The Income Tax Appellate Tribunal, Mumbai, has clarified that providing scholarships to Indian nationals for higher education abroad does not constitute application of income outside India under Section 11(1)(c) of the Income Tax Act, 1961. This ruling affirms the principle that the situs of payment, not the location of the activity, determines compliance with charitable purpose requirements.
Background & Facts
The Dispute
The assessee, Yogayatan Jankalyan Trust, is a charitable trust engaged in promoting education through scholarship grants. On 29.05.2025, it filed Form No. 10AB seeking registration under Section 12AB of the Income Tax Act and approval under Section 80G for tax-deductible donations. The Commissioner of Income Tax (Exemption), Mumbai, rejected both applications. The rejection of Section 12AB registration was based on the alleged violation of Section 11(1)(c), which prohibits application of income for charitable purposes outside India. The CIT(E) contended that granting scholarships to Indian students studying abroad amounted to application of funds outside India. Consequently, the Section 80G approval was rejected under Section 80G(5)(i), which mandates prior registration under Section 12AB.
Key Facts
- The trust was established for charitable purposes, including advancement of education through scholarships
- The trust disbursed scholarships to Indian students pursuing higher education at institutions outside India
- All scholarship payments were made from India to beneficiaries or educational institutions via Indian banking channels
- The trust’s object clause permits funding for education both within and outside India
- No adverse findings were recorded regarding the genuineness of the trust’s activities or the charitable nature of its objects
- The trust had previously received similar approvals under pre-amendment provisions of the Act
Procedural History
- 29.05.2025: Assessee filed Form 10AB for registration under Section 12AB and approval under Section 80G
- [Date unspecified]: Ld. CIT(E) issued order rejecting both applications
- [Date unspecified]: Assessee filed appeals before the Income Tax Appellate Tribunal (ITAT), Mumbai
- 08.04.2026: Hearing conducted before the Tribunal
- 20.04.2026: Judgment pronounced
Relief Sought
The assessee sought: (1) setting aside of the order rejecting Section 12AB registration; (2) grant of registration under Section 12AB; (3) setting aside of the order rejecting Section 80G approval; and (4) grant of approval under Section 80G.
The Legal Issue
The central question was whether disbursing scholarship funds to Indian students for higher education abroad constitutes application of income for charitable purposes outside India under Section 11(1)(c) of the Income Tax Act, thereby disqualifying the trust from registration under Section 12AB.
Arguments Presented
For the Appellant
The appellant’s counsel contended that the payment of scholarships was made within India, and the ultimate beneficiary was an Indian national. The charitable purpose - education of Indians - was fulfilled through the disbursement of funds on Indian soil. Reliance was placed on the coordinate bench decision in Income Tax Officer (E) v. J.N. Tata Endowment for Higher Education of Indians ([2024] 166 taxmann.com 126), which held that the situs of application of income is the place of payment, not the location of the educational activity. It was further argued that Section 11(1)(c) does not require the charitable activity to be conducted within India, only that the application of income occur within India. The counsel emphasized that the CIT(E) erred in evaluating the application of income at the stage of registration, which is limited to examining the objects and genuineness of the trust.
For the Respondent
The Revenue relied on the CIT(E)’s order, arguing that since the educational activity occurred outside India, the application of income was effectively outside India, violating Section 11(1)(c). It was contended that the object clause permitting foreign education rendered the trust ineligible for registration. The Revenue did not dispute the genuineness of the trust but insisted on strict territorial compliance with Section 11(1)(c).
The Court's Analysis
The Tribunal emphasized that the statutory language of Section 11(1)(c) focuses on the location of the application of income, not the location where the charitable purpose is executed. The Tribunal relied extensively on the reasoning in J.N. Tata Endowment, where the coordinate bench held:
"The crucial question is only whether the conditions in section 11 are complied with. That section states that the income derived from property held under trust wholly for charitable purposes shall not be included in the total income to the extent to which such income is applied to such purposes in India. The question is whether this section requires the application of money in India or the carrying out of the purposes in India or both... The relevant consideration is whether the situs of the application of the money and not the place in which the objects of the trust may become effective."
The Tribunal noted that the payments in the present case were made from India to Indian students, and the trust’s activities were consistent with the statutory intent of promoting education among Indian citizens. The Tribunal further cited the CBDT’s own position under Section 10(16), which treats scholarships for overseas education as exempt without requiring the education to be conducted in India. The Tribunal held that the CIT(E) committed a legal error by conflating the location of the activity with the location of payment. At the registration stage under Section 12AB, the authority is not empowered to adjudicate the allowability of income application - only to verify the objects and genuineness of the trust. Since no adverse findings were made on either, the rejection was unsustainable.
The Verdict
The appeals were allowed. The Tribunal set aside the order dated [unspecified] rejecting registration under Section 12AB and directed the Ld. CIT(E) to grant registration to the assessee in accordance with law. Consequently, as the rejection under Section 80G was solely based on the non-grant of Section 12AB registration, the Tribunal directed the Ld. CIT(E) to grant approval under Section 80G to the assessee. The order was pronounced on 20.04.2026.
What This Means For Similar Cases
Charitable Trusts Can Fund Overseas Education Without Losing Exemption Status
- Practitioners may now confidently advise charitable trusts to include overseas education in their object clauses without fear of automatic disqualification under Section 11(1)(c)
- The situs of payment, not the location of educational activity, is the decisive factor for compliance
- Trusts must ensure all disbursements are made from Indian bank accounts to maintain clear evidentiary trail
Registration Under Section 12AB Is Not a Merits-Based Review
- Assessing officers and CIT(E) must restrict their scrutiny at the registration stage to the trust’s objects and genuineness of activities
- No inquiry into the future application of income, including its geographical scope, is permissible at this stage
- Rejection on grounds of potential future violations under Section 11(1)(c) is legally untenable
Precedent Binding Across Jurisdictions
- The J.N. Tata Endowment decision is now binding on all benches of the ITAT
- Similar cases involving scholarships, research grants, or cultural exchanges funded by Indian trusts for overseas beneficiaries are now protected under this precedent
- Revenue authorities must update their internal guidelines to reflect this clarified interpretation
