1. This appeal is directed against the order passed by the Director of IT (Exemptions) (hereinafter referred to as 'DI') rejecting the application for registration made under Section 12A of the IT Act, 1961 by the appellant trust.
2. One of the conditions stipulated for granting exemption from income-tax to a charitable or religious trust or institution is that the institution in question must be registered under Section 12A. Prior to 1st April, 1997, the filing of such an application was a mere formality since the only requirements were that the application be made in accordance with the requirements of Section 12A r/w Rule 17A of the IT Rules, 1962 and that Form No. 16A was properly filled up. An order of registration was not necessary and mere filing was considered as due compliance with the legal provisions.
3. With effect from 1st April, 1997, the registration of a trust or institution was made mandatory as per the procedure laid down in Section 12AA. Under Clause (a) of Section 12AA(1), the Chief CIT/CIT was empowered on receipt of an application for registration under Section 12A(a) to call for such documents or information as he thought necessary in order to satisfy himself about the genuineness of the activities of the trust or institution. Further, the authority concerned was also empowered to make such inquiries as he may deem necessary in this behalf 4. As provided in Clause (b) of Section 12AA(1) after the authority concerned was satisfied about the objects of the trust or institution and the genuineness of its activities he was to pass an order granting registration but if it was not so satisfied it would pass an order in writing refusing registration. The proviso to Section 12AA(1)(b) however stipulated that no order refusing registration was to be passed unless the applicant had been allowed reasonable opportunity of being heard.
5. CBDT Circular No. 762, dt. 18th Feb., 1998 explained the scope and effect of the newly inserted Section 12AA as also the amendment of Section 12A by the Finance (No. 2) Act, 1996 as follows : "Under the existing provisions of the IT Act, exemption from income-tax in respect of the income of a charitable or religious trust or institution is available only if the conditions specified in that section are satisfied. One of the conditions is that the person in receipt of the income shall make an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Chief CIT or the CIT within the specified time. However, there was no provision in the IT Act for processing of such an application and granting or refusal of registration to the concerned trust or institution.
Hence, the Finance (No. 2) Act, 1996, now provides for a procedure to be followed for grant of registration to a trust or institution.
According to this procedure, the Chief CIT or CIT shall call for documents and information and conduct enquiries to satisfy about the genuineness of the trust or institution. After he is satisfied about the charitable or religious nature of the objects and genuineness of the activities of the trust or institution, he will pass an order granting registration. If he is not so satisfied, he will pass an order refusing registration. However, an opportunity of being heard shall have to be provided to the applicant before an order of refusal to grant registration is passed by the Chief CIT or the CIT. The reasons for refusal of registration shall also have to be mentioned in that order. The order granting or refusing registration has to be passed within six months from the end of the month in which the application for registration is received by the Chief CIT or the CIT and a copy of such order shall be sent to the applicant.
It has also been provided that the grant of registration shall be one of the conditions for grant of income-tax exemption.
6. The facts of the present case are that one Smt. Prem Lata Dawar expired on 3rd Jan., 2001 leaving behind a Will dt. 26th July, 1996 and a Codicil dt. 5th April, 2000 As per the Will specified amounts were to be paid to 24 individuals and 30 institutions and in regard to the remaining amount the following directions were given : "The balance amount after making the above payments would be used for donations to various temples and other religious and charitable institutions and organizations, for setting up various Satsang Halls, Yagshalas, education of poor and needy, for medical research, for hospitals, for dispensaries, for medical centre and various other religious educational, charitable and philanthropic purposes.
The donation may also be made to other charitable, religious or philanthropic trusts.
The executor shall in her/his sole discretion be entitled to give and donate any amount to all or any of the aforesaid objects as she/he may deem fit and proper." 7. The residuary estate comprised of a sum of Rs. 2,13,60,528 kept in various banks. This amount was utilised by the executors of the Will as the corpus of the trust created w.e.f. 1st April, 2001 by means of the trust deed executed and registered on 31st March, 2001. There were five trustees including the two executors of the Will.
