Misclassification of Expenses Can Affect 80G Approval: Tribunal Orders Fresh Verification

Narayan Cultural Mission Vs CIT (Exemption) (ITAT Ahmedabad)

Misclassification of Expenses as Religious – Cultural & Administrative Costs Not Religious in Nature –Tribunal Orders Fresh Verification

Assessee, a charitable trust registered under the Mumbai Charitable Mission Act, 1950 at Vadodara, has been active since 1982 in educational, medical & cultural activities. It filed Form 10AB for renewal of approval u/s 80G after expiry of provisional registration (granted in Nov 2021). CIT(E) rejected application on 19.12.2024, noting that in FY 2020-21, assessee incurred Rs.28,119/- on religious activities out of receipts of Rs.3,85,237/- (7.3%), breaching the 5% cap under s.80G(5B). Further, relying on past applications (2019 rejection also for similar reasons), CIT(E) held that the trust consistently exceeded the threshold, with religious expenditure ranging from 25% to 63% of income in earlier years. Since assessee did not respond to final SCN, CIT(E) concluded violation was established & rejected application.

On appeal, Assessee contended that CIT(E) wrongly classified administrative & cultural expenses (electricity, printing, calendars, cleaning, postage, AGM expenses, funeral aid, medical & educational support, cultural events) as religious expenditure. It argued that social gatherings like Annadaanam, Navati, Vilakku, Pongala, etc. were community cultural events, not religious rituals. Correct classification showed religious expenses within 5% in all years except marginally in FY 2020-21. Thus, rejection was factually incorrect.

Tribunal noted that CIT(E) had not properly verified classification of expenses, & that assessee’s explanations were not considered since no response was given to SCN. Considering detailed submissions before Tribunal, it held that nature of expenses required factual re-examination. In the interest of justice, Tribunal remanded matter to CIT(E) for recomputation & reconsideration, directing assessee to cooperate & furnish details.

Key Findings

• CIT(E) rejected 80G application citing breach of 5% cap on religious expenses u/s 80G(5B).
• Assessee argued misclassification of administrative & cultural expenses as religious.
• Tribunal found merit in contention & held matter required factual verification.
• Case remanded to CIT(E) for fresh adjudication after giving assessee opportunity.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal is filed by the assessee as against the order dated 19/12/2024 passed by the Commissioner of Income Tax (Exemption), Ahmedabad [hereinafter referred to as “CIT(E)”] denying registration under section 80G(5) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).

2. The assessee has raised the following Grounds of Appeal:

On the facts in the circumstances of your appellant case and in law, the rejection of application u/s 80G by CIT (EXEMPTION) AHEMDABAD is bad in law due to following grounds,

Provision of section 80G(5)[iv] (8) OF Income Tax Act 1961, states that an institution of fund which incurred expenditure during the previous year which is of religious nature for an amount not exceeding 5% of its total income le expenditure which is of religious nature for an amount not exceeding 5% of its total income.

The expenditure like municipal tax, electricity expense, security expense, AGM expense, printing and stationary expense, calendar expense (S.C.N.M), cleaning expense, postages Expenses being administrative nature expenses not to be consider as religious expense for the purpose of counting 5% of its total income.

Further, the expenditure incurred towards funeral activities, medical and educational expense and other cultural activities expenses to achieve other charitable purposes are not to be consider as religious expenses.

So for considering the religious expenditure the CIT (EXEMPTION) AHEMDABAD has considered the administrative and other charitable expenses as religious expense which is wrong.

Actual religious expenditure for last 3 years are as under;

So far Shree Narayan Culture Mission is concern, it is true fact that the large number of person is associated with the activities of mission which originally belongs to Keralan and tamilian people.

Therefore it is consider to be fit case for celebrating Annadaanam, Navati, Vilakku, Mandala Annadaanam Pongala, Pratistha Dinam, Chathayam as a social occasion for assembling the people and mission uses the said occasions for raising fund by collection of donation, membership fee etc.

