 Legal Series Vol.

VIII  Issue 8  November 2015 For private circulation only

CAN 12AA BE REJECTED FOR ABSENCE

OF SOME CLAUSES IN THE TRUST DEED

Authors* :
Dr. Manoj Fogla
Dr. Sanjay Patra, ED, FMSF

* The Authors can be contacted at mfogla@yahoo.com

  Legal Series Vol. VIII  Issue 8  November 2015 For private circulation only

CAN 12AA BE REJECTED FOR ABSENCE

OF SOME CLAUSES IN THE TRUST DEED

CONTENTS

1. INTRODUCTION 01

2. SHOULD AMENDMENT IN TRUST DEED

BE SUBJECT TO PRIOR APPROVAL OF CIT 01

3. EVEN A COMPETENT COURT DOES NOT HAVE

THE RIGHT TO APPROVE AMENDMENT IN TRUST DEED 04

4. IF THE CHANGES ARE EXECUTIVE IN NATURE

WITHOUT AFFECTING THE PRIMARY OBJECT 04

5. CLAUSE REGARDING ACTIVITY OUTSIDE INDIA 04

6. A CLAUSE THAT ON DISSOLUTION THE PROPERTIES SHALL GO

TO ANOTHER ORGANISATION REGISTERED UNDER SECTION 12AA 06

7. INVESTMENT SHALL BE MADE ONLY IN ACCORDANCE

WITH THE PROVISIONS OF SECTION 11(5) 07
 CAN 12AA BE REJECTED FOR ABSENCE OF SOME CLAUSES IN THE TRUST DEED

INTRODUCTION

1.1.1 It has been noticed that the Commissioner of Income Tax (Exemptions) insists on certain
untenable clauses in the Trust Deed or the Memorandum of Association. There have
been several instances where the application for 12AA registration has been rejected
due to the absence of some specific clauses in the Trust Deed. Some of such clauses
are as under:

- Any amendment in the Trust Deed shall be subject to prior approval of CIT

- The activity of the organization shall be confined to India only.

- The investment shall be made specifically in compliance with section 11(5) of

the Income Tax Act.

1.1.2 In this issue we shall discuss the legal and technical aspects pertaining to such clauses
and whether it is legally necessary to have such clauses.

SHOULD AMENDMENT IN TRUST DEED

BE SUBJECT TO PRIOR APPROVAL OF CIT

1.2.1 Whether 12AA registration be denied if amendment in Trust Deed is subject prior
approval of CIT. Or can 12AA registration be cancelled if amendment in Trust Deed
is not intimated to the CIT. These are controversial issues and has been a subject
matter of dispute. However the law is very simple and provides that cancellation of
12AA registration cannot be made only if there was a change in the Trust Deed and
was not intimated to the CIT, unless:

(i) The changes are substantial and affect the charitable or religious character.

(ii) The changes bring any clause pertaining to commercial activity.

1.2.2 The Bhansali Trust (supra) case relied on the decision of the Mumbai Bench of the
Tribunal in the case of Mehta Jivraj Makandas & Parekh Govindaji Kalyanji Modh
Vanik Vidyarthi Public Trust v. DIT (Exemption) [2011] 131 ITD 462/12
taxmann.com 335 where it was held that there is no statutory requirement of intimating
the change in objects to the DIT (Exemption). It is further pointed out that the Mumbai
Tribunal in the case of Mehta Jivraj Makandas & Parekh Govindaji Kalyanji Modh

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Vanik Vidyarthi Public Trust (supra) that there was no provision or judicial precedence
to suggest that a Trust will cease to avail benefits of Section 11 only because there
was amendment in the Trust Deed.

