SANTOSH TRUST,GHAZIABAD vs. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 6, DELHI, DELHI

At the outset we like to observe that as far the charitable objectives in the form of running medical college is 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.

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.

In this context we find that from the perusal 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 Act 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.

Now if we take up the provision of the Act, we find that the procedure provided 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;

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 referred 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 raising 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.

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.

However, if we look at the provisions of section 12AB(4), it comes up that clause (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 issued, calling assessee, to explain why registration should not be cancelled. Where law provides order has to be passed ‘after affording a reasonable opportunity of being heard’, then that certainly indicates legislative 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 alone the impugned orders deserve to be quashed.

Even otherwise we have examined the merits of allegations and coming to the issue of alleged 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.

As with regard to remaining issues, at 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 imparting 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.

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 transaction was duly scrutinised 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 theappellant 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 the 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 the 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 the above year in clause 41where details of specified persons as referred in section 13(3) of the Act was provided.

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)

Now examining specific allegation of diversion of funds to the entity 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. It also mentions that the trust has started making advance payments to M/s SHPL for the purpose of these purchases, the said assets however, continued 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 Santosh 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 managing trustee of M/s Santosh Trust to make repayment of loan to financial creditors of SHPL. Here, the allegation of ld. Prescribed authority is that in this there is no reference that 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 has 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. Thus 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 liquidation. Thereafter, ld. PCIT makes following conclusions:

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 sec12AB(4) to label the transaction as specified violation which is contrary to scheme of Act.

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 the purview of sec 12AB. Reliance in this regard is placed on decision of co-ordinate bench in Richmond Educational Society Versus DCIT/ ACIT, Central Circle, GhaziabadITA No. 4779/Del/2025 order dated 11.03.2026.Which has been relied also by Pune bench in Yashaswi Academy for Skills versus PCIT, (Central) Pune ITA No. 2814/PUN/2025 order dated 03.07.2026.

Thus mere allegations that certain transactions conferred benefit on persons referred to in section 13(3) of the Act, do not, by themselves, 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 the assessment stage and do not by themselves warrant cancellation of registration for which reliance is further placed on the decision of G.D. Education Society Versus DCIT/ACIT, Central Circle 2026(5) TMI 1776 - ITAT DELHI.

Coming to the merits of allegation we find that name 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 appellant 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.

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.

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).

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.ThenHon'bleSupreme 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 in compliance of directions of the Hon'ble Apex Court and to avoid squandering of assets for which part payment had 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.

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.

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 per the requirement of trust and availability of the assets 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 provides 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 in terms of agreement dated 01.03.2016 and addendum dated 29.03.2018 by 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, as 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 proceedings under Sarfaesi Act followed by the litigation in NCLT and ultimate liquidation proceedings have been considered in orders passed by NCLT and Hon’ble Supreme Court.

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 (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).

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.

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.