Section 12A(1) of the Income-tax Act, 1961, lays out the preconditions that must be fulfilled by any charitable or religious trust to claim tax exemptions under sections 11 and 12. One of the key requirements is registration under section 12AB, as specified under section 12A(1)(ac). The Finance Act, 20,20 brought about a comprehensive overhaul of the registration process for such organizations. Under the revised system, the entire procedure is now digital, and a unique registration number (URN) is assigned to each entity.
Background and Transition from Sections 12A and 12AA to 12AB
Previously, trusts and institutions were registered under section 12A or 12AA. With the introduction of section 12AB, all such entities must now re-register to continue enjoying tax exemptions. The Finance Act, 202,0 initially set the implementation date of the new provisions to June 1, 2020. However, due to the COVID-19 pandemic and the economic challenges it brought, the implementation was deferred to October 1, 2020, as per the official press release dated May 9, 2020.
Categories of Registration under the New Scheme
As per the new scheme effective from October 1, 2020, the following categories of registration are applicable:
Existing trusts or institutions already registered under section 12A or 12AA must re-register under section 12AB
Trusts seeking provisional registration and then converting it into regular registration
Trusts seeking renewal of registration under section 12AB, which includes:
Registration already granted under section 12AB (excluding provisional registrations)
Re-registration to confirm any change in object clauses
Reactivation of registration if it has become inoperative due to approvals under section 10(23C) or section 10(46)
Validity Period of Registration under Section 12AB
Under the new registration mechanism, the validity period for a registration granted under section 12AB is five years. However, for provisional registrations, the validity period is three years. After the expiry of the valid period, the organization is required to apply for renewal well in advance. Failure to renew may result in the loss of the tax exemption benefit. All renewal applications must be submitted at least six months before the expiry of the existing registration.
Mandatory Re-registration for Existing Entities
All entities already registered under section 12A or 12AA as of October 1, 2020, were required to re-register under the new scheme within three months, i.e., by December 31, 2020. The application had to be made electronically. The authorities were not expected to conduct an inquiry for such re-registrations and were to grant registration within three months from the end of the month in which the application was made. The granted registration would remain valid for five years.
Provisional Registration and Conversion to Regular Registration
For newly established trusts or institutions that were not previously registered, provisional registration under section 12AB could be granted for three years without any inquiry. However, such provisional registration would cease to be effective once the trust or institution begins its operations. This means that even though the provisional registration is valid for three years, the organization must apply for a regular registration within six months of the commencement of its activities or six months before the end of the three years, whichever is earlier.
Normal registration following provisional registration is granted after the prescribed inquiries and will remain valid for five years starting from the first assessment year for which the provisional registration was issued. The provisional registration, therefore, is more of a temporary compliance to bridge the gap between the inception of the organization and the commencement of its charitable activities.
Treatment of Pending Applications as Per Finance Act, 2020
The Finance Act, 2020, also dealt with pending applications under the old provisions. All such applications for registration pending as on October 1, 2020, were deemed to be made under section 12AB. Applicants were not required to file a fresh application. However, these pending applications were treated as applications for provisional registration only. This technicality had implications for the year in which the application was filed. Specifically, the organizations were not eligible for exemptions for the financial year corresponding to the year of application.
Timing for Application and Impact on Exemption Eligibility
The timing of the application is critical for exemption eligibility. To avail of exemptions for a particular assessment year, an application for provisional registration must be filed at least one month before the end of the previous year relevant to that assessment year. For example, if an organization filed its application before February 28, 2020, it would be eligible for exemptions for the assessment year 2021-22 corresponding to the financial year 2020-21. Applications filed after that would not be eligible for the same financial year.
All existing applications under section 12AA were treated as fresh applications under section 12A(1)(ac)(vi). These organizations could not claim exemptions for the previous year 2019-20. In such cases, they might have to rely on the proviso to section 12A(2) to seek retrospective exemptions.
Renewal of Registration and Enquiry by Authorities
Organizations granted registration under the amended act must renew their registration before expiry. The renewal application must be submitted at least six months before the expiration date. The registration is then granted after a due process of inquiry by the tax authorities, and the validity period remains five years from the date of approval.
