CIT(E) Must Specify the Exact “Specified Violation” Before Cancelling Trust Registration: ITAT Mumbai

 

 

Vague allegations cannot justify cancellation of charitable trust registration; taxpayer must know the precise violation and material relied upon

Registration under section 12A/12AB is extremely important for a charitable or religious institution because it forms the foundation for claiming exemption under sections 11 and 12 of the Income-tax Act.

But what happens when the Commissioner (Exemptions) proposes to cancel that registration on the ground of a “specified violation”, without clearly telling the trust exactly which statutory violation it is alleged to have committed?

Can a registration be cancelled on the basis of a vague allegation that the trust’s activities are not charitable or that there has been a violation of section 12AB(4), without identifying the precise statutory category?

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has answered this question firmly: the assessee must be told precisely what violation is alleged.

In National Payments Corporation of India v. Commissioner of Income-tax (Exemptions), reported at [2026] 185 taxmann.com 275 (Mumbai – Trib.), order dated 25 March 2026, the Tribunal held that where there are multiple possible categories of “specified violation”, the Commissioner must clearly identify the applicable category and provide sufficient particulars and material to enable the trust to respond meaningfully.

The matter was therefore remanded to the Commissioner (Exemptions) for a fresh opportunity.

The assessee: A non-profit company with charitable registration

The assessee, National Payments Corporation of India (NPCI), was a non-profit company registered under the Income-tax Act.

It had registration under section 12A and was therefore entitled to claim the benefits available to eligible charitable institutions, subject to fulfilment of the statutory conditions.

The controversy began when the Assessing Officer made a reference to the Commissioner (Exemptions) proposing cancellation of the assessee’s registration.

The reference alleged that there had been “specified violations” within the meaning of section 12AB(4).

The Commissioner proceeded with the cancellation proceedings.

The allegation concerning payment gateway and banking services

The Commissioner (Exemptions) examined the activities of the assessee relating to providing payment gateway and banking network services.

According to the Commissioner, the assessee was providing such services in relation to the business activities of its member/promoter banks.

Those banks, in turn, provided the services to their customers for consideration.

The Commissioner took the view that the activities were chargeable and were not being provided free of service.

On that basis, an allegation was made regarding benefit to specified persons under section 13(1)(c) read with section 13(3).

The Commissioner consequently invoked section 12AB(4) and cancelled the registration.

The assessee’s objection: What exactly is the violation?

The assessee challenged the cancellation proceedings.

One of its important grievances was that the Assessing Officer’s reference itself had not been supplied to the assessee.

More importantly, neither the show-cause notices nor the eventual cancellation order clearly identified the exact sub-clause of “specified violation” under section 12AB(4) that was allegedly attracted.

This created a fundamental problem.

The trust was effectively being told:

“You have committed a specified violation.”

But it was not being clearly told:

“This is the exact statutory violation you have committed, these are the facts supporting it, and these are the documents/materials on which we rely.”

The Tribunal found this distinction important.

What is a “specified violation”?

Section 12AB contains the statutory framework governing registration of charitable and religious institutions.

The law contemplates circumstances in which registration can be cancelled or otherwise acted upon where there is a “specified violation.”

But the expression cannot be used as a general label without identifying the actual statutory provision or category relied upon.

Where several possible violations can fall within the statutory framework, the authority must make its case sufficiently specific.

The Tribunal therefore emphasised that the Commissioner cannot proceed on the basis of an unspecified or vague allegation.

Natural justice requires precise allegations

The most important principle emerging from the ruling is one of natural justice.

A taxpayer cannot effectively defend himself against an allegation unless he knows exactly what the allegation is.

For example, there is a significant difference between saying:

“There has been a specified violation.”

and saying:

“You have committed this particular specified violation under this particular statutory clause because these specific transactions resulted in the alleged benefit to specified persons.”

The second formulation gives the assessee something meaningful to answer.

The first does not.

The Tribunal therefore held that where multiple reasons may amount to a violation, the Commissioner must specify the particular category of specified violation being invoked.

Why a vague show-cause notice is problematic

A show-cause notice is not merely a procedural formality.

It is the foundation of the assessee’s opportunity to defend itself.

If the notice does not contain clear particulars of the alleged violation, the assessee may not know:

–  Which statutory provision it is alleged to have violated;

–  Which transaction is under examination;

–  Which persons are alleged to have benefited;

–  What conduct is considered non-charitable;

–  Which documents or evidence are being relied upon; and

–  What factual explanation or legal defence needs to be furnished.

In such circumstances, the opportunity of hearing becomes more apparent than real.

The Tribunal recognised that an effective opportunity of hearing must be a meaningful opportunity.

Material relied upon must also be disclosed

The issue was not restricted merely to the wording of the alleged violation.

The Tribunal also emphasised the importance of providing the assessee with the facts and materials proposed to be relied upon.

This is particularly relevant where the cancellation proposal originates from an Assessing Officer’s reference.

If the reference contains allegations or material forming the basis of the proposed cancellation, the trust must have an opportunity to know what has been alleged and on what material.

Otherwise, the assessee is effectively required to defend itself against an unseen case.

That would undermine the principles of natural justice.

Registration cannot be cancelled through a moving target

A particularly useful lesson from the judgment is that the Commissioner cannot leave the alleged violation ambiguous and then develop the case during the cancellation proceedings.

The assessee should know the case it has to meet before it is required to respond.

This ensures that:

Allegation → Evidence → Opportunity to respond → Decision

remain properly connected.

If the allegation changes or becomes clearer only after the assessee has responded, the opportunity of hearing may become meaningless.

The Tribunal did not decide the merits finally

It is important to understand what the ITAT actually decided.

The Tribunal did not hold that the assessee had not committed any violation.

Nor did it hold that the activities of the assessee were necessarily charitable.

Instead, the Tribunal found that the cancellation proceedings suffered from a lack of sufficient specificity.

Therefore, rather than finally deciding the merits of the cancellation, the matter was remanded to the Commissioner (Exemptions).

The Commissioner was directed to give the assessee another opportunity to present its case after properly identifying the relevant specified violation.

This distinction is important.

The taxpayer received a procedural victory—not necessarily a final determination that the registration could never be cancelled.

A fresh opportunity must be meaningful

The remand direction is significant.

The Commissioner has to identify the precise category of specified violation under which the assessee is proposed to be proceeded against.

The assessee must then be given an opportunity to respond to that specific allegation.

Only thereafter can the Commissioner take an appropriate decision regarding cancellation.

This ensures that the assessee knows exactly what it has to defend.

Why this judgment matters to charitable trusts

Cancellation of registration under section 12AB can have serious consequences.

A trust may lose the ability to claim exemption under sections 11 and 12, and the consequences may extend to its tax liability for the relevant period.

Therefore, cancellation proceedings cannot be treated as a routine administrative exercise.

The Commissioner must follow the statutory procedure carefully and observe the principles of natural justice.

The decision in National Payments Corporation of India provides useful protection against vague cancellation proceedings.

What should a trust do on receiving a cancellation notice?

A trust receiving a notice proposing cancellation should carefully examine the exact language of the show-cause notice.

In particular, it should check:

1.  What specific violation has been alleged?

The notice should identify the relevant statutory category rather than merely stating that a “specified violation” has occurred.

2.  Which transactions are being questioned?

The trust should know the transactions, activities or conduct forming the basis of the allegation.

3.  Who are the alleged specified persons?

Where section 13(1)(c) or related provisions are invoked, the identity and relationship of the alleged specified persons become important.

4.  What material is being relied upon?

The trust should be given access to the relevant reports, statements, references and other material forming the basis of the proposed action.

5.  Was the Assessing Officer’s reference supplied?

If the cancellation proceedings originate from an AO’s reference, the trust should know the contents of that reference where it forms part of the case against the trust.

6.  Does the final cancellation order travel beyond the show-cause notice?

An authority should ordinarily decide the case on the basis of allegations that were properly put to the assessee.

The importance of section 13 allegations

The case is also significant because the Commissioner sought to connect the activities of the assessee with section 13(1)(c) and section 13(3).

Where a trust is alleged to have provided benefits to specified persons, the factual foundation becomes extremely important.

Questions such as the following may arise:

– Who received the benefit?

– What was the nature of the benefit?

– Was the transaction at arm’s length?

– Was consideration actually received?

– What was the commercial rationale?

– Was the activity incidental to the charitable objects?

– What provisions of section 13 are specifically attracted?

A vague allegation of “benefit to specified persons” does not by itself answer these questions.

The assessee must be given an opportunity to address the precise factual and legal allegations.

The larger principle: Tax proceedings cannot be vague

Although the judgment concerns cancellation of charitable trust registration, the principle has much wider significance.

Natural justice is not satisfied by merely issuing a notice.

The notice must contain enough information for the recipient to understand the case being made against him.

This principle is particularly important in tax administration because the consequences of an adverse order can be substantial.

A taxpayer cannot be expected to guess what provision the department has in mind or which factual allegation it must rebut.

Impact under the Income-tax Act, 2025

The corresponding framework for charitable or religious institutions has also been reorganised under the Income-tax Act, 2025, including provisions referred to as sections and 270 in the material relevant to this ruling.

The numbering and drafting framework have changed under the new legislation, but the underlying principle of procedural fairness remains highly relevant.

Where a statutory authority proposes to cancel a registration or take adverse action for a specified violation, the taxpayer must be informed of the precise allegation and given a meaningful opportunity to respond.

The key takeaway

The Mumbai ITAT ruling in National Payments Corporation of India sends a clear message to the tax administration:

“Specified violation” cannot be a vague label.

If registration of a charitable trust is proposed to be cancelled, the Commissioner (Exemptions) must clearly identify the specific statutory category of violation, disclose the relevant factual basis and material relied upon, and give the assessee a meaningful opportunity to defend itself.

If that is not done, the cancellation order becomes vulnerable on the ground of violation of natural justice.

The judgment can therefore be summed up in one simple principle:

Before cancelling a trust’s registration, tell the trust exactly what it has allegedly done wrong.

A taxpayer cannot effectively answer an allegation that is left undefined—and natural justice does not permit the tax department to make the assessee play a guessing game.

Case discussed: National Payments Corporation of India v. Commissioner of Income-tax (Exemptions), [2026] 185 taxmann.com 275 (Mumbai – Trib.), order dated 25 March 2026.

The copy of the order is as under:

ITA No.7044-Mum-2025