Published 19 October 2026
When a charity loses its registration, the loss of future exemption is not the main cost. The main cost is a one-time tax, at the maximum marginal rate, on the market value of everything the charity owns less what it owes. The same tax applies if it converts into a non-charitable form, merges with the wrong kind of entity, fails to hand over its assets on dissolution, or simply misses its renewal date. The law treats each of these as the charity leaving the regime with assets built up out of tax-free income. This guide sets out how registration is cancelled, the time limits, and how the tax on accreted income is computed and paid, under both Acts, as they stand on 19 October 2026.
Which Act governs which year
Under section 536(2) of the Income-tax Act, 2025, the 1961 Act continues to govern proceedings for any tax year beginning before 1 April 2026, “including notices, assessment, reassessment, recomputation, rectification, penalty, reference, revision and appeals”, by the procedure of the 1961 Act. Section 536(2)(e) lets a proceeding pending on 1 April 2026 continue as if the 2025 Act had not been enacted.
| Subject | 1961 Act | 2025 Act |
|---|---|---|
| Cancellation for specified violations | s.12AB(4), (5) and its Explanation; for s.10(23C), the provisos to that clause | s.351 |
| Reference by the Assessing Officer | Second proviso to s.143(3) | s.270(13) |
| Rejection of renewal with cancellation | s.12AB(1)(b)(ii)(B)(I) | s.332(7)(b)(ii) |
| Tax on accreted income | s.115TD | s.352 |
| Interest on unpaid accreted tax | s.115TE | s.352(6) |
| Assessee in default | s.115TF | s.352(7), (8) |
| Valuation | Rule 17CB of the 1962 Rules | Rule 189 of the 2026 Rules |
| Merger without accreted tax | s.12AC | s.354A |
| Appeal against cancellation | s.253 | s.362(1)(b)(i) |
A specified violation in financial year 2025-26 or earlier is examined under section 12AB(4) of the 1961 Act, even if the notice issues now. An event on or after 1 April 2026 falls under section 352. The reasoning is textual: section 115TD charges a specified person who “in any previous year” has converted, merged or failed to transfer its assets, and a previous year beginning on or after 1 April 2026 is not one to which section 536(2)© preserves the 1961 Act. Section 352, for its part, defines “specified person” (in section 355(l)) as any person registered under any “specified provision” at any time, and section 355(m) includes sections 12A, 12AA, 12AB and 10(23C) of the 1961 Act. A charity registered only under the 1961 Act is therefore within section 352.
How cancellation proceedings begin
Section 351(2) of the 2025 Act lists three triggers, each “for any tax year”:
- the Principal Commissioner or Commissioner notices one or more specified violations;
- he receives a reference from the Assessing Officer under section 270(13), which requires the Assessing Officer, when satisfied during an assessment that a specified violation has occurred, to send a reference and not to complete the assessment without giving effect to the Commissioner’s order; or
- the organisation is selected under the Board’s risk management strategy.
The period from the reference to receipt of the Commissioner’s order is excluded in computing the time limit for the assessment (section 286). Section 12AB(4) of the 1961 Act has the same three triggers, with the reference under the second proviso to section 143(3).
The specified violations
Section 351(1) lists seven:
- (a) income applied other than for the organisation’s objects;
- (b) a commercial activity in contravention of section 345 (not incidental to the objects, or without separate books);
- © income applied for private religious purposes that do not enure for the benefit of the public;
- (d) for a charity created after the commencement of the Act, income applied for the benefit of a particular religious community or caste, other than Scheduled Castes, Scheduled Tribes, backward classes, women and children;
- (e) an activity that “is not genuine or is not being carried out in accordance with all or any of the conditions subject to which it was registered”;
- (f) non-compliance with another law material to the objects, where the order holding so “has either not been disputed, or has attained finality”; and
- (g) an application for registration containing false or incorrect information.
The Finance Act, 2026 omitted “or 346” from clause (b) from 1 April 2026. A breach of the 20 per cent limit on commercial receipts for general public utility objects in section 346 is now dealt with by taxing the year’s regular income under section 353(1)(d), not by cancellation. The Explanation to section 12AB(4) of the 1961 Act has the same seven heads; its clause (b) covers business not incidental to the objects, or without separate books, for all trusts.
