BCAS Raises Concern Over Mandatory ‘Irrevocable Clause’ for Charitable Trust Re-registration

The Bombay Chartered Accountants’ Society recently issued a representation to the Revenue Secretary, the Ministry of Finance, the Central Board of Direct Taxes, and the Government of India regarding the renewal of registration under section 12A of the Income Tax Act, 1961.

BCAs added that when a public charitable trust applies under section 12AA to renew its tax registration, the form asks whether the trust deed clearly says that the trust cannot be irrevocable.

Many old trusts were created long ago, before this question even existed, so their deeds don’t mention this in so many words even though, legally, they still cannot be cancelled. Because the online form doesn’t allow the process to continue if the answer is “No,” trusts are forced to say “Yes.”

On scrutiny of the applications, the Office of the Commissioner of Income Tax (Exemption) directs trusts to change their trust deeds to add an “irrevocable” clause, even though the trust is already considered irrevocable under the law.

The Supreme Court, in the case of CIT vs. S. Raghbir Singh (1965), has clarified the legal position on this issue. The Court held that where a trust deed does not contain any provision allowing the trust to be cancelled, the property to be taken back, or control to be resumed by the settlor, such a trust cannot be treated as revocable. Accordingly, the correct approach is to examine whether the trust deed contains any clause that permits revocation. Therefore, the focus should be on checking whether the trust deed includes any provision that allows the trust to be cancelled or reversed, rather than on whether the deed specifically states that the trust is irrevocable.

Several High Courts have ruled in the following cases that a trust does not need to specifically include a dissolution clause in its trust deed in order to be granted registration.

Geeta Lalwani Foundation v. DIT, 2018 (7), TMI 2053 Bombay HC

CIT(E) vs. Setco Foundation, 2019(2) TMI 532-Bombay

CIT v. Tapagachha Sangh Mota, TS-251-HC-2015 (Guj)

CIT v. Shree Durga Mata Mandir, 2020 (3) TMI 501 – Punjab & Haryana HC

CIT(E) v. Shri Narsinghji Ka Mandir, 2019-TIOL-2110-HC-RAJ-IT

Under the Maharashtra Public Trust Act, if a charitable trust is no longer able to carry out its original purpose, the Charity Commissioner can decide that the trust’s income or property should be used for some other similar charitable purpose. However, even in such situations, the trust itself cannot be cancelled or dissolved, which shows that public charitable trusts are meant to continue permanently.

In other states as well, a trust is allowed to use its income or assets only for the purposes stated in its trust deed. The money or property of the trust cannot be given back to the person who created the trust or distributed among any individuals, which reinforces the charitable and non-revocable nature of such trusts.

If renewal of registration is denied for such trusts, it would lead to avoidable legal disputes and court cases and seriously disrupt the working of many well-established and respected charitable organizations that rely on this registration to carry out their activities smoothly.

Bombay Chartered Accountants’ Society requests senior tax authorities to issue clear instructions stating that when a public charitable trust applies for re-registration, it should not be compulsory for the trust deed to specifically mention that the trust is “irrevocable.” Instead, the tax officer should carefully review the trust deed and other submitted documents to decide whether the trust is, in substance, permanent and cannot be cancelled, even if such a clause is not written.

Click on the Link given below to read the full representation: