Registration under Section 12AB cannot be cancelled absent proof of non-genuine activities or statutory violations.

ORDER

Manoj Kumar Aggarwal, Accountant Member. – Aforesaid appeals by assessee arise out of separate orders of Ld. Commissioner of Income Tax (Exemptions), Chandigarh [CIT(E)]. First, we take up ITA No.117/Chandi/2026 which arises out of an order passed by Ld. CIT(E) on 16.12.2025 which is assessee’s registration cancellation order in terms of powers conferred u/s 12AB(4). In this order, the registration of the assessee as granted on 24.09.2021 for AYs 2022-23 to 2026-27 has been cancelled by invoking the powers conferred u/s 12AB(4).

2. The Ld. AR advanced vehement arguments assailing the cancellation of registration and referred to financial statements as well as supporting case laws. The Ld. CIT-DR also advanced arguments and referred to the findings of Ld. CIT(E) to support cancellation of registration. The written submissions have also been filed on behalf of the assessee as well as on behalf of the revenue. Having heard rival submissions, oral and written and upon perusal of case records, our adjudication would be as under.

3.1 The assessee’s activities were subjected to examination pursuant to information that the assessee society deposited cash of Rs.14.82 Crores in its bank accounts. It transpired that the assessee-society was running various educational institutions which are tabulated at Page-2 of the impugned order. One of the institutions being run by the assessee was World University of Design. The assessee was required to furnish documents with respect to its income and expenditure along with various other details. The assessee was confronted with various issues vide show-cause notice dated 31.10.2025. In this notice, the Ld. CIT(E) proposed cancellation of registration on various grounds.

3.2 The first observation of Ld. CIT(E) was that the assessee-trust took two flats on rent on annual rent of Rs.10 Lacs from Vice Chairman Shri Vijayant Bansal vide lease agreement dated 01.04.2021. The lease agreement was signed by Shri Vijayant Bansal and World University of Design through authorized signatory Shri Rakesh Mohan. The Ld. CIT(A) observed that lease deed was signed by person who was not authorized by members of the society. The deed was for 3 years but the deed was not registered with the relevant authorities leading to evasion of stamp duty. The society was closely controlled by members of the same family. Therefore, producing extract of resolution without any independent verifiable evidence was not admissible. Since lease deed was not registered, it could not be relied upon as an evidence and it was signed by person who was not authorized by members of the society. Therefore, an opinion was formed that the society was not carrying out its activities as per law.

3.3 It was further noted that the assessee received money from various entities for letting out the property of the society for conducting competitive examination and for use of mobile towers. The letting out of premises for competitive examination for exploiting the properties commercially was not aligned with the objects of the society and the same was unrelated to carrying out of educational activities. The assessee contended that the mobile towers help in better connectivity in the premises and the income received from conducting examination was used for charitable purposes. Therefore, no adverse inference was to be drawn on this issue. However, the same stood rejected by Ld. CIT(E).

3.4 The third observation of Ld. CIT was that the assessee society made payment of Rs.98,800/- to Omaxe Heights RWA for which sufficient documents could not be furnished by the assessee.

3.5 The assessee claimed agricultural expenses of Rs.6,37,968/- for which no supporting documents were allegedly furnished except for ledger account of PepsiCo India Holdings Pvt. Ltd. Apparently, the assessee paid rent for agricultural fields. The assessee also appeared to have purchased 14 shares of Bayer Crop Science Ltd. at the rate of Rs.4389/ per share which was not permitted mode of investment u/s 11(5) of the Act.

3.6 As per bank statement, the assessee made payment to SPS hospital for the purpose of training of nursing students. However, the same was not supported by invoices. The assessee furnished MOU with SPS hospital and contended that training of nursing students was mandatory. The society also submitted a fees sheet mentioning details of fees received from the students. The Ld. CIT(E) held that mere submission of MOU would not prove that services were actually rendered and without invoices, the genuineness of the payments could not be verified.

3.7 The assessee paid CSR expenses of Rs.1 Lacs to Lalita Ashram Trust which was stated to be engaged in charitable activities including education. The Ld. CIT(E) rejected the explanation for want of supporting documents.

3.8 The last of the observation that the assessee earned profit of 36.18%, 30.61% & 37.22% in AYs 2020-21, 2021-22 & 2022-23 respectively. The imparting of education was essentially charitable in nature. The object of establishing educational institution was not to make profits. Reference was made to the decision of Hon’ble Apex Court in the case of Union of India v. Baba Banda Singh Bahadur Education Trust 454 ITR 273 (SC)/CA No.10511 of 2013 dated 26.04.2023 wherein systematic profit generation was adversely been commented by Hon’ble Court. The decision in T.M.A. Pai Foundation v. State of Karnataka (2002) 8 SCC 481 as well as the decision in Islamic Academy of Education v. State of Karnataka (2003) 6 SCC 697 was also referred to by Ld. CIT(E). The ratio of these decisions was held to be applicable to the case of the assessee. The profits margins of the society were excessive and the perusal of Balance Sheet would show that the assessee was having huge surpluses.

3.9 It was further observed by Ld. CIT(E) that the provisions of Sec.12AB(4) as amended by Finance Act 2022 provide that the registration could be cancelled by appropriate authority if one or more violations had taken place. These specified violations, as mentioned in Explanation thereto would mean as under: –

3.10 The Ld. CIT(E) categorized the violations made by the assessee-trust as under: –

In view of the above, it was evident that activities of the Society were not being carried out as per its stated objects. The Society had deliberately violated Stamp Act and Registration Act in collaboration with its key persons. The Society had not been maintaining proper documentation and the same cannot be submitted during the proceedings. The Society could not place on record whether commercial exploitation of properties was allowed while granting registration u/s 12A of the Act. More importantly, the Society made false submission regarding donations. Systematic profit generation further hits the charitable claim of the Society. From the above, it was clear that the Society had made violations which were covered by section 12AB(4)/(5) prior to amendment by the Finance Act, 2022 and post amendment as well. It was finally held that the activities of the Society were not genuine and the same were not being carried out in accordance with the objects of the Society. The Society was a profitmaking concern, driven by commercial considerations. The Society had deliberately violated provisions of the other applicable laws as discussed above. The Society had not been maintaining proper records and therefore, the registration granted to the assessee on 24.09.2021 for AYs 2022-23 to 2026-27 was cancelled. Aggrieved, the assessee is in further appeal before us.

4. We have carefully considered the rival submissions, perused the impugned order, the material placed on record and the judicial precedents cited before us. The short issue for our consideration is whether, on the facts and circumstances of the case, the Ld. CIT(E) was justified in invoking the provisions of Section 12AB(4) of the Act and cancelling the registration already granted to the assessee.

5. Before adverting to the individual allegations levelled by Ld. CIT(E), it would be appropriate to examine the scope of powers conferred u/s 12AB(4). The registration granted to a charitable institution could not be cancelled merely because certain irregularities or deficiencies are noticed during the course of proceedings. The jurisdiction u/s 12AB(4) is confined to examination of the “specified violations” as enumerated in the Explanation thereto. Therefore, before exercising such drastic power of cancellation, Ld. CIT(E) is required to establish, on the basis of cogent and credible material, that the activities of the trust are either not genuine or are not being carried out in accordance with its objects or that any other specified violation contemplated by the statute has actually occurred. It is equally well settled that issues relating to computation of income, allowability of expenditure, mode of application of income or verification of supporting evidences ordinarily fall within the jurisdiction of Ld. Assessing Officer during assessment proceedings. Such matters, by themselves, cannot constitute valid grounds for cancellation of registration unless they establish that the institution itself has ceased to exist for charitable purposes.

6. In the present case, the proceedings were initiated primarily because the assessee had deposited cash aggregating to Rs.14.82 Crores in its bank accounts. During the course of proceedings, the assessee explained that the deposits represented duly recorded donations and receipts / fees received in the normal course of assessee’s educational activities. It was submitted that none of assessee’s institutions collect the fees at their own counters but all fees & other charges are collected directly through assessee’s bankers only. In fact, no adverse comment has been made by Ld. CIT(E) on the sources of these deposits. There is nothing in the impugned order to indicate the cash deposits represent undisclosed income neither there is any allegation of diversion of funds for non-charitable purposes. Further, no doubt has been raised on the charitable activities being carried out by the assessee. No infirmity has been found in the source of these deposits and there is no finding that the receipts of the assessee are fictitious, in any manner. Therefore, the very foundation on which the proceedings were initiated remains unsupported by any tangible material.

