Charitable trusts get Bombay HC relief in registration dispute with I-T department

In a significant relief to charitable trusts, the Bombay high court has held that registration under Section 12AB of the Income-tax (I-T) Act cannot be denied merely because the trust deed does not contain an explicit irrevocability clause.

Without such registration the trust cannot claim tax exemption.Several rejection orders passed by the I-T department now stand struck down, the high court has directed the I-T department to reconsider these applications within six weeks.The high court quashed the rejection orders not only in the petitioners’ cases but also in all similarly placed matters and directed the department to decide the applications afresh in accordance with the judgment.

According to tax professionals, this would benefit a large number of charitable trusts.The order, related to a writ petition filed by the Chamber of Tax Consultants, the Bombay Chartered Accountants’ Society and several public trusts engaged in charitable medical and education spheres, after the Commissioner of I-T (Exemptions) rejected renewal applications on the ground that the trust deeds did not expressly state that the trusts were irrevocable.

Under tax laws, an irrevocable trust is one in which the settlor has permanently transferred the assets to the trust and cannot reclaim them. The I-T department had insisted that trust deeds must explicitly state this. The petitioners argued that it is a settled principle of law that a trust (whether private or charitable) is irrevocable unless the trust deed expressly reserves a power of revocation.The issue arose after the I-T department began to reject registration applications filed in Form 10AB for not having an irrevocability clause in the trust deed.

The tax department also treated the reply in the form as incorrect when trusts answered ‘Yes’ that such a clause existed. Trusts said the online form did not allow submission unless that option was chosen.A division bench of the Bombay high court held that neither Section 12AB nor the earlier registration regime requires the presence of an explicit irrevocability clause and that the I-T department had attempted to read a condition into the statute which does not exist.The court accepted the trusts’ contention that, in law, a public charitable trust is presumed to be irrevocable unless the deed specifically provides otherwise, and that silence in the deed cannot be treated as revocability. It also noted that under the Maharashtra Public Trusts Act, trust assets cannot revert to the settlor and must continue to be used for charitable purposes, making such trusts inherently irrevocable.The bench further observed that the Income-tax Act already contains safeguards, including provisions denying tax exemption where the income benefits interested persons and has exit-tax rules on dissolution of the trust. Thus, rejection of registration on technical grounds by the I-T department was unjustified.Importantly, the court also took note of the practical difficulty created by the e-filing software utility and directed the I-T authorities to modify the form so that trusts are not compelled to make incorrect declarations.