It is common for the income tax department to ask for audit report in form 10B from an applicant trust or society who file application before commissioner of Income Tax for registartion trust under section 12AA of the Income Tax Act . The moot point , however , is whether the commissioner can actually ask for the audit report in form 10B even when the registaretion of the trust/institution itself is not done or whether it is mandatory to include the audit report along with the application for registration. In other words if you do not submit the audit report in the prescribed form, can this in itslef become a ground for not granting registration u/s 12AA of the Income Tax Act. In this post, I am going to analyse these issues .
What documents required for application for registration u/s 12AA?
An applicant for registration of trust or institution is required to abide by the Rule 17A (1)(a) of the Income Tax Rule that lays down submission of following documents for registrtion purpose :
- Form 10A duly filled in and
If trust is created under an instrument , the instrument of creation of trust/institution in original ( trust deed ) or a certified copy thereof.
If trust or institution not created by an instrument s, then document evidencing the creation of the trust or the establishment of the institution
- If trust or institution was in existence prior to the year of application , then 2 copies of accounts of trust/instituition of maximum three years prior to the year of application for registration u/s 12A
It must be noted that the word audited accounts is not written in the Rule 17A of the Income Tax Act.
There is also no requirement of any audit report in Form 10B as per Rule 17A of the Income Tax Act.
In this regard , decision of Madras High Court in case of DIT(Exemption), Madras vs R.J.B.V. Vasudevan Educational & Charitable Trust  370 ITR 517 (Madras) in which the facts in brief was that the Director (Exemptions) refused registration of the trust on the ground that that there was no activity worth its name was undertaken by assessee-trust except some small amount of donation made for charitable purposes. He further found that accounts submitted along with Form 10A were not audited accounts for three years. Accordingly, assessee’s application seeking registration was rejected.
On assessee’s appeal , however , the Tribunal, held that the Director (Exemptions) had not pointed out as to how the objects of the trust as not charitable or the activities of the trust as not genuine. In so far as the issue relating to filing of audited accounts for three years as required in Form 10B, the Tribunal held that the non-filing of audited accounts did not make any difference and that did not make the trust ineligible for registration. Accordingly, the Tribunal allowed the assessee’s appeal.
Department filed an appeal against that order , in which The Hon’ble High Court held as under
In this case, the assessee is yet to obtain registration under section 12AA. Therefore, rule 17B of the Income-tax Rules has no application for the present. If the respondent/assessee satisfies the requirement of rule 17A and had submitted Form 10A along with requisite documents, the assessee is entitled to seek registration under section 12AA, unless there is some material to decline such registration as is provided in the said section. The Original Authority has not recorded his subjective satisfaction in this case. Also, the reasoning given by the Authority is not in consonance with the provisions of law.
Can Commissioner Ask For Audit Report During Registration Process ?
The registration of the trust is dones as per section 12AA of the Income Tax Act . The said provision under clause (a) and (b) clearly provides that the commissioner has power to call for such documentsas he desires in order to satisfy himself about the genuineness of activities of the trust.
So, if he desires that an audited accounts of the trust or institution maybe provided , it is in interest of applicant that the accounts of the trust/institution get audited and a copy thereof should be provided to the commissioner. This will butress the genuineness point before him. So getting a Form 10B signed is not something which should be contested.
In this regard , the decision of ITAT , Cochin in Kasargod District Health & Family Welfare Society Kanhangad vs CIT, Kozhikode  66 SOT 103 (Cochin – Trib.) should be noted in which the facts related to case was that the commissioner rejected the claim of the assessee for registration under section 12AA only on the ground that the deed does not contain the mandatory clauses for audit as required under section 12A(b).
The ITAT set aside the order for fresh consideration , holding however as under :
7. In order to satisfy the genuineness of the activity of the trust or institution, the Administrative Commissioner may call for such document or information from the applicant / society. Therefore, if the Administrative Commissioner calls for the audited statement to satisfy himself about the genuineness of the activity of the trust, it is the obligation of the assessee society to file the same before the Administrative Commissioner to prove its genuineness. Though section 12A(b) requires the assessee to file audited statement alongwith the return of income for claiming exemptions u/s 11 & 12, there is no prohibition u/s 12AA of the Act to call for the audited statement at the time of registration by the Administrative Commissioner in order to satisfy himself about the genuineness of the activity of the assessee society. The assessee claims that the copies of the audited statements were filed before this Tribunal.
So, if the CIT calles for audited accounts , the applicant should submit it , so that genuineness is not in doubt.
- Rule 17A does not require submission of audit report in Form 10B
- Rule 17B does not apply in case of section 12AA
- However, if CIT while hearing the case of registration u/s 12AA , asks for audited accounts , it should be submited.
- Audited accounts and audit report in Form 10B are different. Audit report can not be asked. However , remember if you desire exemption u/s 11 & 12 , you will have to follow the conditions given in section 12A of the Income Tax Act which in other words means that you file audit report with tax return ( or at least before assessment before A.O )