1.2.3 In the case Mehta Jivraj Makandas & Parekh Govindaji Kalyanji Modh Vanik Vidyarthi
Public Trust v. Director of Income-tax (E) [2011] 12 taxmann.com 335 (Mum.) it was
held that there was no statutory requirement for intimation of any changes in the trust
deed, particularly if the primary objects and character of the trust is not altered.
Further the CIT cannot insist on a clause in the Trust Deed which provides that any
amendment in Trust Deed shall be subject to prior approval of CIT. In the case Income-
tax Officer, (E) 1 (1), Mumbai v. Bhansali Trust [2015] 63 taxmann.com 56 (Mumbai
- Trib.) it was held that mere non-intimation of amendments in trust deed to department
cannot ipso facto lead to cancellation of registration under section 12AA(3) because
the statutory requirement of cancellation of registration contained in section 12AA(3)
prescribes that the cancellation of registration cannot be effectuated unless a case is
made out that the new objects do not fit in with the existing objects, i.e., new objects
are ‘non-charitable’ in nature or that the activities are not genuine. In other words,
any legitimate amendment in the Trust deed does not result in any reason for
cancellation on the part of the Commissioner of Income Tax unless such amendment
results in violation of the conditions of section 12AA read with section 11. If after the
amendment the Trust Deed is valid and eligible for exemptions it is not necessary to
take prior approval of the CIT. The relevant extract is as under :

“The original object of the trust of providing hostel accommodation to the

students had not been deleted. The object had only been modified so as
to include other deserving students also in addition to the students of Modh
community. There was only one addition in the objects which was to provide
medical aid to the poor and deserving persons of any community. Thus
even the amended objects remained charitable and had not caused any
detriment to the original objects as students of the Modh community
continued to be eligible for the benefits. Further the trust had already
been granted exemption under section 80G based on the amended objects
for the subsequent period. There is no statutory requirement of intimating
the changes to the Income-tax Department. The requirement of intimation
is mentioned only in the Form No. 10A and even in the Form No. 10A there
is no time limit prescribed. The assessee had already intimated the changes
to the department though later and, therefore, technically there was no
violation on the part of the assessee because of no time limit being
prescribed. Moreover, there being no statutory requirement of intimating
changes, registration could not be cancelled or the trust could not be

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declared invalid only on the ground that changes were not intimated.
[Para 9]”

1.2.4 In the case Income-tax Officer, (E) 1 (1), Mumbai v. Bhansali Trust [2015] 63
taxmann.com 56 (Mumbai - Trib.) it was held that mere non-intimation of amendments
in trust deed to department cannot ipso facto lead to cancellation of registration
under section 12AA(3). In both the above cases the decision of Hon’ble High Court
of Allahabad in case of Allahabad Agricultural Institute v. Union of India [2007]
291 ITR 116/163 Taxman 67 was distinguished. In this case the assessee made
wholesale changes in the objects of trust deed (6 original object clauses were replaced
with 14 new clauses), the assessee had been granted registration under section 12A
based on certain objects. Subsequently there were changes made in the objects
which were not intimated to the department. The Assessing Officer therefore held
that the registration granted under section 12A was not valid and thus did not grant
exemption under section 11 of the Income-tax Act. The decision of the Assessing
Officer was challenged in a writ petition under article 226 of the Constitution. The
Hon’ble High Court noted that there were wholesale changes in the objects.

1.2.5 Similarly in the case Board of Control for Cricket in India v. ITO [2012] 22

taxmann.com 29/136 ITD 301 (Mum) the changes were substantive, which included
amendment of rules and regulations providing for promotion of commercial interests
towards administration of IPL Championship League, etc. In the decision of the Mumbai
Bench of the Tribunal in the case of Board of Control for Cricket in India (supra) the
amendments in the Memorandum of Association were found to be ‘substantial and
material changes’ and, therefore, the Tribunal opined that such activities were required
to be examined by the income tax authorities so as to enable the assessee to continue
availing the benefits of section 11/12 of the Act. It was found that the amendments
to the Memorandum of Association included amendment of rules and regulations
providing for promotion of commercial interests towards administration of IPL
Championship League, etc. which resulted in carrying on of any commercial activity
by the assessee.

1.2.6 A Trust Deed is a permanent constitutional document and cannot be drafted only
from the point of view of section 12AA of the Income Tax Act. There are many other
sections under which exemptions can be claimed, for example 10(23C)(iiiac),
10(23C)(iiiad), 10(23C)(iv), 10(23C)(v), 10(23C)(vi). In future also the Trust may be
subjected to exemptions under some other sections even if it is registered under section
12AA.

