Natural Justice Requires Disclosure of Secret Evidence in 80G/12AB Proceedings | ITAT Delhi Quashes Cancellation of Trust Registration

The Income Tax Appellate Tribunal Delhi has reaffirmed that procedural fairness is non-negotiable in tax proceedings involving charitable trusts. In a significant ruling, the Tribunal set aside the cancellation of registration under Section 12AB and the rejection of 80G approval, holding that reliance on unconfronted investigative reports and generalized doubts violates fundamental principles of natural justice.

Background & Facts

The Dispute

The appellant, M/s Vaidik Sewa Trust, is a charitable trust established under a trust deed dated 16.05.2019, with the primary objective of imparting free education to underprivileged children. The Trust applied for provisional registration under Section 12A(1)(ac)(iii) of the Income Tax Act, 1961, which was granted on 08.07.2024. Subsequently, it applied for approval under Section 80G(5) to enable donors to claim tax deductions. Both applications were denied by the Commissioner of Income Tax (Exemptions), Chandigarh, leading to two appeals before the ITAT Delhi.

Key Facts

• The trust deed outlines multiple charitable objects including education, relief to the poor, scholarships, hospital support, promotion of "Vasudhaiva Kutumbakam", service to cows, establishment of gaushalas, and social reform
• Object No. (xiv) explicitly mandates respect for all castes and religions on humanitarian grounds, with no restriction based on religion, caste, or creed
• The Trust submitted a paper book of 78 pages containing: trust deed, financial statements, bank statements, photographs of educational activities, and bills/vouchers evidencing expenditure
• The CIT(E) conducted a discreet field enquiry through an Inspector, whose report was never shared with the Trust
• The CIT(E) rejected the 80G application on 01.09.2025, citing vague concerns about religious-cum-charitable nature of objects and lack of verifiable educational activity
• The CIT(E) cancelled the Section 12A registration on 24.03.2026, relying primarily on the findings from the 80G proceedings
• No specific deficiency was pointed out in any document submitted by the Trust

Procedural History

• 16.05.2019: Trust deed executed
• 08.07.2024: Provisional registration granted under Section 12A(1)(ac)(iii)
• 01.09.2025: CIT(E) order rejecting application for approval under Section 80G(5)
• 24.03.2026: CIT(E) order cancelling registration under Section 12AB
• 2026: Appeals filed before ITAT Delhi (ITA No. 5138/Del/2026 and 7651/Del/2025)
• 09.07.2026: Hearing conducted
• 15.07.2026: Judgment pronounced

Relief Sought

The Assessee sought: (i) restoration of registration under Section 12AB read with Section 12A, and (ii) grant of approval under Section 80G(5), arguing that the orders were legally unsustainable due to breach of natural justice and lack of evidentiary basis.

The Legal Issue

The central question was whether the cancellation of registration under Section 12AB and rejection of approval under Section 80G(5) could be sustained when based solely on an unconfronted field enquiry report and generalized observations, without specific rebuttal of documentary evidence submitted by the assessee.

Arguments Presented

For the Appellant

The Learned Counsel contended that:

• The CIT(E) violated principles of natural justice by relying on an Inspector’s report never shared with or confronted to the Trust
• The voluminous documentary evidence - trust deed, financials, bank statements, photographs, and vouchers - was entirely ignored without any specific finding of falsity or deficiency
• The objection to the breadth of objects was legally untenable, as the trust’s activities were not confined to any religious community and included verifiable educational work
• The cancellation of registration under Section 12AB could not be predicated on findings from Section 80G proceedings that themselves were legally flawed
• Precedents such as CIT v. Sardar Singh and CIT v. Shri Ram Trust were cited to support the requirement of specific reasoning and opportunity to be heard

For the Respondent

The Learned CIT-DR relied entirely on the orders passed by the CIT(E), arguing that:

• The trust’s objects were too broad and included religious elements
• The field enquiry revealed no tangible evidence of educational activities
• The Trust failed to demonstrate genuine charitable work
• No independent submissions were made to counter the CIT(E)’s findings

The Court's Analysis

The Tribunal emphasized that natural justice is a foundational pillar of tax administration, particularly when rights to tax exemptions are at stake. It held that material collected ex parte - such as the Inspector’s report - cannot be used against an assessee without providing an opportunity to rebut it. The Tribunal cited well-established jurisprudence that administrative action based on secret evidence is void ab initio.

"It is well settled that material collected behind the back of an assessee cannot be used against it without confronting the assessee with such material and affording an opportunity to rebut the same."

The Tribunal further observed that the CIT(E) had failed to engage with the documentary evidence submitted by the Trust. The financial statements, bank records, photographs, and bills were not merely formalities but constituted prima facie proof of charitable activity. The CIT(E)’s dismissal of this evidence as "generalized doubt" without identifying any specific inconsistency, forgery, or misrepresentation was legally unsustainable.

Regarding the objection to the trust’s objects, the Tribunal noted that the inclusion of religiously inspired objectives such as "service to cows" or "promotion of Sanatan thought" does not, by itself, render the trust non-charitable. The critical test under Section 12A and 80G is whether the trust’s activities are genuinely charitable and open to the public without discrimination. The trust deed explicitly prohibited exclusion on grounds of religion or caste, and no material was produced to show that benefits were restricted to any particular community.

The Tribunal also clarified that findings under Section 80G cannot be mechanically imported into Section 12AB proceedings. Each provision has distinct conditions, and the cancellation of registration requires independent scrutiny. The CIT(E)’s reliance on the flawed 80G order to cancel registration was therefore impermissible.

The Verdict

The appeals were allowed. The ITAT Delhi quashed the CIT(E)’s order dated 24.03.2026 cancelling the registration under Section 12AB and directed its immediate restoration. The order dated 01.09.2025 rejecting approval under Section 80G(5) was also set aside, and the CIT(E) was directed to grant approval to the Trust in accordance with law. The Trust’s documentary evidence was held sufficient to satisfy the conditions of both provisions.

What This Means For Similar Cases

Natural Justice Cannot Be Sacrificed for Administrative Convenience

• Practitioners must challenge any tax order relying on secret or unconfronted reports
• The burden shifts to the revenue to prove that all material was disclosed and opportunity to rebut was granted
• Failure to share inspection reports or field enquiry findings renders the order void

Documentary Evidence Must Be Addressed Specifically

• Generic statements like "activities not genuine" or "lack of verification" are legally inadequate
• Every document submitted - bank statements, invoices, photographs - must be individually examined and addressed
• Ignoring voluminous evidence without specific rebuttal amounts to arbitrary decision-making

Broad Charitable Objects Are Not Invalid Per Se

• Trusts with multiple objects including religious, cultural, or social elements are not disqualified if they serve the public without discrimination

• The focus must be on actual activities, not theoretical objects

• Courts and authorities must distinguish between religious inspiration and religious exclusivity

• Practitioners should ensure all supporting documents are systematically compiled and explicitly referenced in submissions

• In appeals, always raise breach of natural justice as a primary ground, even if other issues exist

• When challenging 80G rejections, cross-argue that Section 12A registration cannot be prejudiced by collateral proceedings