Santosh Trust Vs ACIT (ITAT Delhi)
Summary: The assessee, Santosh Trust, challenged the rejection of its application for renewal of registration under Section 12AB of the Income-tax Act, 1961 and consequential cancellation of its Section 80G approval. The Trust, engaged in medical education and running Santosh Medical College & Hospital and Santosh Dental College & Hospital, had applied for renewal in Form 10AB. The prescribed authority alleged diversion of funds to Santosh Hospital Pvt. Ltd., a company in which the founder trustee had been a director, and cash deposits of Rs.39 crore during the demonetisation period.
The Tribunal found that the prescribed procedure under Section 12AB(4) had not been properly followed, particularly since the assessee had not been specifically confronted with the demonetisation allegation. On merits, it noted that the cash-deposit issue had already been considered in earlier proceedings and that the payments to Santosh Hospital Pvt. Ltd. arose from an agreement to acquire hospital assets entered into in 2016. The Tribunal held that the alleged benefit to a person covered by Section 13(3), even if established, was governed by Section 13(1)(c) and could not, by itself, be converted into a specified violation under Section 12AB(4). It further found that the payments to the liquidator were made to protect the Trust’s substantial financial interest in the hospital assets and followed the existing acquisition arrangement and directions of the Supreme Court.
The Trust’s activities remained charitable and genuine, and the relevant transactions had also been examined in earlier assessment proceedings without adverse findings. The Tribunal therefore held that the prescribed authority had exceeded the scope of its powers in rejecting renewal and cancelling registration. The appeals were allowed, and the prescribed authority was directed to grant renewal of registration under Section 12A(1)(ac) and approval under Section 80G within four weeks.
Key Ruling
The ITAT held that alleged application of funds for the benefit of persons specified under Section 13(3) could not, by itself, justify cancellation of registration under Section 12AB where the Trust’s charitable objects and genuineness of its activities remained established. It also held that the prescribed authority could not use the registration proceedings to determine issues relating to application of funds beyond the statutory scope of Section 12AB.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
These appeals are preferred by the Assessee against the order dated 23.03.2026 & 28.03.2026 of the Pr. Commissioner of Income-tax (Central) Delhi (hereinafter referred as ‘Competent Authority’ or ‘Prescribed Authority’) against the rejection of renewal of registration u/s 12A r.w.s 12AA and Section 12AB and consequent cancellation of approval under Section 80G of the Act.
2. Heard and perused the records. The two appeals were heard together as they involve common question of facts and law and ITA 3128/Del/ 2026 is considered to be the lead case and its findings shall squarely cover the issues of ITA 3570/Del/2026, as a consequential effect only.
3. The relevant facts are, that t he appellant is as a charitable trust duly registered u/s 12A of the Act vide order dt: 17.06.2009 and its registration stands renewed upto 31.03.2026 u/s 12AB of the Act. The trust came into existence w.e.f 16.12.2004 through a trust deed of even date executed by Dr. P Mahalingam and Mrs.Kuilambal. The appellant has also been grante d exemption in terms of section 80G(5) (iv) of Act vide order dt: 28.09.2011. The copy of Trust deed dated 16.12.2004, available at PB page 1-18, shows that t he main object of the appellant trust is to impart medical education to the students with no discr imination of cast, religion and creed. In order to accomplish this philanthropic objective, the appellant has been running of late a medical college named as ‘Santosh Medical College & Hospital’ and another integrated institution named as ‘Santosh Dental C ollege & Hospital’ at Ghaziabad NCR provided to the public at large. Ld. Counsel had made pertinent reference to the fact that the services of the above institutions have found recognition from the Ministry of Human Resource Development, Government of India. The Ministry vide Notification dated 13.06.2007 has granted it the prestigious tag bestowing independent/ autonomous status of deemed to be university in the name and style of ‘Santosh University’. The said University status was reviewed and extended by Ministry of Human Resource Development vide Notification dated 16th December 2019.
4. The appellant trust had filed an application for renewal of the registration in Form 10AB on 30.09.2025 and the Ld. PCIT has passed the impugned order of the rejection of application and cancellation of registration on occurrence of the following specified violation as per sec 12AB(4) of the Act;
i. Diversion of funds of the appellant trust to a company where trustee is interested as director (PB 233-236).
ii. Cash deposit of Rs.39 Crore during demonetiz ation in the month of Nov2019.