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EVEN A COMPETENT COURT DOES NOT HAVE

THE RIGHT TO APPROVE AMENDMENT IN TRUST DEED

1.3.1 The CIT(E) does not have any power to allow or approve amendment to the Trust
Deed. It has to be understood that even a Court of law does not have the power to
amend the Trust Deed. Not to discuss about the Trustees or any authority. In the case
of CIT v. Kamla Town Trust [1996] 217 ITR 699/84 Taxman 248 (SC) it has been
held that any change in trust deed is not possible unless the deed itself provides for
such change. Approaching the registrar shall only be relevant if a change is legally
permissible. The Civil Court has power to direct changes in the trust deed only in the
spirit of the Doctrine of Cy pres which implies that the original intent of the settlor
should not fail. However, once a civil court allows an amendment, it is not open on the
part of the Assessing Officer to challenge such rectification.

IF THE CHANGES ARE EXECUTIVE IN NATURE

WITHOUT AFFECTING THE PRIMARY OBJECT

1.4.1 It is important to ensure that there is no change in the tone and tenor of the objects
pursued by the assessee in a real sense. The amendments should not result in major
changes in objects they can be enabling clauses which provide only 'means' or 'power'
to achieve objects in the Trust Deed. The Hon'ble Bombay High Court in the case of
Deccan Gymkhana (Oldesty Trust) v. CIT [2003] 262 ITR 459/131 Taxman 279
(Bom) as well as the judgment of Hon'ble Supreme Court in the case of CIT v. Federation
of India Chamber of Commerce & Industry [1981] 130 ITR 186/6 Taxman 7 has
laid down that a distinction has to be made between the 'purpose' of a Trust and the
'powers' conferred upon the Trustees as being incidental to accomplish the purpose
of the Trust. The amendments should only enable the Trustees to carry out activities
for accomplishing the purpose of the Trust, which is for a 'charitable purpose' as per
original Trust deed. Such amendments will not signify that the registration granted to
the assessee under section 12A of the Act is rendered nugatory.

CLAUSE REGARDING ACTIVITY OUTSIDE INDIA

1.5.1 It has also been noticed that the CIT(E) insists on a clause which prohibits activity

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outside India at the time of 12AA registration. It will be a grave error on the part of
the CIT(E) if he/she insists on a clause which prohibits activity outside India. Such
clause will be in direct contravention of the statute as well as against the available
judicial precedence as explained below:
 Section 11(1)(c) allows for activities outside India provided such activities are
notified or approved by CBDT. In other words if the Trust has a prohibitory
clause then how will it engage in approved charitable activities outside India.
 The provisions of section 11(1)(c) makes it very clear that if there is activity
outside India then income to that extent will become taxable. If activity outside
India is totally prohibited then this provision will become redundant and
meaningless.
 In a landmark case American Hotel & Lodging Association, Educational Institute
v. CBDT [2008] 170 Taxman 306, the Supreme Court held that an Trust is
expected to serve people of India, dominantly, if it is claiming tax exemptions
in India. In other words Supreme Court did not say that activity outside India is
totally prohibited. It further explained even if section 10(23C) is silent about
the place of the activities they have to be conducted primarily inside India
only.
 A Trust Deed is a permanent constitutional document and cannot be drafted
only from the point of view of section 12AA of the Income Tax Act. There are
many other sections under which exemptions can be claimed, for example
10(23C)(iiiac), 10(23C)(iiiad), 10(23C)(iv), 10(23C)(v), 10(23C)(vi). In future
also the Trust may be subjected to exemptions under some other sections even
if it is registered under section 12AA.
 The CIT(E) cannot use coercion to forcefully amend the Trust Deed. The CIT(E)
should understand that even a Court of law does not have the power to amend
the Trust Deed, forget about the Trustees. In the case of CIT v. Kamla Town
Trust [1996] 217 ITR 699/84 Taxman 248 (SC) it has been held that any
change in trust deed is not possible unless the deed itself provides for such
change. Approaching the registrar shall only be relevant if a change is legally
permissible. The Civil Court has power to direct changes in the trust deed only
in the spirit of the Doctrine of Cypres which implies that the original intent of the
settlor should not fail. However, once a civil court allows an amendment, it is
not open on the part of the Assessing Officer to challenge such rectification.
 In DIT (Exemption) v. Japan Chamber of Commerce & Industry in India [2009]
308 ITR 76 (Delhi), it was held that at registration level the issue of activity

