Section 12

Section 12 — the law in short

What the courts have decided on section 12, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• ACIT v Ahmedabad Urban Development Authority Supreme CourtCuts both ways
  We charge fees for our public utility work. Does that cost us charitable status under s.2(15)?
  Only if the fees are pitched above cost. Charging on a cost or nominal mark-up basis is not trade, commerce or business; charges noticeably higher than cost are. Even permissible commercial activity must be carried on in the actual course of achieving the general public utility object, and receipts from it must stay within 20 per cent of total receipts.
• Ananda Social and Educational Trust v CIT Supreme CourtHelps taxpayerNo later treatment found
  Our trust was formed weeks ago and has done nothing yet. Can registration be refused for that?
  No. Registration cannot be refused merely because a newly formed trust has not started activities. 'Activities' includes proposed activities, so at the registration stage the Commissioner looks at whether the objects are genuinely charitable and whether the proposed activities are genuine.
• Radhasoami Satsang v CIT Supreme CourtHelps taxpayer
  The department accepted your position for years and has now reversed it. Can it?
  Not without a material change. Res judicata does not strictly apply between years, but where a fundamental aspect running through several years has been found as a fact and allowed to stand, it should not be changed in a later year.
• CIT (E) v IILM Foundation High CourtHelps taxpayerNo later treatment found
  Our trust pays a salary to its chairperson, who is a trustee. Does that cost us the s.11 exemption?
  No, provided the salary is no more than what the services are reasonably worth. Section 13(2)(c) is not a bar on paying a specified person at all: it deems a salary to be application for that person's benefit only to the extent it is in excess of what may reasonably be paid for the services, so a payment that is reasonable for the service is not caught by s.13(1)(c) at all. The Delhi High Court answered both questions of law against the revenue and dismissed its appeals. Note what was not in issue: the reasonableness of the Rs 16,20,000 salary had been found below and was not contested before the High Court, which recorded that there was no cavil about it, so the decision is on the legal point and not a finding on the facts of this trust's remuneration.
• CIT (E) v Hamdard National Foundation (India) High CourtHelps taxpayer
  The officer says we let our building to a related party below market rent. Is that by itself a breach of s.13(2)(b)?
  No, not by itself. The burden of showing that the rent was inadequate is on the Department, and the market rate is not the only yardstick. Where the rent charged was higher than the valuation the municipal corporation had adopted for house tax, and the officer's only material was enquiries from estate agents and figures picked off the internet, the Delhi High Court held that s.13(2)(b) was not attracted and the s.11 exemption stood.
• Trust for Reaching the Unreached v CIT High CourtHelps taxpayer
  Our audit report was not e-filed with the return and exemption was denied. Can the delay be condoned?
  Yes. The requirement to furnish the audit report with the return is procedural and directory, so exemption under ss.11 and 12 cannot be refused merely for late filing. The Commissioner's refusal to condone was set aside because the s.119(2)(b) discretion must be exercised equitably and judiciously, not on an exclusively pro-revenue view.
• Society for Human Transformation and Research v ITO (Exemptions) ITATHelps taxpayerNo later treatment found
  My trust gave interest-free or low-interest advances to entities connected with its trustees. The Assessing Officer has treated the interest not charged as a benefit to specified persons, disallowed it under s.40A(2)(a) and denied exemption on the whole income. Can he do that?
  Not on this record. Where the counterparties are themselves institutions registered under s.12A and s.80G and there is no material showing that any specified person derived a personal benefit, the transactions do not establish diversion of charitable funds for private benefit, and s.13(1)(c) is not attracted. Section 40A(2)(a) cannot be used at all: it disallows excessive or unreasonable expenditure paid to a related party in the course of business or profession, and does not authorise an addition for interest the trust failed to charge.
• Gujarat Maritime Board v DCIT (Exemption), Ahmedabad ITATCuts both waysNo later treatment found
  The Assessing Officer says my statutory authority's port charges and lease rentals are trade or business, so the proviso to s.2(15) denies exemption. How is that tested after Ahmedabad Urban Development Authority?
  The size of the receipts and of the surplus is not the test. Applying the Supreme Court's framework in Ahmedabad Urban Development Authority, the Tribunal held that what matters is the statutory setting in which the receipts arise, the nature of the functions discharged, the manner in which the charges are fixed and regulated, and the destination of the surplus — and on that footing the Board continued to fall within 'advancement of any other object of general public utility' and remained entitled to exemption under ss.11 and 12.