Therefore the expenditure incurred on various social occasion stated above are not of religious expenditure but was actually social activities which are carried out on various religious occasions.

In view of above explanation, it is cleared that administrative and various cultural expenses are not of religious nature but of social occasion the mission has not incurred religious expenditure exceeding 5% of total income.

Therefore, we request you to consider our application for registration u/s 80G.

3. At the outset, we note that there is a delay of 29 days in filing of present appeal before us. The assessee has filed application for condonation of delay, along-with an Affidavit. We are hereby inclined to condone the delay on account of smallness of the period of delay in filing of present appeal causing no perceptible prejudice to the Revenue and in the interest of justice.

4. The brief facts of the case are that the assessee/applicant trust, Shree Narayana Cultural Mission filed an application in Form No. 10AB seeking approval under sub-clause (B) of clause (iii) of the first proviso to section 80G(5) of the Income Tax Act, 1961 (Act). The application was made to the Commissioner of Income Tax (Exemptions) for the purpose of allowing donors to claim deductions under section 80G of the Act. As per procedure, CIT(Exemptions) issued notices to the applicant requesting necessary information and supporting documents. In response to questionnaire dated 3rd October 2024, the applicant submitted that it had not incurred any religious expenditure. However, on examining the audited financial statements for FY 2020-21, CIT(Exemptions) noted that the applicant had in fact spent ₹28,119 out of total receipts of Rs.3,85,237/- on religious activities, which came to 7.3% of total income, exceeding the permissible limit of 5% under section 80G(5B) of the Act. A show cause notice dated 9th December 2024 was issued, giving the applicant a final opportunity to explain why the application should not be rejected for this violation. The applicant, however, did not respond to this notice, nor did it request for an extension. The CIT(Exemptions) observed that the details submitted by the applicant in the Form 10AB itself showed that in earlier financial years too, significant religious expenditure had been incurred by the assessee/applicant trust. For example, in FY 2021-22 and 2020-21, the applicant reported religious expenses amounting to 38.74% and 63.06% of its total income respectively. This, according to CIT(Exemptions), demonstrated a clear and consistent pattern of spending beyond the 5% threshold. Moreover, this was not the first instance of such a violation. An earlier application by the same applicant for 80G approval had already been rejected in 2019 for the same reason, where religious expenses in previous years were also far above the permitted limit, reaching 25.21% to 51.05% of total income. Since the law under section 80G(5B) permits religious expenditure only up to 5% of total income in order to remain eligible for approval, and the applicant not only exceeded this limit but also failed to respond to the final notice, the CIT (Exemptions) held that the applicant was not eligible for approval under section 80G. The CIT(Exemptions) placed reliance on the decision by the ITAT, Cochin in the case of Nilackal St. Thomas Church & Ecumenical Centre Trust vs CIT, where on similar facts, application filed u/s 80G of the Act was rejected on grounds of excessive religious expenditure. Accordingly, in light of the above observations, CIT(Exemptions) rejected the application filed in Form No. 10AB by the assessee/applicant trust on account of violation of section 80G(5B) of the Act.

