Grounds of Cancellation of Registration U/s 12AB
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Cancellation of Registration U/s 12AB – Statutory Grounds for Cancellation Consequences
Registration under Section 12AB remains valid until its expiry or cancellation. Over the years, amendments (2004, 2014, 2019, 2020, 2022, 2023) have expanded the Commissioner’s powers to cancel registrations for various violations. From 01‑04‑2021, Section 12AB replaced Section 12AA. From 01‑04‑2022, new provisions govern cancellation, including provisional registrations.
Registration u/s 12AB is central to the tax‑exempt status of charitable and religious institutions. However, the principal commissioner or commissioner is empowered to cancel such registration if substantive violations indicate that the trust no longer functions in accordance with its stated charitable purpose.
- Who Can Cancel : Principal Commissioner (PCIT) or Commissioner (CIT) can cancel any final or provisional registration granted under Section 12AB or earlier Section 12AA.
- When Registration Can Be Cancelled : Cancellation can occur if PCIT/CIT notices one or more specified violations, a reference is received from the Assessing Officer, or The case is selected under risk‑management criteria.
- Specified Violations (Clauses a–g) : Under Explanation to Section 12AB(4), violations include:
(a) Income applied for purposes other than stated objects.
(b) Non‑incidental business activity or failure to maintain separate books.
(c) Use of income for private religious purposes.
(d) Benefits to a particular religious community or caste.
(e) Activities not genuine or not as per registration conditions.
(f) Noncompliance with other material laws where violation has attained finality.
(g) Filing incomplete / false / inaccurate information in Form 12A(1)(ac).
- Procedure for Cancellation : PCIT/CIT may call for documents, conduct inquiries, and must provide a reasonable opportunity of being heard. Orders must specify whether registration is cancelled or retained.
- Time Limit : The cancellation order must be passed within 6 months from the end of the quarter in which the first notice is issued.
- Proviso to Section 2(15)—No Automatic Cancellation : CBDT Circular clarifies that merely exceeding the 2(15) commercial activity limit in a particular year does not justify cancellation. Only exemption may be denied for that year, not registration.
Statutory Grounds for Cancellation
Below is a refined and structured explanation of the grounds and consequences of cancellation u/s 12AB.
Application of Income for Non‑Charitable or Unapproved Objects
Using income for purposes that do not fall within the definition of “charitable purpose” u/s 2(15), or for objects not approved at the time of registration, constitutes a fundamental violation. Such misapplication indicates deviation from the trust’s core mandate and justifies cancellation
Non‑Incidental Business Activities / Failure to Maintain Separate Books
If a trust conducts business activities that are not incidental to the attainment of its charitable objects or fails to maintain separate books of account as required U/s 11(4A), it ceases to qualify for exemption. Persistent non‑compliance may result in withdrawal of registration
Application of Income for Private Religious Purposes
Utilising funds for the benefit of specific individuals, families, or private religious institutions is impermissible. Section 13 strictly prohibits the use of charitable funds for private religious purposes, and a violation undermines the institution’s public charitable character.
Benefit to a Particular Religious Community or Caste
Activities or income applied exclusively for the benefit of a particular religious community or caste attract Section 13(1)(b). Such exclusivity is inconsistent with the inclusive and public‑oriented nature of charitable registration.
Activities Not Genuine or Not in Accordance with Registration Conditions
Registration may be cancelled if the activities are not genuine, funds are diverted or siphoned, activities materially deviate from approved objects, or prescribed conditions of registration are violated. This strikes at the root of the trust’s credibility and charitable status.
Consequences of Cancellation of Registration U/s 12AB
Denial of Exemption U/s s 11 and 12
Upon cancellation, all income becomes taxable at the Maximum Marginal Rate (MMR). The trust loses the core tax benefit that accompanies charitable registration. Income taxed under normal provisions (five heads of income); Sections 11 & 12 not available. Cancellation of Section 80G Approval.
Loss of Accumulation and Application Benefits
The trust can no longer accumulate income U/s 11(2) or claim the benefit of the deemed application. This directly impacts financial planning and project execution.
Withdrawal of Section 80G Eligibility
Once registration U/s 12AB is cancelled, 80G approval becomes invalid. Consequently, donors lose the deduction benefit, significantly reducing donor confidence and charitable inflows. Which are directly impacting donor confidence and funding. Eligibility for Section 10 Exemptions: Once 12AB is cancelled, other Section 10 exemptions (except specific restricted clauses) become available.
Reopening of Past Assessments
If violations are found to be continuous or systemic, past assessments may be reopened. This increases exposure to tax demands, penalties, and prolonged litigation.
Levy of Exit Tax on Accreted Income U/s 115TD
Exit Tax under Section 115TD: Cancellation deemed as conversion to non‑charitable form → Accreted income taxed at maximum marginal rate. Cancellation triggers a deemed conversion of a charitable institution into a non‑charitable entity. The institution must pay exit tax on accreted income.
- calculated as Fair Market Value (FMV) of Assets – Liabilities.
- Taxed at the maximum marginal rate.
This is one of the most financially impactful consequences.
Adverse Reputational and Regulatory Impact
Cancellation may lead to collateral consequences such as loss of FCRA credibility, ineligibility for CSR funding, and withdrawal of governmental or institutional support. This may significantly hamper ongoing and future operations.
Assessment Impact: AO will compute income accordingly for all subsequent years. Appeals against cancellation orders lie with the Income Tax Appellate Tribunal (ITAT) under Section 253(1)(c).
Conclusion
Cancellation of registration U/s 12AB is a serious regulatory action designed to address substantive, not minor, violations. While procedural lapses may not normally trigger cancellation, systemic deviation, misuse of income, or non‑genuine activities can lead to severe tax and operational consequences. To preserve registration and retain tax benefits, trusts must ensure:
- Strict alignment between stated objects and actual activities,
- Transparent fund utilisation,
- Compliance with statutory conditions, and
- Proper documentation and governance practices.
While isolated or procedural lapses may not, by themselves, justify cancellation, systemic deviation from objects, lack of genuineness of activities, or misuse of income strikes at the root of eligibility for exemption. Accordingly, strict alignment between approved objects, actual activities, and statutory compliance is essential to preserve registration and the attendant tax benefits.