7. The first allegation pertains to lease of two residential flats taken by the assessee-trust from its Vice Chairman. The Ld. CIT(E) has observed that the lease deed was not registered and that the same was allegedly executed by an unauthorized person. In our considered opinion, these allegations, in the very first instance, do not satisfy the statutory requirements of Sec. 12AB(4). The question that arises for our consideration is whether the unregistered document, though styled as lease deed, could by itself, renders the assessee ineligible for registration u/s 12AB of the act. In our considered opinion, the answer has to be in negative. The reason being that it is an admitted position that the said document and the payment of the rent has not been disputed by the revenue. Thus, the existence of the arrangement and factum of payment of rent could not be said to be in dispute. The mere circumstance that the document evidencing such an arrangement was not registered may, at best, give rise to an issue under the applicable provisions of the Stamp Act or Registration Act, as the case may be. Such a defect, however, cannot by itself be elevated to the status of a violation going to the root of assessee’s eligibility of registration u/s 12AB. For the purpose of registration u/s 12AB, the relevant consideration is whether the assessee satisfies the statutory conditions prescribed under the act and whether its activities are genuine and are being carried out in accordance with its stated objects. A violation of a statutory requirement which has a direct nexus with the objects and activities of the assessee or which materially effects the genuineness of such activities or the manner in which the charitable purposes are being pursued, may certainly constitute a relevant ground for refusing registration. However, an independent or collateral infraction which neither affects the genuineness of the activities nor constitutes a violation of the provisions governing charitable institutions under the income tax act, cannot merely on that account, furnish a valid basis for denial of registration u/s 12AB. In the present case, the alleged non registration of the lease deed does not, in our view, have any such nexus with the charitable objects or activities of the assessee. At the highest, it may constitute a matter to be examined under the relevant provisions of the Stamp Act or the Registration Act. It cannot. However, be treated as an impediment to the assessee’s fulfilment of its charitable objects or as a violation of the conditions governing registration u/s 12AB. We, therefore, hold that the unregistered nature of the lease deed, in the facts and circumstances of the present case, cannot constitute a valid ground for refusing registration u/s 12AB of the Act. The authority concerned was required to examine whether the assessee had satisfied the statutory conditions relevant for registration u/s 12AB rather than treating the alleged non-registration of the lease documents, standing alone, as sufficient to deny impugned registration to the assessee trust. There is also finding that the rent paid was excessive or unreasonable having regard to prevailing market rates or that any undue benefit was conferred upon the Vice Chairman. Even assuming that there exist certain procedural deficiencies regarding execution or registration of the lease deed, the same could not, ipso facto, lead to the conclusion that the activities of the Society are not genuine or are contrary to its charitable objects. The assessee, in its reply dated 30.09.2025 duly explained that the prevailing market price of the two units was in the range of Rs.9.60 Lacs to Rs.12 Lacs per annum whereas the assessee paid rent of Rs.10 Lacs per annum which was reasonable. It was also explained that the said units was used for the purpose of admission of students since the institute was located in a remote area. Therefore, such an observation does not invalidate the registration of the assessee.

8. The second allegation relates to receipts earned by permitting use of the educational premises for conduct of competitive examinations and installation of mobile towers to various agencies. We find considerable force in the submissions advanced on behalf of the assessee that these receipts are merely incidental to the main object of imparting education. It is a matter of common knowledge that educational institutions permit government agencies, universities and examining bodies to utilize available infrastructure during periods when classrooms and auditoriums remain vacant. Likewise, installation of mobile towers facilitates communication within the campus and generates incidental revenue. Such receipts do not alter the predominant character of the institution nor do they establish that the Society has undertaken any independent commercial activity. It has not been established that educational activities have been discontinued or overshadowed by these incidental receipts. On the contrary, the record clearly demonstrates that the assessee continued to run various educational institutions including the World University of Design throughout the relevant period. Therefore, the finding recorded by the Ld. CIT(E) could not result into cancellation of registration of assessee trust.

