Wrongful Application Of Foreign Contribution By Trust Not In Accordance With Trust’s Objective: Delhi High Court Upholds Reassessment

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 has observed that the AO based its opinion on tangible and concrete information in the form of the petitioner’s trust deed and the statement of the managing trustee that certain identified foreign contributions received by the petitioner were utilized for a purpose divergent from its object as disclosed in the trust deed. The wrongful application of the exemption availed under Section 11 or Section 12 of the Income Tax Act in relation to such funds would undoubtedly result in the AO forming the subjective satisfaction that the wrongly availed exemption vis-à-vis foreign contributions escaped income for the purpose of assessment under the Income Tax Act.

The petitioner/assessee is a trust with the objective of conducting research and development on environmental issues and human behaviour, innovating and implementing technical and institutional designs for integrated social development, and providing assistance to various local and national authorities in this regard.

The petitioner was granted registration under the Foreign Contribution (Regulations) Act 1976 (FCRA) for the purpose of receiving foreign contributions in the petitioner’s accounts. Under the FCRA, the petitioner’s object was declared to be “social nature.".

A survey was conducted by the respondent or department under Section 133 of the Income Tax Act. No incriminating materials were found during the survey; however, it is alleged that the respondent, with an ulterior motive, conducted a roving and fishing inquiry against the petitioner. The respondent seized books of accounts, financial documents, and mobile phones belonging to the petitioner's trust.

After a prolonged period of six years, the department issued the SCN to the petitioner. It called upon the petitioner to show cause as to why a notice under Section 148 of the Income Tax Act should not be issued to the petitioner in relation to an alleged escaped assessment of income to the extent of INR 2,23,95,787 on account of a wrongful claim qua foreign contribution under Section 11 of the Income Tax Act.

The petitioner denied the allegations. However, it has been insinuated 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. The petitioner entered into suspicious transactions that remained unexplained in relation to a “film screening”. The apparent inconsistency between the purpose declared under the FCRA and the Income Tax Return (ITR) vis-à-vis the activities undertaken by the petitioner on the ground.

The department contended that the apparent divergent stance taken by the Petitioner Trust in relation to its object, i.e., under the FCRA, the Petitioner disclosed its object as “social” whereas under its returns filed under the IT Act, the object was disclosed as “preservation of monuments, places, or objects of artistic or historic interest”.

The fulcrum of the dispute was twofold. First, whether the AO could have initiated reassessment proceedings pursuant to Section 149(1) of the Income Tax Act. Second, whether the AO had the requisite material or information to arrive at the subjective satisfaction that there was an escapement of income for the petitioner

The court noted that the limitation vis-à-vis the initiation of reassessment proceedings would resultantly extend to 10 years in light of the fact that the AO had in its possession, inter alia, books of accounts evidencing voluntary deposits in bank accounts extending to more than INR 50,00,000. .

The court has held that an individual seeking to invoke the equitable jurisdiction of a high court must approach this court displaying bona fides. However, the petitioner has unquestionably suppressed material facts in relation to the cancellation of its registration under Sections 12A, 12AA, and 12AB of the Income Tax Act.

Counsel For Petitioner: Suruchi Aggarwal

Counsel For Respondent: Tushar Mehta

Case Title: Enviornics Trust Versus The Dept. Commissioner Of Income Tax

Citation: 2023 LiveLaw (Del) 1122

Case No.: W.P.(C) 14191/2023 & CM APPL. 56145-46/2023

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