisional registration when they apply in form 10A. The said trust have to file form 10AB within six months of the commencement of their activities for getting permanent registration. The trust which are new and have started activities can apply directly under this clause for permanent registration in form 10AB.

Procedure for Registration 12AB.

(Earlier section 12AA for procedure for registration is non operative from 1st April 2021)

The CIT exemption where the application is made under sub-clause (i) of section 12(1)(ac), pass an order in writing registering the trust or institution for a period of five years. The CIT is not required to do any investigation or call for details. This registration was to be granted for a period of 5 years.

The CIT exemption on receipt of application for clauses other than the sub-clause (i) of 12(1)(ac), call for such documents or information from the trust or institution as he thinks fit to access the

1. the genuineness of activities of the trust or institution
2. the compliance of such requirements of any other law for the time being in force by the trust or institution as are material for the purpose of achieving its objects;

The CIT Exemptions after satisfying himself about the objects of the trust or institution and the genuineness of its activities under item (A) and compliance of the requirements under item (B),

1. Pass an order in writing registering the trust or institution for a period of five years.
2. if he is not so satisfied, pass an order in writing rejecting such application and also cancelling its registration already granted;

Issues in Registration.

Difficulties Faced by Trusts; The trust taxation and compliance is being carried out by a small group of professionals. The said professionals in some of the cases are not charging any professional fees out of moral obligation or other reasons and hence are reluctant to take additional work unless proper remuneration is paid. The new law required all charitable trusts to re-register leading a lot of small trust going to people who did not really understood the law.

The further difficulty was that the government has been in the last few years, changing the law for charitable trusts on a constant basis. This lead to some errors by trusts or professionals in filling applications due to not being updated with either the law or the procedure.

This was further aggravated by the online system which did not allow the officers processing the application, to ask the assesse to change the clause under which application was made in case the application was being made in the wrong sub-clause. The common issues are listed below and will be dealt with in detail.

1. The application made in the wrong sub clause of section 12A (1) (ac).</strong > The department in such cases is rejecting the application without any show cause being issued. This is actually an error due to the new law and the filling being done by persons who are not aware of the law. The order for rejection of application have been appealed against and the same are being set aside by the ITAT in practically all cases. The department in these cases are arguing that the system does not allow them to change the clause and that they cannot help the assesse. The alternative is to file a fresh application under the correct clause. However, the issue of the taxation of the intermediate period income is an issue. However, the government has come out with circular 7 of 2024 on 25th April 2024. The said circular has extended the date of filling application under section 10A and 10AB to 30-6-2024. Thus all those whose applications are rejected only on account of delay in filling the application, who have filed an appeal to ITAT and whose cases are set aside may file a fresh application and get their registration. The issue of the intermediate period would still be open as the section 12A(2) fourth proviso reproduced hereunder.

   “Provided also that provisions contained in the first and second proviso shall not apply in case of any trust or institution which was refused registration or the registration granted to it was cancelled at any time under [section 12AA or section 12AB]”.

   Thus these trust whose application have been rejected once cannot claim exemption based on the old certificate of registration. This is an unintended hardship and it is necessary a clarification be issued. However it can be argued that the ITAT has cancelled the order of rejection and that the system itself does not allow amendment of the clause, thus the only solution would be to file a fresh application and since the rejection order is set aside the fourth proviso as reproduced above would not apply and assesse trust is eligible to the exemption under section 11 for the intermediate period based on the old registration granted. However, the appeal will have to be filed in case of demand being raised.

2. The application has not been made for the new registration though they were registered earlier; There are still some trusts who have not filed application for the new registration in spite of plethora of extensions granted by the government, due to lack of knowledge or indifference. These trusts can now file an application before the 30-6-2024 (as per the circular 7 of 2024 dated 25th April 2024) and avoid consequences under 115TD (taxation on the market value of assets at maximum marginal rate) and also taxation of the income from A Y 21-22 to 2023-24 by rejection of section 11 benefit. It is important that the trusts analyse the registrations granted and take corrective steps or could face serious consequences.
3. The application has not been made for the new registration as new trust after rejection of the application due to late filling;   in certain cases the trust had not applied within the time provided. The trust filed a fresh application as a new trust. These trust were granted provisional registration. The said trust can now surrender the registration and seek a proper registration as the date is extended to 30-6-2024 as per circular 7 of 2024. The para 5 of the circular is reproduced for ready reference

   “5. It is also clarified that if any existing trust, institution or fund who had failed to file Form No. 10A for AY 2022-23 within the due date as extended by the CBDT circular no. 6/2023 dated 24-5-2023 and subsequently, applied for provisional registration as a new trust, institution or fund and has received Form No. 10AC, it can avail the option to surrender the said form No. 10AC and apply for registration for A Y 2022-23 as an existing trust, institution or fund in form 10A within the extended time provided in paragraph 3(i) i.e. 30-6-2024.”

   This also gives hope for trusts which were earlier registered and then due to some reason registration was cancelled or was surrender. They as per the circular can apply for fresh registration. The condition in clause vi (b) that one should not have claimed benefit under section 11 is a hindrance for certain cases. The circular seems to give hope in such cases but the law needs to reconsider the condition as trust which want to take benefit may be allowed, if they exit there after they can be taxed under 115TD.

