Bombay High Court gives big relief to charitable trusts – No need for irrevocability clause in trust deed for registration
In a very important decision that will benefit thousands of charitable trusts across the country, the Bombay High Court has held that registration under section 12AB cannot be denied merely because the trust deed does not contain an express irrevocability clause or dissolution clause. The judgment has brought much-needed clarity on an issue which was creating serious difficulties for old trusts while applying for fresh registration or renewal under the new registration regime introduced from 01-04-2021.
The case before the Bombay High Court was filed by several charitable trusts along with professional bodies whose applications for renewal of registration under section 12AB were rejected by the Commissioner of Income Tax (Exemptions). The department had taken a stand that the trust deed must specifically contain a clause stating that the trust is irrevocable and must also contain a clause explaining how the trust property will be dealt with on dissolution. If such clause was not present, registration was being refused. In some cases, the rejection was also made on the ground that in Form 10AB the applicant had answered “Yes” to the question whether the trust is irrevocable, while the trust deed did not contain an explicit irrevocability clause. The department treated this as furnishing incorrect information and treated it as a violation under section 12AB(4).
Because of this approach, many old trusts were facing serious hardship. Several trusts were created 20, 30 or even 50 years ago, when such clauses were not normally included in trust deeds. At that time, registration under section 12A or 12AA was granted without any objection. However, while applying for renewal under the new law, the department started insisting on an express irrevocability clause and dissolution clause, failing which registration was denied.
The High Court examined the provisions of section 12AB and made it very clear that the law only requires the Commissioner to satisfy himself about the objects of the trust, the genuineness of activities and compliance with other applicable laws. The section nowhere requires that the trust deed must contain an irrevocability clause. The Court held that the Commissioner cannot impose a condition which is not found in the statute. If the law does not require a specific clause, registration cannot be refused for absence of such clause.
The department had relied on sections 60 to 63 of the Income Tax Act which deal with revocable transfer of assets and argued that exemption under section 11 is subject to these provisions and therefore the trust must be irrevocable. The High Court rejected this argument and explained that a transfer is treated as revocable only if the document itself contains a provision allowing the settlor to take back the property or to reassume control over the income or assets. If the trust deed is silent, it does not become revocable. On the contrary, the normal rule of law is that a trust is irrevocable unless there is an express power of revocation. Silence in the deed means the trust is irrevocable, not revocable.
The Court also gave great importance to the provisions of the Maharashtra Public Trusts Act. Under that law, once property is dedicated to a public charitable trust, it cannot go back to the settlor. Even if the trust is dissolved, the property cannot be returned to the founder but must be transferred to another charitable trust or to the Public Trusts Administration Fund. Because of this statutory scheme, the Court held that public charitable trusts registered under the State law are inherently irrevocable. Therefore, insisting on a separate irrevocability clause in the trust deed has no legal basis.
Another important point noted by the Court was the problem in the online filing system. In Form 10AB, the portal requires the applicant to answer whether the trust is irrevocable, and if the answer is “No”, the form cannot be uploaded. Because of this, applicants were compelled to answer “Yes” even when the deed did not contain an express clause. The Court held that the department cannot penalize the assessee for a defect in its own system.
The High Court also observed that the Income Tax Act already contains sufficient safeguards to prevent misuse of trust property. Section 13 denies exemption if income is used for the benefit of interested persons, and section 115TD imposes tax on accreted income on dissolution or conversion of trust. In addition, while granting registration, the department itself imposes conditions that assets cannot go to the settlor. In view of these safeguards, refusal of registration for want of an irrevocability clause was held to be unnecessary and unjustified.
The Court further noted that many trusts had already been granted registration earlier under section 12A, 12AA and even under the new section 12AB with the same trust deed. When there is no change in law or facts, the department cannot suddenly adopt a different interpretation and deny renewal. Such an approach was held to be arbitrary.
Accordingly, the Bombay High Court set aside the rejection orders and held that absence of an irrevocability clause or dissolution clause in the trust deed is not a valid ground for denying registration under section 12AB.
This decision is a major relief for charitable trusts, educational institutions, hospitals, religious trusts and NGOs across the country. Many pending cases where registration was refused on technical grounds are likely to be decided in favour of the trusts in view of this ruling. The judgment also sends a clear message that while examining registration of charitable trusts, the department must look at the substance of the trust and its activities, and not deny exemption on mere drafting defects in old documents.
The copy of the order is as under:
