Section 80G Approval Cannot Be Denied Without Examining 5% Religious Expenditure Threshold: ITAT Chandigarh

Background and Overview

The Income Tax Appellate Tribunal, Chandigarh Bench, recently delivered a significant ruling in Sanatan Dharm Venkuth Dhamsewa Samiti Vs CIT (Exemptions) (ITA No.572/CHANDI/2026), adjudicating a consolidated batch of 24 appeals filed by various assessee-trusts. All these appeals arose from separate but substantively uniform orders passed by the Commissioner of Income Tax (Exemptions), Chandigarh [CIT(E)], each rejecting the applications for approval under Section 80G of the Income-tax Act, 1961. The singular common thread across all rejections was the CIT(E)'s conclusion that the respective trusts were engaged in religious activities, thereby disqualifying them from the benefit of Section 80G.

The Tribunal's order, pronounced on 03.08.2026, did not independently grant approval to any of the trusts. Rather, it set aside all the impugned orders and remanded the matters back to the CIT(E) for fresh adjudication, laying down comprehensive guiding principles to govern that re-examination.

The Two Core Grounds of Challenge

Ground 1: Non-Application of the Five Per Cent Threshold Under Section 80G(5B)

The first common ground advanced on behalf of all the assessee-trusts related to the manner in which the CIT(E) applied Explanation 3 to Section 80G. The CIT(E) had selectively quoted certain objects from the trust deeds and, invoking Explanation 3, concluded that charitable purpose does not extend to a purpose the whole or substantially the whole of which is of a religious nature. On this basis alone, approval was refused.

The Tribunal found this approach to be legally deficient for a fundamental reason: no examination of the financial statements of any of the trusts had been undertaken. The conclusion was therefore not anchored to any factual determination.

Crucially, the Tribunal drew attention to Section 80G(5B), which contains a non-obstante clause. This sub-section provides that an institution shall be deemed to continue satisfying the requirements of Section 80G(5) in any previous year where the expenditure of a religious nature does not exceed five per cent of the institution's total income for that year. The Tribunal noted that:

  • No such five per cent examination had been conducted in any of the impugned orders.
  • No corresponding findings had been recorded on this aspect.
  • The issue had apparently not even been raised before or confronted to the assessees during the proceedings before the CIT(E).

This procedural and substantive lapse rendered the rejection orders unsustainable on the first ground itself.

Ground 2: Nature of Activities — Whether Truly "Religious" in Character

The second substantial ground was that the activities undertaken by the respective trusts could not be legitimately characterised as "religious activities" within the contemplation of Section 80G. The assessee-trusts further contended that their activities were not restricted to or designed for the benefit of any particular religious community, caste or section of society. Reliance was placed on several judicial precedents in support of these contentions.

Statutory Framework: What Section 80G Actually Prohibits

The Tribunal undertook a careful reading of Section 80G(5) to identify the actual legislative intent. The provision was enacted to incentivise philanthropic contributions by allowing deductions for donations made to approved institutions. However, the following conditions and restrictions are embedded within the provision:

  • The institution must not be established for the benefit of any particular religious community or caste.
  • Parliament did not impose a blanket prohibition on institutions that may incidentally engage in certain religious activities.
  • This deliberate legislative distinction reflects Parliament's intent to differentiate between institutions predominantly established for religious purposes and institutions whose dominant character remains charitable despite the presence of some religious elements.

The inquiry under Section 80G is not whether any religious activity exists, but whether such activity dominates the institution's objects and functioning so as to fundamentally alter its charitable character.