Ban on Dissolution Surplus to Members Invalidates Mutual Benefit Finding for Section 12AB Registration

By | October 31, 2026
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Ban on Dissolution Surplus to Members Invalidates Mutual Benefit Finding for Section 12AB Registration

Issue

Whether the CIT(Exemption) can reject a society’s Section 12AB charitable registration by mischaracterizing it as a mutual benefit association and considering assessment-stage commercial receipt issues despite statutory prohibitions on distributing assets upon dissolution under Section 14 of the Societies Registration Act, 1860.

Facts

  • Registration Application: The assessee-society, registered under the Societies Registration Act, 1860 with asserted charitable objects, filed Form 10AB seeking registration under Section 12AB of the Income-tax Act.
  • Rejection by CIT(E): The CIT(Exemption) rejected the Section 12AB registration and denied Section 80G(5) approval.
  • Grounds of Rejection:
    • The CIT(E) categorized the society as a mutual benefit association benefiting only its members rather than the general public.
    • The CIT(E) held that gross receipts were commercial in nature and failed the test of voluntary contributions.
    • The CIT(E) observed that funds were not applied toward charitable purposes as per Section 2(15).
  • Statutory Framework: Section 14 of the Societies Registration Act, 1860 explicitly prohibits the distribution of surplus assets or money among members upon dissolution of the society.

Decision

  • Mutual Benefit Finding Invalidated: Rejection on the ground of being a mutual benefit association is unjustified because Section 14 of the Societies Registration Act expressly prevents members from receiving assets upon dissolution.
  • Scope at Registration Stage: At the stage of granting registration, the CIT(Exemption) must strictly focus on the objects of the society and the genuineness of its activities, rather than delving into assessment-stage issues like commercial receipts or income application.
  • Commercial Receipts Ground Rejected: The CIT(E) erred in denying registration on grounds of commercial activities or nature of receipts during initial registration verification.
  • Matter Remanded: The case is restored to the CIT(Exemption) to grant Section 12AB registration upon due verification of charitable objects and activity genuineness, ensuring no specified statutory violations under Section 12AB(4) exist.

