The Bombay High Court has ruled that a public charitable trust is deemed irrevocable by operation of law unless the instrument of trust expressly provides for a power of revocation. The absence of an explicit irrevocability clause is not a ground for rejecting an application for registration or renewal under section 12AB of the Income Tax Act.
For trusts registered under the Maharashtra Public Trusts Act, 1950 (MPT Act), the statutory framework (including sections 22(3A), 22(3B), and 55) ensures that assets can never revert to the settlor, making them inherently irrevocable for the purposes of the Income-tax Act, added the Court.
Further, the Court clarified that the absence of a dissolution clause in a trust deed is not a valid ground for rejecting registration, as there is no such requirement in the Act, and state laws like the MPT Act provide a mechanism for the application of assets upon dissolution.
At the same time, procedural form cannot be used as a tool to coerce applicants into making incorrect declarations that are then used to their detriment. Thus, rejecting an application by treating a forced answer in Form 10AB as ‘false or incorrect information’ is arbitrary, illegal, and not a valid ground for rejection, added the Court.
The Division Bench comprising Justice B. P. Colabawalla and Firdosh P. Pooniwalla observed that a plain reading of section 12AB does not contain any condition that a trust deed must have an explicit irrevocability clause for registration to be granted. The Respondent’s reliance on sections 60 to 63 of the Act was deemed misplaced. The Bench clarified that for a transfer to be ‘revocable’ under section 63, the instrument must contain a positive provision for re-transfer or give the transferor a right to re-assume power.
Silence in the deed implies irrevocability, not revocability, the Bench held that it is a settled principle of law that a trust is irrevocable unless the trust deed expressly reserves a power of revocation.
The Bench’s interpretation was further fortified by the provisions of the MPT Act, under which the Petitioner trusts are registered. It was noted that once property is dedicated to a public charitable purpose, the settlor is divested of the property, and the assets can never revert to the settlor. Even if a trust registered under the MPT Act is revocable and is revoked, sections 22(3A) and 22(3B) of the MPT Act mandate that the assets are taken over and the sale proceeds are deposited in the Public Trusts Administration Fund, preventing any re-transfer to the settlor.
Further, Section 55 of the MPT Act, which provides for the application of the cy-pres doctrine, ensures that upon failure of the original object, the property is applied to another charitable object and does not revert to the settlor.
The Bench also reiterated that the absence of a dissolution clause is not a valid ground for rejecting registration under section 12AA, as the statute does not require it and the MPT Act (section 55) takes care of such a contingency. The Bench noted that the Ministry of Finance itself had stated in a reply to the Public Accounts Committee that in states like Maharashtra, where specific legislation bars the reversion of assets, the inclusion of a dissolution clause is ‘neither necessary nor legal’.
Further, the Bench found it undisputed that the online utility for Form 10AB compelled applicants to answer ‘Yes’ to the question, ‘Whether the trust deed contains clause that the trust is irrevocable?’. If ‘No’ was selected, the system would not allow the form to be filed, displaying an error message. The Bench deemed this to be completely arbitrary, as a system cannot be designed to prevent an applicant from filing an application with correct particulars, especially when the form contains a verification clause for truthfulness.
Lastly, the Bench held that penalising a taxpayer for a situation created by a utility designed by the Department itself is a violation of all legal principles. It ruled that using this forced declaration to reject the application on the grounds of furnishing ‘false or incorrect information’ under section 12AB(4) is unjustifiable. The Bench also noted that the trusts’ subsequent assertion of being irrevocable was a bona fide and legally correct belief, given that the absence of a revocation clause renders a trust irrevocable, and therefore, it cannot be considered false information.
Briefly, the petitioners are a group of public charitable trusts and two bodies representing tax practitioners, and were registered under the Maharashtra Public Trusts Act, 1950 (MPT Act) and had been granted registration under sections 12A/12AB of the Income-tax Act, for several years. It had filed a petition challenging the action of the Commissioner of Income Tax (Exemptions) in rejecting the applications filed by these trusts for the renewal of their registration under section 12AB of the Act.
The rejections were primarily based on two grounds: first, that the trust deeds did not contain an explicit clause stating the trust is ‘irrevocable’ or a clause for the manner of dissolution; and second, that the applicants, by answering ‘Yes’ to a mandatory question in the online Form 10AB about the existence of an irrevocability clause (which was necessary to submit the form), had furnished ‘false or incorrect information’, constituting a ‘specified violation’.
Appearances:
Senior Advocate Percy Pardiwalla, along with Advocates Dharan Gandhi and Aanchal Vyas, for the Petitioner/ Taxpayer
Advocate Arjun Gupta, for the Respondent/ Revenue