8. The appellant applied for registration under Section 12A of the IT Act, 1961 and pursuant thereto the "DI" gave a hearing when the appellant was required to file copy of the Will of late Smt. Prem Lata Dawar as also to produce the original trust deed. The "DI" examined the Will and the trust deed observing that "the objects of the trust are charitable in nature" but by means of an order sheet entry, he raised the following specific query : "Whether the trust formation was permitted by Will ref-p.-7 of the Will. In other words whether declaration of trust by executrixes was ultra vires or inter vires the mandate of the Will regarding residual estate." 9. The main issue according to the "DI" was whether the Will authorised the executrixes to set a trust. On behalf of the trust, written submissions were filed wherein it was contended that by the utilisation of the residual estate as the trust's initial corpus, no part of the Will was violated as it contemplated the application of residual estate for religious, educational, charitable and philanthropic purposes. It was in fact emhasised that the Will authorised the executrixes to carry on any or all the objects mentioned in the Will and, therefore, the creation of the charitable trust utilising the residual estate was within the mandate of the Will.
10. The other plea on behalf of the trust was that the enquiry contemplated under Section 12AA was restricted to the examination of the genuineness of the objects of the trust or its charitable nature and not to the conducting of an enquiry whether the formation was in accordance with the provisions of the Will or otherwise.
11. The objections raised by the trust were considered by the "DI" and he proceeded to record his views as follows : (i) the directions in the Will were binding on the executrixes and if they did not have any mandate under the Will to settle the property on the trust created with the residuary estate, then such disposal of assets would be against the law leading to the inference that no property was settled on trust and such a trust would be non est in law.
In other words the "DI" opined that he was within his jurisdiction to examine the contents of the Will; ' (ii) that as per the Will of late Smt. Prem Lata Dawar, the Executrixes could only gift/donate the residual estate but could not create a trust out of such residual estate; (ii) that although the executrixes were entitled to make a gift out of the residual estate to any other institution mentioned in the Will, there was no such institution existing and for a gift two persons were required. Further, the appellant trust was not in existence as it came into existence only after the receipt of the residual estate; (iv) on the submission of the appellant that it could use the residual estate for setting up an institution, which would perform charitable, educational and philanthropic activities the "DI" was of the view that there was no such direction contained in the Will.
That the direction was to donate money to certain types of institutions for carrying on specified types of activities and even for giving a donation, two persons were required and the appellant was not in existence to take the donation at the relevant point of time; (v) on the submission of the appellant that one charitable trust could make payments to another charitable trust and which could be regarded as application of money, the "DI" accepted the proposition put forward but distinguished it from the present case where the taker did not exist.
12. In conclusion, the "DI" rejected the claim for registration under Section 12A observing as under : "In view of the aforesaid discussion, it is held that the executrixes did not have any mandate under the Will to set up a new trust and, therefore, they were not legally competent to transfer the estate to a trust to be newely set up by them. It, therefore, follows automatically that the residual estate was not legally a transferable assets for setting up a new trust or transferred, and it continues to vest in executrixes. In absence of any valid settlement of property, it is held that valid trust has not come into existence. As no legal entity has come into existence, there is no institution which can be registered under Section 12A of the ' IT Act. Accordingly I reject the application. As there is no assessee registered under Section 12A before me the application under Section 80G is also rejected." 13. It may be mentioned that the "DI" in corning to the conclusion that he did referred to the following decisions ; 4. K. Narayana Setty Ramarathanamma Trust v. Asstt. CIT (1998) 61 TTJ (Bang) 269 : (1998) 66 ITD 138 (Bang).