5. At the outset we like to observe that as far the charitable objectives in the form of running medical college i s concerned, the impugned order has not given any adverse observation regarding the above charitable activities in imparting of the medical treatment and education to the aspirants in general carried out by the appellant trust duly recognized by various authorities. There is no allegation that the trust has failed to achieve its charitable objects over the period in which it held the registration vide Form 10C, dated 24.09.2021. The rejection of renewal is primarily for alleged specified violations.
6. The foremost contention of ld. Counsel is that without due opportunity of hearing the impugned order is passed and ld. DR has rebutted the same by submitting that order itself mentions of the notice being issued.
7. In this context we find that from the perusa l of the show cause notice dated 28.02.2026 reproduced in the impugned order para 13 ( copy of which is available at page PB 235) the allegation of diversion of funds was confronted to the assesseeby making out a case of violation of sec 13(1) of the A ct and r/wSection 11(5) of the Act. But there is no mention of any proposed adverse view being taken by the Ld. Pr CIT regarding cash deposit during the demonetization period.
8. Now if we take up the provision of the Act, we find that the procedure provid ed under section 12AB(4) for cancellation of the registration has also not been followed. As for convenience we reproduce the relevant part of Section 12AB(4), which provides for procedure to be adopted for cancellation of a registration in case of alleged specified violations;
“(4) Where registration or provisional registration of a trust or an institution has been granted under clause (a) or clause (b) or clause (c) of sub-section (1) or clause (b) of sub- section (1) of section 12AA, as the case may be, and subsequently,—
(a) the Principal Commissioner or Commissioner has noticed occurrence of one or more specified violations during any previous year; or
(b) the Principal Commissioner or Commissioner has received a reference from the Assessing Officer under the second proviso to sub- section (3) of section 143 for any previous year; or
(c) such case has been selected in accordance with the risk management strategy, formulated by the Board from time to time, for any previous year, the Principal Commissioner or Commissioner shall,—
(i) call for such documents or information from the trust or institution, or make such inquiry as he thinks necessary in order to satisfy himself about the occurrence or otherwise of any specified violation;
(ii) pass an order in writing, cancelling the registration of such trust or institution, after affording a reasonable opportunity of being heard, for such previous year and all subsequent previous years, if he is satisfied that one or more specified violations have taken place;
(iii) pass an order in writing, refusing to cancel the registration of such trust or institution, if he is not satisfied about the occurrence of one or more specified violations; (iv) forward a copy of the order under clause (ii) or claus e (iii), as the case may be, to the Assessing Officer and such trust or institution.
Explanation.—For the purposes of this sub-section, the following shall mean “specified violation”,—
(a) where any income derived from property held under trust, wholly or in part for charitable or religious purposes, has been applied, other than for the objects of the trust or institution; or
(b) the trust or institution has income from profits and gains of business which is not incidental to the attainment of its objective s or separate books of account are not maintained by such trust or institution in respect of the business which is incidental to the attainment of its objectives; or
(c) the trust or institution has applied any part of its income from the property held und er a trust for private religious purposes, which does not enure for the benefit of the public; or (d) the trust or institution established for charitable purpose created or established after the commencement of this Act, has applied any part of its income for the benefit of any particular religious community or caste; or
(e) any activity being carried out by the trust or institution,—
(i) is not genuine; or
(ii) is not being carried out in accordance with all or any of the conditions subject to which it was registered; or
(f) the trust or institution has not complied with the requirement of any other law, as referred to in item (B) of sub-clause (i) of clause (b) of sub- section (1), and the order, direction or decree, by whatever name called, holding that such non- compliance has occurred, has either not been disputed or has attained finality; or (g) the application referred to in clause (ac) of sub- section (1) of section 12A is not complete or it contains false or incorrect information.”
9. We find from the impugned order that there is absolutely no reference of aforesaid procedure being adopted. Only one notice dated 28.02.2026, is ref erred in the impugned order. There is no reference as to if for purpose of invoking powers of cancellation u/s 12AB(4) of the Act, cognizance was being taken under which of the relevant clauses (a) to (c) of Section 12AB(4) of the Act. We find from PB of assessee that first notice as general practice formal queries, was issued on 08.01.2026, copy of which is available at pages 218- 219 of PB and thereafter notice dated 28.02.2026 was issued, copy of which is available at page 220- 221 of PB and which is also mentioned in the impugned order. This notice itself mentions that this notice dated 28.02.2026 was issued in continuation of earlier notice dated 08.02.2026.