9. The Ld. CIT(E) has further referred to payments made to Omaxe Heights RWA, agricultural expenditure, payments to SPS Hospital and donation to Lalita Ashram Trust. In our opinion, these observations relate essentially to adequacy of documentary evidence. The assessee, in its reply dated 30.09.2025, furnished explanations regarding each of these expenditures. The payment to SPS Hospital was made on account of training charges to students of school of health sciences (nursing) and the payment was duly supported by the Memorandum of Understanding explaining that clinical training formed a mandatory component of the nursing curriculum. The payment was made through banking channels which is evidenced by ledger extract. In reply dated 01.12.2025, it was explained that the payment to Omaxe Heights RWA was paid for providing temporary accommodation to the employees of World Design University at Kundli (Sonepat) since it was situated in a remote area. It was demonstrated that the entire payment was made through banking channels only. In the same reply, it was stated that donation of Rs.1 Lacs was made to Lalita Asharma which was engaged in charitable activities including education. The payment was just a fraction of total expenditure. Similar explanation was furnished for other expenditure also. We are of the considered opinion that even if Ld. CIT(E) considered the supporting evidence to be insufficient, the proper course was to leave these issues for examination by the Assessing Officer in the relevant assessment proceedings. In our considered opinion, the power of cancellation cannot be exercised merely because certain vouchers, invoices or agreements were not produced to the satisfaction of Ld. CIT(E). Such deficiencies may, at the most, justify verification or even disallowance during assessment proceedings but they do not establish that the charitable activities themselves are not genuine. In fact, Ld. AR has placed on record assessment order passed in the case of the assessee in scrutiny assessment proceedings for AYs 2017-18, 2018-19 & 2023-24 accepting the returned income of the assessee. Therefore, all these observations could not lead to cancellation of assessee’s impugned registration. Every alleged violation does not automatically result in cancellation of registration u/s 12AB unless it is further established that the institution has ceased to pursue its charitable objects or has committed any specified violation contemplated by the statute. No such finding emerges from the impugned order.

10. The Ld. CIT(E) has also drawn adverse inference on the ground that the Society initially denied making donation and subsequently admitted the same. We are unable to subscribe to this reasoning. The donation itself stands duly recorded in the books of account. There is no allegation that the payment was fictitious or represented diversion of charitable funds for private benefit. An inconsistency in explanation cannot, by itself, justify the drastic consequence of cancellation of registration.

11. The last of the objections is the fact that the assessee has generated surplus which ranged between approximately 30% to 37% during the relevant years. In our considered opinion, the approach adopted by Ld. CIT(E) legally unsustainable. The generation of surplus by an educational institution, by itself, is not prohibited so long as the predominant object continues to be imparting education and the surplus is ploughed back for advancement of educational activities. An educational institution cannot be denied its charitable character merely because it generates surplus while efficiently managing its affairs. In the present case, if the revenue sought to establish that the fees charged by the assessee was excessive or exorbitant, it was incumbent upon it to place cogent material on record in support of such conclusion. This could, for instance, have included the fee structure approved or prescribed by the competent Fee committee or reliable comparable instances of similarly placed engineering colleges, providing substantially similar courses and facilities and operating under comparable regulatory and grading conditions. No such material has been brought on record. The mere fact that the assessee has generated a surplus cannot, in the absence of any material demonstrating that the fees charged were excessive, or that the fee structure prescribed by the competent authority had been violated, could lead to the conclusion that the assessee was pursuing its educational activities with a profit motive. Such a conclusion cannot rest merely on an inference drawn from the quantum of surplus. We, therefore, find ourselves unable to conquer with the findings of Ld. CIT(E) that the fees charged by the assessee were exorbitant and that the resultant surplus constituted a ground for denying registration u/s 12AB. In the absence of any finding by competent regulatory authority or any cogent and independent material brought on record by the revenue, demonstrating that the assessee had charged fees in excess of the permissible or prescribed fee structure, the said finding of the Ld. CIT(E) cannot, in our considered view, be sustained. Further, the financial statements placed before us demonstrate that the surplus generated by the assessee has been retained within the institution and utilized towards creation of infrastructure, expansion of educational facilities and advancement of its objects. There is absolutely no material indicating diversion of profits amongst members or related parties. Therefore, the finding that the Society exists for profiteering is not borne out from the record. The reliance placed by the Ld. CIT(E) upon judicial precedents dealing with commercialization of educational institutions is misplaced since the facts of the present case do not disclose any distribution of profits or private enrichment. Mere existence of surplus cannot be equated with existence for profit.

