Registration cannot be denied based on commercial activity; CSR funds are not “commercial receipts.”
I. Registration vs. Exemption: The “Two-Stage” Rule
The Conflict: The Commissioner (CIT-E) rejected the trust’s registration (Form 10AB), arguing that because the trust sold processed agricultural goods, it was a “business” under the Proviso to Section 2(15).
The Verdict: The Tribunal/Court ruled in favour of the Assessee, establishing a clear jurisdictional boundary:
The Enquiry Limit: At the registration stage (u/s 12AB / Section 332), the CIT(E) can only look at two things: (1) The Objects of the Trust and (2) The Genuineness of activities.
The “Yearly” Test: Whether the trust’s business receipts exceed the 20% limit (Proviso to Section 2(15)) is a matter for the Assessing Officer to check during the yearly tax return filing.
The Logic: Even if a trust is denied exemption in a “high-revenue year,” its status as a charitable registration should remain intact. Rejection of registration is a “death penalty” that the CIT(E) cannot impose based on a preliminary view of commerciality.
II. CSR Funds: Not a “Quid Pro Quo”
The Conflict: The trust received CSR funds from NIIFL for solar dehydration equipment. The CIT(E) treated this as “consideration for services” (commercial income).
The Verdict: The Court dismissed this view:
Grant vs. Contract: CSR receipts are statutory obligations of the donor (the company). They are grants, not a “quid pro quo” (this-for-that) commercial deal.
Charitable Link: Using solar dehydration to prevent food waste and provide livelihood for the poor is “Relief of the Poor” and “Preservation of Environment”—both core charitable purposes under Section 2(15) / Section 2(23).
Key Takeaways for NGOs in 2026
Social Enterprise is Safe: If your NGO sells products (e.g., handicrafts made by rural women or processed waste), you are eligible for registration. The sale of goods is “incidental” to the charitable object of providing a livelihood.
CSR is Not Revenue: Ensure your CSR agreements are drafted as Grants for specific equipment or projects. This prevents the Department from labeling your CSR income as “Consultancy” or “Commercial Consideration.”
Section 332 Compliance (New Act): Under the Income-tax Act, 2025, the registration process is fully digitized. While the scope of inquiry is limited, you must ensure that your Trust Deed explicitly lists the “Relief of the Poor” or “Environmental Preservation” to avoid the CIT(E) claiming your objects are vague.
Audit Defense: Maintain separate books for any activity in the nature of trade or commerce. This ensures you can prove that the business is “incidental” to your main charitable goal when the yearly assessment occurs.
IN THE ITAT CHENNAI BENCH ‘A’
Gramonnati Trust
v.
Commissioner of Income-tax (Exemptions)*
Manu Kumar Giri, Judicial Member
and S. R. RAGHUNATHA, Accountant Member
and S. R. RAGHUNATHA, Accountant Member
IT Appeal No. 3038 (Chny) OF 2024
APRIL 1, 2026
K.G. Raghunath, Adv. for the Appellant. Ms. E. Pavuna Sundari, CIT for the Respondent.
ORDER
S.R. Raghunatha, Accountant Member. – The present appeal is filed by the assessee against the order of the learned Commissioner of Income Tax (Exemption) dated 30.09.2024 (hereinafter referred to as the “ld.CIT(E)”) rejecting registration u/s.12AB of the Income Tax Act, 1961 (hereinafter referred as “the Act”).
2. The brief facts of the case emanating from the records are that the assessee is a Trust, constituted under a duly executed Trust Deed dated 05.10.2017. Its objects, inter alia, are relief of the poor, preservation of the environment, and advancement of other charitable purposes. The application in Form 10AB dated 09.03.2024 u/s.12A(1)(ac)(iii) was filed in accordance with law. During the proceedings the assessee filed the details as and when called for. On perusal of the submissions of the assessee, the ld.CIT(E) noted that the trust aims for rural transformation through technology and entrepreneurship, empowering rural women, Running the solar dyer production system, MOU with NIIFL (National Investment and Infrastructure Fund Limited) aiming introduction of effective dehydration system in fruits and Vegetables. Further, it is also observed that the funds have been transferred to the assessee by NIIFL. Hence, the ld.CIT(E) passed the impugned order by rejecting the registration u/s.12AB of the Act stating that the activities of the trust is commercial in nature and the activities does fall under ‘Charitable Purposes’ as envisaged u/s.2(15) of the Act.