10. However, this notice dated 28.02.2026 nowhere indicates that it was issued under which of the clauses of Section 12AB(4) of the Act. There is no reference or illustration of any specified violation found by ld. Prescribed Authority, from the information made available by assessee or on enquiry of that authority. Then this notice straight way mentions that show cause is issued for explaining why registration u/s 12AB should not be cancelled. Without giving conclusive observation as to which one of the specified violation, i.e one or all of (i) to (f), described in Explanation to section 12AB(4) of the Act was found to have occurred.
11. However, if we look at the provisions of section 12AB(4), it comes up that cla use (i) provides for inquiry and the notice issued by prescribed authority is to examine and record satisfaction, if there is occurrence of specified violations. Once this finding and satisfaction is arrived at, then under clause (ii) notice has to be issu ed, calling assessee, to explain why registration should not be cancelled. W here law provides order has to be passed ‘after affording a intention of exhibiting in the order the justification to cancel registration on specific charges. However, here ld. Prescribed authority has issued a general notice, covering scope of clause (a) as well as of clauses (i) and (ii) of Section 12AB(4) of the Act, without any reference of specified violations. More particularly, no reference of issue of cash deposit during demonetization. In fact the alleged default covered by Sec 13(1) of the Act was re- characterized to a distinctly different default of Sec 12AB(4) (a) of the Act. Reliance is placed on the decision in Ram Saran Das KishoriLal Charitable Trust vs CIT(Exemption) 180 taxmann.com 546 (Del-Trib), where a co- ordinate, in which one of us, the Judicial Member was the author, has expressed that such notices should be issued following due process prescribed in the Act, for cancellation of registration. Thus on this account al one the impugned orders deserve to be quashed.
12. Even otherwise we have examined the merits of allegations and coming to the issue of all eged specified violation out of cash deposit during the demonetization period, ld. Counsel has appraised us that the issue of cash deposit during the demonetization period for AY 2017- 18 has been allowed by ld. CIT(A) and same was allowed by the this vide order 29.08.2025 in ITA no. (copy made available at PB 180-215) and the same stands confirmed byHon’bleDelhi High Court vide order dated 10.04.2026 (copy available at PB 216-217). Therefore, we sustain the contention that on issue of cash deposit there is factually a binding judicial finding that the source of deposits was not undisclosed income but the fee received, which is part of reported income so there is no justification left for sustaining the conclusion of Ld PCIT for rejecting registration.
13. As with regard to remaining issues, a t the very beginning of this discussion we find it a curious case where at the time of application of renewal of registration when only activities and object of the trust needs to be seen as per Sec 12AB(1) (b) of the Act and the powers are confined to verification of the activities/objects of the trust only, the provisions of Specified Violations as per Explanation (a) to Sec 12AB of the Act have been invoked. The appellant’s predominant and substantive activity of impa rting medical education through functional institutions was neither found to be sham nor it was shown to have departed from its objects, and none of the conditions in Form 10AC was shown to have been violated on any other ground then impugned specified violations.
14. Then coming to merits of second issue of alleged specified violation we find that appellant filed a detailed reply to show cause notices vide letter dated 06.03.2026 (copy available at PB 222-231) whereby the purpose of advance given was explained to be solely and exclusively for expansion of running a Hospital and the same continued from AY 2016- 17 and onwards and the advance which stood at Rs.56.70 Crore as on 31.03.2022 increased to Rs.71.70 Crore as on 31.03.2023. We find that the above tr by Ld. AO in the assessment for AY 2023- 24 framed u/s 143(3) of IT Act vide order dated 28.02.2025 (copy available at PB 168). In the above assessment, specific query was raised in notice dated 09.10.2024,copy available at PB 171, therein regarding advances given and the appellant in reply to above notice vide reply dated 16.12.2024 (copy available at PB 176B) in S.No.4 had explained the transaction of advance to Santosh Hospital and same was accepted by Ld. AO who completed th e assessment at returned income without making any adverse observation although cancellation of registration is retrospective w.e.f FY 2022 -23 relevant to AY 2023-24. In fact t he above order of assessment has been passed after taking approval from Addl. CIT, Central Range- 2, Delhi and with whom case was discussed by Ld. AO from time to time during assessment proceedings. The fact that the above entity is a related party was in the knowledge of the Ld. AO which is evident from audit report in Form 10B for th e above year in clause 41where details of s pecified persons as referred in section 13(3) of the Act was provided.