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outside India is not relevant. It was observed that the question of exemption
under section 11/12 was to be dealt with separately by the Assessing Officer
at the time of the assessment for each year. In case any income of the assessee
is applied outside India, it goes without saying that the provisions of section 11
would apply and the Assessing Officer would deal with the situation accordingly.
Therefore, activity outside India cannot be a ground for rejection.
 In the case of M.K. Nambyar Saarc Law Charitable Trust v. Union of India
[2004] 140 Taxman 616 (Delhi) it was held that registration cannot be denied
to charitable or religious trust merely because income is applied outside India.
It was held that income applied by a trust or institution outside India is not a
relevant criterion for rejecting an application for registration under section
12Aand if income is so applied, then section 11(1)(c) will be applicable and if
permission is granted by the Board either by general or special order, then
benefit can be extended.

A CLAUSE THAT ON DISSOLUTION THE PROPERTIES SHALL GO

TO ANOTHER ORGANISATION REGISTERED UNDER SECTION 12AA

1.6.1 It has also been noticed that the CIT(E) insists on a clause providing that on dissolution
the properties shall go to another like minded organisations registered under section
12AA. Again it is incorrect to insist on insertion of a clause that on dissolution the
properties shall go to another like minded organisations registered under section
12AA, for the following reasons:
 There is nothing in the Income Tax to suggest that in case of the dissolution of a
Trust the properties shall go to another 12AA registered society. If there is a
clause regarding dissolution where on dissolution the properties are not
distributed to any private beneficiaries and are given to a likeminded
organisation, it would suffice. There is nothing in the Income Tax Act to suggest
that the properties cannot be given to another exempt organisation registered
under, say, under section 10(23C)(v) or (vi) provided the objects are similar.
 In the case of Disha India Micro Credit v. CIT [2011] TaxPub(DT) 873 (Del-
Trib)/[2011] 38 (II) ITCL 301, the assessee was a micro finance company
registered under section 25 of the Companies Act, 1956. It had applied for
registration under section 12A in Form No. 10A. The assessee.s application for
registration under section 12A was rejected by the CIT. The CIT had observed
that the various clauses of the Memorandum of the company would clearly

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show that the assessee had a motive of profit also, along with the stated motive
of service to the poor and needy people as claimed by the assessee. He
further observed that such profit even if to be ploughed back as claimed by
the assessee, liable to income-tax under IT Act. It was held that merely because
there was a surplus from the activity of micro financing, that by itself, cannot be
a ground to say that the assessee did not exist for charitable purpose
particularly when under the Memorandum of Association and Articles of
Association, it had been clearly provided that the profit shall not be distributed
amongst the members but shall be utilized towards its objects, and in the case
of dissolution, any property remaining after meeting out the liability shall be
transferred to the association having similar object. Therefore, the rejection of
the registration of trust on this score was also unjustified.

INVESTMENT SHALL BE MADE ONLY IN ACCORDANCE

WITH THE PROVISIONS OF SECTION 11(5)

1.7.1 It has also been noticed that the CIT(E) insists on a clause providing that investments
shall be only as per provisions of section 11(5).

