12AA Registration cannot be refused because activities have not commenced!

Allahabad High Court’s recent order brings hope and relief to fresh applicants

When a newly established charitable trust, society or Section 8 Company applies to the Income tax authorities for tax exemption under section 12AA, it has become quite routine and standard practice on the part of the Commissioner of Income Tax to insist on scrutinizing the “activities” of the applicant organization. The new applicant’s arguments to the effect: “We are newly registered … we don’t have the funds … foundations will not give us grants until we have at least a 12AA registration … individuals will not donate till we have 80G certificate …” all fall on deaf ears!

Fortunately, the Allahabad High Court has recently (7^th September 2017: Income Tax Appeal No: 33 of 2017) held that:

• At the time of registration of a charitable institution u/s 12AA, the Commissioner of Income Tax (CIT) is not required to look into the activities, where such activities have not or are in the process of its initiation.
• Registration cannot be refused on the ground that the trust has not yet commenced the charitable or religious activity.
• At registration stage, only the genuineness of the objects has to be tested and not the activities, unless such activities have commenced.

The provisions of Section 12AA have been construed in the judgments of several High Courts and the preponderance of the judicial opinion of all the High Courts is:

• At the time of registration under section 12AA of the Income tax Act, which is necessary for claiming exemption under sections 11 and 12 of the Act, the Commissioner of Income tax is not required to look into the activities, where such activities have not or are in the process of its initiation. 
• Where a trust, set up to achieve its objects of establishing educational institution, is in the process of establishing such institutions, and receives donations, the registration under section 12AA cannot be refused, on the ground that the trust has not yet commenced the charitable or religious activity. Any inquiry of the nature would amount to putting the cart before the horse. At this stage, only the genuineness of the objects has to be tested and not the activities, which have not commenced. 
• The inquiry of the Commissioner of Income tax at such preliminary stage should be restricted to the genuineness of the objects and not the activities unless such activities have commenced. 
• The trust or society cannot claim exemption, unless it is registered under section 12AA of the Act and thus at that such initial stage the test of the genuineness of the activity cannot be a ground on which the registration may be refused.