15. A co-ordinate bench in the case of Lakhmi Chand Charitable Society vs PIT 2026 (7) TMI 1815 (ITAT Del) order dt: 22.07.2026, in which one of us, the Judicial Member was author of the decision, has held that in absence of any adverse observation by the Ld. AO regarding the subject transaction in assessment orders, the Ld. PCIT’s action of taking a contrary view to the view taken by Ld. AO is beyond scope of powers of the above authority u/s 12AB(4) of the Act. Thus for same issue cancellation of registration or rejection of renewal application is not justified.
16. Now examining specific allegation of diversion of funds to the en tity in which the trustee covered by category of disqualification u/s 13(3) of the Act, is concerned, we find that the ld. Prescribed authority has made observation in para 3 that the assesse trust has entered into an agreement with M/s Santosh Hospital Pvt. Ltd. (SHPL) to purchase the asset of the said company and that the said company was a concern in which Dr. P. Mahalingam, the trustee of assesse trust was a director and thus, was a related party within the meaning of Section 13(1). The Prescribed authority admits that this agreement of purchase was signed in 2016. I t also mentions that the trust has started making advance payments to M/s SHPL for the purpose of these purchases, the said assets however, conti nued to remain with M/s SHPL during agreement was completed. Ld. Prescribed authority mentions the fact that in 2018, M/s SHPL went into liquidation after an application was filed before NCLT. Ld. Prescribed authority records in para 7 that in 2022, M/s Sa ntosh Trust, wrote a letter to the liquidator that in pursuance to Hon’ble Supreme Court order dated 16.12.2022 in Civil Appeal No. 3076 – 3077 of 2022 wherein Hon’ble Court has allowed Dr. P. Mahalingam., who is suspended director of SHPL and found and mana ging trustee of M/s Santosh Trust to make repayment of loan to financial creditors of SHPL. Here, the payment are made for any assets to be acquired. Ld. Prescribed authority records that liquidator had granted permission to M/s Santosh Trust to make payment to the liquidator on account of SHPL. Thus, ld. Prescribed authority concluded that there is close connection between trust and promoter of SHPL and the liquidator while giving permission to make payment ha s not indicated that the payment were being made for any specific assets to be acquired by the assesse trust. Accordingly, ld. Prescribed authority concluded that the primary contention of the assesse that the amount paid to the liquidator was for purchase of the hospital assets is without any proof or corroborative evidences. It was thus, concluded that trust had made payment to bail out a company under liquidation in which the founder trustee was the promoter and suspended director. Thu s alleging that the activity of the assesse is not charitable. There was allegation of application of funds or diversion of funds on account of surplus generated in running the education institutions for the benefit of company in liquidatio n. Thereafter, ld. PCIT makes following conclusions:
“12. The payment to the company in liquidation [ with the liquidator] in no manner establishes that the payment has been made for purchase of assets of the said hospital, SHPL. In the payment request ma de also there is no reference to the purchase of the hospital assets. The procedure for the sale of assets of a company in liquidation is clearly specified and there is no provision to accept payment by the liquidator from parties for specific assets. The payment, therefore, was not for assets but in fact to support the company which was in liquidation and was earlier a related party of the assessee trust. The assessee had an argument that as the director was suspended the entity is no longer a related conc ern under section 13. This does not impact the fact that the payment is to a liquidating company without any reference to thepayment to be for purchase of hospital.
13. A detailed show cause was issues to the assessee on these facts on 28.2.2026 The show cause was as under:
-
- “Santosh Trust, the assessee entered into an agreement with private limited company M/s Santosh Hospital Private Limited (SHPL) to buy the assets of the said company.
- The said company was a concern in which Dr. P. Mahalingam, the trustee of the assessee trust was a director. It was a related party within the meaning of Section 13(1) of the Act. This agreement of purchase was signed in 2016. T he trust had started making advance payments to M/s SHPL for the purposes of this purchase. The assets, however, continue to remain with M/s SHPL during the agreement was completed.
- In 2018, SHPL went into liquidation after an application was filed to the NCLT against the said company.
- The assessee trust filed an application before the liquidator for recovery of Rs. 70 Crores and had been paid to M/s Santosh as a part of the said agreement.
- The payment in any case was not in accordance with the provisions of section 11(5) and also not application for charitable purposes since it was only an advance.
- The trust thereafter made further payments to a concern in which the founder trustee M/s P. Mahalingam was the suspended director, even after the initiation of liquidation proceedings.
