The Income Tax Appellate Tribunal, Delhi, has clarified that an entity engaged in environmental education through fee-based school programs does not automatically lose its charitable status merely because it charges fees, provided its primary object falls under the fifth limb of Section 2(15) of the Income-tax Act. This ruling reinforces that the nature of activities, not revenue structure alone, determines exemption eligibility.
Background & Facts
The Dispute
The appellant, M/s. Sowgood Foundation, a non-profit company incorporated on 09.01.2020, sought registration under Section 12A(1)(ac)(iv) of the Income-tax Act, 1961, to claim tax exemption for its activities focused on environmental awareness, farming education, and waste management. The Commissioner of Income Tax (Exemptions), Delhi, rejected the application on 30.05.2025, holding that the Foundation’s activities were predominantly commercial and that it had incorrectly applied under Section 12A instead of the appropriate provision for entities engaged in general public utility.
Key Facts
- The Foundation’s objects include promoting environmental protection, spreading awareness about farming and composting, establishing farm-based classroom learning in schools, training educators in nature awareness, and advocating sustainable development.
- The Foundation receives funding from two sources: CSR donations and private school fees.
- In FY 2022-23, it received Rs. 10,22,560 as "sale of services" from schools; in FY 2023-24, this rose to Rs. 24,37,936.
- In AY 2024-25, it reported business receipts of Rs. 16,01,700, on which TDS was deducted under Section 194JB.
- The Foundation filed ITR-6 for AYs 2023-24 and 2024-25, as it had not yet received Section 12A registration.
- The CIT(E) concluded that the Foundation’s activities fell under the "general public utility" limb of Section 2(15), triggering the 20% commercial receipts threshold, and rejected registration on grounds of commercial dominance.
Procedural History
- 09.01.2020: M/s. Sowgood Foundation incorporated with charitable objects.
- 16.10.2024: Application filed in Form 10AB for registration under Section 12A(1)(ac)(iv).
- 30.05.2025: CIT(E) issued order rejecting registration under Section 12A, citing commercial nature of activities and misapplication of provision.
- 11.02.2026: Hearing held before ITAT Delhi.
- 11.05.2026: ITAT delivered judgment allowing the appeal.
The Parties' Positions
For the Appellant
- Argued that its primary objects fall squarely under the fifth limb of Section 2(15) - "advancement of any other object of general public utility" does not apply, as its activities are specifically environmental and educational, not general utility.
- Contended that fees charged are nominal and used to sustain educational outreach, not for profit.
- Stated that ITR-6 was filed only because registration was pending, not because it considered itself a business.
- Cited Ahmedabad Urban Development Authority v. ACIT (449 ITR 1 SC) to affirm that objects must be examined holistically.
- Relied on Aroh Foundation v. CIT(E) (2025) 476 ITR 504 (Del) to argue that TDS deduction by payers cannot be used to deny exemption.
For the Respondent
- Argued that the Foundation’s receipt of Rs. 24.37 lakh in service fees in FY 2023-24 exceeded 20% of total receipts, triggering the proviso to Section 2(15).
- Contended that filing ITR-6 and accepting TDS under Section 194JB demonstrated the Foundation’s own recognition of its commercial character.
- Relied on Queen’s Education Society v. CIT (372 ITR 699 SC) and American Hotel & Lodging Association v. CBDT (301 ITR 86 SC) to assert that substance must prevail over form.
- Maintained that registration under Section 12A was misapplied since no prior registration existed, and the correct provision would have been under the general public utility limb.
Relief Sought
The appellant sought: (1) setting aside of the CIT(E)’s order dated 30.05.2025; (2) grant of registration under Section 12A; and (3) recognition that its activities fall under the fifth limb of Section 2(15), not the seventh (general public utility).
The Legal Issue
The central question was whether an entity whose primary objects involve environmental education and awareness, and which charges modest fees to sustain its outreach, qualifies for registration under Section 12A under the fifth limb of Section 2(15), or whether its fee-based activities trigger the commercial threshold under the seventh limb (general public utility) and disentitle it to exemption.
Arguments Presented
For the Appellant
The appellant relied on Ahmedabad Urban Development Authority v. ACIT (449 ITR 1 SC) to argue that Section 2(15) has distinct limbs, and the proviso applying the 20% commercial threshold only applies to the seventh limb - "advancement of any other object of general public utility." The Foundation’s objects - promoting environmental protection, farming education, and nature awareness - are explicitly covered under the fifth limb, which does not attract the proviso. The filing of ITR-6 was a procedural necessity due to lack of registration, not an admission of commercial intent. The deduction of TDS under Section 194JB by schools, as held in Aroh Foundation v. CIT(E), cannot be used to infer the nature of the recipient’s activities. The application under Section 12A(1)(ac)(iv) was a bona fide error, not a fraudulent misrepresentation.
