The Income Tax Appellate Tribunal, Delhi, has delivered a landmark ruling clarifying that financial irregularities involving benefit to related parties under Section 13 of the Income Tax Act cannot serve as grounds for cancellation of registration under Section 12AB. The judgment reinforces the distinction between assessment-stage tax consequences and registration-stage eligibility, safeguarding the charitable character of institutions against disproportionate administrative action.
Background & Facts
The Dispute
The appellant, Richmond Educational Society, is a registered charitable society established in 2006 under the Societies Registration Act, 1860, with the primary object of imparting education - a recognized charitable purpose under Section 2(15) of the Income Tax Act. The Society was granted registration under Section 12AA in 2009 and later renewed under Section 12AB in 2022 for assessment years 2022-23 to 2026-27. It operates three educational institutions in Noida and Meerut.
Procedural History
- 11 July 2023: A search and seizure operation under Section 132 was conducted at the premises of the PTC Group, with a consequential search at the Society’s offices.
- 24 December 2024: The Principal Commissioner of Income Tax (Central), Kanpur, issued a show-cause notice proposing cancellation of the Society’s registration under Section 12AB(4).
- 26 June 2025: The PCIT passed an order cancelling the registration for assessment years 2019-20 to 2023-24 and all subsequent years, citing four alleged financial irregularities.
- 30 January 2026: Hearing before the ITAT Delhi.
- 11 March 2026: Order pronounced allowing the appeal.
The Parties' Positions
The Assessee contended:
- No incriminating material was found during the search.
- The alleged transactions - salary payments, cash receipts, advance payments, and off-book entries - were isolated financial matters, not indicative of non-genuine activities.
- The PCIT lacked jurisdiction to cancel registration, as the competent authority was the CIT (Exemptions), Lucknow.
- The show-cause notice failed to specify which clause of the Explanation to Section 12AB(4) was invoked.
- The provisions of Section 12AB(4), introduced with effect from 1 April 2022, cannot be applied retrospectively.
The Revenue contended:
- The transactions constituted violations of Section 13(1)(c), extending benefits to related parties.
- Such violations triggered the ‘specified violation’ under Section 12AB(4), warranting cancellation.
- The PCIT had jurisdiction by virtue of a transfer order under Section 127.
Relief Sought
The Assessee sought restoration of its registration under Section 12AB, quashing of the cancellation order, and a declaration that the alleged financial irregularities are matters for assessment proceedings under Section 11 and Section 13, not grounds for registration cancellation.
The Legal Issue
The central question was whether alleged violations of Section 13(1)(c) - involving benefit to specified persons through financial transactions - constitute a ‘specified violation’ under the Explanation to Section 12AB(4), thereby justifying cancellation of registration, or whether such violations are confined to denial of exemption at the assessment stage.
Arguments Presented
For the Petitioner
The Assessee relied on:
- Judicial precedents from the Karnataka High Court in CIT v. A.S. Kupparaju Brothers Charitable Foundation Trust and CIT v. Islamic Academy of Education, which held that misapplication of funds or benefit to trustees does not render the core charitable activity non-genuine.
- The Supreme Court’s decision in Sri Agasthyar Trust v. CIT, affirming that deviation from trust terms constitutes breach of trust, not invalidation of the trust itself.
- The legislative intent behind the Finance Act, 2022, which introduced Section 115BBI to tax diverted income at 30% without cancelling registration, indicating a deliberate separation of consequences.
- The CBDT Circular No. 387/1984, which limits denial of exemption to the diverted portion only.
- The show-cause notice’s failure to specify the exact clause of the Explanation to Section 12AB(4), violating natural justice.
For the Respondent
The Revenue argued:
- The term ‘activities’ in Section 12AB(4) includes financial transactions, as they reflect the operational reality of the trust.
- The PCIT’s jurisdiction was validly transferred under Section 127, which defines ‘case’ broadly to include all proceedings.
- The retrospective application of Section 12AB(4) was permissible as it was procedural and not substantive.
- The alleged transactions demonstrated a pattern of diversion, undermining the genuineness of the Society’s educational activities.
The Court's Analysis
The Tribunal undertook a meticulous statutory interpretation, emphasizing the legislative architecture of the Income Tax Act. It observed that Section 12AB(4) introduces a distinct and narrow category of ‘specified violations’ - exhaustively enumerated in its Explanation - and that Section 13(1)(c) is conspicuously absent from this list.
"The legislature has consciously excluded violations of Section 13(1)(c) from the definition of 'specified violation' under Section 12AB(4). This is not an oversight but a deliberate legislative choice to confine cancellation of registration to fundamental deviations from charitable purpose, not financial improprieties."
The Court distinguished between ‘activities’ and ‘transactions’. Activities refer to the substantive, ongoing charitable functions - here, running schools. Transactions are incidental financial acts, such as salary payments or advance disbursements. The Tribunal held that Section 12AB(4) targets only cases where the very nature of the activity is fraudulent or non-existent, not where the manner of funding is disputed.
It further noted that Section 13(1)(c) and Section 115BBI together form a self-contained regime for dealing with benefit to related parties: the diverted income is taxed at 30% on a gross basis, but the registration remains intact. To cancel registration on the same facts would render Section 115BBI otiose and impose a disproportionate penalty.
The Tribunal also rejected the Revenue’s jurisdictional argument. Section 127 governs transfer of assessment proceedings, not registration jurisdiction. The CBDT Notification No. 52/2014 explicitly vests registration and cancellation powers in the CIT (Exemptions). The PCIT (Central), Kanpur, had no authority to act.
Finally, the Court held that Section 12AB(4), effective from 1 April 2022, cannot be applied retrospectively to assessment years prior to that date. The absence of express retrospective language, coupled with the principle of strict construction of fiscal statutes, invalidated the cancellation for AYs 2019-20 to 2022-23.
The Verdict
The Assessee won. The ITAT Delhi held that alleged violations of Section 13(1)(c) do not constitute a ‘specified violation’ under Section 12AB(4) and cannot justify cancellation of registration. The order of cancellation was quashed on multiple grounds: lack of jurisdiction, retrospective application, and failure to specify the statutory ground in the notice. The Society’s registration under Section 12AB was restored.
What This Means For Similar Cases
Registration Cancellation Requires Genuine Activity Failure
- Practitioners must now argue that cancellation under Section 12AB(4) is only justified if the core charitable activity is sham, fictitious, or non-existent.
- Isolated financial irregularities, even if amounting to breach of trust or tax evasion, are matters for assessment under Section 11 and Section 13, not grounds for registration cancellation.
- In appeals against cancellation, focus on demonstrating the continuity and genuineness of the primary charitable activity.
Section 13 Violations Are Taxable, Not Cancelable
- Section 115BBI is now the exclusive remedy for income diverted to related parties: tax at 30% on gross amount, no registration impact.
- Any attempt to link Section 13 violations to Section 12AB(4) cancellation is legally unsustainable post-2022 amendments.
- Practitioners should oppose cancellation notices that cite Section 13 breaches without referencing the specific clauses of the Explanation to Section 12AB(4).
Jurisdictional Authority Must Be Explicitly Vested
- Only the CIT (Exemptions) designated under CBDT Notification No. 52/2014 has jurisdiction to cancel registration under Section 12AB.
- Transfer of assessment jurisdiction under Section 127 does not transfer registration powers.
- Practitioners must verify jurisdictional authority before responding to cancellation notices and challenge any action by non-designated authorities as void ab initio.