Consequences of Non-Compliance with Re-registration Requirement
Section 12AB mandates that all trusts and institutions already registered under section 12A or 12AA must apply for registration again within the prescribed timeframe. Failure to comply results in the loss of exemption under sections 11 and 12 from the financial year 2020-21 onward. There is no provision in the law to accommodate late applications. Hence, entities that did not submit their application by December 31, 2020, are deemed to have forfeited their registration. Such organizations lose the right to claim income exemptions under sections 11 and 12 and are instead taxed as regular assessees under the five heads of income specified in the Income-tax Act.
Fresh Registration and Time Constraints
Section 12AB also governs new registration applications. According to the provision, applications must be filed at least one month before the start of the previous year relevant to the assessment year for which the trust seeks registration and exemptions. This effectively means that if an NGO is formed and applies for registration, it may need to wait an entire year before it can claim the benefits under sections 11 and 12.
This stipulation ensures that the registration is effective from the beginning of the year for which the exemption is claimed. Delays in application can result in the organization losing the benefit of tax exemption for the first year of operation.
Restriction on Dual Approval under Sections 10 and 12AB
The Finance Act, 2020 also clarified that an organization cannot simultaneously avail benefits under both section 10(23C) or section 10(46) and section 12AA or 12AB. If a trust is granted approval under section 10(23C) or is notified under section 10(46), its registration under section 12AA or 12AB becomes inoperative from that date onward. In practical terms, this means that organizations must choose between the two benefits and cannot operate under both exemptions at the same time.
The change is reflected by an amendment to section 11(7), which explicitly states that registration under section 12AA or 12AB will become inoperative upon the grant of approval under section 10(23C) or notification under section 10(46). However, no corresponding amendment has been made to the provisions under section 10. Therefore, it is only the registration under section 12AA/12AB that becomes inoperative, and not the other way around.
Appeals Against Rejection of Registration
In cases where the application for registration under section 12AB is rejected, the aggrieved trust or institution has the right to appeal to the Appellate Tribunal under section 253 of the Income-tax Act. This ensures a legal remedy and due process in the event of unfavorable decisions by the tax authorities.
Continued Relevance of Judicial Precedents under Section 12AA
Although section 12AA has been replaced by section 12AB, the process of verification, enquiry, and grounds for granting or denying registration remain largely similar. Therefore, judicial precedents and case laws developed under section 12AA are still applicable under the new regime. Courts and tribunals are likely to continue relying on these judgments while interpreting the provisions of section 12AB.
Non-retrospective Nature of Registration and Exceptions
One of the important changes introduced by the Finance Act, 20,20,, is the prospective nature of the registration under section 12AB. However, the law also protects the proviso to section 12A(2). According to this provision, organizations that receive registration under section 12AA or 12AB will be eligible for tax exemption for any preceding year for which the assessment is still open, provided their objects and activities remain unchanged. Moreover, the assessing officer is prohibited from reopening past assessments under section 147 solely because the trust was not registered in those years.
Procedure for Fresh Registration
Where the trust or institution is not already registered under Section 12A or 12AA of the Act, it must apply for fresh registration under clause (ac)(i) of Section 12A(1). This application is to be made in Form 10A to the Principal Commissioner or Commissioner of Income-tax authorized by the Board, electronically through the income tax portal, on or before the 1st day of June of the previous year relevant to the assessment year from which the registration is sought. The Principal Commissioner or Commissioner shall call for such documents or information and make inquiries to satisfy themselves about the genuineness of the activities of the trust or institution and compliance with other laws. If satisfied, the authority will pass an order in writing registering the trust or institution for five years. If not satisfied, after providing a reasonable opportunity of being heard, the authority may pass an order in writing rejecting the application and also cancelling the existing registration, if any. Every order granting or rejecting the application for registration shall be passed within six months from the end of the month in which the application was received.