For the Respondent
The Revenue contended that the Foundation’s receipt of over Rs. 24 lakh in service fees in FY 2023-24, coupled with TDS deduction and ITR-6 filing, demonstrated a profit motive. It relied on Queen’s Education Society and American Hotel & Lodging Association to assert that courts permit scrutiny of actual activities at the registration stage. The Revenue argued that even if the objects appear charitable, the financial pattern reveals commercial dominance, and the proviso to Section 2(15) applies because the activities are "of general public utility." It further claimed that the Foundation’s misapplication of Section 12A(1)(ac)(iv) - which requires prior registration - invalidated the application.
The Court's Analysis
The Tribunal first examined the precise wording of Section 2(15), which defines "charitable purpose" as including seven limbs. The fifth limb covers "advancement of any other object of general public utility" only if it does not involve commercial activity - but crucially, the proviso to Section 2(15) applies only to the seventh limb, not the preceding ones.
"Section 2(15) proviso read with clauses (i) & (ii) gets attracted only in instance of assessee's concerned carrying out objects of general public utility i.e. the seventh/last limb than those preceding the same."
The Tribunal held that the Foundation’s stated objects - promoting environmental awareness, farming education, and nature-based learning - are not "general public utility" in the sense of the seventh limb, but fall squarely under the fifth limb, which is exempt from the 20% commercial receipts threshold.
The Tribunal rejected the Revenue’s reliance on TDS deduction under Section 194JB, citing Aroh Foundation v. CIT(E) (2025) 476 ITR 504 (Del), which held that the deductor’s obligation to deduct TDS does not determine the recipient’s charitable character. Similarly, the filing of ITR-6 was held to be a procedural consequence of non-registration, not an admission of business status.
The Tribunal also dismissed the Revenue’s technical objection regarding the misapplication of Section 12A(1)(ac)(iv), relying on Niravadya Foundation v. CIT (Exemption) [2025] 173 Taxmann.com 179 (Ahmedabad Trib.), which held that a bona fide error in selecting the correct sub-clause cannot be grounds for outright rejection.
The Tribunal emphasized that the Commissioner’s role at the registration stage is to assess genuineness, not to impose commercial thresholds where they do not legally apply. The Foundation’s activities, though fee-based, were educational and non-profit in intent, and the revenue profile did not override the statutory classification under the fifth limb.
The Verdict
The appeal was allowed. The ITAT set aside the CIT(E)’s order dated 30.05.2025 and directed the Commissioner to grant registration under Section 12A to M/s. Sowgood Foundation. The Tribunal held that the Foundation qualifies under the fifth limb of Section 2(15), and the 20% commercial receipts threshold does not apply. The Foundation’s filing of ITR-6 and the deduction of TDS under Section 194JB were held irrelevant to its exemption eligibility. The technical error in selecting Section 12A(1)(ac)(iv) was deemed a bona fide mistake and not a ground for rejection.
What This Means For Similar Cases
Charitable Status Is Determined by Object, Not Revenue Source
- Practitioners must now argue that entities promoting education, environment, or health under limbs 1 - 5 of Section 2(15) are not subject to the 20% commercial receipts threshold, even if they charge fees.
- Fee-based models for educational outreach (e.g., school workshops, training programs) do not automatically convert charitable entities into commercial ones.
- The burden remains on the Revenue to prove that the object itself is not charitable, not merely that income is generated.
TDS and ITR Filing Are Not Conclusive Evidence of Commercial Intent
- Deduction of TDS by third parties (e.g., schools paying fees) cannot be used to infer the recipient’s business character.
- Filing ITR-6 due to pending registration is a procedural formality, not an admission of business status.
- Practitioners should proactively submit affidavits clarifying the reason for ITR-6 filing when challenging registration rejections.
Technical Errors in Application Form Cannot Justify Rejection
- Misapplication of a sub-clause under Section 12A, if made in good faith, cannot be grounds for outright rejection.
- Authorities must allow correction or clarification before rejecting applications on technical grounds.
- The Niravadya Foundation precedent now binds all authorities: substance over form must prevail at the registration stage.