3. Aggrieved by the order of the ld.CIT(E), the assessee is in appeal before us by raising the following grounds of appeal:
“1 . The Learned CIT has rejected the application for registration without comprehending that the nature of activity of the Trust falls squarely under the ambit of “Relief of the Poor”
2. The Learned CIT, has, by ignoring the concept of Relief of Poor that is in-built and associated in the activities of the Trust, has arbitrarily resorted to seek the application of the concept of General Public Utility” in an erroneous manner
3. The action of the Learned CIT to invoke the concept of General Public Utility alone, by ignoring the application of principles of “Relief of Poor”, has further resulted erroneous activity of verification of the application of the threshold limit of 20% of receipts for commercial purposes.
4. Therefore the Learned CIT has rejected the application on the grounds that the commercial activity is more than 20% of the total receipts of the Trust by completely ignoring the concept and application of principles of -“Relief of Poor” on the activities of the Gramonnati Trust.
5. Further, while adjudicating on the ground of “Relief of Poor the Learned CIT, has, without considering the manner in which the Trust has contributed to the “Relief of Poor” and thereby bringing improvements to the welfare, and standard of living of the economically and socially disadvantaged and needy people, namely the various Self Help Groups (SHG), has arbitrarily concluded in Para 4.1 of the impugned order that the activity of assistances extended to the Economically and socially disadvantaged section of the Society is a “Trading and Commercial nature and Rejection the application seeking registration U/s 12AB of the Act.
Thus, it is the humble prayer and submission of the appellant, that Para 4.1 of the impugned order rejecting the application of the appellant, has not been discussed in detail on the merits and facts of the application made by the appellant in Form 10AB of the Act.
6. The Learned Assessing Officer has miserably failed to comprehend and appreciate the binding nature of the decisions of the various Hon’ble High Courts on the same issue on hand and various associated aspects thereof.
In view of the above and in view of further grounds that may be advanced, as the circumstances may warrant, in the interest of deliverance of justice, during the course of hearings, it is prayed that the Honourable Commissioner of Income Tax (Appeals) may be pleased to grant suitable relief after considering all the evidences and explanations that the Assessee could produce before the Honourable Commissioner of Income Tax (Appeals), during the course of hearing on appeals, on the issues raised in the Rejection Order concerned.”
4. The ld.AR for the assessee assailing the action of the ld.CIT(E), submitted that the order does not record any finding that the Trust deed is non-charitable, nor that the activities are not genuine, nor that funds have been misapplied, nor that trustees derive any personal benefit. The entire cancellation rests solely on the reasoning that the Trust maintains purchase and sale accounts, incurs salary expenditure, and therefore operates in a commercial line of activity.
5. The ld.AR submitted that the scope of enquiry u/s.12AB of the Act is limited. The ld.CIT(E) is required to satisfy himself about the objects of the Trust and the genuineness of its activities. This position has been settled by the Hon’ble Supreme Court in Ananda Social and Educational Trust v. CIT (SC), wherein it was held that at the stage of registration, the authority must examine only whether the objects are charitable and whether activities are genuine; the application of income and computation issues arise at the assessment stage. The impugned order travels far beyond this limited jurisdiction. The assessee’s activities squarely fall within the limb of relief of the poor and preservation of environment as contained in Section 2(15) of the Act.
6. The ld.AR further submitted that the Trust was founded by a retired Army Major who, after years of service in the Kashmir border areas, resolved to rehabilitate widows of terror victims, injured and handicapped army personnel, and economically distressed women in war-affected and rural regions. The Trust operates in terror-affected regions near Banihal in Kashmir, where large quantities of agricultural produce, particularly apples and apricots, are rejected due to cosmetic damage or discoloration. Nearly 30% of fruit is wasted and left to decompose.
7. The decomposition generates harmful emissions and environmental degradation. The assessee procures such rejected produce at discounted value and distributes it to Self-Help Groups consisting predominantly of widows of terror victims, injured army personnel, and economically distressed women. These beneficiaries slice and process the fruit using solar dehydration equipment funded through CSR contributions. The dehydrated produce is then sold at prices substantially below prevailing market rates. Further, the ld.AR stated that the proceeds are entirely ploughed back into wages and maintenance of the project. There is no element of private profit. No surplus has been distributed. In fact, expenses have exceeded income and the founder has infused personal savings to sustain operations. The activity is structured livelihood rehabilitation combined with environmental conservation.