4. Failure to file form 10AB within time; the trusts which were not registered earlier and have started activity recently were allotted provisional registration. The said trust were required to apply for permanent registration with six months of the commencement of activity but have in some cases failed to file the form 10AB within six months of commencement of the activities as per sub-clause (vi)(B) of section 12(1)(ac). The delay in filling of this form 10AB has led to the CIT exemptions rejecting the application filed late and cancellation of the provisional registration already granted. The said trusts had appealed against the said orders to ITAT and had in some cases also applied for condo nation under section 119(2) (b), however these applications for condo nation were also rejected. It would be really costly for these trusts to approach the high court in writ against the order under section 119(2) (b). There were therefore representations made to CBDT that the delay needs to be condoned as the charitable trusts cannot be punished for such technical errors. The trusts were forced to file and appeal to ITAT or take it up in writ petition. Some of the relevant judgments are listed below.
   1. T B Lulla Charitable Foundation vs. CIT (Exemptions) Pune ITA 1220/ PUN/2023
   2. Tomorrow’s Foundation vs. CIT (Exemptions) 160 taxmann.com 174
   3. Shree Navsari Modh Vanik Panch vs CIT (Exemptions) 159 taxmann.com 1249 (Surat ITAT)

   However the circular 7 of 2024 dated 25th April 2024 concurs with the judgments. The government looking in to the difficulties faced has in spite of the election period come out with the circular 7 of 2024 extending the due date of such application to 30-6-2024. The trusts can now approach the CIT exemptions for registration as per para 4.1 reproduced hereunder

   “4.1 Further, in cases where any trust, institution or fund has already made an application in form NO 10AB and where the Principal Commissioner or Commissioner has passed an order rejecting such application, on or before the issuance of this circular, solely on account of the fact that the application was furnished after the due date or that the application has been furnished under the wrong section was furnished after the due date or that the application has been furnished under the wrong section code, it may furnish applicable in form No. 10AB within the extended time provided in paragraph 3(ii) i.e. 30-6-2024.”

5. Failure to file form 10AB in case of issue of erroneous provisional registration; The trust in certain cases due to technical mistake were issued “provisional registration for three years” instead of permanent registration for five years. There were also certain conditions of registration listed in form 10AC which were not as per provisions of law and not uniform for all trusts. The CBDT issued a circular 11 of 2022 dated 3rd June 2022 which provided that the said registration is to be deemed to be regular registration. The conditions in the form 10AC were also replaced by conditions in circular 11 of 2022. The trusts had to apply before the 30th September 2023 as they were issued registration up to march 31-3-2024. The application for some of these trusts were made after 30th September 2023, these applications were rejected by the CIT exemptions in most cases and the trusts were forced to file an appeal and incur unnecessary litigation cost. The trusts had also in some cases filed an application under section 119(2) (b) to PCIT/CIT which were also rejected. Fortunately now a circular 7 of 2024 is issue extending the date of filling such applications under form 10AB to 30th June 2024.
6. Consequences of failure to file form 10A/10AB within 30-6-2024;  The trusts who fail to file an application even till 30th June this time, there can be serious consequences. The trusts will not be able to get registration as the existing trusts which have availed benefit of section 11 earlier do not have any clause to apply in the six options stated above. The law is made in such a manner that the non- application by trust in time leads to the complete denial of benefit of section 11 benefit in future. The trust will also have to pay exit tax as per section 115TD on the fair market value of the assets. This is the very reason that the CBDT has been constantly extending the date of getting registration by trusts. However, the problem does not end over here. What if the trust fails to file an application before 6 months of expiration of such registration in future? The approach of the department has been that the said trust loses the opportunity to get registration and will have to pay the exit tax and will not be allowed to get registration. This is likely to lead to constant litigation for trusts which make a mistake of not applying in time.
7. Registration is rejected due to objects being for a particular religious community or caste; The section 12AB(4) provides for cancellation of registration where he has realised on his own or by a reference by the assessing officer under section 143(3) or a case is selected on a risk management strategy, that the trust has made specified violation. The clause (d) of explanation to section 12AB provides as under

   “(d) The trust or institution established for charitable purpose created or established after the commencement of this Act, has applied any part of its income for the benefit of any particular religious community or caste”

   There are a lot of community trusts like the “Shree Surti Modh Vanik Jagruti mandal” or “Dawoodi Bohara Jamat” these trusts have one or two objects for the benefit of the community and the rest of the objects are charitable objects and benefit for any person. The CIT exemption has in recent times rejected the application under 12A quoting clause (d) reproduced above. There are judgments which provide that the actual expenses on the objects have to be looked in to and one cannot pick one object from trust deed and reject the registration when on actual expense is incurred on the object. The intention of the clause is to not give registration if money is used for any particular “religious community or caste”. The community trust are not religious communities, like the Shree Surti Modh Vanik trust is a community trust which does welfare activity for all, it has an object to have marriage bureau for the community youth. Can such clause be said to be benefit for a religious community or caste? The issue is a debatable one and the decisions in favour of the assesse are listed below and can be used in appropriate cases

Sr. No.	Name	Citation
1.	SHREE MALIYA KADVA PATEL VERSUS THE INCOME TAX OFFICER, WARD-1 (3), VERAVAL	2022 (9) TMI 330
2.	National Association of Muslims Foundation	[2012] 20 taxmann.com 94 (Hyderabad)
3.	Ahmedabad Rana Caste Association vs. Commissioner of Income Tax	82 ITR 704 (SC)
4.	COMMISSIONER OF INCOME TAX vs. DAWOODI BOHARA JAMAT	364 ITR 31

Suggestions

The issue of circular 7 of 2024 would definitely help a lot of trust in regularising the registration both under section 12A and 80G. The fact that the circular 6 of 2023 did not extend the due date of filling application under section 80G was an issue.

However, it would help all trusts if CBDT could issue guidelines for condo nation of delay in filling of Form 10AB similar to circulars 3 of 2020 dated 3rd January 2020 and 16 of 2022 dated 19th July 2022 for condo nation in filling form 10 and form 9A. This would avoid issuing of regular extensions.