Section 12AB Income Tax Act | Trust Registration Cannot Be Denied Based on Section 13 Allegations of Income Misuse: ITAT Delhi

The Income Tax Appellate Tribunal, Delhi, has clarified that allegations of improper application of funds under Section 13 of the Income Tax Act cannot serve as a basis for rejecting a trust’s registration under Section 12AB. The ruling reinforces the statutory distinction between registration eligibility and post-registration compliance, offering critical guidance to charitable institutions navigating tax exemptions.

Background & Facts

The Dispute

The appellant, Pista Devi Education Society, a registered educational trust operating a school in Gurgaon, Haryana, applied for registration under Section 12AB(1)(b)(ii) of the Income Tax Act, 1961, on 24.02.2025. The application sought recognition of its charitable status to qualify for income tax exemptions under Sections 11 and 12. The Commissioner of Income Tax (Exemptions), Chandigarh, rejected the application by order dated 06.08.2025, citing alleged irregularities in financial transactions with trustees and related entities.

Key Facts

• The trust was registered under the Haryana Registration and Regulation of Societies Act, 2012, on 09.07.2017 (Registration No. HR018201703050)
• The trust’s objects, as per its Memorandum and Bye-laws, are exclusively educational and charitable, falling under Section 2(15) of the Act
• The trust is affiliated with the Directorate of Elementary Education, Haryana (12.11.2021) and the Directorate of School Education (28.08.2025)
• The trust holds registration under the Foreign Contribution (Regulation) Act, 2010
• The trust filed annual accounts, audit reports in Form 10B/10BB, and income tax returns for FY 2022-23 to 2024-25
• The CIT identified three primary concerns:
  • High-frequency, interest-free loans from trustees Shri Anil Tayal (President), Smt. Shewta Tayal (Vice-President), and Smt. Savita Tayal
  • A debit transaction of Rs. 92,50,000 from Anil Tayal’s account during FY 2024-25, with an opening balance of Rs. 64,89,869 as of 01.04.2024
  • Variance in rent payments to M/s Gargi Farms: Rs. 50,000 (FY 2022-23), Rs. 20,000 (FY 2023-24), Rs. 1,00,000 (FY 2024-25)
• The CIT concluded these transactions indicated benefit to interested persons under Section 13(3), suggesting the trust was a facade for private gain

Procedural History

• 24.02.2025: Application for registration under Section 12AB(1)(b)(ii) filed
• 13.03.2025: CIT issued show cause notice seeking explanation for financial transactions
• 06.08.2025: CIT rejected registration application, citing Section 13 violations
• 20.01.2026: Hearing before ITAT Delhi
• 20.04.2026: Judgment pronounced

Relief Sought

The appellant sought setting aside of the CIT’s order dated 06.08.2025 and direction to grant registration under Section 12AB of the Act.

The Legal Issue

The central question was whether the Commissioner of Income Tax (Exemptions) can reject an application for registration under Section 12AB of the Income Tax Act on the ground of alleged violations of Section 13, particularly concerning transactions with interested persons, prior to any assessment or claim of exemption.

Arguments Presented

For the Appellant

The appellant’s counsel, Sh. R.S. Punia and Sh. Pawan Chhikara, CA, argued that:

• The trust’s objects are exclusively charitable and educational, duly documented and certified by state education authorities
• All financial transactions with trustees were interest-free loans, documented in ledger accounts, and used exclusively for infrastructure, staff salaries, and academic materials
• The rent variance to M/s Gargi Farms was explained as market-driven and below prevailing rates, with lease deed dated 06.01.2021 submitted
• Section 13 applies only at the assessment stage to deny exemption under Sections 11 and 12, not to reject registration under Section 12AB
• The CIT’s reliance on Section 13 was legally impermissible at the registration stage
• The trust had submitted complete documentation, including bank statements, audit reports, and affiliation certificates

For the Respondent

The Respondent, Sh. Jitender Singh, CIT(DR), contended that:

• The frequency and magnitude of transactions with trustees, particularly the Rs. 92,50,000 payment to Anil Tayal, indicated potential benefit to interested persons under Section 13(3)
• The rent variance to Gargi Farms lacked justification and suggested artificial inflation or diversion of funds
• The trust had not claimed any application of income in its returns for the last two years, raising suspicion of non-genuine activity
• The CIT was entitled to scrutinize financial patterns to assess genuineness of the trust’s charitable purpose

The Court's Analysis

The Tribunal undertook a detailed statutory interpretation of Sections 12AB and 13 of the Income Tax Act, emphasizing their distinct purposes and temporal application.

"Section 13 of the Act merely provides for circumstances under which exemption otherwise allowable under Section 11 and 12 shall not be granted to the extent income is applied or used for the benefit of interested persons. The said provision, therefore, operates only after registration is granted and only at the assessment stage, when exemption under Section 11 and 12 is claimed."

The Tribunal held that Section 12AB(1)(b) confines the scope of inquiry to two matters: (i) the genuineness of the trust’s activities, and (ii) compliance with applicable laws relevant to achieving its objects. It explicitly does not authorize examination of how income is applied post-registration.

"The scope of examination at the time of grant of registration under Section 12AB is confined to the objects of the trust and the genuineness of its activities, and not to the application or alleged misapplication of income, which is a matter to be examined by the Assessing Officer during assessment proceedings."

The Tribunal further clarified that Section 12AB(4) - which permits cancellation of registration - applies only where registration has already been granted and a specified violation is detected during assessment or through risk profiling. Since no registration had been granted in this case, Section 12AB(4) was inapplicable.

The Tribunal rejected the CIT’s reliance on Section 13(1)(c) as legally misplaced, noting that even if the transactions were excessive or suspicious, such concerns fall within the domain of the Assessing Officer during assessment under Section 143(3), not the Commissioner during registration.

The Tribunal also referenced the decision in Shree Dandhavya Chhasath Prajapati Samaj v. CIT(E), which held that allegations under Section 13 cannot be grounds for rejecting registration under Section 12AB. The Tribunal affirmed that the trust’s activities were educational, public-facing, and aligned with its stated objects, with no evidence of fictitiousness or non-compliance with any law.

The Verdict

The appeal was allowed. The order of the CIT (Exemptions) dated 06.08.2025 rejecting the registration application under Section 12AB is set aside. The CIT (Exemptions) is directed to grant registration under Section 12AB of the Income Tax Act, 1961, to Pista Devi Education Society, in accordance with law, within 4 weeks from the date of this order.

What This Means For Similar Cases

Registration Cannot Be Denied Based on Section 13 Allegations

• Practitioners must now argue that any allegations of income misuse, excessive payments to trustees, or irregular financial flows must be addressed during assessment under Section 143(3), not at the registration stage
• CITs cannot use Section 13 as a proxy to deny registration; doing so exceeds statutory authority
• Trusts should ensure documentation of all loans and transactions with trustees, even if interest-free, to preempt suspicion

Genuineness of Activities Trumps Financial Patterns

• The Tribunal prioritized the trust’s stated charitable objects and institutional affiliations over speculative financial concerns
• Submission of affiliation certificates, audit reports, and lease deeds was sufficient to establish genuineness
• Variance in rent or loan frequency alone, without proof of private benefit, cannot invalidate registration

Procedural Compliance Is Non-Negotiable

• Trusts must file complete documentation under Section 12AB, including constitution, annual accounts, and audit reports
• Failure to submit documents may be grounds for rejection, but misinterpretation of submitted documents is not
• The burden of proving non-genuineness lies with the revenue; mere suspicion is insufficient