Delhi HC Quashes Income Tax Notice under Section 12AB(4)(a) Against CHRI

The Delhi High Court recently delivered an important ruling that provides much-needed clarity on the relationship between the Foreign Contribution (Regulation) Act (FCRA) and the Income Tax Act.

The Court set aside a notice issued under Section 12AB(4)(a) of the Income Tax Act, 1961, against the Commonwealth Human Rights Initiative (CHRI). The notice had proposed cancellation of CHRI’s income tax registration on the basis that its FCRA certificate was cancelled by the Ministry of Home Affairs.

However, the High Court ruled that the Income Tax Department’s action was premature, since the cancellation of the FCRA certificate itself is still under challenge before another bench of the Court.

Background of the Case

• On 29 July 2025, the Income Tax Department issued a notice to CHRI under Section 12AB(4)(a), citing cancellation of its FCRA certificate as the reason.

• CHRI approached the Delhi High Court, arguing that since its challenge against the FCRA cancellation (W.P.(C) 8666/2022) is still pending, any parallel tax action based on that cancellation would be unsustainable.

• Senior Advocate Arvind P. Datar, appearing for CHRI, pointed out that cancellation of tax registration cannot be based on a ground which is still sub judice.

• The Revenue’s counsel also admitted that the only basis for the tax notice was the FCRA cancellation.

Court’s Observations

A Bench of Justice V. Kameswar Rao and Justice Vinod Kumar agreed with CHRI’s contention. The Court noted:

• The Income Tax Department’s action was premature because the FCRA cancellation was still under judicial consideration.

• Until the competent bench decides the challenge to the FCRA cancellation, the Income Tax authorities cannot proceed with cancellation under Section 12AB.

Accordingly, the Court quashed the notice but clarified that authorities are free to take action in the future depending on the outcome of the FCRA case.

Key Takeaways for NGOs & Charitable Trusts

1. Interconnected Laws: Actions under the Income Tax Act, such as cancellation of registration, must be based on final and binding findings under other applicable laws.

2. Judicial Safeguard: If the underlying cause (like FCRA cancellation) is still under challenge, authorities cannot act prematurely.

3. Future Action Possible: The Court has left the door open for fresh proceedings once the FCRA challenge is resolved.

FAQs

1. What is Section 12AB of the Income Tax Act?
Section 12AB deals with the registration of charitable and religious trusts, NGOs, and non-profit institutions. It allows the Income Tax Department to cancel registration if certain conditions are violated.

2. Why was CHRI’s tax registration notice quashed?
Because the only ground for cancellation was the FCRA certificate cancellation, which itself is still under judicial review.

3. Can the Income Tax Department issue a fresh notice later?
Yes, the Delhi HC clarified that authorities may proceed afresh depending on the final outcome of the FCRA cancellation case.

4. What does this mean for NGOs receiving foreign funds?
It highlights the importance of compliance with FCRA rules. However, it also shows that courts will protect organizations from premature or unfair action by tax authorities.

5. How can NGOs safeguard their registrations?
By ensuring compliance with both FCRA and Income Tax Act requirements, and by seeking legal remedies promptly in case of disputes.

Conclusion
This judgment reinforces that income tax actions cannot be taken in isolation when the very foundation of such action is still under dispute in another court. For NGOs and charitable organizations, it is a reminder to stay vigilant on compliance, but also a reassurance that the judiciary ensures fairness in administrative actions.