ITAT Delhi Rules NBFC Fixed Deposits Cannot Automatically Trigger Rejection of Section 12AB Renewal for Charitable Trusts

The regulatory landscape governing charitable institutions in India mandates strict adherence to statutory provisions, particularly concerning the deployment of funds and the validation of philanthropic activities. A recurring point of friction between tax authorities and charitable entities is the conflation of assessment proceedings with registration protocols.

In a highly significant judicial determination, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has provided critical clarity on this jurisdictional overlap. The ruling in the case of Lala Sohana Mal Jagmohan Lal Khanna Educational And Charitable Trust Vs CIT Exemptions (ITA Nos. 3645 and 3646/Del/2026) establishes that an alleged infraction regarding investment modes cannot serve as the sole foundation for discarding a trust's application for registration renewal.

Pronounced on 28 September 2026, for the Assessment Year 2025-26, the Tribunal's directive emphasizes that evaluating the genuineness of a trust's activities under Section 12AB of the Income Tax Act, 1961, is fundamentally distinct from penalizing specific investment deviations, which falls strictly within the domain of standard assessment.

The Factual Matrix of the Dispute

The controversy originated when the assessee, a charitable trust, submitted applications seeking the renewal of its registration under Section 12AB and the corresponding approval for donor deductions under Section 80G of the Income Tax Act, 1961.

The Commissioner of Income Tax (Exemptions), Chandigarh, via an order dated 18.02.2026, dismissed both applications. The rejection was predicated on two primary objections raised by the revenue authorities:

  1. Disputed Investment Channels: The tax department observed that the assessee had parked certain funds in fixed deposits with Non-Banking Financial Companies (NBFCs). The CIT(E) concluded that this financial decision contravened the permissible investment avenues strictly delineated under Section 11(5) of the Act.
  2. Verification of Donee Institutions: The revenue authorities noted that the assessee had disbursed donations to specific entities whose active registration status under Section 12AB was allegedly unverified or absent.

Relying on these twin pillars, the CIT(E) determined that the assessee's operational framework lacked the requisite genuineness, thereby disqualifying the trust from retaining its tax-exempt status and its ability to offer Section 80G benefits to its contributors. Aggrieved by this outright rejection, the assessee escalated the matter to the ITAT Delhi.

To fully grasp the implications of this appellate decision, it is essential to dissect the statutory provisions that govern the taxation and operational compliance of charitable organizations.

The Scope of Section 12AB

Introduced to streamline and digitize the registration process for charitable trusts, Section 12AB mandates that the Principal Commissioner or Commissioner must satisfy themselves regarding two core elements before granting or renewing registration:

  • The objects of the trust or institution.
  • The genuineness of its activities in relation to those objects.