14. Before us the learned counsel for the appellant argued at length initially referring to the Will and the trust deed copies thereof being placed on the paper book- filed during the course of the hearing. The main submissions were : (i) as per the Will, the residual estate could be applied for charitable purposes in any manner including through a trust; (ii) it was the case of a public charitable trust and not a private trust; (iii) the two ladies i.e., Smt. Sukarana Batra and Smt. Sneh Lamba were the executrixes of the Will as also the authors of the trust and there was a simultaneous act of formation of the trust and giving property to it; (iv) the scope of enquiry contemplated under Section 12AA was only to see the validity of the trust and if it was not in accordance with the Will, then it was for a civil Court to decide; (v) all relevant provisions of the Trusts Act stood satisfied and the appellant trust had been accepted as charitable and further all the trustees were having due authority in dealing with its affairs; (vi) if the terms of the Will were not complied with then the beneficiaries could go to Court and file a suit but the "DI" could not reject the claim for registration on such a purported ground; and (vii) there was no dispute on the genuineness of the Will and similarly there was no dispute on the creation of the trust as a valid trust complying with relevant provisions of law.
15. In support of his arguments, the learned counsel referred to/relied on the following decisions : (i) M. Visvesvaraya Industrial Research & Development Centre v. ITAT and Ors. (2001) 251 ITR 852 (Bom); 16. Reliance was also placed on the judgment of the Hon'ble Delhi High Court dt. 21st Dec., 2001 in the case of Parivar Seva Sanstha in CWP No. 2879 of 2001 [reported as Parivar Seva Sanstha v. Director of IT (Exemption) 17. The learned Departmental Representative on behalf of the Revenue vehemently supported the order of the "DI". According to him the term "make such inquiries" was wide enough to include an examination of the Will to ascertain whether the subject-matter of the trust i.e., the property with which it was impressed was one which the settlors were competent to dispose. The plea in other words was that the "DI" was competent to examine the validity of a trust including the origin of its initial corpus. The inquiry according to him was not an empty formality.
18. During the course of his arguments, the learned Departmental Representative referred to the trust deed as also the relevant clause of the Will which provided in clear terms what was to be done with the residue estate According to him the creation of a trust was not the mandate of the Will since the executrixes could only gift/donate the funds for specified charitable activities and nothing more. In conclusion, he urged that the action of the "DI" be upheld. He relied on the following reported decisions to support Revenue's case : (iii) Laxminarayan Maharaj and Anr. v. CIT (1984) 150 ITR 465 (MP); and 19. The learned Departmental Representative also referred to the commentary of Chaturvedi and Pithisaria in support of Revenue's case.
20. The learned counsel in his reply accepted that the "DI" had the power to examine the genuineness of the trust only but according to him the Will could not be the subject-matter of examination. The learned counsel at this stage relied upon the judgment of the Hon'ble Allahabad High Court in the case of Fifth Generation Education Society v. CIT (1990) 185 ITR 634 (All) as also the decisions relied upon by the Revenue in support of its case.
21. We have examined the rival submissions and have also perused the material on record to which our attention was invited during the course of the hearing. The decisions cited at the Bar by the parties have also been considered by us.
22. In the earlier part of this order, we have highlighted the position pre 1st April, 1997 and post that date when there was a sea change on the question of registration by the insertion of Section 12AA. To appreciate the controversy before us, we would reproduce the relevant provisions as follows : "12AA. (1) The CIT, on receipt of an application for registration of a trust or institution made under Clause (a) of Section 12A, shall- (a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and (b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he- (i) shall pass an order in writing registering the trust or institution; (ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, 23. The provision is covered in terms which are wide enough to cover any type of inquiry which would satisfy the authority concerned about the objects of the trust or institution and the genuineness of its activities. It may be appreciated that at the stage of registration, the authority may have before it only the objects which are to be carried out arid not actually being undertaken and, therefore, we would observe that grant of registration does not ensure the benefits of Sections 11 and 12 since that would be the subsequent stage when activities are undertaken with reference to the document by which the trust or institution is created/set up.
24. In the- present case, the "DI" does not doubt the charitable nature of the purported activities of the appellant trust and his main objection is that the Will does not authorise the executrixes to set up a trust and further he is entitled to look into the Will to satisfy himself about the genuineness of the trust and its activities. As against this, the argument of the learned counsel for the appellant is that the Will cannot be looked into and what the law provides is that the "DI" may ensure that the trust is validly created and its objects are charitable in nature.