Defaults in books, audit or return are not specified violations. They are taxed under section 353, as explained in the guide on trust audit and ITR-7.
The order and its time limit
The Commissioner calls for documents or information or makes inquiries, and then passes a written order either cancelling the registration, “after affording a reasonable opportunity of being heard, for such tax year and all subsequent tax years”, or not cancelling it. Copies go to the Assessing Officer and the organisation (s.351(2)(i) to (iii)). Section 351(3) requires the order “before the expiry of six months, calculated from the end of the quarter in which the first notice is issued”. The 1961 limit in section 12AB(5) is worded the same way, for first notices issued on or after 1 April 2022.
In Ananda Social and Educational Trust v. CIT (Supreme Court, 19 February 2020), a society had applied for registration under section 12AA two months after its formation, without having undertaken any activity, and was refused. In upholding the grant, the Court drew a contrast with cancellation: there, the Commissioner “would be bound to record the finding that an activity or activities actually carried on by the Trust are not genuine being not in accordance with the objects of the Trust”. The statement was made about section 12AA(3) of the 1961 Act, but clause (e) of the present list uses the same idea of genuineness.
Other ways registration ends
- A failed renewal. In cases 3, 4, 5 and 7 of the section 332(3) Table (regular registration after provisional, renewal, and modification of objects), a Commissioner not satisfied must reject the application “and also cancel” the registration (s.332(7)(b)(ii)).
- A false provisional application. A provisional registration granted by the CPC in Form No. 106 may be cancelled by the jurisdictional Commissioner after a hearing if Form No. 104 contained false or incorrect information, and it is then treated as never granted (rule 181(6), (7)).
- A missed window. Under section 332(6), failure to apply in time in cases 3, 4, 5 or 7, where the delay is not condoned, makes the person liable to tax on accreted income.
Appeal
Orders under section 332(7) and section 351(2)(ii) are appealable to the Tribunal under section 362(1)(b)(i), within two months from the end of the month in which the order is communicated (s.362(3)). The procedure is in the guide on appealing to the ITAT. The appeal also fixes when tax on accreted income falls due.
Tax on accreted income
When it arises, and when it is payable
Section 352(1) imposes on every specified person, “in addition to the income-tax chargeable in respect of his total income”, additional income-tax on accreted income “at the maximum marginal rate” in the cases in the Table in section 352(4). The specified person and its principal officer or trustee must pay it “within fourteen days from the due date” in column D:
| Sl. No. | Case | Specified date (valuation) | Due date (tax payable within 14 days of it) |
|---|---|---|---|
| 1 | Registration cancelled or withdrawn; appeal filed | Date of the cancellation order | Date the appeal order confirming cancellation is received |
| 2 | Registration cancelled or withdrawn; no appeal | Date of the cancellation order | Date the period for appeal under s.362 expires |
| 3 | Objects modified so as not to conform, and no fresh application in that tax year | Date of modification | End of that tax year |
| 4 | Objects modified; fresh application rejected; appeal filed | Date of modification | Date the appeal order confirming cancellation is received |
| 5 | Objects modified; fresh application rejected; no appeal | Date of modification | Date the period for appeal under s.362 expires |
| 6 | Failure to apply within time under s.10(23C) first proviso (i) to (iii) or s.12A(1)(ac)(i) to (iii) of the 1961 Act, or s.332(3) cases 3, 4, 5 or 7 | Last date for the application | End of that tax year |
| 7 | Conversion into a form not eligible for registration | Date of conversion | End of that tax year |
| 8 | Merger with an entity that is not a registered non-profit organisation; with one having the same or similar objects where prescribed conditions are not met; or with one that does not have the same or similar objects | Date of merger | Date of merger |
| 9 | Failure on dissolution to transfer all assets to another registered non-profit organisation within twelve months from the end of the month of dissolution | Date of dissolution | Date the twelve months expire |
Row 8 was substituted by the Finance Act, 2026 from 1 April 2026, and section 354A was inserted with it: where a registered non-profit organisation merges with another that has the same or similar objects and the merger “fulfils such conditions as may be prescribed”, section 352 does not apply. The Income-tax Rules, 2026 as notified on 20 March 2026 contain no rule prescribing those conditions. Section 12AC of the 1961 Act, inserted from 1 April 2025, is the counterpart.