Key Takeaways

  • Limited Scope of Section 12AB Inquiry: At the registration stage, the Commissioner’s mandate is restricted to evaluating the charitable nature of the objects and verifying activity genuineness, without preempting assessment-stage issues like receipt classification.
  • Impact of Statutory Dissolution Clause: Express statutory prohibitions against distributing dissolution surplus to members negate allegations of being a private mutual benefit entity.
  • Separation of Assessment and Registration: Commercial activity nuances under Section 2(15) are matters for assessment proceedings rather than threshold bars for Section 12AB registration.
IN THE ITAT CHENNAI BENCH ‘D’
CSI Chennai Chapter
v.
CIT(Exemption)*
SS VISWANETHRA RAVI, Judicial Member
and Inturi Rama Rao, Accountant Member
ITA No. 2973 (CHNY) OF 2026
SEPTEMBER  29, 2026
S. Sridhar, Adv. for the Appellant. K Jayaganesh for the Respondent.
ORDER
Inturi Rama Rao, Accountant Member. – This appeal filed by the Assessee directed against the order passed by learned Commissioner of Income Tax(Exemption), Chennai dated 30.03.2026 denying grant of registration u/s.12AB of the Income Tax Act, 1961.
2. The Assessee raised the following grounds of appeal :
” 1.The Commissioner of Income Tax (Exemption) is not justified in rejecting the appellant’s application under item (ii) of clause (ac) of sub section (1) of section 12A seeking registration u/s 12AB of the IT Act 1961.
2. The CIT (Exemption) is not justified in coming to the conclusion that the applicant society.
* I s predominantly for the benefit of members. The society is for the benefit of particular section of the people and not for the general public, hence the society is evolved and exist on the principle of mutuality and not charity.
* R eceived “gross receipts” which is commercial in nature.
* Failed to prove that its income / receipts are voluntary in nature.
* Has not applied funds for amounts towards charitable purposes (“Relief of the Poor”, “Education” and “Medical Relief” as defined u/s 2(15) of the Act.
3. The CIT (Exemption) has erred in coming to the conclusion that the society is predominantly for the benefit of the members only and not a charitable organization.
4. The CIT (Exemption) is not justified in stating that applicant society activities cannot be held as “Education” “Medical Relief” and “Relief of the Poor”.
5. The CIT (Exemption) is not justified in coming to the conclusion that the applicant society runs on commercial lines with profit motive and not for charitable as envisage u/s 2(15) of the act.
6. The CIT (Exemption) is not justified in coming to the conclusion that the activities of the trust are not charitable in nature.
7. For these and other reasons that may be adduced at the time of hearing, it is prayed that Justice may be rendered to the appellant by directing the CIT (Exemption) to grant registration u/s 12AB of the IT act.”
3. Briefly, the facts of the case are that the assessee is a Society incorporated under the provisions of Societies Act. It was stated to have been formed with charitable objects. It is formed with following objects :
“ 1. Hold periodical meetings, conference.
2. Arrange clinical discourses,.
3. Actively encourage research,.
4. Engage in public advanced education.
5. Publish, distribute or otherwise circulate medical records.
6. Coordinate as necessary .
7. Raise and borrow money.
8. Erect, maintain, improve or alter and keep in repair any building.
9. Do all such other things.”
4. The appellant-society filed an application in Form No.10AB seeking grant of Registration u/s.12AB of the Income Tax Act, 1961 on 29.09.2025. On receipt of the said application, the Learned CIT(E) sought information from the appellant-society, so as to satisfy himself about the charitable nature of the objects of the Society and genuineness of the activities of the Society and also required the appellant to file certain documents and the copy of the approval u/s.12A obtained in the old regime etc. The appellant-society has filed the required information, details on 31.03.2026. On perusal of the information filed by the appellantsociety, the Learned CIT(E) concluded that the appellant-society was formed with the object of benefiting the members of the appellant-society not for the public at large, therefore, concluded that it is a mutual benefit association and does not exist for the benefit of public at large. He further concluded that appellantsociety has received “Gross Receipts” which are commercial in nature, appellant-society had failed to prove that its income / receipts are voluntary in nature and had not applied funds/amounts towards charitable purposes (Relief of the Poor”, “Education” & “Medical Relief”. The application filed seeking grant of approval u/s.80G(5) of the Act was denied.
5. Being aggrieved by the above order, an appeal was filed before this Tribunal. The Learned Counsel submits that the Learned CIT(E) had failed to appreciate the objects of the society are for the benefit of public at large. He further submits that the Learned CIT(Exemption) had clearly fell in error in classifying the appellant-society as a mutual benefit association without appreciating that the provisions of Societies Act prohibits distribution of dividends amongst its members. Finally, it submits that at the time of grant of registration, he can only look into the objects of the appellant-society. As regards, the application filed seeking approval u/s.80G(5) of the Act, he submits that the Co-ordinate Bench of this Tribunal had restored the matter to file of Learned CIT(Exemption) vide order in UFX Ventures (P.) Ltd. v. Asstt. CIT [IT Appeal No. 2272 & 2273 (CHNY) of 2025, dated 11-3-2026].
6. On the other hand, the Learned CIT-DR opposed the above submissions and submits that the Learned CIT(Exemption) had passed a very-well reasoned order taking into consideration the objects of the appellant-society. Therefore, the order of the Learned CIT(Exemption) cannot be interfered by this Tribunal.