- This action on the part of the trust of making payments was rather attempting to bail out a company liquidation in which the trustee is a director clearly established with the activity is in no way charitable.”
14. The r eply to the same was received on 05.03.2026. The reply has been considered but does not alter the factual position above in any manner. A payment has been made to the liquidating company SHPL to enable the company to meet its financial debt obligations. There is no assurance from the liquidator {IRP} that the payments are for purchase or transfer of any assets to the trust. The payment has beenmade only to protect the interest of a trustee who is a suspended director in the liquidating entity. The assessee could not provide any judgment on the issue of payment to a liquidating company by a trust, in his favor in this regard. The payment is in no manner an application for the objects of the trust. Therefore, it clearly constitutes a specified violation. Furth er the reply has tried to state that the application of the funds cannot be examined during the registration proceedings. This totally incorrect interpretation of the provision. The section itself clearly states that the commissioner is required to be satisfied of the genuineness of the activities of the trust.
15. It is also noted that the registration to the applicant society was granted on 24.09.2021 in Form 10AC. There were specific conditions which were provided and the registration was subject to those conditions. On of the conditions clearly stated as under:
“(q). the applicant shall comply with the provisions of the Income tax Act 1961 read with the Income tax Rules1962”
It is evident form the above discussion in para that this condition has been violated by the applicant society as fund have been diverted which is a non- constitute specified violations under Explanation to section 12AB. This means the provisions of the law have not been complied with. It is therefore clear that the objects of the trust have not been carried out in accordance with the conditions laid down in the registration. The satisfaction of conditions subject to which registrat ion is granted is the sine qua non of validity of such registration and its continuation. In the present case the conditions laid down in the registration have been violated in carrying on the objects therefore the registration is required to be cancelled. It is also stated in section 12AB(4) that a cancellation is required to be made for the previous year in which the specified violation is noticed and allsubsequent previous years.
16. In this context in renewal it is required to further seen as to wheth er any object or activity other than the charitable or genuine activity related to any charitable objects. In the present case the funds are being diverted and therefore this is not a charitable activity. This is also codified on the statute as a specified violation which is the basis of cancellation of registration. It is therefore clear that the Principal Commissioner has to be satisfied about the occurrence or otherwise of the specified violation during the renewal of registration process (in this case) as this itself would be a non- genuine activity. Also, in the present case there is a violation of the conditions subject to which the registration was granted. The arguments of the assessee therefore do not apply to the present law and provisions. Further this is not a case where the said amount is to be brought to tax for being applied elsewhere. It is a case of a specified violation for utilization of the funds for purposes other than the objects of the Trust. This objection of the assessee is also therefore not valid.
17. Explanation to section 12AB(4) is quoted hereunder:
“Explanation.—For the purposes of this sub- section, the following shall mean “specified violation”,—
(a) where any income derived from property held under trust, wholly or in part for charitable or religious purposes, has been applied, other than for the objects of the trust or institution; or
………
(e) any activity being carried out by the trust or institution,—
(i) is not genuine; or
(ii) is not being carried out in accorda nce with all or any of the conditions subject to which it was registered;”
The clause (a) above clearly implies that the funds of the assessee trust are required to be applied to purposes for which the trust is registered, and in the present case this is not so. As a consequence, therefore the activity of diversion of fund is est ablished, making such activity not genuine.
18. With reference to the genuineness of the activities of the trust, it is further placed on record that the trust had deposited an amount of Rs.39 crores during the demonetization period in November 2016. The said addition in AY 2017- 18 is also a subject matter of a separate judicial appeal process. What it underlines is that the Trust is actually engaged in activities which are not genuine and such activities are not included in the objects. This further is t antamount to the fact that the objects are not being carried out in accordance with the designated objects. The threshold for genuineness of activity to be eligible for exemption is different and lower than the threshold for taxability. The facts indisputa bly show that the trust routed to a related party. At the first instance an agreement was made to purchase hospital assets from a related concern in 2016. Later furthe r surplus was diverted to bail out the same entity (SHPL) which was under liquidation.
19. It is seen from the above discussion, the income derived from the trust has been applied to purposes other than the objects of the trust or institution and due to this there is a clear “specified violation” resulting in this activity of diversion of funds of the trust being non genuine. In the present case as stated above the conditions laid down in the registration have also been violated in carrying on the objects . Therefore, the registration under section 12AB cannot be granted and is required to be cancelled. Since the first specified violation resulting in the activities not being genuine and diversion of funds, has been noticedfrom FY 2022- 23, when the payment to the liquidating company was made, the registration is cancelled for the previous year 2022-23 and all subsequent previous years.
