In another ruling, which is in line with strong procedural checks for charitable establishments, the Income Tax Appellate Tribunal (ITAT), Chandigarh Bench has set aside the cancellation of a trust registration under Section 12AB of the Income Tax Act. The Tribunal was of the opinion that receipt of donations by the NRIs does not automatically amount to “foreign contribution” and that mere compliance with the Foreign Contribution Regulation Act (FCRA) cannot be treated as a breach of the charitable objectives of a trust. For non-governmental organisations (NGOs) and charitable trusts which are involved in the Indian economy in the form of cross-border donations, this decision is of great added value.
PCIT ruled that under Section 12AB(4), the trust’s registration had been cancelled on the grounds that:
- Deficiencies established under the Income Tax Act.
- Breach of FCRA provisions.
- Misapplication of funds.
The trust had challenged the order to the ITAT, saying the cancellation was jurisdictionally questionable and procedurally wrong.
Key Legal Findings
Lack of Jurisdiction
The Tribunal ruled that the PCIT did not have the legal power to cancel registration pursuant to Section 12AB. Such power sits solely with the Commissioner of Income Tax (Exemptions) [CIT(E)]. Any such action without jurisdiction is legally unsustainable.
Expose the “Specified Violations” and No Retrovaluation
The “specified violation provision” in Section 12AB(4) was created (in 2022). The Tribunal held that there was no retrospective application of this provision to earlier financial years. Punishments for such or other adverse provisions are to be applied prospectively, unless specifically stated otherwise.
Violators of the Principles of Natural Justice
The notices given did not specify the specific nature of violations claimed. The Tribunal reiterated that such vague or general allegations cannot excuse rescission of the charitable registration process. Fair opportunity, clarity about charges, and reasoned orders are all key to tax proceedings.
Nor Will NRI Contributions Automatically Be Considered to Belong to the Category of Foreign Donations
A key take-home point for the Tribunal is that NRIs' donations are not considered to be foreign contributions on a per se basis in all cases. Plus, conformance with FCRA norms isn't synonymous with non-compliancy with regards to charities.
Implication for Non-Governmental Organizations and Charitable Trusts
This ruling creates several important safeguards:
- Canceling registration under section 12AB cannot be an arbitrary thing.
- Tax authorities must strictly adhere to jurisdiction limits.
- For one thing, any new penal provisions cannot be retroactive.
- FCRA compliance is not proof of culpability.
- Correct and reasonable procedural fairness should be conducted before any adverse actions.
This judgement reassures NGOs being provided with international or NRI aid that legal receipt of funds is not a ground for automatic cancellation in respect of tax registration.
It is the ITAT Chandigarh’s judgment that emphasizes due process and jurisdiction, and the application of good or fair rules of the law in relation to tax as well as regulatory actions, against charitable institutions. NGOs and charity trusts can also ensure strong compliance provisions under both Act and FCRA but should remember all their legal safeguards to avoid arbitrary formality of administrative action.