12. The Ld. CIT(E) has referred to the decision of Hon’ble Supreme Court in Baba Banda Singh Bahadur Education Trust (Supra) while holding that the generation of surplus by the assessee disentitles it from continuing to enjoy registration u/s 12AB. In our considered opinion, the reliance is misplaced both on facts as well as in law. We find that this case law is in the context of exemption u/s 10(23)(vi) which mandate that the assessee must solely be engaged in educational activities which fact was found missing in that case and the assessee earned profit of 67.81% without depreciation and 44.48% with depreciation. The facts in this case are materially distinguishable. This case arose out of rejection of approval u/s 10(23C)(vi) where the Commissioner had recorded findings regarding exceptionally high profit margins over a continuous period and examined whether the institution existed solely for educational purposes within the meaning of Sec. 10(23C). The Supreme Court considered the effect of the larger Bench decision in New Noble Educational Society v. Chief CIT [2022] 448 ITR 594 (SC), which governs the interpretation of the expression “solely for educational purposes” occurring in Section 10(23C). The Court was not concerned with the scope of cancellation of registration u/s 12AB nor with the existence of “specified violations” as contemplated therein. It deserves to be noticed that the issue before us is cancellation of registration u/s 12AB(4). The jurisdiction under the said provision is confined to examining whether any “specified violation” as defined in the Explanation exists or not. The Ld. CIT(E) is not exercising jurisdiction u/s 10(23C) nor is he deciding the allowability of exemption for a particular assessment year. Therefore, the statutory enquiry u/s 12AB is materially different from the enquiry undertaken while considering approval u/s 10(23C). The Commissioner was, therefore, required to first establish that the activities of the assessee were not genuine or were not being carried out in accordance with its objects. The impugned order, however, proceeds principally on the quantum of surplus and certain alleged procedural deficiencies only which could not be held to be justified. As against this, in the present case, the surplus so earned by the assessee continues to be applied towards charitable activity of the assessee-trust. Therefore, these findings could not result into denial of impugned registration to the assessee-trust. The facts of the present case do not disclose any material indicating that the assessee has converted itself into a profit-oriented commercial enterprise. The receipts from permitting use of campus facilities for competitive examinations and installation of mobile towers are merely incidental to the educational activities. The Revenue has failed to establish that such incidental receipts have become the dominant source of income or that educational activity has become subservient to commercial exploitation. There is equally no evidence of siphoning of funds, distribution of profits or personal enrichment of the members of the Society. Therefore, the cited case law is factually distinguishable.