The application filed on 30.09.2025 for renewal of registration in Form 10AB is therefore rejected and registration stands cancelled.”
14. At the outset we find that when such an alleged action is specifically covered by sec 13(1)(c) of the Act and there was no justification for Ld. PCIT(Central) to invoke Explanation (a) to sec 12AB(4) to label the transaction as specified violation which is contrary to scheme of Act.
15. Then we are of considered view that the provision of sec 13(1)(c) of the Act is self contained code by itself to deal with situations involving alleged benefit to specified persons and defaults specified under clause (c) & (d) of sec 13(1) have not been brought into Explanation 2 to sec 12AB of the Act which defines specified violation although in the above Explanation to sec 12AB(4), the clauses (a) & (b) of sec 13(1) has been brought in clauses (c) & (d) to sec 12AB(4). The exclusion of sec 13(1) (c) in specified violation shows legislative intent to spare such violation from ambit of sec 12AB(4) of the Act. Since, in the present case, the alleged violation is under section 13(1)(c) of the Act, the same goes out of th e purview of sec 12AB. Reliance in this regard is placed on decision of co-ordinate bench in CIT/ ACIT, Central Circle, Ghaziabad ITA No. 4779/Del/2025 order dated 11.03.2026.Which has been relied also by Pune bench in Yashaswi Academy for Skills for Skills versus PCIT, (Central) Pune ITA No. 2814/PUN/2025 order dated 03.07.2026.
16. Thus m ere allegations that certain transactions conferred benefit on persons referred to in section 13(3) of the Act, do not, by the mselves, establish that the charitable activity is non- genuine or that the institution has abandoned its charitable object. The violations involving benefit to specified persons are dealt with by denial of exemption or taxation of the diverted income at th e assessment stage and do not by themselves warrant cancellation of registration for which reliance is further placed on the decision of G.D. Educ ation Society Versus DCIT/ACIT, Central Circle 2026(5) TMI 1776 – ITAT DELHI.
17. Coming to the merits of allegation we find that n ame of the trustee in question is Sh. P Mahalingam, who is also settlor of the trust and who was director in M/s Santosh Hospital P Ltd (‘SHPL”) till 04.04.2019 when the company went into liquidation.Date of agreement with M/s SHPL for acquisition of Hospital in Chennai and all its assets is 01.03.2016 and addendum is dated 29.03.2018. Payments were made to the said company by ap pellant trust till 29.03.2018 of Rs.33,48,20,363/-.The acquisition of the assets was to be completed by 29.03.2020 as per clause 3 of addendum.
18. We find that payment was made to acquire hospital and assets being part of main objects to the trust and therefore, such transaction cannot be treated as application of income for the purposes other than the objects of the trust as per section 12AB(4) r/w Explanation (a) of the Act. Then this transactions was regularly scrutinized in past assessments for AY 2016-17, AY 2017- 18, AY 2018-19, AY 2021-22 and AY 2023- 24, copies of orders of which are placed in paper book at pages 163-168.
19. Then recovery proceedings were initiated by a financer M/s MuthootFincorp Ltd (“MFL”) against M/s SHPL and vide order dated 12.07.2018 of CMM Chennai, there was an order of taking over possession of assets of the SHPL and subsequent notice of auction by MFL on 29.05.2019, under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002).
20. M/s SHPL filled CIRP proceedings before NCLT to escape auction of assets by the MFL vide 28.03.2019. The NCLT ordered liquidation of company on 04.12.2019 and appellate authority i.e. NCLAT confirmed liquidation order dated 14.02.2022.Then Hon’ble Supreme Court ordered deposit of installments of Rs.57.50 Crore to escape liquidation process and which were paid by the appellant to salvage assets of the company and also in order to safeguard the amounts already paid. Thus it was i n compliance of directions of the Hon’ble already been made, the amounts were paid by the appellant to the liquidator. It was explained to ld. Prescribed authority that these amounts were not paid to bail out any trustee, as it is the trust who would have suffered huge loss consequent to liquidation of above company as its interest in respect of amounts already paid would be recoverable in liquidation as unsecured creditors only. Thus the amount so paid would have only been lost. The attempt of Sh. P Mahalingam, to regain the control of assets, would only have served the ends of agreement of M/s SHPL, with the assessee and not Sh. P Mahalingam, as an individual.