• CMR Engineering Educational Society v DCIT ITATHelps taxpayerNo later treatment found
  After a search the PCIT (Central) has cancelled my society's registration under s.12AB(4) for a 'specified violation', relying on loose sheets and statements. Does he have to prove one of the listed violations, or is a general finding of misuse enough?
  He has to prove one of the listed violations. Section 12AB(4) as amended by the Finance Act 2022 is not a general power to withdraw registration: cancellation can follow only on the occurrence of one or more of the 'specified violations' defined in the Explanation to that sub-section, and the onus of establishing that occurrence lies on the Department. Suspicion, however strong, will not do.
• MAA Sharda Kothari Foundation v CIT (Exemption), Ahmedabad ITATHelps taxpayerNo later treatment found
  The CIT(E) rejected my Form 10AB as premature because the trust had not yet started activities or received donations. Can he do that?
  No — not on that ground alone. Section 12A(1)(ac)(iii) fixes only the outer date by which a provisionally registered trust must apply for regular registration; it contains no bar on applying earlier, and rejecting an application as premature because activities had not commenced by the date of filing is not in accordance with the legislative intent of that clause read with s.12AB(1)(b).
• Versova Kokni Sunni Jamat Trust v CPC ITATHelps taxpayerJudgment not reachable
  We have no 12A registration. Is a corpus donation given for buying property taxable in our hands?
  No. A voluntary contribution made with a specific direction that it form part of the corpus is a capital receipt, and that character does not depend on the trust holding registration under s.12A or s.12AA. The addition of Rs 8,99,811 was deleted.
• Gram Sewa and Viklang Shayta Sanstha v DCIT ITATHelps taxpayerNo later treatment found
  The trust's Form 10B did not go with the return and the exemption has been refused. Does filing it in answer to the s.139(9) notice save the claim?
  Yes. The Tribunal held that the authorities were not justified in refusing the exemption under s.11 where the assessee had filed the audit report in answer to the defect notice under s.139(9) and before the assessment proceedings were completed. A highly technical view of the timing defeats the purpose of the requirement where substantive compliance has been made.
• CBDT Circular No. 2/2024 — audit report filed in the wrong form CBDT Circulars & InstructionsHelps taxpayerNo later treatment found
  For AY 2023-24 my trust filed Form 10B when Form 10BB was the right form. Is there a CBDT relaxation, and what exactly does it cover?
  Yes, but it is narrow. By Circular No. 2/2024 dated 5 March 2024 the CBDT allowed trusts and institutions that had furnished an audit report on or before 31 October 2023 in Form No. 10B where Form No. 10BB was applicable, and vice versa, to furnish the audit report in the applicable form for AY 2023-24 on or before 31 March 2024. It covers only AY 2023-24, only a wrong-form filing that was itself made by 31 October 2023, and the window it gave has closed.
• Statutory position — s.164: the maximum marginal rate where beneficiaries' shares are indeterminate, and every proviso that takes a trust out of it, in sequence CBDT Circulars & InstructionsCuts both ways
  Our discretionary trust has been charged at the maximum marginal rate under section 164 because the beneficiaries' shares are not fixed. What exactly takes a trust out of that rate, and does it help that the trust was created by my father's will?
  Section 164(1) charges the relevant income at the maximum marginal rate where income for which a section 160(1)(iii) or (iv) representative is liable is not specifically receivable on behalf of any one person, or where the individual shares of the persons for whose benefit it is receivable are indeterminate or unknown. The FIRST PROVISO takes a case out of that rate — not into exemption, but into tax 'as if it were the total income of an association of persons' — in four situations, and only four: (i) none of the beneficiaries has any other income chargeable under the Act exceeding the maximum amount not chargeable to tax in the case of an association of persons, and none is a beneficiary under any other trust; (ii) the relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him; (iii) the relevant income is receivable under a trust created before 1 March 1970 by a non-testamentary instrument which the Assessing Officer is satisfied was created bona fide exclusively for the benefit of the settlor's relatives, or, where the settlor is a Hindu undivided family, of the members of that family, in circumstances where they were mainly dependent on the settlor for support and maintenance; or (iv) the relevant income is receivable by trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in that business or profession. The SECOND PROVISO then cuts all four down where there is business income: where the income of a section 160(1)(iv) trustee consists of, or includes, profits and gains of business, the first proviso applies only if those profits and gains are receivable under a trust declared by a person by will exclusively for the benefit of a relative dependent on him for support and maintenance, and that trust is the only trust so declared by him.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.