ITAT Delhi Clarifies: Alleged Payments to Interested Persons Not a Ground to Deny Section 12AB Registration

1. Background of the Dispute

In Pista Devi Education Society Vs CIT (Exemptions), ITAT Delhi Bench ‘A’ examined whether registration under Section 12AB of the Income Tax Act 1961 can be denied merely because the Commissioner suspects:

  • Unsecured loan transactions and payments involving trustees / specified persons, and
  • Possible application of income attracting Section 13.

The assessee, Pista Devi Education Society, an educational society running a school in Haryana, filed an application for registration under Section 12(1)(ac)(vi) on 24.02.2025. The application was handled by the CIT (Exemptions), Chandigarh.

The CIT(E):

  • Called for documents to examine the objects and genuineness of activities,
  • Issued a show cause notice dated 13.03.2025, and
  • Ultimately rejected the registration under Section 12AB(1)(b)(ii) by order dated **06.08.2025`.

The assessee challenged this rejection before the Income Tax Appellate Tribunal, Delhi.

2. CIT(E)’s Findings and Reasons for Rejection

2.1 Scrutiny of Bank Transactions with Society Members

On reviewing the bank statements, the CIT(E) observed:

  • Multiple high-value debit entries in favour of society members:
    • Sh. Anil Tayal (President)
    • Smt. Shewta Tayal (Vice-President)
    • Smt. Savita Tayal
  • Several cash deposits and withdrawals in the assessee’s bank account.

The CIT(E) required the assessee to:

  • Explain the nature and purpose of these entries,
  • Demonstrate how they related to the charitable objects, and
  • Furnish supporting documentation.

Though the assessee filed details, the CIT(E) concluded that:

  • The pattern and frequency of transactions with these individuals gave an impression of business-like activity,
  • The assessee had not established that these were in aid of charitable purposes.

2.2 Alleged Excess Payment to Anil Tayal

From the ledger and bank statements, the CIT(E) noted:

  • Opening balance in favour of Sh. Anil Tayal: Rs. 64,89,869/- as on 01.04.2024,
  • Payments during Financial Year 2024-25: Rs. 92,50,000/-.

According to the CIT(E):

  • This outflow exceeded the recorded liability,
  • The assessee did not produce adequate explanation or evidence to justify the alleged excess payment,
  • This raised suspicion of benefit to a specified person.

Ledgers of Shweta Tayal and Savita Tayal were also held to be:

  • Unsupported by documentary evidence, and
  • Not clearly linked to any demonstrated charitable necessity, such as infrastructure or academic requirements.

2.3 Rent Payments to M/s Gargi Farms

The CIT(E) also scrutinized transactions with M/s Gargi Farms relating to premises rent. Observations included:

  • Rent shown in the ledger decreased from Rs. 50,000/- (Financial Year 2022-23) to Rs. 20,000/- (Financial Year 2023-24),
  • In the next year, rent increased sharply to Rs. 1,00,000/-,
  • The assessee had argued that rent was at arm’s length and paid via banking channels,
  • However, no independent corroboration of fair market rent or valuation was produced,
  • No explanation was offered for the year-on-year variation in rent.

2.4 Overall Conclusion of the CIT(E)

Based on:

  • Loan and payment transactions with society office-bearers,
  • Variance and pattern of rent to Gargi Farms,
  • Perceived lack of evidence on charitable nexus of these payments,

the CIT(E) held that:

  • The activities were not genuine,
  • The activities were not in accordance with the objects of the society,

and therefore rejected the Form 10AB application for registration under Section 12AB.

3. Assessee’s Submissions Before ITAT

The assessee filed a detailed paper book before the Tribunal containing, inter alia:

  • Ledger accounts of Anil Tayal, Shweta Tayal, Savita Tayal and M/s Gargi Farms for Financial Years 2022-23, 2023-24 and 2024-25 (01.04.2022 to 31.03.2025),
  • Copy of lease deed dated 06.01.2021,
  • Registration certificate of the society under the Haryana Registration and Regulation of Societies Act, 2012,
  • Copy of Constitution / Memorandum and Bye-Laws of the society,
  • Affiliation letters:
    • Director of Elementary Education, Haryana, Panchkula dated 12.11.2021,
    • Directorate of School Education dated 28.08.2025,
  • Annual accounts for preceding years, audit reports in Form 10B/10BB and income tax returns,
  • Bank statements, cash book and date-wise details of charitable activities,
  • Registration certificate under the Foreign Contribution (Regulation) Act, 2010.

3.1 Nature of Loan Transactions

The assessee contended:

  • Amounts received from Anil Tayal, Shweta Tayal, and Savita Tayal were unsecured, interest-free loans,
  • These loans were utilized to:
    • Fund school infrastructure,
    • Meet academic and operational expenditure, including salaries,
    • Support the charitable object of imparting education,
  • No interest or personal benefit was given to the lenders.