The Kerala High Court has held that the wrong selection of section 10(23c) instead of Section 12AB of the Income Tax Act, 1961 requires fresh examination under CBDT Circular.

The bench of Justice Devan Ramachandran and Justice Basant Balaji has set aside the orders of the Income Tax Appellate Tribunal (ITAT) and the Commissioner of Income Tax (Exemptions), directing fresh consideration of a trust’s claim for registration under Section 12A/12AB of the Income Tax Act from 1 April 2021.

The appellant trust contended that it had originally been registered under Section 12A of the Income Tax Act as far back as 23 March 1988. However, during the migration to the new registration regime introduced under the Income Tax Act, an error allegedly occurred while filing an online application for provisional registration for the assessment year 2020-21. According to the trust, Section 10(23C) was inadvertently selected instead of Section 12A/12AB, resulting in registration being granted under the wrong provision. 

The trust subsequently obtained a final registration under Section 10(23C) on 22 September 2021, valid up to March 2024. Upon realizing the mistake, it surrendered the registration and applied afresh for registration under Section 12A, relying upon CBDT Circular No. 7/2024 dated 25 April 2024. 

According to the trust, while a fresh registration was eventually granted, it was effective only from 2023-24, leaving a gap for earlier years, particularly Assessment Year 2022-23, thereby depriving it of exemption benefits under Sections 11 and 12. 

The dispute reached the ITAT, Kochi Bench, where the trust sought recognition of registration from an earlier date. The Tribunal rejected the plea, holding that registration under Section 12A could not be granted with retrospective effect. 

Aggrieved by the decision, the trust approached the Kerala High Court.

The appeal raised important legal questions, including:

• Whether exemption under Sections 11 and 12 could be denied despite filing Form 10AB within the extended period permitted under CBDT Circular No. 7/2024.
• Whether denial merely because an earlier application was filed under the wrong statutory provision violated the principle of “substance over form.”
• Whether a curable procedural defect could deprive a genuine charitable institution of statutory benefits.
• Whether the authorities had failed to properly consider the impact of CBDT Circular No. 7/2024. 

The Income Tax Department argued that CBDT Circular No. 7/2024 would apply only where an application had been rejected because it was filed under the wrong provision or beyond the prescribed time limit.

According to the Department, the trust’s original application under Section 10(23C) had not been rejected but had in fact been accepted and registration granted. Therefore, the Circular could not be invoked to seek retrospective benefits. 

The Court noted that the trust had indeed enjoyed registration under Section 12A since 1988 and that there was at least a possibility that the subsequent application had been made under the wrong provision due to an error. However, the Court observed that there was insufficient material on record to conclusively establish the alleged system error. 

Importantly, the Bench found that the impact of CBDT Circular No. 7/2024 had not been properly examined by the authorities. The Court also observed that this specific contention had not been effectively considered by the ITAT while deciding the appeal. 

The Court remarked that if the trust’s original application had been rejected because it was filed under an incorrect section code, the Circular could potentially have enabled a fresh application and restoration of benefits. The peculiar circumstance in the present case was that the application had been allowed under the wrong provision and later surrendered. 

Holding that the matter required fresh examination, the High Court allowed the appeal and set aside both the ITAT order and the order passed by the Commissioner of Income Tax (Exemptions). The Court directed the Commissioner to reconsider the trust’s application and specifically evaluate the applicability of CBDT Circular No. 7/2024 and the trust’s argument that surrender of the incorrectly granted registration should be treated as equivalent to rejection of an application filed under the wrong statutory provision. 

While granting relief to the trust, the High Court clarified that it was not expressing any final opinion on the merits of the claim. The Court expressly stated that its observations should not be construed as entitling the trust to registration from 2021 as a matter of right. Instead, all contentions must be independently examined by the Commissioner while passing a fresh order. 

The Commissioner of Income Tax (Exemptions) has been directed to complete the reconsideration exercise within three months from receipt of the judgment.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: Pre-29 March 2022 Faceless Reassessment Orders Valid: ITAT