Whether rejection order of renewal application in Form 10AD attracts tax under Section 115TD and what is position under new Income Tax Act 2025?
A pertinent issue under the law relating to charitable trusts and institutions is whether rejection of a renewal application filed in Form 10AD would trigger taxation at the Maximum Marginal Rate (MMR) under Section 115TD of the Income-tax Act.
Section 115TD, which deals with MMR becomes applicable in specified circumstances such as conversion of a charitable trust into a non-charitable form, merger with a non-eligible entity, or failure to comply with prescribed conditions relating to registration, in case where registration is cancelled or in case of modification of objects fresh application is not made or such fresh application is rejected. In particular, Section 115TD(3)(iii) applies where a trust or institution fails to make an application for renewal of registration under certain Sections of 12A(1)(ac) within the prescribed time. Thus, the legislative trigger under this clause is the failure to apply or cancellation of registration, and not the rejection of an application.
Accordingly, a plain reading of the provision suggests that mere rejection of a renewal application in Form 10AD does not, by itself, attract the provisions of Section 115TD. However, the position does not end there and must be read in conjunction with the provisions governing registration.
Under Section 12AB(1)(b)(ii)(B)(I), where the Commissioner is not satisfied about the genuineness of activities or compliance with conditions, he is required to pass an order rejecting the application and cancel the registration.
This distinction is crucial. While rejection alone does not trigger Section 115TD, cancellation of registration is one of the specified events that can attract MMR tax U/s. 115TD. Consequently, in cases where the rejection of Form 10AD is accompanied by cancellation of registration, the provisions of Section 115TD would get attracted, resulting in taxation at the Maximum Marginal Rate on accreted income.
The same scheme continues under the proposed Income Tax Act, 2025. The provisions corresponding to Section 115TD are contained in Section 352, while those corresponding to Section 12AB are found in Section 332(7)(b)(ii). These provisions similarly provide that if the Commissioner is not satisfied, he shall reject the application and cancel the registration. Therefore, even under the new law, the decisive factor remains cancellation of registration and not mere rejection of the application.
In this context, the introduction of a provision permitting re-application under Rule 181(12) of the Income Tax Rules, 2026 is a welcome step. It provides an opportunity to the trust or institution to rectify deficiencies and seek fresh registration, thereby mitigating the harsh consequence of MMR taxation in appropriate cases.
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