21. In any case, the payment to above company was made in AY 2023- 24 and onwards when Sh. P Mahalingam, the alleged benefitted trustee has ceased to be director in M/s SHPL, the vendor company, post appointment of liquidator from year 2019 and the transaction thus went out of purview of sec 13(1) (c) r.w.s 11(5) of the Act.
22. Now, while all these facts and circumstances and the material on record is considered we find that what is material is that initial agreement of purchase of assets is dated 01.03.2026 and copy of which is available at page No. 19-33 of the paper book and the relevant is clause 1.1 which mentions that the asset described in schedule 1 are being purchased by the assesse and SHPL shall, convey, transfer, assigned and deliver to the trust these assets from time to time within a period of 5 years as peassets free and clear of any encumbrances except as mentioned in the said agreement. Sub- clause (i) of Clause 1.2 mentions that the amounts paid of Rs. 6 crores shall be kept in escrow account and this agreement itself it was mentioned that the receivables incurred out of this agreement shall be utilized for servicing the repayment of credit facility availed by SHPL from its various lenders. Sub-clause (ii) of Clause 1.2 mentions that these payments in the escrow accounts are out of instructions and mandate of SHPL. Clause 1.3.1 lays down period of transfer of assets would be 5 years and in case of any delay in transfer such assets SHPL shall intimate the trust in advance. Clause 1.3.2 specifically provide s that SHPL shall obtain NOC in writing from the existing lenders and from any lender which may exist in future with respect to transfer of assets in favour from the hospital.
22.1 Then, there was addendum to this agreement and the copy of which is available at page No. 34- 38 of the paper book and this addendum dated 29.03.2016 determine the total cost of the assets at Rs.125,00,00,000/- and mentions that out of which the trust has paid total sum of Rs.33,48,20,363/- as has been date of addendum. This document further mentions that SHPL transfer and deliver to the trust the assets within the period of 2 years from the date of this addendum dated 29.03.2020 or earlier date of fully payment of the consideration. It was agreed by clause 4 that SHPL shall transfer, deliver assets performing of other obligations also, for the purpose of conveying, transferring absolutely, clear, marketable title of the schedule property.
22.2 This agreement addendum became basis for making payments which admittedly were made in relevant financial years and have not been subjected to any doubt by the ld. Tax authority and the genuineness of this transaction stands accepted is the form of assessment order completed for AY: 2016- 17 onwards till AY; 2023-24.
22.3 Further, a s we have gone through the recitals of this agreement and the addendum we find that the same are very illustrative and very meticulously drafted to protect the interest of assesse and to ensure that assesse gets a clear and encumbrances title of the assets. It appears from these recitals that SHPL was already under some financial distress and for that reason provision was made for payment in escrow account, which were to be paid to the lenders and there was specific recitals that SHPL shall ensure no objection from the lenders before transferring the assets to the assesse.
22.4 The value of the assets has not at all been doubted at any stage and it is not the case of the department that the assets were being purchased beyond arm’s length or on inflated prices to benefit said trustee. The subsequent events of assesse entering into financials difficulties reflected by the proceedi ngs under Sarfaesi Act followed by the litigation in NCLT and ultimat e liquidation proceedings have been considered in orders passed by NCLT and Hon’ble Supreme Court.
22.5 It appears that Dr. P. Mahalingam by contesting liquidation before Hon’ble Supreme Court is making of desperate attempts to continue running the hospital and thereby preserve the assets for which assesse has entered into an agreement of purchases of the assets in the year 2016 and had received substantial component of the total consideration. The order dated 16.12.2022,of Hon’ble Supreme Court, copy of which is available at page No. 74- 84 of the paper book, shows that Dr. P. Mahalingam has sought indulgence of Hon’ble Supreme Court against orders of National Company Law Appellate Tribunal, Pr. Bench, New Delhi to ensure that the hospital continue to run its life and Hon’ble Supreme Court was pleased to grant interim relief to the said petitioner Dr. P. Mahalingam to continue to use building for hospital purposes. Order reflect that corporate debtors were not willing to accept proposals of Dr. P. Mahalingam and had not accepted the profit of Rs.10 crores which was directed to be deposited with official liquidator and which was supposed to be invested in an interest bearing deposit. Hon’ble Supreme Court interim order shows that Dr. P. Mahalingam was directed to make a further payment of Rs.5 crores towards dues of respondent No. 1 MuthootFincorp Ltd. on or before 31.03.2023 and which was also to be kept in interest bearing deposits.