1.7.2 Again a Trust Deed is a de facto perpetual document and a trust near may not avail
Income Tax exemptions in the long run, therefore it is legally incorrect to provide in
the Trust Deed any specific manner of investments under any specific section of a
particular statute. It is the right of the Trustees to make investment in a prudent manner.
If, however, the Trust is registered under section 12AA it has to invest as per provisions
of section 11(5). Whether the investment are in compliance with section 11(5) or not
is an assessment issue. If the CIT(E) forces a clause that no such investment shall be
possible then there will be no meaning of enacting section 13(1)(d) in the Act. It may
be noted that under section 13(1)(d) even if there is a violation then only the amount
of investment is taxed and 12AA registration is not withdrawn as per judicial
precedence. If investments are made in violation of section 11(5), the question is;
should the organisation lose its exemption under sections 11 and 12. In Gurdayal
Berlia Charitable Trust v. Fifth ITO [1990] 34 ITD 489 (Bom.), the Tribunal observed
that only the income from unapproved investment would be taxable at the maximum
marginal rate while the rest of the income would be exempt. However, in DIT
(Exemption) v. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533 the
Bombay High Court held that the maximum marginal rate of income-tax would
apply only to that part of the income which had forfeited exemption and not the

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 CAN 12AA BE REJECTED FOR ABSENCE OF SOME CLAUSES IN THE TRUST DEED

entire income. The statute seems to be in favour of complete denial of exemption.

CBDT in its explanatory circular to the insertion of sub-section (5) to section 13 confined
the denial of exemption only to the extent of the assets which turned out to be in
violation of section 11(5). In this circular, it was also stated that such confinement was
possible only in that particular circumstance and not otherwise. The extract of the
circular is as under :
 Modification of the provisions relating to charitable trusts -Section 13(1)(d) of
the Income-tax Act, as amended by the Finance Act, 1983, provides that
exemption from tax to a charitable or religious trust or institution will be forfeited
if any funds of the trust or institution are invested or deposited after 28-2-
1983, otherwise, then in any one or more of the forms or modes mentioned in
section 11(5) of the Income-tax Act. Assets not held in any one or more of the
permissible forms or modes including shares in companies were required to be
liquidated by 30th November, 1983. Exceptions were, however, made in
relation to assets received as corpus donation before 1st June, 1973, and in
relation to debentures of companies acquired before 1st March, 1983.
 With a view of removing hardship arising out of this scheme, a new
subsection (5) has been inserted in section 13 of the Income-tax Act to provide
that where the debentures of an Indian company are acquired by the trust or
institution after the 28th February, 1983, but before the 25th July, 1991, the
exemption from tax under section 11, will be denied only in respect of interest
on such debentures. If debentures are not disinvested by 31st March, 1992,
the trust or institution will lose exemption under section 11.
 Further, a new clause (iia) has been inserted in the proviso in clause (d) of sub-
section (1) of section 13 to secure that mere accretion to the existing holding of
shares by way of bonus shares or acceptance of donations in kind or any asset
not conforming to the provision of section 11(5) will not make the fund or trust
or institution lose tax exemption. The trusts or institutions will, however, be
required to dispose or convert the assets not conforming to the requirement of
section 11(5) into permissible investment within one year from the end of the
financial year in which such bonus shares or other assets are received on 31-3-
1992, whichever is later. These amendments take effect retrospectively from
1st April, 1983.

1.7.3 The circular allowed an exception by limiting the denial of exemption only to the
extent of the asset which turned out to be impermissible but were permissible at the
time of investment. Only under such circumstances, the limited denial was allowed,

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 CAN 12AA BE REJECTED FOR ABSENCE OF SOME CLAUSES IN THE TRUST DEED

thus implying that it would not be available otherwise. In the case of DIT v. Agrim
Charan Foundation [2001] 119 Taxman 569 (Delhi), it was held that innocent violation
of section 11(5) would not attract forfeiture of exemption. In this case the assessee
had invested in the fixed deposits of two companies which were not covered under
section 11(5). The investment was withdrawn when the assessee became aware of
such violation. The court held that violation without any mala fide intention will not
result in the forfeiture of exemption.

1.7.4 Therefore, under the prevailing law barring exceptions and innocent violations, it
seems that wilful violation of section 11(5) in prohibited investments will result in
forfeiture of entire income and the investments shall be taxed at maximum marginal
rate. However, in Gurdayal Berlia Charitable Trust v. Fifth ITO [1990] 34 ITD 489,
Bombay, the Tribunal observed that only the income from unapproved investment
would be taxable at the maximum marginal rate while the rest of the income would
be exempt.

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