25. We are afraid that on the facts of the present case, we are unable to agree with the learned counsel. One of the conditions for forming a valid trust is that there must be "trust property" and which in the present case is the "residual estate" mentioned on the Will and which is sought to be transferred to the appellant trust.
26. Can it be argued that the "DJ" is precluded from examining the document by which the amount comprising the "residual estate" was sought to be transferred to a trust and which in this case is the Will of late Smt. Prem Lata Dawar. The answer is in emphatic "No". More so when one of the arguments of the learned counsel was that any violation of the terms of the Will could be settled in the Court by an aggrieved party by filing a suit. If this proposition was to be accepted then it would mean that on the one hand there is trust granted registration under Section 12A and on the other hand the trust property itself is in jeopardy being the subject-matter of litigation between the beneficiaries of a Will. In our opinion such a situation is to be clearly avoided and we, therefore, hold on the facts of the present case that the "DI" was within his authority to examine the contents of the Will.
27. We now come to the other submissions made by the parties opining at the outset that the "DI" has taken a very narrow and hypertechnical view of the desire expressed by late Smt. Prem Lata Dawar in her Will.
According to him the amount of the residual estate could be donated for specified activities but not given to a non-existent trust.
28. According to us, the view of the "DI" is erroneous both on facts and in law. It is better left to the executrixes of the Will whether they want to dole out the funds as desired by the deceased in the form of donation or the same object is better achieved through the medium of a trust.
29. It may not be out of place to mention that even as per the Will, the amounts could be donated to other charitable, religious or philanthropic trusts. The "DI" opines that even this requirement is not fulfilled in the present case since the present trust was not in existence. In our opinion, it does not really matter on the present facts whether the funds are donated to an existing trust or the trust comes into existence consequent to the funds being given to it as "trust property". We must emphasise that at the moment, it is only the registration under Section 12A which is under consideration and subsequently the Department would examine whether exemption under Sections 11 and 12 is available on merits.
30. Would the Department have been satisfied and considered it as due compliance with the provisions of law in case a sum of Re. 1 would have been impressed as "trust property" and the "residual estate" than donated to the appellant trust As per the narration of the facts, in the order of the "DI" most probably "yes", since the trust would have come into existence with the sum of Re. 1.
31. In the final analysis, we hold that there is no violation of the mandate of the Will of late Smt. Prem Lata Dawar.
32. We now deal with some of the decisions relied upon by the parties observing at the outset that none of these refer to the newly inserted provisions of Section 12AA which came on the statute book w.e.f. 1st April, 1997.
33. In the case of Ananda Marga Pracharaka Sangha v. CIT (supra) their Lordships of the Hon'ble Calcutta High Court were considering a situation where the assessee had raised an argument that registration granted under Section 12A by the CIT operates retrospectively. Their Lordships opined that by the mere fact of grant of registration in the subsequent years, it could not be assumed that the requirements of Section 12A were fulfilled for the instant assessment year. It was with reference to these facts that it was observed that registration under Section 12A was not "an idle or empty formality".
34. In the case of M. Visvesvaraya Industrial Research & Development Centre v. ITAT and Anr. (supra) their Lordships of the Bombay High Court held that registration under Section 12A did not preclude an inquiry whether the income of the trust had been applied for charitable purposes in a particular year. This supports the view expressed in the earlier part of our order and even otherwise the newly inserted provisions of Section 12AA were not under consideration of their Lordships.
35. In the case of Fifth Generation Education Society v. CIT (supra) their Lordships held that registration under Section 12A was a precondition for availing the benefits under Sections 11 and 12 and at this stage, the CIT was not required to examine the application of income and all that he was to examine was whether the application was made in accordance with the requirements of Section 12A r/w Rule 17A of the IT Rules, 1962, and whether Form No. 10A had been properly filled up. Further, he was also to see whether the objects of the trust were charitable or not. We have already opined so in the earlier part of our order with reference to provisions of Section 12AA highlighting its comparison to Section 12A. Their Lordships of the Allahabad High Court observed that no activity needs to be carried on by the society for obtaining registration. This view squarely applies to the facts before us where provisions of Section 12AA are also under consideration.