22.6 It appears that in this sequence of event arising out of Hon’ble Suprem e Court directions dated 02.05.2022, the assesse which had substantial interest in assets of SHPL came forward to make the payment on account of Dr. P.substantially to protect the i nterest of the assesse as assesse had already paid a substantial amount to SHPL in the agreement dated 01.03.2010 and addendum dated 29.02.2016. Merely because there is connection of Dr. P. Mahalingam with the assesse trust also does not lead to inferences that the amounts were being paid for benefit of Dr. P. Mahalingam but in fact the payments were made to official liquidator in pursuance and his part consideration of agreement dated 01.03.2016 and addendum dated 29.03.2016. It is not the case o f the department that this payment made to liquidator were not to be adjusted against the sales consideration to be paid in lieu of assets sought to be purchased by agreement dated 01.03.2016.
22.7 Thus, where the agreement between the trust and SHPL was initiated in year 2016 and subsequently SHPL has gone into financial distress due to which a clear title could not be transferred to the trust, then subsequent payment being made to the liquidator in furtherance of directions of Hon’ble Supreme Court dated 16.12.2022, are only to ensure that SHPL is able to meet out its financial liabilities and the agreement dated 29.03.2016 followed by addendum dated 12.07.2019 culminates into transfer of assets of SHPL to the assesse. Hence, conclusion drawn by ld. PCIT that provisions of clause (a) of Explanation to Section 12AB(4) is not sustainable in law. It is not a case of diversion of funds in a non- genuine activity rather the assesse’s endeavor to acquire that assets of SHPL backs to year 2016. At this stage, the transaction between assesse and SHPL cannot be coloured as tainted or non-genuine.
23. Then we are of considered view that scope on examination of the issue for grant of registration u/s 12A(1) (ac) (ac)(i) of the Act is to examine the object of the trust and the genuineness of activities and further that there is no infringement of any other law for the time being enforce. The law in this regard is settled that at this stage only the object of the trust and genuineness of the activities were to be examined along with the fact if there was any infringement of any other law for the time being in enforce. The certificate of registration is only an enabling provision to claim exemption and by merely granting registration, income is not exempted. The Id. Tax authorities have sufficient powers to subsequently examine the application of funds and to then deny the exemption as claimed. However, at this stage by examining the application of funds, registration cannot be denied by alleging that some parts of the funds are diverted. Reliance in this regard is placed on the decision of Hon’ble Karnataka High Court in CIT, CC Vs. AS Kupparaju Brothers Charitable Foundation Trust (2012) 17 taxman.com 242 (Karnataka); the Coordinate Bench decision in the case of Pista Devi Education Society Vs. CIT(Exemptions) Chandigarh 2026 (5) TMI 993- ITAT Delhi, Indian Institute of Model Education Society, Chandigarh Vs. The CIT(E) Chandigarh 2026 (5) TMI 36- ITAT Chandigarh, Richmond Educational Society vs DCIT, DCIT/ACIT, Central Circle, Ghaziabad 2026 (Supra), Muni Education Society vs ITO, Exemption 2026 (7) TMI 887 (ITAT Del) dt: 10.07.2026 and Seth PannaLal Charitable Trust vs CIT (Exemption) 183 taxmann.com 181 (Delhi-Trib).
24. There is no denial on the part of the department that assessee is a trust actively running a Hospital and Medical College. The issue of non- application of certain part of funds to non- charitable activities cannot be made basis to hold that objects were non- charitable or that these activities were not genuine or contrary to its objects or that any applicable law has been violated. The scope of inquiry is confined to examine charitable nature of objects and the genuineness of activities which prima facie stand established from the facts discussed hereinbefore. However, while passing impugned order Id. Prescribed authority has not found any deficiency or discrepancy in any other claim of the assessee and only for the reason of certain payments made to entity where trustee was alleged to be interested, the registration has been denied and which certainly is beyond the scope of powers vested to make inquiries u/s 12AB(1) (b) of the Act. 25. As a sequel of aforesaid discussion of issues we are inclined to sustain the grounds. The impugned order is not sustainable in law for both, rejection of applications and cancellation of registration. Thus appeals are allowed. The ld. Prescribed authority is directed to issue the renewal of registration u/s 12 A(1)(ac) of the Act and approval u/s 80G of the Act in period of four weeks.
Order pronounced in the open court on 31.08.2026