8. The Hon’ble Supreme Court in CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC) and later in CIT v. Surat Art Silk Cloth Manufacturers Association ITR 1 (SC) laid down that the predominant object test must be applied. If the primary purpose is charitable, the mere fact that some income is generated does not convert the activity into business. In Surat Art Silk, the Constitution Bench categorically held that profit making per se does not defeat charity unless profit making is the predominant objective.
9. Further, ld.AR submitted that in the case of Queen’s Educational Society v. CIT ITR 699 (SC), the Hon’ble Supreme Court held that incidental surplus arising from charitable activity does not alter the character of the institution so long as the surplus is applied for charitable purposes. The same principle applies here. The Ld.AR submitted that the ld.CIT(E) has wrongly invoked the proviso to Section 2(15). It is further submitted that the proviso primarily affects entities falling under the limb advancement of any other object of general public utility. The assessee’s activities are not confined to GPU; they independently fall under relief of the poor and preservation of environment, which are separate limbs. Even otherwise, the proviso applies only where the activity is in the nature of trade, commerce, or business with profit motive. The Hon’ble Supreme Court in CIT (Exemptions) v. Ahmedabad Urban Development Authority /[2022] 449 ITR 1 (SC) (AUDA case) clarified that the test is whether the activity is carried out with a profit motive in a commercial sense. It did not hold that existence of sale transactions ipso facto renders an institution commercial.
10. Hence, the ld.AR submitted that the reliance placed on AUDA case is misplaced. That case dealt with statutory development authorities engaged in large-scale land allotment and infrastructure development for consideration. The factual matrix is wholly distinguishable from a welfare trust rehabilitating terror widows and injured army personnel through solar dehydration of agricultural waste. The assessee is not engaged in systematic commercial exploitation of assets. The scale, intent, and context are entirely different. Even assuming without admitting that the activity has elements of business, Section 11(4A) expressly permits incidental business, provided it is incidental to the attainment of objects and separate books are maintained. The processing and sale of waste fruit is inseparably linked to livelihood generation and environmental preservation. The maintenance of trading accounts is merely an accounting necessity to reflect transparency and audit compliance. The Hon’ble Madras High Court in CIT v. Tamil Nadu Cricket Association ITR 633 (Madras) held that incidental commercial receipts do not defeat charitable status where the dominant object remains charitable.
11. The ld.CIT(E)’s order also characterizes the CSR contribution from NIIFL as consideration. This finding is factually incorrect. The CSR contributions u/s.135 of the Companies Act are statutory obligations. NIIFL, being a Government of India supported institution aligned with national development policy initiatives, operates within the constitutional framework of public welfare planning and coordination. CSR funds were granted for procurement of solar dehydrators, without interest, without return obligation, and solely for project implementation. NIIFL derives no commercial benefit. To characterize statutory CSR support as quid pro quo business consideration is legally untenable.
12. Therefore, the cancellation power u/s.12AB of the Act is drastic and must be exercised only when activities are not genuine or not in accordance with objects. The Hon’ble Madras High Court in Director of Income-tax (Exemptions) v. Ramoji Foundation [2014] 362 ITR 512 (Mad.) held that registration cannot be cancelled merely because the authority forms a different view on application of income. The impugned order does not establish deviation from objects or lack of genuineness.
13. In the present case, the Commissioner has effectively adjudicated on computation aspects and presumed commerciality based on accounting presentation. Such reasoning is contrary to settled law. Even if in a particular assessment year, the proviso to Section 2(15) were to be attracted, the consequence would be denial of exemption for that year and not the cancellation of registration itself. The registration and exemption are distinct stages, as clarified in Ananda Social and Educational Trust (supra).
14. In light of the above reasons and arguments, the ld.AR submitted that the impugned order is unsustainable in law and liable to be set aside and restore the registration of the Trust in the interest of justice.
15. Per contra, the ld.DR supported the order of the ld.CIT(E) and prayed for confirming the same as the activities of the assessee is commercial in nature.