7. We heard the rival submissions and perused the material on record. The sole issue that arises for our consideration is whether the Learned CIT(Exemption) was justified in rejecting the grant of registration u/s.12AB of the Act. The Learned CIT(Exemption) had denied the grant of registration for the reason that it is a mutual benefit association and benefitting the members of the Society only, not for the public at large and engaged in the commercial activity and the application filed by the appellant-society seeking grant of approval u/s.80G(5) of the Act was rejected by the Learned CIT(Exemption).
8. We had carefully perused the reasoning of the Learned CIT(Exemption) that the appellant-society is engaged in the object of rendering services to its members but not the public at large. It is an undisputed fact that the appellant-society was formed under Societies Registration Act, 1860. The provisions of section 12D of the Societies Registration Act, 1860 empowers the Registrar of the Societies to cancel the registration of the any society on the ground that the activities or proposed activities of the society will be subversive of the objects of the society or opposed to public policy. A society can be registered under the provisions of Societies Registration Act, only if the objects of the Society benefit the public at large. Therefore, presumption has to be drawn that objects of the society are for the benefit of public at large so long as the registration of the society is not cancelled. Further, the provisions of Section 14 of the Societies Registration Act, 1860 expressly prohibits distribution of assets, money in the event of dissolution of the Society among its members. The relevant provisions are extracted below :
“14. Upon a dissolution no member to receive profit.
If upon the dissolution of any society registered under this Act there shall remain after the satisfaction of all its debts and liabilities any property whatsoever, the same shall not be paid to or distributed among the members of the said society or any of them, but shall be given to some other society, to be determined by the votes of not less than three-fifths of the members present personally or by proxy at the time of the dissolution, or, in default thereof, by such Court as aforesaid:Clause not to apply to Joint-stock Companies. Provided, however, that this clause shall not apply to any society which shall have been founded or established by the contributions of shareholders in the nature of a Joint-stock Company.”
9. Thus, it is clear that the provisions of section 14 of the Societies Registration Act, 1860 clearly negates the stand of the Learned CIT(Exemption).
10. Further, as regards, the reasoning of the Learned CIT(Exemption) that it is engaged in the commercial activity, we are of the considered opinion that at the time of grant of registration, the Learned CIT(Exemptions) can only look into the objects of the Society. The issues of the assessment cannot be looked into. In this connection, we place reliance on the decision of the Hon’ble Supreme Court in the case of Ananda Social & Educational Trust v. CIT  426 ITR 340 (SC). The relevant observations made vide para 12 of the judgment are extracted below :
“12. Since Section 12-AA pertains to the registration of the trust and not to assess of what a trust has actually done, we are of the view that the term “activities” in the provision includes “proposed activities”. That is to say, a Commissioner is bound to consider whether the objects of the trust are genuinely charitable in nature and whether the activities which the trust proposed to carry on are genuine in the sense that they are in line with the objects of the trust. In contrast, the position would be different where the Commissioner proposes to cancel the registration of a trust under sub-section (3) of Section 12-AA of the Act. There the Commissioner would be bound to record the finding that an activity or activities actually carried on by the trust are not genuine being not in accordance with the objects of the trust. Similarly, the situation would be different where the trust has before applying for registration been found to have undertaken activities contrary to the objects of the trust.”
11. Recently, the Hon’ble Supreme Court in the case of CIT v. International Health Care Education and Research Institute [2025] 171  482 ITR 287 (SC) after making a reference to the earlier judgment in the case of Ananda Social and Educational Trust (supra) held that the mere registration u/s.12AA of the Act automatically does not entitle any charitable trust to claim exemption under Sections 10 and 11 respectively of the Act, 1961. When a return is filed by any trust claiming exemption, it is for the Assessing Officer to look into all the materials and satisfy itself whether the exemption had been claimed genuinely or not! If the assessing officer is not convinced, it is always open for him to decline grant of exemption.
12. We may also state here that the above position of law equally holds good even in the New Regime of Registration u/s.12AB of the Act inserted by Taxation and Others Laws (Relaxation and Amendment of certain Provisions) Act, 2020 with effect from 01.04.2021.
13. With regard to the reasoning of the Learned CIT(Exemption) that since the application for grant of approval u/s.80G(5) was rejected by the Learned CIT(Exemption), as noted by us(supra) that the matter was restored to the file of Learned CIT(Exemption) for fresh disposal of the application. So, none of the reasons assigned by the Learned CIT(Exemption) for rejection of the grant of registration u/s.12AB cannot be sustained in the eyes of law.
14. In view of the above discussion, the order of the Learned CIT(Exemption) is hereby set-aside and matter is restored to the file of Learned CIT(Exemption) for grant of registration u/s.12AB of the Act on being satisfied on due verification of the material on record that the objects of the appellant-society are charitable in nature and genuineness of its activities and there are no specified violations as mentioned in the Explanation inserted to sub-section (4) of section 12AB of the Act. Thus, the matter is restored to the file of Learned CIT(Exemption) on the above lines for de novo disposal of application in accordance with law after affording an opportunity of being heard to the appellant-society.
15. In the result, appeal filed by the assessee in ITA No.2973/CHNY/2026 is partly allowed for statistical purposes.