Statutory 5% religious expenditure limit must be factually verified before denying Section 80G registration.

The Respondent-Assessee, a Trust, applied for approval under Section 80G(5)(iii) of the Income Tax Act, 1961.

The Commissioner of Income Tax (Exemptions) [CIT(E)] rejected the application on June 28, 2024, observing that the Trust’s objects (specifically Serial Nos. 7 and 8) were religious in nature, making the Trust a "composite" entity (both religious and charitable), which contravened Section 80G(5).

The Assessee appealed to the Income Tax Appellate Tribunal (ITAT), which found that the CIT(E) failed to verify if the religious expenditure exceeded the statutory 5% limit.

The ITAT set aside the rejection and remanded the matter for fresh verification.

The Revenue appealed this remand to the High Court.

1. Whether the Tribunal erred in directing the CIT(E) to examine the application under the limited purview of Section 80G(5B) while ignoring that the Trust’s objects were explicitly religious-cum-charitable.

2. Whether the provisions of Section 80G(5B) can override the substantial definitions of "charitable purpose" under Section 80G(5) read with Section 2(15) of the Act.

The Court applied Section 80G(5) of the Income Tax Act, which limits deductions to institutions established for "charitable purposes," and Explanation 3, which clarifies that "charitable purpose" excludes purposes that are wholly or substantially religious.

The Court relied on Section 80G(5B), which provides a non-obstante clause stating that an institution shall be deemed charitable even if it incurs religious expenditure, provided such expenditure does not exceed 5% of its total income in the previous year.

The Court also followed the precedent set by its Co-ordinate Bench in The Commissioner of Income Tax (Exemption) v. Pranam Charitable Trust (Tax Appeal No. 1049 of 2024).

The Court analyzed the interplay between the restrictive clause in Section 80G(5) and the "deeming" provision in Section 80G(5B). It noted that the ITAT correctly identified that a Trust cannot be denied registration solely because some of its objects are "religious".

The High Court observed that the CIT(E) summarily rejected the application based on the text of the Trust deed's objects without conducting an evidentiary inquiry into the actual expenditure.

Following the reasoning in Pranam Charitable Trust, the Court held that the Revenue must first determine whether the actual religious expenditure exceeded the 5% threshold before disqualifying the Trust.

Since the CIT(E) failed to perform this factual analysis, the ITAT's order to remand the case for verification was legally sound.

The Court affirmed that under Section 80G(5B), the mere presence of religious objects does not disqualify a Trust if its religious expenditure remains within the 5% limit. The CIT(E) is directed to verify the Trust’s expenditure and consider the grant of registration afresh based on that verification.