Procedure for Re-registration
Where the trust or institution is already registered under the existing provisions of Section 12A or Section 12AA, it must apply for re-registration under clause (ac)(ii) of Section 12A(1). This application is also to be made in Form 10A, and the registration shall be granted for five years. The Principal Commissioner or Commissioner shall grant registration without conducting any detailed inquiry into the activities of the trust. Re-registration must be applied for within the time prescribed under Rule 17A.
Procedure for Provisional Registration
Where a trust or institution is in the process of establishment and has not yet commenced activities, it can apply for provisional registration under clause (ac)(i) of Section 12A(1). This application is to be made in Form 10A at least one month before the commencement of the previous year relevant to the assessment year from which the registration is sought. The authority shall grant provisional registration for three years without making detailed inquiries into the genuineness of activities or compliance with laws.
Validity and Renewal of Registration
Fresh registration is granted for five years. Provisional registration is granted for three years. In both cases, trusts or institutions must apply for renewal at least six months before the expiry of the registration period. In case of provisional registration, the trust must apply for regular registration at least six months before the expiry of the provisional period or within six months of commencement of activities, whichever is earlier.
Cancellation of Registration
The Principal Commissioner or Commissioner may cancel the registration granted under Section 12AB if the trust or institution violates the conditions subject to which registration was granted or if its activities are not genuine or are not being carried out by the objects of the trust or institution. Before cancellation, the trust or institution must be given a reasonable opportunity of being heard. If registration is cancelled, the trust or institution will not be eligible for exemption under Sections 11 and 12.
Conditions Attached to Registration and Continued Eligibility
Registration under section 12AB is granted subject to the condition that the objects of the trust or institution are genuine and that its activities conform to those objects. The authority granting registration is required to be satisfied about the genuineness of activities and compliance with other laws that are material for achieving the objects of the trust. Registration does not confer an absolute right to exemption. The organisation must continuously satisfy the tests of charitable purpose and application of income by sections 11 and 12. The law expects that funds received by the trust will be applied for charitable purposes and not diverted for private benefit. The maintenance of books of account, proper custody of records, and transparent governance practices are fundamental to sustaining registration and exemption. Failure to maintain records or misuse of funds may invite inquiry, cancellation of registration, and disallowance of exemption for relevant years.
Application of Income and Accumulation Rules
A registered trust must apply its income for charitable purposes in the manner prescribed by section 11. Income applied for charitable purposes within the same year, income accumulated or set apart under section 11 (2) and income applied in subsequent years by conditions specified in section 11 are eligible for exemption. Accumulation must comply with the conditions of section 11(2), which require a declaration of the purpose of accumulation and adherence to the time limit permitted for utilisation. The rules require thathe t the application of income should be traceable and supported by vouchers, bank records, and resolutions where applicable. Improper accumulation or undisclosed diversion of income for non-charitable purposes can lead to the denial of exemption and penalties.
Investments, Specified Funds and Related Limits
Trusts are permitted to invest or deposit funds in specified modes prescribed in the Act and rules. Any income from such investments is eligible for exemption if the funds have been applied to charitable purposes or accumulated by section 11. When a trust carries on a business that is incidental to its charitable objectives, the income from such business may still qualify for exemption provided it meets the tests of incidental business and the profits are applied for charitable purposes. If the business is not incidental and is carried on like a commercial undertaking, it may be taxable. The law also recognises specified funds and endowments where capital has to be preserved and the income alone applied; the distinction between corpus and income must be clear and respected in accounting.
Business Activities, Incidental Trade, and Separate Business Tests
The Act and judicial precedents distinguish between business activities that are incidental to charitable objectives and those that are commercial. An activity will be treated as incidental if it is undertaken as a means to further the charitable objects and not primarily to generate profit. When a trust engages in business activities, the character of the activity, the volume of transactions, pricing policies, use of commercial marketing strategies, and how surplus is used determine whether the activity remains incidental. If the activity evolves into a business carried on like an independent commercial enterprise, income from that activity is liable to tax. Proper segregation of accounts between charitable activities and business operations is essential to demonstrate that any commercial activity is incidental and that profits are applied to charitable purposes.