5. The assessee/applicant trust is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee.

6. Before us, the counsel for the assessee submitted that the assessee is a charitable trust registered under the Mumbai Charitable Mission Act, 1950 at Vadodara, and has been engaged in charitable activities since 15th June 1982. The mission’s main objectives are educational, social, and cultural in nature, intended for the benefit of the general public regardless of caste, creed, or religion. Its work includes establishing and running schools, libraries, educational support for the poor, promotion of social and athletic facilities, and providing medical aid to the needy. It was submitted that based on these charitable purposes, the mission was granted provisional registration under section 80G(5) of the Income Tax Act on 18th November 2021, valid up to AY 2024-25. On expiry of this provisional registration, the mission made a timely application for renewal on 29th June 2024, which was within the extended due date. In response, notices were issued by the CIT (Exemption), Ahmedabad on 3rd October 2024 and 7th November 2024, to which the mission duly complied by submitting the required information. The counsel argued that despite full compliance, the application for registration under section 80G of the Act was rejected on 2nd December 2024 on the ground that the mission had allegedly incurred religious expenditure beyond the 5% threshold prescribed under section 80G(5B). The Counsel for the assessee contended that the CIT (Exemption) had wrongly classified certain administrative and cultural expenses as religious expenditure. These included payments such as municipal taxes, electricity, security, printing and stationery, calendar expenses, cleaning, postage, and AGM-related costs, all of which are general administrative in nature and cannot be categorized as religious expenses under the Act. Further, the counsel for the assessee submitted that expenses incurred towards funeral assistance, medical aid, educational support, and cultural events were all in furtherance of its charitable objectives, not religious ones. The Ld. CIT(Exemptions) had, according to the assessee, mischaracterized these activities, thereby inflating the proportion of religious expenditure incorrectly. The counsel for the assessee also placed on record the mission’s own records. For the FY 2020-21, religious expenditure was ₹28,119 out of total income of Rs.3,85,237 (i.e., 7.3%). For FY 2021-22, it was Rs.38,285 out of Rs.18,28,880 (1.92%), and for FY 2022-23, it was ₹92,402 out of Rs.24,50,975 (3.77%). It was argued that only in one year (2020-21) did the religious expenditure slightly exceed the 5% limit, and even that included items not correctly categorized. Furthermore, the counsel argued that while many people associated with the mission are of Keralite and Tamil origin, the events like Annadaanam, Navati, Vilakku, Mandala Annadaanam, Pongala, Pratistha Dinam, and Chathayam were conducted not as religious rituals, but as community social gatherings aimed at bringing people together and raising funds through donations and memberships. These events served as platforms for social and cultural engagement, and any related expenditure should not be treated as religious in nature. In light of these facts, the counsel submitted that the mission has not violated the 5% limit on religious expenditure under section 80G(5B) when expenses are properly classified, and that the CIT (Exemption)’s rejection was based on an incorrect interpretation of the nature of expenses. Therefore, the application under section 80G deserves to be reconsidered and approved.

7. In response, the Ld. DR placed reliance on the observations made by the Ld. CIT(Exemptions) in its order.

8. We have heard the rival contentions and perused the material on record. The brief facts of the case are that the application filed by the assessee/ applicant trust in Form No. 10AB seeking approval u/s 80G of the Act was rejected by the CIT(Exemptions) primarily on the ground that the assessee had incurred religious expenditure exceeding the permissible threshold of 5% of total income as laid down under section 80G(5B) of the Act. However, before us, the assessee has contended that the classification of certain expenses as religious in nature was factually incorrect, and that the CIT(Exemptions) had wrongly included administrative and cultural expenses—such as electricity charges, calendar printing, funeral aid, and medical support for the needy, under the head of “religious expenditure”. It was further submitted that many events conducted by the trust were social or cultural gatherings aimed at community welfare and fundraising, and not purely religious rituals, and thus the expenses on such occasions should not have been treated as religious in nature. We find merit in the contention that the nature and classification of expenses require a proper factual verification, which may not have been fully undertaken by the CIT(Exemptions), especially in light of the detailed explanations and breakdown of expenditure provided during the appellate proceedings before us. Since the assessee did not respond to the show cause notice earlier, the CIT(Exemptions) had no occasion to examine these explanations at that stage. Accordingly, in the interest of justice, we deem it appropriate to set aside the impugned order passed by the CIT(Exemptions) and restore the matter to the file of the CIT(Exemptions) for the limited purpose of recomputing and reexamining the expenditure incurred on religious purposes, after duly considering the submissions furnished by the assessee, including the nature and purpose of various expenses and the events conducted. The assessee is directed to fully cooperate in the proceedings before the CIT(Exemptions) and furnish all required details and clarifications within a reasonable time. The CIT(Exemptions) shall pass a fresh order in accordance with law, after affording due opportunity of being heard to the assessee.

9. In the result, the appeal is allowed for statistical purposes.

Order pronounced in the open court on 23-09-2025