Cancellation risk for GPU-based NPOs diluted: A shift under the Income-tax Act, 2025

The transition of India’s income-tax regime from the Income-tax Act, 1961 (‘1961 Act’) to the Income-tax Act, 2025 (‘2025 Act’) has brought to the fore several noticeable and significant changes in the overall legislative framework. This is notwithstanding the Government’s stated position that the 2025 Act is not intended to depart from the policy foundations underpinning the 1961 Act. Closer scrutiny, however, reveals that certain departures are neither incidental nor purely stylistic, but appear to reflect conscious and substantive shifts in policy. Simultaneously, some changes seem to have arisen from an overzealous or, at times, overly reductive, exercise in redrafting, leading to unintended consequences in both interpretation and application.

One area where these developments are particularly pronounced is the taxation framework for charitable entities. Under the 2025 Act, this regime has been recast within the broader construct of taxation of ‘registered not-for-profit organisations’ (‘NPOs’).

Among the various changes introduced under the 2025 Act in relation to taxation of charitable entities, this article focuses on a critical aspect: the conditions governing cancellation of registration of NPOs engaged in the ‘advancement of any other object of general public utility’ (‘GPU objects’). The implications of these provisions are far-reaching, with the potential to jeopardise the very existence of such entities. Notably, the Finance Act, 2026 has recalibrated these provisions, aiming to preserve the core principles of the 1961 Act. However, a deeper examination suggests that, despite its well-intentioned design, the reorganisation has led to certain departures from the earlier framework.

The 2025 Act framework: Triggering cancellation through ‘Specified Violation’

In line with the 1961 Act, Section 351 of the 2025 Act defines ‘specified violation’ which may result in cancellation of registration of an NPO. One such stated violation was where an NPO pursuing GPU objects undertakes commercial activities in contravention of Section 346.

Section 346 permits an NPO pursuing GPU objects to undertake commercial activities only if the following conditions are cumulatively satisfied:

·         The activity is undertaken in the course of actual carrying out of advancement of the GPU object;

·         The aggregate receipts from such activity do not exceed 20% of total receipts of the NPO during the relevant tax year; and

·         Separate books of account are maintained for such activity.

A breach of any of these conditions constituted a ‘specified violation’ under Section 351, exposing the NPO to the cancellation of its registration.

Finance Act, 2026: Diluted the cancellation trigger

The Finance Act, 2026 amended Section 351 of the 2025 Act to exclude the contravention of any condition in Section 346 from the definition of ‘specified violation’. In effect, even where an NPO pursuing GPU objects exceeds the prescribed threshold or fails to demonstrate that commercial activity is in the course of actual advancement of its GPU object, or does not maintain separate books of account, the same would no longer trigger cancellation of its registration. This is subject to any other specified violation getting triggered upon non-compliance with Section 346.

This marks a fundamental shift in as much as the amendment removes the disproportionate consequence of cancellation, restoring a degree of regulatory balance. However, it is critical to note that this relaxation does not shield the NPO from denial of tax exemption for breach of any of the conditions during a particular tax year.

Position under the Income-tax Act, 1961: A useful benchmark

To appreciate the departure under the 2025 Act and the significance of the amendment thereto, it is pertinent to note the provisions governing the cancellation of registration of a charitable entity (now, NPO) under the 1961 Act.

Section 2(15) of the 1961 Act provides for the definition of ‘charitable purpose’. It includes ‘relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest’, and the advancement of any other object of general public utility.

The proviso to Section 2(15) of the 1961 Act additionally provides that if an entity pursuing a GPU object engages in commercial activity, then it will qualify as carrying on a ‘charitable purpose’ only if,

·         such activity is undertaken in the course of actual carrying out of advancement of GPU object, and

·         aggregate receipts from such activity during a year do not exceed 20% of the total receipts of the entity.

Further, Section 13(8) provides for denial of exemption to the entity pursuing GPU objects if in a particular year, the entity engages in commercial activity but does not meet the conditions laid out in the proviso to Section 2(15) in that year.

The Central Board of Direct Taxes (‘CBDT’), vide Circular No. 21 dated 27 May 2016, categorically clarified that exceeding the prescribed threshold would not automatically warrant cancellation of charitable entity’s registration without there being any change in the nature of activities of the trust. This was because the temporary excess of receipts beyond the specified threshold in one year may not necessarily be the outcome of alteration in the very nature of the activities of the trust requiring cancellation of its registration.

Subsequently, Section 12AB(4) laid down the ‘specified violations’ which may lead to the cancellation of registration of a charitable entity. One such specified violation is where (a) the trust has business income which is not incidental to the attainment of its object, or (b) the trust has not maintained separate books of account in respect of such incidental business.

The Supreme Court in the case of Ahmedabad Urban Development Authority[1] interpreted the word ‘incidental’ referred to in Section 11(4A) in the case of charitable entities pursuing GPU objects in light of the proviso to section 2(15) of the Act. The Court held that if the commercial activity undertaken by such entities are actually in the course of achieving the GPU object, then the income therefrom is logically incidental. That is, Section 11(4A) is applicable to the charitable entities pursuing GPU objects and is intended to ensure that the quantitative limit imposed by the proviso to Section 2(15) can be computed and ascertained.

Thus, the framework governing the cancellation of registration of a charitable entity pursuing GPU objects under the 1961 Act distinguished between loss of exemption (annual consequence) and cancellation of registration (permanent consequence). While exceeding the prescribed quantitative threshold alone could have resulted in denial of exemption for the concerned year, undertaking commercial activities not being in the course of achieving the GPU objects or non-maintenance of separate books of account in relation to commercial and non-commercial activities could have resulted in cancellation of registration.

Comparative analysis: Beyond mere alignment

While the Memorandum to the Finance Bill, 2026 indicates that the amendment to Section 351 of the 2025 Act seeks to align the 2025 Act with the 1961 Act, the amendment arguably goes a step further.

Under the 1961 Act, conducting commercial activities not being in the course of achieving the GPU objects or not maintaining separate books of account in relation to commercial and non-commercial activities can still trigger cancellation of registration. In contrast, the 2025 Act, as amended by the Finance Act, 2026, has insulated NPOs pursuing GPU objects from cancellation even in such situations, so long as no other specified violation is attracted.

At the same time, the amended law preserves the integrity of the tax framework by ensuring that non-compliance has appropriate consequences in the form of denial of exemption for that year. Moreover, where commercial activities of the NPO assume a predominant character, the revenue authorities may examine as to whether the entity genuinely qualifies as pursuing a ‘charitable purpose’.

Conclusion

The Income-tax Act, 2025, as amended by the Finance Act, 2026, represents a welcome recalibration of the regulatory framework governing the NPOs pursuing GPU objects, as compared to the Income-tax Act, 1961. The expansion of protection provided to such NPOs from cancellation of their registration reflects a conscious policy choice to reduce their existential risks, where some degree of commercial activity is often inevitable. By delinking concerned non-compliances from the drastic consequence of cancellation, the Act restores a measure of certainty and operational flexibility.

While the amendment significantly mitigates the risk of cancellation for NPOs pursuing GPU objects, it does not dilute the underlying discipline governing NPOs. The non-compliance with Section 346 may still result in: denial of exemption for the relevant year; taxation of income derived from such commercial activities; and scrutiny of the genuineness of charitable purpose. Accordingly, from a tax incidence perspective, adherence to the prescribed conditions in Section 346 remains critical.

[The authors are Partner and Associate Partner, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys]

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[1] ACIT (Exemptions) v. Ahmedabad Urban Development Authority [[2022] 143 taxmann.com 278 (SC)].