Tax exemption could be revoked if your FCRA registration is cancelled

Did you know that if your organization’s FCRA registration is cancelled it could potentially also lead to cancelation of your registration for tax exemption and tax deduction with Income tax? A classic example is the Income tax department’s notice, dated July 29, 2025 to Commonwealth Human Rights Initiative (CHRI) to cancel CHRI’s tax registration under Section 12AB(4)(a) of the Income Tax Act, 1961. The sole ground for this notice was the prior cancellation of the organization’s Foreign Contribution Regulation Act (FCRA) certificate by the Ministry of Home Affairs.

Delhi High Court quashes notice, but ….

The Delhi High Court has set aside this notice issued by the Income Tax Department to the Commonwealth Human Rights Initiative (CHRI), deeming the action premature. Senior Counsel for the petitioner, Arvind P. Datar, argued that the tax department’s notice could not be sustained while the challenge to the FCRA certificate cancellation was still under judicial review in a separate case (W.P.(C) 8666/2022).

Representing the tax department, Mr. Shlok Chandra did not dispute the link between the two actions. The court agreed that since the ground for the tax notice was pending adjudication, the department’s move was premature. The notice was consequently quashed, but the court granted the respondents (i.e., the Income tax department) the liberty to take further action in accordance with the law after the conclusion of the legal challenge to the FCRA certificate cancellation.

In other words, the court has quashed the notice on a technical ground i.e., the FCRA certificate cancellation is still under judicial review in a separate case (W.P.(C) 8666/2022).

The High Court has given the Income tax department the liberty “to take further action in accordance with the law (i.e., invoke Section 12(AB)4) after the conclusion of the legal challenge to the FCRA certificate cancellation.

Provision for cancelation under Income tax

The Finance Act, 2022 substituted subsection (4) and (5) of section 12AB with a new subsection (4) which provides a list of ‘Specified Violation’ which if undertaken by the charitable trust or institution registered or provisionally registered under section 12AB, the Principal Commissioner or Commissioner may cancel the registration of such charitable trust or institution.

Similar amendment has also been made in section 80G and 10(23C).

As per the amended subsection (4) of section 12AB, “Specified Violation” means:

• Any income of the trust or institute has been applied, other than for the purpose of religious or charitable;
• The trust or institution has income from profits and gains of business which is not related to its objectives;
• The trust or institute is carrying out business activities which are related to its objectives but separate books of account are not maintained in respect of such business;
• The trust or institution has applied any part of its income for private religious purposes, which is not for the benefit of the public;
• The trust or institution has applied any part of its income for the benefit of any particular religious community or caste;
• Any activity carried out by the trust or institution which are not genuine or not in accordance with all or any conditions subject to which it was registered;
• The trust or institution has not complied with the requirement of any law which are material for achieving its objectives.

The last specified violation, “The trust or institution has not complied with the requirement of any law which are material for achieving its objectives “means that if the trust or institution has not complied with the requirement of any law (e.g. FCRA) which is material for achieving its objectives, the Principal Commissioner or Commissioner of Income tax may cancel the tax exemption and tax deduction registration of such an organisation.