Lala Sohana Mal Jagmohan Lal Khanna Educational And Charitable Trust Vs CIT Exemptions (ITAT Delhi)
NBFC Fixed Deposits Cannot, by Themselves, Defeat a Trust’s 12AB Renewal: Delhi ITAT
A possible violation of the permitted investment modes under Section 11(5) is an issue for assessment. It does not, by itself, establish that a charitable trust’s activities are not genuine. The Delhi Bench of the ITAT has made this distinction while considering the rejection of a trust’s applications for renewal under Section 12AB and approval under Section 80G.
The decision is Lala Sohana Mal Jagmohan Lal Khanna Educational and Charitable Trust v. CIT(E), ITA Nos. 3645 and 3646/Del/2026, pronounced on 28 September 2026. The Tribunal set aside the basis on which the CIT(E) had objected to the trust’s fixed deposits with non-banking finance companies and sent the matter back for verification of another factual issue. The approvals were not granted outright; both appeals were allowed for statistical purposes.
Why the CIT(E) rejected the applications
The trust had sought renewal of its registration under Section 12AB and the related approval under Section 80G. The CIT(E) rejected the applications on two grounds. First, the trust had placed money in fixed deposits with certain non-banking finance companies (NBFCs), which the CIT(E) considered contrary to the investment requirements of Section 11(5). Second, the trust had made donations to institutions which, according to the CIT(E), were not registered under Section 12AB.
Both observations required examination, but they raised different questions. The NBFC deposits concerned the mode in which the trust invested its funds. The donations concerned the identity and registration status of the recipient institutions. The CIT(E) treated them as reasons to reject the renewal and approval applications.
Investment compliance and genuineness are distinct issues
The Tribunal addressed the NBFC deposits directly. It observed that even if the deposits were construed as a violation of Section 11(5), the consequence of such a violation would be considered in assessment proceedings. The existence of those deposits could not, on its own, justify denying registration under Section 12AB.
The Tribunal also rejected the inference that placing funds in NBFC deposits made the trust’s transactions ingenuine. Its reasoning is important: an investment may invite a tax consequence because it does not meet a prescribed mode, but that does not automatically prove that the investment was fictitious or that the trust was carrying on sham activities.
The order does not decide that NBFC fixed deposits are a permitted mode under Section 11(5). Nor does it rule out an assessment consequence if a violation is established. The finding is narrower and more useful for registration proceedings: the CIT(E) cannot equate a disputed investment mode with lack of genuineness and reject renewal on that basis alone.
The donations required factual verification
The CIT(E)’s other reason for rejection was that certain institutions receiving donations from the trust were allegedly not registered under Section 12AB. Before the Tribunal, the trust placed copies of those institutions’ registration details in its paper book.
Rather than making its own final finding on the donees’ status, the Tribunal directed the CIT(E) to verify the facts. It added that the issue could not, in any event, be used in the manner adopted by the CIT(E) to deny the trust’s Section 12AB registration.
That direction is significant for the outcome. The Tribunal did not simply accept the downloaded records as conclusively establishing every donee’s position. It left the factual check to the authority handling the applications. The trust therefore succeeded in removing the stated grounds for outright rejection, while the application process still required further consideration.
What was the result for Section 80G?
The order deals with two appeals, arising from the rejection of the Section 12AB renewal and the Section 80G application. The Tribunal restored both matters to the CIT(E) and allowed both appeals for statistical purposes.
This should not be reported as an unconditional grant of either renewal or 80G approval. The CIT(E) must act in accordance with the Tribunal’s findings, verify the material relating to the donee institutions and dispose of the restored matters. Equally, the CIT(E) cannot simply repeat that the NBFC deposits themselves prove that the trust’s activities are not genuine, since the Tribunal has expressly rejected that reasoning.
Author’s comment
This order highlights a distinction that can be lost in trust proceedings: registration examines the institution, while assessment determines the tax consequence of particular transactions. A questionable investment must be addressed under the relevant provisions. It should not be turned, without further evidence, into a finding that the trust itself is ingenuine.
The same care is needed with donations to other institutions. Their registration certificates, validity periods and identity details can be checked. A factual doubt calls for verification; it is not a substitute for a reasoned finding on the applicant trust’s eligibility.
For trusts facing similar objections, the response should put the investment schedule and supporting records before the CIT(E), explain the circumstances of each deposit, and provide verifiable documents for any donee whose status has been questioned. This ruling offers a strong answer to automatic rejection of 12AB renewal for an alleged Section 11(5) breach, while leaving the actual assessment consequences of the deposits open.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. The appeals in ITA Nos.3645 & 3646/Del/2026 for AY 2025-26, arise out of the ld. Commissioner of Income Tax (Exemptions), Chandigarh [hereinafter referred to as ‘ld. CIT(E)’, in short] dated 18.02.2026 for registration of u/s 12AA and 80G of the Income Tax Act, 1961.
2. We have heard the rival submissions and perused the material available on record. At the outset, we find that the ld CIT(E) had rejected the application of the assessee seeking renewal of registration u/s 12AB of the Act and consequential exemption u/s 80G of the Act, on the ground that the assessee had made investments in certain Non Banking Finance Companies (NBFC) in the form of fixed deposits which is in violation of provision of Section 11(5) of the Act and the donations made to certain institution which are not registered u/s 12AB of the Act. In our considered opinion, the fact of assessee making investments in deposits in NBFC, even if construed to be in violation of provisions of Section 11(5) of the Act would be a subject matter of assessment proceedings and the same cannot be a reason for denial of registration u/s 12AB of the Act. The said transaction of investment in NBFCs cannot be treated by any stretch of imagination that the transactions of the assessee are ingenuine. Hence, the observation made by the ld CIT(E) in this regard are rejected.
3. With regard to donations made to certain donee institutions, the ld CIT(E) had observed that the donee institutions are not registered u/ 12AB of the Act. The ld AR had downloaded the income tax registration u/s 12AB of the Act of the said donee institutions from the internet and had placed the same in the paper book. The matter is to be examined by the ld CIT(E). Hence, we deem it fit and appropriate to restore this issue to the file of the ld CIT(E) for factual verification. In any event, the same cannot be a reason for denial of registration u/s 12AB of the Act. With these observations, the grounds raised by the assessee in both the appeals are restored to the file of the ld CIT(E) and allowed for statistical purposes.
4. In the result, the appeals of the assessee are allowed for statistical purposes.
Order pronounced in the open court on 28th-Sep-2026.