36. In the case of Nachimuthu Industrial Association v. CIT (supra) the assessee had only appropriated out of its profit for the year ending 31st March, 1965 a sum of Rs. 3 lakhs and credited it to the "reserve for donation account" but had not actually spent or utilized the income for charitable purposes. The assessee claimed that in the immediately succeeding year it had donated a sum of Rs. 2.77 lakhs for various charitable purposes. The AO on the ground that provisions of Section 11 were not fulfilled rejected the assessee's claim and on further appeal, the AAC held that as there was no donation out of the income of the previous year, the assessee was not entitled to the deduction but he held that the assessee would be eligible for relief in respect of 25 per cent of the income, which could be accumulated for application in future for charitable purposes. The Tribunal, on further appeal, confirmed the view taken by the AAC and on a reference under Section 256(1), their Lordships confirmed the view taken by the Tribunal. The facts before us are entirely different and the aforesaid judgment would therefore, not be applicable.
37. In the judgment of Hanmantram Ramnath v. CIT (supra), their Lordships of the Hon'ble Bombay High Court took the view that mere entries in the books of accounts did not lead to the creation of the valid trust since there was no setting apart of an ascertained property and there was no evidence to show that the settlor had divested himself of the ownership. The facts before us are entirely different and this judgment would therefore not apply.
38. In the case of New Life in Christ Evangelistic Association (NLC) v.CIT (supra), the Hon'ble Madras High Court took the view that at the stage of grant of certificate under Section 12A, the only enquiry, which could possibly be made would be whether the applicant had made the application in time and whether the accounts of the society are maintained in the manner as suggested by the said section. It was held that the scope of enquiry could not go beyond this but it must be appreciated that in the present appeal, we are concerned with the changed position of law brought about by insertion of Section 12AA w.e.f. 1st April, 1997. This decision accordingly would not be applicable, 39. In the case of Laxminarayan Maharaj and Anr. v. CIT (supra), their Lordships of the Hon'ble M.P. High Court were examining a situation where there were no documents evidencing the creation of a trust but the assessee sought to place on record a number of documents evidencing the existence of a trust. Their Lordships remanded the matter back to the CIT directing him to reconsider the application of the trust for registration under Section 12A taking into account all those documents, which afforded a logical basis for inferring the creation of a trust.
This decision would not be applicable, in our opinion as in the present case there is not only the existence of a trust deed but also the Will of the deceased.
40. The decision of the Bangalore Bench of the Tribunal in the case of K. Narayana Setty Ramarathanamma Trust v. Asstt. CIT (supra) has been delivered on its own facts as that was a case in which the assessee charitable trust received donation of more than Rs. 8 lakhs through the executor of the Will of the founder and one of the trustees of the trust. The executor himself a trustee while making the said donation informed that the donation should be treated as towards the corpus of the trust. The AO held that since there was no such fact mentioned in the Will, the donation should be treated as having been received by the assessee-trust by way of mere voluntary contribution not forming part of the corpus of the trust. On appeal, the CIT(A) upheld the order of the AO. On the facts of the case, the Tribunal took the view that the amount in question had been contributed solely towards the corpus.
41. The judgment of the Hon'ble Delhi High Court in the case of Parivar Seva Sanstha (supra) relied upon by the learned counsel for the appellant pertains to the grant of continuation of approval under Section 80G(5)(vi) of the IT Act, 1961 and on the facts of the case, their Lordships took the view that the order of the CIT could not be sustained since the view expressed therein did not have any factual basis and must, therefore, be held to be perverse. In the case before us, there is no allegation of perversity either in the grounds raised or in the arguments advanced and as already highlighted by us, it is an opinion expressed by the "DI" on merits to reject the assessee's claim for registration under Section 12A.42. In the final analysis, taking into account the facts of the case as also the provisions of Section 12AA, we in the ultimate analysis hold that the action of the "DI" in refusing to register the applicant trust under Section 12A was not in order. We, therefore, direct the grant of registration. No other prayer has been made in the present appeal by the applicant and a perusal of the grounds raised before the Tribunal show that no other relief or direction is sought from us.