13. To further support our conclusion, we quote the recent decision of Hon’ble High Court of Punjab & Haryana in the case of CIT v. Baba Gandha Singh Education Trust 489 ITR 217 (Punj & Har) which had similar factual matrix wherein appropriate authority levelled similar allegation of generation of surplus out of educational activities. The assessee argued that the surplus so generated was being ploughed back into educational infrastructure of the trust and therefore, it was being used for educational purposes only as per objects of respondent Trust. The CIT(E) had no power to dictate the trust in what manner it should use its funds. The activity of trust has to be in line with the objects of society. There can be thousands of ways in which object of society could be achieved. One way could be to grant waiver of fee to students or provide free books and uniform to the students and yet another way could be by way of strengthening school infrastructure by investing in laboratories, library or other infrastructure for providing quality education. All the purposes would be in line with object of the trust. Merely because the trust has used its surplus money for strengthening educational infrastructure and has not used the surplus money to waive-off fee of students, it could not be held that the trust was not working in pursuance of its activities. The Ld. CIT failed to find any deviation on the part of respondent-society from the objects for which it was registered. There was no finding that trust had generated surplus by indulging in any activity which was not as per its object. The manner in which surplus money has been used could not be dictated by Ld. CIT(E) but could only be adjudged in accordance with objects of the society. The Hon’ble Court referred to para-76 under clause (b) of decision of Hon’ble Supreme Court in New Noble Educational Society (Supra) holding that where surplus accrues in a given year or set of years per se, it is not a bar, provided such surplus is generated in the course of providing education or educational activities. Therefore, mere generation of surplus money, if the same is in course of providing education or education activities or for object for which registration was accorded, in that case, surplus money by itself could not be a ground to cancel registration. In present case, there was total absence of finding by CIT that respondent-Trust had generated surplus money by indulging in activities other than objects for which it was registered or that surplus amount was used for activities other than its objects. The Hon’ble Court also held that the judgment of Hon’ble Supreme Court in New Noble Educational Society (supra) was applicable to the facts of the present case to a limited extent that mere surplus income would not result in conclusion that institution had not generated the same for the purpose for which it was registered thus leading to cancellation of its registration. Finally, the view of the Tribunal that there being no violation of Sec. 12AA(3), mere generation of surplus continuously would not result in assumption that respondent had earned the same by violating its objects. The aforesaid judgment, being that of the jurisdictional High Court on the scope of cancellation of registration, squarely governs the controversy before us. The distinction between an institution existing solely for educational purposes and an institution carrying on commercial activities continues to depend upon examination of the dominant purpose and the actual conduct of the institution. The mere existence of surplus, without evidence of diversion of income or profit distribution, is not by itself determinative.

14. In the present case also, it has nowhere been established that the assessee has discontinued educational activities. It is an admitted position that the Society continues to run educational institutions including the World University of Design and other educational establishments. There is also no finding that any part of the surplus has been distributed amongst members, office bearers or related parties or that the funds have been diverted for non-charitable purposes. On the contrary, the financial statements indicate that the surplus has remained invested in the educational institutions and their infrastructure.

15. Lastly, we do not find any merit in the observation that the affairs of the Society are managed by members of the same family. The Income-tax Act nowhere prohibits management of a charitable institution by related persons. Unless it is established that prohibited benefits have been conferred upon specified persons attracting the provisions of the Act, family management by itself cannot constitute a specified violation under section 12AB(4).

16. Having examined each of the allegations individually as well as cumulatively, we find that none of them establish that the assessee has abandoned its charitable objects or that its activities are not genuine. The impugned order proceeds largely on suspicion, procedural irregularities and issues relating to assessment of income. Such matters may certainly be examined by the Assessing Officer while framing assessments under the Act, but they do not furnish valid jurisdictional foundation for cancellation of registration. The distinction between cancellation of registration and denial of exemption in a particular assessment year must always be kept in mind. Registration concerns the very character of the institution, whereas assessment concerns computation of taxable income. The two operate in distinct fields. Unless Ld. CIT(E) demonstrates existence of one or more specified violations contemplated by section 12AB(4), the registration cannot be cancelled. We are, therefore, of the considered view that the Ld. CIT(E) travelled beyond the scope of jurisdiction vested under section 12AB(4). The findings recorded in the impugned order do not satisfy the statutory requirements for cancellation of registration. Consequently, the order dated 16.12.2025 cancelling the registration granted to the assessee cannot be sustained.

17. Finally, on the given facts and circumstances of the case, the impugned order is set aside and the registration granted to the assessee u/s 12AB is restored. It is, however, clarified that the Assessing Officer shall be at liberty to examine the allowability of expenditure, application of income or any other issue arising during assessment proceedings strictly in accordance with law, uninfluenced by any observations contained in the order of the Ld. CIT(E). The appeal stand allowed.

18. ITA No.156/Chandi/26 assails consequential rejection of application filed by the assessee in Form No.10AB on 28.09.2025. The application was held to be not maintainable since the registration granted to the assessee by CPC on 24.09.2021 was cancelled. Since we have restored the said registration, the consequential rejection of application stand 28.09.2025 stand reversed. The Ld. CIT(E) is directed to grant appropriate registration to the assessee-trust as per its application. This appeal stand allowed.

19. Both the appeals stand allowed.