Delhi High Court upholds reassessment on wrongful application by Trust on foreign contribution’s objective

Delhi High Court upholds reassessment on wrongful application by Trust on foreign contribution’s objective

It disclosed the purpose as ‘social’, whereas the ITR stated it as ‘preservation of monuments and places of historic interest’

The Delhi High Court has upheld the reassessment proceedings against a trust for wrongful application of foreign contribution, which was against the objective of the trust.

The bench of Chief Justice Satish Chandra Sharma and Justice Tushar Rao Gedela observed that the Assessing Officer (AO) based his opinion on tangible and concrete information in the form of the petitioner’s trust deed and the statement of the managing trustee.

He identified that foreign contributions received by the petitioner were utilized for a purpose divergent from its objective as disclosed in the trust deed.

The wrongful application of the exemption availed under Section 11 or Section 12 of the Income Tax Act, 1961, related to the funds resulted in the AO forming the subjective satisfaction that the wrongly availed exemption vis-à-vis foreign contributions escaped income assessment.

The petitioner/assessee is a trust with the objective of conducting research and development on environmental issues and human behavior, innovating, and implementing technical and institutional designs for integrated social development, and aiding various local and national authorities.

The petitioner was granted registration under the Foreign Contribution (Regulations) Act 1976 for receiving foreign contributions. Under the FCRA, the petitioner’s purpose was declared as ‘social’ in nature.

The Income Tax department conducted a survey under Section 133 of the IT Act, but no incriminating material was found. However, it was alleged that the department conducted the inquiry with some ulterior motive. It seized the books of accounts, financial documents, and mobile phones belonging to the petitioner's trust.

After six years, the IT department issued a show-cause notice to the petitioner under Section 148 of the IT Act for an allegedly escaping income assessment of Rs.2,23,95,787 on account of wrongful claim qua foreign contribution under Section 11.

The petitioner denied the allegations.

However, it was alleged that the petitioner engaged identified persons, including the Legal Initiative for Forest and Environment (LIFE), to initiate litigation in India for lobbying against certain economic activities under the guise of furthering environmental standards.

Moreover, the trust entered suspicious transactions that remained unexplained related to a film screening. Also, there were inconsistencies between the purpose declared under the FCRA and the Income Tax Return (ITR) vis-à-vis the activities undertaken.

The IT department contended that the divergent stance taken by the petitioner trust on its objective disclosed it as ‘social’, whereas in its ITR the objective was mentioned as ‘preservation of monuments, places, or objects of artistic or historic interest.’

Thus, the fulcrum of the dispute was twofold. One, whether the AO could have initiated reassessment proceedings pursuant to Section 149(1) of the IT Act. Two, whether he had the requisite material or information to conclude that there was an escapement of income.

The judges noted that the limitation on the initiation of reassessment proceedings would resultantly extend to 10 years since the AO had in his possession, inter alia, books of accounts evidencing voluntary deposits in bank accounts extending to over Rs.50,00,000.

Thus, the bench held that an individual seeking to invoke the equitable jurisdiction of a high court must approach the court displaying bona fides. However, the petitioner suppressed material facts related to the cancellation of its registration under Sections 12A, 12AA, and 12AB of the IT Act.