Section 115TD of the 1961 Act covers the same events in sub-sections (1) and (3), with payment due within fourteen days under section 115TD(5). Section 115TD(3)(iii), inserted by the Finance Act, 2023, is the source of row 6.
The computation
Section 352(2) states the formula A = B − C, where A is accreted income, B is the aggregate fair market value of total assets on the specified date and C is total liability on that date, each “computed in accordance with such method of valuation, as may be prescribed”. Section 352(3) reduces A by the accreted income attributable to specified assets and related liabilities. Section 355(k) defines these as assets directly acquired:
- out of agricultural income;
- before the date registration took effect, where no exemption was allowed for that period;
- in the period before registration took effect, where the exemption was nonetheless allowed for that period by the provisos to section 12A(2) or the eighth proviso to section 10(23C) of the 1961 Act (for these, the registration is treated as effective from the earliest year allowed); and
- in a dissolution case, assets transferred to another specified person within the twelve months.
Valuation under rule 189
Rule 189 of the 2026 Rules carries forward the method of rule 17CB of the 1962 Rules.
- Total assets are the fair market value of all assets in the audited balance sheet as on the specified date, less tax paid (TDS, TCS and advance tax, net of refunds claimed) and any amount shown as an asset that does not represent the value of an asset, such as unamortised deferred expenditure (rule 189(1)).
- Quoted shares and securities: the average of the lowest and highest price on a recognised stock exchange on the specified date, or on the last traded date before it.
- Unquoted equity shares: the formula (A + B − L) × (PV) / (PE), based on book values with bullion, jewellery, artistic work, shares, securities and immovable property taken at fair market value.
- Other shares and securities: the open-market price on a merchant banker’s or accountant’s valuation report.
- Immovable property: the higher of the registered valuer’s open-market value and the stamp duty value on the specified date.
- A business undertaking: its net assets by the same formula.
- Any other asset: the open-market price on a registered valuer’s report, or, where no valuer is registered for that class, a valuer from one of the bodies listed.
- Total liability is the book value of liabilities on the specified date, excluding corpus and capital funds, reserves and surpluses, contingent liabilities, unascertained provisions and excess tax provisions (rule 189(3)). The corpus is therefore not deducted: it is part of what is taxed.
Interest, finality and recovery
If the tax is not paid in time, simple interest is charged at one per cent of the tax for every month or part of a month from the day after the last date for payment to the date of payment (s.352(6); s.115TE of the 1961 Act). The payment is “the final payment of tax in respect of the said income”, and no credit or deduction is allowed for it to anyone (s.352(5)). The specified person and its principal officer or trustee are assessees in default. In a dissolution case, so is the person to whom an asset forming part of the computation was transferred, but only to the extent the asset received can meet the liability (s.352(7), (8)). Where the trust or institution later transfers an asset on which accreted income was computed and the tax paid, section 73(1) (Table: Sl. No. 21) takes its cost of acquisition as the fair market value used in the section 352(2) computation.
What to have ready
- The registration orders and their validity periods, and the dates of every application window under section 332(3).
- Any notice under section 351(2)(i), with the date of the first notice (which starts the six-month clock).
- Records answering each specified violation alleged: application registers, separate books for commercial activities, related-person records, and compliance orders under other laws.
- For an accreted income computation: an audited balance sheet as on the specified date, valuation reports under rule 189, and evidence that particular assets are specified assets.
- For a merger or dissolution: the objects and registration of the transferee, and the dates of transfer of each asset.
The procedure in order
- Identify the governing Act: 1961 for violations in years before 1 April 2026; 2025 for later years and later events.
- On a notice under section 351(2), file the documents sought and attend the hearing; the order is due within six months from the end of the quarter of the first notice.
- On an adverse order, decide whether to appeal under section 362 within two months from the end of the month of communication; the choice fixes the due date in rows 1 and 2.
- Identify the specified date and the column D due date in the section 352(4) Table.
- Value assets and liabilities under rule 189, excluding specified assets.
- Pay the tax at the maximum marginal rate within fourteen days of the due date; interest at one per cent a month runs after that.
- On dissolution or merger, complete the transfer of all assets to an eligible registered non-profit organisation within twelve months from the end of the month of dissolution, or meet the merger conditions once prescribed.
This is the last guide in the charitable trusts set. The first guide covers registration and its time limits, which decide whether the renewal case in row 6 ever arises.