16. We have considered the rival submissions, perused the material available on record, and examined the impugned order passed by the ld.CIT(E). At the outset, it is an undisputed fact that the assessee is a Trust constituted by a duly executed Trust Deed dated 05.10.2017. The objects of the Trust, as borne out from the Trust Deed, include relief of the poor, preservation of environment, and advancement of other charitable purposes. The ld.CIT(E) has not recorded any adverse finding with regard to the charitable nature of the objects of the Trust.
17. The primary issue for our consideration is whether the ld.CIT(E) was justified in rejecting the application for registration u/s.12AB of the Act.
18. It is well-settled law that at the stage of granting registration u/s.12AB of the Act, the scope of enquiry is confined to examination of the objects of the Trust and verification of the genuineness of its activities. This legal position has been clearly laid down by the Hon’ble Supreme Court in Ananda Social and Educational Trust(supra), wherein it was held that issues relating to application of income or computation of income are to be examined at the stage of assessment and not at the stage of registration.
19. In the present case, the ld.CIT(E) has not brought on record any material to demonstrate that the objects of the Trust are non-charitable or the activities of the Trust are not genuine. Thus, the rejection of registration travels beyond the permissible scope of enquiry u/s.12AB of the Act.
From the material on record, it emerges that the assessee Trust is engaged in
| • | procurement of rejected agricultural produce; |
| • | distribution of such produce to economically weaker sections, including widows of terror victims and injured personnel; |
| • | processing through solar dehydration systems; and |
| • | sale of the processed goods, with proceeds being utilized for sustaining the project and paying wages. |
20. These activities, in our considered view, are intrinsically linked to relief of the poor, by providing livelihood opportunities and preservation of environment, by preventing wastage and decomposition of agricultural produce.
21. The ld.CIT(E) has characterized these activities as commercial merely on the basis that the assessee maintains purchase and sale accounts and incurs expenditure such as salaries. In our opinion, such reasoning is superficial and not in consonance with settled legal principles.
22. The Hon’ble Supreme Court in Surat Art Silk Cloth Manufacturers Association(supra) has laid down the “predominant object test”, holding that if the primary purpose of an institution is charitable, the fact that it carries on some activity yielding profit will not alter its charitable character, unless profit-making is the predominant objective.
23. In the present case, we find that there is no material to suggest that profitmaking is the dominant objective, the surplus, if any, is ploughed back into the charitable activities and there is no allegation of private profit or benefit to trustees. Therefore, the mere existence of sale transactions does not render the activity commercial in nature.
24. The ld.CIT(E) has invoked the proviso to Section 2(15) of the Act to conclude that the assessee’s activities are commercial. However, we find merit in the contention of the assessee that its activities fall within the specific limbs of relief of the poor and preservation of environment, which are independent categories under Section 2(15) and the proviso primarily applies to entities engaged in “advancement of any other object of general public utility”.
25. Even otherwise, as clarified by the Hon’ble Supreme Court in Ahmedabad Urban Development Authority(supra), the decisive test is the presence of a profit motive in a commercial sense. In the present case, the facts do not indicate any such profit motive.
26. Further, the ld.CIT(E) has also observed that funds received from NIIFL constitute consideration. We find that the funds were received as CSR contributions and there is no evidence of quid pro quo or commercial obligation. We also find that the funds were utilized for procurement of equipment for charitable activities. Therefore, the characterization of such contributions as commercial consideration is factually and legally untenable.
27. Even assuming that certain elements of the activity may resemble business, Section 11(4A) permits incidental business activities, provided they are incidental to the attainment of the objects and supported by maintenance of separate books of account. In the present case, the processing and sale of agricultural produce is inseparably connected with the charitable objectives of livelihood generation and environmental protection.
28. We also note that the registration u/s.12AB of the Act and eligibility for exemption u/s.11 and 12 of the Act operate at different stages. Even if the proviso to Section 2(15) of the Act were attracted in a particular year, the consequence would be denial of exemption for that year and not cancellation or rejection of registration.
29. In the present facts and circumstances of the case we hold that the ld.CIT(E) has erred in rejecting the application for registration by exceeding the scope of enquiry permissible u/s.12AB of the Act as the objects of the assessee Trust are charitable in nature and the conclusion of the ld.CIT(E) that the activities are commercial is not supported by material on record and is contrary to settled legal principles.
30. Accordingly, the impugned order passed by the ld.CIT(E) is set aside, and the ld.CIT(E) is directed to grant registration to the assessee u/s.12AB of the Act.
31. In the result the appeal filed by the assessee is allowed.