Governance Requirements and Trustee Responsibilities
Trustees or managing members are duty-bound to ensure that the affairs of the trust are conducted in a transparent and accountable manner. Governance requirements include the maintenance of adequate records, preparation of annual accounts, conducting audits where required by law, holding meetings as per the trust deed, and ensuring compliance with conditions of registration. Trustees must ensure that funds are not utilised for personal benefit, that conflicts of interest are disclosed, and that remuneration to trustees or related parties is reasonable and authorised under the trust instrument or applicable law. Failure by trustees to observe statutory duties can expose them to legal consequences and can be a ground for cancellation of registration.
Audit, Return Filing and Reporting Obligations
A registered trust or institution is required to file its income-tax return in the prescribed form within the time permitted under the Act. Where the total income computed without giving effect to sections 11 and 12 exceeds the maximum amount not chargeable to tax, an audit of accounts by an accountant as defined under the Act is mandatory, and the audit report must be furnished in the prescribed form. The audit report is an important compliance document and must be prepared carefully with supporting schedules and evidence. The income-tax return must disclose details of income, application of funds, investments, donations received,, and amounts spent on charitable activities. Non-filing or inaccurate filing may invite scrutiny, reassessment, and penalties.
TDS, Tax Deduction and Compliance with Withholding Obligations
Trusts receiving income on which tax is deductible at source must ensure compliance with withholding obligations when they make payments that attract tax deduction. Conversely, trusts may also be recipients of payments where tax is deducted at source by payers. Proper reconciliation of TDS credits in returns and maintaining records of TDS certificates is essential. Failure to deduct tax where required or to deposit deducted tax with the government can result in interest, penalties,, and possible prosecutions. Trustees should keep updated on withholding provisions and ensure their accounting systems capture taxable transactions correctly.
Interaction with Other Statutory Regimes and Approvals
A trust registered under section 12AB may be subject to other statutory regimes depending on its activities. Approvals or registrations under foreign contribution regulations, goods and services tax, labour laws, registration under social welfare or education authorities, and other sectoral approvals may be necessary. The law prohibits the simultaneous operation of certain approvals, such that a trust cannot enjoy benefits under two conflicting provisions simultaneously. Trusts must therefore evaluate other statutory approvals they hold and choose the regime that best serves their objectives while ensuring compliance with all applicable obligations.
Penalties, Cancellatio,and Consequences of Non-Compliance
Non-compliance with the conditions of registration, misuse of funds, failure to maintain proper accounts, carrying on non-incidental business, or failure to file returns may invite penalties under the Income-tax Act and cancellation of registration under section 12AB. Cancellation results in loss of exemption under sections 11 and 12 for the period specified and may trigger tax liability for earlier years if fraudulent or wilful misstatements are found. The law also contemplates penalties for concealment, undue claims,, and furnishing incorrect statements. After cancellation, trusts may appeal against the order within the legal framework. Trustees exposed to penalties must ensure compliance or seek corrective measures at the earliest possible stage to mitigate adverse consequences.
Assessments, Inquiries, es, and Appeals Mechanism
Once registered, a trust remains subject to assessment and inquiry like any other assessee. The assessing officer may call for documents, conduct a scrutiny assessment,,s and form an opinion about the genuineness of activities and application of income. Where registration is denied or cancelled, the trust has the right to administrative and judicial remedies, including appeals to higher authorities and tribunals as provided in the Act. Timely response to notices, adequate documentation, and engaging professional assistance can help navigate assessments and appeals effectively. It is important to preserve records for the period prescribed by law to meet any retrospective enquiries.
Practical Compliance Checklist and Documentation
To maintain registration and maximise the protection afforded by section 12AB, trusts should adopt robust accounting and governance practices. Essential documents include trust deeds or Memorandum of Association, minutes of governing body meetings, bank statements, invoices and receipts for expenditures, donation receipts and donor details, audit reports, annual accounts, tax returns, correspondence with tax authorities and records of investments. Trustees should ensure timely filing of Form 10A, renewal applications when due, audit compliance where applicable,, and maintenance of separate ledgers for any business activities. A proactive compliance culture reduces the risk of disputes with tax authorities and helps in sustaining the charitable status.
