Cancellation of Registration under Section 12AA & Denial of Exemption under Section 80G: Legal Framework, Challenges & a Landmark Victory
Introduction
Charitable trusts and non-profit institutions play a crucial role in the socio-economic development of India. To encourage and support their activities, the Income Tax Act, 1961, provides significant tax exemptions and benefits. Two key provisions in this regard are:
- Section 12AA (now replaced by Section 12AB post-2020 amendments), which governs the registration of charitable and religious trusts, enabling them to claim exemption on income.
- Section 80G, which allows donors to claim deductions for donations made to eligible institutions.
However, these exemptions are not automatic. They are subject to compliance, and any deviation real or perceived can lead to cancellation of registration and denial of exemption, severely affecting the functioning and credibility of the trust.
This blog examines the legal framework, grounds for cancellation, procedural safeguards, and highlights a real-life success story where we secured a favorable ruling from the Income Tax Appellate Tribunal (ITAT) for a charitable trust whose registration under Section 12AA and approval under Section 80G were wrongfully withdrawn.
Grounds for Challenging Section 148 Notices
Section 12AA – Registration of Charitable Trusts
Section 12AA (now 12AB) lays down the procedure for registration of a trust or institution that wishes to claim exemption under Sections 11 and 12 for income applied toward charitable or religious purposes.
Registration under this section is essential for a trust to:
- Claim income tax exemption on donations and other receipts.
- Establish its credibility and compliance with the law.
- Continue its recognition in the eyes of the law and the public.
Section 80G – Tax Deduction for Donors
Section 80G of the Income Tax Act allows donors to claim deductions for donations made to eligible charitable organizations. A trust must obtain approval under Section 80G(5) from the Commissioner of Income Tax (Exemptions).
Benefits of 80G approval include:
- Greater donor confidence and participation.
- More funding for welfare activities.
Enhanced compliance profile for the trust.
Grounds for Cancellation of 12AA & Denial of 80G Exemption
The Commissioner of Income Tax (Exemptions) can cancel registration under 12AA/12AB or deny 80G approval on the following grounds:
Non-Genuine Activities:
If the activities of the trust are found to be not genuine, or not being carried out in accordance with its stated objects.
Violation of Law:
Engaging in activities that contravene any law, including misuse of funds, political involvement, or commercial operations.
Non-Compliance:
Failure to file returns, maintain books of accounts, or furnish audit reports can lead to revocation.
Lack of Opportunity:
Unfortunately, in many cases, authorities cancel registrations without giving the trust a proper opportunity to respond, violating principles of natural justice.
Our Success Story: A Landmark Victory Before ITAT
Background
Our client, a reputed charitable trust, had been engaged in multiple public welfare projects for years focusing on education, healthcare, and skill development. The trust had valid registration under Section 12AA and approval under Section 80G(5).
However, during an internal review, the Commissioner of Income Tax (Exemption):
- Cancelled the 12AA registration, alleging procedural and operational lapses.
- Denied exemption under Section 80G, citing reasons that were never properly communicated to the trust.
These actions were taken without giving the trust a meaningful hearing, and without considering the voluminous records of compliance and social impact.
Legal Challenge
Our legal team, led by Adv. Sachin P. Kumar, filed an appeal before the Income Tax Appellate Tribunal (ITAT).
Key arguments presented:
- Violation of Natural Justice:
The trust was not given a fair opportunity to respond to allegations. Any adverse action without proper hearing is void and illegal. - Compliance Track Record:
The trust had consistently filed returns, conducted audits, and submitted all relevant documents over the years. - Socio-Economic Relevance:
The trust’s work aligned with constitutional goals of social justice and public welfare, and its registration should not be cancelled on minor or technical grounds. - Procedural Irregularities:
The order passed by the CIT (Exemption) was non-speaking, vague, and not supported by evidence.
ITAT Ruling
The Income Tax Appellate Tribunal (ITAT) carefully examined the arguments and ruled in favor of our client. The Tribunal:
- Set aside the cancellation order under Section 12AA.
- Quashed the denial of exemption under Section 80G(5).
- Remanded the matter for fresh adjudication with directions to follow due process and give the trust an opportunity of being heard.
Outcome
This decision provided major relief to the trust, restoring its ability to claim exemptions and continue fundraising. It also reaffirmed that administrative authorities must act fairly and reasonably, especially when dealing with charitable institutions.
Key Takeaways from the Case
1. Due Process is Essential
Tax authorities must provide a proper opportunity to be heard before passing any order that affects the rights and status of a charitable trust.
2. Documentation and Compliance
Trusts must maintain transparent accounts, file timely returns, and regularly update registration details to avoid adverse actions.
3. Judicial Forums Provide Relief
If wronged by arbitrary or unlawful action, trusts can seek relief from appellate authorities, including ITAT and High Courts.
4. Trusts Are Vital for Society
Their work supports constitutional goals such as education, healthcare, upliftment of the poor, and environmental protection. The law must encourage not discourage their functioning.
Practical Tips for Trusts and NGOs
- Regular Filing: Submit income tax returns, audit reports (Form 10B), and Form 10 regularly.
- Update Trust Deed: Ensure your objectives are charitable and non-controversial.
- Avoid Political Activities: Stay away from political funding or ideologies.
- Respond to Notices: Never ignore communication from the IT Department.
Consult Professionals: Engage a qualified tax professional to handle registrations, renewals, and compliance.
Conclusion
The provisions under Section 12AA and Section 80G are designed to support and regulate the functioning of charitable institutions. However, arbitrary cancellations or denials especially without due process can cripple the operations of even the most genuine trusts.
Our recent victory before the ITAT, where the tribunal reinstated our client’s registration and exemption status, underscores the importance of vigilant legal representation and the need to uphold the rule of law in tax administration.
Charitable trusts are the backbone of social justice in India. The law must protect their existence and enable their work, not obstruct it without reason.
Facing cancellation of 12AA or denial of 80G exemption?
We specialize in representing charitable and non-profit entities before the Income Tax Department, CIT (Exemption), ITAT, and High Courts. For any information drop us a mail on spkumarassociates@gmail.com or reach our website www.sachinpkumar.com