The Delhi High Court has held that charging a partial, subsidised or concessional amount for accommodation or services does not, by itself, make an institution’s activities commercial, observing that charitable services need not necessarily be provided free of cost.

The bench of Justice Dinesh Mehta and Justice Aditi Choudhary clarified that registration under Section 12A of the Income Tax Act, 1961 does not automatically entitle an institution to approval under Section 80G. The latter requires a separate examination of the applicable statutory conditions by the competent authority.

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The Bench upheld the direction to grant charitable registration to a foundation but set aside the Income Tax Appellate Tribunal’s direction granting Section 80G approval. It remanded the Section 80G application to the Commissioner of Income Tax (Exemptions), Delhi, for fresh consideration.

The foundation, incorporated under Section 8 of the Companies Act, 2013, applied for registration under Section 12A(1)(ac)(iii) of the Income Tax Act. It also sought approval under Section 80G to enable eligible donors to claim deductions on donations made to it.

The Commissioner rejected both applications through separate orders dated September 28, 2024. The authority considered the proposed activities commercial because the foundation intended to charge occupants for accommodation. The Commissioner also expressed an apprehension that the accommodation units might be sold outright.

The foundation challenged the rejection before the ITAT. After examining its objects, project proposal and other material, the Tribunal held that the inference of commercial activity was premature, particularly because operations had not yet commenced.

The Tribunal set aside the rejection orders and directed the Commissioner to approve both applications.

The department challenged those directions before the High Court. The Court also considered two connected writ petitions filed by the foundation.

The department argued that the proposed collection of rent supported the Commissioner’s conclusion that the foundation’s activities would be commercial.

It also relied on the possibility of outright sale of the units. According to the Revenue, since the project was still under development and operations had not begun, its charitable character could not be established with certainty.

The foundation contended that its purpose had to be assessed from its memorandum of association, constitutional documents and project proposal. It argued that a project could take years to become operational and that the absence of a final decision on accommodation charges did not justify an inference of commercial activity.

It further submitted that the apprehension about outright sale lacked evidentiary support. To address that concern, the foundation furnished an affidavit or undertaking before the Court stating that it would not sell the units outright to occupants.

The High Court agreed with the foundation on the issue of charitable registration.

It held that, at the initial stage of establishing a charitable organisation, the authority must examine its objects, project report and the purpose for which it has been formed.

The Bench observed that the mere possibility of recovering charges for accommodation or services could not establish that the proposed operations would be commercial.

Explaining the distinction, the Court stated, “charitable activity does not necessarily mean that services have to be given for free.”

The Court recognised that charging a partial, subsidised or concessional amount could also constitute charitable activity.

It therefore held that the Commissioner had erred in rejecting the Section 12A application, particularly in view of the undertaking that the accommodation units would not be sold outright.

The Revenue’s challenge to the Tribunal’s direction granting charitable registration was consequently rejected.

The Court reached a different conclusion on the Tribunal’s direction concerning Section 80G.

It held that the parameters governing registration under Section 12A and approval under Section 80G are different. While Section 12A registration involves a preliminary examination of the institution’s objects, the inquiry under Section 80G requires deeper scrutiny because of the tax benefits associated with eligible donations.

The Bench noted that the material considered by the Tribunal was confined to the project proposal. That material could support the direction concerning charitable registration, but it did not justify directing Section 80G approval without the necessary inquiry by the Commissioner.

The Court emphasised that the acceptance of a Section 12A application does not automatically require acceptance of a Section 80G application. An institution must independently satisfy the applicable prerequisites under the third proviso to Section 80G(5).

The High Court noted that the Commissioner had rejected the Section 80G application because the Section 12A application had been rejected.

However, reversing the rejection of charitable registration did not dispense with the separate examination required for Section 80G approval.

The Court held that the Tribunal could not direct approval merely on the strength of the project proposal when the competent authority had not conducted the requisite inquiry. It accordingly set aside the Tribunal’s order in ITA concerning Section 80G.

The High Court restored the Section 80G application to the Commissioner for a decision in accordance with law.

The Commissioner was directed to decide the application within 30 days of a certified copy of the judgment being placed before the authority. The foundation was permitted to submit a detailed representation and any additional material on which it wished to rely.

Disposing of the connected writ petitions, the Court directed the Commissioner to grant registration under Section 12A(1)(ac)(iii) forthwith and separately decide the Section 80G application as directed.

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