Treatment of Pending Applications and Transition Provisions
The provisions of section 12AB were introduced to replace the earlier sections 12A and 12AA governing the registration of trusts and institutions. With the introduction of this section, all the trusts and institutions registered under the earlier provisions are required to revalidate their registrations by applying afresh under the new procedure laid down in section 12AB. The transition to section 12AB was aimed at bringing uniformity, transparency, and accountability in the functioning of charitable and religious institutions. As per the Finance Act, 2020, all existing registrations under section 12A or 12AA became inoperative from 1st April 2021. Accordingly, trusts and institutions were required to reapply for registration under section 12AB to continue availing the exemption benefits under sections 11 and 12. The Central Board of Direct Taxes (CBDT) notified procedures and forms to facilitate this transition, including the filing of Form 10A for provisional and revalidation of existing registration, and Form 10AB for permanent registration. The time limits for filing these forms were initially set and later extended through various circulars to accommodate compliance challenges.
Withdrawal or Cancellation of Registration
The registration granted under section 12AB can be withdrawn or cancelled by the Principal Commissioner or Commissioner of Income-tax if certain conditions are not met by the trust or institution. The grounds for cancellation include the following: 1. If the activities of the trust or institution are not genuine; 2. If the activities are not being carried out by the objects of the trust or institution, 3. If the trust or institution has not complied with the requirements of any other law, and such non-compliance has been held as a violation by a competent authority, 4. If the application for registration contains incorrect or false information. Before the cancellation of registration, the trust or institution is given a reasonable opportunity to be heard. If the registration is cancelled, the benefits under sections 11 and 12 cease to be available, and the income of the trust or institution becomes taxable at the normal rates applicable under the Act. Further, the registration once cancelled may not be reinstated unless a fresh application is made and approved under the current provisions. This ensures that only compliant and bona fide organizations continue to enjoy the tax benefits provided to charitable and religious entities.
Interaction with Section 10(23C) and Other Provisions
Charitable and religious institutions may alternatively seek exemption under section 10(23C), which also provides for exemption to educational and medical institutions and funds established for charitable purposes. However, the Income-tax Act, 1961, mandates that a trust or institution must choose only one mode of exemption — either under section 12AB or under section 10(23C). Institutions cannot simultaneously avail exemptions under both provisions. The Finance Act, 2020,, and subsequent amendments harmonized the provisions of section 10(23C), section 11, and section 12AB to ensure consistency and prevent double claims of exemption. Additionally, trusts and institutions registered under section 12AB are also required to comply with other provisions of the Act,, such as those related to TDS, return filing under section 139(4C), and maintenance of proper books of accounts. Moreover, provisions relating to the accumulation and application of income under section 11(2) and the treatment of corpus donations and anonymous donations under sections 11(1)(d) and 115BBC also apply. In this context, the choice between registration under section 12AB and approval under section 10(23C) should be made after careful consideration of the nature of the activities undertaken, funding sources, and compliance readiness of the organization.
Conclusion
The registration of charitable and religious trusts and institutions under section 12AB of the Income-tax Act, 1961,, is a critical step in securing tax exemption for income applied to charitable or religious purposes. Trusts and institutions must ensure timely compliance with the provisions of section 12AB, including adherence to filing requirements, maintenance of proper documentation, and conducting activities in line with their stated objectives. The failure to comply with these requirements could lead to cancellation of registration and loss of exemption, thereby exposing the income to taxation. The procedural clarity and digital facilitation provided by the Income-tax Department aim to promote a transparent and accountable ecosystem for non-profit organizationsCharitable and religious entities should remain updated with the latest notifications and circulars issued by the CBDT and seek professional advice to navigate the complex regulatory environment. By maintaining integrity in their operations and compliance discipline, these institutions can continue to contribute meaningfully to society while availing the benefits accorded under the law.